This is the accessible text file for GAO report number GAO-06-382SP
entitled 'Principles of Federal Appropriations Law: Third Edition:
Volume II: which was released on February 1, 2006.
This text file was formatted by the U.S. General Accounting Office
(GAO) to be accessible to users with visual impairments, as part of a
longer term project to improve GAO products’ accessibility. Every
attempt has been made to maintain the structural and data integrity of
the original printed product. Accessibility features, such as text
descriptions of tables, consecutively numbered footnotes placed at the
end of the file, and the text of agency comment letters, are provided
but may not exactly duplicate the presentation or format of the
printed version. The portable document format (PDF) file is an exact
electronic replica of the printed version. We welcome your feedback.
Please E-mail your comments regarding the contents or accessibility
features of this document to Webmaster@gao.gov.
United States General Accounting Office
GAO:
Office of the General Counsel:
January 2004:
Principles of Federal Appropriations Law:
Third Edition:
Volume II:
This volume supersedes the Volume II, Second Edition of the Principles
of Federal Appropriations Law, 1992.
On August 6, 2010, the web versions of the Third Edition of the
Principles of Federal Appropriations Law, Volumes I, II and III, were
reposted to include updated active electronic links to GAO decisions.
Additionally, the Third Edition's web based Index/Table of Authorities
(Index/T0A) was replaced by an Index/TOA that incorporated information
from Volume I, II and III. These four documents can be used
independently or interactively. To use the documents interactively,
click on [hyperlink, http://www.gao.gov/special.pubs/redbookl.html]
and you will be directed to brief instructions regarding interactive
use.
The Security of this file is set to prevent a situation where linked
references are appended to the PDF. If this change prevents an Acrobat
function you need (e.g., to extract pages), use the password "redbook"
to revise the document security and enable the additional functions.
Abbreviations:
APA: Administrative Procedure Act:
BLM: Bureau of Land Management:
CDA: Contract Disputes Act of 1978:
CCC: Commodity Credit Corporation:
C.F.R.: Code of Federal Regulations:
EAJA: Equal Access to Justice Act:
EEOC: Equal Employment Opportunity Commission:
FAR: Federal Acquisition Regulation:
FY: Fiscal Year:
GAO: Government Accountability Office:
GSA: General Services Administration:
HUD: Department of Housing and Urban Development:
IRS: Internal Revenue Service:
NRC: Nuclear Regulatory Commission:
OMB: Office of Management and Budget:
SBA: Small Business Administration:
TFM: Treasury Financial Manual:
U.S.C.: United States Code:
URA: Uniform Relocation Assistance and Real Property Acquisition
Policies Act:
[End of section]
Foreword:
This is Volume II of Principles of Federal Appropriations Law, third
edition. As we explained in the Foreword to the third edition of
Volume I, publication of this volume continues our process of revising
and updating the second edition of the "Red Book" and reissuing it in
what will ultimately be a 3-volume looseleaf set with cumulative
annual updates. This volume and all other volumes of Principles,
including the annual updates, are available on GAO's Web site
[hyperlink, http://www.gao.gov] under "Legal Products." The annual
updates are only available online. The online updated versions contain
hyperlinks to the GAO material cited. Check the GAO Web site for other
interesting information, for example, materials from our annual
Appropriations Law Forum.
Our objective in Principles is to present a basic reference work
covering those areas of law in which the Comptroller General issues
decisions, using text discussion with specific legal authorities to
illustrate the principles discussed, their application, and
exceptions. As we noted in our first volume, Principles should be used
as a general guide and starting point, not as a substitute for
original legal research. We measure our success in this endeavor by
Principles' day-to-day utility to its federal and nonfederal audience.
In this regard, we appreciate the many comments and suggestions we
have received to date, and hope that our publication will continue to
serve as a useful reference.
Signed by:
Anthony H. Gamboa:
General Counsel:
February 2006:
[End of Foreword]
Detailed Table of Contents: Volume II: Chapters 6-11:
Chapter 6 Availability of Appropriations: Amount:
A. Introduction:
B. Types of Appropriation Language:
1. Lump-Sum Appropriations:
a. Effect of Budget Estimates:
b. Restrictions in Legislative History:
c. "Zero Funding" Under a Lump-Sum Appropriation:
2. Line-Item Appropriations and Earmarks:
C. The Antideficiency Act:
1. Introduction and Overview:
2. Obligation/Expenditure in Excess or Advance of Appropriations:
a. Exhaustion of an Appropriation:
(1) Making further payments:
(2) Limitations on contractor recovery:
b. Contracts or Other Obligations in Excess or Advance of
Appropriations:
(1) Proper recording of obligations:
(2) Obligation in excess of appropriations:
(3) Variable quantity contracts:
(4) Multiyear or "continuing" contracts:
c. Indemnification:
(1) Prohibition against unlimited liability:
(2) When indemnification may be permissible:
(3) Statutorily authorized indemnification:
d. Specific Appropriation Limitations/Purpose Violations:
e. Amount of Available Appropriation or Fund:
f. Intent/Factors beyond Agency Control:
g. Exceptions:
(1) Contract authority:
(2) Other obligations "authorized by law":
3. Voluntary Services Prohibition:
a. Introduction:
b. Appointment without Compensation and Waiver of Salary:
(1) The rules—general discussion:
(2) Student interns:
(3) Program beneficiaries:
(4) Applicability to legislative and judicial branches:
c. Other Voluntary Services:
d. Exceptions:
(1) Safety of human life:
(2) Protection of property:
(3) Recent developments:
e. Voluntary Creditors:
4. Apportionment of Appropriations:
a. Statutory Requirement for Apportionment:
b. Establishing Reserves:
c. Method of Apportionment:
d. Control of Apportionments:
e. Apportionments Requiring Deficiency Estimate:
f. Exemptions from Apportionment Requirement:
g. Administrative Division of Apportionments:
h. Expenditures in Excess of Apportionment:
5. Penalties and Reporting Requirements:
a. Administrative and Penal Sanctions:
b. Reporting Requirements:
6. Funding Gaps:
D. Supplemental and Deficiency Appropriations:
E. Augmentation of Appropriations:
1. The Augmentation Concept:
2. Disposition of Moneys Received: Repayments and Miscellaneous
Receipts:
a. General Principles:
(1) The "miscellaneous receipts" statute:
(2) Exceptions:
(3) Timing of deposits:
(4) Money received (or not received) "for the Government":
b. Contract Matters:
(1) Excess reprocurement costs:
(2) Other damage claims:
(3) Refunds and credits:
(4) "No-cost" contracts:
c. Damage to Government Property and Other Tort Liability:
d. Fees and Commissions:
e. Economy Act:
f. Setoff:
g. Revolving Funds:
h. Trust Funds:
i. Fines and Penalties:
j. Miscellaneous Cases: Money to Treasury:
k Miscellaneous Cases: Money Retained by Agency:
L Money Erroneously Deposited as Miscellaneous Receipts:
3. Gifts and Donations to the Government:
a Donations to the Government:
b. Donations to Individual Employees:
(1) Contributions to salary or expenses:
(2) Travel-related promotional items:
4. Other Augmentation Principles and Cases:
Chapter 7: Obligation of Appropriations:
A. Introduction: Nature of an Obligation:
B. Criteria for Recording Obligations (31 U.S.C. § 1501):
1. Section 1501(a)(1): Contracts:
a. Binding Agreement:
b. Contract "in Writing":
c. Requirement of Specificity:
d. Invalid Award/Unauthorized Commitment:
e. Variations in Quantity to Be Furnished:
f. Amount to Be Recorded:
g. Administrative Approval of Payment:
h. Miscellaneous Contractual Obligations:
i. Interagency Transactions:
(1) Economy Act agreements:
(2) Non-Economy Act agreements:
(3) "Binding agreement" requirement:
(4) Orders from stock:
(5) Project orders:
2. Section 1501(a)(2): Loans:
3. Section 1501(a)(3): Interagency Orders Required by Law:
4. Section 1501(a)(4): Orders without Advertising:
5. Section 1501(a)(5): Grants and Subsidies:
a Grants:
b. Subsidies:
6. Section 1501(a)(6): Pending Litigation:
7. Section 1501(a)(7): Employment and Travel:
a Wages, Salaries, Annual Leave:
b. Compensation Plans in Foreign Countries:
c. Training:
d. Uniform Allowance:
e. Travel Expenses:
f. State Department: Travel Outside Continental United States:
g. Employee Transfer/Relocation Costs:
8. Section 1501(a)(8): Public Utilities:
9. Section 1501(a)(9): Other Legal Liabilities:
C. Contingent Liabilities:
D. Reporting Requirements:
E. Deobligation:
Chapter 8: Continuing Resolutions:
A. Introduction:
1. Definition and General Description:
2. Use of Appropriation Warrants:
B. Rate for Operations:
1. Current Rate:
2. Rate Not Exceeding Current Rate:
3. Spending Pattern under Continuing Resolution:
a. Pattern of Obligation:
b. Apportionment:
4. Liquidation of Contract Authority:
5. Rate for Operations Exceeds Final Appropriation:
C. Projects or Activities:
D. Relationship to other Legislation:
1. Not Otherwise Provided For:
2. Status of Bill or Budget Estimate Used as Reference:
3. More Restrictive Authority:
4. Lack of Authorizing Legislation:
E. Duration:
1. Duration of Continuing Resolution:
2. Duration of Appropriations:
3. Impoundment:
Chapter 9: Liability and Relief of Accountable Officers:
A. Introduction:
B. General Principles:
1. The Concepts of Liability and Relief:
a. Liability:
b. Surety Bonding:
c. Relief:
2. Who Is an Accountable Officer?
a. Certifying Officers:
b. Disbursing Officers:
c. Cashiers:
d. Collecting Officers:
e. Other Agents and Custodians:
3. Funds to Which Accountability Attaches:
a. Appropriated Funds:
(1) Imprest funds:
(2) Flash rolls:
(3) Travel advances:
b. Receipts:
c. Funds Held in Trust:
d. Items Which Are the Equivalent of Cash:
4. What Kinds of Events Produce Liability?
5. Amount of Liability:
6. Effect of Criminal Prosecution:
a. Acquittal:
b. Order of Restitution:
C. Physical Loss or Deficiency:
1. Statutory Provisions:
a. Civilian Agencies:
b. Military Disbursing Officers:
2. Who Can Grant Relief?
a. 31 U.S.C. § 3527(a):
b. 31 U.S.C. § 3527(b):
c. Role of Administrative Determinations:
3. Standards for Granting Relief:
a. Standard of Negligence:
b. Presumption of Negligence/Burden of Proof:
c. Actual Negligence:
d. Proximate Cause:
e. Unexplained Loss or Shortage:
f. Compliance with Regulations:
g. Losses in Shipment:
h. Fire, Natural Disaster:
i. Loss by Theft:
(1) Burglary: forced entry:
(2) Robbery:
(3) Riot, public disturbance:
(4) Evidence less than certain:
(5) Embezzlement:
j. Agency Security:
k. Extenuating Circumstances:
D. Illegal or Improper Payment:
1. Disbursement and Accountability:
a. Statutory Framework: Disbursement Under Executive Order No. 166:
b. Automated Payment Systems:
c. Statistical Sampling:
d. Provisional Vouchers and Related Matters:
e. Facsimile Signatures and Electronic Certification:
f. GAO Audit Exceptions:
2. Certifying Officers:
a. Duties and Liability:
b. Applicability of 31 U.S.C. § 3528:
c. Relief:
3. Disbursing Officers:
a. Standards of Liability and Relief:
b. Some Specific Applications:
(1) Fraudulent travel claims:
(2) Other cash payments fraudulently obtained:
(3) Military separation vouchers:
(4) Assignment of contract payments:
(5) Improper purpose/payment beyond scope of legal authority:
4. Check Losses:
a Check Cashing Operations:
b. Duplicate Check Losses:
c. Errors in Check Issuance Process:
5. Statute of Limitations:
E. Other Relief Statutes:
1. Statutes Requiring Affirmative Action:
a. United States Court of Federal Claims:
b. The Legislative and Judicial Branches:
c. Savings Bond Redemption Losses:
2. Statutes Providing "Automatic" Relief:
a. Waiver of Indebtedness:
b. Compromise of Indebtedness:
c. Foreign Exchange Transactions:
d. Check Forgery Insurance Fund:
e. Secretary of the Treasury:
f. Other Statutes:
F. Procedures:
1. Reporting of Irregularities:
2. Obtaining Relief:
3. De Minimis Rule: Payments of $100 or Less:
4. Relief versus Grievance Procedures:
G. Collection Action:
1. Against Recipient:
2. Against Accountable Officer:
H. Restitution, Reimbursement, and Restoration:
1. Restitution and Reimbursement:
2. Restoration:
a. Adjustment Incident to Granting of Relief:
b. Other Situations:
Chapter 10: Federal Assistance: Grants and Cooperative Agreements:
A. Introduction:
B. Grants versus Procurement Contracts:
1. Judicial and GAO Decisions on the Nature of Grants:
a. Contractual Aspects of Grants:
b. Differences between Grants and Contracts:
c. Grants as "Hybrids":
2. The Federal Grant and Cooperative Agreement Act:
a. Purposes and Provisions of the Act:
b. Agency Implementation of the Act:
c. Decisions Interpreting the Act:
3. Competition for Discretionary Grant Awards:
C. Some Basic Concepts:
1. The Grant as an Exercise of Congressional Spending Power:
a. Constitutionality of Grant Conditions:
(1) Conditions must be in pursuit of the general welfare and related
to the purpose of the expenditure:
(2) Conditions must be unambiguous:
(3) Conditions must be otherwise constitutional:
b. Effect of Grant Conditions:
2. Availability of Appropriations:
a. Purpose:
b. Time:
c. Amount:
3. Agency Regulations:
a. General principles:
b. Office of Management and Budget Circulars and the "Common Rules":
c. The Federal Financial Assistance Management Improvement Act:
d. The "Cognizant Agency" Concept:
4. Contracting by Grantees:
5. Liability for Acts of Grantees:
a. Liability to Grantee's Contractors:
b. Liability for Grantee Misconduct:
6. Types of Grants: Categorical versus Block:
7. The Single Audit Act:
D. Funds in Hands of Grantee: Status and Application of Appropriation
Restrictions:
E. Grant Funding:
1. Advances of Grant/Assistance Funds:
2. Cash Management of Grants:
a. General Rule on Interest on Grant Advances:
b. State Governments and Interest on Grant Advances:
(1) Intergovernmental Cooperation Act:
(2) Decisions under the Intergovernmental Cooperation Act:
c. Other Cash Management Requirements:
3. Program Income:
4. Cost-Sharing:
a. Local or Matching Share:
(1) General principles:
(2) Hard and soft matches:
(3) Matching one grant with funds from another:
(4) Relocation allowances:
(5) Payments by other than grantor agency:
b. Maintenance of Effort:
F. Obligation of Appropriations for Grants:
1. Requirement for Obligation:
2. Changes in Grants:
G. Grant Costs:
1. Allowable versus Unallowable Costs:
a. The Concept of Allowable Costs:
b. Grant Cost Cases:
(1) Scope of judicial review:
(2) Court case examples:
(3) GAO case examples:
c. Note on Accounting:
2. Pre-Award Costs (Retroactive Funding):
H. Recovery of Grantee Indebtedness:
1. Government's Duty to Recover:
2. Offset and Withholding of Claims Under Grants:
Chapter 11: Federal Assistance: Guaranteed and Insured Loans:
A. Introduction:
1. General Description:
2. Sources of Guarantee Authority:
B. Budgetary and Obligational Treatment:
1. Prior to Federal Credit Reform Act:
2. Federal Credit Reform Act of 1990:
a. Post-1991 Guarantee Commitments:
b. Pre-1992 Commitments:
c. Entitlement Programs:
d. Certain Insurance Programs:
C. Extension of Guarantees:
1. Coverage of Lenders (Initial and Subsequent):
a. Eligibility of Lender/Debt Instrument:
b. Substitution of Lender:
c Existence of Valid Guarantee:
d. Small Business Investment Companies:
e. The Federal Financing Bank:
2. Coverage of Borrowers:
a. Eligibility of Borrowers:
b. Substitution of Borrowers:
c. Loan Purpose:
d. Change in Loan Purpose:
3. Terms and Conditions of Guarantees:
a. Introduction:
b. Property Insurance Programs under the National Housing Act:
(1) Maximum amount of loan:
(2) Maximum loan maturity:
(3) Owner/lessee requirement:
(4) Execution of the note:
(5) Reporting requirement:
(6) Payment of premiums:
c. Small Business Administration Business Loan Program:
(1) Payment of guarantee fee:
(2) Notice of default:
D. Rights and Obligations of Government upon Default:
1. Nature of the Government's Obligation:
2. Scope of the Government's Guarantee:
3. Amount of Government's Liability:
4. Liability of the Borrower:
a. Veterans' Home Loan Guarantee Program:
(1) Loans closed prior to 1990:
(2) Loans closed after December 31, 1989:
b. Debt Collection Procedures:
5. Collateral Protection:
[End of Detailed Table of Contents]
Chapter 6: Availability of Appropriations: Amount:
A. Introduction:
The two preceding chapters have discussed the purposes for which
appropriated funds may be used and the time limits within which they
may be obligated and expended. This chapter will discuss the third
major concept of the "legal availability" of appropriations—
restrictions relating to amount. It is not enough to know what you can
spend appropriated funds for and when you can spend them. You also
must know how much you have available for a particular object.
In this respect, the legal restrictions on government expenditures are
different from those governing your spending as a private individual.
For example, as an individual, you can buy a house and finance it with
a mortgage that may run for 25 or 30 years. Since you do not have
enough money to cover your full legal obligation under the mortgage,
you sign the mortgage papers on the assumption that you will continue
to have an income adequate to cover the mortgage. If your income
diminishes substantially or, heaven forbid, disappears, and you are
unable to make the payments, you lose the house. A government agency
cannot operate this way. The main reason why is the Antideficiency
Act, discussed in section C of this chapter.
Under the Constitution, Congress makes the laws and provides the money
to implement them; the executive branch carries out the laws with the
money Congress provides. Under this system, Congress has the "final
word" as to how much money can be spent by a given agency or on a
given program. Congress may give the executive branch considerable
discretion concerning how to implement the laws and hence how to
obligate and expend funds appropriated, but it is ultimately up to
Congress to determine how much the executive branch can spend. In
applying these concepts to the day-to-day operations of the federal
government, it should be readily apparent that restrictions on
purpose, time, and amount are very closely related. Again, the
Antideficiency Act is one of the primary "enforcement devices." Its
importance is underscored by the fact that it is the only one of the
fiscal statutes to include both civil and criminal penalties for
violation.
To ensure that the Antideficiency Act's prohibition against
overobligating or overspending an appropriation remains meaningful,
agencies must be restricted to the appropriations Congress provides.
The rule prohibiting the unauthorized "augmentation" of
appropriations, covered in section E of this chapter, is thus a
crucial complement to the Antideficiency Act.
While Congress retains, as it must, ultimate control over how much an
agency can spend, it does not attempt to control the disposition of
every dollar. We began our general discussion of administrative
discretion in Chapter 3 by quoting Justice Holmes' statement that
"some play must be allowed to the joints if the machine is to work."
[Footnote 1] This is fully applicable to the expenditure of
appropriated funds. An agency's discretion under a lump-sum
appropriation is discussed in section F of this chapter.
Congress has been making appropriations since the beginning of the
Republic. In earlier times when the federal government was much
smaller and federal programs were (or at least seemed) much simpler,
very specific line-item appropriations were more common.[Footnote 2]
In recent decades, however, as the federal budget has grown in both
size and complexity, a lump-sum approach has become a virtual
necessity.[Footnote 3] For example, an appropriation act for an
establishment the size of the Defense Department structured solely on
a line-item basis would rival the telephone directory in bulk.
Over the course of this time, certain forms of appropriation language
have become standard. This section will point out the more commonly
used language with respect to amount.
A lump-sum appropriation is one that is made to cover a number of
specific programs, projects, or items. (The number may be as small as
two.) In contrast, a line-item appropriation is available only for the
specific object described.
Lump-sum appropriations come in many forms. Many smaller agencies
receive only a single appropriation, usually termed "Salaries and
Expenses" or "Operating Expenses." All of the agency's operations must
be funded from this single appropriation. Cabinet-level departments
and larger agencies receive several appropriations, often based on
broad object categories such as "operations and maintenance" or
"research and development." For purposes of this discussion, a lump-
sum appropriation is simply one that is available for more than one
specific object.
The amount of a lump-sum appropriation is not derived through
guesswork. It is the result of a lengthy budget and appropriation
process. The agency first submits its appropriation request to
Congress through the Office of Management and Budget, supported by
detailed budget justifications. Congress then reviews the request and
enacts an appropriation which may be more, less, or the same as the
amount requested. Variations from the amount requested are usually
explained in the appropriation act's legislative history, most often
in committee reports.[Footnote 4]
All of this leads logically to a question which can be phrased in
various ways: How much flexibility does an agency have in spending a
lump-sum appropriation? Is it legally bound by its original budget
estimate or by expressions of intent in legislative history? How is
the agency's legitimate need for administrative flexibility balanced
against the constitutional role of the Congress as controller of the
public purse?
The answer to these questions is one of the most important principles
of appropriations law. The rule, simply stated, is this: Restrictions
on a lump-sum appropriation contained in the agency's budget request
or in legislative history are not legally binding on the department or
agency unless they are carried into (specified in) the appropriation
act itself, or unless some other statute restricts the agency's
spending flexibility. This is an application of the fundamental
principle of statutory construction that legislative history is not
law and carries no legal significance unless "anchored in the text of
the statute." Shannon v. United States, 512 U.S. 573, 583 (1994).
[Footnote 5] Of course, the agency cannot exceed the total amount of
the lump-sum appropriation, and its spending must not violate other
applicable statutory restrictions.[Footnote 6] The rule applies
equally whether the legislative history is mere acquiescence in the
agency's budget request or an affirmative expression of intent.
The rule recognizes the agency's need for flexibility to meet changing
or unforeseen circumstances, yet preserves congressional control in
several ways. First, the rule merely says that the restrictions are
not legally binding. The practical wisdom of making the expenditure is
an entirely separate question. An agency that disregards the wishes of
its oversight or appropriations committees will most likely be called
upon to answer for its digressions before those committees next year.
An agency that fails to "keep faith" with the Congress may find its
next appropriation reduced or limited by line-item restrictions. As
Professor Schick put it:
"What gives the appropriations reports special force is not their
legal status but the fact that the next appropriations cycle is always
less than one year away. An agency that willfully violates report
language risks retribution the next time it asks for money. It may
find this year's report language relocated to the next appropriations
act, thereby giving it even less leeway than it had before. Or it may
find the next time that the appropriations committees' guidance is
more detailed and onerous or that its appropriation has been cut."
[Footnote 7]
That Congress is fully aware of these dynamics is evidenced by the
following statement from a 1973 House Appropriations Committee report:
"In a strictly legal sense, the Department of Defense could utilize
the funds appropriated for whatever programs were included under the
individual appropriation accounts, but the relationship with the
Congress demands that the detailed justifications which are presented
in support of budget requests be followed. To do otherwise would cause
Congress to lose confidence in the requests made and probably result
in reduced appropriations or line item appropriation bills."[Footnote
8]
Justice Souter made the same point, writing for the Court in Lincoln
v. Vigil, 508 U.S. 182 (1993):
"Congress may always circumscribe agency discretion to allocate
resources by putting restrictions in the operative statutes (though
not, as we have seen, just in the legislative history). And, of
course, we hardly need to note that an agency's decision to ignore
congressional expectations may expose it to grave political
consequences."
Id. at 193 (citations omitted).
Second, restrictions on an agency's spending flexibility exist through
the operation of other laws. For example, a "Salaries and Expenses"
appropriation may be a large lump sum, but much of it is in fact
nondiscretionary because the salaries and benefits (e.g., health
insurance and retirement contributions) of agency employees constitute
mandatory expenditures once fixed in accordance with the parameters
established by law.[Footnote 9] Third, reprogramming arrangements with
the various committees provide another safeguard against abuse.
[Footnote 10]
Finally, Congress always holds the ultimate trump card. It has the
power to make any restriction legally binding simply by including it
in the appropriation act.[Footnote 11] Thus, the treatment of lump-sum
appropriations may be regarded as yet another example of the efforts
of our legal and political systems to balance the conflicting
objectives of executive flexibility and congressional control.
[Footnote 12]
Two common examples of devices Congress uses when it wants to restrict
an agency's spending flexibility are line-item appropriations and
earmarks. Congress uses other tools as well. The following are just
two examples taken from the Consolidated Appropriations Resolution,
2003, Pub. L. No. 108-7, 117 Stat. 11 (Feb. 20, 2003), the omnibus
appropriation act for fiscal year 2003. The first is an example of a
notice requirement:
"Funds made available under this heading [Salaries and Expenses,
Department of Housing and Urban Development] shall only be allocated
in the manner specified in the report accompanying this Act unless the
Committees on Appropriations ... are notified of any changes in an
operating plan or reprogramming..."
117 Stat. 499. The second is a proviso that incorporates by reference
instructions found in a conference report:
"Provided, That notwithstanding any other provision of law, the Office
of Economic Adjustment... is authorized to make grants using funds
made available under the heading `Operation and Maintenance, Defense-
Wide' in accordance with the guidance provided in the Joint
Explanatory Statement of the Committee of Conference for the
Conference Report to accompany H.R. 5010... and these projects shall
hereafter be considered to be authorized by law."
117 Stat. 533.
The 1983 appropriation act for the Department of Housing and Urban
Development contained a restriction incorporating by reference budget
estimates that the Administration had provided:
"Where appropriations in titles I and II of this Act are expendable
for travel expenses and no specific limitation has been placed
thereon, the expenditures for such travel expenses may not exceed the
amounts set forth therefor in the budget estimates submitted for the
appropriations...."[Footnote 13]
A provision prohibiting the use of a construction appropriation to
start any new project for which an estimate was not included in the
President's budget submission is discussed in 34 Comp. Gen. 278 (1954).
Also, the availability of a lump-sum appropriation may be restricted
by provisions appearing in statutes other than appropriation acts,
such as authorization acts.[Footnote 14] For example, if an agency
receives a line-item authorization and a lump-sum appropriation
pursuant to the authorization, the line-item restrictions and earmarks
in the authorization act will apply just as if they appeared in the
appropriation act itself. The topic is discussed in more detail in
Chapter 2, section C.
a. Effect of Budget Estimates:
Perhaps the easiest case is the effect of the agency's own budget
estimate. The rule here was stated in 17 Comp. Gen. 147, 150 (1937) as
follows:
"The amounts of individual items in the estimates presented to the
Congress on the basis of which a lump-sum appropriation is enacted are
not binding on administrative officers unless carried into the
appropriation act itself."
See also Thompson v. Cherokee Nation of Oklahoma, 334 F.3d 1075, 1085-
86 (Fed. Cir. 2003), aff'd sub nom., 543 U.S._____, 125 S. Ct. 1172
(2005); B-63539, June 6, 1947; B-55277, Jan. 23, 1946; B-35335, July,
17, 1943; B-48120-0.M., Oct. 21, 1948. This is essentially the same
rule as applied to allocations of amounts in congressional committee
reports and other specifications in the legislative history concerning
the use of lump-sum appropriations, which, as discussed later in this
section, likewise have no legally binding effect unless tied to the
appropriation language itself.
It follows that the lack of a specific budget request will not
preclude an expenditure from a lump-sum appropriation which is
otherwise legally available for the item in question. E.g., B-278968,
May 28, 1998; 72 Comp. Gen. 317, 319 (1993); 71 Comp. Gen. 411, 413
(1992).[Footnote 15] To illustrate, the Administrative Office of the
U.S. Courts asked for a supplemental appropriation of $11,000 in 1962
for necessary salaries and expenses of the Judicial Conference in
revising and improving the federal rules of practice and procedure.
The House of Representatives did not allow the increase but the Senate
included the full amount. The bill went to conference but the
conference was delayed and the agency needed the money. The
Administrative Office then asked whether it could take the $11,000 out
of its regular 1962 appropriation even though it had not specifically
included this item in its 1962 budget request. Citing 17 Comp. Gen.
147, and noting that the study of the federal rules was a continuing
statutory function of the Judicial Conference, the Comptroller General
concluded as follows:
"In the absence of a specific limitation or prohibition in the
appropriation under consideration as to the amount which may be
expended for revising and improving the Federal Rules of practice and
procedure, you would not be legally bound by your budget estimates or
absence thereof.
"If the Congress desires to restrict the availability of a particular
appropriation to the several items and amounts thereof submitted in
the budget estimates, such control may be effected by limiting such
items in the appropriation act itself. Or, by a general provision of
law, the availability of appropriations could be limited to the items
and the amounts contained in the budget estimates. In the absence of
such limitations an agency's lump-sum appropriation is legally
available to carry out the functions of the agency."
B-149163, June 27, 1962. See also 20 Comp. Gen. 631 (1941); B-198234,
Mar. 25, 1981; B-69238, Sept. 23, 1948. The same principle would apply
where the budget request was for an amount less than the amount
appropriated, or for zero. 2 Comp. Gen. 517 (1923); B-126975, Feb. 12,
1958.
b. Restrictions in Legislative History:
Often issues are raised when there are changes to or restrictions on a
lump-sum appropriation imposed during the legislative process but not
in the legislation itself. The "leading case" in this area is 55 Comp.
Gen. 307 (1975), the so-called "LTV case." The Department of the Navy
had selected the McDonnell Douglas Corporation to develop a new
fighter aircraft. LTV Aerospace Corporation protested the selection,
arguing that the aircraft McDonnell Douglas proposed violated the 1975
Defense Department Appropriation Act. The appropriation in question
was a lump-sum appropriation of slightly over $3 billion under the
heading "Research, Development, Test, and Evaluation, Navy." This
appropriation covered a large number of projects, including the
fighter aircraft in question. The conference report on the
appropriation act had stated that $20 million was being provided for a
Navy combat fighter, but that "adaptation of the selected Air Force
Air Combat Fighter to be capable of carrier operations is the
prerequisite for use of the funds provided." The Navy conceded that
the McDonnell Douglas aircraft was not a derivative of the Air Force
fighter and that its selection was not in accord with the instructions
in the conference report. The issue, therefore, was whether the
conference report was legally binding on the Navy. In other words, did
the Navy act illegally by not choosing to follow the conference report?
The ensuing decision is GAO's most comprehensive statement on the
legal availability of lump-sum appropriations. Pertinent excerpts are
set forth below:
"Congress has recognized that in most instances it is desirable to
maintain executive flexibility to shift around funds within a
particular lump-sum appropriation account so that agencies can make
necessary adjustments for `unforeseen developments, changing
requirements,... and legislation enacted subsequent to
appropriations.' [Citation omitted.] This is not to say that Congress
does not expect that funds will be spent in accordance with budget
estimates or in accordance with restrictions detailed in Committee
reports. However, in order to preserve spending flexibility, it may
choose not to impose these particular restrictions as a matter of law,
but rather to leave it to the agencies to 'keep faith' with the
Congress....
"On the other hand, when Congress does not intend to permit agency
flexibility, but intends to impose a legally binding restriction on an
agency's use of funds, it does so by means of explicit statutory
language....
"Accordingly, it is our view that when Congress merely appropriates
lump-sum amounts without statutorily restricting what can be done with
those funds, a clear inference arises that it does not intend to
impose legally binding restrictions, and indicia in committee reports
and other legislative history as to how the funds should or are
expected to be spent do not establish any legal requirements on
Federal agencies....
"We further point out that Congress itself has often recognized the
reprogramming flexibility of executive agencies, and we think it is at
least implicit in such [recognition] that Congress is well aware that
agencies are not legally bound to follow what is expressed in
Committee reports when those expressions are not explicitly carried
over into the statutory language....
"We think it follows from the above discussion that, as a general
proposition, there is a distinction to be made between utilizing
legislative history for the purpose of illuminating the intent
underlying language used in a statute and resorting to that history
for the purpose of writing into the law that which is not there....
"As observed above, this does not mean agencies are free to
ignore clearly expressed legislative history applicable to the use of
appropriated funds. They ignore such expressions of intent at the
peril of strained relations with the Congress. The Executive branch...
has a practical duty to abide by such expressions. This duty, however,
must be understood to fall short of a statutory requirement giving
rise to a legal infraction where there is a failure to carry out that
duty."
55 Comp. Gen. at 318, 319, 321, 325. Accordingly, GAO concluded that
Navy's award did not violate the appropriation act and the contract
therefore was not illegal.
The same volume of the Decisions of the Comptroller General contains
another often-cited case, 55 Comp. Gen. 812 (1976), the Newport News
case. This case also involved the Navy. This time, Navy wanted to
exercise a contract option for construction of a nuclear powered
guided missile frigate, designated DLGN 41. The contractor, Newport
News Shipbuilding and Dry Dock Company, argued that exercising the
contract option would violate the Antideficiency Act by obligating
more money than Navy had in its appropriation.
The appropriation in question, the "Naval Vessels" appropriation,
provided a lump sum for vessels, much of which was earmarked,
including an earmark for DLGN: "For Naval vessels: for the Navy,
$3,156,400,000, of which sum $244,300,000 shall be used only for the
DLGN nuclear powered guided missile frigate program;..." The committee
reports on the appropriation act and the related authorization act
indicated that, out of the $244 million appropriated, $152 million was
for construction of the DLGN 41 and the remaining $92 million was for
long lead time activity on the DLGN 42. Clearly, if the $152 million
specified in the committee reports for the DLGN 41 was legally
binding, obligations resulting from exercise of the contract option
would exceed the available appropriation.
The Comptroller General applied the "LTV principle" and held that the
$152 million was not a legally binding limit on obligations for the
DLGN 41. As a matter of law, the entire $244 million was legally
available for the DLGN 41 because the appropriation act did not
include any restriction. Therefore, in evaluating potential violations
of the Antideficiency Act, the relevant appropriation amount is the
total amount of the lump-sum appropriation minus sums already
obligated, not the lower figure derived from the legislative history.
[Footnote 16] As the decision recognized, Congress could have imposed
a legally binding limit by the very simple device of appropriating a
specific amount only for the DLGN 41, appropriating a specific amount
only for the DLGN 42, or by incorporating the committee
reports in the appropriation language.
This decision illustrates another important point: The terms "lump-
sum" and "line-item" are relative concepts. The $244 million
appropriation in the Newport News case could be viewed as a line-item
appropriation in relation to the broader "Shipbuilding and Conversion"
category, but it was also a lump-sum appropriation in relation to the
two specific vessels included. This factual distinction does not
affect the applicable legal principle. As the decision explained:
"Contractor urges that LW is inapplicable here since LW involved a
lump-sum appropriation whereas the DLGN appropriation is a more
specific 'line item' appropriation. While we recognize the factual
distinction drawn by Contractor, we nevertheless believe that the
principles set forth in LTV are equally applicable and controlling
here.... Implicit in our holding in LW and in the other authorities
cited is the view that dollar amounts in appropriation acts are to be
interpreted differently from statutory words in general. This view, in
our opinion, pertains whether the dollar amount is a lump-sum
appropriation available for a large number of items, as in LTV, or, as
here, a more specific appropriation available for only two items."
55 Comp. Gen. at 821-22.
A precursor of LW and Newport News provides another interesting
illustration. In 1974, controversy and funding uncertainties
surrounded the Navy's "Project Sanguine," a communications system for
sending command and control messages to submerged submarines from a
single transmitting location in the United States. The Navy had
requested $16.6 million for Project Sanguine for Fiscal Year 1974. The
House deleted the request; the Senate restored it; the conference
committee compromised and approved $8.3 million. The Sanguine funds
were included in a $2.6 billion lump-sum Research and Development
appropriation. Navy spent more than $11 million for Project Sanguine
in Fiscal Year 1974. The question was whether Navy violated the
Antideficiency Act by spending more than the $8.3 million provided in
the conference report. GAO found that it did not, because the
conference committee's action was not specified in the appropriation
act and was therefore not legally binding. Significantly, the
appropriation act did include a proviso prohibiting use of the funds
for "full scale development" of Project Sanguine (not involved in the
$11 million expenditure), illustrating that Congress knows perfectly
well how to impose a legally binding restriction when it desires to do
so. GAO, Legality of the Navy's Expenditures for Project Sanguine
During Fiscal Year 1974, LCD-75-315 (Washington, D.C.: Jan. 20, 1975).
See also B-168482-0.M., Aug. 15, 1974.
Similarly, the Department of Health, Education, and Welfare received a
$12 billion lump-sum appropriation for public assistance in 1975.
Committee reports indicated that $9.2 million of this amount was being
provided for research and development activities of the Social and
Rehabilitation Service. Since this earmarking of the $9.2 million was
not carried into the appropriation act itself, it did not constitute a
statutory limit on the amount available for the program. B-164031.3,
Apr. 16, 1975.
GAO has applied the rule of the LTV and Newport News decisions in a
number of additional cases and reports, several of which involve
variations on the basic theme.[Footnote 17] One variation involves
something of a reverse LTV theme when agencies attempt to invoke
legislative history to supply a legal basis for their action that is
absent from the relevant statutory language. In B-278121, Nov. 7,
1997, the Library of Congress took the position that appropriation
language earmarking $9,619,000 for a particular purpose, to remain
available until expended, did not require the entire amount to be used
exclusively for that purpose. Rather, the Library maintained, the
figure constituted merely a "cap" or upper limit on the amount
available for the stated purpose. The Library pointed to the way in
which the conference committee described the figures relative to this
appropriation as implicitly supporting its position. GAO rejected the
Library's interpretation of the statutory language and, in particular,
its reliance on implications from the legislative history:
"Because the language of the law is clear, we have no basis to resort
to assumptions or inferences drawn from inexplicit statements
contained in the conference report. When the Congress appropriates
lump-sum amounts without statutorily restricting what can be done with
these funds, a clear inference arises that it does not intend to
impose legally binding restrictions, and indicia in committee reports
and other legislative history as to how the funds should or are
expected to be spent do not establish any legal requirements on
federal agencies. 55 Comp. Gen. 307, 319 (1975). Implicit within this
holding is the more basic proposition that an existing statutory
provision cannot be superseded or repealed by statements,
explanations, recommendations, or tables contained in committee
reports or in other legislative history. Id. In other words, if
explanations or other comments in committee reports do not create any
legally binding restrictions on an agency's discretionary authority to
spend a lump-sum appropriation as it chooses, such comments certainly
cannot supersede an existing statutory provision that establishes a
legally binding amount that the agency may dispose of as an available
appropriation."
B-278121, at 2 (emphasis supplied).
Similarly, the Comptroller General flatly rejected the notion that
otherwise illegal agency actions could be ratified and thereby
validated when the agency notified congressional committees of the
actions and the committees expressed no objection. See B-285725, Sept.
29, 2000; B-248284, Sept. 1, 1992. The decision in B-285725 observed:
"Nothing we reviewed clearly communicates to the Congress that the
District [of Columbia] was requesting that Congress ratify or
otherwise validate an unauthorized disbursement made by the District
in excess of an available appropriation let alone that the Congress
enact legislation that expressly or impliedly authorizes the otherwise
unauthorized action. While legislative history may be useful to
clarify an ambiguity in legislative language, one may not refer to the
legislative history to write into the law that which is not there. 55
Comp. Gen. 307, 325 (1975). The District would have us write into the
language of the law something that is not even mentioned in the
relevant committee reports."
The treatment of lump-sum appropriations as described above has been
considered by the courts as well as GAO, and they reached the same
result.[Footnote 18] The United States Court of Appeals for the
District of Columbia Circuit noted that lump-sum appropriations have a
"well understood meaning" and stated the rule as follows:
"A lump-sum appropriation leaves it to the recipient agency (as a
matter of law, at least) to distribute the funds among some or all of
the permissible objects as it sees fit."
International Union v. Donovan, 746 F.2d 855, 861 (D.C. Cir. 1984),
cert. denied, 474 U.S. 825 (1985). The court in that case refused to
impose a "reasonable distribution" requirement on the exercise of the
agency's discretion, and found that discretion unreviewable. Id. at
862-63. See also McCarey v. McNamara, 390 F.2d 601 (3rd Cir. 1968);
Blackhawk Heating & Plumbing Co. v. United States, 622 F.2d 539, 547
n.6 (Ct. Cl. 1980).
One court, at odds with the weight of authority, concluded that an
agency was required by 31 U.S.C. § 1301(a) (purpose statute) to spend
money in accordance with an earmark appearing only in legislative
history. Blue Ocean Preservation Society v. Watkins, 767 E Supp. 1518
(D. Haw. 1991).
The Supreme Court's 1993 decision in Lincoln v. Vigil, 508 U.S. 182,
put to rest any lingering uncertainty that might have existed on this
point. Writing for a unanimous Court, Justice Souter quoted the rule
stated in the LTV decision and described it as "a fundamental
principle of appropriations law." Id. at 192. Specifically, the Court
held that reprogrammings under lump-sum appropriations fall within the
Administrative Procedure Act's exemption for actions "committed to
agency discretion" (5 U.S.C. § 701(a)(2)) and, therefore, are not
subject to judicial review. The Court said that the Administrative
Procedure Act "makes clear that 'review is not to be had' in these
rare circumstances where the relevant statute 'is drawn so that a
court would have no meaningful standard against which to judge the
agency's exercise of discretion.'" Lincoln, 508 U.S. at 191.
Lincoln concerned a decision by the Indian Health Service to
discontinue a health program that had exclusively assisted Indian
children in the southwestern United States and to channel the funds
into a nationwide program for similar purposes. While the program had
been funded for some years under a lump-sum appropriation, it was
never mentioned in the language of the appropriation acts. The Court
stated in this regard:
"The allocation of funds from a lump-sum appropriation is...
traditionally regarded as committed to agency discretion. After all,
the very point of a lump-sum appropriation is to give an agency the
capacity to adapt to changing circumstances and meet its statutory
responsibilities in what it sees as the most effective or desirable
way.
"An agency's allocation of funds from a lump-sum appropriation
requires a complicated balancing of a number of factors which are
peculiarly within its expertise: whether its resources are best spent
on one program or another; whether it is likely to succeed in
fulfilling its statutory mandate; whether a particular program best
fits the agency's overall policies; and, indeed, whether the agency
has enough resources to fund a program at all.... The agency is far
better equipped than the courts to deal with the many variables
involved in the proper ordering of its priorities. Of course, an
agency is not free simply to disregard statutory responsibilities:
Congress may always circumscribe agency discretion to allocate
resources by putting restrictions in the operative statutes (though
not, as we have seen, just in the legislative history). And, of
course, we hardly need to note that an agency's decision to ignore
congressional expectations may expose it to grave political
consequences. But as long as the agency allocates funds from a lump-
sum appropriation to meet permissible statutory objectives, [5 U.S.C.]
§ 701(a)(2) gives the courts no leave to intrude."
508 U.S. at 192-93 (citations and internal quotations omitted).
The Court noted that while the agency had repeatedly informed Congress
about the program in question, "as we have explained, these
representations do not translate through the medium of legislative
history into legally binding obligations." Id. at 194. Subsequent
judicial decisions have, of course, followed this approach. E.g.,
State of California v. United States, 104 F.3d 1086,1093-94 (9th
Cir.), cert. denied, 522 U.S. 806 (1997); State of New Jersey v.
United States, 91 F.3d 463,470-71 (3rd Cir. 1996); Vizenor v. Babbitt,
927 E Supp. 1193 (D. Minn. 1996); Allred v. United States, 33 Fed. CL
349 (1995). But see Ramah Navajo School Board, Inc. v. Babbitt, 87
F.3d 1338 (D.C. Cir. 1996).[Footnote 19]
While Lincoln, LTV, and related decisions clearly affirm that agencies
have very broad legal discretion when allocating funds under lump-sum
appropriations, an important caveat must be noted: Such discretion
obviously does not extend to allowing an agency to avoid contractual
or other legal obligations imposed upon it. In other words, the agency
cannot reprogram funds otherwise available for payments under a
contract and then claim (at least successfully) that its hands are
tied from malting the contract payments. The Supreme Court's recent
decision in Cherokee Nation of Oklahoma v. Leavitt, 543 U.S. 631,125
S. Ct. 1172 (2005), illustrates this point.
Cherokee Nation of Oklahoma v. Leavitt addressed the Indian Health
Service's obligation to pay contract support costs under the Indian
Self-Determination and Education Assistance Act, as amended, 25 U.S.C.
§§ 450-450n.[Footnote 20] The Act requires the Secretary of Health and
Human Services,[Footnote 21] at the request of Indian tribes, to enter
into self-determination contracts whereby the tribes agree to
administer programs and provide services that would otherwise be the
responsibility of the federal government. See generally 25 U.S.C. §
450f. The federal government makes contract payments of not less than
the amounts the government would have incurred in administering the
programs directly, including, among other things, certain
administrative contract support costs. Id. § 450j-1(a). With respect
to contract funding, 25 U.S.C. § 450j-1(b) includes the following
proviso:
"Notwithstanding any other provision in this subchapter, the provision
of funds under this subchapter is subject to the availability of
appropriations and the Secretary is not required to reduce funding for
programs, projects, or activities serving a tribe to make funds
available to another tribe or tribal organization under this
subchapter."
The Cherokee Nation litigation grew out of the government's refusal to
pay the full support cost amounts claimed by the tribes under their
contracts for certain fiscal years. The government maintained that
appropriations for those fiscal years were insufficient to fund the
full amounts. The Court disagreed. The Court noted that the self-
determination contracts were no less legally binding than ordinary
procurement contracts. Cherokee Nation of Oklahoma v. Leavitt, 125 S.
Ct. at 1178-79. The contracts for the fiscal years in question were
funded from lump-sum appropriations to the Indian Health Service that,
the Court pointed out, far exceeded the total payments due under the
contracts and contained no restrictions on the amounts of such
payments. Id. at 1177. The Court then recited two basic propositions
asserted by the tribes that, it noted, the government had conceded.
The first was the "fundamental principle of appropriations law"
recognized in Lincoln that when Congress appropriates lump-sum amounts
unaccompanied by restrictions, a clear inference arises that it does
not intend to impose legally binding restrictions and committee
reports and other legislative history do not establish legally binding
requirements. Cherokee Nation of Oklahoma v. Leavitt, 125 S. Ct. at
1177. The second was that:
"as long as Congress has appropriated sufficient legally unrestricted
funds to pay the contracts at issue, the Government normally cannot
back out of a promise to pay on grounds of 'insufficient
appropriations,' even if the contract uses language such as 'subject
to the availability of appropriations,' and even if an agency's total
lump-sum appropriation is insufficient to pay all the contracts the
agency has made."
Id. In support of this proposition, the Court cited Ferris v. United
States, 27 Ct. Cl. 542 (1892), and Blackhawk Heating & Plumbing Co. v.
United States, 622 F.2d 539 (Ct. CL 1980). To the same effect, the
Court quoted the following statement from the government's brief on
the law applicable to ordinary procurement contracts:
"If the amount of an unrestricted appropriation is sufficient to fund
the contract, the contractor is entitled to payment even if the agency
has allocated the funds to another purpose or assumes other
obligations that exhaust the funds."
Cherokee Nation of Oklahoma v. Leavitt, 125 S. Ct. at 1179-80
(emphasis supplied).
The Court rejected the government's contentions that the provisos in
25 U.S.C. § 450j-1(b), quoted previously, precluded full payment under
the contracts. The Court observed that the first proviso making
funding "subject to the availability of appropriations" is frequently
used language that simply makes clear that contracts cannot become
binding in advance of appropriations or otherwise without regard to
the availability of appropriations. Cherokee Nation of Oklahoma v.
Leavitt, 125 S. Ct. at 1180-81. "Since Congress appropriated adequate
funds here," said the Court, the first proviso, "if interpreted as
ordinarily understood, would not help the Government." Id. at 1181.
The Court concluded that the second proviso, stating that the
government need not reduce funding benefiting other tribes in order to
fund self-determination contracts was likewise unavailing to the
government:
"The Government argues that these other funds, though legally
unrestricted (as far as the appropriations statutes' language is
concerned) were nonetheless unavailable to pay `contract support
costs' because the Government had to use those funds to satisfy a
critically important need, namely, to pay the costs of 'inherent
federal functions,' such as the cost of running the Indian Health
Service's central Washington office. This argument cannot help the
Government, however, for it amounts to no more than a claim that the
agency has allocated the funds to another purpose, albeit potentially
a very important purpose. If an important alternative need for funds
cannot rescue the Government from the binding effect of its promises
where ordinary procurement contracts are at issue, it cannot rescue
the Government here, for we can find nothing special in the statute's
language or in the contracts.
"We recognize that agencies may sometimes find that they must spend
unrestricted appropriated funds to satisfy needs they believe more
important than fulfilling a contractual obligation. But the law
normally expects the Government to avoid such situations, for example,
by refraining from making less essential contractual commitments; or
by asking Congress in advance to protect funds needed for more
essential purposes with statutory earmarks; or by seeking added
funding from Congress; or, if necessary, by using unrestricted funds
for the more essential purpose while leaving the contractor free to
pursue appropriate legal remedies arising because the Government broke
its contractual promise. The Government, without denying that this is
so as a general matter of procurement law, says nothing to convince us
that a different legal rule should apply here."
Id. at 1180 (citations omitted; emphasis supplied).[Footnote 22]
Finally, the Court declined to construe an appropriation act provision
enacted in a subsequent fiscal year as creating a statutory cap on
funding for the years covered by the litigation. This later-enacted
provision stated in part:
"Notwithstanding any other provision of law... amounts appropriated to
or earmarked in committee reports for the Indian Health Service...
[for] payments to tribes... for contract support costs... are the
total amounts available for fiscal years 1994 through 1998 for such
purposes."[Footnote 23]
The Court acknowledged that it was reasonable to interpret the
language as restricting payments for the prior years. However, it
opted not to do so since such an interpretation would treat the
language as retroactively repudiating a binding government contract
and thereby raising constitutional concerns. Cherokee Nation of
Oklahoma v. Leavitt, 125 S. Ct. at 1182. The Court also rejected the
government's contention that the language simply clarified that the
prior ambiguous appropriation language was not unrestricted,
concluding that there was nothing ambiguous about the prior language.
Id. Rather, the Court treated the later-enacted language as affecting
only unobligated carryover balances from the prior year appropriations.
c. "Zero Funding" Under a Lump-Sum Appropriation:
Does discretion under a lump-sum appropriation extend so far as to
permit an agency to "zero fund" a particular program? Although there
are few cases, the answer would appear, for the most part, to be yes,
as long as the program is not mandatory and the agency uses the funds
for other authorized purposes to avoid impoundment complications.
E.g., B-209680, Feb. 24, 1983 (agency could properly decide not to
fund a program where committee reports on appropriation stated that no
funds were being provided for that program, although agency would have
been equally free to fund the program under the lump-sum
appropriation); B-167656, June 18, 1971 (agency has discretion to
discontinue a function funded under a lump-sum appropriation to cope
with a shortfall in appropriations); 4B Op. Off. Legal Counsel 701,
704 n.7 (1980) (same point).
The more difficult question is whether the answer is the same where
there is no shortfall problem and where it is clear that Congress
wants the program funded. In International Union v. Donovan, 746 F.2d
855, 861 (D.C. Cir. 1984), cert. denied, 474 U.S. 825 (1985),
discussed previously, the court upheld an agency's decision to
allocate no funds to a program otherwise authorized for funding under
a lump-sum appropriation. Although there was in that case a
"congressional realization, if not a congressional intent, that
nothing would be expended" for the program in question, 746 F.2d at
859, it seems implicit from the court's discussion of applicable law
that the answer would have been the same if legislative history had
"directed" that the program be funded. The same result would seem to
follow from 55 Comp. Gen. 812 (1976), discussed above, holding that
the entire unobligated balance of a lump-sum appropriation should be
considered available for one of the objects included in the
appropriation, at least for purposes of assessing potential violations
of the Antideficiency Act.
In B-114833, July 21, 1978, the Department of Agriculture wanted to
use its 1978 lump-sum Resource Conservation and Development
appropriation to fund existing projects rather than starting any new
ones, even though the appropriations committee reports indicated that
the funds were for certain new projects. Since the language referring
to new projects was stated in committee reports but not in the statute
itself, the Department's proposed course of action was legally
permissible.
In a very early, 1922 decision, 1 Comp. Gen. 623 (1922), GAO seemed to
suggest that there are constraints on an agency's discretion. The
appropriation in question provided for "rent of offices of the
recorder of deeds, including services of cleaners as necessary, not to
exceed 30 cents per hour,... $6,000." The Comptroller General held
that the entire $6,000 could not be spent for rent. The decision stated:
"Since [the appropriation act] provides that the amount appropriated
shall cover both rent and cleaning services, it must be held that the
entire amount can not be used for rent alone.
"...The law leaves to the discretion of the commissioners the question
as to what portion of the amount appropriated shall be paid for rent
and what portion shall be paid for services of cleaners, but it does
not vest in the commissioners the discretion to determine that the
entire amount shall be paid for rent and that the cleaning services
shall be left unprovided for, or be provided for from other funds."
Id. at 624. As a practical matter it would not have been possible to
rent office space and totally eliminate cleaning services, and the use
of any other appropriation would have been clearly improper. A factor
which apparently influenced the decision was that the "regular office
force" was somehow being coerced to do the cleaning, and these were
employees paid from a separate appropriation. Id.
2. Line-Item Appropriations and Earmarks:
Congress may wish to specifically designate, or "earmark," part of a
more general lump-sum appropriation for a particular object, as either
a maximum, a minimum, or both.
An earmark refers to the portion of a lump-sum appropriation
designated for a particular purpose.[Footnote 24] The term earmark
often is used interchangeably with the term "line item." In
appropriations language, however, a line item is an appropriation that
is dedicated for a specific purpose, rather than an amount within a
lump-sum appropriation.[Footnote 25] The following example of
earmarking language in a lump-sum appropriation can be found in the
Consolidated Appropriations Act of 2004:
"For necessary administrative expenses of the domestic nutrition
assistance programs funded under this Act, $138,304,000, of which
$5,000,000 shall be available only for simplifying procedures,
reducing overhead costs,... and prosecution of fraud and other
violations of law..."[Footnote 26]
In this example, the $5 million is an earmark.
Often, cases interpreting earmarks turn on congressional intent. See,
e.g., B-285794, Dec. 5, 2000 (use of statutory interpretation to
determine whether the Community Development Block Grant (CDBG) heading
requiring competition for assistance "under this heading" applied to
an earmark within the CDBG lump-sum appropriation).
For simplicity of illustration, let us assume that we have a lump-sum
appropriation of $1 million for "general construction" and a
particular object within that appropriation is "renovation of office
space." If the appropriation specifies "not to exceed" $100,000 for
renovation of office space or "not more than" $100,000 for renovation
of office space, then $100,000 is the maximum available for renovation
of office space. 64 Comp. Gen. 263 (1985).[Footnote 27] A specifically
earmarked maximum may not be supplemented with funds from the general
appropriation.
Statutory authority to transfer funds between appropriations may
permit the augmentation of a "not to exceed" earmark in some cases. In
12 Comp. Gen. 168 (1932), it was held that general transfer authority
could be used to increase maximum earmarks for personal services,
subject to the percentage limitations specified in the transfer
statute because, in this case, the transfer authority was remedial
legislation designed to mitigate the impact of reduced appropriations.
The decision pointed out that if the personal services earmark had
been a separate line-item appropriation, the transfer authority would
clearly apply. Id. at 170. Somewhat similarly, in 36 Comp. Gen. 607
(1957), funds transferred to an operating appropriation from a civil
defense appropriation could be used to exceed an administrative
expense limitation in the operating appropriation. Congress had
imposed new civil defense functions but had neglected to adjust the
administrative expenses limitation. However, in 33 Comp. Gen. 214
(1953), the Comptroller General held that general transfer authority
could not be used to exceed a maximum earmark on an emergency
assistance program where it was clear that Congress, aware of the
emergency, intended that the program be funded only from the earmark.
See also 18 Comp. Gen. 211 (1938). As in many cases, these decisions
turned on congressional intent.
Under a "not to exceed" earmark, the agency is not required to spend
the entire amount on the object specified. See, e.g., Brown v.
Ruckelshaus, 364 F. Supp. 258, 266 (C.D. Cal. 1973) ("the phrase 'not
to exceed' connotes limitation, not disbursement"). If, in our
hypothetical, the entire $100,000 is not used for renovation of office
space, unobligated balances may—within the time limits for obligation—
be applied to other unrestricted objects of the appropriation. B-
290659, July 24, 2002; 31 Comp. Gen. 578, 579 (1952); 15 Comp. Dec.
660 (1909); B-4568, June 27, 1939.
If later in the fiscal year a supplemental appropriation is made for
"renovation of office space," the funds provided in the supplemental
may not be used to increase the $100,000 maximum for general
construction unless the supplemental appropriation act so specifies.
See section D of this chapter for a further discussion of supplemental
appropriations.
An earmark that authorizes an agency to use a lump-sum appropriation
for "not more than" a certain dollar amount has the same effect as a
"not to exceed" earmark. For example, when the Department of State
received a lump-sum appropriation for "International Organizations and
Programs" authorizing it to make "not more than" $34 million of that
lump sum available for the United Nations Population Fund (UNFPA), the
Comptroller General concluded:
"While the appropriation limits the State Department's use of the lump-
sum appropriation for 'International Organizations and Programs' for
UNFPA to no more than $34 million, it does not require by law that any
amounts be used for UNFPA."
B-290659, July 24, 2002. In this case, the State Department could use
the funds for UNFPA only after the Department ensured that UNFPA
practices satisfied three statutory conditions, one of which was that
UNFPA would not fund abortions. Pub. L. No. 107-115, § 576, 115 Stat.
2118, 2168 (Jan. 10, 2002). The Department had delayed obligating
funds for UNFPA pending an analysis of a report of a team reviewing
UNFPA's involvement in Chinese family planning practices, including
the funding of abortions.[Footnote 28]
Words like "not more than" or "not to exceed" are not the only ways to
establish a maximum limitation. If the appropriation includes a
specific amount for a particular object (such as "for renovation of
office space, $100,000"), then the appropriation establishes a maximum
that may not be exceeded. 36 Comp. Gen. 526 (1957); 19 Comp. Gen. 892
(1940); 16 Comp. Gen. 282 (1936).
Another device Congress has used to designate earmarks as maximum
limitations is the following general provision:
"Whenever in this Act, an amount is specified within an appropriation
for particular purposes or objects of expenditure, such amount, unless
otherwise specified, shall be considered as the maximum amount that
may be expended for said purpose or object rather than an amount set
apart exclusively therefor." (Emphasis added.)[Footnote 29]
By virtue of the "unless otherwise specified" clause, the provision
does not apply to amounts within an appropriation which have their own
specific earmarking "words of limitation," such as "exclusively." 31
Comp. Gen. 578 (1952).
If a lump-sum appropriation includes several particular objects and
provides further that the appropriation "is to be accounted for as one
fund" or "shall constitute one fund," then the individual amounts are
not limitations, the only limitation being that the total amount of
the lump-sum appropriation cannot be exceeded. However, individual
items within that lump-sum appropriation that include the "not to
exceed" language will still constitute maximum limitations. 22 Comp.
Dec. 461 (1916); 3 Comp. Dec. 604 (1897); A-79741, Aug. 7, 1936. The
"one fund" language is generally used when Congress authorizes an
agency to transfer unexpended balances of prior appropriations to a
current appropriation. For example, the Energy and Water Development
Appropriations Act for 2002 states that:
"The unexpended balances of prior appropriations provided for
activities in the Act may be transferred to appropriation accounts for
such activities established pursuant to the title. Balances so
transferred may be merged with funds in the applicable established
accounts and thereafter may be accounted for as one fund for the same
period as originally enacted."[Footnote 30]
If Congress wishes to specify a minimum for the particular object but
not a maximum, the appropriation act may provide "General construction,
$1 million, of which not less than $100,000 shall be available for
renovation of office space." B-137353, Dec. 3, 1959. See also 64 Comp.
Gen. 388 (1985); B-131935, Mar. 17, 1986. If the phrase "not less
than" is used, in contrast with the "not to exceed" language, portions
of the $100,000 not obligated for renovation of office space may not
be applied to the other objects of the appropriation. 64 Comp. Gen. at
394-95; B-128943, Sept. 27, 1956.
Another phrase Congress often uses to earmark a portion of a lump-sum
appropriation is "shall be available." There are variations. For
example, our hypothetical $1 million "renovation of office space"
appropriation may provide that, out of the $1 million, $100,000 "shall
be available" or "shall be available only" or "shall be available
exclusively" for renovation of office space. Still another variation
is "$1 million, including $100,000 for renovation of office space."
If the "shall be available" phrase is combined with the maximum or
minimum language noted above ("not to exceed," "not less than," etc.),
then the above rules apply and the phrase "shall be available" adds
little. See, e.g., B-137353, Dec. 3, 1959. However, if the earmarking
phrase "shall be available" is used without the "not to exceed" or
"not less than" modifiers, the rules are not quite as firm.
Cases interpreting the "shall be available" and "shall be available
only" earmarks are somewhat less than consistent. The earlier
decisions proclaimed "shall be available" to constitute a maximum but
not a minimum (B-5526, Sept. 14, 1939), although it could be a minimum
if Congress clearly expressed that intent (B-128943, Sept. 27, 1956).
Later cases held the earmark to constitute both a maximum and a
minimum which could neither be augmented nor diverted to other objects
within the appropriation. B-137353, Dec. 3, 1959; B-137353-0.M., Oct.
14, 1958. Another early decision held summarily that "shall be
available only" results in a maximum which cannot be augmented. 18
Comp. Gen. 1013 (1939). Later decisions, however, have expressed the
view that the effect of "shall be available only"—whether it is a
maximum or a minimum—depends on the underlying congressional intent.
53 Comp. Gen. 695 (1974); B-142190, Mar. 23, 1960. Applying this test,
the earmark in 53 Comp. Gen. 695 was found to be a maximum; similar
language had been found a minimum in B-142190, which could be exceeded.
If the phrase "shall be available" may be said to contain an element
of ambiguity, addition of the word "only" does not produce a plain
meaning. The Claims Court, reviewing an authorization earmark for a
Navy project known as RACER, commented:
"It is not apparent from the language of the authorization ($45
million 'is available only for') that Congress necessarily mandated
the Navy to spend all $45 million on the RACER system. Rather,
Congress may have merely intended to preclude the Navy from spending
that $45 million on any other activities, i.e., the money would be
forfeited if not spent on the RACER system."
Solar Turbines, Inc. v. United States, 23 Cl. Ct. 142, 158 (1991).
Use of the word "exclusively" is somewhat more precise. The earmark
"shall be available exclusively" is both a maximum which cannot be
augmented from the general appropriation, and a minimum which cannot
be diverted to other objects within the appropriation. B-102971, Aug.
24, 1951. Once again, however, clearly expressed congressional intent
can produce a different result. B-113272-0.M., May 21, 1953; B-111392-
0.M., Oct. 17, 1952 (earmark held to be a minimum only in both cases).
Similarly, the term "including" has been held to establish both a
maximum and a minimum. A-99732, Jan. 13, 1939. As such, it cannot be
augmented from a more general appropriation (19 Comp. Gen. 892
(1940)), nor can it be diverted to other uses within the appropriation
(67 Comp. Gen. 401 (1988)).
To sum up, the most effective way to establish a maximum (but not
minimum) earmark is by the words "not to exceed" or "not more than."
The words "not less than" most effectively establish a minimum (but
not maximum). These are all phrases with well-settled plain meanings.
The "shall be available" family of earmarking language presumptively
"fences in" the earmarked sum (both maximum and minimum), but is more
subject to variation based upon underlying congressional intent.
Our discussion thus far has centered on the use of earmarking language
to prescribe the amount available for a particular object. Earmarking
language also may be used to vary the period of availability for
obligation.
An earmarked amount within a lump-sum appropriation that is available
without fiscal year limitation is neither a maximum nor a minimum if
the funds have not been designated for a specific purpose. The earmark
addresses only the time availability of the earmarked amount. For
example, in the Legislative Branch Appropriations Act for 2004, the
Salaries, Officers and Employees appropriations lump-sum account
contained the following language:
"For compensation and expenses of officers and employees, as
authorized by law, $156,896,000, including:... for salaries and
expenses of the Office of the Chief Administrative Officer,
$111,141,000, of which $8,400,000 shall remain available until
expended..."[Footnote 31]
In this instance, the earmark extended the time period availability of
$8,400,000 of the $111,141,000 appropriated for salaries and expenses
but did not prescribe the amount available for a particular object.
In a 1997 decision, GAO determined that an earmark extending the time
period also constituted a minimum for the purpose for which it was
earmarked. B-278121, Nov. 7, 1997 (nondecision letter). The Library of
Congress Salaries and Expenses lump-sum appropriation stated as
follows:
"For necessary expenses of the Library of Congress not otherwise
provided for... $227,016,000... Provided further, That of the total
amount appropriated, $9,619,000 is to remain available until expended
for acquisition of books, periodicals, newspapers, and all other
materials including subscriptions for bibliographic services for the
Library...[Footnote 32]
GAO determined that the Library of Congress was required to make the
entire $9,619,000 available for acquisition of books and materials,
even if this required reducing other expenditures within the lump-sum
appropriation.[Footnote 33]
Finally, earmarking language may be found in authorization acts as
well as appropriation acts. The same meanings apply. Several of the
cases cited above involve authorization acts. See, e.g., 64 Comp. Gen.
388 (1985); B-131935, Mar. 17, 1986.
C. The Antideficiency Act:
1. Introduction and Overview:
The Antideficiency Act is one of the major laws in the statutory
scheme by which Congress exercises its constitutional control of the
public purse. It has been termed "the cornerstone of Congressional
efforts to bind the Executive branch of government to the limits on
expenditure of appropriated funds."[Footnote 34]
As with the series of funding statutes as a whole, the Antideficiency
Act did not hatch fully developed but evolved over a period of time in
response to various abuses. As we noted in Chapter 1, as late as the
post-Civil War period, it was not uncommon for agencies to incur
obligations in excess, or in advance, of appropriations. Perhaps most
egregious of all, some agencies would spend their entire
appropriations during the first few months of the fiscal year,
continue to incur obligations, and then return to Congress for
appropriations to fund these "coercive deficiencies.[Footnote 35]
These were obligations to others who had fulfilled their part of the
bargain with the United States and who now had at least a moral—and in
some cases also a legal—right to be paid. Congress felt it had no
choice but to fulfill these commitments, but the frequency of
deficiency appropriations played havoc with the United States budget.
The congressional response to abuses of this nature was the
Antideficiency Act. Its history is summarized in the following
paragraphs:[Footnote 36]
"Control in the execution of the Government's budgetary and financial
programs is based on the provisions of section 3679 of the Revised
Statutes, as amended..., commonly referred to as the Antideficiency
Act. As the name... implies, one of the principal purposes of the
legislation was to provide effective control over the use of
appropriations so as to prevent the incurring of obligations at a rate
which will lead to deficiency (or supplemental) appropriations and to
fix responsibility on those officials of Government who incur
deficiencies or obligate appropriations without proper authorization
or at an excessive rate.
"The original section 3679... was derived from legislation enacted in
1870 [16 Stat. 251] and was designed solely to prevent expenditures in
excess of amounts appropriated. In 1905 [33 Stat. 1257] and 1906 [34
Stat. 48], section 3679... was amended to provide specific
prohibitions regarding the obligation of appropriations and required
that certain types of appropriations be so apportioned over a fiscal
year as to `prevent expenditures in one portion of the year which may
necessitate deficiency or additional appropriations to complete the
service of the fiscal year for which said appropriations are made.'
Under the amended section, the authority to make, waive, or modify
apportionments was vested in the head of the department or agency
concerned. By Executive Order 6166 of June 10, 1933, this authority
was transferred to the Director of the [Office of Management and
Budget]....
"During and following World War II, with the expansion of Government
functions and the increase in size and complexities of budgetary and
operational problems, situations arose highlighting the need for more
effective control and conservation of funds. In order to effectively
cope with these conditions it was necessary to seek legislation
clarifying certain technical aspects of section 3679 of the Revised
Statutes, and strengthening the apportionment procedures, particularly
as regards to agency control systems. Section 1211 of the General
Appropriation Act, 1951 [64 Stat. 765], amended section 3679... to
provide a basis for more effective control and economical use of
appropriations. Following a recommendation of the second Hoover
Commission that agency allotment systems should be simplified,
Congress passed legislation in 1956 [70 Stat. 783] further amending
section 3679 to provide that each agency work toward the objective of
financing each operating unit, at the highest practical level, from
not more than one administrative subdivision for each appropriation or
fund affecting such unit. In 1957 [71 Stat. 440] section 3679 was
further amended, adding a prohibition against the requesting of
apportionments or reapportionments which indicate the necessity for a
deficiency or supplemental estimate except on the determination of the
agency head that such action is within the exceptions expressly set
out in the law. The revised Antideficiency Act serves as the primary
foundation for the Government's administrative control of funds
systems."
In its current form, the law prohibits:
* Making or authorizing an expenditure from, or creating or
authorizing an obligation under, any appropriation or fund in excess
of the amount available in the appropriation or fund unless authorized
by law. 31 U.S.C. § 1341(a)(1)(A).
* Involving the government in any contract or other obligation for the
payment of money for any purpose in advance of appropriations made for
such purpose, unless the contract or obligation is authorized by law.
31 U.S.C. § 1341(a)(1)(B).
* Accepting voluntary services for the United States, or employing
personal services in excess of that authorized by law, except in cases
of emergency involving the safety of human life or the protection of
property. 31 U.S.C. § 1342.
* Making obligations or expenditures in excess of an apportionment or
reapportionment, or in excess of the amount permitted by agency
regulations. 31 U.S.C. § 1517(a).[Footnote 37]
Subsequent sections of this chapter will explore these concepts in
detail. However, the fiscal principles inherent in the Antideficiency
Act are really quite simple. Government officials may not make
payments or commit the United States to make payments at some future
time for goods or services unless there is enough money in the "bank"
to cover the cost in full. The "bank," of course, is the available
appropriation.
The combined effect of the Antideficiency Act, in conjunction with the
other funding statutes discussed throughout this publication, was
summarized in a 1962 decision. The summary has been quoted in numerous
later Antideficiency Act cases and bears repeating here:
"These statutes evidence a plain intent on the part of the Congress to
prohibit executive officers, unless otherwise authorized by law, from
making contracts involving the Government in obligations for
expenditures or liabilities beyond those contemplated and authorized
for the period of availability of and within the amount of the
appropriation under which they are made; to keep all the departments
of the Government, in the matter of incurring obligations for
expenditures, within the limits and purposes of appropriations
annually provided for conducting their lawful functions, and to
prohibit any officer or employee of the Government from involving the
Government in any contract or other obligation for the payment of
money for any purpose, in advance of appropriations made for such
purpose; and to restrict the use of annual appropriations to
expenditures required for the service of the particular fiscal year
for which they are made."
42 Comp. Gen. 272, 275 (1962).
To the extent it is possible to summarize appropriations law in a
single paragraph, this is it. Viewed in the aggregate, the
Antideficiency Act and related funding statutes "[restrict] in every
possible way the expenditures and expenses and liabilities of the
government, so far as executive offices are concerned, to the specific
appropriations for each fiscal year." Wilder's Case, 16 Ct. CL 528,
543 (1880).
2. Obligation/Expenditure in Excess or Advance of Appropriations:
The key provision of the Antideficiency Act is 31 U.S.C. § 1341(a)(1):
[Footnote 38]
"(a)(1) An officer or employee of the United States Government or of
the District of Columbia government may not:
"(A) make or authorize an expenditure or obligation exceeding an
amount available in an appropriation or fund for the expenditure or
obligation; or;
"(B) involve either government in a contract or obligation for the
payment of money before an appropriation is made unless authorized by
law."
Not only is section 1341(a)(1) the key provision of the Act, it was
originally the only provision, the others being added to ensure
enforcement of the basic prohibitions of section 1341.
The law is not limited to the executive branch, but applies to any
"officer or employee of the United States Government" and thus extends
to all branches. Examples of legislative branch applications are B-
303964, Feb. 3, 2005 (Capitol Police use of the Legislative Branch
Emergency Response Fund); B-303961, Dec. 6, 2004 (Architect of the
Capitol); B-107279, Jan. 9, 1952 (Office of Legislative Counsel, House
of Representatives); B-78217, July 21, 1948 (appropriations to Senate
for expenses of Office of Vice President); 27 Op. Att'y Gen. 584
(1909) (Government Printing Office). Within the judicial branch, it
applies to the Administrative Office of the United States Courts.
E.g., 50 Comp. Gen. 589 (1971). However, whether a federal judge is an
officer or employee for purposes of 31 U.S.C. § 1341(a)(1) appears to
remain an open question, at least in some contexts. See Armster v.
United States District Court, 792 F.2d 1423, 1427 n.7 (9th Cir. 1986)
(the Seventh Amendment of the Constitution prohibits suspension of
civil jury trials for lack of funds, whether or not a judge is
considered an employee or officer under the Antideficiency Act). The
Antideficiency Act also applies to officers of the District of
Columbia Courts. B-284566, Apr. 3, 2000.
Some government corporations are also classified as agencies of the
United States Government, and to the extent they operate with funds
which are regarded as appropriated funds, they too are subject to 31
U.S.C. § 1341(a)(1). E.g., B-223857, Feb. 27, 1987 (Commodity Credit
Corporation); B-135075-0.M., Feb. 14, 1975 (Inter-American
Foundation). It follows that section 1341(a)(1) does not apply to a
government corporation that is not an agency of the United States
Government. E.g., B-175155-0.M., July 26, 1976 (Amtrak). These
principles are, of course, subject to variation if and to the extent
provided in the relevant organic legislation.
There are two distinct prohibitions in section 1341(a)(1). Unless
otherwise authorized by law, no officer or employee of the United
States may (1) make any expenditure or incur an obligation in excess
of available appropriations, or (2) make an expenditure or incur an
obligation in advance of appropriations.
The distinction between obligating in excess of an appropriation and
obligating in advance of an appropriation is clear in the majority of
cases, but can occasionally become blurred. For example, an agency
which tries to meet a current shortfall by "borrowing" from (i.e.,
obligating against) the unenacted appropriation for the next fiscal
year is clearly obligating in advance of an appropriation. E.g., B-
236667, Jan. 26, 1990. However, it is also obligating in excess of the
currently available appropriation. Since both are equally illegal,
determining precisely which subsection of event, the point to be
stressed here is that the law is violated not just when there are
insufficient funds in an account when a payment becomes due. The very
act of obligating the United States to make a payment when the
necessary funds are not already in the account is also a violation of
31 U.S.C. § 1341(a). E.g., B-300480, Apr. 9, 2003.
In B-290600, July 10, 2002, both the Office of Management and Budget
(OMB) and the Airline Transportation Stabilization Board (ATSB)
violated the Antideficiency Act when OMB apportioned, and ATSB
obligated an appropriation, in advance of, and thus in excess of, its
availability. The Air Transportation Safety and System Stabilization
Act authorized the President to issue up to $10 billion in loan
guarantees, and to provide the subsidy amounts necessary for such
guarantees,[Footnote 39] to assist air carriers who incurred losses
resulting from the September 11, 2001, terrorist attacks on the United
States. Pub. L. No. 107-42, title I, § 101(a)(1), 115 Stat. 230 (Sept.
22, 2001). Congress established the ATSB to review and decide on
applications for these loan guarantees. The budget authority for the
guarantees was available only "to the extent that a request, that
includes designation of such amount as an emergency requirement ... is
transmitted by the President to Congress." Id. at § 101(b). The
President had not submitted such a request at the time OMB apportioned
the funds to ATSB and the ATSB obligated the funds; therefore, both
OMB and ATSB made funds available in advance of their availability,
violating the Antideficiency Act. See section C of this chapter for a
discussion of the apportionment process.
Note that 31 U.S.C. § 1341(a) refers to overobligating and
overspending the amount available in an "appropriation or fund." The
phrase "appropriation or fund" refers to appropriation and fund
accounts. An appropriation account is the basic unit of an
appropriation generally reflecting each unnumbered paragraph in an
appropriation act. Fund accounts include general fund accounts,
intragovernmental fund accounts, special fund accounts, and trust fund
accounts.[Footnote 40] See, e.g., 72 Comp. Gen. 59 (1992) (Corps of
Engineers was prohibited by the Antideficiency Act from overobligating
its Civil Works Revolving Fund's available budget authority).
Thus, for example, the Antideficiency Act applies to Indian trust
funds managed by the Bureau of Indian Affairs However, the investment
of these funds in certificates of deposit with federally insured banks
under authority of 25 U.S.C. § 162a does not, in GAO's opinion,
constitute an obligation or expenditure for purposes of 31 U.S.C. §
1341. Accordingly, overinvested trust funds do not violate the
Antideficiency Act unless the overinvested funds, or any attributable
interest income, are obligated or expended by the Bureau. B-207047-
0.M., June 17, 1983. Cf. B-303413, Nov. 8, 2004 (the Federal
Communications Commission's (FCC) regulatory action to provide
spectrum rights through a license modification instead of an auction
did not violate section 1341; spectrum licenses that impose costs and
expenses on the licensee do not constitute an obligation and
expenditure of the FCC). GAO also views the Antideficiency Act as
applicable to presidential and vice-presidential "unvouchered
expenditure" accounts. B-239854, June 21, 1990 (internal memorandum).
a. Exhaustion of an Appropriation:
When we talk about an appropriation being "exhausted," we are really
alluding to any of several different but related situations:
* Depletion of appropriation account (i.e., fully obligated and/or
expended).
* Similar depletion of a maximum amount specifically earmarked in a
lump-sum appropriation.[Footnote 41]
* Depletion of an amount subject to a monetary ceiling imposed by some
other statute (usually, but not always, the relevant program
legislation).
(1) Making further payments:
In simple terms, once an appropriation is exhausted, the making of any
further payments, apart from using expired balances to liquidate or
make adjustments to valid obligations recorded against that
appropriation, violates 31 U.S.C. § 1341. When the appropriation is
fully expended, no further payments may be made in any case. If an
agency finds itself in this position, unless it has transfer authority
or other clear statutory basis for making further payments, it has
little choice but to seek a deficiency[Footnote 42] or supplemental
appropriation from Congress, and to adjust or curtail operations as
may be necessary. E.g., B-285725, Sept. 29, 2000; 61 Comp. Gen. 661
(1982); 38 Comp. Gen. 501 (1959). For example, when the Corporation
for National and Community Service obligated funds in excess of the
amount available to it in the National Service Trust, the Corporation
suspended participant enrollment in the AmeriCorps program and
requested a deficiency appropriation from Congress.[Footnote 43]
In many ways, the prohibitions in the Adequacy of Appropriations Act,
41 U.S.C. § 11, parallel those of 31 U.S.C. § 1341(a). The Adequacy of
Appropriations Act states in part that:
"No contract or purchase on behalf of the United States shall be made,
unless the same is authorized by law or is under an appropriation
adequate to its fulfillment, except in the Department of Defense and
in the Department of Transportation with respect to the Coast Guard
when it is not operating as a service in the Navy, for clothing,
subsistence, forage, fuel, quarters, transportation, or medical and
hospital supplies, which, however, shall not exceed the necessities of
the current year."
41 U.S.C. § 11(a). For example, a contract in excess of the available
appropriation violates both statutes. E.g., 9 Comp. Dec. 423 (1903).
However, a contract in compliance with 41 U.S.C. § 11 can still result
in a violation of the Antideficiency Act. Assessment of Antideficiency
Act violations is not frozen at the point when the obligation is
incurred. Even if the initial obligation was well within available
funds, the Antideficiency Act can still be violated if upward
adjustments cause the obligation to exceed available funds. E.g., 55
Comp. Gen. 812, 826 (1976).
What one authority termed the "granddaddy of all violations[Footnote
44] occurred when the Navy overobligated and overspent nearly $110
million from its "Military Personnel, Navy" appropriation during the
years 1969-1972. GAO summarized the violation in a letter report, B-
177631, June 7, 1973. While there may have been some concealment, GAO
concluded that the violation was not the result of some evil scheme;
rather, the "basic cause of the violation was the separation of the
authority to create obligations from the responsibility to control
them." The authority to create obligations had been decentralized
while control was centralized in the Bureau of Naval Personnel.
Granddaddy was soon to lose his place of honor on the totem pole.
Around November of 1975, the Department of the Army discovered that,
for a variety of reasons, it had overobligated four procurement
appropriations in the aggregate amount of more than $160 million and
consequently had to halt payments to some 900 contractors. The Army
requested the Comptroller General's advice on a number of potential
courses of action it was considering. The resulting decision was 55
Comp. Gen. 768 (1976). The Army recognized its duty to mitigate the
Antideficiency Act violation.[Footnote 45] It was clear that without a
deficiency appropriation, all the contractors could not be paid. One
option—to use current appropriations to pay the deficiencies—had to be
rejected because there is no authority to apply current funds to pay
off debts incurred in a previous year. Id. at 773. An option GAO
endorsed was to reduce the amount of the deficiencies by terminating
some of the contracts for convenience, although the termination costs
would still have to come from a deficiency appropriation unless there
was enough left in the appropriation accounts to cover them. Id.
(2) Limitations on contractor recovery:
If the Antideficiency Act prohibits any further payments when the
appropriation is exhausted, where does this leave the contractor? Is
the contractor expected to know how and at what rate the agency is
spending its money? There is a small body of judicial case law which
discusses the effect of the exhaustion of appropriations on government
obligations. The fate of the contractor seems to depend on the type of
appropriation involved and the presence or absence of notice, actual
or constructive, to the contractor on the limitations of the
appropriation.
Where a contractor is but one party out of several to be paid from a
general appropriation, the contractor is under no obligation to know
the status or condition of the appropriation account on the
government's books. If the appropriation becomes exhausted, the
Antideficiency Act may prevent the agency from making any further
payments, but valid obligations will remain enforceable in the courts.
For example, in Ferris v. United States, 27 Ct. Cl. 542 (1892), the
plaintiff had a contract with the government to dredge a channel in
the Delaware River. The Corps of Engineers made him stop work halfway
through the job because it had run out of money. In discussing the
contractor's rights in a breach of contract suit, the court said:
"A contractor who is one of several persons to be paid out of an
appropriation is not chargeable with knowledge of its administration,
nor can his legal rights be affected or impaired by its
maladministration or by its diversion, whether legal or illegal, to
other objects. An appropriation per se merely imposes limitations upon
the Government's own agents; it is a definite amount of money
entrusted to them for distribution; but its insufficiency does not pay
the Government's debts, nor cancel its obligations, nor defeat the
rights of other parties."
Id. at 546.
The rationale for this rule is that "a contractor cannot justly be
expected to keep track of appropriations where he is but one of
several being paid from the fund." Ross Construction Corp. v. United
States, 392 F.2d 984, 987 (Ct. Cl. 1968). Other illustrative cases are
Dougherty ex rel. Slavens v. United States, 18 Ct. Cl. 496 (1883), and
Joplin v. United States, 89 Ct. Cl. 345 (1939). The Antideficiency Act
may "apply to the official, but [does] not affect the rights in this
court of the citizen honestly contracting with the Government."
Dougherty, 18 Ct. Cl. at 503. Thus, it is settled that contractors
paid from a general appropriation are not barred from recovering for
breach of contract even though the appropriation is exhausted.
However, under a specific line-item appropriation, the answer is
different. The contractor in this situation is deemed to have notice
of the limits on the spending power of the government official with
whom he contracts. A contract under these circumstances is valid only
up to the amount of the available appropriation Exhaustion of the
appropriation will generally bar any further recovery beyond that
limit. E.g., Sutton v. United States, 256 U.S. 575 (1921); Hooe v.
United States, 218 U.S. 322 (1910); Shipman v. United States, 18 Ct.
Cl. 138 (1883); Dougherty, 18 Ct. Cl. at 503.
The distinction between the Ferris and Sutton lines of cases follows
logically from the old maxim that ignorance of the law is no excuse.
If Congress appropriates a specific dollar amount for a particular
contract, that amount is specified in the appropriation act and the
contractor is deemed to know it. It is certainly not difficult to
locate. If, on the other hand, a contract is but one activity under a
larger appropriation, it is not reasonable to expect the contractor to
know how much of that appropriation remains available for it at any
given time. A requirement to obtain this information would place an
unreasonable burden on the contractor, not to mention a nuisance for
the government as well.
In two cases in the 1960s, the Court of Claims permitted recovery on
contractor claims in excess of a specific monetary ceiling. See
Anthony P Miller, Inc. v. United States, 348 F.2d 475 (Ct. Cl. 1965)
(claim by Capehart Housing Act contractor); Ross Construction Corp. v.
United States, 392 F.2d 984 (Ct. Cl. 1968) (claim by contractor for
"off-site" construction ancillary to Capehart Act housing). The court
distinguished between matters not the fault or responsibility of the
contractor (for example, defective plans or specifications or changed
conditions under the "changed conditions" clause), in which case above-
ceiling claims are allowable, and excess costs resulting from what it
termed "simple extras," in which case they are not. Without attempting
to detail the fairly complex Capehart legislation here, we note merely
that Ross is more closely analogous to the Ferris situation (392 F.2d
at 986), while Anthony P Miller is more closely analogous to the
Sutton situation (392 F.2d at 987). The extent to which the approach
reflected in these cases will be applied to the more traditional form
of exhaustion of appropriations remains to be developed, although the
Ross court intimated that it saw no real distinction for these
purposes between a specific appropriation and a specific monetary
ceiling imposed by other legislation (id.).
b. Contracts or Other Obligations in Excess or Advance of
Appropriations:
It is easy enough to say that the Antideficiency Act prohibits you
from obligating a million dollars when you have only half a million
left in the account, or that it prohibits you from entering into a
contract in September purporting to obligate funds for the next fiscal
year that have not yet been appropriated. Many of the situations that
actually arise from day to day, however, are not quite that simple. A
useful starting point is the relationship of the Antideficiency Act to
the recording of obligations under 31 U.S.C. § 1501.
(1) Proper recording of obligations:
Proper recording practices are essential to sound funds control. An
amount of recorded obligations in excess of the available
appropriation is prima facie evidence of a violation of the
Antideficiency Act, but is not conclusive. B-134474-0.M., Dec. 18,
1957.[Footnote 46]
An example of this is B-300480, Apr. 9, 2003, in which the Corporation
for National and Community Services failed to recognize and record
obligations for national service educational benefits of AmeriCorps
participants when it incurred that obligation. In that case, the
Corporation made grant awards to state corporations, who, in turn,
made subgrants to nonprofit entities, who enrolled participants. In
its grant awards to the state corporations, the Corporation approved
the enrollment of a specified number of new program participants.
Because the Corporation in the grant agreement had committed to a
specified number of new participants, the Corporation incurred an
obligation for the participants' educational benefits at that time;
without further action by the Corporation, the Corporation was legally
required to pay education benefits of all participants, up to the
number the Corporation had specified in the grant agreement, if the
grantee and subgrantee, who needed no further approval from the
Corporation, enrolled that number of new participants, and if they
satisfied the criteria for benefits. The Corporation's failure to
recognize and record its obligation did not ameliorate its violation
of the Act. See also B-300480.2, June 6, 2003.
Also, in many situations, the amount of the government's liability is
not definitely fixed at the time the obligation is incurred. An
example is a contract with price escalation provisions. A violation
would occur if sufficient budget authority is not available when an
agency must adjust a recorded obligation. See, e.g., B-240264, Feb. 7,
1994 (an agency would incur an Antideficiency Act violation if it must
adjust an obligation for an incrementally funded contract to fully
reflect the extent of the bona fide need contracted for and sufficient
appropriations are not available to support the adjustment).
This is illustrated in B-289209, May 31, 2002. After holding that the
Coast Guard had wrongly used no-year funds from the Oil Spill
Liability Trust Fund for administrative expenses, GAO concluded that
the agency should adjust its accounting records by deobligating the
incorrectly charged expenses and charging them instead to the proper
appropriation. GAO advised the Coast Guard that these adjustments
could result in a violation of the Antideficiency Act to the extent
that there was insufficient budget authority, and that the agency
should report any deficiency in accordance with the Antideficiency Act.
The incurring of an obligation in excess or advance of appropriations
violates the Act, and this is not affected by the agency's failure to
record the obligation. E.g., 71 Comp. Gen. 502, 509 (1992); 65 Comp.
Gen. 4, 9 (1985); 62 Comp. Gen. 692, 700 (1983); 55 Comp. Gen. 812,
824 (1976); B-245856.7, Aug. 11, 1992.
(2) Obligation in excess of appropriations:
Incurring an obligation in excess of the available appropriation
violates 31 U.S.C. § 1341(a)(1).[Footnote 47] As the Comptroller of
the Treasury advised an agency head many years ago, "your authority in
the matter was strictly limited by the amount of the appropriation;
otherwise there would be no limit to your power to incur expenses for
the service of a particular fiscal year." 9 Comp. Dec. 423, 425
(1903). If you want higher authority, the Supreme Court has stated
that, absent statutory authorization, "it is clear that the head of
the department cannot involve the government in an obligation to pay
any thing in excess of the appropriation." Bradley v. United States,
98 U.S. 104, 114 (1878).
To take a fairly simple illustration, the statute was violated by an
agency's acceptance of an offer to install automatic telephone
equipment for $40,000 when the unobligated balance in the relevant
appropriation was only $20,000. 35 Comp. Gen. 356 (1955).
In a 1969 case, the Air Force wanted to purchase computer equipment
but did not have sufficient funds available. It attempted an
arrangement whereby it made an initial down payment, with the balance
of the purchase price to be paid in installments over a period of
years, the contract to continue unless the government took affirmative
action to terminate. This was nothing more than a sale on credit, and
since the contract constituted an obligation in excess of available
funds, it violated the Antideficiency Act. 48 Comp. Gen. 494 (1969).
(3) Variable quantity contracts:
A leading case discussing the Antideficiency Act ramifications of
"variable quantity" contracts (requirements contracts, indefinite
quantity contracts, and similar arrangements) is 42 Comp. Gen. 272
(1962).[Footnote 48] That decision considered a 3-year contract the
Air Force had awarded to a firm to provide any service or maintenance
work necessary for government aircraft landing on Wake Island. GAO
questioned the legality of entering into a contract of more than 1
year since the Air Force had only a 1-year appropriation available.
The Air Force argued that it was a "requirements" contract, that no
obligation would arise unless or until some maintenance work was
ordered, and that the only obligation was a negative one—not to buy
service from anyone else but the contractor should the services be
needed. GAO disagreed. The services covered were "automatic incidents
of the use of the air field." There was no place for a true
administrative determination that the services were or were not
needed. There was no true "contingency" as the services would almost
certainly be needed if the base were to remain operational.
Accordingly, the contract was not a true requirements contract but
amounted to a firm obligation for the needs of future years, and was
therefore an unauthorized multiyear contract. As such, it violated the
Antideficiency Act. The solution was to contract on an annual basis
with renewal options from year to year, and, if that did not meet the
Air Force's needs, then ask Congress for multiyear procurement
authority.[Footnote 49]
The Wake Island decision noted that the contract contained no
provision permitting the Air Force to reduce or eliminate requirements
short of a termination for convenience. Id. at 277. If the contract
had included such a provision—and in the unlikely event that, given
the nature of the contract, such a provision could have been
meaningful—a somewhat different analysis might have resulted. Compare,
for example, the situation in 55 Comp. Gen. 812 (1976). The exercise
of a contract option required the Navy to furnish various items of
government-furnished property (GFP), but another contract clause
authorized the Navy to unilaterally delete items of GFP. If the entire
quantity of GFP had to be treated as a firm obligation at the time the
option was exercised, the obligation would have exceeded available
appropriations, resulting in an Antideficiency Act violation. However,
since the Navy was not absolutely obligated to furnish all the GFP
items at the time the option was exercised, the Navy could avert a
violation if it were able to delete enough GFP to stay within the
available appropriation; if it found that it could not do so, the
violation would then exist.[Footnote 50] See also B-134474-0.M., Dec.
18, 1957.
In 47 Comp. Gen. 155 (1967), GAO considered an Air Force contract for
mobile generator sets which specified minimum and maximum quantities
to be purchased over a 12-month period. Since the contract committed
the Air Force to purchase only the minimum quantity, it was necessary
to obligate only sufficient funds to cover that minimum. See also B-
287619, July 5, 2001. Subsequent orders for additional quantities up
to the maximum were not legally objectionable as long as the Air Force
had sufficient funds to cover the cost when it placed those orders.
See also 19 Comp. Gen. 980 (1940). The fact that the Air Force, at the
time it entered into the contract, did not have sufficient funds
available to cover the maximum quantity was, for Antideficiency Act
purposes, irrelevant. The decision distinguished the Wake Island case
on the basis that nothing in the mobile generator contract purported
to commit the Air Force to obtain any requirements over and above the
specified minimum from the contractor.
In 63 Comp. Gen. 129 (1983), GAO found no Antideficiency Act problems
with a General Services Administration "Multiple Award Schedule"
contract under which no minimum purchases were guaranteed and no
binding obligation would arise unless and until a using agency made an
administrative determination that it had a requirement for a scheduled
item.
Regardless of whether we are dealing with a requirements contract,
indefinite quantity contract, or some variation, two points apply as
far as the Antideficiency Act is concerned:
* Whether or not there is a violation at the time the contract is
entered into depends on exactly what the government is obligated to do
under the contract.
* Even if there is no violation at the time the contract is entered
into, a violation may occur later if the government subsequently
incurs an obligation under the contract in excess of available funds,
for example, by electing to order a maximum quantity without
sufficient funds to cover the quantity ordered.
A conceptually related situation is a contract that gives the
government the option of two performances at different prices. The
government can enter into such a contract without violating the
Antideficiency Act as long as it has sufficient appropriations
available at the time the contract is entered into to pay the lesser
amount. For example, the Defense Production Act of 1950 authorizes the
President to contract for synthetic fuels, but the contract must give
the President the option to refuse delivery and instead pay the
contractor the amount by which the contract price exceeds the
prevalent market price at the time of the delivery. Such a contract
would not violate the Antideficiency Act at the time it is entered
into as long as sufficient appropriations are available to pay any
anticipated difference between the contract price and the estimated
market price at the time of performance. 60 Comp. Gen. 86 (1980). Of
course, the government could choose not to accept delivery unless
there were sufficient appropriations available at that time to cover
the full cost of the fuel under the contract.
An agreement to pay "special termination" costs under an incrementally
funded contract creates a firm obligation, not a contingent liability,
to pay the contractor because the contracting agency remains liable
for the costs even if it decides not to fund the contract further. B-
238581, Oct. 31, 1990.
(4) Multiyear or "continuing" contracts:
A multiyear contract is a contract covering the needs or requirements
of more than one fiscal year. Our discussion here presupposes a
general familiarity with relevant portions of Chapter 5, primarily the
nature of a fixed-term appropriation and the bona fide needs rule as
it applies to multiyear contracts.
We start with some very basic propositions:
* A fixed-term appropriation (fiscal year or multiple year) may be
obligated only during its period of availability.
* A fixed-term appropriation may be validly obligated only for the
bona fide needs of that fixed term.
* The Antideficiency Act prohibits the making of contracts which
exceed currently available appropriations or which purport to obligate
appropriations not yet made.
As we have seen in Chapter 5, performance may extend into a subsequent
fiscal year in certain situations. Also, as long as a contract is
properly obligated against funds for the year in which it was made,
actual payment can extend into subsequent years. Apart from these
situations, and unless the agency either has specific multiyear
contracting authority (e.g., 62 Comp. Gen. 569 (1983)), is contracting
in compliance with the multiyear contracting provisions of the Federal
Acquisition Streamlining Act of 1994 (discussed below and in Chapter 5
in relation to the bona fide needs rule), or is operating under a no-
year appropriation (e.g., 43 Comp. Gen. 657 (1964)), the
Antideficiency Act, together with the bona fide needs rule, prohibits
contracts purporting to bind the government beyond the obligational
duration of the appropriation.[Footnote 51] This is because the
current appropriation is not available for future needs, and
appropriations for those future needs have not yet been made.
Citations to support this proposition are numerous.[Footnote 52] The
rule applies to any attempt to obligate the government beyond the end
of the fiscal year, even where the contract covers a period of only a
few months. 24 Comp. Gen. 195 (1944).
An understanding of the principles applicable to multiyear contracting
begins with a discussion of a 1926 decision of the United States
Supreme Court. An agency had entered into a long-term lease for office
space with 1-year (i.e., fiscal year) funds, but its contract
specifically provided that payment for periods after the first year
was subject to the availability of future appropriations. In Leiter v.
United States, 271 U.S. 204 (1926), the Supreme Court specifically
rejected that theory. The Court held that the lease was binding on the
government only for one fiscal year, and it ceased to exist at the end
of the fiscal year in which the obligation was incurred. It takes
affirmative action to bring the obligation back to life. The Court
stated its position as follows:
"It is not alleged or claimed that these leases were made under any
specific authority of law. And since at the time they were made there
was no appropriation available for the payment of rent after the first
fiscal year, it is clear that in so far as their terms extended beyond
that year they were in violation of the express provisions of the
[Antideficiency Act]; and, being to that extent executed without
authority of law, they created no binding obligation against the
United States after the first year. [Citations omitted.] A lease to
the Government for a term of years, when entered into under an
appropriation available for but one fiscal year, is binding on the
Government only for that year. [Citations omitted.] And it is plain
that, to make it binding for any subsequent year, it is necessary, not
only that an appropriation be made available for the payment of the
rent, but that the Government, by its duly authorized officers,
affirmatively continue the lease for such subsequent year; thereby, in
effect, by the adoption of the original lease, making a new lease
under the authority of such appropriation for the subsequent year."
Id. at 206-07.
The Federal Acquisition Streamlining Act of 1994 (FASA) supplied the
"specific authority of law" missing in Leiter to enable agencies to
enter into multiyear contracts using fiscal year funds.[Footnote 53]
The multiyear contracts provision, codified at 41 U.S.C. § 254c,
authorizes executive agencies, using fiscal year funds, to enter into
multiyear contracts (defined as contracts for more than 1 but not more
than 5 years) for the acquisition of property or services.
To take advantage of FASA, the agency must either (1) obligate the
full amount of the contract to the appropriation current at the time
it enters into the contract, or (2) obligate the costs of the first
year of the contract plus termination costs. Of course, if the agency
elects to obligate only the costs of the individual years for each
year of the contract, the agency needs to obligate the costs of each
such year against the appropriation current for that year. Contracts
relying on FASA must provide that the contract will be terminated if
funds are not made available for the continuation of the contract in
any fiscal year covered by the contract. Funds available for
termination costs remain available for such costs until the obligation
for termination costs has been satisfied. 41 U.S.C. § 254c(b).
Importantly, FASA does not apply to all contracts that are intended to
meet the needs of more than one fiscal year. Obviously, if multiple
year or no-year appropriations are legally available for the full
contract period, an agency need not rely on FASA. Also, certain
contract forms do not constitute multiyear contracts within the scope
of FASA. For example, in B-302358, Dec. 27, 2004, GAO determined that
a Bureau of Customs and Border Protection procurement constituted an
"indefinite-delivery, indefinite-quantity" (IDIQ) contract that was
not subject to FASA. The decision explained that, unlike a contract
covered by FASA, an IDIQ contract does not obligate the government
beyond its initial year. Rather, it obligates the government only to
order a minimum amount of supplies or services. The cost of that
minimum amount is recorded as an obligation against the appropriation
current when the contract is entered into.[Footnote 54]
Leiter provides the general framework governing the legality of
contracts carrying potential liabilities beyond the fiscal year
availability of the appropriations that funded them. While FASA
provides the necessary authority to avoid the Leiter problems, the
Leiter analysis remains relevant to the extent that FASA does not
apply. Thus, GAO decisions interpreting Leiter before enactment of
FASA still need to be considered. For example, GAO refused to approve
an automatic, annual renewal of a contract for repair and storage of
automotive equipment, even though the contract provided that the
government had a right to terminate. The reservation of a right to
terminate does not save the contract from the prohibition against
binding the government in advance of appropriations. 28 Comp. Gen. 553
(1949).
The Post Office wanted to enter into a contract for services and
storage of government-owned highway vehicles for periods up to 4 years
because it could obtain a more favorable flat rate per mile of
operations instead of an item by item charge required if the contract
was for 1 year only. GAO held that any contract for continuous
maintenance and storage of the vehicles would be prohibited by 31
U.S.C. § 1341 because it would obligate the government beyond the
extent of the existing appropriation. However, there would be no legal
objection to including a provision that gave the government an
affirmative option to renew the contract from year to year, not to
exceed 4 years as specified in the statute authorizing the Postmaster
to enter into these types of contracts. 29 Comp. Gen. 451 (1950).
[Footnote 55]
Where a contract gives the government a renewal option, it may not be
exercised until appropriations for the subsequent fiscal year actually
become available. 61 Comp. Gen. 184, 187 (1981). Under a 1-year
contract with renewal options, the fact that funds become available in
subsequent years does not place the government under an obligation to
exercise the renewal option. Government Systems Advisors, Inc. v.
United States, 13 Cl. Ct. 470 (1987), aff'd, 847 F.2d 811 (Fed. Cir.
1988).[Footnote 56]
Note that, in Leiter, the inclusion of a contract provision
conditioning the government's obligation on the subsequent
availability of funds was to no avail. In this regard, see also 67
Comp. Gen. 190, 194 (1988); 42 Comp. Gen. 272, 276 (1962); 36 Comp.
Gen. 683 (1957). If a "subject to availability" clause were sufficient
to permit multiyear contracting, the effect would be automatic
continuation from year to year unless the government terminated. If
funds were not available and the government nevertheless permitted or
acquiesced in the continuation of performance, the contractor would
obviously be performing in the expectation of being paid.[Footnote 57]
Apart from questions of legal liability, the failure by Congress to
appropriate the money might be viewed as a serious breach of faith.
Congress, as a practical if not a legal matter, would have little real
choice but to appropriate funds to pay the contractor. This is another
example of a type of "coercive deficiency" the Antideficiency Act was
intended to prohibit.[Footnote 58] Thus, it is not enough for the
government to retain the option to terminate at any time if sufficient
funds are not available. Under Leiter and its progeny, the contract
"dies" at the end of the fiscal year, and may be revived only by
affirmative action by the government. This "new" contract is then
chargeable to appropriations for the subsequent year.
Although today FASA and the Federal Acquisition Regulation recognize
"subject to availability" clauses, such a clause, by itself, is not
sufficient. FASA provides that a multiyear contract for purposes of
FASA:
"may provide that performance under the contract during the second and
subsequent years of the contract is contingent upon the appropriation
of funds and (if it does so provide) may provide for a cancellation
payment to be made to the contractor if such appropriations are not
made."
41 U.S.C. § 254c(d). If an agency decides to include a "subject to
availability" clause for the second and subsequent years, the agency
also has to provide for possible termination. Availability clauses are
required by the Federal Acquisition Regulation in several situations.
While the prescribed contract clauses vary in complexity, they all
have one thing in common—each requires the contracting officer to
specifically notify the contractor in writing that the contractor may
resume performance. For example: (1) contract actions initiated prior
to the availability of funds;[Footnote 59] (2) certain requirements
and indefinite-quantity contracts:[Footnote 60](3) fully funded cost-
reimbursement contracts;[Footnote 61] (4) facilities acquisition and
use;[Footnote 62] and (5) incrementally funded cost-reimbursement
contracts.[Footnote 63] See 48 C.F.R. subpt. 32.7. The objective of
these clauses is compliance with the Antideficiency Act and other
fiscal statutes. See ITT Federal Laboratories, ASBCA No. 12987, 69-2
BCA ¶ 7,849 (1969), rev'd and remanded on other grounds, ITT v. United
States, 453 F.2d 1283 (1972). What is not sufficient is a simple
"subject to availability" clause which would permit automatic
continuation subject to the government's right to terminate.
In B-259274, May 22, 1996, the Air Force exercised an option to a
severable service contract that extended the contract from September
1, 1994, to August 31, 1995, using fiscal year 1994 funds.[Footnote
64] However, the Air Force only had enough fiscal year 1994 budget
authority to finance 4 months of the option period, leaving the
remaining 8 months unfunded. The Air Force modified the agreement by
adding a clause stating that the government's obligation beyond
December 31, 1994, was subject to the availability of appropriations.
Significantly, however, the clause further stated that no legal
liability on the part of the government would arise for contract
performance beyond December 31, 1994, unless and until the contractor
received notice in writing from the Air Force contracting officer that
the contractor could continue work. GAO held that this clause
converted the government's obligation for the remaining 8 months to no
more than a negative obligation not to procure services elsewhere
should such services be needed. Since this contractual obligation
created no financial exposure on the part of the government, the Air
Force had not violated the Antideficiency Act.
It may be useful at this point to reiterate the basic principle that,
in the context of contractual obligations, compliance with the
Antideficiency Act is determined first on the basis of when an
obligation occurs, not when actual payment is scheduled to be made. In
the case of a contract with an option to renew, for example, as long
as sufficient funds are available to cover the initial contract, there
is no violation at the time the contract is made. No obligation
accrues for future option years unless and until the government
exercises its option.
Another issue to consider with respect to multiyear contracts is the
relationship between termination charges and the Antideficiency Act.
As a general proposition, the government has the right to terminate a
contract "for the convenience of the government" if that action is
determined to be in the government's best interests. The Federal
Acquisition Regulation prescribes the required contract clauses. 48
C.F.R. subpt. 49.5.[Footnote 65] Under a termination for convenience,
the contractor is entitled to be compensated, including a reasonable
profit, for the performed portion of the contract, but may not recover
anticipatory profits on the terminated portion. E.g.,
48 C.F.R. §§ 49.201, 49.202. Total recovery may not exceed the
contract price. Id. § 49.207.
In the typical contract covering the needs of only one fiscal year,
termination does not pose a problem. Under 48 C.F.R. § 49.207, the
contractor's recovery cannot exceed the contract price; thus, the
basic contract obligation will be sufficient to cover potential
termination costs. Under a contract with options to renew, however,
the situation may differ. A contractor who must incur substantial
capital costs at the outset has a legitimate concern over recovering
these costs if the government does not renew. A device sometimes used
to address this problem, albeit with limited success, is a clause
requiring the government to pay termination charges or "separate
charges" upon early termination. As discussed in Chapter 5, section
B.8.c, separate charges have been found to violate the bona fide needs
rule to the extent they do not reasonably relate to the value of
current fiscal year requirements. E.g., 36 Comp. Gen. 683 (1957),
affd, 37 Comp. Gen. 155 (1957).
Separate charges also have been held to violate the Antideficiency
Act. The leading case in this area is 56 Comp. Gen. 142 (1976), affil,
56 Comp. Gen. 505 (1977). The Burroughs Corporation protested the
award of a contract to the Honeywell Corporation to provide automatic
data processing (ADP) equipment to the Mine Enforcement and Safety
Administration. If all renewal options were exercised, the contract
would run for 60 months after equipment installation. The contract
included a "separate charges" provision under which, if the government
failed to exercise any renewal option or otherwise terminated prior to
the end of the 60-month systems life, the government would pay a
percentage of all future years' rentals based on Honeywell's "list
prices" at the time of failure to renew or of termination. This
provision violated the Antideficiency Act for two reasons. First, it
would amount to an obligation of fiscal year funds for the
requirements of future years. And second, it would commit the
government to indeterminate liability because the contractor could
raise its list or catalog prices at any time. The government had no
way of knowing the amount of its commitment. Similar cases involving
separate charges are 56 Comp. Gen. 167 (1976); B-216718.2, Nov. 14,
1984; and B-190659, Oct. 23, 1978.[Footnote 66]
The Burroughs decision also offers guidance on when separate charges
may be acceptable. One instance is where it is the only way the
government can obtain its needs. Cited in this regard was 8 Comp. Gen.
654 (1929), a case involving the installation of equipment and the
procurement of a water supply from a town. There, however, the town
was the only source of a water supply, a situation clearly
inapplicable to a competitive industry like ADP. 56 Comp. Gen. at 157.
In addition, separate charges are permissible if they, together with
payments already made, reasonably represent the value of requirements
actually performed. Thus, where the contractor has discounted its
price based on the government's stated intent to exercise all renewal
options, separate charges may be based on the "reasonable value (e.g.,
ADP schedule price) of the actually performed work at termination
based upon the shortened term." Id. at 158. However, termination
charges may not be inconsistent with the termination for convenience
clause remedy; for example, they may not exceed the value of the
contract or include costs not cognizable under a "T for C." Id. at 157.
Where termination charges are otherwise proper, the Antideficiency Act
also requires that the agency have sufficient funds available to pay
them if and when the contingency materializes. E.g., 62 Comp. Gen. 143
(1983); 8 Comp. Gen. 654, 657 (1929). See also Aerolease Long Beach v.
United States, 31 Fed. Cl. 342, 362 (1994), aff'd, 39 F.3d 1198 (Fed.
Cir. 1994) (agency complied with Antideficiency Act requirements by
including termination costs as current obligations). This requirement
is sometimes specified in multiyear contracting legislation. An
example is 40 U.S.C. § 322, the Information Technology Fund. In
operating the Fund, the General Services Administration is authorized
to enter into information technology multiyear contracts if "amounts
are available and adequate to pay the costs of the contract for the
first fiscal year and any costs of cancellation or termination." Id. §
322(e)(1)(A). Congress may also, of course, provide exceptions. E.g.,B-
174839, Mar. 20, 1984.
c. Indemnification:
Under an indemnification agreement, one party promises, in effect, to
cover another party's losses. It is no surprise that the government is
often asked to enter into indemnification agreements. The problem is
that such agreements create a risk that the government, at some point
in the future, may have to pay amounts in excess of available funds.
Consequently, with one very limited exception discussed below, GAO and
numerous courts have adhered to the rule that, absent express
statutory authority, the government may not enter into an agreement to
indemnify where the amount of the government's liability is
indefinite, indeterminate, or potentially unlimited.[Footnote 67] Such
an agreement would violate both the Antideficiency Act, 31 U.S.C. §
1341, and the Adequacy of Appropriations Act, 41 U.S.C. § 11, since it
can never be said that sufficient funds have been appropriated to
cover the government's indemnification exposure. As discussed in this
section, indemnity clauses have been upheld under certain conditions:
* where the potential liability of the government was limited to a
definite amount known at the time of the agreement, was within the
amount of available appropriations, and was not otherwise prohibited
by statute;
* where the indemnification agreement is a legitimate object of an
appropriation, the agreement specifically provides that the amount of
liability is limited to available appropriations, and there is no
implication that Congress will, at a later date, appropriate funds to
meet deficiencies; or;
* where Congress has specifically authorized the agency to indemnify.
Although a provision limiting liability to appropriations available at
the time a loss arises would prevent any overt Antideficiency Act or
Adequacy of Appropriations Act violation by removing the "unlimited
liability" objection, it could have disastrous fiscal consequences for
the agency as well as present other, practical problems. For example,
payment of an especially large indemnity obligation at the beginning
of a fiscal year could wipe out the entire unobligated balance of the
agency's appropriation for the rest of the fiscal year, forcing the
agency to seek a supplemental appropriation to finance basic program
activities. Conversely, if a liability arises toward the end of the
fiscal year it is quite possible that no unobligated balance would be
available for an indemnity payment, which means indemnification could
prove largely illusory from the standpoint of the contractor or other
"beneficiary."
Another practical problem concerns recording the obligations that may
arise under indemnity clauses. The indemnity is a potential liability
that may become an actual liability when some event outside of the
government's control is triggered, at which point the liability
becomes a recordable obligation. This creates a fiscal dilemma,
however. While the liability is not sufficiently definite at the time
the indemnity agreement is made to formally record an obligation, good
financial management requires that the agency recognize its contingent
liability.[Footnote 68] Although most of our cases do not directly
address this issue, the ones that do, discussed below, have
recommended either the obligation or administrative reservation
[Footnote 69] of sufficient funds to cover the potential liability.
Clearly, however, this could create a fiscal nightmare where an
estimate of potential liability could encompass the entire
appropriation for the agency for that fiscal year, and tying up that
entire sum would prevent the agency from meeting its mission.
What follows is a discussion of indemnification proposals in decisions
issued over the years. As you will see, we have struggled with the
practical problems posed by the inclusion of indemnity clauses in
government contracts and agreements. For the past several years it has
been our view that even if indemnification clauses are rewritten to
meet the minimum requirements of the Antideficiency Act or Adequacy of
Appropriations Act, there should be a clear governmentwide policy
restricting their use. Given the potential liability of the government
created by such clauses, exceptions to this policy should not be made
without express congressional acquiescence, as has been done whenever
Congress has decided that it was in the best interests of the
government to assume the risks of having to pay off on an indemnity
obligation. See, for example, 10 U.S.C. § 2354, 42 U.S.C. § 2210, and
other examples given below.
(1) Prohibition against unlimited liability:
As noted above, absent specific statutory authority, the government
generally may not enter into an indemnification agreement which would
impose an indefinite or potentially unlimited liability on the
government. In plain English, you cannot purport to bind the
government to unlimited liability. The rule is not some arcane GAO
concoction. The Court of Claims stated in California-Pacific Utilities
Co. v. United States, 194 Ct. Cl. 703, 715 (1971)):
"The United States Supreme Court, the Court of Claims, and the
Comptroller General have consistently held that absent an express
provision in an appropriation for reimbursement adequate to make such
payment, [the Antideficiency Act, 31 U.S.C. § 1341] proscribes
indemnification on the grounds that it would constitute the obligation
of funds not yet appropriated. [Citations omitted.]"
For example, in an early case, the Interior Department, as licensee,
entered into an agreement with the Southern Pacific Company under
which the Department was to lay telephone and telegraph wires on
property owned by the licensor in New Mexico. The agreement included a
provision that the Department was to indemnify the Company against any
liability resulting from the operation. Upon reviewing the indemnity
provision, the Comptroller General found that it purported to impose
indeterminate contingent liability on the government in violation of
Revised Statutes § 3732, the predecessor to the Adequacy of
Appropriations Act, 41 U.S.C. § 11. By including the indemnity
provision, the contracting officer had exceeded his authority, and the
provision was held void. 16 Comp. Gen. 803 (1937).
Similarly, an indefinite and unlimited indemnification provision in a
lease entered into by the General Services Administration without
statutory authority was held to impose no legal liability on the
government since it violated the provisions of 31 U.S.C. § 1341 and 41
U.S.C. § 11. 35 Comp. Gen. 85 (1955).
In 59 Comp. Gen. 369 (1980), the National Oceanic and Atmospheric
Administration (NOAA) desired to undertake a series of hurricane
seeding experiments off the coast of Australia in cooperation with its
Australian counterpart. The State Department, as negotiator, sought
GAO's opinion on an Australian proposal under which the United States
would agree to indemnify Australia against all damages arising from
the activities. State recognized that an unlimited agreement would
violate the Antideficiency Act and asked whether the proposal would be
acceptable if it specified that the government's liability would be
subject to the appropriation of funds by Congress for that purpose.
GAO expressed dissatisfaction with this proposal because, even though
it would impose no legal obligation unless or until funds are
appropriated, it would impose a moral obligation on the United States
to make good on its promise.[Footnote 70] There was a way out, however—
insurance. Ordinarily, appropriations are not available to acquire
insurance,[Footnote 71] but GAO concluded that the government's policy
of self-insurance did not apply here since the insurance would not be
for the purpose of protecting against a risk to which the United
States would be exposed but rather is the price exacted by Australia,
as the United States' partner in an international venture, to protect
Australia's interests. GAO said that NOAA could therefore purchase
private insurance, with the premiums to be shared by the government of
Australia, provided that the United States' liability under the
agreement was limited to its share of the insurance premiums. NOAA's
use of its appropriation for the United States' share of the insurance
premium would simply be a necessary expense of the project.
Another decision applying the general rule held that the Federal
Emergency Management Agency[Footnote 72] could not agree to provide
indeterminate indemnification to agents and brokers under the National
Flood Insurance Act. B-201394, Apr. 23, 1981. If the agency considered
indemnification necessary to the success of its program, it could
either insert a provision limiting the government's liability to
available appropriations or seek broader authority from Congress.
In B-201072, May 3, 1982, the Department of Health and Human Services
questioned the use of a contract clause entitled "Insurance—Liability
to Third Persons," found in the Federal Procurement Regulations
(predecessor to the Federal Acquisition Regulation). The clause
purported to permit federal agencies to agree to reimburse
contractors, without limit, for liabilities to third persons for
death, personal injury, or property damage, arising out of performance
of the contract and not compensated by insurance, whether or not
caused by the contractor's negligence. Since the clause purported to
commit the government to an indefinite liability which could exceed
available appropriations, the Comptroller General found it in
violation of the Antideficiency Act and the Adequacy of Appropriations
Act. This decision was affirmed upon reconsideration in 62 Comp. Gen.
361 (1983), one of GAO's more comprehensive discussions of the
indemnification problem.
For other cases applying or discussing the general rule, see B-260063,
June 30, 1995; 35 Comp. Gen. 85 (1955); 20 Comp. Gen. 95, 100 (1940);
7 Comp. Gen. 507 (1928); 15 Comp. Dec. 405 (1909); B-242146, Aug. 16,
1991; B-117057, Dec. 27, 1957; A-95749, Oct. 14, 1938; 8 Op. Off.
Legal Counsel 94 (1984); 2 Op. Off. Legal Counsel 219, 223-24 (1978).
A brief letter report making the same point is GAO, Agreements
Describing Liability in Undercover Operations Should Limit the
Government's Liability, GGD-83-53 (Washington, D.C.: Mar. 15, 1983).
In some of the earlier GAO cases-—for example, 7 Comp. Gen. 507 and 16
Comp. Gen. 803 (1937)-—the Comptroller General offered as further
support for the indemnification prohibition the then-existing
principle that the United States was not liable for the tortious
conduct of its employees. Of course, since the enactment of the
Federal Tort Claims Act in 1946,[Footnote 73] this is no longer true.
Thus, the reader should disregard any discussion of the government's
lack of tort liability appearing in the earlier cases. The thrust of
those cases, namely, the prohibition against open-ended liability,
remains valid.
The Comptroller General recognized a limited exception to the rule in
59 Comp. Gen. 705 (1980). In that decision, the Comptroller General
held that the General Services Administration could agree to certain
indemnity provisions in procuring public utility services for
government agencies under the Federal Property and Administrative
Services Act, 40 U.S.C. § 501. To apply the general rule against
indemnification in this situation, the Comptroller General suggested,
would constitute "an overly technical and literal reading of the Anti-
Deficiency Act." Id. at 707. The decision reasoned as follows:
"The procurement of goods or services from state-regulated utilities
which are virtually monopolies is unique in important ways. As a
practical matter, there is no other source for the needed goods or
services. Moreover, the tariff requirements, such as this
indemnification undertaking, are applicable generally to all of the
same class of customers of the utility, and are included in the tariff
only after administrative proceedings in which the government has the
opportunity to participate. The United States is not being singled out
for discriminatory treatment nor, presumably, can it complain that the
objectionable provision was imposed without notice and the opportunity
for a hearing.
"Under the circumstances, we have not objected in the past to the
procurement of power by GSA under tariffs containing the indemnity
clause and there is no reason to object to the purchase of power under
contracts containing essentially the same indemnity clause. As noted
already, this has of necessity been the practice in the past. The
possibility of liability under the clause is in our judgment remote.
In any event, we see little purpose to be served by a rule which
prevents the United States from procuring a vital commodity under the
same restrictions as other customers are subject to under the tariff
if the utility insists that the restrictions are non-negotiable.
However, because the possibility exists, however remote, that these
agreements could result in future liability in excess of available
appropriations, GSA should inform the Congress of the situation."
Id.
Subsequent decisions emphasize that the extent of the exception carved
out by 59 Comp. Gen. 705 is limited to its facts. See, e.g., B-260063,
June 30, 1995; 62 Comp. Gen. 361 (1983); B-242146, Aug. 16, 1991. In B-
197583, Jan. 19, 1981, GAO once again applied the general rule and
held that the Architect of the Capitol could not agree to indemnify
the Potomac Electric Power Company (PEPCO) for loss or damages
resulting from PEPCO's performance of tests on equipment installed in
government buildings or from certain other equipment owned by PEPCO
which could be installed in government buildings to monitor
electricity use for conservation purposes. GAO pointed to two
distinguishing factors that justified—and limited—the exception in 59
Comp. Gen. 705. First, in 59 Comp. Gen. 705, there was no other source
from which the government could obtain the needed utility services.
Here, the testing and monitoring could be performed by government
employees. The second factor is summarized in the following excerpt
from B-197583, Jan. 19, 1981:
"An even more important distinction, though, is that unlike the
situation in the GSA case [59 Comp. Gen. 705], the Architect has not
previously been accepting the testing services or using the impulse
device from PEPCO and has therefore not previously agreed to the
liability represented by the proposed indemnity agreements. In the GSA
case, GSA merely sought to enter a contract accepting the same service
and attendant liability, previously secured under a non-negotiable
tariff, at a rate more advantageous to the Government. Here, however,
the Government has other means available to provide the testing and
monitoring desired."
Thus, the case did not fall within the "narrow exception created by
the GSA decision," and the proposed indemnity agreement was improper.
More recent decisions likewise reaffirm the general rule against open-
ended indemnification agreements and reemphasize the limited
application of the exception in 59 Comp. Gen. 705. In B-242146, Aug.
16, 1991, GAO held that the United States Park Police could not
include in mutual assistance agreements with local law enforcement
agencies a clause that the United States would indemnify the latter
agencies against claims arising from police actions they took in
national parks. Citing 62 Comp. Gen. 361 (1983) and other cases, the
decision observed:
"This Office has long held that absent statutory authority, indemnity
provisions which subject the United States to indefinite or
potentially unlimited contingent liability contravene the
Antideficiency Act, 31 U.S.C. § 1341(a) ...since it can never be said
that sufficient funds have been appropriated to cover the contingency.
"Here, the potential liability of the Park Police is unknown because
the clause in question provides an indemnity for property damage and
personal injury. There is no possible way to know at the time the
[mutual assistance] memoranda are signed whether there are sufficient
funds in the appropriation to cover a liability or when it arises
under the indemnification clause because no one knows in advance how
much the liability may be." (Footnote omitted.)
The decision rejected the argument that 59 Comp. Gen. 705 supported
the indemnification clause in this case, stating:
"We were careful to point out in 62 Comp. Gen. at 364 ... that 59
Comp. Gen. 705 should not serve as a precedent. Indeed, except for 59
Comp. Gen. 705, the accounting officers of the Government have never
issued a decision sanctioning the incurring of an obligation for an
open-ended indemnity in the absence of statutory authority to the
contrary.' 62 Comp. Gen. 364-365."
In B-260063, June 30, 1995, GAO again distinguished 59 Comp. Gen. 705
in holding that a federal agency should not agree to indemnify a
utility company for providing electricity to one of the agency's
remote facilities. The decision pointed out that, unlike the situation
in 59 Comp. Gen. 705, the indemnity clause proposed here was not part
of a generally applicable tariff but would discriminate against the
agency.
As indicated previously, the general rule against open-ended indemnity
agreements has received consistent acceptance by the courts. Examples
of court cases endorsing the general rule against open-ended
indemnification are Frank v. United States, 797 F.2d 724, 727 (9th
Cir. 1986); Union Pacific Railroad Corp. v. United States, 52 Fed. Cl.
730, 732-735 (2002); Lopez v. Johns Manville, 649 F. Supp. 149 (WD.
Wash. 1986), aff'd on other grounds, 858 F.2d 712 (Fed. Cir. 1988); In
re All Asbestos Cases, 603 F. Supp. 599 (D. Hawaii 1984); Johns-
Manville Corp. v. United States, 12 Cl. Ct. 1 (1987). Several of these
are asbestos cases in which the courts rejected claims of an implied
agreement to indemnify. In Johns-Manville Corp., the court stated:
"Contractual agreements that create contingent liabilities for the
Government serve to create obligations of funds just as much as do
agreements creating definite or certain liabilities. The contingent
nature of the liability created by an indemnity agreement does not so
lessen its effect on appropriations as to make it immune to the
limitations of [the Antideficiency Act]."
12 Cl. Ct. at 25.
In Hercules, Inc. v. United States, 516 U.S. 417 (1996), the Supreme
Court rejected the argument by a manufacturer of the Vietnam War-era
defoliant "Agent Orange" that it had an implied-in-fact contract with
the United States to indemnify it for tort damages arising from third-
party claims against it. The Court noted that an implied-in-fact
contract depends upon a meeting of the minds, and that such a meeting
of the minds was unlikely given the rule against open-ended indemnity
contracts:
"There is ... reason to think that a contracting officer would not
agree to the open-ended indemnification alleged here. The Anti-
Deficiency Act bars a federal employee or agency from entering into a
contract for future payment of money in advance of, or in excess of,
an existing appropriation. 31 U.S.C. § 1341. Ordinarily no federal
appropriation covers contractors' payments to third-party tort
claimants in these circumstances, and the Comptroller General has
repeatedly ruled that Government procurement agencies may not enter
into the type of open-ended indemnity for third-party liability that
petitioner Thompson claims to have implicitly received under the Agent
Orange contracts. We view the Anti-Deficiency Act, and the contracting
officer's presumed knowledge of its prohibition, as strong evidence
that the officer would not have provided, in fact, the contractual
indemnification [petitioner] claims."
516 U.S. at 426-427 (footnotes omitted).
The Court cited several instances in which Congress had enacted
statutory authorizations for indemnification, and noted that the
existence of these statutory authorizations further militated against
finding an implied contract to indemnify in this case:
"These statutes [authorizing indemnification], set out in meticulous
detail and each supported by a panoply of implementing regulations,
... would be entirely unnecessary if an implied agreement to indemnify
could arise from the circumstances of contracting. We will not
interpret the [Agent Orange] contracts so as to render these statutes
and regulations superfluous."
Id. at 429.[Footnote 74]
The Federal Circuit's recent decision in E.I. DuPont De Nemours &
Company, Inc. v. United States, 365 F.3d 1367 (Fed. Cir. 2004),
provides an interesting twist. The issue in that case was whether an
indemnity clause contained in a World War II-era contract required the
United States to reimburse the contractor for environmental cleanup
costs it incurred at the contract site as a result of liability
imposed on it under the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980 (popularly known as "CERCLA"
or the "Superfund" law), 42 U.S.C. §§ 9601-9675.[Footnote 75] The
Court of Federal Claims had viewed the contract's indemnity clause as
extending to CERCLA liability, but concluded that the general rule
against open-ended indemnification applied to invalidate the clause
under the Antideficiency Act:
"Even though the Indemnification Clause was included in this contract
and it is quite reasonable to assume that both the contracting officer
and the contractor believed this Clause to place the risk of virtually
all liabilities on the government rather than the contractor, the
state of the law compels us to hold this clause to be void and
unenforceable....
"Although we are of the opinion that the current state of the law
compels the result expressed, this result is so totally at odds with
the agreement the parties clearly made concerning reimbursement and
indemnity, and plaintiff is so clearly entitled to the indemnity it
seeks under the plain language of the contract it had with the
government, made during truly emergency, wartime conditions, we
suggest that plaintiff may want to consider the avenue for potential
relief available in a Congressional Reference case pursuant to 28
U.S.C. §§ 1492 & 2509."
E.I. DuPont De Nemours & Company, Inc. v. United States, 54 Fed. Cl.
361, 372-373 (2002).
The Federal Circuit reversed in E.I. DuPont De Nemours & Company,
Inc., 365 F.3d 1367. The court did not question the general rule
against open-ended indemnity provisions; nor did it dispute the lower
court's conclusion that the indemnity clause in the DuPont contract
was originally invalid under that rule. However, the court concluded
that the government in effect ratified the clause through actions
taken under a subsequent statute—the Contract Settlement Act of 1944,
at 41 U.S.C. §§ 101, 120(a)—that did permit such indemnity provisions.
Thus, the court reasoned, the indemnity clause in this case satisfied
the "otherwise authorized by law" exception in the Antideficiency Act,
31 U.S.C. § 1341(a)(1)(B). E.I. DuPont De Nemours & Company, Inc., 365
F.3d at 1375-80.
Executive branch adjudicative bodies such as boards of contract
appeals and the Federal Labor Relations Authority have also applied
the general anti-indemnity rule. See Appeals of National Gypsum Co.,
ASBCA No. 53259, 03-1 B.C.A. ¶ 32,054 (2002) (indemnity provision of
World War II contract unenforceable because in violation of the
Antideficiency Act and the Executive Order under which the contract
was entered into); KMS Development Co. v. General Services
Administration, GSBCA No. 12584, 95-2 B.C.A. ¶ 27, 663 (1995) (no
implied-in-fact contract of indemnity since such a contract would be
ultra vires as a violation of the Antideficiency Act); National
Federation of Federal Employees and U.S. Department of the Interior,
35 F.L.R.A. 1034 (1990) (proposal to indemnify union against judgments
and litigation expenses resulting from drug testing program held
contrary to law and therefore nonnegotiable); American Federation of
State, County and Municipal Employees and U.S. Department of Justice,
42 F.L.R.A. 412, 515-17 (1991) (similar proposal for drug testing
indemnification).
In sum, the GAO decisions, court cases, and other administrative
decisions reflect a clear rule against open-ended indemnification
agreements (absent statutory authority). Indeed, the Supreme Court's
opinion in Hercules, Inc. v. United States, 516 U.S. 417 (1996),
discussed previously, commented upon the nearly uniform line of
Comptroller General decisions on this point, noting that 59 Comp. Gen.
705 stood as the "one peculiar exception." 516 U.S. at 428.
(2) When indemnification may be permissible:
Indemnification agreements may be proper if they are limited to
available appropriations and are otherwise authorized. Before ever
getting to the question of amount, for an indemnity agreement to be
permissible in the first place, it must be authorized either expressly
or under a necessary expense theory. 59 Comp. Gen. 369 (1980). The
determination as to whether an expense is necessary as incident to the
object of the applicable funding source is determined on a case-by-
case basis.[Footnote 76] Although GAO generally affords agencies broad
discretion in determining whether a specific expenditure is reasonably
related to the accomplishment of an authorized purpose, an agency's
discretion in such matters is not unlimited. 18 Comp. Gen. 285, 292
(1938). GAO has had occasion both to approve and to disapprove
contract indemnification provisions as necessary or incident to the
object of the applicable funding source. See, e.g., 63 Comp. Gen. 145,
150 (1984) (all but one indemnity provision in contracts for vessels
were approved as incidental expenses under the Navy's authorized
prepositioning ship chartering program); 59 Comp. Gen. 369
(disapproved—general statutory authority to carry out international
programs did not provide authority for the United States to agree to
provide complete indemnification of another country for all damages
resulting from an international weather modification project); 42
Comp. Gen. 708, 712 (1963) (approved—obligation of an agency for
damage or destruction that might arise under an indemnity clause in an
aircraft rental contract was a necessary expense incident to the
hiring of aircraft for which the agency's appropriation was expressly
available); B-201394, Apr. 23, 1981 (disapproved—no specific
appropriation was available to pay costs arising under a clause
indemnifying agents and brokers under the National Flood Insurance
program); B-137976, Dec. 4, 1958 (disapproved—an obligation arising
under an indemnity provision in an agency's agreement for training
with a nongovernment facility was not a necessary expense under the
statute authorizing such training agreements).
Once you cross the purpose hurdle—that is, once you determine that the
indemnification proposal you are considering is a legitimate object on
which to spend your appropriations—you are ready to grapple with the
unlimited liability issue.
One way to deal with this issue is to specifically limit the amount of
the liability assumed. Such a limitation of an indemnity agreement may
come about in either of two ways: it may follow necessarily from the
nature of the agreement itself or it may be expressly written into the
agreement, coupled with an appropriate obligation or administrative
reservation of funds. The latter alternative is the only acceptable
one where the government's liability would otherwise be potentially
unlimited.
For example, where the government rented buses to transport Selective
Service registrants for physical examination or induction, there was
no objection to the inclusion of an indemnity provision for damage to
the buses caused by the registrants. This was a standard provision in
the applicable motor carrier charter coach tariff. 48 Comp. Gen. 361
(1968). Potential liability was not indefinite since it was
necessarily limited to the value of the motor carrier's equipment.
Similarly, under a contract for the lease of aircraft, the Federal
Aviation Administration (FAA) could agree to indemnify the owner for
loss or damage to the aircraft in order to eliminate the need to
reimburse the owner for the cost of "hull insurance" and thereby
secure a lower rental rate. The liability could properly be viewed as
a necessary expense incident to hiring the aircraft, FAA had no-year
appropriations available to pay for any such liability, and, as in the
Selective Service case, the agreement was not indefinite because
maximum liability was measurable by the fair market value of the
aircraft. 42 Comp. Gen. 708 (1963). See also 22 Comp. Gen. 892 (1943)
(Maritime Commission could amend contract to agree to indemnify
contractor against liability to third parties, in lieu of reimbursing
contractor for cost of liability insurance premiums, to the extent of
available appropriations and provided liability was limited to the
amount of coverage of the discontinued insurance policies replaced by
the indemnity agreement).[Footnote 77]
In B-114860, Dec. 19, 1979, the Farmers Home Administration asked
whether it could purchase surety bonds or enter into an indemnity
agreement in order to obtain the release of deeds of trust for
borrowers in Colorado where the original promissory notes had been
lost while in the Administration's custody. Colorado law required one
or the other where the canceled original note could not be delivered
to the Colorado public trustee. GAO concluded that the indemnity
agreement was permissible as long as it was limited to an amount not
to exceed the original principal amount of the trust deed. The
decision further advised that the Administration should reserve
sufficient funds to cover its potential liability. The latter aspect
of the decision was reconsidered in B-198161, Nov. 25, 1980. Reviewing
the particular circumstances involved, GAO was unable to foresee
situations in which the government might be required to indemnify the
public trustee, and accordingly advised the Administration that the
reservation of funds would not be necessary. While reservation of the
funds may not have been necessary, GAO did state: "Although the
liability which arises from an indemnity agreement to secure the
release of a trust deed may be contingent, the maximum cost of
liquidating that liability would normally be a recordable expense
limited by the administration's annual budget authority."
In 63 Comp. Gen. 145 (1984), certain indemnification provisions in a
ship-chartering agreement were found not to impose indefinite or
potentially unlimited contingent liability because liability could be
avoided by certain separate actions solely under the government's
control.
In cases like the Selective Service bus case (48 Comp. Gen. 361) and
the FAA aircraft case (42 Comp. Gen. 708), even though the
government's potential liability is limited and determinable, this
fact alone does not guarantee that the agency will have sufficient
funds available should the contingency ripen into an obligation. This
concern is met in one of two ways. The first is either to obligate or
to reserve administratively sufficient funds to cover the potential
liability, although this point has not been completely explored in
past decisions. In particular cases, reservation may be determined
unnecessary, as in B-198161, Nov. 25, 1980, discussed above. Also,
naturally, a specific directive from Congress will render reservation
of funds unnecessary. See B-159141, Aug. 18, 1967 (reservation of
termination costs for supersonic aircraft contract). The second way is
for the agreement to expressly limit the government's liability to
appropriations available at the time of the loss with no implication
that Congress will appropriate funds to make up any deficiency.
This second device—the express limitation of the government's
liability to available appropriations—is sufficient to cure an
otherwise fatally defective (i.e., unlimited) indemnity proposal. For
example, the government may in limited circumstances assume the risk
of loss to contractor-owned property. While the maximum potential
liability would be determinable, it could be very large and the
administrative reservation of funds is not feasible. Thus, without
some form of limitation, such an agreement could result in obligations
in excess of available appropriations. The rules concerning the
government's assumption of risk on property owned by contractors and
used in the performance of their contracts are set forth in 54 Comp.
Gen. 824 (1975), modifying B-168106, July 3, 1974. The rules are
summarized below:[Footnote 78]
* If administratively determined to be in the best interest of the
government, the government may assume the risk for contractor-owned
property which is used solely in the performance of government
contracts.
* The government may not assume the risk for contractor-owned property
which is used solely for nongovernment work. If the property is used
for both government and nongovernment work and the nongovernment
portion is separable, the government may not assume the risk relating
to the nongovernment work.
* Where the amount of a contractor's commercial work is so
insignificant when compared to the amount of the contractor's
government work that the government is effectively bearing the entire
risk of loss by in essence paying the full insurance premiums, the
government may assume the risk if administratively determined to be in
the best interest of the government.
Any agreement for the assumption of risk by the government under the
above rules must contain a clause to clearly provide that, in the
event the government has to pay for losses, payments may not exceed
appropriations available at the time of the losses, and that nothing
in the contract may be considered as implying that Congress will at a
later date appropriate funds sufficient to meet deficiencies. 54 Comp.
Gen. at 827.
A somewhat different situation was discussed in 60 Comp. Gen. 584
(1981), involving an "installment purchase plan" for automatic data
processing equipment. Under the plan, the General Services
Administration would make monthly payments until the entire purchase
price was paid, at which time GSA would acquire unencumbered ownership
of the equipment. GSM obligation was conditioned on its exercising an
option at the end of each fiscal year to continue payments for the
next year. The contract contained a risk of loss provision under which
GSA would be required to pay the full price for any equipment lost or
damaged during the term of the contract. GAO concluded that the
equipment should be treated as contractor-owned property for purposes
of the risk of loss provision, and that the provision would be
improper unless one of the following conditions were met:
* The contract includes the clause specified in 54 Comp. Gen. 824
limiting GSA's liability to appropriations available at the time of
the loss and expressly precluding any inference that Congress would
appropriate sufficient funds to meet any deficiency; or;
* If the contract does not include these restrictions, then GSA must
obligate sufficient funds to cover its possible liability under the
risk of loss provision.
If neither of these conditions is met, the assumption of risk clause
could violate the Antideficiency Act by creating an obligation in
excess of available appropriations if any equipment is lost or damaged
during the term of the contract.
In 1982, the Defense Department and the state of New York entered into
a contract for New York to provide certain support functions for the
1980 Winter Olympic Games at Lake Placid. The contract provided for
federal reimbursement of any disability benefits which New York might
be required to pay in case of death or injury of persons participating
in the operation. The contract specified that the government's
liability could not exceed appropriations for assistance to the Games
available at the time of a disabling event, and that the contract did
not imply that Congress would appropriate funds sufficient to meet any
deficiencies. Since these provisions satisfied the test of 54 Comp.
Gen. 824, the indemnity agreement was not legally objectionable. B-
202518, Jan. 8, 1982. Under this type of arrangement, GAO noted that
an estimated amount should have been recorded as an obligation when
the agency was notified that a disabling event had occurred. However,
no violation of the Antideficiency Act actually occurred in this case
because sufficient funds remained available for obligation at the time
New York filed its claim for indemnification under the contract.
Also, the decision in the National Flood Insurance Act case mentioned
above (B-201394, Apr. 23, 1981) noted that the defect could have been
cured by inserting a clause along the lines of the clause in 54 Comp.
Gen. 824. The same point was made in B-201072, May 3, 1982, also
discussed earlier. See also National Railroad Passenger Corp. v.
United States, 3 CL Ct. 516, 521 (1983) (indemnification agreement
between the Federal Railroad Administration and Amtrak did not violate
Antideficiency Act where liability was limited to amount of
appropriation).
However, as noted in the introduction to this section, over the years
GAO has expressed the view that indemnity agreements, even with
limiting language, should not be entered into without congressional
approval in view of their potentially disruptive fiscal consequences
to the agency.[Footnote 79] 63 Comp. Gen. 145, 147 (1984); 62 Comp.
Gen. 361, 368 (1983); B-242146, Aug. 16, 1991. If an agency thinks
that indemnification agreements in a particular context are
sufficiently in the government's interest, the preferable approach is
for the agency to go to Congress and seek specific statutory
authority. See B-201394, Apr. 23, 1981.
As discussed below, Congress has seen fit to enact legislation
authorizing indemnification agreements when warranted by the
circumstances. In 1986, the Chairman of the Subcommittee on Nuclear
Regulation, Senate Committee on Environment and Public Works, in
connection with proposed Price-Anderson Act amendments the committee
was considering, asked GAO to identify possible funding options for a
statutory indemnification provision. GAO's response, B-197742, Aug. 1,
1986, listed several options and noted the benefits and drawbacks of
each from the perspective of congressional flexibility. The options
ranged from creating a statutory entitlement with a permanent
indefinite appropriation for payment (indemnity guaranteed but no
congressional flexibility), to making payment fully dependent on the
appropriations process (full congressional flexibility but no
guarantee of payment). In between were various other devices such as
contract authority, use of contract provisions such as those in 54
Comp. Gen. 824, and various forms of limited funding
authority.[Footnote 80]
The discussion in B-197742 highlights the essence of the
indemnification funding problem:
"An indemnity statute should generally include two features—the
indemnification provisions and a funding mechanism. Indemnification
provisions can range from a legally binding guarantee to a mere
authorization. Funding mechanisms can similarly vary in terms of the
degree of congressional control and flexibility retained. It is
impossible to maximize both the assurance of payment and congressional
flexibility. Either objective is enhanced only at the expense of the
other....
"If payment is to be assured, Congress must yield control over
funding, either in whole or up to specified ceilings .... Conversely,
if Congress is to retain funding control, payment cannot be assured in
any legally binding form and the indemnification becomes less than an
entitlement."
B-197742 at 9, 11.
(3) Statutorily authorized indemnification:
When we first stated the anti-indemnity rule at the outset of this
discussion, we noted that the rule applies in the absence of express
statutory authority to the contrary. Naturally, an indemnification
agreement, however open-ended it may be, will be "legal" if it is
expressly authorized by statute.
One statutory exception to the indemnification rules exists for
certain defense-related contracts by virtue of 50 U.S.C. § 1431, often
referred to by its Public Law designation, Public Law 85-804.[Footnote
81[ The statute evolved from a temporary wartime measure, section 201
of the First War Powers Act, 1941, ch. 493, 55 Stat. 838, 839 (Dec.
18, 1941). The implementing details on indemnification are found in
Executive Order No. 10789, as amended,[Footnote 82] and Federal
Acquisition Regulation (FAR), 48 C.F.R. part 50 (2005). For example,
while the decision to indemnify under Public Law 85-804 is
discretionary, B-287121, Mar. 20, 2001, such discretion must be
exercised by the agency head and cannot be delegated. B-257139, Aug.
30, 1994, citing FAR, 48 C.F.R. § 50.201(d).
Other examples of statutory exceptions are:
* section 4 of the Price-Anderson Act, 42 U.S.C. § 2210, which
provides contract authority permitting, among other things,
indemnification agreements with Nuclear Regulatory Commission
licensees and Department of Energy contractors to pay claims resulting
from nuclear accidents;
* section 119 of the Comprehensive Environmental Response,
Compensation, and Liability Act, 42 U.S.C. § 9619, which authorizes
indemnification of certain Superfund cleanup contractors against
negligence (but not gross negligence or intentional misconduct);
* section 308 of the National Aeronautics and Space Act, 42 U.S.C. §
2458b, which authorizes the Administrator of the National Aeronautics
and Space Administration (NASA) to indemnify users of NASA space
vehicles against third party claims that are not covered by insurance;
* section 2354 of title 10, United States Code, which authorizes the
military departments to indemnify research and development contractors
against liability not covered by insurance; and;
* section 7423(2) of title 26, United States Code, which authorizes
indemnification of federal employees for damages awarded in suits
involving their performance of duties under the Internal Revenue Code.
Congress also may enact legislation to provide indemnification for a
specific or one-time event. For example, Congress specifically
indemnified the manufacturers, distributors, and those who
administered the swine flu vaccine purchased and used as part of the
National Swine Flu Immunization Program of 1976 against liability for
other than their own negligence to persons alleging personal injury or
death arising out of the administration of such vaccine. Pub. L. No.
94-380, 90 Stat. 1113 (Aug. 12, 1976).
d. Specific Appropriation Limitations/Purpose Violations:
In Chapter 4 we covered in some detail 31 U.S.C. § 1301(a), which
prohibits the use of appropriations for purposes other than those for
which they were appropriated. As seen in that chapter, violations of
purpose availability can arise in a wide variety of contexts—charging
an obligation or expenditure to the wrong appropriation, making an
obligation or expenditure for an unauthorized purpose, violating a
statutory prohibition or restriction, etc. The question we explore in
this section is the relationship of purpose availability to the
Antideficiency Act. In other words, when and to what extent does a
purpose violation also violate the Antideficiency Act?
Why does it matter whether you have violated one statute or two
statutes? One reason is that, if the second statute is the
Antideficiency Act, there are statutory reporting requirements and
potential penalties to consider in addition to any administrative
sanctions that agencies may impose through internal processes for
violations of section 1301 alone.
A useful starting point is the following excerpt from 63 Comp. Gen.
422, 424 (1984):
"Not every violation of 31 U.S.C. § 1301(a) also constitutes a
violation of the Antideficiency Act.... Even though an expenditure may
have been charged to an improper source, the Antideficiency Act's
prohibition against incurring obligations in excess or in advance of
available appropriations is not also violated unless no other funds
were available for that expenditure. Where, however, no other funds
were authorized to be used for the purpose in question (or where those
authorized were already obligated), both 31 U.S.C. § 1301(a) and §
1341(a) have been violated. In addition, we would consider an
Antideficiency Act violation to have occurred where an expenditure was
improperly charged and the appropriate fund source, although available
at the time, was subsequently obligated, malting readjustment of
accounts impossible."
First, suppose an agency charges an obligation or expenditure to the
wrong appropriation account, either charging the wrong appropriation
for the same time period, or charging the wrong fiscal year. The above
passage from 63 Comp. Gen. 422 provides the answer—if the
appropriation that should have been charged in the first place has
sufficient available funds to enable the adjustment of accounts, there
is no Antideficiency Act violation. The decision in 73 Comp. Gen. 259
(1994) illustrates this point. In that case, an agency had erroneously
charged a furniture order to the wrong appropriation account, but had
sufficient funds in the proper account to support an adjustment
correcting the error. Thus, GAO concluded, there was no violation of
the Antideficiency Act. Id. at 261. On the other hand, a violation
exists if the proper account does not have enough money to permit the
adjustment, and this includes cases where sufficient funds existed at
the time of the error but have since been obligated or expended. See
also 70 Comp. Gen. 592 (1991); B-222048, Feb. 10, 1987; B-95136, Aug.
8, 1979.
Other cases illustrating or applying this principle are 57 Comp. Gen.
459 (1978) (grant funds charged to wrong fiscal year); B-224702, Aug.
5, 1987 (contract modifications charged to expired accounts rather
than current appropriations); and B-208697, Sept. 28, 1983 (items
charged to General Services Administration Working Capital Fund which
should have been charged to other operating appropriations). Actually,
the concept of "curing" a violation by malting an appropriate
adjustment of accounts is not new See, e.g., 16 Comp. Dec. 750 (1910);
4 Comp. Dec. 314, 317 (1897). The Armed Services Board of Contract
Appeals also has followed this principle. New England Tank Industries
of New Hampshire, Inc., ASBCA No. 26474, 88-1 BCA ¶ 20,395 (1987).
[Footnote 83]
The next situation to consider is an obligation or expenditure in
excess of a statutory ceiling. This may be an earmarked maximum in a
more general appropriation or a monetary ceiling imposed by some other
legislation. An obligation or expenditure in excess of the ceiling
violates 31 U.S.C. § 1341(a). See, for example, the following:
* Monetary ceilings on minor military construction (10 U.S.C. § 2805):
63 Comp. Gen. 422 (1984); GAO, Continuing Inadequate Control Over
Programming and Financing of Construction, B-133316 (Washington, D.C.:
July 23, 1964); Review of Programming and Financing of Selected
Facilities Constructed at Army, Navy, and Air Force Installations, B-
133316 (Washington, D.C.: Jan. 24, 1961).[Footnote 84]
* Monetary ceiling on lease payments for family housing units in
foreign countries (10 U.S.C. § 2828(e)): 66 Comp. Gen. 176 (1986); B-
227527, B-227325, Oct. 21, 1987 (nondecision letter); GAO, Leased
Military Housing Costs in Europe Can Be Reduced by Improving
Acquisition Practices and Using Purchase Contracts, GAO/NSIAD-85-113
(Washington, D.C.: July 24, 1985), at 7-8.
* Ceiling in supplemental appropriation: B-204270, Oct. 13, 1981
(dollar limit on Standard Level User Charge payable by agency to
General Services Administration).[Footnote 85]
* Ceiling in authorizing legislation: 64 Comp. Gen. 282 (1985) (dollar
limit on two Small Business Administration direct loan programs).
In a statutory ceiling case, the account adjustment concept described
above may or may not come into play. If the ceiling represents a limit
on the amount available for a particular object, then there generally
will be no other funds available for that object and hence no
"correct" funding source from which to reimburse the account charged.
If, however, the ceiling represents only a limit on the amount
available from a particular appropriation and not an absolute limit on
expenditures for the object, as in the minor military construction
cases, for example, then it may be possible to cure violations by an
appropriate adjustment. 63 Comp. Gen. at 424.
The final situation is an obligation or expenditure for an object that
is prohibited or simply unauthorized. In 60 Comp. Gen. 440 (1981), a
proviso in the Customs Service's 1980 appropriation expressly
prohibited the use of the appropriation for administrative expenses to
pay any employee overtime pay in an amount in excess of $20,000. By
allowing employees to earn overtime pay in excess of that amount, the
Customs Service violated 31 U.S.C. § 1341. The Comptroller General
explained the violation as follows:
"When an appropriation act specifies that an agency's appropriation is
not available for a designated purpose, and the agency has no other
funds available for that purpose, any officer of the agency who
authorizes an obligation or expenditure of agency funds for that
purpose violates the Antideficiency Act. Since the Congress has not
appropriated funds for the designated purpose, the obligation may be
viewed either as being in excess of the amount (zero) available for
that purpose or as in advance of appropriations made for that purpose.
In either case the Antideficiency Act is violated."
Id. at 441.
In B-201260, Sept. 11, 1984, the Comptroller General advised that
expenditures in contravention of the Boland Amendment would violate
the Antideficiency Act (although none were found in that case). The
Boland Amendment, an appropriation rider, provided that "[n]one of the
funds provided in this Act may be used" for certain activities in
Central America. In B-229732, Dec. 22, 1988, GAO found the
Antideficiency Act violated when the Department of Housing and Urban
Development used its funds for commercial trade promotion activities
in the Soviet Union, an activity beyond its statutory authority.
Similarly, a nonreimbursable interagency detail of an employee,
contrary to a specific statutory prohibition, produced a violation in
B-247348, June 22, 1992 (letter to Public Printer). All three cases
also involved purpose violations and are consistent with 60 Comp. Gen.
440, the rationale being that expenditures would be in excess of
available appropriations, which were zero.[Footnote 86]
More recent GAO decisions likewise consistently apply the principle
that the use of appropriated funds for unauthorized or prohibited
purposes violates the Antideficiency Act (absent an alternative
funding source) since zero funds are available for that purpose. B-
302710, May 19, 2004 (use of funds in violation of statutory
prohibition against publicity or propaganda); B-300325, Dec. 13, 2002
(appropriations used for unauthorized technical assistance purposes);
B-300192, Nov. 13, 2002 (violation of appropriation rider prohibiting
use of funds to implement an Office of Management and Budget
memorandum); B-290005, July 1, 2002 (appropriation used to procure
unauthorized legal services); 71 Comp. Gen. 402, 406 (1992)
(unauthorized use of Training and Employment Services appropriation);
B-246304, July 31, 1992 (potential violation of appropriation act "Buy
American" provision); B-248284, Sept. 1, 1992 (nondecision letter)
(reprogramming of funds to an unauthorized purpose).
One court reached a result that appears to interpret the
Antideficiency Act somewhat differently. In Southern Packaging and
Storage Co. v. United States, 588 E Supp. 532 (D.S.C. 1984), the court
found that the Defense Department had purchased certain combat meal
products ("MRE") in violation of a "Buy American" appropriation rider,
which provided that "no part of any appropriation contained in this
Act ... shall be available" to procure items not grown or produced in
the United States. The court rejected the contention that the
violation also contravened the Antideficiency Act, stating:
"There is no evidence in this case to show that [the Defense Personnel
Supply Center] authorized expenditures beyond the amount appropriated
by Congress for the procurement of the MRE rations and the component
foods thereof."
Id. at 550.
Given the sparse discussion in the decision, the fact that Congress
does not make specific appropriations for MRE rations, and the fact
that the Antideficiency Act regulates both obligations and
expenditures in excess of available authority, it is difficult to
discern precisely how the Southern Packaging court would apply the
Antideficiency Act. In any event, we have found no subsequent judicial
or administrative decision that cites this aspect of the Southern
Packaging opinion.
e. Amount of Available Appropriation or Fund:
Questions occasionally arise over precisely what assets an agency may
count for purposes of determining the amount of available resources
against which it may incur obligations.
The starting point, of course, is the unobligated balance of the
relevant appropriation. In section F of this chapter, we discuss the
rule that subdivisions of a lump-sum appropriation appearing in
legislative history are not legally binding on the agency. They are
binding only if carried into the appropriation act itself, or are made
binding by some other statute. Thus, the entire unobligated balance of
an unrestricted lump-sum appropriation is available for Antideficiency
Act purposes. 55 Comp. Gen. 812 (1976).
Where an agency is authorized to retain certain receipts or
collections for credit to an appropriation or fund under that agency's
control, those receipts are treated the same as direct appropriations
for purposes of obligation and the Antideficiency Act, subject to any
applicable statutory restrictions. E.g., 71 Comp. Gen. 224 (1992)
(National Technical Information Service may use subscription payments
to defray its operating expenses but, under governing legislation, may
use customer advances only for costs directly related to firm orders).
In addition, certain other assets may be "counted" as available budget
authority, that is, obligated against. For example, OMB Circular No. A-
11 includes certain spending authority from offsetting collections as
a form of "budget authority."[Footnote 87] See also B-134474-0.M.,
Dec. 18, 1957. This does not mean anticipated receipts from
transactions that have not yet occurred or orders that have not yet
been placed. Thus, the Library of Congress could not retain in a
revolving fund advances from federal agencies in excess of amounts
needed to cover current orders in anticipation of applying the excess
amounts to future orders. B-288142, Sept. 6, 2001. Obligations cannot
be charged against anticipated proceeds from an anticipated sale of
property. See, e.g., B-209758, Sept. 29, 1983 (nondecision memorandum)
(sale of assets seized from embezzler). Thus, the Customs Service
violated the Antideficiency Act by obligating against anticipated
receipts from future sales of seized property unless it had sufficient
funds available from other sources to cover the obligation. B-237135,
Dec. 21, 1989. Similarly, the Comptroller General found that the Air
Force violated the Antideficiency Act by overobligating its Industrial
Fund based on estimated or anticipated customer orders. See GAO, The
Air Force Has Incurred Numerous Overobligations in its Industrial
Fund, AFMD-81-53 (Washington, D.C.: Aug. 14, 1981); 62 Comp. Gen. 143,
147 (1983). Even where receivables are properly included as budgetary
resources, an agency may not incur obligations against receipts
expected to be received after the end of the current fiscal year
without specific statutory authority. 51 Comp. Gen. 598, 605 (1972).
In 60 Comp. Gen. 520 (1981), GAO considered whether the General
Services Administration (GSA) could obligate against the value of
inventory in the General Supply Fund. GSA buys furniture and other
equipment for other agencies through the General Supply Fund, a
revolving fund established by statute. Agencies pay GSA either in
advance or by reimbursement. For reasons of economy, GSA normally
makes consolidated and bulk purchases of commonly used items. Concern
over the application of the Antideficiency Act arose when, for several
reasons, the Fund began experiencing cash flow problems. To help
remedy its "cash flow" problems GSA wanted to consider the amount of
available budget authority to include inventory as well as cash assets
and advances.
The Comptroller General held that inventory in the General Supply Fund
did not constitute a budgetary resource against which obligations
could be incurred. The items in the inventory had already been
purchased and could not be counted again as a new budgetary resource.
Thus, for Antideficiency Act purposes, GSA could not incur obligations
using the value of inventory as an available "budgetary resource."
Supplemental appropriations requested but not yet enacted obviously
may not be counted as a budgetary resource. B-230117-0.M., Feb. 8,
1989.
f. Intent/Factors beyond Agency Control:
A violation of the Antideficiency Act does not depend on intent or
lack of good faith on the part of contracting or other officials who
obligate or pay in advance or in excess of appropriations. Although
these factors may influence the applicable penalty, they do not affect
the basic determination of whether a violation has occurred. 64 Comp.
Gen. 282, 289 (1985). The Comptroller General once expressed the
principle in the following passage which, although stated in a
slightly different context, is equally applicable here:
"Where a payment is prohibited by law, the utmost good faith on the
part of the officer, either in ignorance of the facts or in disregard
of the facts, in purporting to authorize the incurring of an
obligation the payment of which is so prohibited, cannot take the case
out of the statute, otherwise the purported good faith of an officer
could be used to nullify the law."
A-86742, June 17, 1937.
To illustrate, a contracting officer at the United States Mission to
the North Atlantic Treaty Organization accepted an offer for
installation of automatic telephone equipment at twice the amount of
the unobligated balance remaining in the applicable account. The
Department of State explained that the contracting officer had
misinterpreted GAO regulations and implementing State Department
procedures. But for this misinterpretation, additional funds could
have been placed in the account. State therefore felt that the
transaction should not be considered in violation of the Act. GAO did
not agree and held that the overobligation must be immediately
reported as required by 31 U.S.C. § 1517(b). The official's state of
mind was not relevant in deciding whether a violation had occurred. 35
Comp. Gen. 356 (1955).
An overobligation may result from external factors beyond the agency's
control. Whether this will produce an Antideficiency Act violation
depends on the particular circumstances. In 58 Comp. Gen. 46 (1978),
the Army asked whether it could make payments to a contractor under a
contract requiring payment in local (foreign) currency where the
original dollar obligation was well within applicable funding
limitations but, due to subsequent exchange rate fluctuations, payment
would exceed those limitations. The Army argued that a payment under
these circumstances should not be considered a violation of the Act
because currency fluctuations are totally beyond the control of the
contracting officer or any other agency official. GAO disagreed. The
fact that the contracting officer was a victim of circumstances does
not make a payment in excess of available appropriations any less
illegal. (It is, of course, as with state of mind, relevant in
assessing penalties for the violation.) See also 38 Comp. Gen. 501
(1959) (severe adverse weather conditions or prolonged employee
strikes generally are not sufficient to justify overobligation by
former Post Office Department, but facts in a particular case could
justify deficiency apportionment).
In apparent contrast, the Comptroller General stated in 62 Comp. Gen.
692, 700 (1983) that an overobligation resulting from a judicial award
of attorney's fees under 28 U.S.C. § 2412(d), the Equal Access to
Justice Act, would not violate the Antideficiency Act. See also 63
Comp. Gen. 308, 312 (1984) (judgments or board of contract appeals
awards under Contract Disputes Act, same answer); B-227527, B-227325,
Oct. 21, 1987 (nondecision letter) (amounts awarded by court judgment
not counted in determining whether statutory ceiling on lease payments
has been exceeded and Antideficiency Act thereby violated).
The distinction is based on the extent to which the agency can act to
avoid the overobligation even though it is imposed by some external
force beyond its control. Thus, the currency fluctuation decision
stated:
"When a contracting officer finds that the dollars required to
continue or make final payment on a contract will exceed a statutory
limitation he may terminate the contract, provided the termination
costs will not exceed the statutory limitations. Alternatively, the
contracting officer may issue a stop work order and the agency may ask
Congress for a deficiency appropriation citing the currency
fluctuation as the reason for its request."
58 Comp. Gen. at 48. Similarly, the Postmaster General could curtail
operations if necessary. 38 Comp. Gen. 501, 504 (1959). See also 66
Comp. Gen. 176 (1986) (Antideficiency Act would not preclude Air Force
from entering into lease for overseas family housing without provision
limiting annual payments to statutory ceiling, even though certain
costs could conceivably escalate above ceiling, where good faith cost
estimates were well below ceiling and lease included termination for
convenience clause). Where the agency could have acted to avert the
overobligation but did not, there will be a violation. In contrast, in
the case of a payment ordered by a court, comparable options (apart
from seeking a deficiency appropriation) are not available.
(Curtailing activities after the overobligation has occurred to avoid
compounding the violation is a separate question.)
g. Exceptions:
The Antideficiency Act by its own terms recognizes that Congress can
and may grant exceptions. 31 U.S.C. § 1341(a). The statute prohibits
contracts or other obligations in advance or excess of available
appropriations, "unless authorized by law." This is nothing more than
the recognition that Congress can authorize exceptions to the statutes
it enacts.
(1) Contract authority:
At the outset, it is necessary to distinguish between "contract
authority" and the "authority to enter into contracts." A contract is
simply a legal device employed by two or more parties to create
binding and legally enforceable obligations in furtherance of some
objective. The federal government uses contracts every day to procure
a wide variety of goods and services. An agency does not need specific
statutory authority to enter into contracts. It has long been
established that a government agency has the inherent authority to
enter into binding contracts in the execution of its duties. Van
Brocklin v. Tennessee, 117 U.S. 151, 154 (1886); United States v.
Maurice, 26 F. Case 1211, 1216-17 (No. 15,747) (C.C.D. Va. 1823). It
should be apparent that these contracts, "authorized by law" though
they may be, are not sufficient to constitute exceptions to the
Antideficiency Act, else the Act would be meaningless.
For purposes of the Antideficiency Act exception, a contract
authorized by law requires not only authority to enter into a
contract, but authority to do so without regard to the availability of
appropriations. While the former may be inherent, the latter must be
conferred by statute. The most common example of this is "contract
authority" as that term is defined and described in Chapter 2—
statutory authority to enter into binding contracts without the funds
adequate to make payments under them.
In some cases, the "exception" language will be unmistakably explicit.
An example is the Price-Anderson Act, which provides authority to
"make contracts in advance of appropriations and incur obligations
without regard to" the Antideficiency Act. 42 U.S.C. § 2210(j). Other
examples of clear authority, although perhaps not as explicit as the
Price-Anderson Act, are discussed in 27 Comp. Gen. 452 (1948) (long-
term operating-differential subsidy agreements under the Merchant
Marine Act); B-211190, Apr. 5, 1983 (contracts with states under the
Federal Boat Safety Act); B-164497.3, June 6, 1979 (certain provisions
of the Federal-Aid Highway Act of 1973); and B-168313, Nov. 21, 1969
(interest subsidy agreements with educations institutions under the
Housing Act of 1950).
In an earlier case involving contract authority, GAO insisted that the
Corps of Engineers had to include a "no liability unless funds are
later made available" clause for any work done in excess of available
funds. 2 Comp. Gen. 477 (1923). The Corps later had trouble with this
clause because a Court of Claims decision, C.H. Leavell & Co. v.
United States, 530 F.2d 878 (Ct. Cl. 1976), allowed the contractor an
equitable adjustment for suspension of work due to a delay in enacting
an appropriation to pay him, notwithstanding the "availability of
funds" clause. In 56 Comp. Gen. 437 (1977), GAO overruled 2 Comp. Gen.
477, deciding that section 10 of the River and Harbor Act of 1922, 33
U.S.C. § 621, by expressly authorizing the Corps to enter into large
multiyear civil works projects without seeking a full appropriation in
the first year, constituted the necessary exception to the
Antideficiency Act and a "funds available" clause was not necessary.
This applies as well to contracts financed from the Corps' Civil Works
Revolving Fund. B-242974.6, Nov. 26, 1991 (internal memorandum). The
rationale of 56 Comp. Gen. 437 also has been applied to long-term fuel
storage facilities contracts authorized by 10 U.S.C. § 2388. New
England Tank Industries of New Hampshire, Inc., ASBCA No. 26474, 88-1
BCA ¶ 20,395 (1987), vacated on other grounds, New England Tank
Industries of New Hampshire v. United States, 861 F.2d 685 (Fed. Cir.
1988).
In 28 Comp. Gen. 163 (1948), the Comptroller General considered
whether the Commissioner of Reclamation had budget authority to enter
into certain contracts in advance of appropriations (contract
authority). Congress had authorized the contract authority in an
appropriation act but made it subject to a monetary ceiling. Since the
contract authority was explicit, with no language making it contingent
on appropriations being made at some later date, the Comptroller
General concluded that the statute authorized the Commissioner to
enter into a firm and binding contract.
The Bureau of Mines was authorized to enter into a contract (in
advance of the appropriation) to construct and equip an anthracite
research laboratory. The Bureau asked the General Services
Administration (GSA) to enter into the contract on its behalf pursuant
to section 103 of the Federal Property and Administrative Services Act
of 1949, ch. 288, 63 Stat. 377, 380 (June 30, 1949), which provided
that "funds appropriated to ...other Federal agencies for the
foregoing purposes [execution of contracts and supervision of
construction] shall be available for transfer to and expenditure by
the [GSA]." GAO held that the Bureau's contract authority provided a
sufficient legal basis for GSA to enter into contracts for
construction of the laboratory pursuant to section 103. 29 Comp. Gen.
504 (1950).[Footnote 88]
A somewhat different kind of contract authority is found in 41 U.S.C.
§ 11, the so-called Adequacy of Appropriations Act. An exception to
the requirement to have adequate appropriations—or any appropriation
at all—is made for procurements by the military departments for
"clothing, subsistence, forage, fuel, quarters, transportation, or
medical and hospital supplies, which, however, shall not exceed the
necessities of the current year." By administrative interpretation,
the Defense Department has limited this authority to emergency
circumstances where immediate action is necessary. Department of
Defense Financial Management Regulation 7000.14-R, vol. 3, ch. 12, ¶
120201 (Jan. 31, 2001).
It should again be emphasized that to constitute an exception to 31
U.S.C. § 1341(a), the "contract authority" must be specific authority
to incur the obligation in excess or advance of appropriations, not
merely the general authority any agency has to enter into contracts to
carry out its functions. Also, an appropriation obviously is needed to
liquidate the contract obligation.
Congress may grant authority to contract beyond the fiscal year in
terms which amount to considerably less than the type of contract
authority described above. An example is 43 U.S.C. § 388, which
authorizes the Secretary of the Interior to enter into certain
contracts relating to reclamation projects "which may cover such
periods of time as the Secretary may consider necessary but in which
the liability of the United States shall be contingent upon
appropriations being made therefore." See PCL Construction Services,
Inc. v. United States, 41 Fed. Cl. 242, 257 (1998), aff'd, 96 Fed.
Appx. 672 (Fed. Cir. 2004) (pursuant to 43 U.S.C. § 388, firm fixed-
price contract awarded by the Bureau of Reclamation to construct a
visitors center and parking structure at Hoover Dam could be
incrementally funded without violating the Antideficiency Act). While
this provision has been referred to as an exception to the
Antideficiency Act (B-72020, Jan. 9, 1948), it authorizes only
"contingent contracts" under which there is no legal obligation to pay
unless and until appropriations are provided. 28 Comp. Gen. 163
(1948). A similar example, discussed in B-239435, Aug. 24, 1990, is 38
U.S.C. § 230(c) (Supp. II 1990) (subsequently recodified at 38 U.S.C.
§ 316) which authorized the Department of Veterans Affairs to enter
into certain leases for periods of up to 35 years but further provided
that the government's obligation to make payments was "subject to the
availability of appropriations for that purpose." For another example,
see B-248647.2, Apr. 24, 1995, which discussed the Federal Triangle
Development Act, 40 U.S.C. §§ 1101-1109. This act directed GSA to
enter into a long-term lease and required the lease agreement to
recognize that GSA could obligate funds for lease payments only on an
annual basis. 40 U.S.C. § 1105. Therefore, the GSA multiyear lease
agreement at issue was specifically "authorized by law" and did not
violate the Antideficiency Act. B-248647.2 at fn. 3.
(2) Other obligations "authorized by law:"
The "authorized by law" exception in 31 U.S.C. § 1341(a) applies to
noncontractual obligations as well as to contracts. The basic approach
is the same. The statutory authority must be more than just authority
to undertake the particular activity. For example, statutory authority
to acquire land and to pay for it from a specified fund is not an
exception to the Antideficiency Act. 15 Comp. Gen. 662 (1921). It
merely authorizes acquisitions to the extent of funds available in the
specified source at the time of purchase. Id. Similarly, the authority
to conduct hearings, without more, does not confer authority to do so
without regard to available appropriations. 16 Comp. Dec. 750 (1910).
Provisions in the District of Columbia Code requiring Saint
Elizabeth's Hospital to treat all patients who meet admission
eligibility requirements were held not to authorize the Hospital to
operate beyond the level of its appropriations. If mandatory
expenditures, together with nonmandatory expenditures, would cause a
deficiency, the Hospital would have to reduce nonmandatory
expenditures. 61 Comp. Gen. 661 (1982).
Congress may expressly state that an agency may obligate in excess of
the amounts appropriated, or it may implicitly authorize an agency to
do so by virtue of a law that necessarily requires such obligations.
See B-262069, Aug. 1, 1995. Several cases have considered the effect
of various statutory salary or compensation increases. If a statutory
increase is mandatory and does not vest discretion in an
administrative office to determine the amount, or if it gives some
administrative body discretion to determine the amount, payment of
which then becomes mandatory, the obligation is deemed "authorized by
law" for Antideficiency Act purposes. See, e.g., 39 Comp. Gen. 422
(1959) (salary increases for Wage Board employees); B-168796, Feb. 2,
1970 (mandatory statutory increase in retired pay for Tax Court
judges); B-107279, Jan. 9, 1952 (mandatory increases for certain
legislative personnel). GAO has not treated the granting of increases
retroactively to correct past administrative errors as creating the
same type of exception. See 24 Comp. Gen. 676 (1945). Increases which
are discretionary do not permit the incurring of obligations in excess
or advance of appropriations. 31 Comp. Gen. 238 (1951) (discretionary
pension increases); 28 Comp. Gen. 300 (1948).[Footnote 89]
Some other examples of obligations authorized by law for
Antideficiency Act purposes are:
* Defense Health Program obligations for medical services. B-287619,
July 5, 2001.
* Mandatory pilot program in Vermont under Farms for the Future Act of
1990 (loan guarantees and interest assistance). B-244093, July 19,
1991.
* Mandatory transfer from one appropriation account to another where
"donor" account contained insufficient unobligated funds. 38 Comp.
Gen. 93 (1958).
* Provision in Criminal Justice Act of 1964 imposing unequivocal
legislative directive for commencement of certain programs which would
necessarily involve creation of financial obligations. B-156932, Aug.
17, 1965.
* Provision in District of Columbia Criminal Justice Act of 1974
(CJA), as amended, malting attorney representation in CJA cases a
mandatory expense. B-283599, Sept. 15, 1999. See also B-284566, Apr.
3, 2000.
* Statute authorizing Interstate Commerce Commission to order a
substitute rail carrier to serve shippers abandoned by their primary
carrier in emergency situations, and to reimburse certain costs of the
substitute carrier. B-196132, Oct. 11, 1979.
What are perhaps the outer limits of the "authorized by law" exception
are illustrated in B-159141, Aug. 18, 1967. The Federal Aviation
Administration (FAA) had entered into long-term, incrementally funded
contracts for the development of a civil supersonic aircraft (SST). To
ensure compliance with the Antideficiency Act, the FAA each year
budgeted for, and obligated, sufficient funds to cover potential
termination liability. The appropriations committees became concerned
that unnecessarily large amounts were being tied up this way,
especially in light of the highly remote possibility that the SST
contracts would be terminated. In considering the FAA's 1968
appropriation, the House Appropriations Committee reduced the FAA's
request by the amount of the termination reserve, and in its report
directed the FAA not to obligate for potential termination costs. The
Comptroller General advised that if the Senate Appropriations
Committee did the same thing—a specific reduction tied to the amount
requested for the reserve, coupled with clear direction in the
legislative history—then an overobligation resulting from a
termination would be regarded as authorized by law and not in
violation of the Antideficiency Act.
3. Voluntary Services Prohibition:
a. Introduction:
We previously discussed the Antideficiency Act prohibitions contained
in section 1341 of title 31, United States Code. The next section of the
Antideficiency Act is 31 U.S.C. § 1342:
"An officer or employee of the United States Government or of the
District of Columbia government may not accept voluntary services for
either government or employ personal services exceeding that
authorized by law except for emergencies involving the safety of human
life or the protection of property...."
This provision first appeared, in almost identical form, in a
deficiency appropriation act enacted in 1884.[Footnote 90] Although
the original prohibition read "hereafter, no department or officer of
the United States shall accept ...," it was included in an
appropriation for the then Indian Office of the Interior Department,
and the Court of Claims held that it was applicable only to the Indian
Office. Glavey v. United States, 35 Ct. Cl. 242, 256 (1900), rev'd on
other grounds, 182 U.S. 595 (1901). The Comptroller of the Treasury
continued to apply it across the board. See, e.g., 9 Comp. Dec. 181
(1902). In any event, the applicability of the 1884 statute soon
became moot because Congress reenacted it as part of the
Antideficiency Act in 1905[Footnote 91] and again in 1906.[Footnote 92]
Prior to the 1982 recodification of title 31, section 1342 was
subsection (b) of the Antideficiency Act, while the basic prohibitions
of section 1341, previously discussed, constituted subsection (a). The
proximity of the two provisions in the United States Code reflects
their relationship, as section 1342 supplements and is a logical
extension of section 1341. If an agency cannot directly obligate in
excess or advance of its appropriations, it should not be able to
accomplish the same thing indirectly by accepting ostensibly
"voluntary" services and then presenting Congress with the bill, in
the hope that Congress will recognize a "moral obligation" to pay for
the benefits conferred—another example of the so-called "coercive
deficiency.[Footnote 93] In this connection, the chairman of the House
committee responsible for what became the 1906 reenactment of the
voluntary services prohibition stated:
"It is a hard matter to deal with. We give to Departments what we
think is ample, but they come back with a deficiency. Under the law
they can [not] make these deficiencies, and Congress can refuse to
allow them; but after they are made it is very hard to refuse to allow
them ...."[Footnote 94]
In addition, as we have noted previously, the Antideficiency Act was
intended to keep an agency's level of operations within the amounts
Congress appropriates for that purpose. The unrestricted ability to
use voluntary services would permit circumvention of that objective.
Thus, without section 1342, section 1341 could not be fully effective.
Note that 31 U.S.C. § 1342 contains two distinct although closely
related prohibitions: It bans, first, the acceptance of any type of
voluntary services for the United States, and second, the employment
of personal services "exceeding that authorized by law."
b. Appointment without Compensation and Waiver of Salary:
(1) The rules—general discussion:
One of the evils that the "personal services" prohibition was designed
to correct was a practice existing in 1884, whereby lower-grade
government employees were being asked to "volunteer" their services
for overtime periods in excess of the periods allowed by law. This
enabled the agency to economize at the employees' expense but
nevertheless generated claims by the employees.[Footnote 95]
Currently, 31 U.S.C. § 1342 serves a number of other purposes and is
relevant in a number of contexts involving services by government
employees or services which would otherwise have to be performed by
government employees. For example, one court suggested that 31 U.S.C.
§ 1342 also is based in part on the principle that only public
officials should be allowed to perform governmental functions. See
Suss v. American Society for the Prevention of Cruelty to Animals, 823
F. Supp. 181, 189 (S.D.N.Y. 1993) ("The risks of abuse of power by
private parties exercising functions involving [the] exercise of
sovereign compulsion is one reason for the limitations imposed by
federal law on the use of volunteers in implementing public sector
programs."). However, as mentioned previously, the fundamental
purposes embodied in section 1342 are to preserve the integrity of the
appropriations process by avoiding "coercive deficiencies" and
augmentations.
One of the earliest questions to arise under 31 U.S.C. § 1342—and an
issue that has generated many cases—was whether a government officer
or employee, or an individual about to be appointed to a government
position, could voluntarily work for nothing or for a reduced salary.
Initially, the Comptroller of the Treasury ducked the question on the
grounds that it did not involve a payment from the Treasury, and
suggested that the question was appropriate to take to the Attorney
General. 19 Comp. Dec. 160, 163 (1912).
The very next year, the Attorney General tackled the question when
asked whether a retired Army officer could be employed as
superintendent of an Indian school without additional compensation. In
what has become the leading case construing 31 U.S.C. § 1342, the
Attorney General replied that the appointment would not violate the
voluntary services prohibition. 30 Op. Att'y Gen. 51 (1913). In
reaching this conclusion, the Attorney General drew a distinction that
the Comptroller of the Treasury thereafter adopted, and that GAO and
the Justice Department continue to follow to this day—the distinction
between "voluntary services" and "gratuitous services." The key
passages from the Attorney General's opinion are set forth below:
"It seems plain that the words 'voluntary service' were not intended
to be synonymous with 'gratuitous service' and were not intended to
cover services rendered in an official capacity under regular
appointment to an office otherwise permitted by law to be non-
salaried. In their ordinary and normal meaning these words refer to
service intruded by a private person as a 'volunteer' and not rendered
pursuant to any prior contract or obligation .... It would be
stretching the language a good deal to extend it so far as to prohibit
official services without compensation in those instances in which
Congress has not required even a minimum salary for the office.
"The context corroborates the view that the ordinary meaning of
'voluntary services' was intended. The very next words 'or employ
personal service in excess of that authorized by law' deal with
contractual services, thus making a balance between 'acceptance' of
'voluntary service' (i.e., the cases where there is no prior contract)
and `employment' of 'personal service' (i.e., the cases where there is
such prior contract, though unauthorized by law).
"Thus it is evident that the evil at which Congress was aiming was not
appointment or employment for authorized services without
compensation, but the acceptance of unauthorized services not intended
or agreed to be gratuitous and therefore likely to afford a basis for
a future claim upon Congress...."
Id. at 52-53, 55.
The Comptroller of the Treasury agreed with this interpretation:
"[The statute] was intended to guard against claims for compensation.
A service offered clearly and distinctly as gratuitous with a proper
record made of that fact does not violate this statute against
acceptance of voluntary service. An appointment to serve without
compensation which is accepted and properly recorded is not a
violation of [31 U.S.C. § 1342], and is valid if otherwise lawful."
27 Comp. Dec. 131, 132-33 (1920).
Two main rules emerge from 30 Op. Att'y Gen. 51 and its progeny.
First, if compensation for a position is fixed by law, an appointee
may not agree to serve without compensation or to waive that
compensation in whole or in part. Id. at 56. This portion of the
opinion did not break any new ground. The courts had already held,
based on public policy, that compensation fixed by law could not be
waived.[Footnote 96] Second, and this is really just a corollary to
the rule just stated, if the level of compensation is discretionary,
or if the relevant statute prescribes only a maximum (but not a
minimum), the compensation can be set at zero, and an appointment
without compensation or a waiver, entire or partial, is permissible.
Id.; 27 Comp. Dec. at 133.
Both GAO and the Justice Department have had frequent occasion to
address these issues, and there are numerous decisions illustrating
and applying the rules.[Footnote 97]
In a 1988 opinion, the Justice Department's Office of Legal Counsel
considered whether the Iran-Contra Independent Counsel could appoint
Professor Laurence Tribe as Special Counsel under an agreement to
serve without compensation. Applying the rules set forth in 30 Op.
Att'y Gen. 51, the Office of Legal Counsel concluded that the
appointment would not contravene the Antideficiency Act since the
statute governing the appointment set a maximum salary but no minimum.
Memorandum Opinion for the Acting Associate Attorney General,
Independent Counsel's Authority to Accept Voluntary Services—
Appointment of Laurence H. Tribe, OLC Opinion, May 19, 1988.
Similarly, the Comptroller General held in 58 Comp. Gen. 383 (1979)
that members of the United States Metric Board could waive their
salaries since the relevant statute merely prescribed a maximum rate
of pay. In addition, since the Board had statutory authority to accept
gifts, a member who chose to do so could accept compensation and then
return it to the Board as a gift. Both cases make the point that
compensation is not "fixed by law" for purposes of the "no waiver"
rule where the statute merely sets a maximum limit for the salary.
A good illustration of the kind of situation 31 U.S.C. § 1342 is
designed to prevent is 54 Comp. Gen. 393 (1974). Members of the
Commission on Marihuana and Drug Abuse had, apparently at the
chairman's urging, agreed to waive their statutory entitlement to $100
per day while engaged in Commission business. The year after the
Commission ceased to exist, one of the former members changed his mind
and filed a claim for a portion of the compensation he would have
received but for the waiver. Since the $100 per day had been a
statutory entitlement, the purported waiver was invalid and the former
commissioner was entitled to be paid. Similar claims by any or all of
the other former members would also have to be allowed. If
insufficient funds remained in the Commission's now-expired
appropriation, a deficiency appropriation would be necessary.
A few earlier cases deal with fact situations similar to that
considered in 30 Op. Att'y Gen. 51—the acceptance by someone already
on the federal payroll of additional duties without additional
compensation. In 23 Comp. Gen. 272 (1943), for example, GAO concluded
that a retired Army officer could serve, without additional
compensation, as a courier for the State Department. The voluntary
services prohibition, said the decision, does not preclude "the
assignment of persons holding office under the Government to the
performance of additional duties or the duties of another position
without additional compensation." Id. at 274. Another World War II era
decision held that American Red Cross Volunteer Nurses' Aides who also
happened to be full-time federal employees could perform volunteer
nursing services at Veterans Administration hospitals. 23 Comp. Gen.
900 (1944).
One thing the various cases discussed above have in common is that
they involve the appointment of an individual to an official
government position, permanent or temporary. Services rendered prior
to appointment are considered purely voluntary and, by virtue of 31
U.S.C. § 1342, cannot be compensated. Lee v. United States, 45 Ct. Cl.
57, 62 (1910); B-181934, Oct. 7, 1974.[Footnote 98] It also follows
that post-retirement services, apart from appointment as a reemployed
annuitant, are not compensable. 65 Comp. Gen. 21 (1985). In that case,
an alleged agreement to the contrary by the individual's supervisor
was held unauthorized and therefore invalid.
It also has been held that experts and consultants employed under
authority of 5 U.S.C. § 3109 (the basic governmentwide authority for
procuring expert and consultant services) may serve without
compensation without violating the Antideficiency Act as long as it is
clearly understood and agreed that no compensation is expected.
27 Comp. Gen. 194 (1947); 6 Op. Off. Legal Counsel 160 (1982). Cf. B-
185952, Aug. 18, 1976 (uncompensated participation in pre-bid
conference, on-site inspection, and bid opening by contractor engineer
who had prepared specifications regarded as "technical violation" of
31 U.S.C. § 1342).
Several of the decisions note the requirement for a written record of
the agreement to serve without compensation. Proper documentation is
important for evidentiary purposes should a claim subsequently be
attempted. E.g., 27 Comp. Gen. at 195; 26 Comp. Gen. 956, 958 (1947);
27 Comp. Dec. 131, 132-33 (1920); 2 Op. Off. Legal Counsel 322, 323
(1977). Specifically, the decisions state that the individuals should
acknowledge in writing and in advance that they will receive no
compensation and that they should explicitly waive any and all claims
against the government on account of their service.
The rule that compensation fixed by statute may not be waived does not
apply if the waiver or appointment without compensation is itself
authorized by statute. The Comptroller General stated the principle as
follows in 27 Comp. Gen. at 195:
"Even where the compensation for a particular position is fixed by or
pursuant to law, the occupant of the position may waive his ordinary
right to the compensation fixed for the position and thereafter
forever be estopped from claiming and receiving the salary previously
waived, if there be some applicable provision of law authorizing the
acceptance of services without compensation." (Emphasis in original.)
As noted above, the decision in 27 Comp. Gen. 194 cited as the
provision authorizing the acceptance of services without compensation
in that case what is now section 3109(b) of title 5, United States
Code. Under section 3109(b), agencies may, when authorized by an
appropriation or other act, procure the services of experts or
consultants for up to 1 year without regard to other provisions of
title 5 governing appointment and compensation. This authority is
subject to a maximum rate of compensation in some cases, but there is
no minimum rate.
In B-139261, June 26, 1959, GAO reiterated the above principle, and
gave several additional examples of statutes sufficient for this
purpose. The examples included the following statutory provisions that
remain essentially the same in substance as they were in 1959:
* section 204(b) of title 29, United States Code, which authorizes the
Administrator of the Labor Department's Wage and Hour Division to
utilize voluntary and uncompensated services;
* section 401(7) of title 39, United States Code, which authorizes the
Postal Service to accept gifts or donations of services or property;
and;
* section 210(b) of title 47, United States Code, which states that no
provision of law shall be construed to prohibit common carriers from
rendering free service to any agency of the government in connection
with preparation for the national defense, subject to rules prescribed
by the Federal Communications Commission.
At this point a 1978 case, 57 Comp. Gen. 423, should be noted. The
decision held that a statute authorizing the Agency for International
Development (MD) to accept gifts of "services of any kind" (22 U.S.C.
§ 2395(d)) did not permit waiver of salary by MD employees whose
compensation was fixed by statute. Section 2395(d) is very similar to
one of the examples given in B-139261, June 26, 1959, discussed above,
of statutes that would authorize the acceptance of voluntary services.
See 39 U.S.C. § 401(7). However, 57 Comp. Gen. 423 is distinguishable
from B-139261, 27 Comp. Gen. 194, and the other voluntary services
cases discussed previously. The question in 57 Comp. Gen. 423 was
whether MD could invoke its gift-acceptance authority to justify
paying regular federal employees less than the salaries prescribed by
law. The decision held that it did not:
"Section 2395(d) ... authorizes the acceptance of gifts. Therefore, MD
may accept services from private sources either gratuitously or at a
fraction of their value. However, section 2395(d) does not authorize
individuals to be appointed to regular positions having compensation
rates fixed by or pursuant to statute at rates less than those
specified. It, therefore, differs from the statute, which was the
subject of 27 Comp. Gen. 194, supra, and accordingly is not a
provision of law authorizing employees whose compensation is fixed by
or pursuant to statute to waive any part of such compensation."
57 Comp. Gen. at 424-25.[Footnote 99]
As noted earlier, 27 Comp. Gen. 194 concerned temporary experts or
consultants. B-139261 concerned civilian volunteers who sought to
provide services for an Air Force reserve center. Likewise, the other
statutory examples cited in B-139261 clearly were aimed at individuals
other than regular federal employees. Thus, 57 Comp. Gen. 423 appears
to represent the sensible caveat that general statutory authorities to
accept voluntary services or "gifts" of services do not supersede
statutes providing for the compensation of federal employees and
cannot be invoked to avoid the consequences of those statutes.
The rules for waiver of salary or appointment without compensation may
be summarized as follows:
* If compensation is not fixed by statute, that is, if it is fixed
administratively or if the statute merely prescribes a maximum but no
minimum, it may be waived as long as the waiver qualifies as
"gratuitous." There should be an advance written agreement waiving all
claims.
* If compensation is fixed by statute, it may not be waived, the
voluntary versus gratuitous distinction notwithstanding, without
specific statutory authority. This authority generally may take the
form of authority to accept donations of services or to employ persons
without compensation.
* If the employing agency has statutory authority to accept gifts, the
employee can accept the compensation and return it to the agency as a
gift. Even if the agency has no such authority, the employee can still
accept the compensation and donate it to the United States Treasury.
(2) Student interns:
In 26 Comp. Gen. 956 (1947), the then Civil Service Commission asked
whether an agency could accept the uncompensated services of college
students as part of a college's internship program. The students
"would be assigned to productive work, that is, to the regular work of
the agency in a position which would ordinarily fall in the
competitive civil service." The answer was no. Since the students
would be used in positions the compensation for which was fixed by
law, and since compensation fixed by law cannot be waived, the
proposal would require legislative authority.
Thirty years later, the Justice Department's Office of Legal Counsel
considered another internship program and provided similar advice.
Without statutory authority, uncompensated student services that
furthered the agency's mission, that is, "productive work," could not
be accepted. 2 Op. Off. Legal Counsel 185 (1978).
In view of the long-standing rule, supported by decisions of the
Supreme Court,[Footnote 100] prohibiting the waiver of compensation
for positions required by law to be salaried, GAO and Justice had
little choice but to respond as they did. Clearly, however, this
answer had its downside. It meant that uncompensated student interns
could be used only for essentially "make-work" tasks, a benefit to
neither the students nor the agencies.
The solution, apparent from both cases, was legislative authority,
which Congress provided later in 1978 by the enactment of 5 U.S.C. §
3111. The statute authorizes agencies, subject to regulations of the
Office of Personnel Management, to accept the uncompensated services
of high school and college students, "notwithstanding section 1342 of
title 31," if the services are part of an agency program designed to
provide educational experience for the student, if the student's
educational institution gives permission, and if the services will not
be used to displace any employee. 5 U.S.C. § 3111(b).
A paper entitled A Part-Time Clerkship Program in Federal Courts for
Law Students by the Honorable Jack B. Weinstein and William B.
Bonvillian, written in 1975 and printed at 68 F.R.D. 265, considered
the use of law students as part-time law clerks, without pay, to
mostly supplement the work of the regular law clerks in furtherance of
the official duties of the courts. Based on the statute's legislative
history and 30 Op. Att'y Gen. 51 (1913), previously discussed, Judge
Weinstein concluded that the program did not violate the
Antideficiency Act. Although this aspect of the issue is not
explicitly discussed in the paper, it appears that the compensation of
regular law clerks is fixed administratively. See 28 U.S.C. §
604(a)(5). In any event, the Administrative Office of the United
States Courts was given authority in 1978 to "accept and utilize
voluntary and incompensated (gratuitous) services." 28 U.S.C. §
604(a)(17).
(3) Program beneficiaries:
Programs are enacted from time to time to provide job training
assistance to various classes of individuals. The training is
intended, among other things, to enable participants to enter the
labor market at a higher level of skill. Questions have arisen under
programs of this nature as to the authority of federal agencies to
serve as employers.
A 1944 case, 24 Comp. Gen. 314, considered a vocational rehabilitation
program for disabled war veterans. GAO concluded that 31 U.S.C. § 1342
did not preclude federal agencies from providing on-the-job training,
without payment of salary, to program participants. The decision is
further discussed in 26 Comp. Gen. 956, 959 (1947).
In 51 Comp. Gen. 152 (1971), GAO concluded that 31 U.S.C. § 1342
precluded federal agencies from accepting work by persons hired by
local governments for public service employment under the Emergency
Employment Act of 1971.[Footnote 101] Four years later, GAO modified
the 1971 decision, holding that a federal agency could provide work
without payment of compensation to (i.e., accept the free services of)
trainees sponsored and paid by nonfederal organizations from federal
grant funds under the Comprehensive Employment and Training Act of
1973.[Footnote 102]
54 Comp. Gen. 560 (1975). The decision stated:
"Considering that the services in question will arise out of a program
initiated by the Federal Government, it would be anomalous to conclude
that such services are proscribed as being voluntary within the
meaning of 31 U.S.C. § [1342]. That is to say, it is our opinion that
the utilization of enrollees or trainees by a Federal agency under the
circumstances here involved need not be considered the acceptance of
'voluntary services' within the meaning of that phrase as used in 31
U.S.C. § [1342]."
Id. at 561.
In B-211079.2, Jan. 2, 1987, the relevant program legislation
expressly authorized program participants to perform work for federal
agencies "notwithstanding section 1342 of title 31." The decision
suggests that the statutory authority was necessary not because of the
Antideficiency Act but to avoid an impermissible augmentation of
appropriations. It is in any event consistent in result with 24 Comp.
Gen. 314 and 54 Comp. Gen. 560. The relationship between voluntary
service and the augmentation concept is explored later in this chapter
in our discussion of augmentation of appropriations.
(4) Applicability to legislative and judicial branches:
The applicability of 31 U.S.C. § 1342 to the legislative and judicial
branches of the federal government does not appear to have been
seriously questioned.
The salary of a Member of Congress is fixed by statute and therefore
cannot be waived without specific statutory authority. B-159835, Apr.
22, 1975; B-123424, Mar. 7, 1975; B-123424, Apr. 15, 1955; A-8427,
Mar. 19, 1925; B-206396.2, Nov. 15, 1988 (nondecision letter).
However, as each of these cases points out, nothing prevents a Senator
or Representative from accepting the salary and then, as several have
done, donate part or all of it back to the United States Treasury.
In 1977, GAO was asked by a congressional committee chairman whether
section 1342 applies to Members of Congress who use volunteers to
perform official office functions. GAO responded, first, that section
1342 seems clearly to apply to the legislative branch. GAO then
summarized the rules for appointment without compensation and advised
that, to the extent that a particular employee's salary could be fixed
administratively by the Member in any amount he or she chooses to set,
that employee's salary could be fixed at zero. This once again was
essentially an application of the rules set down decades earlier in 30
Op. Att'y Gen. 51 (1913) and 27 Comp. Dec. 131 (1920). See also B-
69907, Feb. 11, 1977.
The salary of a federal judge is also "fixed by law"—even more so
because of the constitutional prohibition against diminishing the
compensation of a federal judge while in office. U.S. Const. art III,
§ 1. A case applying the standard "no waiver" rules to a federal judge
is B-157469, July 24, 1974.
c. Other Voluntary Services:
Before entering the mainstream of the modern case law, two very early
decisions should be noted. In 12 Comp. Dec. 244 (1905), the
Comptroller of the Treasury held that an offer by a meat-packing firm
to pay the salaries of Department of Agriculture employees to conduct
a pre-export pork inspection could not be accepted because of the
voluntary services prohibition.[Footnote 103] Similar cases have since
come up, but they have been decided under the augmentation theory
without reference to 31 U.S.C. § 1342. See 59 Comp. Gen. 294 (1980)
and 2 Comp. Gen. 775 (1923), discussed later in section E of this
chapter.
To restate, apart from the 1905 decision, which has not been followed
since, the voluntary services prohibition has not been applied to
donations of money. In another 1905 decision, a vendor asked
permission to install an appliance on Navy property for trial purposes
at no expense to the government. Presumably, if the Navy liked the
appliance, it would then buy it. The Comptroller of the Treasury
pointed out an easily overlooked phrase in the voluntary service
prohibition—the services that are prohibited are voluntary services
"for the United States." Here, temporary installation by the vendor
for trial purposes amounted to service for his own benefit and on his
own behalf, "as an incident to or necessary concomitant of a proper
exhibition of his appliance for sale." Therefore, the Navy could grant
permission without violating the Antideficiency Act as long as the
vendor agreed to remove the appliance at his own expense if the Navy
chose not to buy it. 11 Comp. Dec. 622 (1905). This case has not been
cited since.
For the most part, the subsequent cases have been resolved by applying
the "voluntary versus gratuitous" distinction first enunciated by the
Attorney General in 1913 in 30 Op. Att'y Gen. 51, discussed above. The
underlying philosophy is perhaps best conveyed in the following
statement by the Justice Department's Office of Legal Counsel:
"Although the interpretation of § [1342] has not been entirely
consistent over the years, the weight of authority does support the
view that the section was intended to eliminate subsequent claims
against the United States for compensation of the 'volunteer,' rather
than to deprive the government of the benefit of truly gratuitous
services."
6 Op. Off. Legal Counsel 160, 162 (1982).
In an early formulation that has often been quoted since, the
Comptroller General noted that:
"The voluntary service referred to in [31 U.S.C. § 1342] is not
necessarily synonymous with gratuitous service, but contemplates
service furnished on the initiative of the party rendering the same
without request from, or agreement with, the United States therefor.
Services furnished pursuant to a formal contract are not voluntary
within the meaning of said section."
7 Comp. Gen. 810, 811 (1928).
In 7 Comp. Gen. 810, a contractor had agreed to prepare stenographic
transcripts of Federal Trade Commission public proceedings and to
furnish copies to the Commission without cost, in exchange for the
exclusive right to report the proceedings and to sell transcripts to
the public. The decision noted that consideration under a contract
does not have to be monetary consideration, and held that the contract
in question was supported by sufficient legal consideration. While the
case is thus arguably not a true "voluntary services" case, it has
often been cited since, not so much for the actual holding but for the
above-quoted statement of the rule.
For example, in B-13378, Nov. 20, 1940, the Comptroller General held
that the Secretary of Commerce could accept gratuitous services from a
private agency, created by various social science associations, which
had offered to assist in the preparation of official monographs
analyzing census data. The services were to be rendered under a
cooperative agreement which specified that they would be free of cost
to the government. The Commerce Department agreed to furnish space and
equipment, but the monographs would not otherwise have been prepared.
Applying the same approach, GAO found no violation of 31 U.S.C. § 1342
for the Commerce Department to accept services by the Business
Advisory Council, which were agreed in advance to be gratuitous. B-
125406, Nov. 4, 1955. Likewise, the Commission on Federal Paperwork
could accept free services from the private sector as long as they
were agreed in advance to be gratuitous. B-182087-0.M., Nov. 26, 1975.
In a 1982 decision, the American Association of Retired Persons wanted
to volunteer services to assist in crime prevention activities
(distribute literature, give lectures, etc.) on Army installations.
GAO found no Antideficiency Act problem as long as the services were
agreed in advance, and so documented, as gratuitous. B-204326, July
26, 1982.
In B-177836, Apr. 24, 1973, the Army had entered into a contract with
a landowner under which it acquired the right to remove trees and
other shrubs from portions of the landowner's property incident to an
easement. A subsequent purchaser of the property complained that some
tree stumps had not been removed, and the Army proceeded to contract
to have the work done. The landowner then submitted a claim for
certain costs he had incurred incident to some preliminary work he had
done prior to the Army's contract. Since the landowner's actions had
been purely voluntary and had been taken without the knowledge or
consent of the government, 31 U.S.C. § 1342 prohibited payment.
In 7 Comp. Gen. 167 (1927), a customs official had stored, in his own
private boathouse, a boat which had been seized for smuggling whiskey.
The customs official later filed a claim for storage charges. Noting
that "the United States did not expressly or impliedly request the use
of the premises and therefore did not by implication promise to pay
therefor," GAO concluded that the storage had been purely a voluntary
service, payment for which would violate 31 U.S.C. § 1342.
As if to prove the adage that there is nothing new under the sun, GAO
considered another storage case over 50 years later, B-194294, July
12, 1979. There, an Agriculture Department employee had an accident
while driving a government-owned vehicle assigned to him for his work.
A Department official ordered the damaged vehicle towed to the
employee's driveway, to be held there until it could be sold. Since
the government did have a role in the employee's assumption of
responsibility for the wreck, GAO found no violation of 31 U.S.C. §
1342 and allowed the employee's claim for reasonable storage charges
on a quantum meruit basis.[Footnote 104]
Section 1342 covers any type of service which has the effect of
creating a legal or moral obligation to pay the person rendering the
service. Naturally, this includes government contractors. See PCL
Construction Services, Inc. v. United States, 41 Fed. CL 242, 257-260
(1998), quoting with approval from the second edition of Principles of
Federal Appropriations Law on this point. The prohibition includes
arrangements in which government contracting officers solicit or
permit—tacitly or otherwise—a contractor to continue performance on a
"temporarily unfunded" basis while the agency, which has exhausted its
appropriations and cannot pay the contractor immediately, seeks
additional appropriations. This was one of the options considered in
55 Comp. Gen. 768 (1976), discussed previously in connection with 31
U.S.C. § 1341(a). The Army proposed a contract modification which
would explicitly recognize the government's obligation to pay for any
work performed under the contract, possibly including reasonable
interest, subject to subsequent availability of funds. The government
would use its best efforts to obtain a deficiency appropriation.
Certificates to this effect would be issued to the contractor,
including a statement that any additional work performed would be done
at the contractor's own risk. In return, the contractor would be asked
to defer any action for breach of contract.
GAO found this proposal "of dubious validity at best." Although the
certificate given to the contractor would say that continued
performance was at the contractor's own risk, it was clear that both
parties expected the contract to continue. The government expected to
accept the benefits of the contractor's performance and the contractor
expected to be paid--eventually-—for it. This is certainly not an
example of a clear written understanding that work for the government
is to be performed gratuitously. Also, the proposal to pay interest
was improper as it would compound the Antideficiency Act violation.
Although 55 Comp. Gen. 768 does not specifically discuss 31 U.S.C. §
1342, the relationship should be apparent.
GAO's opinion in B-302811, July 12, 2004, provides a recent example of
an appropriate "gratuitous services" type contract that did not run
afoul of the 31 U.S.C. § 1342 prohibition against voluntary services.
This decision concerned the General Services Administration's (GSA)
proposed National Brokers Contract, under which GSA would award four
real estate brokers exclusive rights to represent the United States
with respect to all GSA real property leases. The brokers would be
required to provide a range of services commonly offered in commercial
leasing transactions such as assisting federal agencies in developing
their space requirements, surveying the rental market, and negotiating
and preparing leases. The proposal took the form of a "no-cost"
contract in which GSA would make no payments to the brokers for their
services. Rather, the brokers would collect commissions from the
landlords who leased property to the federal agencies. In approving
the legality of this proposed arrangement, the decision observed:
"Because the contract was constructed as a no cost contract, GSA will
have no financial liability to brokers, and brokers will have no
expectation of a payment from GSA. The acceptance of services without
payment pursuant to a valid, binding no-cost contract does not augment
an agency's appropriation nor does it violate the voluntary services
prohibition. Although the brokers contract clearly expects that
brokers will be remunerated by commissions from landlords, as is a
common practice in the real estate industry, GSA does not require
landlords to pay commissions. If a landlord were to fail to pay a
broker, the broker would have no claim against GSA."
Id. at 7.[Footnote 105]
d. Exceptions:
Two kinds of exceptions to 31 U.S.C. § 1342 have already been
discussed—where acceptance of services without compensation is
specifically authorized by law, and where the government and the
volunteer have a written agreement that the services are to be
rendered gratuitously with no expectation of future payment.
There is a third exception, written into the statute itself:
"emergencies involving the safety of human life or the protection of
property." The cases dealing with this statutory exception have arisen
in a variety of contexts and are discussed below, along with recent
developments.
(1) Safety of human life:
In order to invoke this exception, the services provided to protect
human life must have been rendered in a true emergency situation. What
constitutes an emergency was discussed in several early decisions.
In 12 Comp. Dec. 155 (1905), a municipal health officer disinfected
several government buildings to prevent the further spread of
diphtheria. Several cases of diphtheria had already occurred at the
government compound, including four that resulted in deaths. The
Comptroller of the Treasury found that the services had been rendered
in an emergency involving the loss of human life, and held accordingly
that the doctor could be reimbursed for the cost of materials used and
the fair value of his services.
In another case, the S.S. Rexmore, a British vessel, deviated from its
course to London to answer a call for help from an Army transport ship
carrying over 1,000 troops. The ship had sprung a leak and appeared to
be in danger of sinking. The Comptroller General allowed a claim for
the vessel's actual operating costs plus lost profits attributable to
the services performed. The Rexmore had rendered a tangible service to
save the lives of the people aboard the Army transport, as well as the
transport vessel itself. 2 Comp. Gen. 799 (1923).
On the other hand, GAO denied payment to a man who was boating in the
Florida Keys and saw a Navy seaplane make a forced landing. He offered
to tow the aircraft over two miles to the nearest island, and did so.
His claim for expenses was denied. The aircraft had landed intact and
the pilot was in no immediate danger. Rendering service to overcome
mere inconvenience or even to avoid a potential future emergency is
not enough to overcome the statutory prohibition. 10 Comp. Gen. 248
(1930).
(2) Protection of property:
The main thing to remember here is that the property must be either
government-owned property or property for which the government has
some responsibility. The standard was established by the Comptroller
of the Treasury in 9 Comp. Dec. 182, 185 (1902) as follows:
"I think it is clear that the statute does not contemplate property in
which the Government has no immediate interest or concern; but I do
not think it was intended to apply exclusively to property owned by
the Government.
The term 'property' is used in the statute without any qualifying
words, but it is used in connection with the rendition of services for
the Government. The implication is, therefore, clear that the property
in contemplation is property in which the Government has an immediate
interest or in connection with which it has some duty to perform."
In the cited decision, an individual had gathered up mail scattered in
a train wreck and delivered it to a nearby town. The government did
not "own" the mail but had a responsibility to deliver it. Therefore,
the services came within the statutory exception and the individual
could be paid for the value of his services.
Applying the approach of 9 Comp. Dec. 182, the Comptroller General
held in B-152554, Feb. 24, 1975, that section 1342 did not permit the
Agency for International Development to make expenditures in excess of
available funds for disaster relief in foreign countries. A case
clearly within the exception is 3 Comp. Gen. 979 (1924), allowing
reimbursement to a municipality which had rendered firefighting
assistance to prevent the destruction of federal property where the
federal property was not within the territory for which the municipal
fire department was responsible.
An exception was also recognized in 53 Comp. Gen. 71 (1973), where a
government employee brought in food for other government employees in
circumstances which would justify a determination that the expenditure
was incidental to the protection of government property in an extreme
emergency. In this case, the General Services Administration had to
assemble and maintain for 5 days a cadre of approximately 175 special
police in connection with the unauthorized occupation of a Bureau of
Indian Affairs building. The police officers were required to perform
tours of duty that sometimes extended to 24 hours. They were kept at
the ready to reoccupy the building and they were not permitted to
leave the marshaling area because of the imminence of court orders and
administrative directives.
(3) Recent developments:
During the past two decades, cases addressing the "emergencies
involving the safety of human life or the protection of property"
exception to 31 U.S.C. § 1342 have arisen primarily in the context of
"funding gaps" where an agency is faced with an appropriations lapse
(or potential lapse) usually at the outset of a fiscal year. These
cases are discussed in detail in section C.6 of this chapter. However,
several points from that discussion are also relevant here. Most
notably, in 1990, Congress amended 31 U.S.C. § 1342 by adding the
following language:
"As used in this section, the term 'emergencies involving the safety
of human life or the protection of property' does not include ongoing,
regular functions of government the suspension of which would not
imminently threaten the safety of human life or the protection of
property."[Footnote 106]
Two recent GAO decisions have considered the emergency exception to 31
U.S.C. § 1342 (including its 1990 amendment) in a context other than a
funding gap. The question in B-262069, Aug. 1, 1995, was whether the
District of Columbia could exceed its appropriation for certain
programs, including Aid to Families with Dependent Children and
Medicaid, without violating the Antideficiency Act. The main issue in
that decision was whether the "unless authorized by law exception" to
the Antideficiency Act in 31 U.S.C. § 1341(a)(1)(A) applied. GAO held
that it did not. The decision also noted the existence of the
emergencies exception to 31 U.S.C. § 1342, but held that it was
likewise inapplicable:
"An 'emergency' under section 1342 'does not include ongoing, regular
functions of government the suspension of which would not imminently
threaten the safety of human life or the protection of property.' We
are not presently aware of any facts or circumstances that would make
this limited exception available to the District. See, 5 Op.
O.L.C. 1, 7-11 (1981)."
B-262069 at 3, fn. 1.
The decision in B-262069 addressed a hypothetical situation; the
District had not actually exceeded its appropriation there.
Unfortunately, a subsequent opinion, B-285725, Sept. 29, 2000,
involved the real thing. In that case, the District of Columbia Health
and Hospitals Public Benefit Corporation (PBC) had incurred
obligations and made payments in excess of its appropriations. The PBC
maintained that the emergency exception to 31 U.S.C. § 1342 as
construed by the Attorney General applied; thus, there was no
violation. GAO disagreed:
"The funding gap situations discussed by the Attorney General arise
typically at the beginning of a fiscal year because of the absence or
expiration of budget authority under circumstances that are beyond an
agency's control. In the present situation, the exhaustion of
appropriations occurred during the fiscal year because of a rate of
operations and obligations in excess of available resources. Viewed in
this light, PBC's failure to regulate its activities and spending so
as to operate within its available budget resources is not the type of
'emergency' covered either by the Attorney General's earlier opinions
or 31 U.S.C. § 1342."
B-285725, Enclosure at 9.
The opinion acknowledged that PBC's ongoing functions of operating a
hospital and clinics involved the provision of services essential to
the protection of human life. However, the opinion observed that PBC,
like many federal agencies engaged in protecting human life and
safety, requested and received appropriations to cover these
functions. It added:
"Once the Congress enacts appropriation[s], it is incumbent on the PBC
(and similarly situated federal agencies) to manage its resources to
stay within the authorized level. Nothing in the District's Submission
demonstrates that the PBC's exhaustion of appropriations prior to the
end of the fiscal year was caused by some unanticipated event or
events (e.g., mass injuries resulting from hurricane, flood or other
natural disasters) requiring PBC to provide services for the
protection of life beyond the level it should have reasonably been
expected to anticipate when it prepared its budget."
Id. By way of summary, the opinion observed:
"While the failure of Congress to enact appropriations at the
beginning of the fiscal year may qualify as an emergency event for
purposes of section 1342, it would be a novel proposition, one that we
are unwilling to endorse, to conclude that an agency's failure to
manage and live within the resources provided for an activity involved
in protecting human life permits it to incur obligations in excess of
amounts provided. Nothing that we have been provided warrants the
conclusion that the overobligations resulted from an unanticipated
emergency rather than from the PBC's failure to manage and live within
its budgetary resources during the fiscal year."[Footnote 107]
B-285725 at 3.
In essence, B-285725 held that the emergencies exception to 31 U.S.C.
§ 1342 does not apply where an agency exceeds its appropriations—at
least absent events beyond the agency's control that the agency (and
presumably the Congress) could not have foreseen in determining the
agency's funding levels.
In two opinions to the United States Marshals Service (USMS) in 1999
and 2000, the Office of Legal Counsel addressed a potential exhaustion
of USMS appropriations, which never materialized: Memorandum Opinion
for the General Counsel, United States Marshals Service, USMS
Obligation To Take Steps To Avoid Anticipated Appropriations
Deficiency, OLC Opinion, May 11, 1999, and Memorandum Opinion for the
General Counsel, United States Marshals Service, Continuation of
Federal Prisoner Detention Efforts in the Face of a USMS
Appropriations Deficiency, OLC Opinion, Apr. 5, 2000. The opinions
dealt with a potential exhaustion of appropriations for USMS prisoner-
detention functions, but did not describe the circumstances giving
rise to the potential exhaustion. While these opinions recognized the
"affirmative obligation" on the part of agencies to manage available
appropriations in order to avoid deficiencies, they did not address
the important distinction between an exhaustion of appropriations (or
funding gap) resulting from unforeseen circumstances and an exhaustion
of appropriations resulting from the agency's failure to manage its
operations within the limits of enacted appropriations. We would
disagree with the Office of Legal Counsel opinions to the extent they
could be read to suggest that regardless of the reasons for the
exhaustion of appropriations, whenever an agency like USMS, whose
statutory mission involves the protection of life and property, runs
out of money, it has open-ended authority to continue to incur
obligations under the Antideficiency Act's emergencies exception.
[Footnote 108] This is exactly the "coercive deficiency" that the
Congress legislated against in enacting the Antideficiency Act.
[Footnote 109] See B-285725, Sept. 29, 2000. The Antideficiency Act
was intended to keep agency operations at a level within the amounts
that Congress appropriates for that purpose. If an agency concludes
that it needs more funds than Congress has appropriated for a fiscal
year, the agency should ask Congress to enact a supplemental
appropriation; it should not continue operations without regard to the
Antideficiency Act.
e. Voluntary Creditors:
A related line of decisions are the so-called "voluntary creditor"
cases. A voluntary creditor is an individual, government or private,
who pays what he or she perceives to be a government obligation from
personal funds. The rule is that the voluntary creditor cannot be
reimbursed, although there are significant exceptions. For the most
part, the decisions have not related the voluntary creditor
prohibition to the Antideficiency Act, with the exception of one very
early case (17 Comp. Dec. 353 (1910)) and two more recent ones (53
Comp. Gen. 71 (1973) and 42 Comp. Gen. 149 (1962)). The voluntary
creditor cases are discussed in detail in Chapter 12, section C.4.c in
volume III of the second edition of Principles of Federal
Appropriations Law, dealing with claims against the United States.
4. Apportionment of Appropriations:
Because of the apportionment and related provisions of the
Antideficiency Act, 31 U.S.C. §§ 1511-1519, an agency generally does
not have the full amount of its appropriations available to it at the
beginning of the fiscal year. Apportionment is an administrative
process by which, as its name suggests, appropriated funds are
distributed to agencies in portions over the period of their
availability. The Office of Management and Budget (OMB) apportions
funds for executive branch agencies. 31 U.S.C. § 1513(b); Exec. Order
No. 6166, § 16 (June 10, 1933), at 5 U.S.C. § 901 note. Appropriations
for legislative branch agencies, the judicial branch, the District of
Columbia, and the International Trade Commission are apportioned by
officials having administrative control of those funds. 31 U.S.C. §
1513(a). In addition to apportionment, appropriations are subject to
further administrative subdivision by the heads of the agencies to
which the appropriations are made. 31 U.S.C. § 1514.
Section 1517(a) of title 31 prohibits officers and employees of the
federal and District of Columbia governments from making or
authorizing an expenditure or obligation that exceeds an apportionment
or the amount permitted under certain other subdivisions of
appropriated funds. Agencies must report violations of section 1517(a)
to the Congress and the President. Those who violate section 1517(a)
are subject to administrative discipline as well as criminal penalties
in the case of willful violations. See 31 U.S.C. §§ 1517(b), 1518, and
1519.
a. Statutory Requirement for Apportionment:
Subsection (a) of section 1512 establishes the basic requirement for
the apportionment of appropriations:
"(a) Except as provided in this subchapter, an appropriation available
for obligation for a definite period shall be apportioned to prevent
obligation or expenditure at a rate that would indicate a necessity
for a deficiency or supplemental appropriation for the period. An
appropriation for an indefinite period and authority to make
obligations by contract before appropriations shall be apportioned to
achieve the most effective and economical use. An apportionment may be
reapportioned under this section."
Although apportionment was first required legislatively in 1905,
[Footnote 110] the current form of the statute derives from a revision
enacted in 1950 in section 1211 of the General Appropriation Act,
1951.[Footnote 111] The 1950 revision was part of an overall effort by
Congress to amplify and enforce the basic restrictions against
incurring deficiencies in violation of the Antideficiency Act, 31
U.S.C. § 1341.
Section 1512(a) requires that all appropriations be administratively
apportioned so as to ensure their obligation and expenditure at a
controlled rate which will prevent deficiencies from arising before
the end of a fiscal year. Although section 1512 does not tell you who
is to make the apportionment, section 1513 names the President as the
apportioning official for most executive branch agencies. The
President delegated the function to the Director of the Bureau of the
Budget in 1933,[Footnote 112] and it now reposes in the successor to
that office, the Director of the Office of Management and Budget
(OMB).[Footnote 113] Legislative and judicial branch appropriations
are apportioned by officials in those branches. 31 U.S.C. § 1513(a).
The term "apportionment" may be defined as follows:
"The action by which [the apportioning official] distributes amounts
available for obligation, including budgetary reserves established
pursuant to law, in an appropriation or fund account. An apportionment
divides amounts available for obligation by specific time periods
(usually quarters), activities, projects, objects, or a combination
thereof. The amounts so apportioned limit the amount of obligations
that may be incurred. An apportionment may be further subdivided by an
agency into allotments, suballotments, and allocations. In
apportioning any account, some funds may be reserved to provide for
contingencies or to effect savings made possible pursuant to the
Antideficiency Act. Funds apportioned to establish a reserve must be
proposed for deferral or rescission pursuant to the Impoundment
Control Act of 1974 (2 U.S.C. §§ 681-688).
"The apportionment process is intended to (1) prevent the obligation
of amounts available within an appropriation or fund account in a
manner that would require deficiency or supplemental appropriations
and (2) achieve the most effective and economical use of amounts made
available for obligation.[Footnote 114]
Apportionment is required not only to prevent the need for deficiency
or supplemental appropriations, but also to ensure that there is no
drastic curtailment of the activity for which the appropriation is
made. 36 Comp. Gen. 699 (1957). See also 38 Comp. Gen. 501 (1959). In
other words, the apportionment requirement is designed to prevent an
agency from spending its entire appropriation before the end of the
fiscal year and then putting Congress in a position in which it must
either enact an additional appropriation or allow the entire activity
to come to a halt. 64 Comp.
Gen. 728, 735 (1985). See also Memorandum Opinion for the General
Counsel, United States Marshals Service, USMS Obligation To Take Steps
To Avoid Anticipated Appropriations Deficiency, OLC Opinion, May 11,
1999 (opining that 31 U.S.C. § 1512(a) imposes "an affirmative
obligation" on federal agencies to take steps to use their available
funds in a way that will avoid the need for a deficiency or
supplemental appropriations, citing 64 Comp. Gen. 728 and 36 Comp.
Gen. 699). In 36 Comp. Gen. 699, Post Office funds had been
reapportioned in such a way that the fourth quarter funds were
substantially less than those for the third quarter. The Comptroller
General stated:
"A drastic curtailment toward the close of a fiscal year of operations
carried on under a fiscal year appropriation is a prima facie
indication of a failure to so apportion an appropriation 'as to
prevent obligation or expenditure thereof in a manner which would
indicate a necessity for deficiency or supplemental appropriations for
such period.' In our view, this is the very situation the amendment of
the law in 1950 was intended to remedy."
36 Comp. Gen. at 703. See also 64 Comp. Gen. 728, 735-36 (1985).
However, the mere fact that an agency faces a severe lack of funds and
needs to curtail services late in a fiscal year does not necessarily
mean that the apportioning authority has violated 31 U.S.C. § 1512(a).
Programmatic factors that could not reasonably be foreseen at the time
of an apportionment or reapportionment may affect the pattern or pace
of spending over the course of the year. Also, as discussed hereafter
in section C.4.e, the statute itself permits apportionments indicating
the need for a deficiency or supplemental appropriation in certain
limited circumstances.
A 1979 decision involved the Department of Agriculture's Food Stamp
Program. The program was subject to certain spending ceilings which it
seemed certain, given the rate at which the Department was incurring
expenditures, that the Department was going to exceed. The Department
feared that, if it was bound by a formula in a different section of
its authorizing act to pay the mandated amount to each eligible
recipient, it would have to stop the whole program when the funds were
exhausted. Based on both the Antideficiency Act and the program
legislation, GAO concluded that there had to be an immediate pro rata
reduction for all participants. Discontinuance of the program when the
funds ran out would violate the purpose of the apportionment
requirement. A-51604, Mar. 28, 1979.
This is not to say that every subactivity or project must be carried
out for the full fiscal year, on a reduced basis, if necessary.
Section 1512(a) applies to amounts made available in an appropriation
or fund. Where, for example, the then Veterans Administration (VA)
nursing home program was funded from moneys made available in a
general, lump-sum VA medical care appropriation, the agency was free
to discontinue the nursing home program and reprogram the balance of
its funds to other programs also funded under that heading. B-167656,
June 18, 1971. (The result would be different if the nursing home
program had received a line-item appropriation.)
The general rule against apportionments that indicate the need for a
deficiency or supplemental appropriation does not preclude an agency
from requesting an apportionment of all or most of its existing
appropriations at the same time that it is seeking a supplemental so
long as the agency has in place a plan that would enable it to
function through the end of the fiscal year should Congress not enact
the supplemental. 64 Comp. Gen. 728, 735 (1985). See also B-255529,
Jan. 10, 1994. In 64 Comp. Gen. 728, the former Interstate Commerce
Commission (ICC) had requested an apportionment of the full annual
amount available to it under a continuing resolution at the outset of
fiscal year 1985. At the same time, the ICC voted to seek a
supplemental appropriation in order to avoid severe staffing cuts that
would have been required without it. The Comptroller General held that
the apportionment was not improper:
"As we have indicated, at the recommendation of its Managing Director
the ICC adopted an operating plan for fiscal year 1985 which included
a request for a supplemental appropriation. However, part of that
operating plan was an emergency plan which would enable the ICC to
operate for the entire fiscal year even without a supplemental. Under
the plan, if the Congress did not enact a supplemental appropriation
by the end of March, the Commission was to furlough all its employees
for 1 day per week for the remainder of the year. This would allow the
Commission to operate through the end of the fiscal year within the
$48 million already appropriated. In fact a supplemental was not
passed by the end of March and the furlough was implemented....
"The actions taken by the ICC ...demonstrate that from the time at
which the Congress and the President approved legislation reducing
ICC's funding below the requested level, every decision related to
expenditures was made to avoid violation of the Antideficiency Act."
64 Comp. Gen. at 735.
The requirement to apportion applies not only to 1-year appropriations
and other appropriations limited to a fixed period of time, but also
to "no-year" money and even to contract authority (authority to
contract in advance of appropriations). 31 U.S.C. §§ 1511(a), 1512(a).
In the case of indefinite appropriations and contract authority, the
requirement states only that the apportionment is to be made in such a
way as "to achieve the most effective and economical use" of the
budget authority. Id. § 1512(a).
Prior to the 1982 recodification of title 31 of the United States
Code, the apportionment requirement applied explicitly to government
corporations which are instrumentalities of the United States.
[Footnote 115] While the applicability of the requirement has not
changed, the recodification dropped the explicit language, viewing it
as covered by the broad definition of "executive agency" in 31 U.S.C.
§ 102.[Footnote 116] The authority of some government corporations to
determine the necessity of their expenditures and the manner in which
they shall be incurred is not sufficient to exempt a corporation from
the apportionment requirement. 43 Comp. Gen. 759 (1964).
The apportionment process provides a set of administrative controls
over the use of appropriations in addition to those Congress has
imposed through the appropriations act itself. The apportionment
process cannot alter or otherwise affect the operation of statutory
requirements concerning the availability or use of appropriated funds.
In this regard, OMB's guidance on apportionments states:
"... The apportionment of funds should not be used as a means of
resolving any question dealing with the legality of using funds for
the purposes for which they are appropriated. Any questions as to the
legality of using funds for a particular purpose must be resolved
through legal channels."
OMB Circ. No. A-11, pt. 4, § 120.17.[Footnote 117]
Furthermore, an apportioning official cannot apportion funds in
advance of their availability for obligation or expenditure. In B-
290600, July 10, 2002, OMB had apportioned certain budget authority
for loan guarantees to the Air Transportation Stabilization Board
pursuant to the Board's request. The statute enacting this budget
authority had conditioned its availability such that the budget
authority "shall be available only to the extent that a request...
that includes designation of such amount as an emergency
requirement... is transmitted by the President to Congress." The
President had not transmitted this designation at the time of the
apportionment. Therefore, GAO concluded that OMB and the Board had
violated the Antideficiency Act. OMB and the Board recognized the
violation and had already taken steps to avoid a recurrence.
b. Establishing Reserves:
Section 1512(c) of 31 U.S.C. provides as follows:
"(c)(1) In apportioning or reapportioning an appropriation, a reserve
may be established only:
"(A) to provide for contingencies;
"(B) to achieve savings made possible by or through changes in
requirements or greater efficiency of operations; or;
"(C) as specifically provided by law.
"(2) A reserve established under this subsection may be changed as
necessary to carry out the scope and objectives of the appropriation
concerned. When an official designated in section 1513 of this title
to make apportionments decides that an amount reserved will not be
required to carry out the objectives and scope of the appropriation
concerned, the official shall recommend the rescission of the amount
in the way provided in chapter 11 of this title for appropriation
requests. Reserves established under this section shall be reported to
Congress as provided in the Impoundment Control Act of 1974 (2 U.S.C.
681 et seq.)."
Section 1512(c) seeks to limit the circumstances in which the full
appropriation is not apportioned or utilized and a reserve fund is
established. Under this provision, the apportioning official is
authorized to establish reserves only to provide for contingencies or
to effect savings, unless the reserve is specifically authorized by
statute.
At one time, this section was a battleground between the executive and
legislative branches. The executive branch had relied on this portion
of the Antideficiency Act to impound funds for general fiscal or
economic policy reasons such as containment of federal spending and
executive judgment of the relative merits, effectiveness, and
desirability of competing federal programs (often referred to as
"policy impoundments"). See 54 Comp. Gen. 453, 458 (1974); B-135564,
July 26, 1973.
Prior to 1974, the predecessor of 31 U.S.C. § 1512(c) contained rather
expansive language to the effect that a reserve fund could be
established pursuant to "other developments subsequent to the date on
which [the] appropriation was made available." 31 U.S.C. § 665(c)(2)
(1970 ed.).
Despite this expansive language, the Comptroller General's position
had been that the authority to establish reserves under the
Antideficiency Act was limited to providing for contingencies or
effecting savings which are in furtherance of, or at least consistent
with, the purposes of an appropriation. B-130515, July 10, 1973. The
Comptroller General did not interpret the law as authorizing a reserve
of funds (i.e., an impoundment) based upon general economic, fiscal,
or policy considerations that were extraneous to the individual
appropriation or were in derogation of the appropriation's purpose. B-
125187, Sept. 11, 1973; B-130515, July 10, 1973. See also State
Highway Commission of Missouri v. Volpe, 479 F.2d 1099, 1118 (8th Cir.
1973), which held that the right to reserve funds in order to "effect
savings" or due to "subsequent events," etc., must be considered in
the context of the applicable appropriation statute.
The Impoundment Control Act of 1974[Footnote 118] amended section
1512(c) by eliminating the "other developments" clause and by
prohibiting the establishment of appropriation reserves except as
provided under the Antideficiency Act for contingencies or savings, or
as provided in other specific statutory authority. The intent was to
preclude reliance on section 1512(c) as authority for "policy
impoundments." City of New Haven v. United States, 809 F.2d 900, 906
(D.C. Cir. 1987); 54 Comp. Gen. 453 (1974); B-148898-0.M., Aug. 28,
1974.
The executive branch, however, continued to defer for policy reasons,
arguing that section 1013 of the Impoundment Control Act provided
authority, independent of the Antideficiency Act, to withhold funds
from obligation temporarily for fiscal policy reasons. GAO agreed that
this interpretation was consistent with the language of the
Impoundment Control Act and with the statutory scheme, pointing out
that Congress had reserved the power under the Impoundment Control Act
to disapprove any deferral, particularly deferrals for fiscal policy
reasons, as a counterweight to the President's power to defer. 54
Comp. Gen. at 455. At that time, the Impoundment Control Act provided
for disapproval using a one-house veto. This counterweight vanished
when the Supreme Court held one-house legislative veto provisions
unconstitutional. Immigration & Naturalization Service v. Chadha, 462
U.S. 919 (1983). Accordingly, in a decision issued on January 20,
1987, the U.S. Court of Appeals for the District of Columbia
invalidated section 1013, which was the sole general legislative
authority for policy deferrals.[Footnote 119] City of New Haven, 809
F.2d at 902, 905-09. In September of 1987, Congress reenacted section
1013(b) of the Impoundment Control Act, 2 U.S.C. § 684(b), without the
unconstitutional legislative veto provision and reiterated that the
same limits on appropriation reserves that appear in 31 U.S.C. §
1512(c) are the sole justifications for deferrals. See Pub. L. No. 100-
119, § 206, 101 Stat. 754, 785 (Sept. 29, 1987). See Chapter 1,
section D.3.b for a general discussion of impoundments and the
Impoundment Control Act.
The Comptroller General discussed examples of permissible (i.e.,
nonpolicy) reserves in 51 Comp. Gen. 598 (1972) and 51 Comp. Gen. 251
(1971). The first decision concerned the provisions of a long-term
charter of several tankers for the Navy. The contract contained
options to renew the charter for periods of 15 years. In the event
that the Navy declined to renew the charter short of a full 15-year
period, the vessels were to be sold by a Board of Trustees, acting for
the owners and bondholders. Any shortfall in the proceeds over the
termination value was to be unconditionally guaranteed by the Navy.
GAO held that it would not violate the Antideficiency Act to cover
this contingent liability by setting up a reserve. 51 Comp. Gen. 598
(1972). In 51 Comp. Gen. 251 (1971), GAO said that it was permissible
to provide in regulations for a clause to be inserted in future
contracts for payment of interest on delayed payments of a
contractor's claim. Reserving sufficient funds from the appropriation
used to support the contract to cover these potential interest costs
would protect against potential Antideficiency Act violations.
In 1981, the Community Services Administration established a reserve
as a cushion against Antideficiency Act violations while the agency
was terminating its operations. Grantees argued that the reserve
improperly reduced amounts available for discretionary grants. In
Rogers v. United States, 14 Cl. Ct. 39, 46-47 (1987), aff'd, 801 F.2d
729 (Fed. Cir. 1988), cert. denied, 490 U.S. 1034 (1989), the court
held that a reasonable reserve for contingencies was properly within
the agency's discretion.
c. Method of Apportionment:
The remaining portions of 31 U.S.C. § 1512 are subsections (b) and
(d), set forth below:
"(b)(1) An appropriation subject to apportionment is apportioned by:
"(A) months, calendar quarters, operating seasons, or other time
periods;
"(B) activities, functions, projects, or objects; or;
"(C) a combination of the ways referred to in clauses (A) and (B) of
this paragraph.
"(d) An apportionment or reapportionment shall be reviewed at least 4
times a year by the official designated in section 1513 of this title
to make apportionments."
Subsection (b) and (d) are largely technical, implementing the basic
apportionment requirement of 31 U.S.C. § 1512(a). Section 1512(b)
makes it clear that apportionments need not be made strictly on a
monthly, quarterly, or other fixed time basis, nor must they be for
equal amounts in each time period. The apportioning officer is free to
take into account the "activities, functions, projects, or objects" of
the program being funded and the usual pattern of spending for such
programs in deciding how to apportion the funds. Absent some statutory
provision to the contrary, OMB's determination is controlling. Thus,
in Maryland Department of Human Resources v. United States Department
of Health & Human Services, 854 F.2d 40 (4th Cir. 1988), the court
upheld OMB's quarterly apportionment of social services block grant
funds, rejecting the state's contention that it should receive its
entire annual allotment at the beginning of the fiscal year. Section
1512(d) requires a minimum of four reviews each year to enable the
apportioning officer to make reapportionments or other adjustments as
necessary.
Conversely, OMB may decide to apportion all or most of an available
appropriation at the outset of a fiscal year. In B-255529, Jan. 10,
1994, GAO held that OMB's apportionments at the beginning of the
fiscal year of the full amounts available for two State Department
appropriation ("Contributions to International Organizations" and
"Contributions for International Peacekeeping Activities") constituted
an appropriate exercise of OMB's discretion. Quoting from an earlier
opinion, B-152554, Feb. 17, 1972, the decision then observed that the
amounts to be apportioned depended on the needs of the programs as
determined by OMB:
"It must be recognized that, with respect to a number of programs,
particularly where grant or other assistance funds are involved, a
large portion of the funds normally are obligated during the early
part of the fiscal year. The pattern of obligations is much different
than where, for example, an appropriation is primarily available for
salaries and administrative expenses. In such case the expenditures
would be comparatively constant throughout the year. The pattern of
obligations, however, is primarily an administrative matter ... [for
resolution through] the apportionment process."
The decision pointed out that, according to the State Department,
payments under the Contributions to International Organizations
account traditionally were made in the first quarter of the fiscal
year. Payments under the Peacekeeping account usually occurred as
bills were received and funds were available, but the Department
advised GAO that there was a large backlog of bills at the time funds
became available, thereby justifying immediate apportionment of the
entire annual appropriation.[Footnote 120]
d. Control of Apportionments:
Section 1513 of title 31, United States Code, specifies the
authorities and timetables for making the apportionments or
reapportionments of appropriations required by section 1512. Section
1513(a) applies to appropriations of the legislative and judicial
branches of the federal government, as well as appropriations of the
International Trade Commission and the District of Columbia
government.[Footnote 121] It assigns authority to apportion to the
"official having administrative control" of the appropriation.
[Footnote 122] Apportionment must be made 30 days before the start of
the fiscal year for which the appropriation is made, or within 30 days
after the enactment of the appropriation, whichever is later. The
apportionment must be in writing.
Section 1513(b) deals with apportionments for the executive branch.
The President is designated as the apportioning authority. As we have
seen, the function has been delegated to the Director, Office of
Management and Budget (OMB).[Footnote 123] The Director of OMB has up
to 20 days before the start of the fiscal year or 30 days after
enactment of the appropriation act, whichever is later, to make the
actual apportionment and notify the agency of the action taken. 31
U.S.C. § 1513(b)(2). Again, the apportionments must be in writing.
Although primary responsibility for a violation of section 1512 lies
with the Director of OMB, the head of the agency concerned also may be
found responsible if he or she fails to send the Director accurate
information on which to base an apportionment.
In B-163628, Jan. 4, 1974, GAO responded to a question from the
chairman of a congressional committee about the power of OMB to
apportion the funds of independent regulatory agencies, such as the
Securities and Exchange Commission (SEC). The Comptroller General
agreed with the chairman that independent agencies should generally be
free from executive control or interference. The response then stated:
"The apportionment power may not lawfully be used as a form of
executive control or influence over agency functions. Rather, it may
only be exercised by OMB in the manner and for the purposes prescribed
in 31 U.S.C. § [1512]—i.e., to prevent obligation or expenditure in a
manner which would give rise to a need for deficiency or supplemental
appropriations, to achieve the most effective and economical use of
appropriations and to establish reserves either to provide for
contingencies or to effect savings which are in furtherance of or at
least consistent with, the purposes of an appropriation.
"As thus limited, the apportionment process serves a necessary
purpose—-the promotion of economy and efficiency in the use of
appropriations.
"Since a useful purpose is served by OMB's proper exercise of the
apportionment power, we do not believe that the potential for abuse of
the power is sufficient to justify removing it from OMB."
Thus, the appropriations of independent regulatory agencies like the
Securities and Exchange Commission (SEC) are subject to apportionment
by OMB, but OMB may not lawfully use its apportionment power to
compromise the independence of those agencies.
The Impoundment Control Act may permit OMB, in effect, to delay the
apportionment deadlines prescribed in 31 U.S.C. § 1513(b). For
example, when the President sends a rescission message to Congress,
the budget authority proposed to be rescinded may be withheld for up
to 45 days pending congressional action on a rescission bill. 2 U.S.C.
§§ 682(3), 683(b). In B-115398.33, Aug. 12, 1976, GAO responded to a
congressional request to review a situation in which an apportionment
had been withheld for more than 30 days after enactment of the
appropriation act. The President had planned to submit a rescission
message for some of the funds but was late in drafting and
transmitting his message. If the full amount contained in the
rescission message could be withheld for the entire 45-day period, and
Congress ultimately declined to enact the full rescission, release of
the funds for obligation would occur only a few days before the budget
authority expired. The Comptroller General suggested that, where
Congress has completed action on a rescission bill rescinding only a
part of the amount proposed, OMB should immediately apportion the
amounts not included in the rescission bill without awaiting the
expiration of the 45-day period. See also B-115398.33, Mar. 5, 1976.
e. Apportionments Requiring Deficiency Estimate:
In our discussion of the basic requirement for apportionment, we quoted
31 U.S.C. § 1512(a) to the effect that appropriations must be
apportioned "to prevent obligation or expenditure at a rate that would
indicate a necessity for a deficiency or supplemental appropriation."
The requirement that appropriations be apportioned so as to avoid the
need for deficiency or supplemental appropriations is fleshed out in
31 U.S.C. § 1515 (formerly subsection (e) of the Antideficiency Act):
"(a) An appropriation required to be apportioned under section 1512 of
this title may be apportioned on a basis that indicates the need for a
deficiency or supplemental appropriation to the extent necessary to
permit payment of such pay increases as may be granted pursuant to law
to civilian officers and employees (including prevailing rate
employees whose pay is fixed and adjusted under subchapter IV of
chapter 53 of title 5) and to retired and active military personnel.
"(b)(1) Except as provided in subsection (a) of this section, an
official may make, and the head of an executive agency may request, an
apportionment under section 1512 of this title that would indicate a
necessity for a deficiency or supplemental appropriation only when the
official or agency head decides that the action is required because of:
"(A) a law enacted after submission to Congress of the estimates for
an appropriation that requires an expenditure beyond administrative
control; or;
"(B) an emergency involving the safety of human life, the protection
of property, or the immediate welfare of individuals when an
appropriation that would allow the United States Government to pay, or
contribute to, amounts required to be paid to individuals in specific
amounts fixed by law or under formulas prescribed by law, is
insufficient.
"(2) If an official making an apportionment decides that an
apportionment would indicate a necessity for a deficiency or
supplemental appropriation, the official shall submit immediately a
detailed report of the facts to Congress. The report shall be referred
to in submitting a proposed deficiency or supplemental appropriation."
Section 1515 thus provides certain exceptions to the requirement of
section 1512(a) that apportionments be made in such manner as to
assure that the funds will last throughout the fiscal year and there
will be no necessity for a deficiency appropriation. Under subsection
1515(a), deficiency apportionments are permissible if necessary to pay
salary increases granted pursuant to law to federal civilian and
military personnel. Under subsection 1515(b), apportionments can be
made in an unbalanced manner (e.g., an entire appropriation could be
obligated by the end of the second quarter) if the apportioning
officer determines that (1) a law enacted subsequent to the
transmission of budget estimates for the appropriation requires
expenditures beyond administrative control, or (2) there is an
emergency involving safety of human life, protection of property, or
immediate welfare of individuals in cases where an appropriation for
mandatory payments to those individuals is insufficient.
Prior to 1957, what is now subsection 1515(b) prohibited only the
making of an apportionment indicating the need for a deficiency or
supplemental appropriation, so the only person who could violate this
subsection was the Director of OMB. An amendment in 1957 made it
equally a violation for an agency to request such an apportionment.
See 38 Comp. Gen. 501 (1959). The exception in subsection
1515(b)(1)(A) for expenditures "beyond administrative control"
required by a statute enacted after submission of the budget estimate
may be illustrated by statutory increases in compensation, although
many of the cases would now be covered by subsection (a). We noted
several of the cases in our consideration of when an obligation or
expenditure is "authorized by law" for purposes of 31 U.S.C. §
1341.[Footnote 124] Those cases established the rule that a mandatory
increase is regarded as "authorized by law" so as to permit
overobligation, whereas a discretionary increase is not. The same rule
applies in determining when an expenditure is "beyond administrative
control" for purposes of 31 U.S.C. § 1515(b). Thus, statutory pay
increases for Wage Board employees granted pursuant to a wage survey
meet the test. 39 Comp. Gen. 422 (1959); 38 Comp. Gen. 538, 542
(1959). See also 45 Comp. Gen. 584, 587 (1966) (severance pay in
fiscal year 1966).[Footnote 125] Discretionary increases, just as they
are not "authorized by law" for purposes of 31 U.S.C. § 1341, are not
"beyond administrative control" for purposes of section 1515(b). 44
Comp. Gen. 89 (1964) (salary increases to Central Intelligence Agency
employees); 31 Comp. Gen. 238 (1951) (pension increases to retired
District of Columbia police and firefighters).
The Wage Board exception was separately codified in 1957 and now
appears at 31 U.S.C. § 1515(a), quoted above. Subsection 1515(a)
reached its present form in 1987 when Congress expanded it to include
pay increases granted pursuant to law to non-Wage Board civilian
officers and employees and to retired and active military personnel.
[Footnote 126]
The "emergency" exceptions in subsection 1515(b)(1)(B) have not been
discussed in GAO decisions, although a 1989 internal memorandum
suggested that the exception would apply to Forest Service
appropriations for fighting forest fires. B-230117-0.M., Feb. 8, 1989.
The exceptions for safety of human life and protection of property
appear to be patterned after identical exceptions in 31 U.S.C. § 1342
(acceptance of voluntary services), so the case law under that section
would likely be relevant for construing the scope of the exceptions
under section 1515(b). See 43 Op. Att'y Gen. 293, 5 Op. Off. Legal
Counsel 1, 9-10 (1981) ("as provisions containing the same language,
enacted at the same time, and aimed at related purposes, the emergency
provisions or sections 1342 and 1515(b)(1)(B) "should be deemed in
pari materia and given a like construction"); Memorandum for the
General Counsel, United States Marshals Service, Continuation of
Federal Prisoner Detention Efforts in the Face of a USMS Appropriation
Deficiency, OLC Opinion, Apr. 5, 2000 ("we think it clear that, if an
agency's functions fall within § 1342's exception for emergency
situations, the standard for the 'emergency' exception under
§ [1515(b)(1)(B)] also will be met"). See also Memorandum for the
Director, Office of Management and Budget, Government Operations in
the Event of a Lapse in Appropriations, OLC Opinion, Aug. 16, 1995, at
7, fn. 6.
It is less obvious that the converse would necessarily be true—that
is, that an "emergency" for purposes of subsection 1515(b)(1)(B)
automatically qualifies as an "emergency" for purposes of section
1342. As we pointed out in discussing section 1342, this section was
amended in 1990 to add the following language:
"As used in this section, the term 'emergencies involving the safety
of human life or the protection of property' does not include ongoing,
regular functions of government the suspension of which would not
imminently threaten the safety of human life or the protection of
property."
Such language was not added to subsection 1515(b)(1)(B). Thus, on its
face, subsection 1515(b)(1)(B) may embody at least a slightly more
flexible standard of "emergency" than section 1342, although we have
found no cases addressing this point.
Importantly, the exceptions in 31 U.S.C. § 1515(b) are exceptions only
to the prohibition against malting or requesting apportionments
requiring deficiency estimates; they are not exceptions to the basic
prohibitions in 31 U.S.C. § 1341 against obligating or spending in
excess or advance of appropriations. The point was discussed at some
length in B-167034, Sept. 1, 1976. Legislation had been proposed in
the Senate to repeal 41 U.S.C. § 11 (the Adequacy of Appropriations
Act),[Footnote 127] which prohibits the malting of a contract, not
otherwise authorized by law, unless there is an appropriation
"adequate to its fulfillment," except in the case of contracts made by
a military department for "clothing, subsistence, forage, fuel,
quarters, transportation, or medical and hospital supplies." The
question was whether, if 41 U.S.C. § 11 were repealed, the military
departments would have essentially the same authority under section
1515(b).
The Defense Department expressed the view that section 1515(b) would
not be an adequate substitute for the 41 U.S.C. § 11 exception which
allows the incurring of obligations for limited purposes even though
the applicable appropriation is insufficient to cover the expenses at
the time the commitment is made. Defense commented as follows:
"The authority to apportion funds on a deficiency basis in [31 U.S.C.
§ 1515(b)] does not, as alleged, provide authority to incur a
deficiency. It merely authorizes obligating funds at a deficiency rate
under certain circumstances, e.g., a $2,000,000 appropriation can be
obligated in its entirety at the end of the third quarter, but it does
not provide authority to obligate one dollar more than $2,000,000."
Letter from the Deputy Secretary of Defense to the Chairman, House
Armed Services Committee, Apr. 2, 1976 (quoted in B-167034, Sept. 1,
1976).
The Comptroller General agreed with the Deputy Secretary, stating:
"[Section 1515(b)] in no way authorizes an agency of the Government
actually to incur obligations in excess of the total amount of money
appropriated for a period. It only provides an exception to the
general apportionment rule set out in [31 U.S.C. § 1512(a)] that an
appropriation be allocated so as to insure that it is not exhausted
prematurely. [Section 1515(b)] says nothing about increasing the total
amount of the appropriation itself or authorizing the incurring of
obligations in excess of the total amount appropriated. On the
contrary, as noted above, apportionment only involves the subdivision of
appropriations already enacted by Congress. It necessarily follows
that the sum of the parts, as apportioned, could not exceed the total
amount of the appropriations being apportioned.
"Any deficiency that an agency incurs where obligations exceed total
amounts appropriated, including a deficiency that arises in a
situation where it was determined that one of the exceptions set forth
in [section 1515(b)] was applicable, would constitute a violation of
31 U.S.C. § [1341(a)] ...."
B-167034, Sept. 1, 1976.
f. Exemptions from Apportionment Requirement:
A number of exemptions from the apportionment requirement, formerly
found in subsection (f) of the Antideficiency Act, are now gathered in
31 U.S.C. § 1516:
"An official designated in section 1513 of this title to make
apportionments may exempt from apportionment:
"(1) a trust fund or working fund if an expenditure from the fund has
no significant effect on the financial operations of the United States
Government;
"(2) a working capital fund or a revolving fund established for
intragovernmental operations;
"(3) receipts from industrial and power operations available under
law; and;
"(4) appropriations made specifically for:
"(A) interest on, or retirement of, the public debt;
"(B) payment of claims, judgments, refunds, and drawbacks;
"(C) items the President decides are of a confidential nature;
"(D) payment under a law requiring payment of the total amount of the
appropriation to a designated payee; and;
"(E) grants to the States under the Social Security Act (42 U.S.C. 301
et seq.)."
Section 1516 is largely self-explanatory and the various enumerated
exceptions appear to be readily understood. Note that the statute does
not make the exemptions mandatory. It merely authorizes them, within
the discretion of the apportioning authority (OMB). OMB's implementing
instructions, OMB Circular No. A-11, Preparation, Submission, and
Execution of the Budget, part 4, § 120 (June 21, 2005), have not
adopted all of the exemptions permitted under the statute. For
example, the Circular's list of funds exempted from apportionment
pursuant to 31 U.S.C. § 1516 does not include trust funds or
intragovernmental revolving funds. See OMB Cir. No. A-11, at § 120.7.
In addition, 10 U.S.C. § 2201(a) authorizes the President to exempt
appropriations for military functions of the Defense Department from
apportionment upon determining "such action to be necessary in the
interest of national defense."
Another exemption, this one mandatory, is contained in 31 U.S.C.
§ 1511(b)(3): appropriations for "the Senate, the House of
Representatives, a committee of Congress, a member, officer, employee,
or office of either House of Congress, or the Office of the Architect
of the Capitol or an officer or employee of that Office" are exempt
from the apportionment requirement. The remainder of the legislative
branch along with the judicial branch are subject to apportionment.
See 31 U.S.C. § 1513(a).
g. Administrative Division of Apportionments:
Thus far, we have reviewed the provisions of the Antideficiency Act
directed at the appropriation level and the apportionment level. The
law also addresses agency subdivisions.
The first provision to note is 31 U.S.C. § 1513(d):
"An appropriation apportioned under this subchapter may
be divided and subdivided administratively within the limits of the
apportionment."
Thus, administrative subdivisions are expressly authorized. The
precise pattern of subdivisions will vary based on the nature and
scope of activities funded under the apportionment and, to some
extent, agency preference. The levels of subdivision below the
apportionment level are, in descending order, allotment, suballotment,
and allocation. See OMB Circular No. A-11, Preparation, Submission,
and Execution of the Budget, § 20.3 (June 21, 2005), which notes under
its definition of apportionment: "An apportionment may be further
subdivided by an agency into allotments, suballotments, and
allocations." As we will see later in our discussion of 31 U.S.C. §
1517(a), there are definite Antideficiency Act implications flowing
from how an agency structures its fund control system.
The next relevant statute is 31 U.S.C. § 1514:[Footnote 128]
"(a) The official having administrative control of an
appropriation available to the legislative branch, the judicial
branch, the United States International Trade Commission, or the
District of Columbia government, and, subject to the approval of the
President, the head of each executive agency (except the Commission)
shall prescribe by regulation a system of administrative control not
inconsistent with accounting procedures prescribed under law. The
system shall be designed to:
"(1) restrict obligations or expenditures from each appropriation to
the amount of apportionments or reapportionments of the appropriation;
and;
"(2) enable the official or the head of the executive agency to fix
responsibility for an obligation or expenditure exceeding an
apportionment or reapportionment.
"(b) To have a simplified system for administratively dividing
appropriations, the head of each executive agency (except the
Commission) shall work toward the objective of financing each
operating unit, at the highest practical level, from not more than one
administrative division for each appropriation affecting the unit."
Section 1514 is designed to ensure that the agencies in each branch of
the government keep their obligations and expenditures within the
bounds of each apportionment or reapportionment. The official in each
agency who has administrative control of the apportioned funds is
required to set up, by regulation, a system of administrative controls
to implement this objective. The system must be consistent with any
accounting procedures prescribed by or pursuant to law, and must be
designed to (1) prevent obligations and expenditures in excess of
apportionments or reapportionments, and (2) fix responsibility for any
obligation or expenditure in excess of an apportionment or
reapportionment.[Footnote 129] Agency fund control regulations in the
executive branch must be approved by OMB. See OMB Cir. No. A-11, pt.
4, § 150.7.
Subsection (b) of 31 U.S.C. § 1514 was added in 1956[Footnote 130] and
was intended to simplify agency allotment systems. Prior to 1956, it
was not uncommon for agencies to divide and subdivide their
apportionments into numerous "pockets" of obligational authority
called "allowances." Obligating or spending more than the amount of
each allowance was a violation of the Antideficiency Act as it then
existed. The Second Hoover Commission (Commission on Organization of
the Executive Branch of the Government) had recommended simplification
in 1955. The Senate and House Committees on Government Operations
agreed. Both committees reported as follows:
"The making of numerous allotments which are further divided and
suballotted to lower levels leads to much confusion and inflexibility
in the financial control of appropriations or funds as well as
numerous minor violations of [the Antideficiency Act]."
S. Rep. No. 84-2265, at 9 (1956); H.R. Rep. No. 84-2734, at 7 (1956).
The result was what is now 31 U.S.C. § 1514(b).[Footnote 131]
As noted, one of the objectives of 31 U.S.C. § 1514 is to enable the
agency head to fix responsibility for obligations or expenditures in
excess of apportionments. The statute encourages agencies to fix
responsibility at the highest practical level, but does not otherwise
prescribe precisely how this is to be done. Apart from subsection (b),
the substance of section 1514 derives from a 1950 amendment to the
Antideficiency Act.[Footnote 132] In testimony on that legislation,
the Director of the then Bureau of the Budget stated:
"At the present time, theoretically, I presume the agency head is
about the only one that you could really hold responsible for
exceeding [an] apportionment. The revised section provides for going
down the line to the person who creates the obligation against the
fund and fixes the responsibility on the bureau head or the division
head, if he is the one who creates the obligation."[Footnote 133]
Thus, depending on the agency regulations and the level at which
administrative responsibility is fixed, the violating individual could
be the person in charge of a major agency bureau or operating unit, or
it could be a contracting officer or finance officer.
Identifying the person responsible for a violation will be easy in
probably the majority of cases. However, where there are many
individuals involved in a complex transaction, and particularly where
the actions producing the violation occurred over a long period of
time, pinpointing responsibility can be much more difficult. Hopkins
and Nutt, in their study of the Antideficiency Act, present the
following as a sensible approach:
"Generally, [the individual to be held responsible] will be the
highest ranking official in the decision-making process who had
knowledge, either actual or constructive, of (1) precisely what
actions were taken and (2) the impropriety or at least
questionableness of such actions. There will be officials who had
knowledge of either factor. But the person in the best and perhaps
only position to prevent the ultimate error—and thus the one who must
be held accountable—is the highest one who is aware of both.[Footnote
134]
Thus, Hopkins and Nutt conclude, where multiple individuals are
involved in a violation, the individual to be held responsible "must
not be too remote from the cause of the violation and must be in a
position to have prevented the violation from occurring."[Footnote 135]
h. Expenditures in Excess of Apportionment:
The former subsection (h) of the Antideficiency Act, now 31 U.S.C. §
1517(a), provides:
"(a) An officer or employee of the United States Government or of the
District of Columbia government may not make or authorize an
expenditure or obligation exceeding:
"(1) an apportionment; or;
"(2) the amount permitted by regulations prescribed under section
1514(a) of this title."
Section 1517(a) must be read in conjunction with sections 1341, 1512,
and 1514, previously discussed.
Subsection 1517(a)(1) prohibits obligations or expenditures in excess
of an apportionment. Thus, an agency must observe the limits of its
apportionments just as it must observe the limits of its
appropriations. It follows that an agency cannot obligate or expend
appropriations before they have been apportioned. Thus, GAO stated in
B-290600, July 10, 2002:
"The Antideficiency Act prohibits ... the making or the authorizing of
obligations or expenditures in advance of, or in excess of, available
appropriations. 31 U.S.C. § 1341. An agency may obligate an
appropriation only after OMB has apportioned it to the agency."
Since the Antideficiency Act requires an apportionment before an
agency can obligate the appropriation, 31 U.S.C. § 1512(a), an
obligation in advance of an apportionment violates the Act. See B-
255529, Jan. 10, 1994. In other words, if zero has been apportioned,
zero is available for obligation or expenditure.[Footnote 136] When an
agency anticipates a need to obligate appropriations upon their
enactment, it may request (but not receive) an apportionment before a
regular appropriation or continuing resolution has been enacted.
Typically, for regular appropriation acts, agencies submit their
apportionment requests to OMB by August 21 or within 10 calendar days
after enactment of the appropriation, whichever is later. See OMB
Circular No. A-11, Preparation, Submission, and Execution of the
Budget, § 120.30 (June 21, 2005). OMB permits agencies to submit
requests on the day Congress completes action on the appropriation
bill. Id. § 120.34. OMB encourages agencies to begin their preparation
of apportionment requests as soon as the House and Senate have reached
agreement on funding levels (id. § 120.30) and to discuss the proposed
request with OMB representatives (id. § 120.34). OMB will entertain
expedited requests and, for emergency funding needs, may approve the
apportionment request by telephone or fax Id. For continuing
resolutions, OMB typically expedites the process by malting
"automatic" apportionments under continuing resolutions. See B-255529,
Jan. 10, 1994; OMB Cir. No. A-11, § 123.5.
Under some circumstances, an agency may have a legal duty to seek an
additional apportionment from OMB. Blackhawk Heating & Plumbing Co. v.
United States, 622 F.2d 539, 552 n.9 (Ct. Cl. 1980); Berends v. Butz,
357 E Supp. 143, 155-56 (D. Minn. 1973). In Berends v. Butz, the
Secretary of Agriculture had terminated an emergency farm loan
program, allegedly due to a shortage of funds. The court found the
termination improper and directed reinstatement of the program. Since
the shortage of funds related to the amount apportioned and not the
amount available under the appropriation, the court found that the
Secretary had a duty to request an additional apportionment in order
to continue implementing the program. The case does not address the
nature and extent of any duty OMB might have in response to such a
request.
Subsection 1517(a)(2) makes it a violation to obligate or expend in
excess of an administrative subdivision of an apportionment to the
extent provided in the agency's fund control regulations prescribed
under section 1514. The importance of 31 U.S.C. § 1514 becomes much
clearer when it is read in conjunction with 31 U.S.C. § 1517(a)(2).
Section 1514 does not prescribe the level of fiscal responsibility for
violations below the apportionment level. It merely recommends that
the agency set the level at the highest practical point and suggests
no more than one subdivision below the apportionment level. The agency
thus, under the statute, has a measure of discretion. If it chooses to
elevate overobligations or overexpenditures of lower-tier subdivisions
to the level of Antideficiency Act violations, it is free to do so in
its fund control regulations.
At this point, it is important to return to OMB Circular No. A-11.
Since agency fund control regulations must be approved by OMB (id. §
150.7), OMB has a role in determining what levels of administrative
subdivision should constitute Antideficiency Act violations. Under OMB
Circular No. A-11, § 145.2, overobligation or overexpenditure of an
allotment or suballotment are always violations. Overobligation or
overexpenditure of other administrative subdivisions are violations
only if and to the extent specified in the agency's fund control
regulations. See 31 U.S.C. §§ 1514(a), 1517(a)(2).
In 37 Comp. Gen. 220 (1957), GAO considered proposed fund control
regulations of the Public Housing Administration. The regulations
provided for allotments as the first subdivision below the
apportionment level. They then authorized the further subdivision of
allotments into "allowances," but retained responsibility at the
allotment level. The "allowances" were intended as a means of meeting
operational needs rather than an apportionment control device. GAO
advised that this proposed structure conformed to the purposes of 31
U.S.C. § 1514, particularly in light of the 1956 addition of section
1514(b), and that expenditures in excess of an "allowance" would not
constitute Antideficiency Act violations.
For further illustration, see 35 Comp. Gen. 356 (1955) (overobligation
of allotment stemming from misinterpretation of regulations); B-95136,
Aug. 8, 1979 (overobligation of regional allotments would constitute
reportable violation unless sufficient unobligated balance existed at
central account level to adjust the allotments); B-179849, Dec. 31,
1974 (overobligation of allotment held a violation of section 1517(a)
where agency regulations specified that allotment process was the
"principal means whereby responsibility is fixed for the conduct of
program activities within the funds available"); B-114841.2-0.M., Jan.
23, 1986 (no violation in exceeding allotment subdivisions termed
"work plans"); B-242974.6, Nov. 26, 1991 (nondecision memorandum)
(under Defense Department regulations, overobligations of
administrative subdivisions of funds that are exempt from
apportionment do not constitute Antideficiency Act violations.).
5. Penalties and Reporting Requirements:
a. Administrative and Penal Sanctions:
Violations of the Antideficiency Act are subject to sanctions of two
types, administrative and penal. The Antideficiency Act is the only
one of the title 31, United States Code, fiscal statutes to prescribe
penalties of both types, a fact which says something about
congressional perception of the Act's importance.
An officer or employee who violates 31 U.S.C. § 1341(a)
(obligate/expend in excess or advance of appropriation), section 1342
(voluntary services prohibition), or section 1517(a) (obligate/expend
in excess of an apportionment or administrative subdivision as
specified by regulation) "shall be subject to appropriate
administrative discipline including, when circumstances warrant,
suspension from duty without pay or removal from office." 31 U.S.C. §§
1349(a), 1518. For a case in which an official was reduced in grade
and reassigned to other duties, see Duggar v. Thomas, 550 F. Supp. 498
(D.D.C. 1982) (upholding the agency's action against a charge of
discrimination).
In addition, an officer or employee who "knowingly and willfully"
violates any of the three provisions cited above "shall be fined not
more than $5,000, imprisoned for not more than 2 years, or both." 31
U.S.C. §§ 1350, 1519. As far as GAO is aware, it appears that no
officer or employee has ever been prosecuted, much less convicted, for
a violation of the Antideficiency Act as of this writing. The knowing
and willful failure to record an overobligation in order to conceal an
Antideficiency Act violation is also a criminal offense. See 71 Comp.
Gen. 502, 509-10 (1992) (discussing several relevant criminal
provisions in title 18, United States Code).
Earlier in this chapter, we pointed out that factors such as the
absence of bad faith or the lack of intent to commit a violation are
irrelevant for purposes of determining whether a violation has
occurred. However, intent is relevant in evaluating the assessment of
penalties. Note that the criminal penalties are linked to a
determination that the law was "knowingly and willfully" violated, but
the administrative sanction provisions do not contain similar
language. Thus, intent or state of mind may (and probably should) be
taken into consideration when evaluating potential administrative
sanctions (whether to assess them and, if so, what type), but must be
taken into consideration in determining applicability of the criminal
sanctions. Understandably, the provisions for fines and/or jail are
intended to be reserved for particularly flagrant violations.
Finally, the administrative and penal sanctions apply only to
violations of the three provisions cited-31 U.S.C. §§ 1341(a), 1342,
and 1517(a). They do not, for example, apply to violations of 31
U.S.C. § 1512 (requiring that all appropriations be administratively
apportioned so as to ensure obligation and expenditure at a controlled
rate which will prevent deficiencies from arising before the end of a
fiscal year). 36 Comp. Gen. 699 (1957).
b. Reporting Requirements:
Once it is determined that there has been a violation of 31 U.S.C. §
1341(a), 1342, or 1517(a), the agency head "shall report immediately
to the President and Congress all relevant facts and a statement of
actions taken." 31 U.S.C. §§ 1351, 1517(b). Further instructions on
preparing the reports may be found in OMB Circular No. A-11,
Preparation, Submission, and Execution of the Budget, § 145 (June 21,
2005). The reports are to be signed by the agency head. Id. § 145.7.
The report to the President is to be forwarded through the Director of
OMB. Id.
In the Consolidated Appropriations Act, 2005, Congress amended the
Antideficiency Act to add that the heads of executive branch agencies
and the Mayor of the District of Columbia shall also transmit "[a]
copy of each report ... to the Comptroller General on the same date
the report is transmitted to the President and Congress."[Footnote 137]
The report is to include all pertinent facts and a statement of all
actions taken to address and correct the Antideficiency Act violation
(any administrative discipline imposed, referral to the Justice
Department where appropriate, new safeguards imposed, etc.). An agency
also should include a request for a supplemental or deficiency
appropriation when needed. It is also understood that the agency will
do everything it can lawfully do to correct or mitigate the financial
effects of the violation. For example, when the Fish and Wildlife
Service improperly entered into contracts for legal services, we
explained that there were a number of ways the Department of Interior
could correct the Service's Antideficiency Act violations if unable to
obtain a deficiency appropriation of the budget authority needed to
cover amounts the Service paid to these contractors, including
ratifying the contracts and covering their costs out of unobligated
balances of the applicable fiscal year appropriation, or paying the
contractors on a quantum meruit basis[Footnote 138] out of unobligated
balances. B-290005, July 1, 2002. See also B-255831, July 7, 1995; 55
Comp. Gen. 768, 772 (1976); B-223857, Feb. 27, 1987; B-114841.2-0.M.,
Jan. 23, 1986. In view of the explicit provisions of 31 U.S.C. § 1351,
there is no private right of action for declaratory, mandatory, or
injunctive relief under the Antideficiency Act. Thurston v. United
States, 696 E Supp. 680 (D.D.C. 1988).
Factors such as mistake, inadvertence, lack of intent, or the minor
nature of a violation do not affect the duty to report. For example,
the Office of Management and Budget (OMB) and the Air Transportation
Stabilization Board (ATSB) were required to report an Antideficiency
Act violation when, as discussed in section C.2 above, OMB erroneously
apportioned, and ATSB erroneously obligated, funds to cover the
subsidy cost of a loan guarantee prior to the availability of budget
authority. B-290600, July 10, 2001. Of course, if the agency feels
there are extenuating circumstances, it is entirely appropriate to
include them in the report. 35 Comp. Gen. 356 (1955).
What if GAO uncovers a violation but the agency thinks GAO is wrong?
The agency must still make the required reports, and must include an
explanation of its disagreement. OMB Cir. No. A-11, § 145. See also
GAO, Anti-Deficiency Act: Agriculture's Food and Nutrition Service
Violates the Anti-Deficiency Act, GAO/AFMD-87-20 (Washington, D.C.:
Mar. 17, 1987).
6. Funding Gaps:
The term "funding gap" refers to a period of time between the
expiration of an appropriation and the enactment of a new one. A
funding gap is one of the most difficult fiscal problems a federal
agency may have to face. As our discussion here will demonstrate, the
case law reflects an attempt to forge a workable solution to a bad
situation.
Funding gaps occur most commonly at the end of a fiscal year when new
appropriations, or a continuing resolution, have not yet been enacted.
In this context, a gap may affect only a few agencies (if, for
example, only one appropriation act remains unenacted as of October
1), or the entire federal government. A funding gap may also occur if
a particular appropriation becomes exhausted before the end of the
fiscal year, in which event it may affect only a single agency or a
single program, depending on the scope of the appropriation. In the
latter case the lack of funds occurs as a consequence of unforeseen
circumstances beyond the agency's control as opposed to the exhaustion
of appropriations as a result of poor management.
Funding gaps occur for a variety of reasons. For one thing, the
complexity of the budget and appropriations process makes it difficult
at best for Congress and the President to get everything done on time.
Add to this the enormity of some programs and the need to address
budget deficits, and the scope of the problem becomes more apparent.
Also, funding gaps are perhaps an inevitable reflection of the
political process.
As GAO has pointed out, funding gaps, actual or threatened, are both
disruptive and costly.[Footnote 139] They also produce difficult legal
problems under the Antideficiency Act. The basic question, easy to
state but not quite as easy to answer, is—what is an agency permitted
or required to do when faced with a funding gap? Can it continue with
"business as usual," must it lock up and go home, or is there some
acceptable middle ground?
In 1980, a congressional subcommittee asked GAO whether agency heads
could legally permit employees to come to work when the applicable
appropriation for salaries had expired and Congress had not yet
enacted either a regular appropriation or a continuing resolution for
the next fiscal year. The Comptroller General replied in B-197841,
Mar. 3, 1980, that 31 U.S.C. §§ 1341(a) and 1342 were both violated if
agency employees reported for work under those circumstances.
Permitting the employees to come to work would result in an obligation
to pay salary for the time worked, an obligation in advance of
appropriations in violation of section 1341(a). With respect to
section 1342, no one was suggesting that the employees were offering
to work gratuitously, even assuming they could lawfully do so, which
for the most part they cannot. The fact that employees were willing to
take the risk that the necessary appropriation would eventually be
enacted did not avoid the violation. Clearly, the employees still
expected to be paid eventually. "During a period of expired
appropriations," the Comptroller General stated, "the only way the
head of an agency can avoid violating the Antideficiency Act is to
suspend the operations of the agency and instruct employees not to
report to work until an appropriation is enacted." B-197841, at 3.
Notwithstanding the literal effect of the Antideficiency Act, however,
the Comptroller General went on to observe in B-197841, "[W]e do not
believe that the Congress intends that federal agencies be closed
during periods of expired appropriations." In this regard, the opinion
pointed out that at the beginning of fiscal year 1980, GAO had
prepared an internal memorandum to address its own operations in the
event of a funding gap. The memorandum said, in effect, that employees
could continue to come to work, but that operations would have to be
severely restricted. No new obligations could be incurred for
contracts or small purchases of any kind, and of course the employees
could not actually be paid until appropriations were enacted. The
opinion further noted that the then chairman of the Senate
Appropriations Committee had placed the 1980 GAO memorandum in the
Congressional Record, and had described it as providing "common sense
guidelines."[Footnote 140] The opinion also pointed to the fact that
when Congress enacted appropriations following a funding gap, it
generally made the appropriations retroactive to the beginning of the
fiscal year and included language ratifying obligations incurred
during the funding gap.
"It thus appears," the opinion concluded, "that the Congress expects
that the various agencies of the Government will continue to operate
and incur obligations during a period of expired appropriations."
Nevertheless, the opinion conceded that this approach would "legally
produce widespread violations of the Antideficiency Act." B-197841, at
4. Therefore, the opinion reiterated GAO's support at that time for
legislation then pending that would provide permanent statutory
authority to continue the pay of federal employees during funding
gaps. Id.[Footnote 141]
Less than two months after GAO issued B-197841, the Attorney General
issued his opinion to the President. The Attorney General essentially
agreed with GAO's analysis that permitting employees to work during a
funding gap would violate the Antideficiency Act, but concluded
further that the approach outlined in the GAO internal memorandum went
beyond what the Act permitted. 43 Op. Att'y Gen. 224, 4A Op. Off.
Legal Counsel 16 (1980). The opinion stated:
"There is nothing in the language of the Antideficiency Act or in its
long history from which any exception to its terms during a period of
lapsed appropriations may be inferred....
"First of all ..., on a lapse in appropriations, federal agencies may
incur no obligations that cannot lawfully be funded from prior
appropriations unless such obligations are otherwise authorized by
law. There are no exceptions to this rule under current law, even
where obligations incurred earlier would avoid greater costs to the
agencies should appropriations later be enacted.
"Second, the Department of Justice will take actions to enforce the
criminal provisions of the Act in appropriate cases in the future when
violations of the Antideficiency Act are alleged. This does not mean
that departments and agencies, upon a lapse in appropriations, will be
unable logistically to terminate functions in an orderly way....
Authority may be inferred from the Antideficiency Act itself for
federal officers to incur those minimal obligations necessary to
closing their agencies."
4A Op. Off. Legal Counsel at 19, 20.
This opinion stands for the proposition that agencies had little
choice but to lock up and go home. A second opinion, 43 Op. Att'y Gen.
293, 5 Op. Off. Legal Counsel 1 (1981), went into much more detail on
possible exceptions and should be read in conjunction with the 1980
opinion.
As set forth in the 1981 Attorney General opinion, the exceptions fall
into two broad categories. The first category is obligations
"authorized by law." Within this category, there are four types of
exceptions:
* Activities funded with appropriations that do not expire at the end of
the fiscal year, that is, multiple year and no-year appropriations.
[Footnote 142]
* Activities authorized by statutes that expressly permit obligations
in advance of appropriations, such as contract authority (see section
C.2.g of this chapter).
* Activities "authorized by necessary implication from the specific
terms of duties that have been imposed on, or of authorities that have
been invested in, the agency." To take the example given in the
opinion, there will be cases where benefit payments under an
entitlement program are funded from other than 1-year appropriations
(e.g., a trust fund), but the salaries of personnel who administer the
program are funded by 1-year money. As long as money for the benefit
payments remains available, administration of the program is, by
necessary implication, "authorized by law," unless the entitlement
legislation or its legislative history provides otherwise or Congress
takes affirmative measures to suspend or terminate the program.
* Obligations "necessarily incident to presidential initiatives
undertaken within his constitutional powers," for example, the power
to grant pardons and reprieves. This same rationale would apply to
legislative branch agencies that incur obligations "necessary to
assist the Congress in the performance of its constitutional duties."
B-241911, Oct. 23, 1990 (nondecision letter).
The second broad category reflected the exceptions authorized under 31
U.S.C. § 1342—emergencies involving the safety of human life or the
protection of property (see also the discussion of this provision in
section C.3.d of this chapter). The Attorney General suggested the
following rules for interpreting the scope of this exception:
"First, there must be some reasonable and articulable connection
between the function to be performed and the safety of human life or
the protection of property. Second, there must be some reasonable
likelihood that the safety of human life or the protection of property
would be compromised, in some degree, by delay in the performance of
the function in question."
5 Op. Off. Legal Counsel at 8.
The Attorney General then cited the identical exception language in
the deficiency apportionment prohibition of 31 U.S.C. § 1515, and
noted that the Office of Management and Budget followed a similar
approach in granting deficiency apportionments over the
years.[Footnote 143] Given the wide variations in agency activities,
it would not be feasible to attempt an advance listing of functions or
activities that might qualify under this exception. Accordingly, the
Attorney General made the following recommendation:
"To erect the most solid foundation for the Executive Branch's
practice in this regard, I would recommend that, in preparing
contingency plans for periods of lapsed appropriations, each
government department or agency provide for the Director of the Office
of Management and Budget some written description, that could be
transmitted to Congress, of what the head of the agency, assisted by
its general counsel, considers to be the agency's emergency functions."
5 Op. Off. Legal Counsel at 11.
Lest this approach be taken too far, Congress added the following
sentence to 31 U.S.C. § 1342:
"As used in this section, the term 'emergencies involving the safety
of human life or the protection of property' does not include ongoing,
regular functions of government the suspension of which would not
imminently threaten the safety of human life or the protection of
property."
Omnibus Budget Reconciliation Act of 1990, Pub. L. No. 101-508, §
13213(b), 104 Stat. 1388, 1388-621 (Nov. 5, 1990).
The conference report on the 1990 legislation explained the intent:
"The conference report also makes conforming changes to title 31 of
the United States Code to make clear that... ongoing, regular
operations of the Government cannot be sustained in the absence of
appropriations, except in limited circumstances. These changes guard
against what the conferees believe might be an overly broad
interpretation of an opinion of the Attorney General issued on January
16, 1981, regarding the authority for the continuance of Government
functions during the temporary lapse of appropriations, and affirm
that the constitutional power of the purse resides with Congress."
H.R. Conf. Rep. No. 101-964, at 1170 (1990).
The Ninth Circuit Court of Appeals added to the list of exceptions,
holding the suspension of the civil jury trial system for lack of
funds unconstitutional. Armster v. United States District Court, 792
F.2d 1423 (9th Cir. 1986). Faced with the potential exhaustion of
appropriations for juror fees, the Administrative Office of the United
States Courts, at the direction of the Judicial Conference of the
United States, had sent a memorandum to all district court judges
advising that civil jury trials would have to be suspended until more
money was available.[Footnote 144] Basing its holding on the
Constitution and expressly declining to rule on the Antideficiency
Act, the court held that a suspension for more than a "most minimal"
time violated the seventh amendment. Id. at 1430. See also Hobson v.
Brennan, 637 E Supp. 173 (D.D.C. 1986). The court said that "we do not
hold that the Anti-Deficiency Act requires the result suggested by the
Administrative Office. If it did, its commands would, of course, have
to yield to those of the Constitution."[Footnote 145] Armster, 792
F.2d at 1430 n.13.
Since the appropriation was not yet actually exhausted, and since
there was still ample time for Congress to provide additional funds,
the court noted that its decision did not amount to ordering Congress
to appropriate money. The court noted, but did not address, the far
more difficult question of what would happen if the appropriation
became exhausted and Congress refused to appropriate additional funds.
Armster, 792 F.2d at 1430-31 and 1431 n.14.
This, then, is the basic framework. There are a number of exceptions
to the Antideficiency Act which would permit certain activities to
continue during a funding gap. For activities not covered by any of
the exceptions, however, the agency must proceed with prompt and
orderly termination or violate the Act and risk invocation of the
criminal sanctions. A very brief restatement may be found in 6 Op.
Off. Legal Counsel 555 (1982).
Within this framework, GAO and the Justice Department addressed a
number of specific problems agencies encountered in coming to grips
with funding gaps during the 1980s and early 1990s. For example,
toward the end of fiscal year 1982, the President vetoed a
supplemental appropriations bill. As a result, the Defense Department
did not have sufficient funds to meet the military payroll. The total
payroll obligation consisted of (1) the take-home pay of the
individuals, and (2) various items the employing agency was required
to withhold and transfer to someone else, such as federal income tax
and Social Security contributions. The Treasury Department published a
change to its regulations permitting a temporary deferral of the due
date for payment of the withheld items, and the Defense Department,
relying on the "safety of human life or protection of property"
exception, used the funds it had available to pay military personnel
their full take-home pay. The Attorney General upheld the legality of
this action. 43 Op. Att'y Gen. 369, 6 Op. Off. Legal Counsel 27
(1982). The Comptroller General agreed, but questioned the blanket
assumption that all military personnel fit within the exception. B-
208985, Oct. 29, 1982; B-208951, Oct. 5, 1982. The extent to which
this device might be available to civilian agencies would depend on
(1) Treasury's willingness to grant a similar deferral, and (2) the
extent to which the agency could legitimately invoke the emergency
exception.
Additional cases dealing with funding gap problems are:
* Salaries of commissioners of Copyright Royalty Tribunal attach by
virtue of their status as officers without regard to availability of
funds. Salary obligation is therefore viewed as "authorized by law"
for purposes of Antideficiency Act, and commissioners could be
retroactively compensated for periods worked without pay during a
funding gap. 61 Comp. Gen. 586 (1982).
* Richmond district office of Internal Revenue Service shut down for
half a day in October 1986 due to a funding gap. Subsequent
legislation authorized retroactive compensation of employees affected.
GAO concluded that the legislation applied to intermittent as well as
regular full-time employees, and held that the intermittent employees
could be compensated in the form of administrative leave for time lost
during the half-day furlough. B-233656, June 19, 1989.
* Witness who had been ordered to appear in federal court was stranded
without money to return home when court did not convene due to funding
gap. Cash disbursement to permit witness to return home or secure
overnight lodging was held permissible since hardship circumstances
indicated reasonable likelihood that safety of witness would be
jeopardized. 5 Op. Off. Legal Counsel 429 (1981).
There are also a few cases addressing actions an agency has taken to
forestall the effects of a funding gap. In 62 Comp. Gen. 1 (1982), the
Merit Systems Protection Board, faced with a substantial cut in its
appropriation, placed most of its employees on half-time, half-pay
status in an attempt to stretch its appropriation through the end of
the fiscal year. A subsequent supplemental appropriation provided the
necessary operating funds. GAO advised that it was within the Board's
discretion, assuming the availability of sufficient funds, to grant
retroactive administrative leave to the employees who had been
affected by the partial shutdown.
GAO reviewed another furlough plan in 64 Comp. Gen. 728 (1985). The
Interstate Commerce Commission had determined that if it continued its
normal rate of operations, it would exhaust its appropriation six
weeks before the end of the fiscal year. To prevent this from
happening, it furloughed its employees for one day per week. GAO found
that the Commission's actions were in compliance with the
Antideficiency Act. While the ICC was thus able to continue essential
services, the price was financial hardship for its employees, plus
"serious backlogs, missed deadlines and reduced efficiency." Id. at
732.
During the 1980s and early 1990s, GAO also issued several reports on
funding gaps. The first was Funding Gaps Jeopardize Federal Government
Operations, PAD-81-31 (Washington, D.C.: Mar. 3, 1981). In that
report, GAO noted the costly and disruptive effects of funding gaps,
and recommended the enactment of permanent legislation to permit
federal agencies to incur obligations, but not disburse funds, during
a funding gap. In the second report, Continuing Resolutions and an
Assessment of Automatic Funding Approaches, GAO/AFMD-86-16
(Washington, D.C.: Jan. 29, 1986), GAO compared several possible
options but this time made no specific recommendation. The Office of
Management and Budget had pointed out, and GAO agreed, that automatic
funding legislation could have the undesirable effects of (1) reducing
pressure on Congress to make timely funding decisions, and (2)
permitting major portions of the government to operate for extended
periods without action by either House of Congress or the President.
The ideal solution, both agencies agreed, is the timely enactment of
the regular appropriation bills.
In Managing the Cost of Government: Proposals for Reforming Federal
Budgeting Practices, GAO/AFMD-90-1 (Washington, D.C.: Oct. 1, 1989) at
28-29, GAO reiterated its support for the concept of an automatic
continuing resolution in a form that does not reduce the incentive to
complete action on the regular appropriation bills. A 1991 GAO report
analyzed the impact of a funding gap which occurred over the 1990
Columbus Day weekend and again renewed the recommendation for
permanent legislation to, at a minimum, allow agencies to incur
obligations to compensate employees during temporary funding gaps but
not pay them until enactment of the appropriation. Government
Shutdown: Permanent Funding Lapse Legislation Needed, GAO/GGD-91-76
(Washington, D.C.: June 6, 1991). The report stated:
"In our opinion, shutting down the government during temporary funding
gaps is an inappropriate way to encourage compromise on the budget.
Beyond being counterproductive from a financial standpoint, a shutdown
disrupts government services. In addition, forcing agency managers to
choose who will and will not be furloughed during these temporary
funding lapses severely tests agency management's ability to treat its
employees fairly."
Id. at 9.
The history of funding gaps over recent decades reveals several
distinct phases, which were captured in an analysis by a Congressional
Research Service report to Congress entitled Preventing Federal
Government Shutdowns: Proposals for an Automatic Continuing Resolution,
No. RL30339 (Washington, D.C.: May 19, 2000) (hereafter "CRS Report").
The first phase, covering fiscal years 1977 through 1980, was a period
in which agencies reacted to funding gaps along the lines suggested in
GAO's opinion in B-197841, Mar. 3, 1980, described previously, by
curtailing operations but not shutting down. During this period, there
were 6 funding gaps that lasted from 8 to 17 days. See the CRS Report
at 4, Table 1. The second phase, covering fiscal years 1981 through
1995, occurred under the stricter approach to funding gaps reflected
in the Attorney General opinions described above. As the CRS Report
notes, funding gaps during this period were less frequent and shorter.
There were 11 funding gaps in all over this period, many of which took
place over weekends. None lasted more than 3 days. Id.
The string of shorter funding gaps came to an abrupt halt in fiscal
year 1996. As CRS reported, the unusually difficult and acrimonious
budget negotiations for that year led to two funding gaps: the first
was 5 days and the second, the longest in history, lasted for 21 days.
Id. at 3, 5. Both of these funding gaps resulted in widespread
shutdowns of government operations. During the first funding gap, an
estimated 800,000 federal employees were furloughed. During the
second, about 284,000 employees were furloughed and another 475,000
continued to work in a nonpay status under the emergency exception to
the Antideficiency Act.[Footnote 146]
Not surprisingly, the events of 1995-1996 spawned additional legal
opinions from the Office of Legal Counsel. These opinions essentially
followed the legal framework described previously and did not break
much new ground. However, they do illustrate the scope and application
of the Antideficiency Act in different funding gap contexts. See,
e.g., Memorandum for the Attorney General, Effect of Appropriations
for Other Agencies and Branches on the Authority To Continue
Department of Justice Functions During the Lapse in the Department's
Appropriations, OLC Opinion, Dec. 13, 1995 (if a suspension of the
Justice Department's functions during the period of anticipated
funding lapse would prevent or significantly damage the execution of
those functions, the Department's functions and activities may
continue); Memorandum for the Attorney General, Participation in
Congressional Hearings During An Appropriations Lapse, OLC Opinion,
Nov. 16, 1995 (Justice Department officials may testify at
congressional hearings during a lapse in funding for the Department);
Memorandum for the Counsel to the President, Authority To Employ the
Services of White House Office Employees During An Appropriations
Lapse, OLC Opinion, Sept. 13, 1995 (outlined the authorities that
permitted White House employees to continue to work, but not actually
be paid, during a funding gap); Memorandum for the Director of the
Office of Management and Budget, Government Operations in the Event of
a Lapse in Appropriations, OLC Opinion, Aug. 16, 1995 (reinforced the
Justice Department's existing narrow interpretation that the emergency
exception applied only in the case of an imminent threat or set of
circumstances requiring immediate action).[Footnote 147]
The 1995-1996 funding gaps also produced at least one lawsuit,
although it did not reach a final decision on the merits. In American
Federation of Government Employees v. Rivlin, Civ. A. No. 95-2115
(EGS) (D.D.C. Nov. 17, 1995), the plaintiffs sought a temporary
restraining order to prevent the executive branch from requiring
federal employees who had been designated "emergency" personnel to
work during the funding gap. They contended that forcing employees to
work without pay violated several personnel statutes and also
constituted a misapplication of 31 U.S.C. § 1342 since many of the
employees did not meet the emergency criteria under section 1342. The
court denied the requested relief, observing:
"The court is not convinced at this juncture that plaintiffs will
either suffer irreparable harm in the event a temporary restraining
order is not issued or that the interests of the public will be best
served by the issuance of a temporary restraining order. Plaintiffs
essentially concede that if the court were to issue a TRO, the
government would indeed be shut down, because the Executive Branch
could not require its employees to work without compensation. Although
undoubtedly the public has an interest in having the budget impasse
resolved and indeed has an interest in the outcome of this judicial
proceeding, one could easily imagine the chaos that would be attendant
to a complete governmental shutdown. It is inconceivable, by any
stretch of the imagination, that the best interests of the public at
large would somehow be served by the creation of that chaos."
American Federation of Government Employees, slip. op. at 4.
The court further observed that it was "purely speculative" whether
any employees would actually go without pay since Congress had always
appropriated funds to compensate employees for services rendered
during a government shutdown. Id. The lawsuit was eventually dismissed
as moot following resolution of the budget impasse. American
Federation of Government Employees v. Rivlin, 995 F. Supp. 165 (D.D.C.
1998).
The current phase in the history of funding gaps commenced on the
heels of the 1995-1996 government shutdowns and has featured, thus
far, the total absence of funding gaps. While there have been delays
in the enactment of regular appropriations, there has been no funding
gap since 1996.
Of course, the potential for future funding gaps still exists and
proposals for legislation to cushion their impact have been raised
again in recent years. However, such proposals have met with little
enthusiasm. GAO was more cautionary in its most recent comments on
this subject. See GAO, Budget Process: Considerations for Updating the
Budget Enforcement Act, GAO-01-991T (Washington, D.C.: July 19, 2001),
at 12:
"The periodic experience of government `shutdowns'—or partial
shutdowns when appropriations bills have not been enacted—has led to
proposals for an automatic continuing resolution. The automatic
continuing resolution, however, is an idea for which the details are
critically important. Depending on the detailed structure of such a
continuing resolution, the incentive for policymakers—some in the
Congress and the President—to negotiate seriously and reach agreement
may be lessened."
For example, GAO pointed out that some negotiators might find the
"default position" specified in an automatic continuing resolution to be
preferable to proposals on the table.
Likewise, several efforts to enact an automatic continuing resolution
in recent years have been unsuccessful. In 1997, President Clinton
vetoed a supplemental appropriations bill that contained such a
provision. In 2000, the House of Representatives rejected such a
proposal in a floor vote.[Footnote 148]
D. Supplemental and Deficiency Appropriations:
A supplemental appropriation may be defined as "an act appropriating
funds in addition to those already enacted in an annual appropriation
act." GAO, A Glossary of Terms Used in the Federal Budget Process, GA0-
05-734SP (Washington, D.C.: September 2005) (Glossary), at 93. The
Glossary adds that:
"Supplemental appropriations provide additional budget authority
usually in cases where the need for funds is too urgent to be
postponed until enactment of the regular appropriation bill.
Supplementals may sometimes include items not appropriated in the
regular bills for lack of timely authorizations."
Id.
The Glossary, at 43, defines a deficiency appropriation as "[a]n
appropriation made to pay obligations for which sufficient funds are
not available."
There is an important distinction between supplemental appropriations
and deficiency appropriations. A supplemental appropriation
"supplements the original appropriation," 4 Comp. Dec. 61 (1897); that
is, it provides additional appropriations to cover additional
obligations to meet needs identified by the executive branch and
concurred in by Congress in advance of the obligational event. A
deficiency appropriation is an appropriation made to pay obligations
for which sufficient funds were not available at the time the
obligations were incurred. 27 Comp. Gen. 96 (1947); 25 Comp. Gen. 601,
604 (1946); 4 Comp. Dec. 61, 62 (1897). The need for deficiency
appropriations often results from violations of the Antideficiency
Act, and they can be made in the same fiscal year as the overobligated
appropriation or in a later year. Notwithstanding the distinctions
between supplemental and deficiency appropriations, Congress often
will use supplemental appropriations bills as the legislative vehicle
for enacting deficiency appropriations, just as Congress may use a
supplemental appropriations bill as the legislative vehicle to enact
new appropriations in addition to those supplementing appropriations
already enacted.
Because a supplemental appropriation "supplements the original
appropriation," it "partakes of its nature, and is subject to the same
limitations as to the expenses for which it can be used as attach by
law to the original appropriation" unless otherwise provided. 4 Comp.
Dec. 61. See also 27 Comp. Gen. 96 (1947); 25 Comp. Gen. 601 (1946);
20 Comp. Gen. 769 (1941). This means that a supplemental appropriation
is subject to the purpose and time limitations, plus any other
applicable restrictions, of the appropriation being supplemented.
Thus, an appropriation made to supplement the regular annual
appropriation of a given fiscal year is available beyond the
expiration of that fiscal year only to liquidate obligations incurred
within the fiscal year. The unobligated balance of a supplemental
appropriation will expire at the end of the fiscal year in the same
manner as the regular annual appropriation. See 27 Comp. Gen. 96; 4
Comp. Dec. 61; 3 Comp. Dec. 72 (1896). Of course, Congress can enact a
supplemental appropriation, just like any other appropriation, to be
available until expended (no-year). E.g., 36 Comp. Gen. 526 (1957); B-
72020, Jan. 9, 1948.
Unless otherwise provided, a restriction contained in an annual
appropriation act will apply to funds provided in a supplemental
appropriation act even though the restriction is not repeated in the
supplemental. For example, a restriction in a foreign assistance
appropriation act prohibiting the use of funds for assistance to
certain countries would apply equally to funds provided in a
supplemental appropriation for foreign assistance for the same fiscal
year. B-158575, Feb. 24, 1966. Similarly, a provision in an annual
appropriation act that "no part of any appropriation for the Bureau of
Reclamation contained in this Act shall be used for the salaries and
expenses" (emphasis added) of certain officials who were not qualified
engineers would apply as well to Bureau funds appropriated in
supplemental appropriation acts for the same fiscal year, so long as
the supplemental appropriation adds funds to amounts already enacted
in the regular appropriation, but not to any new appropriations
enacted in the supplemental appropriation act. B-86056, May 11, 1949.
The rule applies to supplemental authorizations as well as
supplemental appropriations. B-106323, Nov. 27, 1951. If a
supplemental appropriation act includes a new appropriation which is
separate and distinct from the appropriations being supplemented,
restrictions contained in the original appropriation act will not
apply to the new appropriation unless specifically provided. Id. The
fiscal year limitations of the original appropriation, however, would
still apply.
The rule that supplemental appropriations are subject to restrictions
contained in the regular appropriation act being supplemented applies
equally to specific dollar limitations. Thus, if a regular annual
appropriation act specifies a maximum limitation for a particular
object, either by using the words "not to exceed" or otherwise, a more
general supplemental appropriation for the same fiscal year does not
authorize an increase in that limitation. 19 Comp. Gen. 324 (1939); 4
Comp. Gen. 642 (1925); B-71583, Feb. 20, 1948; B-66030, May 9, 1947.
Naturally, this principle will not apply if the supplemental
appropriation specifically provides for the object in question. 19
Comp. Gen. 832 (1940).
New restrictions appearing in a supplemental appropriation act may or
may not reach back and apply to balances remaining in the original
annual appropriation, depending on the precise statutory language
used. Thus, without more, a restriction in a supplemental applicable
by its terms to "this appropriation" would apply only to the
supplemental funds. B-31546, Jan. 12, 1943. See also 31 Comp. Gen. 543
(1952).
At one time, supplemental appropriation acts specified that the funds
were for the same objects and subject to the same limitations as the
appropriations being supplemented. The then Bureau of the Budget
wanted to delete this language pursuant to its mandate to eliminate
unnecessary words in appropriations.[Footnote 149] The Comptroller
General agreed that the language was unnecessary, pointing out that
these conditions would apply even without being explicitly stated in
the supplemental appropriation acts themselves. B-13900, Dec. 17, 1940.
In addition to supplementing prior appropriations, a supplemental
appropriation act may make entirely new appropriations and enact new
legislative provisions which are separate and distinct from those made
by an earlier appropriation act. Where a supplemental appropriation
act contains new legislation, whether permanent or temporary, the new
legislation will take effect on the date the supplemental is enacted
absent a clear intent to make it retroactive. 20 Comp. Gen. 769
(1941). In the cited decision, a supplemental appropriation enacted
late in fiscal year 1941 for the first time permitted payment of
transportation expenses of certain military dependents. The provision
was held effective on the date of enactment of the supplemental act
and not on the first day of fiscal year 1941.
A supplemental appropriation also may add funds to a lump-sum
appropriation for a new object. If the original appropriation was not
available for that object, then the supplemental amounts to a new
appropriation that is, in effect, distinct from the lump-sum
appropriation. For example, a fiscal year 1957 supplemental
appropriation for the Maritime Administration provided $18 million for
a nuclear-powered merchant ship under the heading "ship construction."
Funds for the nuclear-powered ship had been sought under the regular
"ship construction" lump-sum appropriation for fiscal year 1957, but
had been denied. Under the circumstances, the Comptroller General
found that the supplemental appropriation amounted to a specifically
earmarked maximum for the vessel, and that the agency could not exceed
the $18 million by using funds from the regular appropriation. 36
Comp. Gen. 526 (1957).
E. Augmentation of Appropriations:
1. The Augmentation Concept:
As a general proposition, an agency may not augment its appropriations
from outside sources without specific statutory authority. When
Congress makes an appropriation, it also is establishing an authorized
program level. In other words, it is telling the agency that it cannot
operate beyond the level that it can finance under its appropriation.
To permit an agency to operate beyond this level with funds derived
from some other source without specific congressional sanction would
amount to a usurpation of the congressional prerogative. Restated, the
objective of the rule against augmentation of appropriations is to
prevent a government agency from undercutting the congressional power
of the purse by circuitously exceeding the amount Congress has
appropriated for that activity. As one recent decision put it:
"When Congress establishes a new program or activity, it also must
decide how to finance it. Typically it does this by appropriating
funds from the U.S. Treasury. In addition to providing necessary
funds, a congressional appropriation establishes a maximum authorized
program level, meaning that an agency cannot, absent statutory
authorization, operate beyond the level that can be paid for by its
appropriations. An agency may not circumvent these limitations by
augmenting its appropriations from sources outside the government. One
of the objectives of these limitations is to prevent agencies from
avoiding or usurping Congress' power of the purse."
B-300248, Jan. 15, 2004 (citations omitted).
There is no statute which, in those precise terms, prohibits the
augmentation of appropriated funds. The concept does nevertheless have
an adequate statutory basis, although it must be derived from several
separate enactments. Specifically:
* 31 U.S.C. § 3302(b), the "miscellaneous receipts" statute.
* 31 U.S.C. § 1301(a), restricting the use of appropriated funds to
their intended purposes. Early Comptroller of the Treasury decisions
often based the augmentation prohibition on the combined effect of 31
U.S.C. §§ 3302(b) and 1301(a). See, e.g., 17 Comp. Dec. 712 (1911); 9
Comp. Dec. 174 (1902).
* 18 U.S.C. § 209, which prohibits the payment of, contribution to, or
supplementation of the salary of a government officer or employee as
compensation for his or her official duties from any source other than
the government of the United States.
The augmentation concept manifests itself in a wide variety of
contexts. One application is the prohibition against transfers between
appropriations without specific statutory authority. An unauthorized
transfer is an improper augmentation of the receiving appropriation.
E.g., 23 Comp. Gen. 694 (1944); B-206668, Mar. 15, 1982. In B-206668,
a department received a General Administration appropriation plus
separate appropriations for the administration of its component
bureaus. The unauthorized transfer of funds from the bureau
appropriations to the General Administration appropriation was held to
be an improper augmentation of the latter appropriation. Likewise, the
Department of Labor illegally augmented its departmental management
account by "pooling" funds from component appropriations in order to
purchase computer equipment where the costs borne by the components
far exceeded the value of the equipment they received. 70 Comp. Gen.
592 (1991). The Comptroller General rejected the Department's
characterization of this transaction as a "reprogramming," viewing it
instead as an unauthorized transfer among appropriations.
As with the transfer prohibition itself, however, the augmentation
rule has no application at the agency allotment level within the same
appropriation account. 70 Comp. Gen. 601 (1991). It also should be
apparent that the augmentation rule is related to the concept of
purpose availability. A very early case pointed out that charging a
general appropriation when a specific appropriation is exhausted not
only violates 31 U.S.C. § 1301(a) by using the general appropriation
for an unauthorized purpose, but also improperly augments the specific
appropriation. [1] Bowler, First Comp. Dec. 257, 258 (1894). However,
the augmentation rule is most closely related to the subject of this
chapter—availability as to amount—because it has the effect of
restricting executive spending to the amounts appropriated by
Congress. In this respect, it is a logical, perhaps indispensable,
complement to the Antideficiency Act.
For the most part, although the cases are not entirely consistent, GAO
has distinguished between receipts of money and receipts of services,
dealing with the former under the augmentation rule and the latter
under the voluntary services prohibition (31 U.S.C. § 1342).[Footnote
150] For example, in B-13378, Nov. 20, 1940, a private organization
was willing to donate either funds or services. Since the agency
lacked statutory authority to accept gifts, acceptance of a cash
donation would improperly augment its appropriations. Acceptance of
services was distinguished, however, and addressed in relation to the
limits on acceptance of voluntary services set forth in 31 U.S.C. §
1342. GAO drew the same distinction in B-125406, Nov. 4, 1955. See
also B-287738, May 16, 2002, distinguishing between agency acceptance
of money as compensation for damage to government property, which
would constitute an augmentation if retained in agency appropriations,
and acceptance of actual repairs to the property, which would be
permissible.[Footnote 151]
In apparent conflict with these cases, however, is B-211079.2, Jan. 2,
1987, which stated that, without statutory authority, an agency would
improperly augment its appropriations by accepting the uncompensated
services of "workfare" participants to do work which would normally be
done by the agency with its own personnel and funds. Logic would seem
to support the formulation in B-211079.2. Certainly, if I wash your
car without charge or if I give you money to have it washed, the
result is the same—the car gets washed and your own money is free to
be used for something else. Be that as it may, the majority of the
cases support limiting the augmentation rule to the receipt of money.
In the final analysis, the distinction probably makes little practical
difference. In view of 31 U.S.C. § 1342, limiting the augmentation
rule to the receipt of funds does not mean that the rule can be
negated by the unrestricted acceptance of services.[Footnote 152]
In a 1991 case, 70 Comp. Gen. 597, GAO concluded that the then
Interstate Commerce Commission (ICC) would not improperly augment its
appropriations by permitting private carriers to install computer
equipment at the ICC headquarters, to facilitate access to
electronically filed rate tariffs. Installation was viewed as a
reasonable exercise of the ICC's statutory authority to prescribe the
form and manner of tariff filing by those over whom the agency has
regulatory authority. Somewhat similar in concept to the workfare
case, however, the decision suggests that use of the equipment for
other purposes, such as word processing by ICC staff, would be an
improper augmentation, and advised the ICC to establish controls to
prevent this. See also B-277521, July 31, 1997 (granting the Radio and
TV Correspondents Association a permit to locate equipment in the
Capitol in order to broadcast events would not constitute an
augmentation of congressional appropriations since the equipment is
not for official business use of the government).
2. Disposition of Moneys Received: Repayments and Miscellaneous
Receipts:
a. General Principles:
(1) The "miscellaneous receipts" statute:
A very important statute in the overall scheme of government fiscal
operations is 31 U.S.C. § 3302(b), known as the "miscellaneous
receipts" statute. Originally enacted on March 3, 1849 (ch. 110, 9
Stat. 398), 31 U.S.C. § 3302(b) states:
"Except as provided in section 3718(b) of this title, an official or
agent of the Government receiving money for the Government from any
source shall deposit the money in the Treasury as soon as practicable
without deduction for any charge or claim."[Footnote 153]
Penalties for violating 31 U.S.C. § 3302(b) are found in 31 U.S.C. §
3302(d), and include the possibility of removal from office. In
addition, if funds which should have been deposited in the Treasury
(but were not) are lost or stolen, the official may be personally
liable. E.g., 20 Op. Att'y Gen. 24 (1891) (liability would attach
where funds, which disbursing agent had placed in bank which was not
an authorized depositary, were lost due to bank failure).
"It is difficult to see," said an early decision, "how a legislative
prohibition could be more clearly expressed." 10 Comp. Gen. 382, 384
(1931). Simply stated, any money an agency receives for the government
from a source outside of the agency must be deposited into the
Treasury. This means deposited into the general fund ("miscellaneous
receipts") of the Treasury,not into the agency's own appropriations,
even though the agency's appropriations may be technically still "in
the Treasury" until the agency actually spends them.[Footnote 154] The
Comptroller of the Treasury explained the distinction in the following
terms:
"It [31 U.S.C. § 3302(b)] could hardly be made more comprehensive as
to the moneys that are meant and these moneys are required to be paid
'into the Treasury.' This does not mean that the moneys are to be
added to a fund that has been appropriated from the Treasury and may
be in the Treasury or outside. [Emphasis in original.] It seems to me
that it can only mean that they shall go into the general fund of the
Treasury which is subject to any disposition which Congress might
choose to make of it. This has been the holding of the accounting
officers for many years ... [citations omitted]. If Congress intended
that these moneys should be returned to the appropriation from which a
similar amount had once been expended it could have been readily so
stated, and it was not."
22 Comp. Dec. 379, 381 (1916). See also 5 Comp. Gen. 289 (1925).
The term "miscellaneous receipts" does not refer to any single account
in the Treasury. Rather, it refers to a number of receipt accounts
under the heading "General Fund." These are all listed in the Treasury
Department's Federal Account Symbols and Titles Book, recently revised
according to the Treasury Financial Manual Announcement No. A-2005-04,
May 2005. The revised version can be accessed at [hyperlink,
http://www.fmstreas.gov/fastbook] (last visited September 15, 2005).
In addition to 31 U.S.C. § 3302(b), several other statutes require
that moneys received in various specific contexts be deposited as
miscellaneous receipts.[Footnote 155] Examples are:
* 7 U.S.C. §§ 384, 2241, 2246, 2247 (proceeds from sale of various
products by Secretary of Agriculture);
* 16 U.S.C. § 499 (revenue from the national forests, such as timber
sales and proceeds from hunting, fishing, and camping permits, subject
to the deductions specified in 16 U.S.C. §§ 500 and 501);
* 19 U.S.C. § 527 (customs fines, penalties, and forfeitures);
* 40 U.S.C. § 571 (proceeds from the transfer of excess property or
the sale of surplus public property, except as otherwise provided in
subchapter IV of chapter 5 of title 40).[Footnote 156]
Although it is preferable, it is not necessary that the statute use
the words "miscellaneous receipts." A statute requiring the deposit of
funds "into the Treasury of the United States" will be construed as
meaning the general fund of the Treasury. 27 Comp. Dec. 1003 (1921).
To understand the significance of 31 U.S.C. § 3302(b) and related
statutes, it is necessary to recall the provision in article I,
section 9, clause 7 of the U.S. Constitution, the so-called
"Appropriations Clause," directing that "No Money shall be drawn from
the Treasury but in Consequence of Appropriations made by Law." Once
money is deposited into a "miscellaneous receipts" account, it takes
an appropriation to get it out. E.g., 3 Comp. Gen. 296 (1923); 2 Comp.
Gen. 599, 600 (1923); 13 Comp. Dec. 700, 703 (1907). Thus, the effect
of 31 U.S.C. § 3302(b) is to ensure that the executive branch remains
dependent upon the congressional appropriation process. Viewed from
this perspective, 31 U.S.C. § 3302(b) emerges as another element in
the statutory pattern by which Congress retains control of the public
purse under the separation of powers doctrine. See B-302825, Dec. 22,
2004; B-303413, Nov. 8, 2004, at 9; B-287738, May 16, 2002; 51 Comp.
Gen. 506, 507 (1972); 11 Comp. Gen. 281, 283 (1932). See also 10 Comp.
Gen. 382, 383 (1931) (the intent is that "all the public moneys shall
go into the Treasury; appropriations then follow").
As the court observed in Scheduled Airlines Traffic Offices v.
Department of Defense, 87 F.3d 1356, 1361 (D.C. Cir. 1996), the
miscellaneous receipts statute "derives from and safeguards a
principle fundamental to our constitutional structure, the separation-
of-powers precept embedded in the Appropriations Clause" (U.S. Const.
art I, § 9, cl. 7). See also Kate Stith, Congress' Power of the Purse,
97 Yale L. J. 1343 (1988). Professor Stith notes that the
miscellaneous receipts statute "articulates the Principle of the
Public Fisc: All monies of the federal government must be claimed as
public revenues, subject to public control through constitutional
processes." Id. at 1364. This is indeed an important role for a
statute that she describes as having such an "unfortunately bland and
unrevealing name." Id. at 1365.
Accordingly, for an agency to retain and credit to its own
appropriation moneys which it should have deposited into the general
fund of the Treasury is an improper augmentation of the agency's
appropriation. This applies even though the appropriation is a no-year
appropriation. 46 Comp. Gen. 31 (1966). (No-year status relates to
duration, not amount.)
Receipts in the form of "monetary credits" are treated for deposit and
augmentation purposes the same as cash. 28 Comp. Gen. 38 (1948) (use
by government of monetary credits received as payment for sale of
excess electric power held unauthorized unless agency transfers
corresponding amount from its appropriated funds to miscellaneous
receipts). This will not apply, however, where it is clear that the
appropriation or other legislation involved contemplates a different
treatment. B-125127, Feb. 14, 1956 (transfer to miscellaneous receipts
not required where settlement of accounts was to be made on "net
balance" basis). See also B-283731, Dec. 21, 1999 (Defense Department
has specific statutory authority to accept credits under contracts for
travel-related services); 62 Comp. Gen. 70, 74-75 (1982) (credit
procedure which would differ from treatment of cash receipts
recognized in legislative history). When an agency is entitled to
retain a fund in its appropriations (see section E.2.a, below), it may
accept the refund in the form of a credit against future payments due
to the party owing the refund instead of requiring the party to issue
a separate refund check. 72 Comp. Gen. 63, 64 (1992).
(2) Exceptions:
Exceptions to the miscellaneous receipts requirement fall into two
broad categories, statutory and nonstatutory:
* An agency may retain moneys it receives if it has statutory
authority to do so. In other words, 31 U.S.C. § 3302(b) will not apply
if there is specific statutory authority for the agency to retain the
funds. E.g., 72 Comp. Gen. 164, 165-66 (1993) and cases cited.
[Footnote 157]
* Receipts that qualify as "repayments" to an appropriation may be
retained to the credit of that appropriation and are not required to
be deposited into the General Fund. B-302366, July 12, 2004; 6 Comp.
Gen. 337 (1926); 5 Comp. Gen. 734, 736 (1926); B-138942-0.M., Aug. 26,
1976.
Repayments falling within the above nonstatutory exception may be
further defined in terms of two general classes, reimbursements and
refunds, as follows:
* Reimbursements are sums received as a result of commodities sold or
services furnished either to the public or to another government
account, which are authorized by law to be credited directly to a
specific appropriation.
* Refunds are repayments for excess payments and are to be credited to
the appropriation or fund accounts from which the excess payments were
made. They must be directly related to previously recorded
expenditures and are reductions of those expenditures. Refunds to
appropriations represent amounts collected from outside sources for
payments made in error, overpayments, or adjustments for previous
amounts disbursed.
See, e.g., 62 Comp. Gen. 70, 73 (1982); see also, GAO, Policy and
Procedures Manual for the Guidance of Federal Agencies, title 7, § 5.4
(Washington, D.C.: May 18, 1993).
As used in the above definitions, the term "reimbursement" generally
refers to situations in which retention by the agency is authorized by
statute. The term "refund" embraces a category of mostly nonstatutory
exceptions in which the receipt is directly related to, and is a
direct reduction of, a previously recorded expenditure. Thus, the
recovery of an erroneous payment or overpayment which was erroneous at
the time it was made qualifies as a refund to the appropriation
originally charged. E.g., B-139348, May 12, 1959 (utility overcharge
refund); B-138942-0.M., Aug. 26, 1976 (collections resulting from
disallowances by GAO under the "Fly America Act"). Also, the return of
an authorized advance, such as a travel advance, is a refund.
At this point, an important distinction must be made. Moneys collected
to reimburse the government for expenditures previously made are not
automatically the same as "adjustments for previous amounts
disbursed." Reimbursements must generally, absent statutory authority
to the contrary, be deposited as miscellaneous receipts. The mere fact
that the reimbursement is related to the prior expenditure—although
this is an indispensable element of an authorized refund—is not in
itself sufficient to remove the transaction from the scope of 31
U.S.C. § 3302(b). See, e.g., 16 Comp. Gen. 195 (1936); 24 Comp. Dec.
694 (1918); 22 Comp. Dec. 253 (1915); B-45198, Oct. 27, 1944. The
controlling principles were stated as follows in two early decisions:
"The question as to whether moneys collected to reimburse the
Government for expenditures previously made should be used to
reimburse the appropriations from which the expenditures were made or
should be covered into the general fund of the Treasury has often been
before the accounting officers of the Treasury and this office, and it
has been uniformly held that in the absence of an express provision in
the statute to the contrary, such funds should be covered in as
miscellaneous receipts."
5 Comp. Gen. 289, 290 (1925).
"On the other hand, if the collection involves a refund or repayment
of moneys paid from an appropriation in excess of what was actually
due such refund has been held to be properly for credit to the
appropriation originally charged ...."
5 Comp. Gen. 734, 736 (1926).
The key language in the above passage is "in excess of what was
actually due." Apart from the more obvious situations—refunds of
overpayments, erroneous payments, unused portions of authorized
advances—the type of situation contemplated by the "adjustments for
previous amounts disbursed" portion of the definition is illustrated
by 23 Comp. Gen. 652 (1944). The Agriculture Department was authorized
to enter into cooperative agreements with states for soil conservation
projects. Some states were prohibited by state law from making
advances and were limited to making reimbursements after the work was
performed. In these cases, Agriculture initially put up the state's
share and was later reimbursed. The Comptroller General held that
Agriculture could credit the reimbursements to the appropriation
charged for the project. The distinction between this type of
situation and the simpler "related to a previous expenditure"
situation in which the money must go to miscellaneous receipts lies in
the nature of the agency's obligation. Here, Agriculture was not
required to contribute the state's share; it could simply have
foregone the projects in those states which could not advance the
funds. This is different from a situation in which the agency is
required to make a given expenditure in any event, subject to later
reimbursement. In 23 Comp. Gen. 652, the agency made payments larger
than it was required to make, knowing that the "excess" of what it
paid over what it had to pay would (or at least was required to) be
returned. See also 64 Comp. Gen. 431 (1985); 61 Comp. Gen. 537 (1982);
B-69813, Dec. 8, 1947; B-220911.2-0.M., Apr. 13, 1988. For more recent
decisions dealing with an agency's authority to retain "excess"
payments, see B-271127.2, Jan. 30, 1997; 73 Comp. Gen. 321 (1994).
The rationale for crediting refunds to an appropriation account is to
enable the account to be made whole for the overpayment that gave rise
to the refund. As a recent decision pointed out, the refund exception
to the general requirement of section 3302(b) "simply restores to the
appropriation amounts that should not have been paid from the
appropriation." B-302366, July 12, 2004. It follows that the exception
does not permit crediting refunds to appropriations in amounts greater
than the overpayment. The decision in B-302366 illustrates this point.
In that case, a Department of Energy contractor turned over to the
department a refund it had received from the State of Washington for
taxes which the contractor had previously paid and for which it had
been reimbursed by the department. Along with the tax refund, the
contractor also turned over to the department an additional amount it
had received from the state as interest on the refunded taxes. GAO
agreed with the department that the tax refund itself could be
credited to the appropriation originally used to reimburse the
contractor for the tax payment. However, the decision held that the
additional amount representing interest could not be credited to the
appropriation but must be returned to the Treasury as miscellaneous
receipts pursuant to 31 U.S.C. § 3302(b):
"The nonstatutory refund exception ... does not allow the department
to retain the interest paid by the state. Because the nonstatutory
exception operates simply and solely to restore to an appropriation
amounts that should not have been paid from the appropriation,
crediting an amount in excess of that paid from the appropriation
would improperly augment the appropriation."
In this regard, the decision rejected the department's suggestion that
the interest payment could be regarded as merely restoring the
appropriation to an amount adjusted for inflation. The decision noted
that Congress does not appropriate on a net present value basis.
Likewise, GAO has held that agencies may retain and credit to their
appropriations refunds in the form of recoveries under the False
Claims Act (31 U.S.C. § 3729) to the extent that they represent
compensatory damages to reimburse erroneous payments, but not
"exemplary" damages in the nature of penalties. B-281064, Feb. 14,
2000; 69 Comp. Gen. 260 (1990).
For other examples of refunds that may be retained to the credit of an
appropriation, see 65 Comp. Gen. 600 (1986) (rebates from Travel
Management Center contractors); 62 Comp. Gen. 70 (1982) (partial
repayment of contribution to International Natural Rubber Organization
occasioned by addition of new members); B-139348, May 12, 1959 (refund
of overcharge by public utility); and B-209650-0.M., July 20, 1983
(same).
It should be noted that crediting refunds to agency appropriations is
permissive, not mandatory. Thus, the Comptroller General advised the
General Services Administration that rebates received from travel
management contractors could be deposited to the general fund of the
Treasury if the small amounts involved did not justify the cost of
processing these payments to the credit of the agency appropriation
accounts that "earned" them. 73 Comp. Gen. 210 (1994). The Comptroller
General also approved crediting de minimis ($100 or less) rebates to
currently available accounts rather than the prior year accounts that
earned them. 72 Comp. Gen. 63 (1992). However, the Comptroller General
refused to extend this de minimis exception to rebates that could
aggregate $1,000 or more.
72 Comp. Gen. 109 (1993).
A repayment is credited to the appropriation initially charged with
the related expenditure, whether current or expired. If the
appropriation is still current, then the funds remain available for
further obligation within the time and purpose limits of the
appropriation. However, if the appropriation has expired for
obligational purposes (but has not yet been closed), the repayment
must be credited to the expired account, not to current funds. See 23
Comp. Gen. 648 (1944); 6 Comp. Gen. 337 (1926); B-138942-0.M., Aug.
26, 1976. If the repayment relates to an expired appropriation,
crediting the repayment to current funds is an improper augmentation
of the current appropriation unless authorized by statute. B-114088,
Apr. 29, 1953. These same principles apply to a refund in the form of
a credit, such as a credit for utility overcharges. B-139348, May 12,
1959; B-209650-0.M., July 20, 1983.[Footnote 158] Cf. B-260063, June
30, 1995, fn. 3 (there is no authority for an agency to hold refunds
of erroneous payments in an interest bearing account pending final
payment to a contractor since such refunds should be credited to the
appropriation account initially charged with the erroneous payment).
Once an appropriation account has been closed in accordance with 31
U.S.C. §§ 1552(a) or 1555, repayments must be deposited as
miscellaneous receipts regardless of how they would have been treated
prior to closing. 31 U.S.C. § 1552(b). See also B-260993, June 26,
1996; B-257905, Dec. 26, 1995; 73 Comp. Gen. 210, 211 (1994).
Where funds are authorized to be credited to an appropriation,
restrictions on the basic appropriation apply to the credits as well
as to the amount originally appropriated. A-95083, June 18, 1938.
The fact that some particular reimbursement is authorized or even
required by law is not, standing alone, sufficient to overcome 31
U.S.C. § 3302(b). E.g., 67 Comp. Gen. 443 (1988); 22 Comp. Dec. 60
(1915); 1 Comp. Dec. 568 (1895). The accounting for that reimbursement—
whether it may be retained by the agency and, if so, how it is to be
credited—will depend on the terms of the statute. Some statutes, for
example, permit reimbursements to be credited to current
appropriations regardless of which appropriation "earned" the
reimbursement. See, e.g., 10 U.S.C. § 2208(g); 10 U.S.C. § 2210(a)(1);
22 U.S.C. § 2392(c); 22 U.S.C. § 2509(g). As a general proposition,
however, this practice, GAO has pointed out, diminishes congressional
control.[Footnote 159]
As might be expected, there have been a great many decisions involving
the miscellaneous receipts requirement. It is virtually impossible to
draw further generalizations from the decisions other than to restate
the basic rule: An agency must deposit into the General Fund of the
Treasury any funds it receives from sources outside of the agency
unless the receipt constitutes an authorized repayment or unless the
agency has statutory authority to retain the funds for credit to its
own appropriations.
(3) Timing of deposits:
As to the timing of the deposit in the Treasury, 31 U.S.C. § 3302(b)
says merely "as soon as practicable." There is another statute,
however, now found at 31 U.S.C. § 3302(c), which provides in relevant
part:
"(1) A person having custody or possession of public money, including
a disbursing official having public money not for current expenditure,
shall deposit the money without delay in the Treasury or with a
depositary designated by the Secretary of the Treasury under law.
Except as provided in paragraph (2), money required to be deposited
pursuant to this subsection shall be deposited not later than the
third day after the custodian receives the money....
"(2) The Secretary of the Treasury may by regulation prescribe that a
person having custody or possession of money required by this
subsection to be deposited shall deposit such money during a period of
time that is greater or lesser than the period of time specified by
the second sentence of paragraph (1)."
This statute, formerly designated as Revised Statutes § 3621,
originated on March 3, 1857 (ch. 114, 11 Stat. 249). It was amended on
May 28, 1896 (ch. 252, § 5, 29 Stat. 179), to specify a deadline of 30
days. The time limit was reduced to 3 days by section 2652(b)(1) of
the Deficit Reduction Act of 1984, Pub. L. No. 98-369, thy. B. title
VI, 98 Stat. 494, 1152 (July 18, 1984).
A Treasury Department regulation urges agencies to "achieve same day
deposit of money." When same day deposit is not cost-effective or is
impracticable, the regulation generally requires next-day deposit. 31
C.F.R. § 206.5 (2005).[Footnote 160]
As a general proposition, section 3302(c) and the Treasury regulations
place an outer limit on what is practicable under section 3302(b). 11
Comp. Gen. 281, 283-84 (1932); 10 Comp. Gen. 382, 385 (1931). The
deadline applies to all receipts, including those to be credited to an
appropriation account (which, of course, is "in the Treasury"), not
just those for deposit as miscellaneous receipts. E.g., 10 Comp. Gen.
382.
The deposit timing requirements of 31 U.S.C. § 3302(c) and the
implementing Treasury regulations apply as well when public moneys are
held by nonfederal custodians. Thus, GAO found that these requirements
were violated where the Department of Veterans Affairs (VA) allowed
contractors to hold payments it collected on VA loans in an interest-
bearing account for 30 days or more before transferring the payments
to the Treasury. See GAO, Internal Controls: VA Lacked Accountability
Over Its Direct Loan and Loan Sale Activities, GAO/AIMD-99-24
(Washington, D.C.: Mar. 24, 1999), at 16-18.
(4) Money received (or not received) "for the Government:"
As originally enacted, 31 U.S.C. § 3302(b) required deposit into the
Treasury of moneys received "for the use of the United States.
[Footnote 161] The 1982 codification of title 31 changed this language
to moneys received "for the Government."[Footnote 162] The meaning, of
course, is the same. There is no distinction between money received
for the use of the United States and money received for the use of a
particular agency; such a distinction would largely nullify the statute.
Although the concept of money received "for the use of the United
States" or "for the Government" does not lend itself to precise
definition, both the Comptroller General and the courts have applied
this concept broadly, consistent with the key role and purpose of
section 3302(b), in preserving Congress's constitutional power of the
purse. For example, as one recent decision observed:
"The miscellaneous receipts statute ... requires that money received
for the use of the United States be deposited in the Treasury unless
otherwise authorized by law. Court cases and decisions of this Office
make clear that an agency cannot avoid the miscellaneous receipts
statute simply by changing the form of its transactions to avoid the
receipt of money otherwise owed to it."
B-303413, Nov. 8, 2004. See also B-300826, Mar. 3, 2005, at 6, noting
that an agency cannot avoid section 3302(b) by authorizing a
contractor to charge fees to outside parties and keep the payments in
order to offset costs that would otherwise be borne by agency
appropriations.
Neither of the above-cited decisions actually involved transactions
that violated section 3302(b). However, another recent Comptroller
General opinion held that a fee arrangement between the Small Business
Administration (SBA) and a contractor did violate 31 U.S.C. § 3302(b)
and constituted an improper augmentation of SBA's appropriations. B-
300248, Jan. 15, 2004.[Footnote 163] This case concerned SBA's
"Preferred Lender Program" (PLP). Lenders in this program, so-called
"PLP lenders," had authority to make loans without prior SBA approval;
however, the law specifically required SBA to conduct assessments of
these lenders at least annually. SBA contracted with a firm to assist
in conducting the required assessments. Under the contract,
assessments were conducted by a review team consisting of an SBA
employee and one or more employees of the contractor. The SBA
employees, of course, were paid from agency appropriations. However,
the contractor was compensated from fees that SBA imposed on the PLP
lenders and that the lenders paid directly to the contractor.
SBA maintained that the fee proceeds did not constitute "money for the
Government" within the application of 31 U.S.C. § 3302(b) since they
were paid directly to the contractor as compensation for the
contractor's work. The agency also argued that "no-cost" contracts
such as this were largely beyond the reach of the augmentation rule or
section 3302(b). The Comptroller General rejected these arguments,
holding that SBA had "effectively retained and used the fees without
specific authorization" and that the agency's "constructive
disposition" of the fees violated section 3302(b). In essence, the
opinion reasoned that the fee arrangement amounted to shifting to PFP
lenders an expense imposed upon SBA incident to carrying out its
statutory duties that should be borne by the agency's appropriations:
"SBA's position ... is in conflict with our prior decisions and not
supported by the courts. A government official or agent is deemed to
receive money for the government under the Miscellaneous Receipts
Statute if the money is to be used to bear the expenses of the
government or pay the government obligations.... SBA's functions
clearly include conducting oversight of PLP lenders, whether the
review is conducted by SBA's own employees or with the assistance of a
contractor. These functions are among the purposes for which Congress
appropriates funds to SBA ... Thus the fees paid by PLP lenders
represent expenses SBA would have to pay from its appropriations
regardless of whether the expenses were for actions performed by SBA
employees or by a contractor's employees. SBA has devised an
arrangement by which another party incurs these expenses, in effect
using the PLP review fees to substitute for appropriated funds in
paying the cost of the PLP reviews."
B-300248 at 7.
The courts also have given broad application to the section 3302(b)
concept of money received "for the Government." In Reeve Aleutian
Airways, Inc. v. Rice, 789 F. Supp. 417 (D.D.C. 1992), the Air Force
had awarded a contract to a commercial air carrier (MarkAir) to
provide passenger and cargo service to a remote base in the Aleutian
Islands. The carrier's revenue would be derived almost entirely from
fares either purchased directly or reimbursed by the United States
(military personnel, their dependents, and government contractor
employees). The contract granted the carrier landing rights and ground
support at the base, and the contractor agreed to return a specified
portion of its receipts as a "concession fee," to be deposited in the
base morale, welfare, and recreation fund. In upholding a disappointed
bidder's challenge to the award, the court stated:
"The so-called concession fees to be paid by MarkAir were `public
monies' both in the sense that they would be paid by MarkAir
exclusively to purchase the use of property of the United States and
in the sense that the funds were or were derived directly from public
sources—United States taxpayers and the creditors of the United States
who have lent it funds to cover expenses which exceed its revenue.
Obviously, innovation consistent with the law should be encouraged but
this transaction so plainly violates the express terms of 31 U.S.C. §
3302(b) ... that it should be nipped in the bud."
Reeve Aleutian Airways, 789 F. Supp. at 421.
Since there was no authority to divert the funds from the Treasury to
the welfare fund, and since the diversion would actually increase the
cost to the government, the court found the contract award to be
arbitrary and capricious and declared the contract "null, void and of
no force and effect." Id. at 423.
In a case it regarded as "virtually identical" to Reeve Aleutian
Airways, the United States Court of Appeals for the District of
Columbia held that a Department of Defense contract solicitation
requiring payment of the portion of concession fees derived from
unofficial travel to a morale fund rather than to the Treasury
violated 31 U.S.C. § 3302(b). Scheduled Airlines Traffic Offices, Inc.
v. Department of Defense, 87 F.3d 1356, 1363 (D.C. Cir. 1996).
[Footnote 164] The court stated:
"Mindful of both the plain language of the Miscellaneous Receipts
statute and its underlying purpose to preserve congressional control
of the appropriations power, we have no doubt that concession fees for
unofficial travel constitute 'money for the Government' within the
meaning of the statute. Travel agents pay the fees pursuant to
contracts awarded by agencies of the United States, doing so in
consideration for government resources—the right to occupy agency
office space, to utilize government services associated with that
space, and to serve as the exclusive on-site travel agent."
Id. at 1362. The court was not persuaded by the argument that the
required payments to the morale fund did not violate 31 U.S.C. §
3302(b) since they were attributable entirely to commissions on
unofficial travel purchased with private funds:
"This argument is inconsistent with the statute's
unequivocal language. Government officials must deposit in the
Treasury 'money for the Government from any source.' 31 U.S.C. §
3302(b) (emphasis added). The original source of the money—whether
from private parties or the government—is thus irrelevant."
Id.[Footnote 165]
In two decisions, GAO found that the Environmental Protection Agency
(EPA) and the Federal Election Commission did not violate the
miscellaneous receipts statute when they engaged contractors to
respond to public requests for information and to charge, and retain,
fees for the service. In B-166506, Oct. 20, 1975, the Environmental
Protection Agency (EPA) had a number of contracts with private firms
for the processing, storage, and retrieval of various kinds of
recorded environmental information. Much of this information was of
value to private parties and available under the Freedom of
Information Act (FOIA), 5 U.S.C. § 552. Fees collected by an agency
under FOIA must be deposited as miscellaneous receipts. Here, however,
EPA proposed advising requesting parties to deal directly with the
contractors, who would charge and retain fees for providing the data,
although the requestors would retain the right to deal with EPA. GAO
approved the proposal, concluding that fees charged by the contractors
in these circumstances did not constitute money received for the
government.
The EPA decision viewed the contract arrangement as an alternative to
the FOIA process for satisfying information requests and reasoned that
the contractors acted as "independent entrepreneurs" rather than as
agents of EPA in providing such information. The decision cautioned,
however, that the fees charged and retained by the contractors could
not exceed the fees which EPA could charge if it provided the services
directly. Thus, the fees could include the direct costs of document
search and duplication, but not costs associated with developing the
information. In 61 Comp. Gen. 285 (1982), GAO provided similar advice
to the Federal Election Commission in connection with requests from
the public for microfilm copies of its reports, citing B-166506, Oct.
20, 1975.
It may be hard to reconcile the EPA and Federal Election Commission
decisions with more recent decisions, and they should be approached
with caution. The contractor fee arrangements in both of these cases
clearly had at least the indirect effect of relieving the agencies of
expenses incident to the performance of their statutory obligations
that otherwise would have been paid from their appropriations.
In a recent decision, GAO considered whether an agency improperly
avoided the miscellaneous receipts statute by structuring a regulatory
action so that money would not be owed to the government. B-303413,
Nov. 8, 2004. The Federal Communications Commission proposed to
provide spectrum rights to a private company through a "license
modification" in which the company would not pay the government for the
spectrum but would pay certain costs incurred by it and other spectrum
users. If the Federal Communications Act of 1934, as amended, at 47
U.S.C. § 309(j), required the Commission to license the spectrum
through auction instead of a license modification, then the
Commission's proposed regulatory action would improperly avoid the
government's receipt of money otherwise owed to it and thus would
violate the miscellaneous receipts statute. GAO found the Commission's
proposed regulatory action to be within the scope of its authority
under the Federal Communications Act, at 47 U.S.C. § 316(a)(1), and
concluded that the license modification did not violate the
miscellaneous receipts statute.
Both the Comptroller General and the courts have on occasion held that
certain receipts of money did not constitute the receipt of moneys
within the scope of 31 U.S.C. § 3302(b). In B-205901, May 19, 1982, a
railroad had furnished 15,000 gallons of fuel to the Federal Bureau of
Investigation (FBI) for use in an undercover investigation of thefts
of diesel fuel from the railroad. The railroad and FBI agreed that the
fuel or the proceeds from its sale would be returned upon completion
of the investigation. In view of 31 U.S.C. § 3302(b), the FBI then
asked whether money generated from the sale of the fuel had to be
deposited in the Treasury as miscellaneous receipts. In one sense, it
could be argued that the money was received "for the use of the United
States," in that the FBI planned to use it as evidence. However, the
Comptroller General pointed out, this is not the kind of receipt
contemplated by 31 U.S.C. § 3302(b). The decision concluded that
"funds are received for the use of the United States only if they are
to be used to bear the expenses of the Government or to pay the
obligations of the United States." Therefore, there was no legal
barrier to returning the funds to the railroad.
In another case, GAO held that misconduct fines levied on Job Corps
participants by the Labor Department need not be treated as money
received for the Government for purposes of 31 U.S.C. § 3302(b). The
governing legislation specifically authorized "reductions of
allowances" as a disciplinary measure. Labor felt that, in some cases,
immediate collection of a cash fine from the individual's pocket would
be more effective. Finding a legislative intent to confer broad
discretion in matters of enrollee discipline, GAO agreed that the cash
fines could be regarded as a form of disciplinary allowance reduction,
and accordingly credited to Job Corps appropriations. B-130515, Aug.
18, 1970. GAO followed the same approach in a similar question several
years later in 65 Comp. Gen. 666, 671 (1986). The two Job Corps
decisions relied heavily on the language of the program statute
involved in those cases and appear to have little, if any, application
beyond that statute.
In 64 Comp. Gen. 217 (1985), a food service concession contract
required the contractor to reserve a percentage of income to be used
for the replacement of government-owned equipment. The reserve was
found not to constitute money for the Government within the meaning of
31 U.S.C. § 3302(b). GAO distinguished an earlier decision, 35 Comp.
Gen. 113 (1955), on the basis that the reserve here constituted "a
mere bookkeeping entry" whereas the proposal in the 1955 case would
have required the actual transfer of funds to a bank account. 64 Comp.
Gen. at 219.
In Thomas v. Network Solutions, Inc., 176 F.3d 500 (D.C. Cir. 1999),
cert. denied, 528 U.S. 1115 (2000), the court concluded that fees
charged by a party to a cooperative agreement did not constitute money
for the government and thus were not subject to deposit into the
Treasury under 31 U.S.C. § 3302(b). In Thomas, the National Science
Foundation (NSF) entered into a cooperative agreement with Network
Solutions to register Internet domain names and provide related
services to the registrants. In return, Network Solutions was
permitted to charge registrants a fee and to retain the fee as payment
for its services. The plaintiff domain registrants challenged the
legality of the registration fees. Relying in part on the above-cited
Comptroller General decisions dealing with EPA and the Federal
Election Commission, the plaintiffs asserted, among other things, that
the fees exceeded the amount that NSF itself could have imposed under
the user charges statute, 31 U.S.C. § 9701, had the agency provided
domain registration services directly. The court rejected this
argument and distinguished the Comptroller General decisions on the
basis that Network Solutions was not assisting NSF in performing a
statutory duty imposed upon it. Since Congress did not require NSF or
any other federal agency to register Internet domain names, the
registration was not a government service. Thus, neither 31 U.S.C. §
9701 nor 31 U.S.C. § 3302(b) applied. Thomas, 176 F.3d at 510-12.
Finally, several of the trust fund cases discussed hereafter in
section E.2.h of this chapter also address the money received "for the
Government" concept. As explained in section E.2.h, the general rule
is that funds properly received by an agency in a trust capacity are
not subject to section 3302(b); however, there are exceptions and
limits to this general rule.
b. Contract Matters:
(1) Excess reprocurement costs:
We use the term "excess reprocurement costs" here to include two
factually different but conceptually related situations:
* Original contractor defaults. Agency still needs the work done and
contracts with someone else to complete the work, almost invariably at
a cost higher than the original contract price. Original contractor is
liable to the government for these "excess reprocurement costs."
* Defective work by original contractor. Agency incurs additional
expense to correct defective work. Contractor is liable for the amount
of this additional expense.
Disposition of amounts recovered in these situations has generated
numerous cases. Generally, the answer depends on the timing of the
recovery in relation to the agency's reprocurement or corrective
action and the status of the applicable appropriation. The objective
is to avoid the depletion of currently available appropriations to get
what the government was supposed to get under the original obligation.
The rules were summarized, and the case law reviewed, in 65 Comp. Gen.
838 (1986).
The rules are as follows:
* If, at the time of the recovery from the original contractor, the
agency has not yet incurred the additional expense, the agency may
retain the amount recovered to the extent necessary to fund the
reprocurement or corrective measures. The collection is credited to
the appropriation obligated for the original contract, without regard
to the status of that appropriation. Even if that appropriation has
expired and is generally no longer available for obligation, it
usually can still be used to fund the reprocurement or corrective
measures under the "replacement contract" theory until it closes.
[Footnote 166]
* If, at the time of recovery from the original contractor, the agency
has already incurred the additional reprocurement or corrective
expense, the agency may retain the recovery for credit to the
applicable appropriation, to the extent necessary to reimburse itself,
if that appropriation is still available for obligation.
* If the appropriation has expired and is no longer available for
obligation, the recovery should go to miscellaneous receipts.
[Footnote 167]
These rules apply equally to default and defective work situations but
vary with the type and status of the appropriation involved. If the
appropriation used to fund the original contract is a no year
appropriation, the recovery may be credited to that appropriation
regardless of whether the agency has or has not yet actually incurred
the additional costs. If the appropriation is an annual or multiple
year appropriation and the agency has not yet incurred the additional
costs as of the time of recovery, the agency may credit the collection
to the appropriation regardless of whether it is still current or
expired up until the time the account closes. In the case of an annual
or multiple year appropriation, where the agency has already incurred
the reprocurement or corrective costs as of the time of recovery, the
agency may retain the recovery if the appropriation is still available
for obligation, but not if it has expired. (Where the excess costs
have already been incurred and the appropriation has expired at the
time of recovery, it is too late to avoid a depletion of currently
available funds.)
Prior to 1983, essentially two separate lines of cases dealt with
defective work and default. The defective work cases had always
applied the above principles, although not necessarily in those terms.
Some illustrative cases are summarized below:
* Supplies delivered by a contractor were found upon inspection to be
unsatisfactory for use, that is, not in accordance with the terms of
the contract. A refund by the contractor could be credited to the
appropriation originally charged, on the theory that the payment was
improperly made from the appropriation in the first instance. The
appropriation involved was an annual appropriation, and the corrective
costs had not been paid as of the time of the recovery 8 Comp.
Gen. 103 (1928).
* An amount recovered from a contractor's surety because the work
failed to meet specifications, after the contractor had received final
payment, was regarded as in the nature of a reduction in contract
price representing the value of unfinished work, and therefore
amounted to the recovery of an unauthorized overpayment. It could thus
be deposited in the appropriation charged with the contract and
expended for completion of the work. The appropriation involved was a
no-year appropriation. 34 Comp. Gen. 577 (1955).
* Recovery for defective work could be credited to an expired annual
appropriation. Because the corrective work had not yet been
undertaken, the funds would remain available for that corrective work
under the "replacement contract" theory. 44 Comp. Gen. 623 (1965).
In default cases, however, the decisions had consistently held for
several decades that excess reprocurement costs recovered from
defaulting contractors had to be deposited as miscellaneous receipts.
[Footnote 168]
The two lines of cases met in a 1983 decision, 62 Comp. Gen. 678. That
decision recognized that there was no real reason to distinguish
between default and defective work for purposes of accounting for
recoveries. The rules should be the same in both situations.
Accordingly, 62 Comp. Gen. 678 modified the prior default cases and
held, in effect, that the rules previously applied in the defective
work cases should be applied in the future to all excess reprocurement
cost cases "without reference to the event that gave rise to the need
for the replacement contract—that is, whether occasioned by a default
or by defective workmanship." Id. at 681. The decision further held
that the Bureau of Prisons could retain damages recovered from a
contractor charged with defective work, for credit to the
appropriation which had been used to replace the defective work.
The 1983 decision added another new element: Where the recovery, by
virtue of factors such as inflation or underbidding, exceeds the
amount paid to the original contractor, any amounts recovered over and
above what is actually necessary to fund the reprocurement or
corrective work (or to reimburse the appropriation charged with that
work, if it is still currently available) must be deposited in the
Treasury as miscellaneous receipts. Authority to retain funds enables
the agency to get what it originally bargained for, not to make a
"profit" on the transaction. 62 Comp. Gen. at 683.
Logically, the proceeds of a forfeited performance bond should be
available to the contracting agency if and to the extent necessary to
fund a replacement contract to complete the work of the original
contract, and this was the holding in 64 Comp. Gen. 625 (1985).
In 65 Comp. Gen. 838 (1986), GAO reviewed the evolution of the case
law on excess reprocurement costs, restated the rules, and pointed out
that in no case had GAO approved agency retention of recovered funds
where the reprocurement or corrective costs "had already been paid
from an appropriation which, at the time of the recovery, was no
longer available for obligation." Id. at 841 n.5.
Before leaving the subject, it may be helpful to again summarize the
rules in a slightly different manner. Considering the status and the
timing of agency action, in the following five categories, an agency
may retain amounts recovered to the extent necessary to fund the
reprocurement or corrective work, or to reimburse itself for costs
already incurred:
* No-year appropriation where recovery was made before agency incurs
additional costs.
* No-year appropriation where additional costs were incurred prior to
recovery.
* Annual or multiple year appropriation where recovery is made before
the agency incurs additional costs and the appropriation is still
current at time of recovery.
* Annual or multiple year appropriation where additional costs were
incurred prior to recovery and the appropriation is still current at
time of recovery.
* Annual or multiple year appropriation where recovery is made before
the agency incurs additional costs and the appropriation expired at
time of recovery.
Finally, the recovery goes to the Treasury as miscellaneous receipts
when an agency has annual or multiple year appropriations where
additional costs were incurred prior to recovery and the appropriation
had expired at time of recovery.
(2) Other damage claims:
One form of other damage claims is liquidated damages. Liquidated
damages constitute a specific amount of money stipulated in advance by
the contracting parties as the measure of damages for certain breaches
of the contract, such as failure to meet applicable performance
deadlines. See B-148493, Mar. 25, 1963. See also 44 Comp. Gen. 623
(1965). The traditional rule for liquidated damages is that they may
be credited to the appropriation originally charged in circumstances
similar to those applicable to excess reprocurement costs, as
discussed above. 44 Comp. Gen. 623; 23 Comp. Gen. 365 (1943); 9 Comp.
Gen. 398 (1930); 18 Comp. Dec. 430 (1911). See also B-237421, Sept.
11, 1991. The rationale for retaining liquidated damages in the
appropriation account rather than depositing them in the Treasury as
miscellaneous receipts is that liquidated damages effect an authorized
reduction in the price of the individual contract concerned, and also
that this would make the damages available for return to the
contractor should the liability subsequently be relieved. B-242274,
Aug. 27, 1991. However, where this rationale does not apply—for
example, in a case where the contractor did nothing and therefore
earned nothing and remission of liquidated damages under 41 U.S.C. §
256a[Footnote 169] had been denied—the liquidated damages should be
deposited in the Treasury as miscellaneous receipts. 46 Comp. Gen. 554
(1966). Likewise, as in B-242274, Aug. 27, 1991, liquidated damages
cannot be retained and used to fund reprocurements that do not
constitute "replacement contracts" for the contract that gave rise to
the liquidated damages.
In some liquidated damage situations, the agency will not have
incurred any additional reprocurement or corrective costs. This might
happen in a case where an agency received liquidated damages for delay
in performance but the contractor's performance, though late, was
otherwise satisfactory. In other cases, however, the agency will incur
additional costs. In the situation described in 46 Comp. Gen. 554, for
example, the agency would presumably need to reprocure, in which event
it could retain the liquidated damages in accordance with the rules
for excess reprocurement costs just discussed. 64 Comp. Gen. 625
(1985) (modifying 46 Comp. Gen. 554 to that extent). Consistent with
these rules, liquidated damages credited to an expired appropriation
may not be used for work which is not part of a legitimate replacement
contract. B-242274, Aug. 27, 1991.
(3) Refunds and credits:
As discussed previously, the general rule is that refunds, which
include returns of erroneous or excess contract payments as well as
adjustments to previous contract payments, represent an exception to
the miscellaneous receipts deposit requirement of 31 U.S.C. § 3302(b)
and are to be credited to the appropriation or fund accounts from
which the original payments were made.[Footnote 170] Thus, refunds
received by the government under a price redetermination clause may be
credited to the appropriation from which the contract was funded. 33
Comp. Gen. 176 (1953). Contra 24 Comp. Gen. 847, 851 (1945).[Footnote
171]
Refunds received by the government under a warranty clause may be
considered as an adjustment in the contract price and therefore
credited to the appropriation originally charged under the contract.
34 Comp. Gen. 145 (1954). The same result applies where the warranty
refund is in the form of a replacement purchase credit. 27 Comp. Gen.
384 (1948). (These cases are conceptually related to the "defective
work" cases discussed earlier, and the result follows logically from
the result in those cases.)
Not all contract adjustments qualify as "refunds" for purposes of the
section 3302(b) exception. In B-265727, July 19, 1996, the Securities
and Exchange Commission (SEC) asked whether it could reduce its
obligation of appropriated funds for its building lease to reflect the
reduced rent SEC paid as a result of a sublease. Under the arrangement
in question, an SEC employee group subleased parking in the building
from the SEC but paid the landlord directly for this sublease. SEC
deducted these payments under the sublease from its own lease
payments. Relying on the two cases cited above-34 Comp. Gen. 145 and
27 Comp. Gen. 384—SEC argued that the sublease payment was a "refund"
that it could use to reduce the rental payments from its
appropriations. GAO rejected this argument, holding that SEC's use of
amounts paid by the sublessee to reduce the obligation created by
SEC's own lease with the landlord constituted an improper augmentation
of its appropriations. The decision stated:
"In situations where we treated a contract adjustment or price
renegotiation as a refund that could be credited to an appropriation
like those cited by the SEC ... the 'refund' reflected a change in the
amount the government owed its contractor based on the contractor's
performance or a change in the government's requirements."
It went on to point out that neither of these factors was present in
the SEC case.
A different type of credit was discussed in 53 Comp. Gen. 872 (1974).
Prospective timber sale purchasers were to be required to make certain
property surveys, the cost of which would be credited against the sale
price. Forest Service appropriations had previously financed the
surveys. GAO viewed the proposal as an unauthorized augmentation of
those appropriations. Similarly, the Department of Agriculture could
not apply savings in the form of credits accrued under a contract for
the handling of food stamp sales receipts to offset the cost of a
separate data collection contract, even though both contracts were
necessary to the same program objective. A-51604, May 31, 1977.
Credits in the form of rebates may be credited to agency accounts
where they meet the criteria for refunds, that is, they represent
adjustments to previous expenditures from those accounts and thus
serve to make the accounts whole. In 65 Comp. Gen. 600 (1986), GAO
held that agencies could credit rebates of travel agent commissions to
the appropriations charged with the costs of federal employee travel
that included those commissions. See also 73 Comp. Gen. 210 (1994); 72
Comp. Gen. 109 (1993); 72 Comp. Gen. 63 (1992). On the other hand,
rebates that do not meet these criteria must be deposited into the
Treasury pursuant to 31 U.S.C. § 3302(b) unless the agency has
specific statutory authority to retain them. Thus, in a 1996 decision,
GAO observed that energy efficiency rebates received by the SEC from a
local utility company did not meet the criteria for refunds. B-265734,
Feb. 13, 1996, at fn. 1. Nevertheless, GAO held that, because SEC had
the necessary specific statutory authority,[Footnote 172] it could
credit half of an energy efficiency rebate to the accounts that funded
its energy and water conservation activities.
Recoveries of amounts paid under fraudulent contracts constitute
"refunds" that may be deposited to the credit of the appropriation
charged with the payments until the appropriation account is closed.
Once the account is closed, the recoveries should be deposited to the
general fund of the Treasury to the credit of the appropriate receipt
account. B-257905, Dec. 26, 1995.
If a contract requires the government to pay a deposit on containers
and provides for a refund by the contractor of the deposit upon return
of the empty containers by the government, the refund may be credited
to the appropriation from which the deposit was paid. B-8121, Jan. 30,
1940. However, if the contract establishes a time limit for the
government to return the empty containers and provides further that
thereafter title to the containers shall be deemed to pass to the
government, a refund received from the contractor after expiration of
the time limit is treated as a sale of surplus property and must be
deposited as miscellaneous receipts. 23 Comp. Gen. 462 (1943).
(4) "No-cost" contracts:
The federal government sometimes enters into so-called "no-cost"
contracts to obtain services. Typically, the contractor receives no
compensation from the government. B-300248, Jan. 15, 2004. In 63 Comp.
Gen. 459 (1984), GAO considered whether the Federal Communications
Commission could accept offers from industry trade show promoters of
"rent-free" exhibition space and "other free services" intended to
entice the Commission to participate in industry trade shows. The
Commission's participation in a trade show entailed erecting an
exhibition booth and placing staff members and equipment there for the
duration of the show in order to educate the public and respond to
questions about the Commission and its activities. Id. at 459-60. The
Commission felt that it could not afford to rent space from the
promoters; the promoters, realizing that the Commission's presence at
their show would be a "drawing card," offered the Commission rent-free
space, as well as free electricity and other services necessary to
support the Commission's display. Id. GAO found a "mutually beneficial
arrangement" between the Commission and the promoters, although it did
not refer to the mutually beneficial arrangement as a no-cost contract:
"It is to the advantage of the promoters to solicit the Commission's
participation and to waive the usual fees. [At the same time,]
acceptance of the free space and services affords [the Commission]
with an additional opportunity to inform the public ... at no
increased cost to the agency."
Id.
Several recent GAO decisions have addressed no-cost contracts in
relation to the miscellaneous receipts statue, 31 U.S.C. § 3302(b). As
a study of these decisions will show, an agency considering a no-cost
contract should approach the proposed contract with a great deal of
care lest the agency find that it has incurred a constructive
augmentation.
In one case, a no-cost contract arrangement was specifically
authorized by law and thus obviously did not violate section 3302(b).
See B-283731, Dec. 21, 1999 (no-cost contract for travel services
authorized by 10 U.S.C. § 2646). In two related decisions, GAO also
held that the General Services Administration's proposed no-cost
national real estate brokers contract would not violate section
3302(b). B-302811, July 12, 2004; B-291947, Aug. 15, 2003. Under the
proposed contract, real estate brokers would provide lease acquisition
and related services to federal agencies without cost to the
government. Rather, consistent with industry practice, their
compensation would take the form of commissions paid by the lessors.
In affirming the legality of this arrangement, the decision in B-
302811 observed:
"Because the contract was constructed as a no cost contract, GSA will
have no financial liability to brokers, and brokers will have no
expectation of a payment from GSA. The acceptance of services without
payment pursuant to a valid, binding no-cost contract does not augment
an agency's appropriation nor does it violate the voluntary services
prohibition. Although the brokers contract clearly expects that
brokers will be remunerated by commissions from landlords, as is a
common practice in the real estate industry, GSA does not require
landlords to pay commissions. If a landlord were to fail to pay a
broker, the broker would have no claim against GSA."
However, the fact that an agency makes no direct payment for
contractor services does not necessarily mean that arrangement
constitutes a no-cost contract with no implications under 31 U.S.C. §
3302(b). In B-300248, Jan. 15, 2004, discussed at length in section
E.2 of this chapter, the contractor was compensated from fees that the
Small Business Administration (SBA) imposed on lenders and that the
lenders paid directly to the contractor. The opinion rejected SBA's
argument that the "no-cost" nature of the contract took it outside the
application of the normal augmentation and miscellaneous receipts
principles:
"SBA's assertion regarding no-cost contracts ... is misplaced.
Although we have observed that no-cost contracts do not per se violate
the prohibition against augmentation, we have neither applied nor
endorsed the principle that an agency may avoid the prohibition merely
by requiring third parties to pay for an agency's contractual
commitment."
GAO's opinion in B-302811, July 12, 2004, elaborated on the
distinction between the SBA contract, which was found to be a
"constructive augmentation" in violation of section 3302(b), and the
GSA contract, which did not constitute an illegal augmentation:
"The important difference between the GSA and SBA contracts is that
under GSA's contract with brokers, brokers offer their services
without any expectation of payment from GSA, whereas under SBA's
contract, the contractor offered its services only after SBA agreed to
impose a fee on its preferred lenders to cover the contractor's costs
and to require the lenders to pay that fee to the contractor."
c. Damage to Government Property and Other Tort Liability:
As a general proposition, amounts recovered by the government for loss
or damage to government property cannot be credited to the
appropriation available to repair or replace the property, but must be
deposited in the Treasury as miscellaneous receipts. B-287738, May 16,
2002 (damage to government buildings); 64 Comp. Gen. 431 (1985)
(damage to government motor vehicle); 26 Comp. Gen. 618 (1947)
(recovery from insurance company for damage to government vehicle); 3
Comp. Gen. 808 (1924) (loss of Coast Guard vessel resulting from
collision).[Footnote 173] While the recovery may well be "related" to
a prior expenditure for repair of the property, it does not constitute
a refund in the form of an "adjustment" of a previous disbursement
that would qualify for crediting to agency accounts. 64 Comp. Gen.
431, 433 (1985).
There are statutory exceptions to this general proposition. One
involves property purchased and maintained by the General Services
Administration from the General Supply Fund, a revolving fund
established by 40 U.S.C. § 321. By virtue of 40 U.S.C. § 321(b)(2),
recoveries for loss or damage to General Supply Fund property are
credited to the General Supply Fund. This includes recoveries from
other federal agencies for damage to GSA motor pool vehicles. 59 Comp.
Gen. 515 (1980).
Another is 16 U.S.C. § 579c, which authorizes the Forest Service to
retain the proceeds of bond forfeitures resulting from failure to
complete performance under a permit or timber sale contract, and money
received from a judgment, compromise, or settlement of a government
claim for present or potential damage to lands or improvements under
the administration of the Forest Service. If the receipt exceeds the
amount necessary to complete the required work or make the needed
repairs, the excess must be transferred to miscellaneous receipts.
This provision is discussed in 67 Comp. Gen. 276 (1988), holding that
the proceeds of a bond forfeiture could be used to reimburse a general
Forest Service appropriation which had been charged with the cost of
repairs.
In addition, where an agency has statutory authority to retain income
derived from the use or sale of certain property, and the governing
legislation evinces an intent for the particular program or activity
to be self-sustaining, the agency may also retain recoveries for loss
or damage to that property 27 Comp. Gen. 352 (1947) (recovery from
party responsible for loss or damage); 24 Comp. Gen. 847 (1945)
(recovery from insurer); 22 Comp. Gen. 1133 (1943) (same).
There is also a nonstatutory exception to the general proposition.
Where a private party responsible for loss or damage to government
property agrees to replace it in kind or to have it repaired to the
satisfaction of the proper government officials and to make payment
directly to the party making the repairs, the arrangement is
permissible and the agency is not required to transfer an amount equal
to the cost of the repair or replacement to miscellaneous receipts.
[Footnote 174] This principle was first recognized in 14 Comp. Dec.
310 (1907) and has been followed, either explicitly or implicitly,
ever since. E.g., B-287738, May 16, 2002; 67 Comp. Gen. 510 (1988); B-
87636, Aug. 4, 1949; B-128209-0.M., July 12, 1956. The exception
applies even though the money would have to go to miscellaneous
receipts if the responsible party paid it directly to the government.
67 Comp. Gen. at 511; B-87636, Aug. 4, 1949. For an apparent
"exception to the exception" based on the specific legislation
involved, see 28 Comp. Gen. 476 (1949).
Logically, the nonstatutory exception in 14 Comp. Dec. 310 appears
difficult to support. It is, in fact, an extremely rare instance in
which decisions have sanctioned doing indirectly something that cannot
be done directly. Be that as it may, the exception has been followed
since 1907 and appears firmly entrenched. Thus, in B-128209-0.M., July
12, 1956, GAO addressed the relationship between 14 Comp. Dec. 310 and
28 Comp. Gen. 476, stating that "14 Comp. Dec. 310 has been followed
for almost 50 years and we have never expressed disagreement with the
conclusion reached therein." The exception does not disturb the rule
itself; it is "nothing more than an exception that may be advantageous
if the timing of repair and payment can be made to coincide." 64 Comp.
Gen. 431, 433 (1985).
Compensation paid by an insurance company for damage to government
property caused by a contractor may not be used to augment the
agency's appropriation used for the contract. Therefore, absent
specific statutory authority, the moneys, whether paid to the
government or to the contractor, are for deposit into the Treasury as
miscellaneous receipts. B-287738, May 16, 2002; 67 Comp. Gen. 129
(1987); 48 Comp. Gen. 209 (1968). The retention of insurance proceeds
was also at issue in B-93322, Apr. 19, 1950, an apparent exception
based on the particular circumstances involved. In that case, the
General Services Administration had entered into a contract for
renovation of the Executive Mansion. The contract required the
contractor to carry adequate fire and hazard insurance. The renovation
project had been undertaken under a specific appropriation which was
enough for the initial cost but would not have been sufficient for
repairs in the event of a fire or other hazard. Since the renovation
was a "particular job of a temporary nature," and since a contrary
result would defeat the purpose of the appropriation, the Comptroller
General held that insurance proceeds received if a covered risk
occurred could be retained and used for the cost of repairs. Id. at 4.
[Footnote 175]
The rule that recoveries for loss or damage to government property
must be deposited as miscellaneous receipts applies equally to
recoveries from common carriers for government property lost or
damaged in transit. 46 Comp. Gen. 31 (1966); 28 Comp. Gen. 666 (1949);
22 Comp. Dec. 703 (1916); 22 Comp. Dec. 379 (1916). There is a narrow
exception in cases where the freight bill on the shipment of the
property lost or damaged equals or exceeds the amounts paid for
repairs and both are payable from the same appropriation, in which
event the bill is reduced and the amount deducted to cover the cost of
repairs is allowed to remain to the credit of the appropriation. 21
Comp. Dec. 632 (1915), as amplified by 8 Comp. Gen. 615 (1929) and 28
Comp. Gen. 666 (1949). The rule and exception are discussed in 46
Comp. Gen. 31 and in B-4494, Sept. 19, 1939. Also, as with receipts in
general, the miscellaneous receipts requirement does not apply if the
appropriation or fund involved is made reimbursable by statute.
46 Comp. Gen. at 33-34.
In 50 Comp. Gen. 545 (1971), the Comptroller General held that the
requirement to deposit as miscellaneous receipts recoveries from
carriers for property lost or damaged in transit does not apply to
operating funds of the National Credit Union Administration. The
decision noted that, under 12 U.S.C. § 1755, the Administration's
funds consist entirely of fees and assessments collected from member
credit unions and do not include any general revenue appropriations.
Thus, the recoveries should go to the source that bore the costs of
the transactions that gave rise to them.
What happens when one federal agency damages the property of another
agency? Under the so-called "interdepartmental waiver doctrine," the
general rule is that funds available to the agency causing the damage
may not be used to pay claims for damages by the agency whose property
suffered the damage. 65 Comp. Gen. 910, 911 (1986); 46 Comp. Gen. 586,
587 (1966). The interdepartmental waiver doctrine is based primarily
on the concept that property of the various agencies is not the
property of separate entities but rather of the government as a single
entity, and there can be no reimbursement by the government for
damages to or loss of its own property. B-302962, June 10, 2005; 46
Comp. Gen. at 586, 587. However, as GAO pointed out in B-302962, this
general rule also has a well-established exception:
"The interdepartmental waiver doctrine does not apply... where an
agency has statutory authority to retain income derived from the use
or sale of certain property, and the governing legislation shows an
intent for the particular program or activity to be self-sustaining.
24 Comp. Gen. 847 (1945). Thus, where an agency operation is financed
through reimbursements or a revolving fund, the prohibition does not
apply. 65 Comp. Gen. 910 (1986). See also 3 Comp. Gen. 74, 75 (1923).
In such cases, the agency should recover amounts sufficient to cover
loss or damage to property financed by the reimbursements or revolving
fund, regardless of whether that damage is caused by another federal
agency or a private party, and deposit those funds into the revolving
fund. See 65 Comp. Gen. 910. The rationale for this exception is that
the revolving fund, established to operate like a self-sustaining
business, should not bear the cost for 'other than objects for which
the fund was created.' Id."
The decision in B-302962 held that the exception to the
interdepartmental waiver doctrine applied in the case of damage to
facilities of the National Archives and Records Administration whose
operations were financed by a revolving fund. Thus, the Administration
should collect from other federal agencies, their contractors, or the
Administration's own contractors, as the case may be, amounts
sufficient to repair damages they caused to the Administration's
facilities and deposit those amounts into the revolving fund.
While the preceding cases involved loss or damage to property, the
United States may also recover amounts resulting from tortious injury
to persons, for example, under the so-called Federal Medical Care
Recovery Act, 42 U.S.C. § 2651. See, e.g., 57 Comp. Gen. 781 (1978).
Such recoveries, absent express congressional authorization, must be
deposited in the Treasury as miscellaneous receipts. 52 Comp. Gen. 125
(1972). Because of a statutory exception to the miscellaneous receipts
statute, the Department of Veterans Affairs may retain recoveries
under the Federal Medical Care Recovery Act to the extent of medical
care or services furnished under chapter 17 of title 38, United States
Code. The recoveries may be deposited into the Department of Veterans
Affairs Medical Care Collections Fund. Memorandum Opinion for the
Assistant Attorney General, Civil Division, Miscellaneous Receipts Act
Exception for Veterans' Health Care Recoveries, OLC Opinion, Dec. 3,
1998 (construing 38 U.S.C. § 1729A).
A case involving the Military Personnel and Civilian Employees Claims
Act of 1964, 31 U.S.C. § 3721, provides a good illustration of an
adjustment to a prior disbursement, that is, an authorized refund
which the agency may retain for credit to the disbursing
appropriation. The statute authorizes agencies to pay claims by their
employees for personal property lost or damaged incident to service.
In cases where there may be third-party liability (e.g., an insurer or
carrier), the agency has a choice. It may pay the entire amount of the
employee's claim and be subrogated to the employee's claim against the
third party, or it may require the employee to pursue the third-party
claim first. If the agency chooses the former option, it may retain
any third-party recoveries for credit to the appropriation used to pay
the claim. 61 Comp. Gen. 537 (1982). An agency adopting the former
policy, the decision stated,
"will be making payments in some cases that are, strictly speaking,
higher than are required. In such cases, it is entirely legitimate to
treat a third-party recovery as a reduction in the amount previously
disbursed rather than as an augmentation of the agency's
appropriation."
Id. at 540.
A comparison of 61 Comp. Gen. 537 to the Federal Medical Care Recovery
Act case discussed above, 52 Comp. Gen. 125 (1972), illustrates the
distinction previously discussed with respect to applying the
definition of "refund"-61 Comp. Gen. 537 is an example of an
adjustment to an amount previously disbursed; 52 Comp. Gen. 125
illustrates a collection which must go to miscellaneous receipts even
though it is "related" to a prior expenditure.
d. Fees and Commissions:
Federal agencies must have statutory authority both (1) to charge fees
for their programs and activities in the first instance and (2), even
if they have fee-charging authority, to retain in their appropriations
and use the amounts collected. See, e.g., B-300826, Mar. 3, 2005; B-
300248, Jan. 15, 2004. Thus, fees and commissions paid either to the
government itself or to a government employee for activities relating
to official duties must be deposited in the Treasury as miscellaneous
receipts, absent statutory authority to the contrary.
In the case of fees paid directly to the government, the result is a
simple application of 31 U.S.C. § 3302(b). Thus, the following items
must be deposited as miscellaneous receipts:
* Commissions from the use of pay telephones in government buildings.
59 Comp. Gen. 213 (1980); 44 Comp. Gen. 449 (1965); 23 Comp. Gen. 873
(1944); 14 Comp. Gen. 203 (1934); 5 Comp. Gen. 354 (1925); B-4906,
Oct. 11, 1951.
* Fees and related reimbursable incidental expenses paid to the
Department of Agriculture in connection with the investigation of and
issuance of certifications of quality on certain farm products. 2
Comp. Gen. 677 (1923).
* Fees collected under the Freedom of Information Act. 4B Op. Off.
Legal Counsel 684, 687 (1980).
* Fees for copying and shipping documents by the Office of Federal
Housing Enterprise Oversight as part of discovery in administrative
proceedings before that agency. B-302825, Dec. 22, 2004.
Of course, if and to the extent expressly authorized by statute an
agency may retain fees and use them to offset operating costs. See,
e.g., 2 U.S.C. § 68-7(b) (fees and other charges collected for
services provided by the Senate Office of Public Records); 7 U.S.C. §
7333(k)(3) (fees for certain services collected by the Commodity
Credit Corporation); 28 U.S.C. § 1921(e) (fees collected by the United
States Marshals Service for service of civil process and judicial
execution seizures and sales, to the extent provided in advance in
appropriation acts); 28 U.S.C. § 1931 (specified portions of filing
fees paid to the clerk of court). The relevant legislation will
determine precisely what may be retained. E.g., 34 Comp. Gen. 58
(1954).
Training fees illustrate both the general rule and statutory
exceptions. Under the Government Employees Training Act, an agency may
extend its training programs to employees of other federal agencies on
a reimbursable or nonreimbursable basis. 5 U.S.C. § 4104. The agency,
unless it receives appropriations for interagency training, may retain
the fees. B-241269, Feb. 28, 1991 (nondecision letter). Similarly, an
agency may admit state and local government employees to its training
programs and may charge a fee or waive it in whole or in part. 42
U.S.C. § 4742(a). Under 42 U.S.C. § 4742(b), the agency that provided
the training is authorized to credit its appropriation for
reimbursement of fees received. The agency may also admit private
persons to its training programs on a space-available and fee basis,
but, unless it has statutory authority to the contrary, the agency
must deposit the fees as miscellaneous receipts. B-271894, July 24,
1997; 65 Comp. Gen. 666 (1986); 42 Comp. Gen. 673 (1963); B-241269,
Feb. 28, 1991; B-190244, Nov. 28, 1977.
Parking fees assessed by federal agencies under the authority of 40
U.S.C. § 586 are to be credited to the appropriation or fund
originally charged for providing the service. However, any amounts
collected in excess of the actual cost of providing the service must
be deposited as miscellaneous receipts. 55 Comp. Gen. 897 (1976).
Statutes other than 40 U.S.C. § 586 may authorize parking fees, in
which event the terms of the particular statute must be examined. For
example, parking fees at Department of Veterans Affairs medical
facilities are addressed in 38 U.S.C. § 8109. Originally, the fees had
to go to miscellaneous receipts under 31 U.S.C. § 3302(b). 45 Comp.
Gen. 27 (1965). However, 38 U.S.C. § 8109 was amended, and the fees
now go into a revolving fund.
Income derived from the installation and operation of vending machines
on government-owned or controlled property is generally for deposit as
miscellaneous receipts. 32 Comp. Gen. 124 (1952); A-44022, Aug. 14,
1944. There are, however, two major exceptions. First, if an employee
association with administrative approval makes a contractual
arrangement with the vendor, the employee group may retain the income.
32 Comp. Gen. 282 (1952); B-112840, Feb. 2, 1953. Second, under the
Randolph-Sheppard Act, 20 U.S.C. § 107d-3, vending machine income in
certain cases must go to blind licensee-operators or state agencies
for the blind. See B-238937, Mar. 22, 1991; B-199132, Sept. 10, 1980
(nondecision letters).
Donations, which are voluntary, and fees and assessments, which are
not, require different dispositions of amounts collected.[Footnote
176] Statutory authority to accept gifts and donations does not
include fees and assessments exacted involuntarily. 25 Comp. Gen. 637,
639 (1946); B-195492, Mar. 18, 1980; B-225834.2-0.M., Apr. 11, 1988.
However, on occasion, GAO has held that gift-acceptance authorities
extended to certain payments that were not wholly gratuitous or purely
voluntary. See B-286182, Jan. 11, 2001 (statutory authority of the
District of Columbia courts to accept gifts permits acceptance of
services provided as part of an administrative settlement in a rate
case); B-232482, June 4, 1990 (not improper for Commerce Department to
treat certain registration fees as "contributions" within scope of 22
U.S.C. § 2455(f)). For a discussion of the difference between the
statutory authority to accept donations and the authority to charge
fees to cover the costs of services provided, see B-272254, Mar. 5,
1997.
Fees paid to individual employees require a two-step analysis. The
first step is the principle that the earnings of a government employee
in excess of the regular compensation gained in the course of or in
connection with his or her services belong to the government. See,
e.g., 62 Comp. Gen. 39, 40 (1982) and cases cited (military member
must remit to the government fee for service on state jury while he
was not in leave status). The second step is the application of 31
U.S.C. § 3302(b). Using this analysis, GAO has held that agencies must
deposit such fees as miscellaneous receipts in the following instances:
* An honorarium paid to an Army officer for lecturing at a university
in his capacity as an officer of the United States. 37 Comp. Gen. 29
(1957).
* Fees collected from private individuals by government employees for
their services as notaries public. 16 Comp. Gen. 306 (1936).
* Witness fees and any allowances for travel and subsistence, over and
above actual expenses, paid to federal employees for testifying in
certain state court proceedings. 36 Comp. Gen. 591, 592 (1957);
23 Comp. Gen. 628 (1944); 15 Comp. Gen. 196 (1935); B-160343, Nov. 23,
1966.
Applying the same analysis, a proposal under which a nonprofit
corporation funded entirely by private industry would pay monthly
"bonuses" to Army enlistees to encourage enlistment and satisfactory
service, even if otherwise proper, could not be implemented without
specific statutory authority, because the payments could not be
retained by the enlistees but would have to be deposited in the
Treasury under 31 U.S.C. § 3302(b). B-200013, Apr. 15, 1981.
e. Economy Act:
The Economy Act, 31 U.S.C. §§ 1535 and 1536, authorizes the inter- and
intradepartmental furnishing of materials or performance of work or
services on a reimbursable basis.[Footnote 177] It is a statutory
exception to the miscellaneous receipts statute, 31 U.S.C. § 3302(b),
authorizing a performing agency to credit reimbursements to the
appropriation or fund charged in executing its performance.[Footnote
178] Crediting Economy Act reimbursements to agency appropriations is
not mandatory. The performing agency may, at its discretion, deposit
reimbursements for both direct and indirect costs in the Treasury as
miscellaneous receipts. 57 Comp. Gen. 674, 685 (1978), modifying 56
Comp. Gen. 275 (1977). There is one area in which the performing
agency has no discretion. Reimbursements may not be credited to an
appropriation against which no charges have been made in executing the
order.[Footnote 179] This would constitute an improper augmentation of
the credited appropriation(s). As noted in section E.4 of this
chapter, this also applies to appropriations available in different
time periods. See B-288142, Sept. 6, 2001. Such reimbursements must
therefore be deposited into the General Fund as miscellaneous
receipts. An example would be crediting reimbursement for depreciation
to an appropriation that did not bear any costs of the transaction. If
the appropriation that bore the costs is no longer available, the
reimbursement for depreciation must be deposited into the Treasury as
miscellaneous receipts. 57 Comp. Gen. at 685-86. An agency must
deobligate funds at the end of their availability period to the extent
that obligations for Economy Act work exceed costs incurred for that
work. 31 U.S.C. § 1535(d). See B-286929, Apr. 25, 2001; 39 Comp. Gen.
317, 319 (1959); 34 Comp. Gen. 418, 421-22 (1955). Likewise, where
performance of an Economy Act order extends beyond a fiscal year and
is funded by more than one fiscal year appropriation, the
reimbursement must be split between the two appropriations based on
the work actually performed by each. B-301561, June 14, 2004
(nondecision letter).
Reimbursement under the Economy Act is to be made on the basis of
"actual cost" as determined by the performing agency. 31 U.S.C. §
1535(b). Advance payments based on estimated costs are authorized, but
the final payment amount must be adjusted to account for actual costs.
31 U.S.C. § 1535(b), (d); B-282601, Sept. 27, 1999; B-260993, June 26,
1996. See also GAO, DFOH Financial Management, GAO/AIMD-96-167R
(Washington, D.C.: Sept. 30, 1996). While agencies have some
flexibility in determining costs, their determinations must be
reasonable in order to avoid an augmentation. B-257823, Jan. 22, 1998;
B-250377, Jan. 28, 1993.[Footnote 180] In reviewing cost issues under
the Economy Act, GAO's role is to assess the general accuracy and
reasonableness of a performing agency's charges, not to "recompute"
those charges. B-257823, Jan. 22, 1998.
Failure to obtain reimbursement for all required costs in a
reimbursable Economy Act transaction improperly augments the
appropriations of the ordering agency. 57 Comp. Gen. 674, 682 (1978).
Thus, an ordering agency must reimburse all appropriate costs incurred
by the performing agency even if they exceed those agreed upon so long
as the ordering agency received the benefit of the added costs. B-
260993, June 26, 1996. The ordering agency's obligation to reimburse
such additional costs remains even if those costs are not identified
until years later and after the appropriation of the ordering agency
originally charged for the transaction has closed. In this event, the
additional costs are payable from the ordering agency's current
appropriations for the same general purpose. B-260993, June 26, 1996.
By the same token, the performing agency must return to the ordering
agency advance payments that exceeded actual costs. 72 Comp. Gen. 120
(1993).
On occasion, the costs may be so out of proportion as to undercut the
legitimacy of a purported Economy Act transaction altogether. In 70
Comp. Gen. 592 (1991), the Labor Department cited the Economy Act as
authority to combine funds from a number of different departmental
appropriation accounts for component agencies in order to purchase
computer equipment for a department-wide network. However, the value
of equipment provided to the various components under this arrangement
did not match their contributions. For example, one component paid
about four times more than the value of the equipment it received.
Accordingly, the Comptroller General held that this arrangement was
not a legitimate Economy Act transaction or reprogramming. Rather, it
constituted an unauthorized transfer of appropriations that resulted
in a subsidy to, and thus an improper augmentation of, the
department's central management account. 70 Comp. Gen. at 594-96.
Finally, the general authority of the Economy Act cannot be used to
overcome 31 U.S.C. § 3302(b) if the transaction in question is
governed by a more specific statutory authority. In B-241269, Feb. 28,
1991, the Treasury Department's Financial Management Service asked
whether it could invoke the Economy Act to retain reimbursements for
training it provided to employees of other federal and state agencies
as well as a few nongovernmental participants. GAO responded that the
reimbursements were governed not by the Economy Act but by other
statutory authorities dealing specifically with federal training
programs. These statutory authorities allowed the agency that provided
training to credit its appropriations for reimbursements on behalf of
federal and other governmental participants. However, since the
statutes did not cover nongovernmental trainees, they could not
provide an exception from section 3302 that applied to them. Thus, the
fees paid by nongovernmental participants must be deposited into the
General Fund of the Treasury as miscellaneous receipts.[Footnote 181]
The Comptroller General has applied Economy Act cost-reimbursement
principles by analogy to interagency transactions conducted under
other statutory authority requiring reimbursement where that authority
does not otherwise specify the basis for reimbursement. See 72 Comp.
Gen. 159 (1993). Cf. B-276509, Aug. 28, 1998 (implicitly following
Economy Act principles). However, rules that are unique to the Economy
Act, such as the deobligation requirement of 31 U.S.C. § 1535(d), do
not apply to interagency transactions carried out under other
statutory authorities. B-302760, May 17, 2004.
f. Setoff:
Collections by setoff may be factually distinguishable from direct
collections, but the effect on the appropriation is the same. If
crediting an agency appropriation with a direct collection in a
particular instance would result in an improper augmentation, then
retaining an amount collected by setoff would equally constitute an
improper augmentation. Thus, setoffs must be treated the same as
direct collections. If an agency could retain a direct collection in a
given situation, it can retain the setoff. However, if a direct
collection would have to go to miscellaneous receipts, the setoff also
has to go to miscellaneous receipts. In this latter situation, the
agency must take the amount of the setoff from its own appropriation
and transfer it to the General Fund of the Treasury. E.g., 2 Comp.
Gen. 599 (1923); 20 Comp. Dec. 349 (1913).
A hypothetical situation will illustrate. Suppose a contractor
negligently damages a piece of government equipment and becomes liable
to the government in the amount of $500. Suppose further that an
employee of the contracting agency, in a separate transaction,
negligently damages property of the contractor. The contractor files a
claim under the Federal Tort Claims Act and the agency settles the
claim for $600. Neither party disputes the validity or amount of
either claim. The agency sets the contract debt off against the tort
claim and makes a net payment to the contractor of $100. However, if
the agency stops here and if it lacks specific statutory authority to
retain offsets, it has augmented its appropriation to the tune of
$500. If the tort claim had never occurred and the agency collected
the $500 from the contractor, the $500 would have to go to
miscellaneous receipts (see "Contract Matters," above). Conversely, if
the contract claim did not exist, the agency would end up paying $600
on the tort claim. Now, combining both claims, if both were paid
without setoff, the net result would be that the agency is out $600.
The setoff cannot operate to put the agency's appropriation in a
better position than it would have been in had the agency and
contractor simply exchanged checks. Thus, in addition to paying the
contractor $100, the agency must deposit $500 from its own
appropriation into the Treasury as miscellaneous receipts.
A different type of "setoff" occurs under the Back Pay Act, 5 U.S.C. §
5596. When an agency pays an employee back pay under the Back Pay Act,
it must deduct amounts the employee earned through other employment
during the time period in question. The agency simply pays the net
amount. There is no requirement to transfer the amount of the
deduction for outside earnings to miscellaneous receipts. 31 Comp.
Gen. 318 (1952). The deduction for outside earnings is not really a
collection; it is merely part of the statutory formula for determining
the amount of the payment.
g. Revolving Funds:
A major exception to the requirements of 31 U.S.C. § 3302(b) is the
revolving fund.[Footnote 182] For most revolving funds, receipts are
credited directly to the fund and are available, without further
appropriation by Congress, for expenditures to carry out the purposes
of the fund. An agency must have statutory authority to establish a
revolving fund. The enabling statute will specify the receipts that
may be credited to the fund and the purposes for which they may be
expended. An example is the General Services Administration's "General
Supply Fund," noted above under "Damage to Government Property."
Receipts that are properly for deposit to a revolving fund are,
obviously, exempt from the miscellaneous receipts requirement of
section 3302(b). E.g., B-271894, July 24, 1997 (explaining when a
revolving fund may retain receipts and when it must deposit receipts
into the Treasury as miscellaneous receipts).
However, the existence of a revolving fund does not automatically
signal that 31 U.S.C. § 3302(b) will never apply. Thus, where the
statute establishing the fund does not authorize the crediting of
receipts of a given type into the fund, those receipts must be
deposited in the Treasury as miscellaneous receipts. To credit those
receipts to the revolving fund would augment the revolving fund. See,
e.g., B-302825, Dec. 22, 2004 (the Office of Federal Housing
Enterprise Oversight had authority to collect and deposit into its
Oversight Fund annual assessments from the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation; its
authority to conduct administrative and enforcement actions did not
permit it to retain copying fees charged for document discovery). See
also 69 Comp. Gen. 260 (1990); 40 Comp. Gen. 356 (1960); 23 Comp. Gen.
986 (1944); 20 Comp. Gen. 280 (1940).
Augmentation of a revolving fund may occur in other ways, depending on
the nature of the fund and the terms of the governing legislation:
* While the Bureau of Land Management has authority to retain funds
collected as a result of coal trespasses on federal lands, to use
those funds to repair damage to the specific lands involved in the
trespass, and, within the Bureau's discretion, to refund any excess,
the Bureau may not retain an excess of collections over repair costs
which the Bureau determines is inappropriate to refund. To retain such
amounts in the revolving fund to be used for other purposes would
augment the revolving fund. The Bureau must deposit this amount in the
Treasury as miscellaneous receipts. B-204874, July 28, 1982.
* The Corps of Engineers provides construction contract supervision
and administrative services to other agencies and has a revolving fund
(the supervision and administration, or S&A, revolving fund) that it
uses to cover its S&A costs. The Corps changes its customer agencies a
flat rate for this service so that, over time, its S&A revolving fund
will break even. Where the Air Force (a customer agency) received an
amount from an Air Force contractor for additional expenses incurred
by the government as a result of the contractor's defective
workmanship, the Corps could cover into its S&A revolving fund only
that portion representing S&A costs that the Corps had actually
charged the Air Force, regardless of the amount collected from the
contractor. 65 Comp. Gen. 838 (1986). To avoid augmenting its S&A
revolving fund, the Corps had to deposit amounts in excess of that
portion into miscellaneous receipts. Id. See also B-237421, Sept. 11,
1991.
* Although the Corps of Engineers may choose to offer training to
nongovernmental personnel on a limited space-available basis, such
training is not within the scope of the Corps' revolving fund for
furnishing facilities and services for other government agencies.
Therefore, any fees it receives for training nongovernmental personnel
must be deposited to the Treasury under 31 U.S.C. § 3302(b) rather
than being credited to Corps' revolving fund. B-271894, July 24, 1997.
* The Tennessee Valley Authority (TVA) cannot credit to its revolving
fund double and treble damages recovered under the False Claims Act.
Since these damages are in the nature of penalties rather than
compensation for actual losses, TVA must deposit them to the Treasury
as miscellaneous receipts. TVA has no authority to augment its
revolving fund with proceeds that exceed costs it has incurred and
that are unrelated to its commercial and proprietary activities. B-
281064, Feb. 14, 2000.
Legislation that merely authorizes, or even requires, that certain
expenditures be reimbursed is not sufficient to create a revolving
fund. Reimbursements must be deposited as miscellaneous receipts
unless the statute specifically authorizes retention by the agency. 67
Comp. Gen. 443 (1988); 22 Comp. Dec. 60 (1915); 1 Comp. Dec. 568
(1895).
h. Trust Funds:
Moneys properly received by a federal agency in a trust capacity are
not subject to 31 U.S.C. § 3302(b) and thus do not have to be
deposited in the Treasury as miscellaneous receipts, unless otherwise
required.[Footnote 183] B-303413, Nov. 8, 2004; 60 Comp. Gen. 15, 26
(1980); 27 Comp. Gen. 641 (1948). Other authorities supporting this
general proposition are Emery v. United States, 186 F.2d 900, 902 (9th
Cir.), cert. denied, 341 U.S. 925 (1951) (money paid to the United
States under court order as refund of overcharges by persons who had
violated rent control legislation was held in trust for tenants and
could be disbursed to them without need for appropriation); Varney v.
Warehime, 147 F.2d 238, 245 (6th Cir.), cert. denied, 325 U.S. 882
(1945) (assessments levied against milk handlers to defray certain
wartime expenses were trust funds and did not have to be covered into
the Treasury); 62 Comp. Gen. 245, 251-52 (1983) (proceeds from sale of
certain excess stockpile materials where federal agency was acting on
behalf of foreign government); B-223146, Oct. 7, 1986 (moneys received
by Pension Benefit Guaranty Corporation when acting in its trustee
capacity); B-23647, Feb. 16, 1942 (taxes and fines collected in
foreign territories occupied by American armed forces).
In addition, receipts generated by activities financed with trust
funds are generally credited to the trust fund and not deposited as
miscellaneous receipts. United States v. Sinnott, 26 E 84 (D. Ore.
1886) (proceeds from sale of lumber made at Indian sawmill were to be
applied for benefit of Indians and were not subject to 31 U.S.C. §
3302(b)); B-166059, July 10, 1969 (recovery for damage to property
purchased with trust funds). See also 50 Comp. Gen. 545, 547 (1971).
In 51 Comp. Gen. 506 (1972), GAO advised the Smithsonian Institution
that receipts generated by various activities at the National Zoo need
not be deposited as miscellaneous receipts. The Smithsonian is
financed in part by trust funds and in part by appropriated funds.
In a 1991 case, an agency had discovered a $10,000 bank account
belonging to an employee morale club which had become defunct. No
documentation of the club's creation or dissolution could be located.
Thus, if the club had ever provided for the disposition of its funds,
it could no longer be established. Clearly, the money was not received
for the use of the government for purposes of 31 U.S.C. § 3302(b). It
was equally clear that the money could not be credited to the agency's
appropriations. GAO advised that the money could be turned over to a
successor employee morale organization to be used for its intended
purposes. If no successor organization stepped forward, the funds
would have to be deposited in a Treasury trust account in accordance
with 31 U.S.C. § 1322. B-241744, May 31, 1991 (nondecision letter).
There are limits on the extent to which trust funds can legitimately
avoid the application of 31 U.S.C. § 3302(b). The Justice Department's
Office of Legal Counsel has cautioned against carrying the trust
theory too far in the case of trusts created by executive action
rather than statute. For example, the United States and the
Commonwealth of Virginia sued a transportation company for causing an
oil spill in the Chesapeake Bay. A settlement was proposed under which
the defendant would donate money to a private waterfowl preservation
organization The Justice Department's Office of Legal Counsel found
that the proposal would contravene 31 U.S.C. § 3302(b). 4B Op. Off.
Legal Counsel 684 (1980). The opinion did not question that section
3302(b) could be overcome by a statutorily created trust or in other
circumstances where money is "given to the government which is not
available to the United States for disposition on its own behalf." Id.
at 687. However, it listed the following weaknesses in a nonstatutory
trust argument:
"(1) that trusts created by nonstatutory executive action could indeed
be used to circumvent legislative prerogatives in the appropriations
area; (2) that to some extent all money held in the Treasury ... is
received 'in trust' for the citizenry and (3) that Congress has
created or recognized trust funds explicitly in numerous cases and
implicitly in others, but it has neglected to do so in this context."
Id. at 687-68 (footnotes omitted).
The opinion also noted that the applicability of section 3302(b) was
not affected simply because the government did not physically receive
any funds. Rather, "constructive receipt" of funds is sufficient to
trigger the statute:
"In our view, the fact that no cash actually touches the palm of a
federal official is irrelevant for purposes of § [3302(b)], if a
federal agency could have accepted possession and retains discretion
to direct the use of the money. The doctrine of constructive receipt
will ignore the form of a transaction in order to get to its
substance.... Since we believe that money available to the United
States and directed to another recipient is constructively 'received'
for purposes of § [3302(b)], we conclude that the proposed settlement
is barred by that statute."
Id. at 688.
There was a solution in that case, however. Since the United States
had not suffered any monetary loss, it was not required to seek
damages. The proposed contribution by the defendant could be
attributed to the co-plaintiff, Virginia, which of course was not
subject to 31 U.S.C. § 3302(b). Id.[Footnote 184]
Along the lines of the Office of Legal Counsel opinion discussed
above, the court in Motor Coach Industries, Inc. v. Dole, 725 F.2d 958
(4th Cir. 1984), rejected a nonstatutory trust arrangement developed
by the Federal Aviation Administration (FAA) in order to finance
increased surface transportation to Dulles International Airport. FAA
agreed to waive landing fees it charged airlines using Dulles if they
agreed to establish and contribute to an "Air Carriers Trust Fund,"
which would be used to purchase additional ground transport buses to
serve Dulles. The court observed:
"The trust arrangement both undermined the integrity of the
congressional appropriation process and ignored substantive duties
under the procurement statutes. Viewed realistically, the Trust was an
attempt by the FAA to divert funds from their intended destination—the
United States Treasury. Although the purpose for which the FAA sought
the funds was laudable, its methods certainly cannot be praised. Were
the contract between the Trust and [the transport company] left
intact, the agency's end-run around the normal appropriation channels
would have been successful, enabling it effectively to supplement its
budget by $3 million without congressional action."
725 F.2d at 968 (footnote omitted).
i. Fines and Penalties:
Generally speaking, moneys collected as a fine or penalty must be
deposited in the Treasury as miscellaneous receipts pursuant to 31
U.S.C. § 3302(b). E.g., B-281064, Feb. 14, 2000 (double or treble
damages under the False Claims Act, which constitute "exemplary" or
punitive rather than compensatory damages); 70 Comp. Gen. 17 (1990)
(civil penalties assessed against Nuclear Regulatory Commission
licensees); 69 Comp. Gen. 260 (1990) (penalties—as opposed to the
recovery of actual losses—under the False Claims Act); 47 Comp. Gen.
674 (1968) (dishonored checks); B-235577.2-0.M., Nov. 9, 1989 (civil
penalties under Food Stamp Act).
In B-210210, Sept. 14, 1983, the Comptroller General held that the
Commodity Futures Trading Commission lacked authority to enter into a
settlement agreement under which a party charged with violation of the
Commodity Exchange Act would donate funds to an educational
institution with no relationship to the violation. The decision
pointed out that monetary penalties imposed by the Commission were
subject to deposit into the Treasury under 31 U.S.C. § 3302(b) and
rejected the Commission's characterization of the donation as a
"voluntary contribution" as opposed to a "penalty:"
"Despite the statement that the donations would not supplant the
Commission's regular practice of imposing monetary penalties as part
of a settlement, it is difficult to distinguish the proposed donations
from money penalties. The money would be donated as a result of an
enforcement action and in consideration of not imposing some further
sanction or penalty. It is difficult for us to conceive of a situation
under the proposed plan where one making the payment would not
consider the payment a penalty."
Another case concluded that, without statutory authority, permitting a
party who owes a penalty to contribute to a research project in lieu
of paying the penalty amounts to a circumvention of 31 U.S.C. §
3302(b) and improperly augments the agency's research appropriations.
70 Comp. Gen. 17 (1990). A case saying essentially the same thing in
the context of Clean Air Act violations is B-247155, July 7, 1992,
aff'd on reconsideration, B-247155.2, Mar. 1, 1993.
GAO considered similar issues in several cases involving consent
orders between the Department of Energy and oil companies charged with
violation of federal oil price and allocation regulations. The
Department has limited authority to use recovered overcharge funds for
restitution purposes, and in fact has a duty to attempt restitution.
However, to the extent this cannot reasonably be accomplished or funds
remain after restitution efforts have been exhausted, the funds may
not be used for energy-related programs with no restitution nexus but
must be deposited in the Treasury pursuant to 31 U.S.C. § 3302(b). 62
Comp. Gen. 379 (1983); 60 Comp. Gen. 15 (1980). It is equally
unauthorized to give the funds to charity or to use them to augment
appropriations for administering the overcharge refund program. B-
200170, Apr. 1, 1981.
To the same effect is United States v. Smithfield Foods, Inc., 982 E
Supp. 373 (E.D. Va. 1997). Smithfield was assessed a civil penalty of
over $12 million for violating the Clean Water Act. The trial judge
initially ordered the government to submit a proposal for "allocation"
of the penalty with an emphasis on directing all or part of the
penalty toward restoration of the Chesapeake Bay and its tributaries.
The Government responded that, since the Clean Water Act did not
specify an alternative disposition, the penalty must be paid into the
Treasury pursuant to 31 U.S.C. § 3302(b). The court "regretfully
agree[d]" that the penalty proceeds could not be directed toward local
environmental projects. Smithfield Foods, 982 E Supp. at 375.
j. Miscellaneous Cases: Money to Treasury:
In addition to the categories discussed above, there have been
numerous other decisions involving the disposition of receipts in
various contexts. Some cases in which the Comptroller General held
that receipts of a particular type must be deposited in the Treasury
as miscellaneous receipts under 31 U.S.C. § 3302(b) or related
statutes are set forth below.
* Costs awarded to the United States by a court under 28 U.S.C. §
2412. 47 Comp. Gen. 70 (1967).
* Interest earned on grant advances by grantees other than states.
E.g., 69 Comp. Gen. 660 (1990).
* Interest earned by grantees on unauthorized loans of grant funds. 71
Comp. Gen. 387 (1992).
* Interest improperly earned on federal grant funds by various agencies
of the District of Columbia government. B-283834, Feb. 24, 2000.
* Reimbursements received for child care services provided by federal
agencies for their employees under authority of 40 U.S.C. § 590. 67
Comp. Gen. 443, 448-49 (1988).
* Receipts generated by undercover operations by law enforcement
agencies. 67 Comp. Gen. 353 (1988); 4B Op. Off. Legal Counsel 684, 686
(1980). In GAO's opinion, however, short-term operations (a card game
or dice game, for example) may be treated as single transactions. 67
Comp. Gen. 353, clarifying B-201751, Feb. 17, 1981. Thus, 31 U.S.C. §
3302(b) need not be read as requiring an undercover agent
participating in a card game to leave the table to make a
miscellaneous receipts deposit after every winning hand. If, however,
the agent ends up with winnings at the end of the game, the money
cannot be used to offset expenses of the operation.[Footnote 185]
Related cases are 5 Comp. Gen. 289 (1925) and 3 Comp. Gen. 911 (1924)
(moneys used to purchase evidence for use in criminal prosecutions and
recovered when no longer needed for that purpose must be deposited as
miscellaneous receipts).
* Proceeds from silver and gold sold as excess property by the
Interior Department as successor to the American Revolutionary
Bicentennial Administration. (The silver and gold had been obtained by
melting down unsold commemorative medals which had been struck by the
Treasury Department for sale by the American Revolutionary
Bicentennial Administration.) B-200962, May 26, 1981.
* Income derived from oil and gas leases on "acquired lands" (as
distinguished from "public domain lands") of the United States used
for military purposes. B-203504, July 22, 1981.
k. Miscellaneous Cases: Money Retained by Agency:
Most cases in which an agency may credit receipts to its own
appropriation or fund involve the areas previously discussed:
authorized repayments, Economy Act transactions, revolving funds, or
the other specific situations noted. There is another group of cases,
not susceptible to further generalization, in which an agency simply
has specific statutory authority to retain certain receipts. Examples
are:
* Forest Service may retain moneys paid by permittees on national
forest lands representing their pro rata share under cooperative
agreements for the operation and maintenance of waste disposal systems
under the Granger-Thye Act, 16 U.S.C. § 572 (1970). 55 Comp. Gen. 1142
(1976).
* Customs Service may, under 19 U.S.C. § 1524, retain charges
collected from airlines for preclearance of passengers and baggage at
airports in Canada, for credit to the appropriation originally charged
with providing the service. 48 Comp. Gen. 24 (1968).
* Overseas Private Investment Corporation may retain interest on loans
of excess foreign currencies made under the Foreign Assistance Act of
1961, as amended, 22 U.S.C. § 2196. 52 Comp. Gen. 54 (1972).
* The African Development Foundation, by virtue of its statutory gift-
acceptance authority, may retain funds it receives from certain
African governments in order to supplement its grants. B-300218, Mar.
17, 2003.
* Payroll deductions for government-furnished quarters under 5 U.S.C.
§ 5911 are retained in the appropriation(s) or fund(s) from which the
employee's salary is paid. 59 Comp. Gen. 235 (1980), as modified by 60
Comp. Gen. 659 (1981). However, if the employee pays directly rather
than by payroll deduction, the direct payments must go to
miscellaneous receipts unless the agency has specific statutory
authority to retain them. 59 Comp. Gen. at 236.[Footnote 186]
* Under the Mineral Lands Leasing Act of 1920, 30 U.S.C. § 191,
receipts from the sale or lease of public lands are distributed in the
manner specified in the statute. This was held to include the proceeds
of bid deposits forfeited by successful mineral lease bidders who fail
to execute the lease. 65 Comp. Gen. 570 (1986).
* By virtue of provisions in the Job Training Partnership Act[Footnote
187] and annual appropriation acts, certain receipts generated by Job
Corps Centers may be retained for credit to the Labor Department
appropriation from which the Centers are funded. 65 Comp. Gen. 666
(1986).
* Legislation establishing the Commission on the Bicentennial of the
United States Constitution authorized the Commission to retain
revenues derived from its licensing activities but did not address
sales revenues. Sales revenues, therefore, had to be deposited as
miscellaneous receipts. B-228777, Aug. 26, 1988.
In the occasional case, the authority may be less than specific. In B-
114860, Mar. 20, 1975, for example, based on the broad authority of
the National Housing Act, GAO advised that the Department of Housing
and Urban Development could require security deposits from tenants in
HUD-owned multifamily projects. Consistent with practice in the
private sector, the deposit would be considered the property of the
tenant and held in an escrow account, to be either returned to the
tenant upon completion of the lease or forfeited to the government in
cases of breach.
A final case we will note is 24 Comp. Gen. 514 (1945), an exception
stemming from the particular funding arrangement involved rather than
a specific statute. The case dealt with certain government
corporations that did not receive annual appropriations but instead
received annual authorizations for expenditures from their capital
funds for administrative expenses. An appropriation act had imposed a
limit on certain communication expenditures and provided that savings
resulting from the limit "shall not be diverted to other use but shall
be covered into the Treasury as miscellaneous receipts." The
Comptroller General construed this as meaning returned to the source
from which made available. In the case of the corporations in
question, this meant that the savings could be returned to their
capital funds.
l. Money Erroneously Deposited as Miscellaneous Receipts:
The various accounts that comprise the heading "miscellaneous
receipts" are just that—they are receipt accounts, not expenditure or
appropriation accounts. As noted earlier, by virtue of the
Constitution, once money is deposited into miscellaneous receipts, it
takes an appropriation to get it back out. What, therefore, can be
done if an agency deposits some money into miscellaneous receipts by
mistake?
This question really involves two separate situations. In the first
situation, an agency receives funds which it is authorized, under the
principles discussed above, to credit to its own appropriation or
fund, but erroneously deposits them as miscellaneous receipts. The
decisions have always recognized that the agency can make an
appropriate adjustment to correct the error. In an early case, the
Interior Department sold some property and deposited the proceeds as
miscellaneous receipts when in fact it was statutorily authorized to
credit the proceeds to its reclamation fund. The Interior Department
then requested a transfer of the funds back to the reclamation fund,
and the Secretary of the Treasury asked the Comptroller of the
Treasury if it was authorized. Of course it was, replied the
Comptroller:
"This is not taking money out of the Treasury in violation of
paragraph 7, section 9, Article I of the Constitution ....
"The proceeds of the sale ... have been appropriated by law. Taking it
from the Treasury and placing it to the credit in the Treasury of the
appropriation to which it belongs violates neither the Constitution
nor any other law, but simply corrects an error by which it was placed
to the unappropriated surplus instead of to the appropriation to which
it belongs."
12 Comp. Dec. 733, 735 (1906).
This concept has consistently been followed. See 45 Comp. Gen. 724
(1966); 3 Comp. Gen. 762 (1924); 2 Comp. Gen. 599 (1923). Cf. B-
275490, Dec. 5, 1996.[Footnote 188] The concept also has been applied
to permit correction of some errors in accounts that had been closed
and their balances canceled pursuant to 31 U.S.C. §§ 1552 or 1555. See
72 Comp. Gen. 343 (1993). This decision held that, while canceled
balances cannot be restored for purposes of recording obligations or
malting disbursements, bookkeeping records of closed accounts can be
adjusted to correct obvious accounting errors. The decision was
prompted by the Defense Department's request that the Treasury
Department reopen some of its accounts in order to record
disbursements against those accounts for payments that, according to
Defense, had been made from those accounts before cancellation but had
not been properly charged against the accounts. The decision
emphasized that:
"Treasury's authority to correct the accounts relates only to obvious
clerical errors such as misplaced decimals, transposed digits, or
transcribing errors that result in inadvertent cancellations of budget
authority, and is not meant to serve as a palliative for deficiencies
in DOD's accounting systems."
72 Comp. Gen. at 346.
A subsequent decision again stressed that while patently erroneous
appropriation transactions can and often must be corrected, the
authority to make corrections "extends only to clerical and
administrative errors, not all misjudgments and miscalculations by
government officials." B-286661, Jan. 19, 2001, at fn. 5.
In the second situation, a private party pays money to a federal
agency, the agency deposits it as miscellaneous receipts, and it is
subsequently determined that the party is entitled to a refund. Here,
in contrast to the first situation, an appropriation is necessary to
get the money out. E.g., 3 Comp. Gen. 296 (1923).
There is a permanent indefinite appropriation for refunding
collections "erroneously received and covered" that are not properly
chargeable to any other appropriation. 31 U.S.C. § 1322(b)(2). The
availability of this appropriation depends on exactly where the
receipts were deposited. If the amount subject to refund was credited
to some specific appropriation account, the refund is chargeable to
the same account. If, however, the receipt was deposited in the
general fund as miscellaneous receipts, then the appropriation made by
31 U.S.C. § 1322(b)(2) is available for the refund, provided that the
amount in question was "erroneously received and covered." B-257131,
May 30, 1995; 71 Comp. Gen. 464 (1992); 61 Comp. Gen. 224 (1982); 55
Comp. Gen. 625 (1976); 17 Comp. Gen. 859 (1938). Also, the 31 U.S.C. §
1322(b) appropriation is not available as a source for adjusting an
erroneous intra-governmental transfer between two appropriation
accounts since such an adjustment does not involve a "refund" of funds
"erroneously received" by the government. B-286661, Jan. 19, 2001, at
fn. 6.
Examples of cases in which use of the "Moneys Erroneously Received and
Covered" appropriation was found authorized are 71 Comp. Gen. 464
(1992) (refund to investment company of late filing fee upon issuance
of order by Securities and Exchange Commission exempting company from
filing deadline for fiscal year in question); 63 Comp. Gen. 189 (1984)
(Department of Energy deposited overcharge recoveries from oil
companies into general fund instead of first attempting to use them to
make restitution refunds); B-217595, Apr. 2, 1986 (interest
collections subsequently determined to have been erroneous).
One case, 53 Comp. Gen. 580 (1974), combined elements of both
situations. The Army Corps of Engineers had been authorized to issue
discharge permits under the Refuse Act Permit Program. The program was
statutorily transferred in 1972 to the Environmental Protection
Agency. Under the user charge statute, 31 U.S.C. § 9701, both the
Corps and EPA had charged applicants a fee. In some cases, the fees
had been deposited as miscellaneous receipts before the applications
were processed. The legislation that transferred the program to EPA
also provided that EPA could authorize states to issue the permits.
However, there was no provision that authorized EPA to transfer to the
states any fees already paid. Thus, some applicants found that they
had paid a fee to the Corps or EPA, received nothing for it, and were
now being charged a second fee by the state for the same application.
EPA felt that the original fees should be refunded. So did the
applicants.
GAO noted that the user charge statute contemplates that the federal
agency will furnish something in exchange for the fee. Since this had
not been done, the fees could be viewed as having been erroneously
deposited in the general fund. However, the fees had not been
erroneously received—the Corps and EPA had been entirely correct in
charging the fees in the first place-—so the appropriation made by 31
U.S.C. § 1322(b)(2) could not be used. There was a way out, but the
refunds would require a two-step process. The Corps and EPA should
have deposited the fees in a trust account[Footnote 189] and kept them
there until the applications were processed, at which time depositing
as miscellaneous receipts would have been proper. Thus, EPA could
first transfer the funds from the general fund to its suspense account
as the correction of an error, and then make the refunds directly from
the suspense account.
In cases where the "Moneys Erroneously Received and Covered"
appropriation is otherwise available, it is available without regard
to whether the original payment was made under protest. 55 Comp. Gen.
243 (1975).
The appropriation made by 31 U.S.C. § 1322(b)(2) for Refund of Moneys
Erroneously Received and Covered is available only to refund amounts
actually received and deposited. If a given refund bears interest, for
example, a refund claim approved by a contracting officer under the
Contract Disputes Act, the interest portion must be charged to the
contracting agency's operating appropriations for the fiscal year in
which the award is made. B-217595, Apr. 2, 1986.
If an agency collects money from someone to whom it owes a refund from
a prior transaction, it should not simply deposit the net amount. The
correct procedure is to deposit the new receipt into the general fund
(assuming that is the proper receptacle), and then make the refund
using the "Moneys Erroneously Received and Covered" appropriation. B-
19882, Oct. 28, 1941; A-96279, Sept. 15, 1938. However, GAO has
approved offsetting a refund against future amounts due from the same
party in cases where there is a continuing relationship, but suggested
that the party be given the choice. B-217595, Apr. 2, 1986, at 4.
Clearly, if the receipt cannot be regarded as erroneous, 31 U.S.C.
§ 1322(b)(2) is not available. E.g., Lee v. United States, 33 Fed. CL
374 (1995); 53 Comp. Gen. 580 (1974); B-146111, July 6, 1961. Citing
several of the Comptroller General decisions discussed previously, the
court in Lee held that a filing fee appropriately paid by a litigant
and deposited into the Treasury was not subject to refund under
section 1322(b)(2). Lee, 33 Fed. Cl. at 381-84. Also, the "Moneys
Erroneously Received and Covered" appropriation is available only
where the amount to be refunded was deposited into the general fund.
E.g., 11 Comp. Dec. 300 (1904). If a refund is due of moneys deposited
somewhere other than the general fund, some other basis must be sought.
Republic National Bank of Miami v. United States, 506 U.S. 80 (1992),
and the varied opinions of the Justices it spawned, illustrate how
perplexing the issues can be when it comes to retrieving from the
Treasury funds that should not have been deposited there. Republic
National Bank was an "in rem" forfeiture action against property (a
house) that the government alleged had been purchased with income from
illegal drug trafficking. The bank intervened, claiming to be an
innocent owner of the property by virtue of its mortgage interest.
With the consent of the bank, the property was sold and the proceeds
were held by the U.S. marshal pending the outcome of the litigation.
The trial court rejected the bank's claim and ordered the sale
proceeds forfeited to the United States. The bank appealed; however,
when it did not seek to stay execution of the judgment the government
had the marshal deposit the sales proceeds into the Assets Forfeiture
Fund of the Treasury. Once this occurred, the government sought to
dismiss the appeal as moot. The government argued that since the
proceeds were now in the Treasury, they could not be withdrawn without
an appropriation and, thus, the courts could provide no remedy to the
bank.
When the case reached the Supreme Court, all of the Justices rejected
the government's argument and agreed that the bank could be paid if it
prevailed on the merits. However, they were deeply split as to the
rationale. Justice Blackmun, author of most of the Court's opinion in
Republic National Bank, characterized the government's position as
being that, by virtue of the Constitution's Appropriations Clause,
"absent an appropriation, any funds that find their way into a
Treasury account must remain there, regardless of their ownership."
506 U.S. at 89. Rejecting this position as producing "bizarre" and
"absurd" results, Justice Blackmun concluded that an appropriation was
not necessary. He reasoned that money involved in a pending in rem
forfeiture proceeding could not be regarded as "public funds" within
the scope of the Appropriations Clause where the very purpose of the
proceeding was to sort out their proper ownership. Furthermore, he
observed:
"Contrary to the Government's broad submission here, the Comptroller
General has long assumed that, in certain situations, an erroneous
deposit of funds into a Treasury account can be corrected without a
specific appropriation. See 53 Comp. Gen. 580 (1974); 45 Comp. Gen.
724 (1966); 3 Comp. Gen. 762 (1924); 12 Comp. Dec. 733, 735 (1906);
Principles of Federal Appropriations Law, at 5-79 to 5-81. Most of
these cases have arisen where money intended for one account was
accidentally deposited in another. It would be unrealistic, for
example, to require congressional authorization before a data
processor who misplaces a decimal point can 'undo' an inaccurate
transfer of Treasury funds. The Government's absolutist view of the
scope of the Appropriations Clause is inconsistent with these
commonsense understandings."
Republic National Bank, 506 U.S. at 92.
However, Chief Justice Rehnquist, joined by four other Justices, wrote
the opinion of the Court on this point. The Chief Justice expressed
"difficulty accepting the proposition that funds which have been
deposited into the Treasury are not public money, regardless of
whether the Government's ownership of those funds is disputed." Id. at
93. He added, "even if there are circumstances in which funds that
have been deposited into the Treasury may be returned absent an
appropriation, I believe it unnecessary to plow that uncharted ground
here." Id. at 95. Instead, he concluded that the judgment fund
appropriation under 31 U.S.C. § 1304 would be available to provide a
source of payment if the bank prevailed in the case.
Justice Blackmun had rejected the Chief Justice's judgment fund
rationale for two reasons. First, he viewed the judgment fund as being
limited to the payment of money judgments. Second, he pointed out that
the proceeds from the in rem action were not in the judgment fund.
Rather, they were in the Treasury Assets Forfeiture Fund. See Republic
National Bank, 506 U.S. at 91, fn. 6.[Footnote 190]
Finally, in their separate opinions, Justice White and Justice Stevens
both expressed displeasure over the need to address the Appropriations
Clause issue, indicating surprise that the Government would advance
"such a transparently fallacious position." See 506 U.S. at 97-99.
3. Gifts and Donations to the Government:
a. Donations to the Government:
It has long been recognized that the United States (as opposed to a
particular agency) may receive and accept gifts. No particular
statutory authority is necessary. As the Supreme Court has said:
"Uninterrupted usage from the foundation of the Government has
sanctioned it."
United States v. Burrtison, 339 U.S. 87, 90 (1950). The gifts may be
of real property or personal property, and they may be testamentary
(made by will) or inter vivos (made by persons who are not dead yet).
Monetary gifts to the United States go to the general fund of the
Treasury and present no augmentation problem since there is no
appropriation to augment.
However, as the Supreme Court held in the Burrtison case, a state may
prohibit testamentary gifts by its domiciliaries to the United States.
Also, a state may impose an inheritance tax on property bequeathed to
the United States. United States v. Perkins, 163 U.S. 625 (1896). The
tax is not regarded as a constitutionally impermissible tax on federal
property "since the tax is imposed upon the legacy before it reaches
the hands of the government. The legacy becomes the property of the
United States only after it has suffered a diminution to the amount of
the tax ...." Id. at 630.
While gifts to the United States do not require statutory authority,
gifts to an individual federal agency stand on a different footing.
The rule is that a government agency may not accept for its own use
(i.e., for retention by the agency or credit to its own
appropriations) gifts of money or other property in the absence of
specific statutory authority. 16 Comp. Gen. 911 (1937). As the
Comptroller General said in that decision, "[w]hen the Congress has
considered desirable the receipt of donations ... it has generally
made specific provision therefor ...." Id. at 912. See also B-286182,
Jan. 11, 2001; B-289903, Mar. 4, 2002 (nondecision letter).
Thus, acceptance of a gift of money or other property by an agency
lacking statutory authority to do so is an improper augmentation.
E.g., B-286182, Jan. 11, 2001 (District of Columbia Courts statutory
gift-acceptance authority permitted receipt of a private company's
contribution of telecommunications services and equipment). If an
agency does not have statutory authority to accept donations of money,
it must turn the money in to the Treasury as miscellaneous receipts.
E.g., B-139992, Aug. 31, 1959 (proceeds of life insurance policy
designating federal agency as beneficiary). Under the Federal Property
and Administrative Services Act of 1949, as amended, agencies without
gift retention authority must report gifts of property to the General
Services Administration (GSA) and the property is treated in
accordance with its regulations. See 40 U.S.C. § 121; 41 C.F.R. §§ 102-
36.410 and 102-36.415 (2005). Gifts from foreign governments or
entities must also be reported to GSA and treated in accordance with
41 C.F.R. § 102-36.420 and part 101-49.
For purposes of this discussion, the term "gifts" may be defined as
"gratuitous conveyances or transfers of ownership in property without
any consideration." B-286182, Jan. 11, 2001; 25 Comp. Gen. 637, 639
(1946); B-217909, Sept. 22, 1986. A receipt that does not meet this
definition does not become a gift merely because the agency
characterizes it as one. For example, a fee paid for the privilege of
filming a motion picture in a national park is not a gift and must be
deposited as miscellaneous receipts rather than in the agency's trust
fund. 25 Comp. Gen. 637. See also B-89294, Aug. 6, 1963. Similarly, a
reduction of accrued liability in fulfillment of a contractual
obligation is not a donation for purposes of a statute authorizing
appropriations to match "donations." B-183442, Oct. 21, 1975 (statute
indicated that only gifts may be matched and payment in satisfaction
of a contractual debt is not a gift). On the other hand, some payments
that are not wholly voluntary or gratuitous may occasionally qualify
for acceptance as gifts or contributions. See B-286182, Jan. 11, 2001
(District of Columbia Court System may accept and use a contribution
of telecommunication services and equipment from a telecommunication
company as part of a settlement agreement in a rate case); B-232482,
June 4, 1990 (payments of fees by nongovernment participants for
services provided as part of Department of Commerce-sponsored
international trade shows are considered "contributions" under
specific language in Commerce's appropriation act).
A number of departments and agencies have statutory authority to
accept gifts. A partial listing is contained in B-149711, Aug. 20,
1963 (although dated, B-149711 is still useful since there is no more
recent comprehensive compilation of these authorities). The statutory
authorizations contain varying degrees of specificity as to precisely
what may be accepted (money, property, services, etc.). For example,
the State Department's general gift statute, 22 U.S.C. § 2697,
authorizes the State Department to accept gifts of money or property,
real or personal, and, in the Secretary's discretion, conditional
gifts. A case discussing this statute is 67 Comp. Gen. 90 (1987)
(United States Information Agency may accept donations of radio
programs prepared by private syndicators for broadcast over Voice of
America facilities). Another is 70 Comp. Gen. 413 (1991) (United
States Information Agency may accept donations of foreign debt).
Authority to accept voluntary services does not include donations of
cash. A-86115, July 15, 1937; A-51627, Mar. 15, 1937. For a further
discussion of voluntary services, see section C.3 of this chapter.
The authority of the Defense Department to accept gifts is found in
several statutes. First, the Defense Department may accept
contributions of money or real or personal property "for use by the
Department of Defense" from any person, foreign government, or
international organization The money and proceeds from the sale of
property are credited to the Defense Cooperation Account in the
Treasury. The money is not automatically available to Defense, but is
available for obligation or expenditure only in the manner and to the
extent provided in appropriation acts. 10 U.S.C.
§ 2608. Second, the Department may accept services, supplies, real
property, or the use of real property under a mutual defense or
similar agreement or as reciprocal courtesies, from a foreign
government for the support of any element of United States armed
forces in that country. 10 U.S.C. § 2350g. These authorities formed
the basis for the United States to accept contributions from foreign
governments and others to defray the costs of the 1991 military
operations in the Persian Gulf. See GAO, Operations Desert
Shield/Storm: Foreign Government and Individual Contributions to the
Department of Defense, GAO/NSIAD-92-144 (Washington, D.C.: May 11,
1992). Other limited-purpose authorities available to the military are
found in 10 U.S.C. §§ 2601-2607.
We also should note a statute tailor-made for the philanthropist
desiring to make a donation for the express purpose of reducing the
national debt.
(Some people mistakenly think they already do this in April of each
year.) The Secretary of the Treasury may accept gifts of money,
obligations of the United States, or other intangible personal
property made for the express purpose of reducing the public debt.
Gifts of other real or personal property for the same purpose may be
made to the Administrator of the General Services Administration. 31
U.S.C. § 3113.
Assuming the existence of the requisite statutory authority, it is
quite easy to make a gift to the government. The essential elements of
a gift are donative intent, delivery, and acceptance. There are no
particular forms required. A simple letter to the appropriate agency
head transmitting the funds for the stated purpose will suffice. See B-
274855, Jan. 23, 1997; B-157469, July 24, 1974 (nondecision letter).
A 1980 GAO study found that, during fiscal year 1979, 41 government
agencies received a total of $21.6 million classified as gift revenue.
See GAO, Review of Federal Agencies' Gift Funds, FGMSD-80-77
(Washington, D.C.: Sept. 24, 1980). The report pointed out that the
use of gift funds dilutes congressional oversight because the funds do
not go through the appropriation process. The report recommended that
agencies be required to more fully disclose gift fund operations in
their budget submissions.
The issue raised in most gift cases is the purpose for which gift
funds may be used. This ultimately depends on the scope of the
agency's statutory authority and the terms of the gift. Gift funds are
accounted for as trust funds. They generally must be deposited in the
Treasury as trust funds under 31 U.S.C. § 1321(b), to be disbursed in
accordance with the terms of the trust. In 16 Comp. Gen. 650, 655
(1937), the Comptroller General stated:
"Where the Congress authorizes Federal officers to accept private
gifts or bequests for a specific purpose, often subject to certain
prescribed conditions as to administration, authority must of
necessity be reposed in the custodians of the trust fund to make
expenditures for administration in such a manner as to carry out the
purposes of the trust and to comply with the prescribed conditions
thereof without reference to general regulatory and prohibitory
statutes applicable to public funds."
While this passage correctly states the trust fund concept, agencies
have sometimes misconstrued it to mean that they have free and
unrestricted use of donated funds. This is not the case. On the one
hand, donated funds may not be subject to all of the restrictions
applicable to direct appropriations. Yet on the other hand, gift funds
constitute appropriated funds unless Congress provides otherwise
[Footnote 191] and they are still "public funds" in a very real sense.
As GAO stated in B-274855, Jan. 23, 1997:
"Funds available to agencies are considered appropriated, regardless
of their source, if they are made available for collection and
expenditure pursuant to specific statutory authority. See B-215042,
April 12, 1985. This means that although donated funds may not be
subject to all the restrictions applicable to direct appropriations,
they are still public funds. See B-197565, May 13, 1980."
Id. at 3. See also B-275669.2, July 30, 1997. Consequently, gift funds
can be used only in furtherance of authorized agency purposes and
incident to the terms of the trust. See B-300218, Mar. 17, 2003; B-
195492, Mar. 18, 1980.
An interesting illustration of this point occurred in B-16406, May 17,
1941. A citizen had bequeathed money in her will to a hospital. When
the will was made, the hospital belonged to the state of Louisiana. By
the time the will was probated, however, it had been acquired by the
United States. Louisiana was concerned that the bequest might, if
deposited in the United States Treasury, be diverted from the
decedent's intent. There was no need for concern, the Comptroller
General advised. The money would have to be deposited as trust funds
and would be available for expenditure only for the purposes specified
in the trust, that is, for the hospital.
In evaluating the propriety of a proposed use of gift funds, it is
first necessary to examine the precise terms of the statute
authorizing the agency to accept the gift. Limitations imposed by that
statute must be followed. Thus, under a statute which authorized the
Forest Service to accept donations "for the purpose of establishing or
operating any forest research facility," the Forest Service could not
turn over unconditional gift funds to a private foundation under a
cooperative agreement, with the foundation to invest the funds and use
the proceeds for purposes other than establishing or operating forest
research facilities. 55 Comp. Gen. 1059 (1976). See also B-198730,
Dec. 10, 1986 (funds donated to Library of Congress to further
purposes of Library's Center for the Book could not be used for
unrelated Library programs); 40 Op. Att'y Gen. 66 (1941) (Library of
Congress could not, without statutory authority, share income from
donated property with Smithsonian Institution).
Under a statute authorizing the Federal Board for Vocational Education
to accept donations to be used "in connection with the appropriations
hereby made or hereafter to be made, to defray the expenses of
providing and maintaining courses of vocational rehabilitation," the
funds could be used only to supplement the Board's regular
appropriations and could not be used for any expense not legally
payable from the regular appropriation. The statute here conferred no
discretion. 27 Comp. Dec. 1068 (1921).
If an agency is authorized to accept gifts, the funds may be used to
augment a "not to exceed" earmark applicable to that purpose. B-52501,
Nov. 9, 1945. (Although the statute involved in B-52501, the
predecessor of 10 U.S.C. § 2608 noted above, no longer exists, the
point of the decision is still valid.)
Once it is determined that the proposed use will not contravene the
terms of the agency's authorizing statute, the agency will have some
discretion under the trust fund concept. For example, donated funds
may be used for entertainment only if the entertainment will further a
valid function of the agency for which the donated funds were
provided, if the government could not accomplish the function as
effectively without the expenditure, and if the expenditure does not
violate any restrictions imposed by the donor on the use of the funds.
46 Comp. Gen. 379 (1966); B-195492, Mar. 18, 1980; B-170938, Oct. 30,
1972; B-142538, Feb. 8, 1961. See also B-152331, Nov. 19, 1975
(involving a trust fund which included both gift and non-gift funds).
It follows that donated funds may not be used for entertainment which
does not bear a legitimate relationship to official agency purposes.
61 Comp. Gen. 260 (1982), aff'd upon reconsideration, B-206173, Aug.
3, 1982 (donated funds improperly used for breakfast for Cabinet wives
and Secretary's holiday party).
The trust fund concept was also applied in 36 Comp. Gen. 771 (1957).
The Alexander Hamilton Bicentennial Commission had been given
statutory authority to accept gifts and wanted to use the donations to
award Alexander Hamilton Commemorative Scholarships. The Commission
was to have a brief existence and would not have sufficient time to
administer the scholarship awards. The Comptroller General held that
the Commission could, prior to the date of its expiration, transfer
the funds to a responsible private organization for the purpose of
enabling proper administration of the scholarship awards. The
distinction between this case and 55 Comp. Gen. 1059, mentioned above,
is that in 36 Comp. Gen. 771, the objective of transferring the funds
to a private organization was to better carry out an authorized
purpose. In 55 Comp. Gen. 1059, the objective was to enable the funds
to be used for unauthorized purposes.
Another case illustrating permissible administrative discretion under
the trust fund concept is B-131278, Sept. 9, 1957. A number of persons
had made donations to St. Elizabeth's Hospital to enable it to buy an
organ for its chapel. The donors (organ donors?) had made the gifts on
the condition that the Hospital purchase a high-quality (expensive)
organ. When the Hospital issued its invitation for bids on the organ,
the specifications were sufficiently restrictive so as to preclude
offers on lower quality organs. The decision found this to be entirely
within the Hospital's discretion in using the gift funds in accordance
with their terms.
As noted above, however, the agency's discretion in administering its
gift funds is not unlimited. Thus, for example, an agency may not use
gift funds for purely personal items such as greeting cards that do
not further agency purposes for which the gift funds were donated. 47
Comp. Gen. 314 (1967). See also B-195492, Mar. 18, 1980 (when an
agency uses trust funds for what appear to be personal purposes, it
has the burden of showing that this use furthers the trust purposes).
The particular statutory scheme will determine the extent to which
donated funds are subject to other laws governing the expenditure of
public funds. In two cases, for example, where a designated activity
was to be carried out solely or primarily with donated funds, GAO
found that the recipient agency could invest the gift funds in non-
Treasury interest-bearing accounts and was not required to comply with
the Federal Property and Administrative Services Act of 1949 (FPASA),
41 U.S.C. § 251-266, or the Federal Acquisition Regulation (FAR), 48
C.F.R. §§ 1.104 and 12.101. 68 Comp. Gen. 237 (1989) (Christopher
Columbus Quincentenary Jubilee Commission); B-211149, Dec. 12, 1985
(Holocaust Memorial Council). However, these cases were distinguished
in B-275669.2, July 30, 1997, in which GAO determined that the
American Battle Monuments Commission charged with establishing the
World War II memorial must use donated funds for contracts in
accordance with the FPASA and FAR since neither the authorizing
legislation nor the legislative history indicated an intention to
exempt the Commission from such requirements.
Gifts that would require the government to incur significant expenses
in future years present special issues. Although there are no recent
cases, indications are that the agency needs specific statutory
authority—not merely general authority to accept gifts—since the
agency's appropriations would not otherwise be available to make the
future expenditures. For example, an individual made a testamentary
gift to a United States naval hospital. The will provided that the
money was to be invested in the form of a memorial fund, with the
income to be used for specified purposes. The Comptroller General
objected to this, finding that the gift appeared to be conditional and
that "the United States would become, in effect, a trustee for
charitable uses, would never gain a legal title to the money, but
would have the burden and obligation of administering in perpetuity a
trust fund ...." 11 Comp. Gen. 355, 366 (1932). Also, absent specific
authorization by Congress, appropriations would not be available for
the expenses of administering the trust. Therefore, absent
congressional authorization to accept the donation "as made," it could
not be accepted either by the naval hospital, id., or by the Treasury
Department, A-40707, Dec. 15, 1936. See Story v. Snyder, 184 F.2d 454,
456 (D.C. Cir.), cert. denied, 340 U.S. 866 ((1950) ("gifts to the
United States which involve any duty, burden, or condition, or are
made dependent upon some future performance by the United States, are
not accepted by the Government unless by the express authority of
Congress"). See also 10 Comp. Gen. 395 (1931); 22 Comp. Dec. 465
(1916);[Footnote 192] 30 Op. Att'y Gen. 527 (1916). A few of the cases
(e.g., 10 Comp. Gen. 395 and 30 Op. Att'y Gen. 527) have tied the
result to the Antideficiency Act prohibition against incurring
obligations in advance of appropriations, reasoning that acceptance
would, in effect, create an unauthorized and unfunded contractual
commitment to incur future expenses. See 10 Comp. Gen. at 398.
A question that received little attention in the past is whether an
agency with statutory authority to accept gifts may use either
appropriated funds or donated funds to solicit the gifts. GAO found
that the Holocaust Memorial Council may use either appropriated or
donated funds to hire a fund-raiser, but the cases have little
precedential value since the legislation involved included specific
authority to solicit as well as accept donations. See B-211149, Dec.
12, 1985; B-211149, June 22, 1983.
An interesting, and hopefully unique, situation presented itself in B-
230727, Aug. 1, 1988. Congress had enacted legislation to establish a
Commission on Improving the Effectiveness of the United Nations, to be
funded solely from private contributions. Pub. L. No. 100-204, title
VII, pt. B, § 727, 101 Stat. 1331, 1394 (Dec. 22, 1987). The effective
date of the legislation was March 1, 1989. Unfortunately, the
legislation failed to provide a mechanism for anyone (Treasury
Department or General Services Administration, for example) to accept
and account for donations prior to the effective date, and the
Commission itself could not do so since it had no legal existence.
Thus, unless the statute were amended to authorize some other agency
to act on the Commission's behalf, potential donors could not make
contributions prior to the effective date since there was no one
authorized to accept them.
In 1995, GAO was asked whether, under the Public Health Service's gift
acceptance statute, 42 U.S.C. § 238(a), the National Institutes of
Health (NIH), a component of the Public Health Service, may use its
appropriated funds to apply for grants from nongovernmental sources, a
kind of solicitation of funds. GAO determined that, since NIH had the
authority to accept grants as conditional gifts under the statute, it
could use its appropriated funds to cover the costs incurred in
applying for such grants. B-255474, Apr. 3, 1995.
Finally, if an agency is authorized to accept gifts, it may also
accept a loan of equipment by a private party without charge to be
used in connection with particular government work. The agency's
appropriations for the work will be available for repairs to the
equipment, but only to the extent necessary for the continued use of
the equipment on the government work, and not after the government's
use has terminated. 20 Comp. Gen. 617 (1941). In one case, GAO
approved the loan of private property to a federal agency by one of
its employees, without charge and apparently without statutory
authority, where the agency administratively determined that the
equipment was necessary to the discharge of agency functions and the
loan was in the interest of the United States. 22 Comp. Gen. 153
(1942). The decision stressed, however, that the practice of borrowing
property should not be encouraged since it might give rise to claims
against the government or questions about favors received or expected
by the persons loaning the property. The decision seems to have been
based in part on wartime needs and its precedent value would therefore
seem minimal. See, e.g., B-168717, Feb. 18, 1970.
b. Donations to Individual Employees:
(1) Contributions to salary or expenses:
As a general proposition, unless authorized by statute, private
contributions to the salary or expenses of a federal employee are
improper. First, they may in some circumstances violate 18 U.S.C. §
209, which prohibits the supplementation of a government employee's
salary from private sources. "The evils of such, were it permitted,
are obvious." Exchange National Bank v. Abramson, 295 E Supp. 87, 90
(D. Minn. 1969). For purposes of 18 U.S.C. § 209, the proverb that it
is better to give than to receive does not work. Both the giving and
the receiving are criminal offenses under the statute. The employee
would presumably violate the law by receiving more than he or she is
entitled to receive under applicable statutes and regulations. 33 Op.
Att'y Gen. 273, 275 (1922) (object of the predecessor to 18 U.S.C. §
209 was that "no Government official or employee should serve two
masters to the prejudice of his unbiased devotion to the interests of
the United States"). For further discussion of section 209, see the
Memorandum Opinion for the General Counsel, Federal Bureau of
Investigation, Applicability of 18 U.S.C. § 209 to Acceptance by FBI
Employees of Benefits under the 'Make a Dream Come True" Program, OLC
Opinion, Oct. 28, 1997. See also the Office of Government Ethics,
Standards of Ethical Conduct for Employees of the Executive Branch,, 5
C.F.R. part 2635 (2005) (implementing 18 U.S.C. § 201), which prohibit
an employee from accepting gifts from persons whose interests may be
substantially affected by the employee.
Second, they are improper as unauthorized augmentations. To the extent
the private contribution replaces the employee's government salary, it
is a direct augmentation of the employing agency's appropriations. To
the extent the contribution supplements the government salary, it is
an augmentation in an indirect sense, the theory being that when
Congress appropriates money for an activity, all expenses of that
activity must be borne by that appropriation unless Congress
specifically provides otherwise.
An early case in point is 2 Comp. Gen. 775 (1923). The American
Jewelers' Protective Association offered to pay the salary and
expenses of a customs agent for one year on the condition that the
agent be assigned exclusively for that year to investigate jewelry
smuggling. The Comptroller General found the arrangement improper, for
the two reasons noted above. Whether the payments were to be made
directly to the employee or to the agency by way of reimbursement was
immaterial.
Most questions in this area involve schemes for private entities to
pay official travel expenses. From the sheer number of cases GAO has
considered, one cannot help feeling that the bureaucrat must indeed be
a beloved creature. A long series of decisions established the
proposition that donations from private sources for official travel to
conduct government business constituted an unlawful augmentation
unless the employing agency had statutory authority to accept gifts.
If the agency had such authority, the donation could be made to the
agency, not the individual employee, and the agency would then
reimburse the employee in accordance with applicable travel laws and
regulations, with the allowances reduced as appropriate in the case of
contributions in kind.[Footnote 193]
One problem with this system was the lack of uniformity in treatment,
varying with the agency's statutory authority. Congress addressed the
situation in the Ethics Reform Act of 1989, Pub. L. No. 101-194, §
302, 103 Stat. 1716, 1745 (Nov. 30, 1989), codified at 31 U.S.C. §
1353. Subsection (a) provides as follows:
"Notwithstanding any other provision of law, the Administrator of
General Services, in consultation with the Director of the Office of
Government Ethics, shall prescribe by regulation the conditions under
which an agency in the executive branch (including an independent
agency) may accept payment, or authorize an employee of such agency to
accept payment on the agency's behalf, from non-Federal sources for
travel, subsistence, and related expenses with respect to attendance
of the employee (or the spouse of such employee) at any meeting or
similar function relating to the official duties of the employee. Any
cash payment so accepted shall be credited to the appropriation
applicable to such expenses. In the case of a payment in kind so
accepted, a pro rata reduction shall be made in any entitlement of the
employee to payment from the Government for such expenses."
GSA's implementing regulations are found at 41 C.F.R. chapter 304
(2005). Thus, as long as acceptance complies with the statute and
regulations, there is no longer an augmentation problem. The existence
or lack of separate statutory authority to accept gifts is immaterial.
Another relevant statute, which seemingly overlaps 31 U.S.C. § 1353 to
some extent but was left untouched by it, is 5 U.S.C. § 4111, enacted
as part of the Government Employees Training Act, Pub. L. No. 85-507,
72 Stat. 327 (July 7, 1958). Under this provision, an employee may
accept (1) contributions and awards incident to training in
nongovernment facilities, and (2) payment of travel, subsistence, and
other expenses incident to attendance at meetings, but only if the
donor is a tax-exempt nonprofit organization. If an employee receives
a contribution in cash or in kind under this section, travel and
subsistence allowances are subject to an "appropriate reduction."
Section 4111 authorizes the employee to accept the donation. It does
not authorize the agency to accept the donation, credit it to its
appropriations, and then reimburse the employee. 55 Comp. Gen. 1293
(1976). An employee who receives an authorized donation after the
government has already paid the travel expenses cannot keep
everything. The employee must refund to the government the amount by
which his or her allowances would have been reduced had the donation
been received before the allowances were paid. The agency may then
credit this refund to its travel appropriation as an authorized
repayment. Id. at 1294-95. See also 41 C.F.R. § 304-9.5.
The statute requires an "appropriate reduction" in travel payments in
order to preclude the agency from paying for something that has
already been reimbursed by an authorized private organization. An
employee being reimbursed on an "actual expense" basis should not be
claiming items which would duplicate private reimbursements. Thus, the
agency is not required to reduce the actual expense entitlement by the
value of provided meals. 64 Comp. Gen. 185 (1985). However, the value
of subsistence items furnished in kind must be deducted where the
employee is being reimbursed on a per diem basis. Id. at 188; 49 Comp.
Gen. 572, 576 (1970).
The authority conferred by 5 U.S.C. § 4111 is expressly limited to
organizations exempt from taxation under section 501(c)(3) of the
Internal Revenue Code, 26 U.S.C. § 501(c)(3) (religious, charitable,
scientific, educational, etc.). It does not extend to organizations
which may be tax-exempt under other portions of section 501. B-225986,
Mar. 2, 1987. Also, it does not apply to an organization whose
application for exemption under section 501(c)(3) has not yet been
approved; subsequent approval is not retroactive for purposes of 5
U.S.C. § 4111. B-225264, Nov. 24, 1987 (nondecision letter).
Donations made under the express condition that they be used for some
unauthorized purpose should be returned to the donor. 47 Comp. Gen.
319 (1967).
(2) Travel-related promotional items:
Over the years, commercial airlines and others have devised a variety
of programs to reward frequent customers. Promotional materials
awarded to customers may take various forms—bonus trips, reduced-fare
coupons, cash, merchandise, credits toward future goods or services,
etc. Government employees traveling on government business are
eligible for these promotional items the same as anyone else.
Historically, statutes, regulations, and case law had maintained that
the government employee, with certain exceptions, could not keep such
promotional items. The fundamental principle underlying the prior
decisions and regulations in this area was that any benefit, cash
payment or otherwise, received by a government employee from private
sources incident to or resulting from the performance of official duty
was regarded as having been received on behalf of the government and
was the property of the government.[Footnote 194]
On December 28, 2001, the President signed into law a provision that
federal employees may retain travel-related promotional items for
personal use. Pub. L. No. 107-107, div. A, title XI, subtitle B, §
1116, 115 Stat. 1012, 1241 (Dec. 28, 2001), 5 U.S.C. § 5702 note. The
law specifically provides that a federal traveler who receives a
promotional item (such as frequent flyer miles, upgrades, or access to
carrier clubs or facilities) as a result of using travel or
transportation services obtained at federal government expense may
retain those items for personal use if the item is obtained under the
same terms as those offered to the general public and at no additional
cost to the government. The Federal Travel Regulation addresses
promotional items in 41 C.F.R. part 301-53 (2005).
4. Other Augmentation Principles and Cases:
As pointed out earlier in our introductory comments, the augmentation
theory is relevant in a wide variety of contexts. The most common
applications are the areas previously discussed—the spectrum of
situations involving the miscellaneous receipts statute and the
acceptance of gifts. This portion of the discussion will present a
sampling of cases to illustrate other applications of the theory.
Another way of stating the augmentation rule is that when Congress
appropriates funds for an activity, the appropriation represents a
limitation Congress has fixed for that activity, and all expenditures
for that activity must come from that appropriation absent express
authority to the contrary. Thus, a federal institution is normally not
eligible to receive grant funds from another federal institution. It
is not necessary for the grant statute to expressly exclude federal
institutions as eligible grantees; the rule will apply based on the
augmentation theory unless the grant statute expressly includes
federal institutions. 57 Comp. Gen. 662, 664 (1978); 23 Comp. Gen. 694
(1944); B-114868, Apr. 11, 1975.[Footnote 195]
The improper treatment of reimbursable transactions may result in an
augmentation. An example of this type of transaction is an order under
the Economy Act, 31 U.S.C. § 1535.[Footnote 196] Thus, if a given
reimbursement must be credited to the appropriation that "earned" it
(i.e., that financed the transaction), and that appropriation has
expired, crediting the reimbursement to current funds is an improper
augmentation. E.g., 72 Comp. Gen. 109, 110 (1993); B-242274, Aug. 27,
1991. However, a de minimis exception to this rule was recognized in
72 Comp. Gen. 63 (1992). This decision held that a refund of $100 or
less that related to an expired account could be treated as a credit
against a future invoice to the party owing the refund, and thus
applied to a current account since the cost of processing a separate
refund check would exceed the amount of the refund. The decision
reasoned that this approach would save the government money and have
an insignificant impact on the agency's account integrity. Id. at 64.
The decision in 72 Comp. Gen. 109 (1993), which was issued shortly
thereafter, underscored that this exception applied to de minimis
amounts of $100 or less and did not apply to refunds that regularly
exceeded $1,000. 72 Comp. Gen. at 110.
Some statutes give an agency the option of crediting reimbursements
either to current funds or to the appropriation that financed the
transaction. E.g., 10 U.S.C. §§ 2205 and 2210; 22 U.S.C. § 2392(c) and
(d).[Footnote 197] Even here, however, crediting a reimbursement to an
appropriation that bears no relationship to the transaction would be
an unauthorized augmentation. B-132900-0.M., Nov. 1, 1977.
Likewise, treating a transaction which should be reimbursed as
nonreimbursable may result in an improper augmentation. For example,
an agency receives appropriations to do its own work, not that of
another agency. Accordingly, as a general proposition,
interdepartmental loans of personnel on a nonreimbursable basis
improperly augment the appropriations of the receiving agency. 65
Comp. Gen. 635 (1986); 64 Comp. Gen. 370 (1985). Such nonreimbursable
loans also constitute a misuse of the detailing agency's appropriation
under 31 U.S.C. § 1301. B-247348, June 22, 1992.
Reimbursement by one agency to another in situations which are not the
proper subject of an Economy Act agreement or where reimbursement is
not otherwise statutorily authorized is improper for several reasons:
It is an unauthorized transfer of appropriations; it violates 31
U.S.C. § 1301(a) by using the reimbursing agency's appropriations for
other than their intended purpose; and it is an improper augmentation
of the appropriations of the agency receiving the reimbursement. (The
cases do not always cite all of these theories; they again illustrate
the close interrelationship of the various concepts discussed
throughout this publication.) The situation arises, for example, when
agencies attempt to use the Economy Act for a "service" that is a
normal part of the providing agency's mission and for which it
receives appropriations.
To illustrate, an agency acquiring land cannot reimburse the Justice
Department for the legal expenses incurred incident to the acquisition
because these are regular administrative expenses of the Justice
Department for which it receives appropriations. 16 Comp. Gen. 333
(1936). Similarly, an agency cannot reimburse the Treasury Department
for the administrative expenses incurred in making disbursements on
its account. 17 Comp. Gen. 728 (1938).
Federal agencies may not reimburse the Patent Office for services
performed in administering the patent and trademark laws since the
Patent Office is required by law to furnish these services and
receives appropriations for them. 33 Comp. Gen. 27 (1953). Nor may
they reimburse the Library of Congress for recording assignments of
copyrights to the United States. 31 Comp. Gen. 14 (1951). See also 40
Comp. Gen. 369 (1960) (Interior Department may not charge other
agencies for the cost of conducting hearings incident to the
validation of unpatented mining claims, although it may charge for
other services in connection with the validation which it is not
required to furnish); B-211953, Dec. 7, 1984 (General Services
Administration may not seek reimbursement for costs of storing records
which it is required by law to store and for which it receives
appropriations).
The Merit Systems Protection Board may not accept reimbursement from
other federal agencies for travel expenses of hearing officers to
hearing sites away from the Board's regular field offices. Holding the
hearings is not a service to the other agency, but is a Board function
for which it receives appropriations. The inadequacy of the Board's
appropriations to permit sufficient travel is legally irrelevant. 59
Comp. Gen. 415 (1980), affd upon reconsideration, 61 Comp. Gen. 419
(1982). Where an agency provides personnel to act as hearing officers
for another agency, it may be reimbursed if it is not required to
provide the officers (B-192875, Jan. 15, 1980) but may not be
reimbursed if it is required to provide them (32 Comp. Gen. 534
(1953)). Likewise, the Export-Import Bank cannot charge its customers
for travel expenses incurred by Bank employees in transacting their
business. B-277254, Mar. 5, 1997.
A client agency must bear from its own appropriations costs it incurs
in assisting the Justice Department to defend it in litigation. Such
support costs, which may include substantial temporary services
provided by the agency's staff lawyers and paralegals, cannot be
billed to Justice. 73 Comp. Gen. 90 (1994), citing 39 Comp. Gen. 643
(1960).
The decision in 70 Comp. Gen. 601 (1991) provides a variant on this
principle. That decision approved the Army Civilian Appellate Review
Agency's practice of obtaining reimbursement from other Army
components for costs it incurred in investigating grievances filed by
employees of the other components. For one thing, both the Review
Agency and the other components were funded from the same
appropriation in most instances; thus, there could be no augmentation.
However, even when different appropriations were involved, the other
component's appropriation could be charged pursuant to 31 U.S.C. §
1534. Indeed, the decision pointed out that such charges were
"precisely the kind of situation contemplated by section 1534" since
the Review Agency assisted the other components in satisfying their
obligation to provide a grievance resolution process for their
employees. 70 Comp. Gen. at 604.
Augmentation issues also can arise when an agency is trying to decide
which of its appropriations to use for a given object. In 68 Comp.
Gen. 337 (1989), for example, the Railroad Retirement Board wanted to
make performance awards to personnel in its Office of Inspector
General (IG), and was unsure whether to charge its appropriation for
the IG's office or its general appropriation. A reasonable argument
could be made to support either choice. Thus, the Board could make an
election as long as it remained consistent thereafter. Since there was
no indication that the IG appropriation was intended to be the
exclusive funding source for the performance awards, using the general
appropriation would not result in an improper augmentation of the IG
appropriation.[Footnote 198]
A somewhat analogous situation could arise if an agency agrees to
reduce or forgo receipts to which it is entitled, and the party owing
those receipts agrees in return to make some expenditure which would
otherwise have to be borne by a separate appropriation of the same
agency. GAO examined such a situation in B-77467, Nov. 8, 1950,
involving the leasing of lands under the Bankhead-Jones Farm Tenant
Act at reduced rentals on condition that the lessees in return perform
certain improvements to the land. There was no augmentation in that
case, however, since the statute expressly authorized the leasing with
or without consideration and on such terms as the Secretary of
Agriculture determined would best accomplish the purposes of the act.
The following cases illustrate other situations which GAO found would
result in unauthorized augmentations:
* The Customs Service may not charge the party-in-interest for travel
expenses of customs employees incurred incident to official duties
performed at night or on a Sunday or holiday. 43 Comp. Gen. 101
(1963); 3 Comp. Gen. 960 (1924). See also 22 Comp. Dec. 253
(1915).Department of Energy may not use overcharge refunds collected
from oil companies to pay the administrative expenses of its Office of
Hearings and Appeals. B-200170, Apr. 1, 1981.
* Proposal for airlines to reimburse Treasury to permit Customs
Service to hire additional staff to reduce clearance delays at Miami
airport was unauthorized in that it would augment appropriations made
by Congress for that service. 59 Comp. Gen. 294 (1980).
Chapter 6 Footnotes:
[1] Tyson & Brother United Theater Ticket Offices v. Banton, 273 U.S.
418 (1927) (Holmes, J., dissenting).
[2] For fiscal year 1905, for example, Congress appropriated to the
Department of Justice a specific line item of $3,000 for stationery.
Legislative, Executive and Judicial Appropriations Act, 1905, ch. 716,
33 Stat. 85, 134 (Mar. 18, 1904). For fiscal year 2005, Congress
appropriated to the Department of Justice a lump-sum appropriation of
$124,100,000 for administrative expenses. Departments of Commerce,
Justice, and State, the Judiciary, and Related Agencies Appropriations
Act, 2005, Pub. L. No. 108-447, div. B, title I, 118 Stat. 2809, 2853
(Dec. 8, 2004).
[3] As a result of appropriation account consolidation over the years,
200 accounts now cover 90 percent of all federal expenditures. Allen
Schick, The Federal Budget: Politics, Policy, and Process, 229 (2000).
[4] See Chapter 1, section D. See also GAO, A Glossary of Terms Used
in the Federal Budget Process, GAO-05-734SP (Washington, D.C.:
September 2005), Appendixes I and II, for an overview of the budget
and appropriations process.
[5] See Chapter 2, section D.6 for a general discussion of the uses
and limits of legislative history.
[6] For example, agencies and their employees are, of course, legally
bound by apportionments and subdivisions of lump-sum appropriations.
See 31 U.S.C. §§ 1517-1519. See also sections C.4 and C.5 of this
chapter for a discussion of these requirements.
[7] Allen Schick, The Federal Budget: Politics, Policy, and Process,
238 (2000). See also John C. Roberts, Are Congressional Committees
Constitutional?: Radical Textualism, Separation of Powers, and the
Enactment Process, 52 Case Western Reserve L. Rev. 489, 563-64 (2001).
[8] Report of the House Committee on Appropriations on the 1974
Defense Department appropriation bill, H.R. Rep. No. 93-662, at 16
(1973).
[9] Louis Fisher, Presidential Spending Power, 72 (1975).
[10] See Chapter 2, section B.3.b for an overview of reprogramming
concepts and practices, and Schick, supra, at 247-250.
[11] This assumes, of course, that Congress is acting within its
constitutional authority. See Chapter 1, section B for a general
discussion of Congress's constitutional authority to appropriate and
the limits on that authority. Legal Services Corp. v. Velasquez, 531
U.S. 533 (2001), provides an example of restrictive appropriation
language that was declared unconstitutional.
[12] The effort has not always been free from controversy. One
senator, concerned with what he felt was excessive flexibility in a
1935 appropriation, tried to make his point by suggesting the
following:
"Section 1. Congress hereby appropriates $4,880,000,000 to the
President of the United States to use as he pleases.
"Section 2. Anybody who does not like it is fined $1,000."
79 Cong. Rec. 2014 (1935) (remarks of Sen. Arthur Vandenberg), quoted
in Fisher, supra, at 62-63.
[13] Pub. L. No. 97-272, § 401, 96 Stat. 1160, 1178 (Sept. 30, 1982).
[14] A recent example is section 1004(d) of the Bob Stump National
Defense Authorization Act for Fiscal Year 2003, Pub. L. No. 107-314,
116 Stat. 2458, 2629-30 (Dec. 2, 2002), which imposes conditions on
the Department's spending for financial system improvements.
[15] On the other hand, inclusion of a budget estimate for a
particular purpose can strengthen the case that the appropriation is
available for that purpose. See B-285066.2, Aug. 9, 2000.
[16] Of course, all this meant was that there would be no
Antideficiency Act violation at the time the option was exercised. The
decision recognized that subsequent actions could still produce a
violation. 55 Comp. Gen. at 826.
[17] See B-285725, Sept. 29, 2000; B-278968, May 28, 1998; B-278121,
Nov. 7, 1997; B-277241, Oct. 21, 1997; B-271845, Aug. 23, 1996; 71
Comp. Gen. 411, 413 (1992); 64 Comp. Gen. 359 (1985); 59 Comp. Gen.
228 (1980);B-258000, Aug. 31, 1994; B-248284, Sept. 1, 1992; B-
247853.2, July 20, 1992; B-231711, Mar. 28, 1989; B-222853, Sept. 29,
1987; B-204449, Nov. 18, 1981; B-204270, Oct. 13, 1981; B-202992, May
15, 1981; B-157356, Aug. 17, 1978; B-159993, Sept. 1, 1977; B-163922,
Oct. 3, 1975; GAO, Internal Controls: Funding of International Defense
Research and Development Projects, GAO/NSIAD-91-27 (Washington, D.C.:
Oct. 30, 1990).
[18] The Justice Department's Office of Legal Counsel also reached the
same conclusion. See, e.g., Memorandum for the General Counsel, United
States Marshals Service, USMS Obligation to Take Steps To Avoid
Anticipated Appropriations Deficiency, OLC Opinion, May 11, 1999; 16
Op. Off. Legal Counsel 77 (1992); 4B Op. Off. Legal Counsel 702 (1980);
4B Op. Off. Legal Counsel 674 (1980).
[19] In Ramah, Congress had capped the amount appropriated for
contract support cost payments under the Indian Self-Determination and
Education Assistance Act, as amended, 25 U.S.C. §§ 450-450n, at less
than the total amount all recipients would have received if paid their
full allocations under the Act. The court rejected the government's
argument (and the lower court's conclusion) that Lincoln precluded
judicial review of the method the agency devised to distribute the
reduced allocations. Distinguishing Lincoln, the court held that the
Act provided sufficient law to apply in order to determine the
legality of the agency's distribution method. Indeed, the court
further held that the agency's distribution method violated the Act.
The Ramah decision is discussed further in Chapter 2, section C.2, and
Chapter 3, section C.5.
[20] In Cherokee Nation of Oklahoma v. Leavitt, the Court disposed of
three decisions from different appellate courts: Thompson v. Cherokee
Nation of Oklahoma, 334 F.3d 1075 (Fed. Cir. 2003), which the Court
affirmed, as well as Cherokee Nation of Oklahoma v. Thompson, 311 E3d
1054 (10th Cir. 2002), and Shoshone-Bannock Tribes of the Fort Hall
Reservation v. Thompson, 279 E3d 660 (9th Cir. 2002), both of which
the Court reversed. Ramah Navajo School Board, Inc. v. Babbitt, 87
F.3d 1338 (D.C. Cir. 1996), discussed previously, is another decision
on this subject.
[21] The Act also applies to the Secretary of the Interior and
programs administered by that department. However, the Cherokee Nation
of Oklahoma v. Leavitt case concerned self-determination contracts for
the provision of services by the Department of Health and Human
Services' Indian Health Service.
[22 The logical conclusion from the Court's finding that the Indian
Self-Determination Act contracts are no different from ordinary
procurement contracts is that the Indian Health Service, at the time
it entered into the contracts, should have recorded an obligation
against its appropriations for the full amount of the support costs to
which the Tribes were entitled.
[23] Section 314 of the Omnibus Consolidated and Emergency
Supplemental Appropriations Act, 1999, Pub. L. No. 105-277, 112 Stat.
2681, 2681-288 (Oct. 21, 1998).
[24] See GAO, A Glossary of Terms Used in the Federal Budget Process,
GAO-05-734SP (Washington, D.C.: September 2005), at 46-47.
[25] See Glossary, at 64.
[26] Pub. L. No. 108-199, div. A, title IV, 118 Stat. 3, 27 (Jan. 23,
2004).
[27] A "not to exceed" earmark was held not to constitute a maximum in
19 Comp. Gen. 61 (1939), where the earmarking language was
inconsistent with other language in the general appropriation. This
holding was based on an interpretation of the statute as a whole. See
section D of Chapter 2 for additional information on statutory
interpretation.
[28] While the Comptroller General concluded that the Department did
not have to use funds for UNFPA, he cautioned that whenever an agency
withholds fiscal year funds from obligation, it must release the funds
with sufficient time remaining in the fiscal year to obligate them
before the end of the fiscal year. B-290659, July 24, 2002.
[29] District of Columbia Appropriations Act, 2005, Pub. L. No. 108-
335, § 301, 118 Stat. 1322, 1399 (Oct. 18, 2004).
[30] Pub. L. No. 107-66, § 305, 115 Stat. 486, 509 (Nov. 12, 2001).
[31] Pub. L. No. 108-83, 117 Stat. 1007, 1015 (Sept. 30, 2003).
[32] Pub. L. No. 105-55, 111 Stat. 1177, 1191-92 (Oct. 7, 1997).
[33] But see B-231711, Mar. 28, 1989 (appropriation provision
earmarked portion of lump sum to remain available for an additional
fiscal year for a specific purpose, but was neither maximum nor
minimum limitation on amount available for particular object). While B-
231711 was not explicitly overruled by B-278121, Nov. 7, 1997, it has
little precedential value.
[34] Hopkins & Nutt, The Anti-Deficiency Act (Revised Statutes 3679)
and Funding Federal Contracts: An Analysis, 80 Mil. L. Rev. 51,56
(1978).
[35] Hopkins & Nutt, at 57-58; Louis Fisher, Presidential Spending
Power, 232 (1975).
[36] Senate Committee on Government Operations, Financial Management
in the Federal Government, S. Doc. No. 87-11, at 45-46 (1961). In the
Senate document, the Antideficiency Act is cited as "section 3679 of
the Revised Statutes," a designation that is now obsolete.
[37] See S. Doc. No. 87-11, at 48; B-131361, Apr. 12, 1957. Further
discussion of the Antideficiency Act from varying perspectives will be
found in the following sources: James A. Harley, Multiyear Contracts:
Pitfalls and Quandaries, 27 Public Contract L.J. 555 (1998); Col.
James W. McBride, Avoiding Antideficiency Act Violations on Fixed
Price Incentive Contracts (The Hunt for Red Ink), June Army Lawyer
(1994); Fenster & Volz, The Antideficiency Act: Constitutional Control
Gone Astray, 11 Public Contract L.J. 155 (1979); Rollee H. Efros,
Statutory Restrictions on Funding of Government Contracts, 10 Public
Contract L.J. 254 (1978); Hopkins & Nutt, The Anti-Deficiency Act
(Revised Statutes 3679) and Funding Federal Contracts: An Analysis, 80
Mil. L. Rev. 51 (1978); William J. Spriggs, The Anti-Deficiency Act
Comes to Life in U.S. Government Contracting, 10 National Contract
Management Journal 33 (1976-77); Col. John R. Frazier, Use of Annual
Funds with Conditional, Option, or Indefinite Delivery Contracts, 8
A.F. JAG L. Rev. 50 (1966).
[38] Prior to the 1982 recodification of title 31 of the United States
Code, the Antideficiency Act consisted of nine lettered subsections of
what was then 31 U.S.C. § 665. The recodification scattered the law
among several new sections. To better show the relationship of the
material, our organization in this chapter retains the sequence of the
former subsections.
[39] Pursuant to the Federal Credit Reform Act, agencies are required
to have budget authority in advance to cover the long-term costs
(i.e., subsidy costs) of direct loans and loan guarantees. 2 U.S.C. §
661c(b).
[40] See GAO, A Glossary of Terms Used in the Federal Budget Process,
GAO-05-734SP (Washington, D.C.: September 2005), at 3-5.
[41] See section B of this chapter for a discussion of earmarking.
[42] See 31 U.S.C. §§ 1552(a), 1553(a), 1554(a), and Chapter 5,
section D, for a discussion of expired and closed appropriation
accounts.
[43] GAO, Corporation for National and Community Service: Better
Internal Control and Revised Practices Would Improve the Management of
AmeriCorps and the National Service Trust, GAO-04-225 (Washington,
D.C.: Jan. 16, 2004).
[44] Louis Fisher, Presidential Spending Power, 236 (1975).
[45] "We believe it is obvious that, once an Antideficiency Act
violation has been discovered, the agency concerned must take all
reasonable steps to mitigate the effects of the violation insofar as
it remains executory." 55 Comp. Gen. at 772.
[46] GAO has cautioned, however, that an Antideficiency Act violation
should not be determined solely on the basis of year-end reports prior
to reconciliation and adjustment. B-114841.2-0.M., Jan. 23, 1986.
[47] Determining the amount of available budget authority against
which obligations may be incurred is covered later in this chapter in
section C.2.e under the heading "Amount of Available Appropriation or
Fund."
[48] We cover the obligational treatment of contracts of this type in
Chapter 7, section B.1.e, which should be read in conjunction with
this section.
[49] The authority was subsequently sought and granted. See 10 U.S.C.
§ 2306(g). For a discussion of multiyear contracting authority for
defense and civilian agencies, which authorize obligating annual funds
in advance of appropriations, see Chapter 5, section B.9.b.
[50] The rationale worked in that case because the Navy could stay
within the appropriation by deleting a relatively small percentage of
GFP. If the numbers had been different, such that the amount of GFP to
be deleted was so large as to effectively preclude contractor
performance, the analysis might well have been different. In a 1964
report, for example, GAO found the Antideficiency Act violated where
the Air Force, to keep within a "minor military construction" ceiling,
deleted needed plumbing, heating, and lighting from a building
alteration contract, resulting in an incomplete facility, and
subsequently charged the deleted items to Operation and Maintenance
appropriations. GAO, Continuing Inadequate Control over Programming
and Financing of Construction, B-133316 (Washington, D.C.: July 23,
1964), at 12-15.
[51] Every violation of the bona fide needs rule does not necessarily
violate the Antideficiency Act as well. Determinations must be made on
a case-by-case basis. 71 Comp. Gen. 428, 431 (1992); B-235086.2, Jan.
22, 1992 (nondecision letter).
[52] E.g., 67 Comp. Gen. 190 (1988); 66 Comp. Gen. 556 (1987); 61
Comp. Gen. 184, 187 (1981); 48 Comp. Gen. 471, 475 (1969); 42 Comp.
Gen. 272 (1962); 37 Comp. Gen. 60 (1957); 36 Comp. Gen. 683 (1957); 33
Comp. Gen. 90 (1953); 29 Comp. Gen. 91 (1949); 27 Op. Att'y Gen. 584
(1909).
[53] See also 10 U.S.C. §§ 2306b and 2306c, which provide similar
authority for defense agencies and the other agencies listed in 10
U.S.C. § 2302(1). FASA does not affect these authorities. 41 U.S.C. §
254c(e).
[54] See Chapter 7, section B.1.e for a further discussion of
recording obligations under IDIQ and similar contracts.
[55] Some additional cases are 67 Comp. Gen. 190 (1988); 66 Comp. Gen.
556 (1987); 42 Comp. Gen. 272, 276 (1962); 37 Comp. Gen. 155, 160
(1957); 37 Comp. Gen. 60, 62 (1957); 36 Comp. Gen. 683 (1957); 9 Comp.
Gen. 6 (1929); B-116427, Sept. 27, 1955. See also Cray Research v.
United States, 44 Fed. Cl. 327 (1999).
[56] The Claims Court based its conclusion in part on Leiter and the
Antideficiency Act; the Federal Circuit relied on the language of the
contract.
[57] The Federal Acquisition Regulation states that encouraging a
contractor to continue performance in the absence of funds violates
the Antideficiency Act. 48 C.F.R. § 32.704(c) (2005). In this regard,
section C.3 of this chapter discusses how the Antideficiency Act's
prohibition against acceptance of voluntary services, 31 U.S.C. §
1342, prohibits contracting officers from soliciting or permitting a
contractor to continue performance on a "temporarily unfunded" basis.
[58] See section C.1 of this chapter for a discussion of the coercive
deficiency concept.
[59] Availability of Funds, 48 C.F.R. § 52.232-18.
[60] Availability of Funds for the Next Fiscal Year 48 C.F.R. § 52.232-
19.
[61] Limitation of Cost, 48 C.F.R. § 52.232-20.
[62] Limitation of Cost (Facilities), 48 C.F.R. § 52.232-21.
[63] Limitation of Funds, 48 C.F.R. § 52.232-22.
[64] See section B.9.a of Chapter 5 for a discussion of severable
service contracts that cross fiscal years.
[65] Where a termination for convenience clause is required by
regulation, it will be read into the contract whether expressly
included or not. G.L. Christian & Associates v. United States, 312 E2d
418 and 320 E2d 345 (Ct. Cl.), cert. denied, 375 U.S. 954 (1963).
[66] The Burroughs case was decided before the enactment of the FASA
multiyear contracts provision. As discussed above, that provision now
enables agencies to enter into contracts like the one at issue in the
Burroughs case without running afoul of the Antideficiency Act as long
as they follow the terms of the statute by either obligating the full
contract amount against appropriations available at the time of the
contract or obligating the first year costs plus estimated termination
costs. With reference to termination costs, FASA requires the contract
to include a clause stating that the contract shall be terminated if
funds are not made available for its continuation in any fiscal year
and provides that amounts obligated for termination costs shall remain
available until the costs are paid. 41 U.S.C. § 254c(b).
[67] The prohibition against incurring indefinite liabilities is not
limited to indemnification agreements. It applies as well to types of
liabilities such as contract termination charges. The cases are
included in our preceding discussion of multiyear contracting. See
section C.2.b of this chapter.
[68] See section C.2.b of this chapter for a discussion of recording
obligations.
[69] See section C.4.b of this chapter for a discussion on
establishing reserves.
[70] This is still another example of a so-called "coercive
deficiency," particularly in light of the fact that the potential
claimant was another sovereign nation and failure to honor the
agreement would have international consequences. See section C.2.b of
this chapter for a discussion of the "coercive deficiency" concept.
[71] For further information on the government's policy regarding self-
insurance, see Chapter 4, section C.10.
[72] On March 1, 2003, the Federal Emergency Management Agency became
part of the U.S. Department of Homeland Security.
[73] The Act is now codified at 28 U.S.C. §§ 2671-2680.
[74] The Supreme Court's decision affirmed two Claims Court decisions
that had similarly cited the general rule against indemnification
agreements with respect to the Agent Orange contracts: Wm. T Thompson
Co. v. United States, 26 Cl. Ct. 17, 29 (1992); Hercules Inc. v.
United States, 25 Cl. Ct. 616 (1992).
[75] See Major Randall J. Bunn, Contractor Recovery for Current
Environmental Cleanup Costs Under World War H-Era Government
Indemnification Clauses, 41 Air Force L. Rev. 163 (1997), for an
extensive background discussion and analysis of the issues
addressed in the DuPont case. This article also discusses at length
the First War Powers Act and its successor, 50 U.S.C. § 1431 (Pub. L.
No. 85-804, § 1, 72 Stat. 972 (Aug. 28, 1958)), which are referenced
later in this section.
[76] See Chapter 4, section B for a discussion of the necessary
expense rule.
[77] The decision in 22 Comp. Gen. 892 is discussed in 62 Comp. Gen.
361, 362-63 (1983), and Johns-Manville Corp. v. United States, 12 Cl.
Ct. 1, 23 (1987). The Claims Court noted the "significant deficiency"
of 22 Comp. Gen. 892 in that it nowhere mentions the Antideficiency
Act.
[78] The decision in 54 Comp. Gen. 824 overruled a portion of 42 Comp.
Gen. 708 (the FAA aircraft lease case), discussed in the text, to the
extent it held that there was no need to either obligate or reserve
funds. Thus, in a situation like 42 Comp. Gen. 708, the agency would
presumably have to either obligate or administratively reserve funds
or include a provision that payments for losses may not exceed
appropriations available at the time of the loss and nothing in the
contract may be construed as implying that Congress will appropriate
funds to meet any deficiencies at a later date.
[79] To illustrate the potential fiscal consequences, an authorized
indemnity agreement entered into in 1950 produced liability of over
$64 million plus interest more than four decades later. See E.I. Du
Pont De Nemours & Co. v. United States, 24 Cl. Ct. 635 (1991), affd,
980 E2d 1440 (Fed. Cir. 1992).
[80] Note that the Price-Anderson Act, at 42 U.S.C. § 2210(j),
provided contract rather than indemnity authority to the Nuclear
Regulatory Commission (NRC) to address indemnification and other
financial protection that NRC is required to provide nuclear
licensees, contractors, and others to cover the consequences of
nuclear incidents.
[81] Pub. L. No. 85-804, § 1, 72 Stat. 972 (Aug. 28, 1958).
[82] Exec. Order No. 10789, Contracting Authority of Government
Agencies In Connection With National Defense Functions, 23 Fed. Reg.
8897 (Nov. 14, 1958), as amended, 50 U.S.C. § 1431 note. A decision
approving an indemnity agreement under authority of the First War
Powers Act is B-33801, Apr. 19, 1943. A later related decision is B-
33801, Oct. 27, 1943. Both of these decisions involved the famed
"Manhattan Project," although that fact is well-concealed. The
decisions had been classified, but were declassified in 1986.
[83] Although the Board's decision was vacated and remanded on other
grounds by the Court of Appeals for the Federal Circuit, New England
Tank Industries of New Hampshire v. United States, 861 F.2d 685 (Fed.
Cir. 1988), the court noted its agreement with the Board's
Antideficiency Act conclusions. Id. at 692 n.15.
[84] Another report in this series, making similar findings under a
different statutory ceiling, is GAO, Illegal Use of Operation and
Maintenance Funds for Rehabilitation and Construction of Family
Housing and Construction of a Related Facility, B-133102 (Washington,
D.C.: Aug. 30, 1963).
[85] This case also illustrates that the Antideficiency Act applies to
interagency transactions the same as any other obligations or
expenditures. Cf. B-247348, June 22, 1992 (nonreimbursable interagency
personnel detail).
[86] There are also a few older cases finding violations of both
statutes, but they are of little help in attempting to formulate a
reasoned approach. Examples are 39 Comp. Gen 388 (1959), which does
not discuss the relationship, and 22 Comp. Gen. 772 (1943), which
includes a rationale, now obsolete, based on the then-existing lack of
authority to include interest stipulations in contracts.
[87] See generally OMB Circular No. A-11, Preparation, Submission, and
Execution of the Budget, §§ 20.4(b), 20.7, and 20.12 (June 21, 2005).
See also the definitions of "Budget Authority" and "Collections" in
GAO, A Glossary of Terms Used in the Federal Budget Process, GAO-05-
734SP (Washington, D.C.: September 2005), at 20-23, 28-30.
[88] The Public Buildings Act of 1959, Pub. L. No. 86-249, 73 Stat.
479 (Sept. 9, 1959), superseded the provisions of the 1949 legislation
discussed in 29 Comp. Gen. 504. The substance of the Public Buildings
Act of 1959 is codified in 40 U.S.C. §§ 3301-3315.
[89] The decision in 28 Comp. Gen. 300 concerned increases to Wage
Board employees under legislation which is now obsolete (see 39 Comp.
Gen. 422, cited in the text). However, it is still useful for the
basic proposition that nonmandatory increases are not obligations
"authorized by law" as that term is used in 31 U.S.C. § 1341(a). 28
Comp. Gen. at 302.
[90] Act of May 1, 1884, ch. 37, 23 Stat. 17.
[91] Pub. L. No. 217, ch. 1484, § 4, 33 Stat. 1214, 1257 (Mar. 3,
1905).
[92] Pub. L. No. 28, ch. 510, § 3, 34 Stat. 27, 48-49 (Feb. 27, 1906).
[93] See section C.1 of this chapter for a discussion of the coercive
deficiency concept. See also PCL Construction Services, Inc. v. United
States, 41 Fed. Cl. 242, 251-260 (1998) (incrementally funded contract
did not raise coercive deficiency issues where contract clauses
clearly provided that contractor assumed the sole risk of working at a
rate that would exhaust funding.)
[94] 39 Cong. Rec. 3687 (1906), quoted in 30 Op. Att'y Gen. 51, 53-54
(1913).
[95] See 30 Op. Att'y Gen. 51, 54-55 (1913), discussing the
legislative history of the 1884 prohibition.
[96] Glavey v. United States, 182 U.S. 595 (1901); Miller v. United
States, 103 F. 413 (C.C.S.D.N.Y. 1900). See also 9 Comp. Dec. 101
(1902). Later cases following Glavey are MacMath v. United States, 248
U.S. 151 (1918), and United States v. Andrews, 240 U.S. 90 (1916). The
policy rationale is that to permit agencies to disregard compensation
prescribed by statute could work to the disadvantage of those who
cannot, or are not willing to, accept the position for less than the
prescribed salary. See Miller, 103 F. at 415-16.
[97] Some cases in addition to those cited in the text are 32 Comp.
Gen. 236 (1952); 23 Comp. Gen. 109, 112 (1943); 14 Comp. Gen. 193
(1934); 34 Op. Att'y Gen. 490 (1925); 30 Op. Att'y Gen. 129 (1913); 13
Op. Off. Legal Counsel 113 (1989); 3 Op. Off. Legal Counsel 78 (1979).
[98] While the principle in B-181934 remains valid, the decision was
overruled by 55 Comp. Gen. 109 (1975) on factual grounds. Additional
information showed that the individual involved in that case was a "de
facto employee" performing under color of appointment and with a claim
of right to the position. A "voluntary" employee has no such "color of
appointment" or indicia of lawful employment.
[99] Further support for the decision's conclusion that 22 U.S.C. §
2395(d) was addressed to services from private sources rather than
federal employees can be found in the immediately preceding
subsection, which states: "It is the sense of Congress that the
President, in furthering the purposes of this [chapter], shall use to
the maximum extent practicable the services and facilities of
voluntary, nonprofit organizations registered with, and approved by,
the Agency for International Development." 22 U.S.C. § 2395(c).
[100] See footnote number 96, supra, and accompanying text.
[101] Pub. L. No. 92-54, 85 Stat. 146 (July 12, 1971).
[102] Pub. L. No. 93-203, 87 Stat. 839 (Dec. 28, 1973).
[103] It would now also contravene 18 U.S.C. § 209, which prohibits
payment of salaries of government employees from nongovernmental
sources. This statute did not exist at the time of the 1905 decision.
[104] See generally Chapter 12, section C.2.b in volume Ill of the
second edition of Principles of Federal Appropriations Law.
[105] The July 12, 2004, opinion clarified an earlier opinion on the
subject of the National Brokers Contract, B-291947, Aug. 15, 2003.
Also, it distinguished another opinion, B-300248, Jan. 15, 2004, which
held that the Small Business Administration improperly augmented its
appropriations by requiring certain lenders to pay fees to an agency
contractor. See section E.2.a of this chapter for a detailed
discussion of the Small Business Administration opinion and how it
compares with the GSA opinion.
[106] As explained in section C.6, this amendment was intended to
guard against what might have been viewed as an overly broad
application of one of the Attorney General's funding gap opinions.
[107] Finally, the opinion noted that, even if the exception to
section 1342 applied, it would not sanction the agency's actual
disbursement of funds in excess of its appropriations. Thus, the
agency violated the Antideficiency Act in any event.
[108] The opinions did acknowledge, of course, that USMS could not
actually spend funds if its appropriations were exhausted. They also
noted that a determination whether particular obligations would
satisfy the emergencies exception could not be made in the abstract
and would require case-by-case evaluation.
[109] See section C.2.b of this chapter for a discussion of the
"coercive deficiency" concept.
[110] Pub. L. No. 217, ch. 1484, 33 Stat. 1214, 1257 (Mar. 3, 1905).
[111] Pub. L. No. 759, ch. 896, 64 Stat. 595, 765 (Sept. 6, 1950).
[112] Exec. Order No. 6166, § 16 (June 10, 1933), at 5 U.S.C. § 901
note.
[113] Reorganization Plan No. 2 of 1970, 35 Fed. Reg. 7959, 84 Stat.
2085 (effective July 1, 1970), designated the Bureau of the Budget as
OMB and transferred to the President all functions vested in the
former Bureau of the Budget. Executive Order No. 11541, 35 Fed. Reg.
10737 (July 1, 1970), 31 U.S.C. § 501 note, transferred those
functions to the Director of OMB.
[114] GAO, A Glossary of Terms Used in the Federal Budget Process, GAO-
05-734SP (Washington, D.C.: September 2005), at 12-13. See also OMB
Circular No. A-11, pt. 4, Instructions on Budget Execution, §§ 120.1-
120.5 (June 21, 2005). For a discussion of the Impoundment Control
Act, see section D.3.b of Chapter 1.
[115] 31 U.S.C. § 665(d)(2) (1976 ed.).
[116] See the codification note following 31 U.S.C. § 1511.
[117] Before 2002, OMB's guidance on apportionments was located in
Circular No. A-34.
[118] Pub. L. No. 93-344, title X, § 1002, 88 Stat. 297, 332 (July 12,
1974).
[119] The Court concluded that the one-house legislative veto was not
severable from the Act's deferral provision, and invalidated that
provision as well. Id.
[120] The two decisions cited concerned apportionments that OMB made
under continuing resolutions. As a general matter, the discussion of
OMB's apportionment discretion would apply to any appropriation. For a
discussion of continuing resolutions, see Chapter 8.
[121] A permanent provision of law included in the 1988 District of
Columbia appropriation act states that appropriations for the D.C.
government "shall not be subject to apportionment except to the extent
specifically provided by statute." Pub. L. No. 100-202, § 135, 101
Stat. 1329, 1329-102 (1987). This provision appears to implicitly
repeal 31 U.S.C. § 1513(a) as applied to the D.C. government.
[122] Neither section 1513 nor case law defines the phrase "official
having administrative control." Consequently, the apportioning
official for legislative and judicial appropriations is named by the
head of the agency to whom the appropriation is made.
[123] See footnote 113, supra, and accompanying text.
[124] See section C.2.g of this chapter.
[125] The law mandating payment of severance pay was enacted after the
start of fiscal year 1966, which is why the expenditures in that case
would qualify under 31 U.S.C. § 1515(b).
[126] Pub. L. No. 100-202, § 105, 101 Stat. 1329, 1329-433 (Dec. 22,
1987) (1988 continuing resolution).
[127] See section C.2.a of this chapter for a further discussion of 41
U.S.C. § 11.
[128] Prior to the 1982 recodification of title 31, sections 1513(d)
and 1514 had been combined as subsection (g) of the Antideficiency Act.
[129] See, in this regard, GAO, Standards for Internal Control in the
Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 9,
1999); GAO, Policy and Procedures Manual for the Guidance of Federal
Agencies, title 7 (Washington, D.C.: May 18, 1993).
[130] Pub. L. No. 863, ch. 814, § 3, 70 Stat. 782, 783 (Aug. 1, 1956).
[131] The historical summary in this paragraph is taken largely from
37 Comp. Gen. 220 (1957).
[132] Pub. L. No. 759, ch. 896, § 1211, 64 Stat. 595, 765 (Sept. 6,
1950).
[133] Hearings Before Senate Comm. on Appropriations on H.R. 7786,
81st Cong., 2d Sess. 10 (1950), quoted in Hopkins & Nutt, The Anti-
Deficiency Act (Revised Statutes 3679) and Funding Federal Contracts:
An Analysis, 80 Mil. L. Rev. 51, 128 (1978).
[134] Memorandum for the Assistant Secretary of the Army (Financial
Management), 1976, quoted in Hopkins & Nutt, supra, at 130.
[135] Id.
[136] But see Cessna Aircraft Co. v. Dalton, 126 F.3d 1442 (Fed. Cir.
1997), cert. denied, 525 U.S. 818 (1998). In that case, the Navy had
exercised an option to extend a contract on October 1. The
appropriation that Navy charged the obligation to was signed into law
on October 1; however, OMB had not yet apportioned the appropriation.
Cessna, trying to get out of the contract, argued that the obligation
for the contract extension was not valid since it was made in advance
of the apportionment. The court held that the provisions of the
Antideficiency Act were only internal government operating
requirements and, as such, they did not confer legal rights on outside
parties. Id. at 1451-52. See generally Blackhawk Heating & Plumbing
Co. v. United States, 622 E2d 539, 552 n.9 (Ct. Cl. 1980); Rough
Diamond Co. v. United States, 351 F.2d 636, 640, 642 (Ct. Cl. 1965),
cert. denied, 383 U.S. 957 (1966).
In dicta, the court said that apportionment is not a prerequisite to
the obligation of appropriated funds. The court noted that 31 U.S.C. §
1341 explicitly prohibits obligations both in excess of and (unless
otherwise authorized) in advance of appropriations. By contrast, the
court pointed out, the apportionment sections of title 31 explicitly
prohibit only obligations exceeding an apportionment; they do not
literally forbid obligations in advance of an apportionment. Cessna,
126 F.3d at 1450-51. The court also rejected Cessna's reliance on
provisions of the Defense Department accounting manual that generally
prohibited obligations in advance of an apportionment. The Cessna
dicta has not been followed in any subsequent case.
[137] 31 U.S.C. §§ 1351, 1517(b), as amended by Consolidated
Appropriations Act, 2005, Pub. L. No. 108-447, div. G, title II, §
1401, 118 Stat. 2809, 3192 (Dec. 8, 2004). See, in this regard, the
Comptroller General's Memorandum to Heads of Departments, Agencies,
and Others Concerned, Transmission of Antideficiency Act Reports to
the Comptroller General of the United States, B-304335, Mar. 8, 2005.
[138] Payment under this authority is appropriate where there is no
enforceable contractual obligation on the part of the government but
where the government has received a benefit not prohibited by law
conferred in good faith. See chapter 12, section C.2.b in volume Ill
of the second edition of Principles of Federal Appropriations Law for
a general discussion of quantum meruit claims.
[139] See, e.g., GAO, Government Shutdown: Funding Lapse Furlough
Information, GAO/GGD-96-52R (Washington, D.C.: Dec. 1, 1995);
Government Shutdown: Permanent Funding Lapse Legislation Needed,
GAO/GGD-91-76 (Washington, D.C.: June 6, 1991); Funding Gaps
Jeopardize Federal Government Operations, PAD-81-31 (Washington, D.C.:
Mar. 3, 1981).
[140] 125 Cong. Rec. 26974 (Oct. 1, 1979) (remarks of Sen. Magnuson).
[141] GAO commented on this legislation in B-197584, Feb. 5, 1980, and
B-197059, Feb. 5, 1980. The legislation was not enacted.
[142] This would also include certain revolving fund operations, but
not those whose use requires affirmative authorization in annual
appropriation acts. B-241730.2, Feb. 14, 1991 (Government Printing
Office revolving fund).
[143] See section C.4 of this chapter for a more detailed discussion
of apportionment authorities.
[144] The Administrative Office noted a combination of factors
contributing to its projected shortfall, including Congress's decision
to enact an appropriation in an amount less than the Administrative
Office had requested and the appointment of new judges, which
increased the number of jury trials. Armster, 792 E2d at 1425 n.3.
[145] Although this case addressed an agency's projected exhaustion of
its appropriations rather than a funding gap, the court's dicta would
appear relevant for a funding gap.
[146] These figures are based on another CRS report, Shutdown of the
Federal Government: Causes, Effects, and Process, No. 98-844
(Washington, D.C.: Nov. 1, 2003), at 2-3. For a discussion of the
nature, background, and dynamics of the fiscal year 1996 funding gaps
and shutdowns, see Anita S. Krishnakumar, Reconciliation and the
Fiscal Constitution: The Anatomy of the 1995-1996 Budget "Train
Wreck," 35 Harv. J. On Legis. 589 (1998).
[147] The August 1995 opinion was discussed at length and reaffirmed
in a Memorandum for the General Counsel, United States Marshals
Service, Continuation of Federal Prisoner Detention Efforts in the
Face of a USMS Appropriation Deficiency, OLC Opinion, Apr. 5, 2000.
Current Office of Management and Budget guidance still references the
August 1995 opinion as well as the earlier opinions in 43 Op. Att'y
Gen. 224 (1980) and 43 Op. Att'y Gen. 293 (1981) as the principal
legal authorities governing what agencies can do during a funding gap.
See OMB Circular No. A-11, Preparation, Submission, and Execution of
the Budget, § 124.1 (a) (June 21, 2005).
[148] These legislative actions are described in the Congressional
Research Service report, Preventing Federal Government Shutdowns:
Proposals for an Automatic Continuing Resolution, cited previously.
Other automatic continuing resolution bills have been introduced but
died in committee. See H.R. 29, 107th Cong. (2000); H.R. 3744, 107th
Cong. (2001).
[149] Prior to the 1982 recodification of title 31, the mandate was
found in 31 U.S.C. § 623. The recodifiers thought those words
themselves were unnecessary, and the concept is now included in the
general mandate in 31 U.S.C. § 1104(a) to "use uniform terms" in
requesting appropriations.
[150] For a further discussion of the voluntary services prohibition,
see section C.3 of this chapter.
[151] In a 1984 decision, GAO found that acceptance by the Federal
Communications Commission of booth space and utility services at
industry trade shows did not augment the Commission's appropriation
because "no money changed hands, nor was money paid on the
Commission's behalf to anyone else." 63 Comp. Gen. 459, 461 (1984).
GAO found that there was a "mutually beneficial arrangement" between
the Commission and trade show promoters that was "neither an
augmentation of appropriations nor an illegal retention of a gift."
Id. For a discussion of "no-cost" contract, see section E.2.b of this
chapter.
[152] Akin to B-211079.2, the decision in B-286182, Jan. 11, 2001,
suggested that acceptance of services might be considered an improper
augmentation in some circumstances. That decision concerned a
settlement agreement in a rate case whereby a company agreed to
provide telecommunications equipment and services valued at $1.53
million to the District of Columbia courts for the purpose of
facilitating access to the legal system. The decision concluded,
however, that there was no augmentation issue in this case because the
courts had statutory gift-acceptance authority, which is discussed in
section E.3 of this chapter.
[153] The exception referenced as section 3718(b) now appears in
section 3718(d). It permits agencies to contract for assistance in the
collection of debts due the United States, and to pay the contractor
from the amounts recovered. For a decision addressing the scope and
application of this exception, see 72 Comp. Gen. 85 (1993).
[154] As a general proposition, an agency's appropriations do remain
"in the Treasury" until needed for a valid purpose. Unless Congress
expressly so provides, an agency may not have its appropriations paid
over directly to it to be held pending disbursement. 21 Comp.
Gen. 489 (1941).
[155] Several specific references to miscellaneous receipts in the pre-
1982 version of title 31 were deleted in the recodification because
they were regarded as covered by the general prescription of the new
section 3302. An example is the so-called User Charge Statute. The pre-
recodification version, 31 U.S.C. § 483a, required fees to be
deposited as miscellaneous receipts. The current version, 31 U.S.C. §
9701, omits the requirement because, as the Revision Note points out,
it is covered by § 3302.
[156] Section 571 stems from the Federal Property and Administrative
Services Act of 1949, ch. 288, 63 Stat. 377 (June 30, 1949). Prior to
this law, proceeds from the sale of public property were required to
be deposited as miscellaneous receipts under the more general
authority of what is now 31 U.S.C. § 3302(b). See Mammoth Oil Co. v.
United States, 275 U.S. 13, 34 (1927); Pan-American Petroleum &
Transport Co. v. United States, 273 U.S. 456, 502 (1927). (These are
the notorious "Teapot Dome" cases.)
[157] In addition to instances described elsewhere in the text, the
following are examples of statutory exceptions to section 3302(b): 42
U.S.C. § 8287 (measured savings from energy savings performance
contracts), discussed in B-287488, June 19, 2001; 42 U.S.C. § 8256 and
note (rebates received by federal agencies from utility companies on
account of energy-saving measures), discussed in B-265734, Feb. 13,
1996; and 38 U.S.C. § 1729A (compensatory settlement amounts under the
Federal Medical Care Recovery Act stemming from care provided at
Department of Veterans Affairs facilities), discussed in Memorandum
Opinion for the Assistant Attorney General, Civil Division,
Miscellaneous Receipts Act Exception for Veterans' Health Care
Recoveries, OLC Opinion, Dec. 3, 1998.
[158] It should not be automatically assumed that every form of credit
accruing to the government under a contract will qualify as a refund
to the appropriation. See, e.g., B-302366, July 12, 2004; A-51604, May
31, 1977.
[159] For further discussion of these concepts in the context of
statutes applicable to the Defense Department, see GAO, Reimbursements
to Appropriations: Legislative Suggestions for Improved Congressional
Control, FGMSD-75-52 (Washington, D.C.: Nov. 1, 1976). A more recent
report made a similar point in relation to agencies crediting user fee
proceeds to their appropriations. GAO, Federal User Fees: Budgetary
Treatment, Status, and Emerging Management Issues, GAO/AIMD-98-11
(Washington, D.C.: Dec. 19, 1997).
[160] Further guidance is contained in I Treasury Financial Manual
chapter 6-8000. For example, the Manual provides at section 6-8030.20
that collections totaling less than $5,000 may be accumulated and
deposited when the total reaches $5,000. However, deposits must be
made at least weekly regardless of amount.
[161] Act of March 3, 1849, ch. 110, 9 Stat. 398.
[162] Pub. L. No. 97-258, § 1, 96 Stat. 877, 948 (Sept. 13, 1982).
[163] The opinion also concluded that the fee arrangement was not
authorized under the user charge statute, 31 U.S.C. § 9701, or under
provisions of SBA's organic legislation.
[164] The court's disposition in Scheduled Airlines differed from a
Comptroller General decision that had denied a protest against this
solicitation. 73 Comp. Gen. 310 (1994).
[165] Subsequently, Congress enacted legislation that specifically
authorized Defense agencies to enter into contracts of the type
invalidated in Scheduled Airlines Traffic Offices that permit a
portion of commissions from unofficial travel to be deposited into
nonappropriated morale funds. 10 U.S.C. § 2646. See, in this regard, B-
283731, Dec. 21, 1999.
[166] See Chapter 5, section B.6. The basic rule is that where it
becomes necessary to terminate a contract because of the contractor's
default, the funds obligated under the original contract are
available, beyond their original period of availability, for purposes
of funding a contract to complete the unfinished work. Id. As
discussed in section B.6, certain conditions must be met in order to
invoke the replacement contract rule. Excess reprocurement costs
recovered from defaulting contractors cannot be retained by an agency
in its appropriations and applied to a new contract if the
reprocurement does not constitute an appropriate replacement contract.
Cf. B-242274, Aug. 27, 1991 (applying this principle in the context of
recovered liquidated damages).
[167] In 1990, subsequent to the decision in 65 Comp. Gen. 838 and
many of the other decisions discussed in this section, Congress
amended the statutory provisions applicable to the closing of
appropriation accounts and the disposition of account balances. See
generally Chapter 5, section D. These statutory changes do not
fundamentally affect the substantive rules discussed in this section,
although the changes they make in the time periods that appropriation
accounts retain their identity after they expire for obligation
purposes and before they close may affect the practical application of
those rules in particular circumstances.
[168] E.g., 46 Comp. Gen. 554 (1966); 40 Comp. Gen. 590 (1961); 27
Comp. Gen. 117 (1947); 14 Comp. Gen. 729 (1935); 14 Comp. Gen. 106
(1934); 10 Comp. Gen. 510 (1931); 8 Comp. Gen. 284 (1928); 26 Comp.
Dec. 877 (1920); 23 Comp. Dec. 352 (1916); A-26073, Mar. 20, 1929,
affd upon reconsideration, A-26073, Aug. 8, 1929; A-24614, June 20,
1929. The rule was applied regardless of whether the funds were
actually collected back from the contractor or merely withheld from
future contract payments due. 52 Comp. Gen. 45 (1972).
[169] This section provides that whenever a federal contract includes
a provision for liquidated damages for delay, the Secretary of the
Treasury may, upon the recommendation of the head of the procuring
agency, remit all or part of the damages if such action would be just
and equitable. The Comptroller General formerly exercised this
remission function, but it was transferred by law to the executive
branch in 1996. See the codification note following 41 U.S.C. § 256a.
[170] See section E.2.a of this chapter and 65 Comp. Gen. 600 (1986).
[171] The 1953 decision is inconsistent with the 1945 decision on this
point and appears to have effectively overruled the latter decision.
[172] See 42 U.S.C. § 8256(c)(5)(A), which authorizes such credits for
most agencies, subject to appropriation.
[173] Additional cases for this proposition are 35 Comp. Gen. 393
(1956); 28 Comp. Gen. 476 (1949); 15 Comp. Gen. 683 (1936); 5 Comp.
Gen. 928 (1926); 20 Comp. Dec. 349 (1913); 14 Comp. Dec. 87 (1907);
and 9 Comp. Dec. 174 (1902).
[174] A 1943 case suggested a different result, that is, the agency
might have to transfer the value of the repairs to miscellaneous
receipts, if the agency had a specific appropriation for repair or
replacement of the property in question. 22 Comp. Gen. 1133, 1137
(1943). GAO indicated in 67 Comp. Gen. 510 (1988) that this would not
be the case, although 67 Comp. Gen. 510 did not deal with a specific
repair appropriation, which would appear to be a rare case in any
event.
[175] As these cases demonstrate, the government occasionally
purchases insurance; however, it is a self-insurer in most areas. See
generally Chapter 4, section C.10.
[176] See section E.3 of this chapter for a discussion of gifts and
donations.
[177] See section B.1 of Chapter 15 for a more detailed discussion of
the Economy Act. Chapter 15 also discusses a variety of other
interagency ordering authorities including working capital funds,
special revolving funds, franchise funds, and program-specific funds.
[178] Temporary credits among appropriations are authorized by 31
U.S.C. § 1534, which generally provides for common service charges to
more than one appropriation. See Chapter 2, section B.3.a.
[179] Compare 10 U.S.C. § 2205(a), which provides that reimbursements
to Defense Department appropriations under the Economy Act and similar
authorities may be credited to authorized accounts and are available
for obligation for the same period as the funds in the account so
credited.
[180] The cited decisions note, for example, that agencies can use
standard costs for items provided from inventory as well as standard
costs for transportation and labor. While the standard cost for
inventory items may be based on the latest cost to acquire the item
provided, it may not be the cost to acquire a more technologically
advanced item. Also, reimbursement must include reasonable amounts for
both direct and indirect costs. Of course, agencies may have more
latitude to set rates under other, more specific statutes. See, e.g.,
10 U.S.C. § 2205(b); Department of Defense Financial Management
Regulation 7000.14-R, vol. 11A, ch. 3, Economy Act Orders (April
2000), available at [hyperlink,
http://www.defenselink.mil/comptroller/fmr/11A/index.html] (last
visited September 15, 2005).
[181] This and related decisions are also discussed in section E.2.d
of this chapter.
[182] See section C of Chapter 15 for a much more detailed discussion
of revolving funds.
[183] Chapter 17, section D discusses trust funds in far greater
detail. See also 31 U.S.C. §§ 1321-1323.
[184] The opinion noted that the proposed settlement would be
authorized under subsequent amendments to the governing legislation.
[185] The Federal Bureau of Investigation and the Drug Enforcement
Administration now have statutory authority to retain and use the
proceeds from undercover operations, subject to certain conditions.
See Pub. L. No. 102-395, § 102(b), 106 Stat. 1838 (Oct. 10, 1992),
which was continued in effect by Pub. L. No. 104-132, § 815(d), 110
Stat. 1315 (Apr. 24, 1996), and extended to the Bureau of Alcohol,
Tobacco, Firearms, and Explosives by Pub. L. No. 108-447, div. B,
title I, § 116, 118 Stat. 2809, 2870 (Dec. 8, 2004). See 28 U.S.C. §
533 note. Other agencies have similar authority. See also 8 U.S.C. §
1363a(a)(3) (Immigration and Naturalization Service); 19 U.S.C. §
2081(a)(2) (Customs Service); 26 U.S.C. § 7608(c)(1)(B) and (C)
(Internal Revenue Service).
[186] For agencies funded under the annual Interior Department and
Related Agencies appropriation acts, the rentals, whether collected by
payroll deduction or otherwise, go into a "special fund" maintained by
each agency to be used for maintenance and operation of the quarters.
5 U.S.C. § 5911 note.
[187] Pub. L. No. 97-300, 96 Stat. 1324 (Oct. 13, 1982).
[188] The reverse adjustment is made when funds which should have been
deposited as miscellaneous receipts are erroneously credited to an
appropriation. The remedy is a transfer from the appropriation to the
appropriate miscellaneous receipts account. E.g., B-48722, Apr. 16,
1945.
[189] See also B-3596, A-51615, Nov. 30, 1939. Use of a deposit fund
suspense account is equally acceptable. B-158381, June 21, 1968.
[190] In B-259065, Dec. 21, 1995, the Comptroller General sided with
Justice Blackmun on this point, holding that awards against the United
States for the return of forfeited cash or cash proceeds of forfeited
property that had been deposited in the Justice Department's Assets
Forfeiture Fund should be satisfied from that fund.
[191] See, e.g., 36 U.S.C. § 2307 (specifically provides that funds
donated to the United States Holocaust Memorial Museum are not to be
regarded as appropriated funds and are not subject to requirements or
restrictions applicable to appropriated funds).
[192] Some wag once said, jokingly we think, that if you looked hard
enough you could probably find a case dealing with the use of
appropriated funds to buy dog food. 22 Comp. Dec. 465 is it.
[193] Some cases from this series are 59 Comp. Gen. 415 (1980); 55
Comp. Gen. 1293 (1976); 49 Comp. Gen. 572 (1970); 46 Comp. Gen. 689
(1967); 36 Comp. Gen. 268 (1956); 26 Comp. Dec. 43 (1919).
[194] GAO's decisions involving promotional items obtained as a result
of government-sponsored travel were decided under its claims
settlement authority and predate the transfer of this authority to the
executive branch in 1995. For details of this transfer see B-275605,
Mar. 17, 1997. GAO has not issued decisions on such promotional items
subsequent to that transfer. In testimony before the House of
Representative's Subcommittee on Technology and Procurement Policy of
the Committee on Government Reform, the Comptroller General spoke in
favor of proposals that would allow employees who travel on government
business to keep their frequent flyer miles, describing it as a "small
benefit but one that private sector employers commonly provide their
people as part of a mosaic of competitive employee benefits." GAO,
Human Capital: Building the Information Technology Workforce to
Achieve Results, GAO-01-1007T (Washington, D.C.: July 31, 2001), at 23.
[195] GAO has no decisions addressing whether a federal agency with
gift acceptance authority may receive a gift of money transferred to
it from another federal agency.
[196] Economy Act transactions are described in more detail in section
E.2.e of this chapter, above, and in section B.1 of Chapter 15.
[197] For a discussion of some of these statutes as well as related
and predecessor provisions, see B-179708-0.M., Dec. 1, 1975, and B-
179708-0.M., July 21, 1975.
[198] No augmentation requiring an election between potential funding
sources exists, however, where the law clearly authorizes an agency to
use both sources interchangeably in order to supplement each other.
See B-272191, Nov. 4, 1997, distinguishing 68 Comp. Gen. 337.
[End of Chapter 6 footnotes]
[End of Chapter 6]
Chapter 7: Obligation of Appropriations:
A. Introduction: Nature of an Obligation:
B. Criteria for Recording Obligations (31 U.S.C. § 1501):
1. Section 1501(a)(1): Contracts:
a Binding Agreement:
b. Contract "in Writing":
c. Requirement of Specificity:
d. Invalid Award/Unauthorized Commitment:
e. Variations in Quantity to Be Furnished:
f. Amount to Be Recorded:
g. Administrative Approval of Payment:
h. Miscellaneous Contractual Obligations:
i. Interagency Transactions:
(1) Economy Act agreements:
(2) Non-Economy Act agreements:
(3) "Binding agreement" requirement:
(4) Orders from stock:
(5) Project orders:
2. Section 1501(a)(2): Loans:
3. Section 1501(a)(3): Interagency Orders Required by Law:
4. Section 1501(a)(4): Orders without Advertising:
5. Section 1501(a)(5): Grants and Subsidies:
a Grants:
b. Subsidies:
6. Section 1501(a)(6): Pending Litigation:
7. Section 1501(a)(7): Employment and Travel:
a Wages, Salaries, Annual Leave:
b. Compensation Plans in Foreign Countries:
c. Training:
d. Uniform Allowance:
e. Travel Expenses:
f. State Department: Travel Outside Continental United States:
g. Employee Transfer/Relocation Costs:
8. Section 1501(a)(8): Public Utilities:
9. Section 1501(a)(9): Other Legal Liabilities:
C. Contingent Liabilities:
D. Reporting Requirements:
E. Deobligation:
A. Introduction: Nature of an Obligation:
You, as an individual, use a variety of procedures to spend your
money. Consider the following transactions:
* You walk into a store, make a purchase, and pay at the counter with
cash, check, or debit card.
* You move to another counter and make another purchase with a credit
card. No money changes hands at the time, but you sign a credit form
which states that you promise to pay upon being billed. '
* You call the local tree surgeon to remove some ailing limbs from
your favorite sycamore. He quotes an estimate and you arrange to have
the work done. The tree doctor arrives while you are not at home, does
the work, and slips his bill under your front door.
* You visit your family dentist to relieve a toothache. The work is
done and you go home. No mention is made of money. Of course, you know
that the work wasn't free and that the dentist will bill you.
* You now visit your family lawyer to sue the dentist and the tree
surgeon. The lawyer takes your case and you sign a contingent fee
contract in which you agree that the lawyer's fee will be one-third of
any amounts recovered.
Numerous other variations could be added to the list but these are
sufficient to make the point. The first example is a simple cash
transaction. The legal liability to pay and the actual disbursement of
money occur simultaneously. The rest of the examples all have one
essential thing in common: You first take some action which creates
the legal liability to pay—that is, you "obligate" yourself to pay—and
the actual disbursement of money follows at some later time. The
obligation occurs in a variety of ways, such as placing an order or
signing a contract.
The government spends money in much the same fashion except that it is
subject to a variety of statutory restrictions. The simple "cash
transaction" or "direct outlay" involves a simultaneous obligation and
disbursement and represents a minor portion of government
expenditures. The major portion of appropriated funds are first
obligated and then expended. The subsequent disbursement "liquidates"
the obligation. Thus, an agency "uses" appropriations in two basic
ways—direct expenditures (disbursements) and obligations. There is no
legal requirement for you as an individual to keep track of your
"obligations." For the government, there is.
The concept of "obligation" is central to appropriations law. As will
be demonstrated in the discussion below, this is because of the
principle, one of the most fundamental, that an obligation must be
charged against the relevant appropriation in accordance with the
rules relating to purpose, time, and amount. The term "available for
obligation" is used throughout this publication to refer to
availability as to purpose, time, and amount. This chapter will
explore exactly what an obligation is.
It would be nice to start with an all-inclusive and universally
applicable definition of "obligation." However, because of the immense
variety of transactions in which the government is involved, GAO has
defined "obligation" only in the most general terms and has instead
analyzed on a case-by-case basis the nature of the particular
transaction at issue to determine whether an obligation has been
incurred. B-192282, Apr. 18, 1979; B-116795, June 18, 1954.
The most one finds in the decisions are general statements referring
to an obligation in such terms as "a definite commitment which creates
a legal liability of the Government for the payment of appropriated
funds for goods and services ordered or received." B-116795, June 18,
1954. See also B-300480.2, June 6, 2003; B-272191, Nov. 4, 1997; B-
265901, Oct. 14, 1997; 21 Comp. Gen. 1162, 1163 (1941) (circular
letter); B-222048, Feb. 10, 1987; B-82368, July 20, 1954; B-24827,
Apr. 3, 1942. From the earliest days, the Comptroller General has
cautioned that the obligating of appropriations must be "definite and
certain." A-5894, Dec. 3, 1924.
Another definition of an "obligation" that one finds in the decisions
takes a slightly broader perspective:
"A legal duty on the part of the United States which constitutes a
legal liability or which could mature into a legal liability by virtue
of actions on the part of the other party beyond the control of the
United States ..."
42 Comp. Gen. 733, 734 (1963).
Thus, in very general and simplified terms, an "obligation" is some
action that creates a legal liability or definite commitment on the
part of the government, or creates a legal duty that could mature into
a legal liability by virtue of an action that is beyond the control of
the government. Payment may be made immediately or in the future. GAO,
A Glossary of Terms Used in the Federal Budget Process, GAO-05-734SP
(Washington, D.C.: September 2005), at 70. See also McDonnell Douglas
Corp. v. United States, 37 Fed. Cl. 295, 301, order modified, 39 Fed.
Cl. 665 (1997); OMB Circular No. A-11, Preparation, Submission, and
Execution of the Budget, §§ 20.3, 20.5 (June 21, 2005).
An advance of funds to a working fund[Footnote 1] does not in itself
serve to obligate the funds. See B-180578-0.M., Sept. 26, 1978. The
same result holds for funds transferred to a special "holding account"
established for administrative convenience. B-118638, Nov. 4, 1974
(appropriations for District of Columbia Public Defender Service under
control of the Administrative Office of the U.S. Courts are not
obligated by transfer to a "Judiciary Trust Fund" established by the
Administrative Office).
The typical question on obligations is framed in terms of when the
obligation may or must be "recorded," that is, officially charged
against the spending agency's appropriations. Restated, what action is
necessary or sufficient to create an obligation? This is essential in
determining what fiscal year to charge, with all the consequences that
flow from that determination. It is also essential to the broader
concern of congressional control over the public purse.
Before proceeding with the specifics, two general points should be
noted. First, an obligation arises when the definite commitment is
made, even though the actual payment may not take place until a future
fiscal year. B-300480.2, June 6, 2003; 56 Comp. Gen. 351 (1977); 23
Comp. Gen. 862 (1944). Second, for appropriations law purposes, the
term "obligation" includes both matured and unmatured commitments. A
matured commitment is a legal liability that is currently payable. An
unmatured commitment is a liability which is not yet payable but for
which a definite commitment nevertheless exists. For example, a
contractual liability to pay for goods which have been delivered and
accepted has "matured." The liability for monthly rental payments
under a lease is largely unmatured although the legal liability covers
the entire rental period. Both types of liability are "obligations."
The fact that an unmatured liability may be subject to a right of
cancellation does not negate the obligation. A-97205, Feb. 3, 1944, at
9-10.[Footnote 2]
A recent decision illustrates this point. In B-300480, Apr. 9, 2003,
GAO determined that the Corporation for National and Community Service
(Corporation), the parent body of the AmeriCorps national service
program, incurred a legal liability for the award of AmeriCorps
national service educational benefits at the time it entered into a
grant agreement to provide educational benefits to AmeriCorps
participants. Participants in the AmeriCorps program who successfully
completed a required term of service earned a national service
educational award that could be used to pay for post-secondary
education. The Corporation awarded grants to state service
commissions, which awarded subgrants to the nonprofit groups—the
entities that actually enrolled the AmeriCorps participants. When the
Corporation awarded a grant to a state service commission, it entered
into a binding agreement authorizing the state service commissions to
provide grant awards to a specified number of new participants in the
AmeriCorps program. The Corporation argued that it did not incur an
obligation for an education award until the time of enrollment because
the Corporation could modify the terms and conditions of a grant,
including suspension of enrollment, prior to the enrollment of all
positions initially approved in a grant. GAO disagreed and explained
that:
"The fact that the government may have the power to amend unilaterally
a contract or agreement does not change the nature or scope of the
obligation incurred at time of award. Were it otherwise, every
government contract that permits the government to terminate the
contract for the convenience of the government (48 C.F.R. § 49.502),
or to modify the terms of the contract at will (48 C.F.R. §§ 52.243-1,
243-2, 243-3), would not be an obligation of the government at time of
award. Long-standing practice and logic both of the Congress (31
U.S.C. § 1501, 41 U.S.C. § 5) and the accounting officers of the
government (B-234957, July 10, 1989, B-112131, Feb. 1, 1956) have
rejected such a view."
B-300480, Apr. 9, 2003. GAO concluded that because the Corporation had
taken an action that could mature into a legal liability for the
education benefits by virtue of actions taken by the grantee and
participants, not the Corporation, the Corporation incurred an
obligation at the time of grant award. Id. Subsequently, GAO issued a
second decision, B-300480.2, June 6, 2003, which elaborated upon and
affirmed the April decision.
B. Criteria for Recording Obligations (31 U.S.C. § 1501):
The overrecording and the underrecording of obligations are equally
improper. Both practices make it impossible to determine the precise
status of the appropriation and can lead to other adverse
consequences. Overrecording (recording as obligations items that are
not) is usually done to inflate obligated balances and reduce
unobligated balances of appropriations expiring at the end of a fiscal
year. Underrecording (failing to record legitimate obligations) may
result in violating the Antideficiency Act. 31 U.S.C. § 1341.[Footnote
3] A 1953 decision put it this way:
"In order to determine the status of appropriations, both from the
viewpoint of management and the Congress, it is essential that
obligations be recorded in the accounting records on a factual and
consistent basis throughout the Government. Only by the following of
sound practices in this regard can data on existing obligations serve
to indicate program accomplishments and be related to the amount of
additional appropriations required."
32 Comp. Gen. 436, 437 (1953). See also GAO, Policy and Procedures
Manual for Guidance of Federal Agencies, title 7, § 3.5.A.
(Washington, D.C.: May 18, 1993) (hereafter GAO-PPM).
The standards for the proper recording of obligations are found in 31
U.S.C. § 1501(a), originally enacted as section 1311 of the
Supplemental Appropriation Act, 1955, Pub. L. No. 83-663, 68 Stat.
800, 830 (Aug. 26, 1954). A Senate committee has described the origin
of the statute as follows:
"Section 1311 of the Supplemental Appropriation Act of 1955 resulted
from the difficulty encountered by the House Appropriations Committee
in obtaining reliable figures on obligations from the executive
agencies in connection with the budget review. It was not uncommon for
the committees to receive two or three different sets of figures as of
the same date. This situation, together with rather vague explanations
of certain types of obligations particularly in the military
department[s], caused the House Committee on Appropriations to
institute studies of agency obligating practices.
"The result of these examinations laid the foundation for the
committee's conclusion that loose practices had grown up in various
agencies, particularly in the recording of obligations in situations
where no real obligation existed, and that by reason of these
practices the Congress did not have reliable information in the form
of accurate obligations on which to determine an agency's future
requirements. To correct this situation, the committee, with the
cooperation of the General Accounting Office and the Bureau of the
Budget, developed what has become the statutory criterion by which the
validity of an obligation is determined...."[Footnote 4]
Thus, the primary purpose of 31 U.S.C. § 1501 is to ensure that
agencies record only those transactions which meet specified standards
for legitimate obligations. 71 Comp. Gen. 109 (1991); 54 Comp. Gen.
962, 964 (1975); 51 Comp. Gen. 631, 633 (1972); B-192036, Sept. 11,
1978.[Footnote 5]
Subsection (a) of 31 U.S.C. § 1501 prescribes specific criteria for
recording obligations. The subsection begins by stating that "[a]n
amount shall be recorded as an obligation of the United States
Government only when supported by documentary evidence" and then goes
on to specify nine criteria for recording obligations. Note that the
statute requires "documentary evidence" to support the recording in
each instance. In one sense, these nine criteria taken together may be
said to comprise the "definition" of an obligation.[Footnote 6]
If a given transaction does not meet any of the criteria, then it is
not a proper obligation and may not be recorded as one. Once one of
the criteria is met, however, the agency not only may but must at that
point record the transaction as an obligation. While 31 U.S.C. § 1501
does not explicitly state that obligations must be recorded as they
arise or are incurred, it follows logically from an agency's
responsibility to comply with the Antideficiency Act. GAO has made the
point in decisions and reports in various contexts. E.g., B-302358,
Dec. 27, 2004; 72 Comp. Gen. 59 (1992); 65 Comp. Gen. 4, 6 (1985); B-
242974.6, Nov. 26, 1991; B-226801, Mar. 2, 1988; B-192036, Sept. 11,
1978; A-97205, Feb. 3, 1944, at 10; GAO, FGMSD-75-20 (Washington,
D.C.: Feb. 13, 1975) (untitled letter report); GAO, Substantial
Understatement of Obligations for Separation Allowances for Foreign
National Employees, B-179343, (Washington, D.C.: Oct. 21, 1974), at 6.
It is important to emphasize the relationship between the existence of
an obligation and the act of recording. Recording evidences the
obligation but does not create it. If a given transaction is not
sufficient to constitute a valid obligation, recording it will not
make it one. E.g., B-197274, Feb. 16, 1982 ("reservation and
notification" letter held not to constitute an obligation, act of
recording notwithstanding, where letter did not impose legal liability
on government and subsequent formation of contract was within agency's
control). Conversely, failing to record a valid obligation in no way
diminishes its validity or affects the fiscal year to which it is
properly chargeable. E.g., B-226782, Oct. 20, 1987 (letter of intent,
executed in fiscal year 1985 and found to constitute a contract,
obligated fiscal year 1985 funds, notwithstanding agency's failure to
treat it as an obligation). See also 63 Comp. Gen. 525 (1984); 38
Comp. Gen. 81, 82-83 (1958).
The precise amount of the government's liability should be recorded as
the obligation where that amount is known. However, where the precise
amount is not known at the time the obligation is incurred, an
obligation amount must still be recorded on a preliminary basis. How
to determine this amount is discussed in section B.l.f of this
chapter. See also OMB Circular No. A-11, Preparation, Submission, and
Execution of the Budget, § 20.5 (June 21, 2005) for guidance on how to
record obligation amounts in certain situations. As more precise data
on the liability becomes available, the obligation must be
periodically adjusted, that is, the agency must deobligate funds or
increase the obligational level as the case may be. 7 GAO-PPM § 3.5.D;
B-300480, Apr. 9, 2003.
Adjustments to recorded obligations, like the initial recordings
themselves, must be supported by documentary evidence. The use of
statistical methods to make adjustments "lacks legal foundation if the
underlying transactions cannot be identified and do not support the
calculated totals." B-236940, Oct. 17, 1989; GAO, Financial
Management: Defense Accounting Adjustments for Stock Fund Obligations
Are Illegal, GAO/AFMD-87-1 (Washington, D.C.: Mar. 11, 1987), at 6.
A related concept is the allocation of obligations for administrative
expenses (utility costs, computer services, etc.) between or among
programs funded under separate appropriations. There is no rule or
formula for this allocation apart from the general prescription that
the agency must use a supportable methodology. Merely relying on the
approved budget is not sufficient. See GAO, Financial Management:
Improvements Needed in OSMRE's Method of Allocating Obligations,
GAO/AFMD-89-89 (Washington, D.C.: July 28, 1989). An agency may
initially charge common-use items to a single appropriation as long as
it makes the appropriate adjustments from other benefiting
appropriations before or as of the end of the fiscal year. 31 U.S.C. §
1534; 70 Comp. Gen. 601 (1991). The allocation must be in proportion
to the benefit. 70 Comp. Gen. 592 (1991).
Further procedural guidance may be found in OMB Circular No. A-11, at
§ 20.5; the Treasury Financial Manual; and title 7 of GAO's Policy and
Procedures Manual for Guidance of Federal Agencies. For the most part,
the statutory criteria in 31 U.S.C. § 1501(a) reflect standards that
had been developed in prior decisions of the Comptroller General over
the years. See, e.g., 18 Comp. Gen. 363 (1938); 16 Comp. Gen. 37
(1936). The remainder of this section will explore the nine specific
recording criteria.
1. Section 1501(a)(1): Contracts:
Subsection (a)(1) of 31 U.S.C. § 1501 establishes minimum requirements
for recording obligations for contracts. Specifically, there must be
documentary evidence of:
"(1) a binding agreement between an agency and another person
(including an agency) that is:
"(A) in writing, in a way and form, and for a purpose authorized by
law; and;
"(B) executed before the end of the period of availability for
obligation of the appropriation or fund used for specific goods to be
delivered, real property to be bought or leased, or work or service to
be provided."
As seen in Chapter 5, the general rule for obligating fiscal year
appropriations by contract is that the contract imposing the
obligation must be made within the fiscal year sought to be charged
and must meet a bona fide need of that fiscal year. E.g., B-272191,
Nov. 4, 1997; B-235086, Apr. 24, 1991; 37 Comp. Gen. 155 (1957). This
discussion will center on the timing of the obligation from the
perspective of 31 U.S.C. § 1501(a)(1).
Subsection (a)(1) actually imposes several different requirements:
* a binding agreement;
* in writing;
* for a purpose authorized by law;
* executed before the expiration of the period of obligational
availability; and;
* a contract calling for specific goods, real property, work, or
services.
a. Binding Agreement:
An agreement must be legally binding (offer, acceptance, consideration,
made by authorized official). As stated in a 1991 decision:
"The primary purpose of section 1501(a)(1) is to 'require that there
be an offer and acceptance imposing liability on both parties.' 39
Comp. Gen. 829, 831 (1960). Hence the government may record an
obligation under section 1501 only upon evidence that both parties to
the contract willfully express the intent to be bound."
71 Comp. Gen. 109, 110 (1991) (emphasis in original). To be binding,
however, an agreement does not have to be the final "definitized"
contract. The legislative history of subsection (a)(1) makes this
clear. The following excerpt is taken from the conference report:
"Section 1311(a)(1) precludes the recording of an obligation unless it
is supported by documentary evidence of a binding agreement between
the parties as specified therein. It is not necessary, however, that
the binding agreement be the final formal contract on any specified
form. The primary purpose is to require that there be an offer and an
acceptance imposing liability on both parties. For example, an
authorized order by one agency on another agency of the Government, if
accepted by the latter and meeting the requirement of specificity,
etc., is sufficient. Likewise, a letter of intent accepted by a
contractor, if sufficiently specific and definitive to show the
purposes and scope of the contract finally to be executed, would
constitute the binding agreement required."[Footnote 7]
The following passage from 42 Comp. Gen. 733, 734 (1963) remains a
useful general prescription:
"The question whether Government funds are obligated at any specific
time is answerable only in terms of an analysis of written
arrangements and conditions agreed to by the United States and the
party with whom it is dealing. If such analysis discloses a legal duty
on the part of the United States which constitutes a legal liability
or which could mature into a legal liability by virtue of actions on
the part of the other party beyond the control of the United States,
an obligation of funds may generally be stated to exist."
In 35 Comp. Gen. 319 (1955), and 59 Comp. Gen. 431 (1980), the
Comptroller General set forth the factors that must be present in
order for a binding agreement to exist for purposes of 31 U.S.C. §
1501(a)(1) with respect to contracts awarded under competitive
procedures:
* Each bid must have been in writing.
* The acceptance of each bid must have been communicated to the bidder
in the same manner as the bid was made. If the bid was mailed, the
contract must have been placed in the mails before the close of the
fiscal year. If the bid was delivered other than by mail, the contract
must have been delivered in like manner before the end of the fiscal
year.
* Each contract must have incorporated the terms and conditions of the
respective bid without qualification. Otherwise, it must be viewed as
a counteroffer and there would be no binding agreement until accepted
by the contractor.
To illustrate, where the agency notified the successful bidder of the
award by telephone near the end of fiscal year 1979 but did not mail
the contract document until fiscal year 1980, there was no valid
obligation of fiscal year 1979 funds. 59 Comp. Gen. 431 (1980). See
also Goldberger Foods v. United States, 23 Cl. Ct. 295, 302-303,
aff'd, 960 F.2d 155 (Fed. Cir. 1992); B-159999-0.M., Mar. 16. 1967; B-
235086, Apr. 24, 1991; 35 Comp. Gen. 319 (1955). A document is
considered "mailed" when it is placed in the custody of the Postal
Service (given to postman or dropped in mailbox or letter chute in
office building); merely delivering the document to an agency
messenger with instructions to mail it is insufficient. 59 Comp.
Gen. 431, 433 (1980); B-235086, Apr. 24, 1991. Similarly, there was no
recordable obligation of fiscal year 1960 funds where the agency
erroneously mailed the notice of award to the wrong bidder and did not
notify the successful bidder until the first day of fiscal year 1961.
40 Comp. Gen. 147 (1960). It is important to note that, in the above
cases, the obligation was invalid only with respect to the fiscal year
the agency wanted to charge. The agency could still proceed to
finalize the obligation but would have to charge funds current in the
subsequent fiscal year.
A mere request for additional supplies under a purchase order with no
indication of acceptance of the request does not create a recordable
obligation. 39 Comp. Gen. 829 (1960). Similarly, a work order or
purchase order may be recorded as an obligation only where it
constitutes a binding agreement for specific work or services. 34
Comp. Gen. 459 (1955).
A "letter of intent" is a preliminary document that may or may not
constitute an obligation. At one extreme, it may be nothing more than
an "agreement to agree" with neither party bound until execution of
the formal contract. E.g., B-201035, Feb. 15, 1984, at 5. At the other
extreme, it may contain all the elements of a contract, in which event
it will create binding obligations. The crucial question is whether
the parties intended to be bound, determinable primarily from the
language actually used. Saul Bass & Associates v. United States, 505
F.2d 1386 (Ct. Cl. 1974). For a good example of a letter of intent
creating contractual obligations, see B-226782, Oct. 20, 1987.
A letter of intent which amounts to a contract is also called a
"letter contract." In the context of government procurement, it is
used most commonly when there is insufficient time to prepare and
execute the full contract before the end of the fiscal year. As
indicated in the legislative history quoted earlier, a "letter of
intent" accepted by the contractor may form the basis of an obligation
if it is sufficiently specific and definitive to show the purpose and
scope of the contract. 21 Comp. Gen. 574 (1941); B-127518, May 10,
1956. Letters of intent should be used "only under conditions of the
utmost urgency." 33 Comp. Gen. 291, 293 (1954). Under the Federal
Acquisition Regulation (FAR), letter contracts may be used:
"when (1) the Government's interests demand that the contractor be
given a binding commitment so that work can start immediately and (2)
negotiating a definitive contract is not possible in sufficient time
to meet the requirement. However, a letter contract should be as
complete and definite as feasible under the circumstances."
48 C.F.R. § 16.603-2(a) (2005).
The amount to be obligated under a letter contract is the government's
maximum liability under the letter contract itself, without regard to
additional obligations anticipated to be included in the definitive
contract or, restated, the amount necessary to cover expenses to be
incurred by the contractor prior to execution of the definitive
contract. The obligation is recorded against funds available for
obligation at the time the letter contract is issued. 34 Comp. Gen.
418, 421 (1955); B-197274, Sept. 23, 1983; B-197274, Feb. 16, 1982; B-
127518, May 10, 1956. See also FAR, 48 C.F.R. §§ 16.603-2(d), 16.603-
3(a).
Once the definitive contract is executed, the government's liability
under the letter contract is merged into it. If definitization does
not occur until the following fiscal year, the definitive contract
will obligate funds of the latter year, usually in the amount of the
total contract price less an appropriate deduction relating to the
letter contract. B-197274, Sept. 23, 1983. The cited decision, at page
5, specifies how to calculate the deduction as follows:
"The definitized contract then supports obligating against the
appropriation current at the time it is entered into since it is, in
fact, a bona fide need of that year. The amount of the definitized
contract would ordinarily be the total contract cost less either the
actual costs incurred under the letter contract (when known) or the
amount of the maximum legal liability permitted by the letter contract
(when the actual costs cannot be determined)."
Letter contracts should be definitized within 180 days, or before
completion of 40 percent of the work to be performed, whichever occurs
first. FAR, 48 C.F.R. § 16.603-2(c). Also, letter contracts should not
be used to record excess obligations as this distorts the agency's
funding picture. See GAO, Contract Pricing: Obligations Exceed
Definitized Prices on Unpriced Contracts, GAO/NSIAD-86-128
(Washington, D.C.: May 2, 1986).
b. Contract "in Writing:"
Although the binding agreement under 31 U.S.C. § 1501(a)(1) must be
"in writing," the "writing" is not necessarily limited to words on a
piece of paper. The traditional mode of contract execution is to affix
original handwritten signatures to a document (paper) setting forth
the contract terms. Change is in the winds, however, and traditional
interpretations are being reassessed in light of advancing computer
technologies. In 1983, GAO's legal staff, in an internal memorandum to
one of GAO's audit divisions, took note of modern legal trends and
advised that the "in writing" requirement could be satisfied by
computer-related media which produce tangible recordings of
information, such as punch cards, magnetic cards, tapes, or disks. B-
208863(2)-0.M., May 23, 1983.
Eight years later, the Comptroller General issued his first formal
decision on the topic, 71 Comp. Gen. 109 (1991). The National
Institute of Standards and Technology (NISI) asked whether federal
agencies could use certain Electronic Data Interchange (EDI)
technologies to create valid contractual obligations for purposes of
31 U.S.C. § 1501(a). Yes, replied the Comptroller, as long as there
are adequate safeguards and controls to provide no less certainty and
protection of the government's interests as under a "paper and ink"
method. The decision states:
"We conclude that EDI systems using message authentication codes which
follow NIST's Computer Data Authentication Standard ... or digital
signatures following NIST's Digital Signature Standard, as currently
proposed, can produce a form of evidence that is acceptable under
section 1501."
71 Comp. Gen. at 111. In 2000, Congress enacted the Electronic
Signatures in Global and National Commerce Act,[Footnote 8] which
confirmed the legality of digital signatures in any transaction in or
affecting interstate or foreign commerce. Section 101(a) of the act
provides:
"In General. Notwithstanding any statute, regulation, or other rule of
law ... with respect to any transaction in or affecting interstate or
foreign commerce:
(1) a signature, contract, or other record relating to such
transaction may not be denied legal effect, validity, or
enforceability solely because it is in electronic form; and;
(2) a contract relating to such transaction may not be denied legal
effect, validity, or enforceability solely because an electronic
signature or electronic record was used in its formation."
While there may be some room for interpretation as to what constitutes
a "writing" for purposes of 31 U.S.C. § 1501(a)(1), the writing, in
some acceptable form, must exist. Under the plain terms of the
statute, an oral agreement may not be recorded as an obligation. In
United States v. American Renaissance Lines, Inc., 494 F.2d 1059, 1062
(D.C. Cir.), cert. denied, 419 U.S. 1020 (1974), the court found that
31 U.S.C. § 1501(a)(1) "establishes virtually a statute of frauds" for
the government[Footnote 9] and held that neither party can judicially
enforce an oral contract in violation of the statute.
However, the Court of Claims and its successors, the Claims Court and
United States Court of Federal Claims, have taken the position that
31 U.S.C. § 1501(a)(1) does not bar recovery "outside of the contract"
where sufficient additional facts exist for the court to infer the
necessary "meeting of minds" (contract implied-in-fact). Narva Harris
Construction Corp. v. United States, 574 F.2d 508 (Ct. Cl. 1978);
Johns-Manville Corp. v. United States, 12 Cl. Ct. 1, 19-20 (1987). Cf.
Kinzley v. United States, 661 F.2d 187 (Ct. Cl. 1981) (documentary
evidence of employment of persons sufficient to support oral
employment contract for purposes of 31 U.S.C. § 1501(a)(7)). In
Pacord, Inc. v. United States, 139 F.3d 1320 (9th Cir. 1998), the
court relied on Narva Harris Construction Corp. in holding that, even
though the Federal Acquisition Regulation (FAR) generally requires
contracts to be in writing,[Footnote 10] an oral contract may be
enforced if the plaintiff "can establish sufficient facts, beyond a
mere oral agreement, for the court to infer the existence of an
implied-in-fact contract." Pacord, 139 F.3d at 1323.
These would be examples of subsequently imposed liability where the
agency did not record—and lawfully could not have recorded—an
obligation when the events giving rise to the liability took place. If
a contractor received a judgment in this type of situation, the
obligational impact on the contracting agency would depend on whether
the case was subject to the Contract Disputes Act. If the Act applies,
the judgment would be payable initially from the permanent judgment
appropriation (31 U.S.C. § 1304), to be reimbursed by the agency from
currently available appropriations. See 41 U.S.C. §§ 612(a)-(c); B-
252754, Oct. 6, 1994. If the Act does not apply, the judgment would be
paid from the judgment appropriation without reimbursement, and there
would thus be no obligational impact on the agency.
In B-118654, Aug. 10, 1965, GAO concluded that a notice of award
signed by the contracting officer and issued before the close of the
fiscal year did not satisfy the requirements of 31 U.S.C. § 1501(a)(1)
where it incorporated modifications of the offer as to price and other
terms which had been agreed to orally during negotiations. The reason
is that there was no evidence in writing that the contractor had
agreed to the modifications. GAO conceded, however, that the agency's
argument that there was documentary evidence of a binding agreement
for purposes of section 1501(a)(1) was not without merit. In view of
this and since the agency was in the process of changing its
contracting procedures to assure adequate documentary evidence of both
the offer and the acceptance, we did not insist on any appropriation
adjustments.
In a 1977 decision, however, GAO concluded that a signed contract that
included ambiguous terms relating to pricing might not be defeated
where the ambiguity was resolved by telephone conversations that were
incorporated by reference into an award letter, even though there was
no written record of the conversations showing agreement by both
parties. The Comptroller General concluded that the potential defect
in any event would not afford a basis for a third party (in this case
a protesting unsuccessful offeror) to object to the contract's
legality. 56 Comp. Gen. 768, 775 (1977).
c. Requirement of Specificity:
The statute requires documentary evidence of a binding agreement for
specific goods or services. An agreement that fails this test is not a
valid obligation.
For example, a State Department contract under the Migration and
Refugee Assistance Program establishing a contingency fund "to provide
funds for refugee assistance by any means, organization or other
voluntary agency as determined by the Supervising Officer" did not
meet the requirement of specificity and therefore was not a valid
obligation. B-147196, Apr. 5, 1965.
Similarly, a purchase order which lacks a description of the products
to be provided is not sufficient to create a recordable obligation. B-
196109, Oct. 23, 1979. In the cited decision, a purchase order for
"regulatory, warning, and guide signs based on information supplied"
on requisitions to be issued did not validly obligate fiscal year 1978
funds where the requisitions were not sent to the supplier until after
the close of fiscal year 1978. See also 70 Comp. Gen. 481 (1991)
(advances to establish an imprest fund to finance unspecified future
cash payments do not meet the statutory requirements for recording
obligations).
d. Invalid Award/Unauthorized Commitment:
Where a contract award is determined to be invalid, the effect is that
no binding agreement ever existed as required by 31 U.S.C. §
1501(a)(1) and therefore there was no valid obligation of funds. 38
Comp. Gen. 190 (1958); B-157360, Aug. 11, 1965. As discussed in
Chapter 5, section B.6, under more recent authorities the original
obligation is not extinguished for all purposes, and those amounts
originally obligated remain available post-expiration to fund a valid
"replacement contract." 70 Comp. Gen. 230 (1991); 68 Comp. Gen. 158
(1988). Where the invalidity is determined under a bid protest, which
will presumably cover most such instances, the extended availability
described in the GAO decisions is statutorily defined as 100 days
after the final ruling on the protest. 31 U.S.C. § 1558(a). Thus,
cases like 38 Comp. Gen. 190 must be regarded as modified to this
extent. Of course, amounts originally obligated do not survive post-
expiration for anything other than a valid replacement contract. B-
270723, Apr. 15, 1996.
Where the Comptroller General awards bid preparation costs to a
successful protester under authority of 31 U.S.C. § 3554(c), payment
should be charged to the agency's procurement appropriations current
at the time GAO issued its decision. If the agency must verify the
amount of bid preparation costs to which the protester is entitled
prior to payment, the agency should record an estimated obligation,
using GAO's decision as the obligating document. Upon verification,
the obligation is adjusted up or down as necessary, on the basis of
the documents submitted by the protester to substantiate the amount. B-
199368.4, Jan. 19, 1983 (nondecision letter).
Claims against the government resulting from unauthorized commitments
raise obligation questions in two general situations. If the
circumstances surrounding the unauthorized commitment are sufficient
to give rise to a contract implied-in-fact, it may be possible for the
agency to ratify the unauthorized act. If the ratification occurs in a
subsequent fiscal year, the obligation is chargeable to the prior
year, that is, the year in which the need presumably arose and the
claimant performed. B-208730, Jan. 6, 1983. However, before an agency
chooses to ratify the obligation, it first must assure that sufficient
prior year unobligated funds remain available to cover the
ratification. Id.; B-290005, July 1, 2002. If ratification is not
available for whatever reason, the only remaining possibility for
payment is a quantum meruit recovery under a theory of contract
implied-in-law. The quantum meruit theory permits payment in limited
circumstances even in cases where there was no valid obligation, for
example, where the contractor has made partial delivery operating
under what he believed to be a valid contract. B-303906, Dec. 7, 2004;
B-251668, May 13, 1993; B-118428, Sept. 21, 1954. See also 67 Comp.
Gen. 507 (1988). The obligational impact is the same as for
ratification—payment is chargeable to the fiscal year in which the
claimant performed. B-210808, May 24, 1984; B-207557, July 11, 1983.
e. Variations in Quantity to Be Furnished:
In some types of contracts, the quantity of goods to be furnished or
services to be performed may vary. The quantity may be indefinite or it
may be stated in terms of a definite minimum with permissible
variation. Variations may be at the option of the government or the
contractor. The obligational treatment of this type of contract
depends on the exact nature of the contractual liability imposed on
the government.
Before proceeding, it is important to define some terms. A
requirements contract is one in which the government agrees to
purchase all of its needs for the particular item or service during
the contract period from the contractor, and the contractor agrees to
fill all such needs. Federal Acquisition Regulation (FAR), 48 C.F.R. §
16.503(a) (2005); Modern Systems Technology Corp. v. United States,
979 F.2d 200, 206 (Fed. Cir. 1992); Torncello v. United States, 681
F.2d 756, 761 (Ct. CL 1982). An indefinite-quantity contract is one in
which the contractor agrees to supply whatever quantity the government
may order, within limits, with the government under no obligation to
use that contractor for all of its requirements. FAR, 48 C.F.R. §
16.504(a); Hemet Valley Flying Service Co. v. United States, 7 Cl. Ct.
512, 515-16 (1985); Mason v. United States, 615 F.2d 1343, 1346 n.5
(Ct. CL), cert. denied, 449 U.S. 830 (1980); B-302358, Dec. 27, 2004.
Under either type of contract, the government orders specific
quantities from time to time by issuing a document variously termed a
work order, task order, delivery order, etc.
In a requirements contract, the government must state a realistic
estimated total quantity. An agency may obtain its estimate from
records of previous requirements and consumption, or by other means,
and should base the estimate on the most current information
available. FAR, 48 C.F.R. § 16.503(a)(1); B-190855, Mar. 31, 1978; B-
188426, Sept. 20, 1977. It is not legally necessary that requirements
contracts place a minimum or a maximum limit upon the estimated
requirements. B-256312, June 6, 1994; B-226992.2, July 13, 1987. See
also Unlimited Enterprises, Export-Import, Inc., ASBCA No. 34825, 88-3
BCA ¶ 20,908 (1988). However, the FAR provides that "the contract
shall state, if feasible, the maximum limit of the contractor's
obligation to deliver and the Government's obligation to order." 48
C.F.R. § 16.503(a)(2). Needs must relate to the contract period. 21
Comp. Gen. 961, 964 (1942).
If, in the exercise of good faith, the anticipated requirements simply
do not materialize, the government is not obligated to purchase the
stated estimate or indeed, if no requirements arise, to place any
orders with the contractor beyond any required minimum. 47 Comp. Gen.
365, 370 (1968). See also Appeal of Shepard Printing, GPOBCA No. 37-92
(1994); AGSGenesys Corp., ASBCA No. 35302, 89-2 BCA ¶ 21,702 (1989);
World Contractors, Inc., ASBCA No. 20354, 75-2 BCA ¶ 11,536 (1975).
The contractor assumes the risk that nonguaranteed requirements may
fall short of expectations, and has no claim for a price adjustment if
they do. Medan, Inc. v. Austin, 967 F.2d 579 (Fed. Cir. 1992); 37
Comp. Gen. 688 (1958). If, however, the government attempts to meet
its requirements elsewhere, including the development of in-house
capability, or if failure to place orders with the contractor for
valid needs is otherwise found to evidence lack of good faith,
liability will result. E.g., Rumsfeld v. Applied Companies, Inc., 325
F.3d 1328 (Fed. Cir), cert. denied, 540 U.S. 981 (2003); Torncello,
681 F.2d at 768-69; Cleek Aviation v. United States, 19 CL Ct. 552
(1990); Appeal of MDP Construction, Inc., ASBCA No. 49527, 96-2 BCA
¶ 28,525 (1996); Viktoria Transport GmbH & Co., ASBCA No. 30371, 88-3
BCA ¶ 20,921 (1988); California Bus Lines, ASBCA No. 19732,
75-2 BCA ¶ 11,601 (1975); Henry Angelo & Sons, Inc., ASBCA No. 15082,
72-1 BCA ¶ 9356 (1972); B-182266, Apr. 1, 1975.
An indefinite-quantity contract, under current regulations, must
include a minimum purchase requirement which must be more than
nominal. FAR, 48 C.F.R. § 16.504(a)(2); B-302358, Dec. 27, 2004. An
indefinite-quantity contract without a minimum purchase requirement is
regarded as illusory and unenforceable. It is no contract at all.
Torncello, 681 F.2d at 761; Mason, 615 F.2d at 1346 n.5; Howell v.
United States, 51 Fed. CL 516 (2002); Rice Lake Contracting, Inc. v.
United States, 33 Fed. CL 144, 152-53 (1995); Modern Systems
Technology Corp. v. United States, 24 Cl. Ct. 360 (1991). Apart from
the specified minimum, the government is free to obtain its
requirements from other contractors. Government Contract Services,
Inc., GSBCA No. 8447, 88-1 BCA ¶ 20,255 (1987); Alta Construction Co.,
PSBCA No. 1395, 87-2 BCA ¶ 19,720 (1987).
An indefinite-delivery, indefinite-quantity (IDIQ) contract is a form
of an indefinite-quantity contract. As with other indefinite quantity
contracts, an IDIQ contract must require the government to order, and
the contractor to furnish, at least a stated minimum quantity of
supplies or services. FAR, 48 C.F.R. § 16.504(a). While the agency may
place orders at any time during a fixed period, actual delivery dates
during that period are undefined. After award of an IDIQ contract, the
government places task or delivery orders with the contractor (or
contractors) as the government's needs become definite. B-302358, Dec.
27, 2004. IDIQs have historically provided a way to expeditiously fill
certain government needs. See GAO, Contract Management: Few Competing
Proposals for Large DOD Information Technology Orders, NSIAD-00-56
(Washington, D.C.: Mar. 20, 2000), at 5.
What does all this signify from the perspective of obligating
appropriations? As we noted at the outset, the obligational impact of
a variable quantity contract depends on exactly what the government
has bound itself to do. A fairly simple generalization can be deduced
from the decisions: In a variable quantity contract (requirements or
indefinite-quantity), any required minimum purchase must be obligated
when the contract is executed; subsequent obligations occur as work
orders or delivery orders are placed, and are chargeable to the fiscal
year in which the order is placed. B-302358, Dec. 27, 2004.
Thus, in a variable quantity contract with no guaranteed minimum—or
any analogous situation in which there is no liability unless and
until an order is placed—there would be no recordable obligation at
the time of award. B-302358, Dec. 27, 2004; B-259274, May 22, 1996; 63
Comp. Gen. 129 (1983); 60 Comp. Gen. 219 (1981); 34 Comp. Gen. 459,
462 (1955); B-124901, Oct. 26, 1955 ("call contract").[Footnote 11]
Obligations are recorded as orders are placed.
The same approach applies to a contract for a fixed quantity in which
the government reserves an option to purchase an additional quantity.
The contract price for the fixed quantity is an obligation at the time
the contract is entered into; the reservation of the option ripens
into an obligation only if and when the government exercises the
option. 19 Comp. Gen. 980 (1940). See also B-287619, July 5, 2001 (for
medical services provided through civilian contracted care, DOD's
legal liability for at-risk payment is determined by the fixed price
established by the contract and should be recorded at the time DOD
executes the contract, and again when it executes any subsequent
options).
An application of these concepts also can be found at B-192036, Sept.
11, 1978. The National Park Service entered into a construction
contract for the development of a national historic site. Part of the
contract price was a "contingent sum" of $25,000 for "Force Account
Work," described in the contract as miscellaneous items of a minor
nature not included in the bid schedule. No "Force Account Work" was
to be done except under written orders issued by the contracting
officer. Since a written order was required for the performance of
work, no part of the $25,000 could be recorded as an obligation unless
and until such orders were issued and accepted by the contractor. That
portion of the master contract itself which provided for the Force
Account Work was not sufficiently specific to create an obligation.
In a 1955 case, the Army entered into a contract for the procurement
of lumber. The contract contained a clause permitting a 10 percent
overshipment or undershipment of the quantity ordered. This type of
clause was standard in lumber procurement contracts. The Comptroller
General held that the Army could obligate the amount necessary to pay
for the maximum quantities deliverable under the contract. 34 Comp.
Gen. 596 (1955). Here, the quantity was definite and the government
was required to accept the permissible variation.
In another 1955 case, the General Services Administration had
published in the Federal Register an offer to purchase chrome ore up
to a stated maximum quantity. Formal agreements would not be executed
until producers made actual tenders of the ore. The program published
in the Federal Register was a mere offer to purchase and GSA could not
obligate funds to cover the total quantity authorized. Reason: there
was no mutual assent and therefore no binding agreement in writing
until a producer responded to the offer and a formal contract was
executed. B-125644, Nov. 21, 1955.
So-called "level of effort" contracts are conceptually related to the
"variation in quantity" cases. In one case, the Environmental
Protection Agency entered into a cost-plus-fixed-fee contract for
various services at an EPA facility. The contractor's contractual
obligation was expressed as a "level of effort" in terms of staff-
hours. The contractor was to provide up to a stated maximum number of
direct staff-hours, to be applied on the basis of work orders issued
during the course of the contract. Since the government was obligated
under the contract to order specific tasks, the contract was
sufficiently definitive to justify recording the full estimated
contract amount at the time of award. B-183184, May 30, 1975. See also
58 Comp. Gen. 471, 474 (1979); B-199422, June 22, 1981 (nondecision
letter).
f. Amount to Be Recorded:
As noted previously, where the precise amount of the government's
liability is defined at the time the government enters into the
contract that is the amount to be recorded. For example, in the simple
firm fixed-price contract, the contract price is the recordable
obligation. The possibility that the contractor may not perform up to
the level specified in the contract does not provide a basis for
recording less than the full contract price as the obligation.
However, for many types of obligations, the precise amount of the
government's liability cannot be known at the time the liability is
incurred. As summarized in our preliminary discussion of 31 U.S.C.
§ 1501(a), some initial amount must still be recorded. The agency
should then adjust this initial obligation amount up or down
periodically as more precise information becomes available.[Footnote
12]
GAO decisions, as well as GAO's Policy and Procedures Manual for
Guidance of Federal Agencies,[Footnote 13] indicate that, in general,
the agency should use its best estimate to record the initial amount
where the amount of the government's final liability is undefined.
E.g., 56 Comp. Gen. 414, 418 (1977); 50 Comp. Gen. 589 (1971). Section
3.5.D of the Manual further provides that, where an estimate is used,
the basis for the estimate and the computation must be documented.
For example, in 50 Comp. Gen. 589, GAO considered the accounting
procedures used by the Administrative Office of the United States
Courts (Administrative Office) with respect to paying court-appointed
attorneys in federal criminal cases. GAO held that at the time of
appointment of such attorneys a contractual obligation was created on
the part of the government to pay the reasonable costs of the
representation, although the exact amount of such obligation remained
to be determined. Such obligations must, therefore, be charged against
the appropriations current at the time of appointment. Id. at 590-91.
The proper procedure for charging these obligations was described as
follows:
"Upon the appointment of an attorney by the court, a copy of the order
of appointment is sent to [the Administrative Office] for the purpose
of estimating the obligation to be charged against the current
appropriation. This estimate made by [the Administrative Office] is
based on past average costs per case and the fact that the [Criminal
Justice Act] sets dollar limits on the amount of compensation a court-
appointed attorney may receive."
Id. at 589. The appropriation account current at the time of
appointment was thus charged until the voucher reflecting the actual
costs was approved (which could occur in a subsequent fiscal year), at
which point the estimated amounts were adjusted accordingly.[Footnote
14]
Decisions dealing with certain kinds of contract obligations provide
more specific rules. Under a fixed-price contract with escalation,
price redetermination, or incentive provisions, the amount to be
obligated initially is the fixed price stated in the contract or the
target price in the case, for example, of a contract with an incentive
clause. B-255831, July 7, 1995; 34 Comp. Gen. 418 (1955); B-133170,
Jan. 29, 1975; B-206283-0.M., Feb. 17, 1983. Thus, in an incentive
contract with a target price of $85 million and a ceiling price of
$100 million, the proper amount to record initially as an obligation
is the target price of $85 million. 55 Comp. Gen. 812, 824 (1976). See
also McDonnell Douglas Corp. v. United States, 39 Fed. CL 665 (1997).
The agency must increase or decrease the amount recorded (i.e., the
target price) to reflect price revisions at the time such revisions
are made or determined pursuant to the provisions of the contract. 34
Comp. Gen. at 420-21. When obligations are recorded based on a target
price, the agency should establish appropriate safeguards to guard
against violations of the Antideficiency Act. This usually means the
administrative reservation of sufficient funds to cover potential
liability.
B-255831, July 7, 1995; 34 Comp. Gen. at 420-21; B-206283-0.M., Feb.
17, 1983.
The two recent decisions involving the Corporation for National and
Community Service, discussed previously in section A of this chapter,
held that the Corporation must record the government's full liability
under the grant at the time of grant award. B-300480, Apr. 9, 2003,
aff'd, B-300480.2, June 6, 2003. Under the grant agreements involved,
the Corporation agreed to fund a specified number of AmeriCorps
program participants. This number could be converted into a precise
dollar amount. Thus, the Corporation incurred an obligation to pay the
maximum dollar amount if the grantee fully performed under the grant
agreement and enrolled the specified number of participants. While the
grantee might ultimately fail to enroll the number of participants
called for in the grant agreement, the extent of the grantee's
performance under the grant was entirely within the grantee's control.
The decisions rejected contentions by the Corporation and the Office
of Management and Budget that the initial grant obligation should be
recorded on the basis of estimates that reflected past experience. As
the April 9, 2003 decision observed:
"For purposes of identifying the amount of the
Corporation's obligation at grant award ... the grantee and
subgrantee, by their actions in enrolling participants, ultimately
control the amount of the Corporation's liability. If the amount of
liability of the government is under the control of the grantee, not
the Corporation, the government should obligate funds to cover the
maximum amount of the liability. See, e.g., B-238581, Oct. 31, 1990; B-
197274, Sept. 23, 1983."[Footnote 15]
In this regard, the result in the two 2003 decisions is really no
different from the obligation rule that applies to a simple fixed-
price contract. There, the government incurs a firm obligation to pay
a specified amount provided, of course, that the contractor fully
performs under the contract. The possibility that the contractor may
not perform up to the level specified in the contract does not provide
a basis for recording less than the full contract price as the
obligation.
g. Administrative Approval of Payment:
In some instances, a liability does not arise until the agency
formally reviews and approves a payment. In these instances, of
course, the agency should not record an obligation for payment until
it approves the payment. (The review and approval here refers to a
process in addition to the normal review and approval of the voucher
by a certifying and disbursing officer that is always required.) For
example, under Internal Revenue Service (IRS) regulations, IRS has no
financial liability to its informants until it has evaluated the worth
of the information and assessed and collected any underpaid taxes and
penalties stemming from that information. It is at this point that an
appropriate IRS official determines that a reward should be paid and
its amount, and it is at this point that IRS incurs a recordable
obligation. B-137762.32, July 11, 1977.
In 46 Comp. Gen. 895 (1967), GAO approved the then Veterans
Administration's (VA) practice of recording obligations for fee-basis
outpatient treatment of eligible veterans at the time the agency
administratively approved the vouchers. VA had established a review
and approval process to determine whether the government should accept
liability; therefore, no obligation arose until that time. See also B-
133944, Jan. 31, 1958; B-92679, July 24, 1950.
GAO followed 46 Comp. Gen. 895 in a decision concerning the Defense
Department's TRICARE health care program, B-287619, July 5, 2001. The
decision concluded that the Defense Department did not incur a
liability for the costs of medical services provided under the so-
called "pass through" arrangement of the TRICARE program until the
Department processed and approved a claim—that is, until the
Department determined that the beneficiary was eligible to receive
treatment, the services provided were allowable, and the amount billed
was proper. Thus, claims-approval was the appropriate time at which to
record an obligation.
By way of contrast, the obligation for the expenses of a court-
appointed attorney under the Criminal Justice Act of 1964 (CJA) arises
at the time of appointment, not later when the expenses are approved,
because of the terms of the Act. 50 Comp. Gen. 589 (1971). Under
section 2 of the CJA, as amended, 18 U.S.0 § 3006A, the court's order
of appointment establishes contractual liability, even though the
exact amount of the obligation is not determinable until the
attorney's payment voucher is approved. The court's review of the
voucher is intended only to ensure the reasonableness of the expenses
incurred. Thus, GAO held that payment must be charged to the funds
available for the fiscal year in which the appointment was made.
Beginning with fiscal year 1977 the Judiciary has received no-year
appropriations to pay court appointed attorneys. See Departments of
State, Justice, and Commerce, the Judiciary, and Related Agencies
Appropriation Act, 1977, Pub. L. No. 94-362, title IV, 90 Stat. 937,
953 (July 14, 1976); Consolidated Appropriations Act, 2005, Pub. L.
No. 108-447, div. B, title DI, 118 Stat. 2809, 2892 (Dec. 8, 2004).
h. Miscellaneous Contractual Obligations:
The core issue in many of the previously discussed cases has been when
a given transaction ripens into a recordable obligation, that is,
precisely when the "definite commitment" occurs. Many of the cases do
not fit neatly into categories. Rather, the answer must be derived by
analyzing the nature of the contractual or statutory commitments in
the particular case.
A 1979 case dealt with a lease arrangement entered into by the Peace
Corps in Korea. Under a particular type of lease recognized by Korean
law, the lessee does not make installment rental payments. Instead,
the lessee makes an initial payment of approximately 50 percent of the
assessed valuation of the property. At the end of the lease, the
lessor is required to return the entire initial payment. The lessor
makes his profit by investing the initial payment at the local
interest rate. Since the lease is a binding contractual commitment and
since the entire amount of the initial payment may not be recoverable
for a number of reasons, GAO found it improper to treat the initial
payment as a mere advance or an account receivable (as in the case of
travel advances) and thus not reflected as an obligation. Rather, the
amount of the initial payment must be recorded as an obligation
chargeable to the fiscal year in which the lease is entered into, with
subsequent returns to be deposited in the Treasury as miscellaneous
receipts. B-192282, Apr. 18, 1979.
Several cases deal with court-related obligations. For example, the
obligation for fees of jurors, including retroactive increases
authorized by 28 U.S.C. § 1871, occurs at the time the jury service is
performed. 54 Comp. Gen. 472 (1974). See also the discussion of
attorney fee payments in section B.1.g of this chapter. The recording
of obligations for land commissioners appointed to determine just
compensation in land condemnation cases was discussed in B-184782,
Feb. 26, 1976, and 56 Comp. Gen. 414 (1977).[Footnote 16] The rules
derived from these decisions are as follows:
* The obligation occurs at the time of appointment and is chargeable
to the fiscal year of appointment if a specific case is referred to
the commission in that fiscal year.
* Pendency of an action will satisfy the bona fide needs rule and will
be sufficient to support the obligation even though services are not
actually performed until the following fiscal year.
* Appointment of a "continuous" land commission creates no obligation
until a particular action is referred to it.
* An amended court order increasing the compensation of a particular
commissioner amounts to a new obligation and the full compensation is
chargeable to the appropriation current at the time of the amended
order.
* A valid obligation occurs under the above principles even though the
order of appointment does not expressly charge the costs to the United
States because, under the Constitution, the costs cannot be assessed
against the condemnee.
i. Interagency Transactions:
It is not uncommon for federal agencies to provide goods or services to
other federal agencies. Section 1501 addresses these interagency
transactions in two places. Subsection (a)(3) addresses interagency
orders required by law. We discuss these transactions in section B.3
of this chapter. Subsection (a)(1) addresses the obligational
requirements of all other interagency transactions: "a binding
agreement between an agency and another person (including an agency)"
(emphasis added). To distinguish these other transactions from those
required by law, these transactions are often referred to as
"voluntary orders." This section discusses voluntary orders. Because
voluntary orders are covered by section 1501(a)(1), obligations for
many voluntary orders are recorded in the same manner as for
contracts. However, the authority that governs the interagency
transaction, not contract practices, determines the obligational
treatment of a voluntary order.
(1) Economy Act agreements:
A major source of authority for voluntary interagency agreements is
the Economy Act, 31 U.S.C. §§ 1535, 1536. An Economy Act agreement is
recorded as an obligation of the ordering agency at the time the
ordering agency enters into the agreement.[Footnote 17] However,
Economy Act agreements are subject to one additional requirement.
Under 31 U.S.C. § 1535(d), if the ordering agency obligated a fixed-
year appropriation, the ordering agency must deobligate the obligation
at the end of the fiscal year to the extent that the performing agency
has not incurred an obligation, that is, (1) has not provided the
requested item to the ordering agency, (2) has not performed the
requested service, or (3) has not entered into a valid contract with
another person to provide the requested item or service to the
ordering agency. 39 Comp. Gen. 317 (1959); 34 Comp. Gen. 418, 421-22
(1955). It was, for example, improper for the Library of Congress to
use annual funds transferred to it under Economy Act agreements and
not obligated by it prior to the end of the fiscal year to provide
services in the following fiscal year. GAO, Financial Audit: First
Audit of the Library of Congress Discloses Significant Problems,
GAO/AFMD-91-13 (Washington, D.C.: Aug. 22, 1991). The reason for this
requirement is to prevent the Economy Act from being used to extend
the obligational life of an appropriation beyond that provided by law.
31 Comp. Gen. 83, 85 (1951). The deobligation requirement of 31 U.S.C.
§ 1535(d) does not apply to obligations against no-year
appropriations. 39 Comp. Gen. 317, 319 (1959). For more background
information on obligation and deobligation under the Economy Act, see
Chapter 15, section B.1; B-302760, May 17, 2004; B-288142, Sept. 6,
2001; and B-301561, June 14, 2004 (nondecision letter).
(2) Non-Economy Act agreements:
Where the agreement is based on some statutory authority other than
the Economy Act, the recording of the obligation is still governed by
31 U.S.C. § 1501(a)(1). However, the deobligation requirement of 31
U.S.C. § 1535(d) does not apply. In this situation, the obligation
will remain payable in full from the appropriation initially charged,
regardless of when performance occurs, in the same manner as
contractual obligations generally, subject, of course, to the bona
fide needs rule and to any restrictions in the legislation authorizing
the agreement. E.g., B-302760, May 17, 2004 (interagency agreement
pursuant to 2 U.S.C. § 141(c) for renovation of loading dock); B-
289380, July 31, 2002 (interagency agreement pursuant to the
section 27(g) of the Consumer Product Safety Act, 15 U.S.C. §
2076(g)); B-286929, Apr. 25, 2001 (interagency agreement pursuant to
what is now 40 U.S.C. § 322 for implementation of a declassification
information management system); 51 Comp. Gen. 766 (1972) (interagency
agreement pursuant to section 303(a) of the former Manpower
Development and Training Act of 1962, 42 U.S.C. § 2613(a) (1964) for
training of air traffic controllers). Thus, it is necessary to
determine the specific statutory authority supporting the interagency
agreement in order to properly obligate a requesting agency's
appropriation. The following examples illustrate these principles.
The National Park Service (NPS) of the Department of Interior entered
into a series of agreements during fiscal year 1998 with the National
Resource Conservation Service of the Department of Agriculture to
obtain soil surveys at various NPS locations. Each agreement
delineated specific tasks organized in two or three phases across
several fiscal years, culminating in the publication of a final soil
survey report for each location. GAO concluded that the agreements
were entered into primarily under the authority of 16 U.S.C. § 4601-
1(g) and thus were not subject to the deobligation requirement of 31
U.S.C. § 1535(d). However, since NPS provided insufficient information
for GAO to determine whether the agreements were for severable or
nonseverable services for purpose of complying with the bona fide
needs rule,[Footnote 18] GAO returned the case to NPS in order to make
the requisite determinations and adjust its accounts accordingly. B-
282601, Sept. 27, 1999.
The Administrative Office of United States Courts and the General
Services Administration entered into an agreement during fiscal year
1976 for design and implementation of an automated payroll system that
was authorized by 40 U.S.C. § 759 (1976) (a provision of law that has
since been repealed), rather than the Economy Act. The work was to be
performed during fiscal years 1976 and 1977. Since the agreement met
the requirements of 31 U.S.C. § 1501(a)(1), it was properly recordable
as a valid obligation against fiscal year 1976 funds and was not
subject to 31 U.S.C. § 1535(d). 55 Comp. Gen. 1497 (1976).
The Army Corps of Engineers entered into agreement with Department of
Housing and Urban Development (HUD) to perform flood insurance studies
pursuant to orders placed by HUD. Since the agreement presumably
required the Corps to perform as HUD placed the orders, a recordable
obligation would arise when HUD placed an order under the agreement.
Since the agreement was authorized by the National Flood Insurance
Act,[Footnote 19] rather than the Economy Act, funds obligated by an
order would remain obligated even though the Corps did not complete
performance (or contract out for it) until following the fiscal year.
B-167790, Sept. 22, 1977.
(3) "Binding agreement" requirement:
Regardless of whether the Economy Act or other interagency transaction
authority governs the transaction, a voluntary interagency order is
recordable under 31 U.S.C. § 1501(a)(1) only if it constitutes a
binding agreement that meets the other criteria of that subsection. If
it does, the applicability or nonapplicability of 31 U.S.C. § 1535(d)
then becomes relevant. If it does not, an obligation arises only when
the performing agency has completed the work or has awarded contracts
to have the work done. See 59 Comp. Gen. 602 (1980); 39 Comp. Gen. 829
(1960); 34 Comp. Gen. 705, 708 (1955); 23 Comp. Gen. 88 (1943); B-
193005, Oct. 2, 1978; B-180578-0.M., Sept. 26, 1978. For example,
Military Interdepartmental Procurement Requests (MIPR) are viewed as
authorized by the Economy Act. An MIPR is considered a binding
agreement for obligation purposes under 31 U.S.C. § 1501(a)(1). It is
subject to the deobligation requirement of 31 U.S.C. § 1535(d) and is
thus ultimately chargeable to appropriations current when the
performing component incurs valid obligations. 59 Comp. Gen. 563
(1980); 34 Comp. Gen. 418, 422 (1955).
In B-193005, Oct. 2, 1978, GAO considered the procurement of crude oil
for the Strategic Petroleum Reserve. The Federal Property and
Administrative Services Act of 1949[Footnote 20] authorized the
General Services Administration (GSA) to procure materials for other
federal agencies as well as to delegate such authority. GSA delegated
the authority to procure fuel commodities to the Secretary of Defense,
who redelegated the authority to the Defense Fuel Supply Center
(DFSC). Thus, the Department of Energy (DOE) could procure oil through
the DFSC in a non-Economy Act transaction. An order placed by DOE with
DFSC prior to the expiration of the period of availability of the
appropriation to be charged could be recorded as an obligation against
such appropriation under 31 U.S.C. § 1501(a)(1) if it constituted a
"binding agreement." Further, the appropriation that was obligated
would remain available to liquidate contracts awarded by DFSC. This
result would have been precluded by 31 U.S.C. § 1535(d) had the
transaction been governed by the Economy Act.
In 59 Comp. Gen. 602 (1980), GAO considered the procedure by which the
then Bureau of Alcohol, Tobacco, and Firearms (ATF) ordered "strip
stamps" from the Bureau of Engraving and Printing. (These are the
excise tax stamps one sees pasted across the caps of liquor bottles.)
GAO reviewed pertinent legislation and concluded that ATF was not
"required by law" to procure its strip stamps from the Bureau of
Engraving and Printing. Since individual orders were not binding
agreements, it was immaterial in one important respect whether the
order was governed by the Economy Act or some other law; in neither
event could ATF's funds remain obligated beyond the last day of a
fiscal year to the extent an order remained unfilled. Funds could be
considered obligated at the end of a fiscal year only to the extent
that stamps were printed or in process or that the Bureau of Engraving
and Printing had entered into a contract with a third party to provide
them.
(4) Orders from stock:
The obligational treatment of orders for items to be delivered from
stock of the requisitioned agency derives from 32 Comp. Gen. 436
(1953). An order for items to be delivered from stock is a recordable
obligation if (1) it is intended to meet a bona fide need of the
fiscal year in which the order is placed or to replace stock used in
that fiscal year[Footnote 21] and (2) the order is firm and complete.
To be firm and complete, the order must request prompt delivery of
specific available stock items for a stated consideration and must be
accepted by the supplying agency in writing. "Available" means on hand
or routinely on order. However, acceptance is not required for common-
use stock items which are on hand or on order and will be delivered
promptly.
Materials which are specially manufactured or otherwise created for a
particular purpose in order to satisfy an order are not "stock" 44
Comp. Gen. 695 (1965). Likewise, an order for an item not stocked by
the requisitioned agency (or, if out of stock, not routinely on order)
is not a recordable obligation until the requisitioned agency
purchases the item or executes a contract for it. The reason is that
such an order does not mature into a binding agreement until the
requisitioned agency executes the order or purchases the item(s)
needed to fill it; before then, it is merely an offer subject to
acceptance by the requisitioned agency's performance. B-193005, Oct.
2, 1978. The basic rules in this area were established by
34 Comp. Gen. 705 (1955).
Although the foregoing rules were developed prior to the enactment of
31 U.S.C. § 1501(a)(1), they continue to govern the recording of
obligations under that statute. 34 Comp. Gen. 705; 34 Comp. Gen. 418,
422 (1955).
(5) Project orders:
Historically, "project orders" refer to orders authorized by 41 U.S.C.
§ 23,[Footnote 22] which provides:
"All orders or contracts for work or material or for the manufacture
of material pertaining to approved projects heretofore or hereafter
placed with Government-owned establishments shall be considered as
obligations in the same manner as provided for similar orders or
contracts placed with commercial manufacturers or private contractors,
and the appropriations shall remain available for the payment of the
obligations so created as in the case of contracts or orders with
commercial manufacturers or private contractors."[Footnote 23]
GAO has interpreted this statute, which was derived from earlier
appropriation act provisions for the military departments appearing
shortly after World War I,[Footnote 24] as applying only to
transactions between the military departments and establishments owned
by the Defense Department for work related to military projects. 72
Comp. Gen. 172, 173 (1993); B-95760, June 27, 1950. Thus, the decision
in 72 Comp. Gen. 172 held that the Economy Act, rather than 41 U.S.C.
§ 23, applies to Defense Department transactions with other federal
agencies, in this case a Department of Defense request for research
assistance from the Library of Congress.
A project order is a valid and recordable obligation when the order is
issued and accepted, regardless of the fact that performance may not
be accomplished until after the expiration of the fiscal year. 1 Comp.
Gen. 175 (1921); B-135037-0.M., June 19, 1958. The statute does not,
however, authorize the use of the appropriations so obligated for the
purpose of replenishing stock used in connection with the order. A-
25603, May 15, 1929. The requirement of specificity applies to project
orders the same as any other recordable obligations under 31 U.S.C. §
1501(a)(1). B-126405, May 21, 1957.
Since a project order is not an Economy Act transaction, the
deobligation requirement of 31 U.S.C. § 1535(d) does not apply. 34
Comp. Gen. 418, 422 (1955). See also 16 Comp. Gen. 752 (1937). Also,
unlike the Economy Act, 41 U.S.C. § 23 does not authorize advance
payment. Thus, advance payment for project orders is not authorized
unless permitted by some other statute. B-95760, June 27, 1950.
2. Section 1501(a)(2): Loans:
Under 31 U.S.C. § 1501(a)(2), a recordable obligation exists when
there is documentary evidence of "a loan agreement showing the amount
and terms of repayment."
A loan agreement is essentially contractual in nature. Thus, to have a
valid obligation, there must be a proposal by one party and an
acceptance by another. Approval of the loan application must be
communicated to the applicant within the fiscal year sought to be
charged, and there must be documentary evidence of that communication.
B-159999-0.M., Mar. 16, 1967. Where a loan application is made in one
fiscal year and approval is not communicated to the applicant until
the following fiscal year, the obligation is chargeable to the later
year. Id.; B-159999-0.M., Dec. 14, 1966.
Telegraphic notification of approval of a loan application where the
amount of the loan and terms of repayment are thereby agreed upon is
legally acceptable. B-159999-0.M., Dec. 14, 1966.
To support a recordable obligation under section 1501(a)(2), the
agreement must be sufficiently definite and specific, just as in the
case of section 1501(a)(1) obligations. To illustrate, the United
States and the government of Brazil entered into a loan agreement in
1964. As a condition precedent to any disbursement under the
agreement, Brazil was to furnish a statement covering utilization of
the funds. The funds were to be used for various economic and social
development projects "as may, from time to time, be agreed upon in
writing" by the governments of the United States and Brazil While the
loan agreement constituted a valid binding contract, it was not
sufficiently definite or specific to validly obligate fiscal year 1964
funds. The basic agreement was little more than an "agreement to
agree," and an obligation of funds could arise only when a particular
"utilization statement" was submitted and approved. B-155708-0.M.,
Apr. 26, 1965.
Prior to fiscal year 1992, the amount to be recorded in the case of a
loan was quite simple-—the face amount of the loan. From the budgetary
perspective, however, this was undesirable because the obligation was
indistinguishable from any other cash outlay. By disregarding at the
obligational stage the fact that loans are supposed to be repaid, this
treatment did not reflect the true cost to the government of direct
programs. Congress addressed the situation in the Federal Credit
Reform Act of 1990 (FCRA), Pub. L. No. 101-508, § 13201, 104 Stat.
1388, 1388-609 (Nov. 5, 1990), codified at 2 U.S.C. §§ 661-661f). The
general approach of the FCRA is to require the advance provision of
budget authority to cover the subsidy portion of direct loans (in
recognition of the fact that not all loans are repaid), with the non-
subsidy portion (the portion expected to be repaid) financed through
borrowings from the Treasury. The Office of Management and Budget has
issued detailed instructions for implementing the FCRA's requirements
that appear in OMB Circular No. A-11, Preparation, Submission, and
Execution of the Budget, part 5 (June 21, 2005).[Footnote 25]
The FCRA defines "direct loan" as "a disbursement of funds by the
Government to a non-Federal borrower under a contract that requires
the repayment of such funds with or without interest." 2 U.S.C. §
661a(1). A "direct loan obligation" is "a binding agreement by a
Federal agency to make a direct loan when specified conditions are
fulfilled by the borrower." Id. § 661a(2). The "cost" of a direct loan
is the estimated long-term cost to the government, taking into
consideration disbursements and repayments, calculated on a net
present value basis at the time of disbursement. Id. § 661a(5).
Unless otherwise provided by statute, new direct loan obligations may
be incurred only to the extent that budget authority to cover the
subsidy costs is provided in advance. 2 U.S.C. § 661c(b). Under this
provision, the typical appropriation will include both an
appropriation of budget authority for the subsidy costs and a program
ceiling (total face amount of loans supportable by the cost
appropriation). The appropriation is made to a "program account." When
a direct loan obligation is incurred, its cost is obligated against
the program account. See generally OMB Cir. No. A-11, at § 185.10. The
actual funding is done through a revolving, nonbudget "financing
account." Loan repayments are credited to the financing account. See
generally OMB Cir. No. A-11, at § 185.11. The overobligation or
overexpenditure of either the loan subsidy or the credit level
supportable by the enacted subsidy violates the Antideficiency Act.
See OMB Cir. No. A-11, at § 145.3.
3. Section 1501(a)(3): Interagency Orders Required by Law:
The third standard for recording obligations, 31 U.S.C. § 1501(a)(3),
is "an order required by law to be placed with [a federal] agency."
Subsection (a)(3) means exactly what it says. An order placed with
another government agency is recordable under this subsection only if
it is required by statute or statutory regulation to be placed with
the other agency. The subsection does not apply to orders that are
merely authorized rather than required. 34 Comp. Gen. 705 (1955).
An order required by law to be placed with another agency is not an
Economy Act transaction. Therefore, the deobligation requirement of
31 U.S.C. § 1535(d) does not apply. 35 Comp. Gen. 3, 5 (1955). The
fact that the work will be performed in the next fiscal year does not
defeat the obligation as long as the bona fide need test is met. B-
302760, May 17, 2004; 59 Comp. Gen. 386 (1980); 35 Comp. Gen. 3. Also,
the fact that the work is to be accomplished and reimbursement made
through use of a revolving fund is immaterial. 35 Comp. Gen. 3; 34
Comp. Gen. 705.
A common example of "orders required by law" is printing and binding
to be done by the Government Printing Office (GPO). 44 U.S.C. § 501.
[Footnote 26] The rule is that a requisition for printing services may
be recorded as an obligation when placed if (1) there is a present
need for the printing and (2) the requisition is accompanied by copy
or specifications sufficient for GPO to proceed with the job.
Thus, a requisition by the Commission on Fine Arts for the printing of
"Sixteenth Street Architecture, Volume I" placed with GPO in fiscal
year 1977 and accompanied by manuscript and specifications obligated
fiscal year 1977 funds and was chargeable in its entirety to fiscal
year 1977, notwithstanding that the printing would be done in the
following fiscal year. 59 Comp. Gen. 386 (1980). However, a
requisition for U.S. Travel Service sales promotional literature
placed with GPO near the end of fiscal year 1964 did not obligate
fiscal year 1964 funds where no copy or manuscript was furnished to
GPO until fiscal year 1965. 44 Comp. Gen. 695 (1965). For other
printing cases illustrating these rules, see 29 Comp.
Gen. 489 (1950); 23 Comp. Gen. 82 (1943); B-154277, June 5, 1964; B-
123964, Aug. 23, 1955; B-114619, Apr. 17, 1953; B-50663, June 30,
1945; B-35807, Aug. 10, 1943; B-34888, June 21, 1943.
After an agency certifies that it requires the services of GPO, the
Public Printer is required to furnish an estimate of the cost of the
services to the ordering agency, which then may make a requisition for
performance from GPO. The estimate is the amount that the ordering
agency should obligate against its appropriation and establishes a
ceiling that GPO may not exceed without first providing the ordering
agency a new estimate and obtaining a requisition from an authorized
official of the ordering agency. 44 U.S.C. §§ 1102(c), 1103. Thus GPO
was not authorized to exceed its estimate of $14,000 and incur
expenses amounting to $304,334 without first notifying and obtaining
the approval of an authorized official of the requisitioning agency,
in this case the Environmental Protection Agency. B-259208, Mar. 6,
1996. Further, the printing estimate alone, even if written, is not
sufficient to create a valid and recordable obligation unless it is
accompanied by the placement of an order. B-182081, Jan. 26, 1977,
aff'd, B-182081, Feb. 14, 1979. In the cited decision, there was no
valid obligation before the ordering commission went out of existence
and its appropriations ceased to be available for further obligation.
Therefore, there was no appropriation available to reimburse GPO for
work done under the invalid purported obligation.
GPO is required by law to print certain congressional materials such
as the Congressional Record, and receives a "Printing and Binding"
appropriation for this purpose. For items such as these where no
further request or authorization is required, a copy of the basic law
authorizing the printing and a copy of the appropriation constitute
the obligating documents. B-123964, Aug. 23, 1955.
Another common "order required by law" situation is building
alteration, management, and related services to be performed by the
General Services Administration. For example, a job order by the
Social Security Administration for building repairs validly obligated
funds of the fiscal year in which the order was placed, by virtue of
subsection (a)(3), notwithstanding that GSA was unable to perform the
work until the following fiscal year. 35 Comp. Gen. 3 (1955). See also
B-158374, Feb. 21, 1966. However, this result assumes compliance with
the bona fide need concept. Thus, an agreement for work incident to
the relocation of Federal Power Commission employees placed in fiscal
year 1971 did not validly obligate fiscal year 1971 funds where it was
clear that the relocation was not required to, and would not, take
place, nor would the space in question be made tenantable, until the
following fiscal year. B-95136-0.M., Aug. 11, 1972. Orders placed with
GSA are further discussed in 34 Comp. Gen. 705 (1955).
As noted earlier, GAO has expressed the view that the recording
criteria of 31 U.S.C. § 1501(a) should be followed in evaluating
obligations of the government of the District of Columbia. Thus,
orders by a department of the District of Columbia government for
repairs and improvements which are required by statute or statutory
regulation to be placed with the District of Columbia Department of
General Services and performed through use of the Repairs and
Improvements Working Fund create valid obligations when the orders are
placed. B-180578-0.M., Sept. 26, 1978.
4. Section 1501(a)(4): Orders without Advertising:
The fourth recording standard in 31 U.S.C. § 1501(a)(4) is:
"an order issued under a law authorizing purchases without advertising:
(A) when necessary because of a public exigency;
(B) for perishable subsistence supplies; or;
(C) within specific monetary limits."
Subsection (a)(4) is limited to statutorily authorized purchases
without advertising in the three situations specified. The subsection
must be self-explanatory as there appear to be no Comptroller General
decisions under it.
5. Section 1501(a)(5): Grants and Subsidies:
The fifth recording standard in 31 U.S.C. § 1501(a)(5) requires that
the obligation be supported by documentary evidence of a grant or
subsidy payable:
"(A) from appropriations made for payment of, or contributions to,
amounts required to be paid in specific amounts fixed by law or under
formulas prescribed by law;
"(B) under an agreement authorized by law; or:
"(C) under plans approved consistent with and authorized by law."
The recording statute refers to grants and subsidies although federal
assistance may be characterized in many ways. See Chapters 10 and 11,
respectively, for a more comprehensive discussion of the concepts of
federal assistance in the form of grants and cooperative agreements
and federal assistance in the form of guaranteed and insured loans.
a. Grants:
In order to properly obligate an appropriation for an assistance
program, some action creating a definite liability against the
appropriation must occur during the period of the obligational
availability of the appropriation. In some situations, the obligating
action under section 1501(a)(5) involves a discretionary action by an
agency of awarding a grant that is evidenced by a grant agreement. The
particular document will vary and may be in the form of an agency's
approval of a grant application or a letter of commitment. See B-
289801, Dec. 30, 2002; 39 Comp. Gen. 317 (1959); 37 Comp. Gen. 861,
863 (1958); 31 Comp. Gen. 608 (1952); B-128190, June 2, 1958; B-
114868.01-0.M., Mar. 17, 1976.
Generally, in order to properly obligate federal assistance funds,
there must be some action to establish a firm commitment on the part
of the United States. This commitment must be unconditional. 50 Comp.
Gen. 857, 862 (1971). There must be documentary evidence of the grant
award and this requirement is not satisfied by the mere reservation or
earmarking of amounts in accounting records for the purpose of having
them available should an application for a grant be submitted and
approved. Champaign County, Illinois v. United States Law Enforcement
Assistance Administration, 611 F.2d 1200 (7th Cir. 1979); B-126372,
Sept. 18, 1956. Finally, the award terms must be communicated to the
official grantee, and where the grantee is required to comply with
certain prerequisites, such as putting up matching funds, the
prerequisite must also be accepted by the grantee during the period of
availability of the grant funds.
An illustration of this latter requirement is B-220527, Dec. 16, 1985.
The Economic Development Administration made an "offer of grant" to a
Connecticut municipality that would have required a substantial outlay
of funds by the municipality. The offer was accepted by a town
official who had no authority to accept the grant. By its own
municipal ordinance, only the town council could accept a grant offer.
By the time the town marshaled the resources to fulfill its
obligations under the grant and the unauthorized acceptance was
ratified by the town council, the federal funds had expired for
obligational purposes. GAO held that no valid grant obligation on the
part of the government had ever been made. See also B-164990, Jan. 10,
1969, finding an attempted obligation invalid where the program
legislation required approval of a proposed grant by the state
governor and he had not yet agreed, even though the award instruments
had already been executed.
Applying the above principles, the Comptroller General found that a
document entitled "Approval and Award of Grant" used by the Economic
Development Administration was sufficient for recording grant
obligations under the local public works program because it "reflects
the Administration's acceptance of a grant application; specifies the
project approved and the amount of funding; and imposes a deadline for
affirmation by the grantee." B-126652, Aug. 30, 1977. Once the
appropriation has been properly obligated, performance by the grantee
and the actual disbursement of funds may extend beyond the period of
obligational availability. B-300480, Apr. 9, 2003, aff'd, B-300480.2,
June 6, 2003; B-289801, Dec. 30, 2002; 31 Comp. Gen. 608, 610 (1952);
20 Comp. Gen. 370 (1941); B-37609, Nov. 15, 1943; B-24827, Apr. 3,
1942; B-124374-0.M., Jan. 26, 1956.
If the above requirements are not met, then the appropriation is not
obligated. Thus, the Comptroller General determined that the attempted
obligation was invalid in B-164990, Sept. 6, 1968, where the grantee
corporation was not in existence when the obligation was recorded.
Also, the relevant program legislation must be examined to see if
there are any additional requirements.
In other situations, the obligating action for purposes of 31 U.S.C.
§ 1501(a)(5)(A) may take place by operation of law under a statutory
formula grant or by virtue of actions authorized by law to be taken by
others that are beyond the control of the agency (even when the
precise amount of the obligation is not determined until a later
time). When this occurs, the documentary evidence used to support the
accounting charge against the appropriation is a reflection of, not
the creation of, the obligation under the particular law and usually
is generated subsequent to the time that the actual obligation arose.
63 Comp. Gen. 525 (1984); B-164031(3).150, Sept. 5, 1979. Thus where
an agency is required to allocate funds to states on the basis of a
statutory formula, the formula establishes the obligation to each
recipient rather than the agency's allocation since, if the allocation
is erroneous, the agency must adjust the amounts paid each recipient.
41 Comp. Gen. 16 (1961); B-164031(3).150, Sept. 5, 1979.
The rules for deobligation and reobligation of assistance funds are
the same as for other obligations generally. Program legislation in a
given case may, of course, provide for different treatment. For
example, B-211323, Jan. 3, 1984, considered a provision of the Public
Works and Economic Development Act of 1965[Footnote 27] under which
funds apportioned to states remained available to the state until
expended. Under that particular provision, funds deobligated as the
result of a cost underrun could be reobligated by the state, without
fiscal year limitation, for purposes within the scope of the program
statute. For a discussion of obligation and deobligation of funds
under the now defunct Comprehensive Employment and Training Act (the
predecessor of the Job Training Partnership Act) in the context of the
Impoundment Control Act, see B-200685, Apr. 27, 1981.
b. Subsidies:
There have been relatively few cases dealing with the obligational
treatment of subsidies, although the principles should parallel those
for grants since they both derive from 31 U.S.C. § 1501(a)(5). This
may be explained by the fact that some courts when confronted with the
necessity to determine the meaning of "subsidy" (when used in a
statute that does not define the word) have done so in a manner that
is remarkably similar to the commonly used definitions of a grant.
(See the discussion of grants in Chapter 10, section B). Thus a
subsidy has been defined as "a grant of public funds or property by a
government to a private person to assist in establishment or support
of an enterprise deemed advantageous to public..." In re Hooper's
Estate, 359 F.2d 569, 575-76 Ord Cir.), cert. denied sub. nom, 385
U.S. 903 (1966). See also Satellite Broadcasting & Communications
Ass'n of America v. FCC, 146 F. Supp. 2d 803, 829-30 (E.D. Va.), affd,
275 F.3d 337 (4th Cir. 2001), cert. denied, 536 U.S. 922 (2002);
Kennecott Copper Corp. v. State Tax Commission, 60 E Supp. 181 (D.
Utah 1944) rev'd, 150 F.2d 905 (10th Cir. 1945), aff'd, 327 U.S. 573
(1946); Los Angeles County v. State Department of Public Health, 322
P.2d 968, 973 (Cal. App. 2nd Dist. 1958).
The few GAO decisions in this area treat subsidies in a manner similar
to grants for obligational purposes. In 50 Comp. Gen. 857 (1971) GAO
considered legislation authorizing the former Federal Home Loan Bank
Board to make "interest adjustment" payments to member banks. The
payments were designed to adjust the effective rates of interest
charged by member banks on short- and long-term borrowing, the
objective being to stimulate residential construction for low- and
middle-income families. Funds were appropriated to the Board for this
purpose on a fiscal year basis. GAO concluded that an obligation arose
for purposes of 31 U.S.C. § 1501(a)(5) when a Federal Home Loan Bank
made a firm and unconditional commitment in writing to a member
institution, provided that the commitment letter included a reasonable
expiration date. The funds would have to be deobligated to the extent
that a member institution failed to execute loans prior to the
specified expiration date.
In 65 Comp. Gen. 4 (1985), GAO advised the Department of Education
that mandatory interest subsidies under the Guaranteed Student Loan
Program should be recorded as obligations on a "best estimate" basis
as they arise, even if the recordings would exceed available budgetary
resources. Since the subsidies are not discretionary obligations but
are imposed by law, there would be no Antideficiency Act violation.
The decision overruled an earlier case (B-126372, Sept. 18, 1956)
which had held that the recording of obligations for mail rate
subsidies to air carriers could be deferred until the time of payment.
65 Comp. Gen. at 8 n.3.
In 64 Comp. Gen. 410 (1985), GAO considered obligations by the
Department of Housing and Urban Development for operating subsidies to
state public housing authorities for low-income housing projects.
Under the governing statute and regulations, the amount of the subsidy
was determined upon HUD's approval of the state's annual operating
budget, although the basic commitment stemmed from an annual
contribution contract. HUD's practice, primarily for states whose
fiscal year coincides with that of the federal government, was to
record the obligation on the basis of an estimate, issued in a letter
of intent. GAO found this to be legally permissible, but cautioned
that HUD was required to adjust the obligation up or down once it
approved the operating budget.
A 1983 decision, B-212145, Sept. 27, 1983, discusses the use of
estimates subject to subsequent adjustment for the recording of
obligations for payments in lieu of taxes under 31 U.S.C. §§ 6901-6906.
From the perspective of the recording of obligations, these two
decisions-64 Comp. Gen. 410 and B-212145—are simply applications of
the general principle, previously noted, that best estimates should be
recorded when more precise information is not available, subject to
later adjustment.
For additional discussion see Chapter 5, section B.10, relating to the
application of the bona fide needs rule to grants and cooperative
agreements and Chapter 10 relating to the obligation of appropriations
for grants.
6. Section 1501(a)(6): Pending Litigation:
The sixth standard for recording obligations is "a liability that may
result from pending litigation." 31 U.S.C. § 1501(a)(6).
Despite its seemingly broad language, subsection (a)(6) has very
limited application. Most judgments against the United States are paid
from a permanent indefinite appropriation, 31 U.S.C. § 1304.
Accordingly, since the expenditure of agency funds is not involved,
judgments payable under 31 U.S.C. § 1304 have no obligational impact
on the respondent agency.
Not all judgments against the United States are paid from the
permanent judgment appropriation. Several types are payable from
agency funds. However, the mere fact that a judgment is payable from
agency funds does not make it subject to subsection (a)(6). Thus far,
the Comptroller General has applied subsection (a)(6) in only two
situations—land condemnation (35 Comp. Gen. 185 (1955)) and certain
impoundment litigation (54 Comp. Gen. 962 (1975)). In land
condemnation proceedings, the appropriation is obligated when the
request is made to the Attorney General to institute the proceedings.
34 Comp. Gen. 418, 423 (1955); 34 Comp. Gen. 67 (1954);
17 Comp. Gen. 664 (1938); 4 Comp. Gen. 206 (1924). In impoundment
litigation, the Comptroller General has held that when the impounded
balance is obligated under subsection (a)(6) as a liability which
might result from the pending litigation, the balance so obligated may
be used without further appropriation action. 54 Comp. Gen. 962.
However, with limited exceptions, pending litigation itself does not
create an obligation against the United States for purposes of section
1501(a)(6). Rochester Pure Waters District v. EPA, 960 F.2d 180, 186
(D.C. Cir. 1992) (citing 35 Comp. Gen. 185 and 54 Comp. Gen. 962). The
plaintiff in Rochester sought an injunction to restore appropriated
funds that Congress had rescinded pending adjudication of a claim the
plaintiff was pursuing against the Environmental Protection Agency
that would have been payable from the rescinded funds. The court held
that it lacked statutory or constitutional authority to grant the
requested relief.
As stated in 35 Comp. Gen. at 187, subsection (a)(6) requires
recording an obligation in cases where the government is definitely
liable for the payment of money out of available appropriations and
the pending litigation is for the purpose of determining the amount of
the government's liability. Thus, for judgments payable from agency
appropriations in other than land condemnation and impoundment cases,
the standard of 35 Comp. Gen. 185 should be applied to determine
whether an obligation must be recorded.
In cases where a judgment will be payable from agency funds but
recording is not required, 35 Comp. Gen. 185 suggested that the agency
should nevertheless administratively reserve sufficient funds to cover
the contingent liability to avoid a possible violation of the
Antideficiency Act. Id. at 187. While the administrative reservation
may still be a good idea for other reasons, the majority of more
recent cases (cited and summarized in Chapter 6, section C.2.f under
the heading "Intent/Factors Beyond Agency Control") have taken the
position that overobligations resulting from court-ordered payments do
not violate the Antideficiency Act.[Footnote 28]
It should be apparent that the preceding discussion applies to money
judgments-—judgments directing the payment of money. 62 Comp.
Gen. 527 (1983); 61 Comp. Gen. 509 (1982). In some types of
litigation, a court may order an agency to take some specific action.
While compliance will result in the expenditure of agency funds, this
type of judgment is not within the scope of 35 Comp. Gen. 185. While
we have found no cases, it seems clear from the application of 31
U.S.C. § 1501(a) in other contexts that no recordable obligation would
arise while this type of litigation is still "pending."
7. Section 1501(a)(7): Employment and Travel:
Under 31 U.S.C. § 1501(a)(7), obligations are recordable when
supported by documentary evidence of "employment or services of
persons or expenses of travel under law," which covers a variety of
loosely related obligations.
a. Wages, Salaries, Annual Leave:
Salaries of government employees, as well as related items that flow
from those salary entitlements such as retirement fund contributions,
are obligations at the time the salaries are earned, that is, when the
services are rendered. B-303961, Dec. 6, 2004; B-302911, Sept. 7,
2004; B-287619, July 5, 2001; 24 Comp. Gen. 676, 678 (1945). For
example, in 38 Comp. Gen. 316 (1958), the Commerce Department wanted
to treat the salaries of employees performing administrative and
engineering services on highway construction projects as part of the
construction contract costs. Under this procedure, the anticipated
expenses of the employees, salaries included, would be recorded as an
obligation at the time a contract was awarded. However, the
Comptroller General held that this would not constitute a valid
obligation under 31 U.S.C. § 1501. The employee expenses were not part
of the contract costs and could not be obligated before the services
were performed.
Section 1501(a)(7) is not limited to permanent federal employees. It
applies as well to persons employed in other capacities, such as
temporary or intermittent employees or persons employed under a
personal services contract. In Kinzley v. United States, 661 F.2d 187
(Ct. Cl. 1981), for example, the court found various agency
correspondence sufficient compliance with subsection (a)(7) to permit
a claim for compensation for services rendered as a project
coordinator. Unlike subsection (a)(1), the court pointed out,
subsection (a)(7) does not require a binding agreement in writing
between the parties, but only documentary evidence of "employment or
services of persons." Id. at 191.
For persons compensated on an actual expense basis, it may be
necessary to record the obligation as an estimate, to be adjusted when
the services are actually performed. Documentation requirements to
support the obligation or subsequent claims are up to the agency.
E.g., B-217475, Dec. 24, 1986.
When a pay increase is granted to wage board employees, the effective
date of the increase is governed by 5 U.S.C. § 5344. This effective
date determines the government's liability to pay the additional
compensation. Therefore, the increase is chargeable to appropriations
currently available for payment of the wages for the period to which
the increases apply. B-287619, July 5, 2001; 39 Comp. Gen. 422 (1959).
This is true regardless of the fact that appropriations may be
insufficient to discharge the obligation and the agency may not yet
have had time to obtain a supplemental appropriation. The obligation
in this situation is considered "authorized by law" and therefore does
not violate the Antideficiency Act. 39 Comp. Gen. at 426.
Annual leave status "is synonymous with a work or duty status." 25
Comp. Gen. 687 (1946). As such, annual leave obligates appropriations
current at the time the leave is taken. Id.; 50 Comp. Gen. 863, 865
(1971); 17 Comp. Gen. 641 (1938). Except for employees paid from
revolving funds (25 Comp. Gen. 687), or where there is some statutory
indication to the contrary (B-70247, Jan. 9, 1948), the obligation for
terminal leave is recorded against appropriations for the fiscal year
covering the employee's last day of active service. 25 Comp. Gen. at
688; 24 Comp. Gen. 578, 583 (1945).
Bonuses such as performance awards or incentive awards obligate
appropriations current at the time the awards are made. Thus, for
example, where performance awards to Senior Executive Service
officials under 5 U.S.C. § 5384 were made in fiscal year 1982 but
actual payment had to be split between fiscal year 1982 and fiscal
year 1983 to stay within statutory compensation ceilings, the entire
amount of the awards remained chargeable to fiscal year 1982 funds. 64
Comp. Gen. 114, 115 n. 2 (1984). The same principle would apply to
other types of discretionary payments; the administrative
determination creates the obligation. E.g., B-80060, Sept. 30, 1948.
Employees terminated by a reduction in force (RIF) are entitled by
statute to severance pay. 5 U.S.C. § 5595. Severance pay is obligated
on a pay period by pay period basis. Thus, where a RIF occurs near the
end of a fiscal year and severance payments will extend into the
following fiscal year, it is improper to charge the entire amount of
severance pay to the fiscal year in which the RIF occurs. B-200170,
July 28, 1981.
GAO reached a different result in B-200170, Sept. 24, 1982. The United
States Metric Board was scheduled to terminate its existence on
September 30, 1982. Legislative history indicated that the Board's
fiscal year 1982 appropriation was intended to include severance pay,
and no appropriations had been requested for fiscal year 1983. Under
these circumstances, severance payments to be made in fiscal year 1983
were held chargeable to the fiscal year 1982 appropriation. A contrary
result would have meant that the fiscal year 1982 funds would expire,
and Congress would have had to appropriate the same funds again for
fiscal year 1983.
b. Compensation Plans in Foreign Countries:
By statute, the State Department is required to establish compensation
plans for foreign national employees of the Foreign Service in foreign
countries. The plans are to be "based upon prevailing wage rates and
compensation practices ... for corresponding types of positions in the
locality of employment," to the extent consistent with the public
interest. 22 U.S.C. § 3968(a)(1).
Under subsection (b) of 22 U.S.C. § 3968, other government agencies
are authorized to administer foreign national employee compensation
programs in accordance with the applicable provisions of the Foreign
Service Act. This provision, for example, authorized the Defense
Department to establish a pension and life insurance program for
foreign national employees in Bermuda, provided that it corresponded
to prevailing local practice. 40 Comp. Gen. 650 (1961).
Section 3968(c) of title 22, United States Code, authorizes the
Secretary of State to prescribe regulations for local compensation
plans applicable to all federal agencies. To the extent this authority
is not exercised, however, the statute does not otherwise require that
a plan established by another agency conform to the State Department's
plan. An agency establishing a local plan should, to the extent not
regulated by State, coordinate with other agencies operating in the
locality. 40 Comp. Gen. at 652. (As a practical matter, two agencies
operating in the same locality should not develop substantially
different plans, assuming both legitimately reflect prevailing local
practice.)
To the extent the authority of 22 U.S.C. § 3968 is exercised in a
given country, the obligational treatment of various elements of
compensation may vary from what would otherwise be required. For
example, Colombian law provides for the advance payment of accrued
severance pay to help the employee purchase or make improvements on a
home. Thus, under a compensation plan for foreign national employees
in Colombia, severance pay would be recorded as an obligation against
the fiscal year appropriation current at the time of accrual. B-
192511, Feb. 5, 1979.
While 22 U.S.C. § 3968 authorizes compensation plans based on local
practice, it does not permit automatic disregard of all other laws of
the United States. Thus, under the Colombian severance pay program
noted above, if the employee subsequently is terminated for cause or
otherwise loses eligibility, the agency must proceed with collection
action under the Federal Claims Collection Act, local practice to the
contrary notwithstanding. B-192511, June 8, 1979. Similarly, accrued
severance pay retains its status as United States funds up to actual
disbursement and is therefore subject to applicable fiscal and fund
control requirements. B-199722, Sept. 15, 1981 (severance pay plan in
Jordan).
In several foreign countries, foreign nationals employed by the United
States are entitled to be paid a "separation allowance" when they
resign, retire, or are otherwise separated through no fault of their
own. The allowance is based on length of service, rate of pay at time
of separation, and type of separation. Unlike severance pay for
federal employees, these separation allowances represent binding
commitments which accrue during the period of employment. As such,
they should be recorded as obligations when they are earned rather
than when they are paid. GAO, FGMSD-76-25 (Washington, D.C.: Oct. 17,
1975); FGMSD-75-20 (Washington, D.C.: Feb. 13, 1975); Substantial
Understatements of Obligations for Separation Allowances for Foreign
National Employees, B-179343, (Washington, D.C.: Oct. 21, 1974).
(These three items are GAO reports, the first two being untitled
letter reports.) See also B-226729, May 18, 1987; B-192511, Feb. 5,
1979.
c. Training:
The obligation for training frequently stems from a contract for
services and to that extent is recordable under subsection (a)(1)
rather than subsection (a)(7) of 31 U.S.C. § 1501. The rules for
training obligations are summarized in Chapter 5, section B.5.
d. Uniform Allowance:
The Federal Employees Uniform Act, 5 U.S.C. § 5901, authorizes a
uniform allowance for each employee required by statute or regulation
to wear a uniform. The agency may furnish the uniform or pay a cash
allowance. Where an agency elects to pay an allowance, the obligation
arises when the employee incurs the expense and becomes entitled to
reimbursement. Thus, the appropriation chargeable is the one currently
available at the time the employee makes the expenditure or incurs the
debt. 38 Comp. Gen. 81 (1958).
e. Travel Expenses:[Footnote 29]
The obligation of appropriations for expenses relating to travel was
an extremely fertile area and generated a large number of decisions
before 31 U.S.C. § 1501 was enacted. The cases seem to involve every
conceivable permutation of facts involving trips or transactions
covering more than one fiscal year. The enactment of 31 U.S.C. § 1501
logically prompted the question of how the new statute affected the
prior decisions. It did not, replied the Comptroller General. Thus,
the starting point is that subsection (a)(7) incorporates prior GAO
decisions on obligations for travel. 35 Comp. Gen. 183 (1955); 34
Comp. Gen. 459 (1955).
The leading case in this area appears to have been 35 Comp. Gen. 183,
which states the pertinent rules. The rules for travel may be
summarized as follows: The issuance of a travel order in itself does
not constitute a contractual obligation. The travel order is merely an
authorization for the person specified to incur the obligation. The
obligation is not incurred until the travel is actually performed or
until a ticket is purchased, provided in the latter case the travel is
to be performed in the same fiscal year the ticket is purchased. 35
Comp. Gen. at 185. A 1991 decision, 70 Comp. Gen. 469, reaffirmed the
principle that the expenses of temporary duty travel are chargeable to
the fiscal year or years in which they are actually incurred.
Some of the earlier cases in this evolutionary process are as follows:
* Where tickets are purchased in one fiscal year and the travel is
performed in the following fiscal year, the obligation is chargeable
to the year in which the travel is performed, even though early
purchase of the tickets may have been necessary to assure
reservations. 27 Comp. Gen. 764 (1948); 26 Comp. Gen. 131 (1946).
* A "continuous journey" involving more than one segment obligates
funds of the fiscal year in which the ticket was purchased, as long as
the trip starts in that same fiscal year. However, procurement of
transportation en route is a new obligation. Similarly, a round-trip
ticket obligates funds at the time of purchase as long as the trip
starts in the same fiscal year. However, if the return portion of the
ticket cannot be used and a separate return ticket must be purchased,
a new obligation is created. 26 Comp. Gen. 961 (1947); A-36450, May
27, 1931.
* Per diem incident to official travel accrues from day to day. Per
diem allowances are chargeable to appropriations current when the
allowances accrue (i.e., when the expenditures are made). Thus, where
travel begins in one fiscal year and extends into the next fiscal
year, the per diem obligation must be split along fiscal year lines,
even though the cost of the travel itself may have been chargeable in
its entirety to the prior fiscal year. 23 Comp. Gen. 197 (1943).
* Reimbursement on a mileage basis is chargeable to the fiscal year in
which the major portion of the travel occurred. If travel is begun
sufficiently prior to the end of a fiscal year to enable the employee
to complete a continuous journey before the close of the fiscal year,
the obligation is chargeable entirely to that year. However, if the
travel is begun so late in the fiscal year that the major portion of
it is performed in the succeeding fiscal year, it is chargeable to
appropriations for the succeeding year. 9 Comp. Gen. 458, 460 (1930);
2 Comp. Dec. 14 (1895).
* Where (1) an employee is authorized to travel by privately owned
vehicle at not to exceed the constructive cost of similar travel by
rail, (2) the trip starts in one fiscal year and extends into the
following fiscal year, and (3) the journey would have been completed
in the prior year had rail travel been used, the travel expense is
chargeable to the fiscal year in which the travel began. 30 Comp. Gen.
147 (1950).
Other cases involving obligations for travel expenses are: 16 Comp.
Gen. 926 (1937); 16 Comp. Gen. 858 (1937); 5 Comp. Gen. 1 (1925);
26 Comp. Dec. 86 (1919); B-134099, Dec. 13, 1957; A-30477, Apr. 20,
1939; A-75086, July 29, 1936; A-69370, Apr. 10, 1936.
f. State Department: Travel Outside Continental United States:
By virtue of 22 U.S.C. § 2677, appropriations available to the State
Department for travel and transportation outside the continental United
States "shall be available for such expenses when any part of such
travel or transportation begins in one fiscal year pursuant to travel
orders issued in that year, notwithstanding the fact that such travel
or transportation may not be completed during that same fiscal year."
This provision appeared in appropriation acts starting in 1948 and was
subsequently made permanent and codified. It has the effect of
excluding State Department travel or transportation outside the
continental United States from some of the earlier decisions. The
authority is permissive rather than mandatory. 42 Comp. Gen. 699
(1963).
Section 2677 of title 22 applies to temporary duty travel as well as
travel incident to change of duty station. 71 Comp. Gen. 494 (1992).
In either case, expenses are chargeable to the year in which the
travel is ordered as long as some travel-related expense is also
incurred in that year, even though the physical travel may not begin
until the following year. Id. Travel-related expenses in this context
include miscellaneous incidental expenses such as inoculations and
passports as long as they are not incurred at a time so far removed
from the actual travel as to question their legitimacy as incident to
the travel. 30 Comp. Gen. 25 (1950). The statute also permits charging
the prior year for expenses incurred under amended travel orders
issued in the subsequent fiscal year as long as some part of the
travel or transportation began in the prior fiscal year. 29 Comp.
Gen. 142 (1949).
The statute does not permit retroactive charging of an expired
appropriation. Thus, the Comptroller General found it improper to
issue a travel authorization in one fiscal year designating the
succeeding fiscal year as the appropriation to be charged, and then,
at the start of the succeeding fiscal year, cancel the authorization
and replace it with a new authorization retroactively designating the
prior year. 42 Comp. Gen. 699 (1963).
g. Employee Transfer/Relocation Costs:
A government employee transferred to a new duty station is entitled to
various allowances, primarily travel expenses of the employee and his
or her immediate family, and transportation and temporary storage of
household goods. 5 U.S.C. § 5724. In addition, legislation enacted in
1967, now found at 5 U.S.C. § 5724a, authorized several types of
relocation expenses for transferred employees. Specifically, they are:
(1) per diem allowance for employee's immediate family en route
between old and new duty station; (2) expenses of one house-hunting
trip to new duty station; (3) temporary quarters allowance incident to
relocation; (4) certain expenses of real estate transactions incurred
as a result of the transfer; and (5) a miscellaneous expense allowance.
The leading case on the obligation of employee transfer expenses is 64
Comp. Gen. 45 (1984). The rule is that "for all [reimbursable] travel
and transportation expenses of a transferred employee, the agency
should record the obligation against the appropriation current when
the employee is issued travel orders." Id. at 48. This treatment
applies to expenses stemming from employee transfers; it does not
apply to expenses stemming from temporary duty. 70 Comp. Gen. 469
(1991).
The rule of 64 Comp. Gen. 45 applies to obligations for extensions of
temporary quarters subsistence expenses—the obligation is chargeable
to the year in which the transfer order was issued. 64 Comp. Gen. 901
(1985). It also applies to dislocation allowances payable to members
of the armed services incident to a permanent change of station move.
67 Comp. Gen. 474 (1988).
Agencies have discretionary authority under 5 U.S.C. § 5724c to
contract with private firms for arranging the purchase of a
transferred employee's old residence. Since this service is wholly
discretionary and in no way an "entitlement," the agency's obligation
to a relocation firm stems from its contract with the firm, not from
the employee's transfer. Thus, the obligation under one of these
arrangements occurs when a purchase order under the contract is
awarded. 66 Comp. Gen. 554 (1987). Since the obligation is evidenced
by a written contract, it would be recorded under 31 U.S.C. §
1501(a)(1).
The decision at 64 Comp. Gen. 45 overruled prior inconsistent
decisions such as 28 Comp. Gen. 337 (1948) (storage) and B-122358,
Aug. 4, 1976 (relocation expenses under 5 U.S.C. § 5724a). In
assessing the impact of 64 Comp. Gen. 45, however, care must be taken
to determine precisely what has been overruled and what has not. For
example, since 64 Comp. Gen. 45 dealt with reimbursable expenses,
prior decisions addressing the transportation of household goods
shipped directly by the government presumably remain valid.[Footnote
30]
Also, 35 Comp. Gen. 183 (1955) should not be regarded as overruled,
notwithstanding language to the contrary in 64 Comp. Gen. 45. There
are two reasons for this. First, 35 Comp. Gen. 183 was not limited to
employee transfers, but dealt with travel in other contexts as well,
situations not involved in the 1984 decision. Second, 35 Comp. Gen.
183 states, at page 185:
"It may be stated, however, that we have no objection to recording
tentatively as obligations the estimated cost of transportation to be
purchased and reimbursements therefor to be earned, including
reimbursements for transportation of household effects, within the
current fiscal year at the time the travel orders are actually issued
where it is administratively determined desirable in order to avoid
certain additional accounting requirements; but all estimated amounts
for travel and related expenses so recorded should be adjusted to
actual obligations periodically ..."
This is not very different from the holding of 64 Comp. Gen. 45.
8. Section 1501(a)(8): Public Utilities:
Under 31 U.S.C. § 1501(a)(8), a recordable obligation arises when
there is documentary evidence of "services provided by public
utilities. [Footnote 31]
Government agencies are not required to enter into contracts with
public utilities when charges are based on rates that are fixed by
regulatory bodies. However, contracts may be used if desired by the
utility or the agency. GAO, Policy and Procedures Manual for Guidance
of Federal Agencies, title 7, § 6.2.C.5 (Washington, D.C.: May 18,
1993).
If there is a contract, monthly estimates of the cost of services to
be performed, based on past experience, may be recorded as
obligations. If there is no contract, obligations should be recorded
only on the basis of services actually performed. 34 Comp. Gen. 459,
462 (1955). See also B-287619, July 5, 2001; B-259274, May 22, 1996.
A statute relating to obligations for public utility services is 31
U.S.C. § 1308. Under this law, in making payments for telephone
services and for services like gas or electricity where the quantity
is based on metered readings, the entire payment for a billing period
which begins in one fiscal year and ends in another is chargeable to
appropriations current at the end of the billing period. If the charge
covers several fiscal years, 31 U.S.C. § 1308 does not apply. A charge
covering several fiscal years must be prorated so that the charge to
any one fiscal year appropriation will not exceed the cost of service
for a 1-year period ending in that fiscal year. 19 Comp. Gen. 365
(1939). GAO has construed this statute as applicable to teletypewriter
services as well. 34 Comp. Gen. 414 (1955).
The General Services Administration is authorized to enter into
contracts for public utility services for periods not exceeding 10
years. 40 U.S.C. § 501(b)(1)(B).[Footnote 32] A contract for the
procurement of telephone equipment and related services has been held
subject to this provision even where the provider was not a
"traditional" form of public utility. 62 Comp. Gen. 569 (1983). Noting
that the concept of what constitutes "public utility service" is
flexible, the decision emphasized that the nature of the product or
service provided rather than the nature of the provider should govern
for purposes of 40 U.S.C. § 501(b)(1)(B). 62 Comp. Gen. at 575. The
decision also concluded that GSA is not required to obligate the total
estimated cost of a multiyear contract under 40 U.S.C. § 501(b)(1)(B),
but is required to obligate only its annual costs. 62 Comp. Gen. at
572, 576.
9. Section 1501(a)(9): Other Legal Liabilities:
The final standard for recording obligations, 31 U.S.C. § 1501(a)(9),
is documentary evidence of any "other legal liability of the
Government against an available appropriation or fund." This is sort
of a catch-all category designed to pick up valid obligations which
are not covered by 31 U.S.C. §§ 1501(a)(1)-(a)(8). 34 Comp. Gen. 418,
424 (1955).
Thus far, the decisions provide very little guidance on the types of
situations that might be covered by subsection (a)(9). The few
decisions that mention subsection (a)(9) generally cite it in
conjunction with one of the other subsections and stop short of a
definitive statement as to its independent applicability. See, e.g.,
54 Comp. Gen. 962 (1975) (impoundment litigation); B-192511, Feb. 5,
1979 (severance pay plan under 22 U.S.C. § 3968).
Another case, although not specifically citing subsection (a)(9),
pointed out a situation that would seemingly qualify under that
subsection: estimates of municipal tax liabilities on United States
property located in foreign countries, based on tax bills received in
prior years. 35 Comp. Gen. 319 (1955).
Thus, subsection (a)(9) must be applied on a case-by-case basis. If a
given item is a legal liability of the United States, if
appropriations are legally available for the item in terms of purpose
and time, and if the item does not fit under any of the other eight
subsections, then subsection (a)(9) should be considered.
C. Contingent Liabilities:
Up to this point in Chapter 7, we have discussed obligations: what
they are and how and when to record them. As pointed out in the
previous sections of this chapter, the core attribute of an obligation
recordable under 31 U.S.C. § 1501 is that it creates a definite legal
liability on the part of the federal government. While the precise
amount of the liability may be undefined initially, an "obligational
event," reflecting a definite liability, may occur even though the
amount of the liability at that time is undefined. A "contingent
liability" is fundamentally different. In contrast to a definite
liability, a contingent liability does not create an obligation unless
and until the contingency materializes.
Contingent liabilities take different forms depending on the
circumstances. However, whatever form it takes, a contingent liability
by definition lacks the definiteness that is essential to the concept
of an obligation. Thus, GAO defines a "contingent liability"
generically as "[a]n existing condition, situation, or set of
circumstances that poses the possibility of a loss to an agency that
will ultimately be resolved when one or more events occur or fail to
occur.[Footnote 33]
Contingent liabilities are not recordable as obligations under section
1501 of title 31.[Footnote 34] Rather, a contingent liability ripens
into a recordable obligation for purposes of section 1501 only if and
when the contingency materializes. E.g., 62 Comp. Gen. 143, 145-46
(1983); 37 Comp. Gen. 69192 (1958); GAO, Policy and Procedures Manual
for Guidance of Federal Agencies, title 7, § 3.5.0 (Washington, D.C.:
May 18, 1993) (hereafter GAO-PPM).
The contingent liability poses somewhat of a fiscal dilemma. On the
one hand, it is by definition (and absent special statutory treatment)
not sufficiently definite to support the recording of an obligation.
Yet on the other hand, sound financial management may dictate that it
somehow be recognized. Indeed, if completely disregarded, a contingent
liability could mature into an actual liability and result in an
Antideficiency Act violation. Agencies have a legal obligation to take
reasonable steps to avoid situations in which contingent liabilities
become actual liabilities that result in Antideficiency Act
violations. This may include the "administrative reservation" or
"commitment" of funds, as well as taking other actions to prevent
contingencies from materializing.[Footnote 35]
For example, in B-238201, Apr. 15, 1991, the General Services
Administration (GSA) was faced with a contingent liability that could
become an actual liability. GSA was engaged in litigation concerning
an Illinois statute authorizing the taxation of government property
purchased under an installment contract. GSA had entered into
arrangements to purchase buildings in Illinois on an installment
basis, so there was a potential for tax liability, including back
taxes, which would be assessed if the Illinois statute was upheld.
Since the litigation was extending over fiscal years and the outcome
was in doubt, GSA accrued amounts from the fiscal years involved as
loss contingencies for the potential tax liability. GAO agreed with
GSA's approach and stated:
"Because the underlying legal liability of the Government has yet to
be established, the potential tax liability of the [property] is not
sufficiently definite to be recorded as an obligation. However, GSA
has not actually obligated funds for this purpose, ... Instead, in
terms of fiscal operations, it is possible for GSA officials to have
recorded the potential liability as a commitment through the budgetary
account 'Commitments Available for Obligation' in the Standard General
Ledger. This accounting procedure reflects allotments or other
available funds which were earmarked in anticipation of a potential
obligation and is used for purposes of effective financial planning."
Id. See also 35 Comp. Gen. 185, 187 (1955) (GAO recommended reserving
funds as a means to avoid potential Antideficiency Act violations from
contingent liabilities involving pending litigation in cases where it
was believed that claims against the government were meritorious).
In addition to the obligational accounting treatment of contingent
liabilities, agencies need to be aware of the financial accounting
treatment of contingent liabilities. Contingent liabilities may be
sufficiently important to warrant recognition in a footnote to
pertinent financial statements. 62 Comp. Gen. 143, 146 (1983); 37
Comp. Gen. at 692. See also Federal Accounting Standards Advisory
Board, Accounting for Liabilities of the Federal Government, SSFAS No.
5, 55 35-42 (Dec. 20, 1995), as amended by SSFAS No. 12 (December
1998) (provides guidance on the appropriate accounting treatment of
contingent liabilities in financial statements).
D. Reporting Requirements:
When 31 U.S.C. § 1501 was originally enacted in 1954,[Footnote 36] it
required each agency to prepare a report each year on the unliquidated
obligations and unobligated balance for each appropriation or fund
under the agency's control. The reports were to be submitted to the
Senate and House Appropriations Committees, the (then) Bureau of the
Budget, and GAO. GAO was often asked by the appropriations committees
to review these reports.
After several years of reviewing reports, the appropriations
committees determined that the requirement had served its purpose, and
Congress amended the law in 1959 to revise and relax the reporting
procedures. The current reporting requirements are found at 31 U.S.C.
§§ 1108(c) and 1501(b).
Under 31 U.S.C. § 1108(c), each agency, when submitting requests for
appropriations to the Office of Management and Budget, must report
that "the statement of obligations submitted with the request contains
obligations consistent with section 1501 of this title." See 39 Comp.
Gen. 422, 425 (1959). The reports must be certified by officials
designated by the agency head. OMB Circular No. A-11, Preparation,
Submission, and Execution of the Budget, § 51.1 (June 21, 2005). The
certification must be supported by adequate records, and the agency
must retain the records and certifications in such form as to
facilitate audit and reconciliation. Officials designated to make the
certifications may not redelegate the responsibility.[Footnote 37]
The conference report on the original enactment of 31 U.S.C. § 1501
specified that the officials designated to make the certifications
should be persons with overall responsibility for the recording of
obligations, and "in no event should the designation be below the
level of the chief accounting officer of a major bureau, service, or
constituent organizational unit."[Footnote 38]
The person who makes certifications under 31 U.S.C. § 1108(c) is not a
"certifying officer" for purposes of personal accountability for the
funds in question. Although he or she may be coincidentally an
"authorized certifying officer," the two functions are legally
separate and distinct. B-197559-0.M., May 13, 1980.
The statute does not require 100 percent verification of unliquidated
obligations prior to certification. Agencies may use statistical
sampling. B-199967-0.M., Dec. 3, 1980.
In the case of transfer appropriation accounts under interagency
agreements, the certification official of the spending agency must
make the certifications to the head of the advancing agency and not to
the head of the spending agency. 7 GAO-PPM § 3.8.A.
Finally, 31 U.S.C. § 1501(b) provides that any statement of
obligations furnished by any agency to the Congress or to any
congressional committee "shall include only those amounts that are
obligations consistent with subsection (a) of this section."
The definition of the term "deobligation" is an agency's cancellation
or downward adjustment of previously incurred obligations. Deobligated
funds may be reobligated within the period of availability of the
appropriation. For example, annual appropriations may be reobligated
in the fiscal year for which the funds were appropriated, while
multiyear or no-year appropriated funds may be reobligated in the same
or subsequent fiscal years.[Footnote 39] Deobligations occur for a
variety of reasons. Examples are:
* Liquidation in amount less than amount of original obligation. E.g.,
B-207433, Sept. 16, 1983 (cost underrun); B-183184, May 30, 1975
(agency called for less work than maximum provided under level-of-
effort contract). See also B-286929, Apr. 25, 2001.
* Cancellation of project or contract.
* Initial obligation determined to be invalid.
* Reduction of previously recorded estimate.
* Correction of bookkeeping errors or duplicate obligations.
In addition, deobligation may be statutorily required in some
instances. An example is 31 U.S.C. § 1535(d), requiring deobligation
of appropriations obligated under an Economy Act agreement to the
extent the performing agency has not incurred valid obligations under
the agreement by the end of the fiscal year. See section B.1.i of this
chapter for a further discussion of recording obligations in Economy
Act transactions.
For the most part, there are no special rules relating to
deobligation. Rather, the treatment of deobligations follows logically
from the principles previously discussed in this and preceding
chapters. Thus funds deobligated within the original period of
obligational availability are once again available for new obligations
just as if they had never been obligated in the first place.
Naturally, any new obligations are subject to the purpose, time, and
amount restrictions governing the source appropriation. Funds
deobligated after the expiration of the original period of
obligational availability are not available for new obligations. B-
286929, Apr. 25, 2001; 64 Comp. Gen. 410 (1985); 52 Comp. Gen. 179
(1972). They may be retained as unobligated balances in the expired
account until the account is closed, however, and are available for
adjustments in accordance with 31 U.S.C. § 1553(a).
A proper and unliquidated obligation should not be deobligated unless
there is some valid reason for doing so. Absent a valid reason, it is
improper to deobligate funds solely to "free them up" for new
obligations. To do so risks violating the Antideficiency Act. For
example, where a government check issued in payment of some valid
obligation cannot be promptly negotiated (if, for example, it is
returned as undeliverable), it is improper to deobligate the funds and
use them for new obligations. 15 Comp. Gen. 489 (1935); A-44024, Sept.
21, 1942. (The two cited decisions deal with provisions of law which
have since changed, but the thrust of the decisions remains the same.)
The Antideficiency Act violation would occur if the payee of the
original check subsequently shows up and demands payment but the funds
are no longer available because they have been reobligated and the
account contains insufficient funds. This does not preclude an agency
from exercising flexibility in the use of its appropriations so long
as the agency does not risk an Antideficiency Act violation. B-272191,
Nov. 4, 1997.
Under some programs, an agency provides funds to an intermediary which
in turn distributes the funds to members of a class of beneficiaries.
The agency records the obligation when it provides, or legally commits
itself to provide, the funds to the intermediary. It is undesirable
for many reasons to permit the intermediary to hold the funds
indefinitely prior to reallocation. Unless the program legislation
provides otherwise, the agency may establish a reasonable cutoff date
at which time unused funds in the hands of the intermediary are
"recaptured" by the agency and deobligated. GAO recommended such a
course of action in 50 Comp. Gen. 857 (1971). If recapture occurs
during the period of availability, the funds may be reobligated for
program purposes; if it occurs after the period of availability has
ended, the funds expire absent some contrary direction in the
governing legislation. Id.; Dabney v. Reagan, No. 82 Civ. 2231-CSH
(S.D.N.Y. Mar. 21, 1985).
Congress may occasionally by statute authorize an agency to reobligate
deobligated funds after expiration of the original period of
availability. This is called "deobligation-reobligation" (or "deob-
reob") authority. Such authority exists only when expressly granted by
statute. Deobligation-reobligation authority generally contemplates
that funds will be deobligated only when the original obligation
ceases to exist and not as a device to effectively augment the
appropriation. See B-173240-0.M., Jan. 23, 1973. Also, absent
statutory authority to the contrary, "deob-reob" authority applies
only to obligations and not to expenditures. Thus, repayments to an
appropriation after expiration of the original period of obligational
availability are not available for reobligation. B-121836, Apr. 22,
1955.
Chapter 7 Footnotes:
[1] A working fund account is established to receive advance payment
from other agencies or accounts. 14 Comp. Gen. 25 (1934). For an
example, see 10 U.S.C. § 2208, which authorizes working capital funds
in the Department of Defense.
[2] An "unmatured liability" as described in this paragraph is
different from a "contingent liability" as discussed in section C of
this chapter.
[3] For further discussion of the Antideficiency Act, see Chapter 6,
section C.
[4] Senate Committee on Government Operations, Financial Management in
the Federal Government, S. Doc. No. 87-11, at 85 (1961).
[5] Although 31 U.S.C. § 1501 does not expressly apply to the
government of the District of Columbia, GAO has expressed the view
that the same criteria should be followed. B-180578, Sept. 26, 1978.
This is because the proper recording of obligations is the only way to
assure compliance with 31 U.S.C. § 1341, a portion of the
Antideficiency Act, which does expressly apply to the government of
the District of Columbia. District of Columbia Self-Government and
Governmental Reorganization Act (so-called "Home Rule" Act), Pub. L.
No. 93-198, § 603(e), 87 Stat. 774, 815 (Dec. 24, 1973).
[6] S. Doc. No. 87-11, at 86.
[7] H.R. Rep. No. 83-2663, at 18 (1954), quoted in B-118654, Aug. 10,
1965.
[8] Pub. L. No. 106-229, § 101(a), 114 Stat. 464 (June 30, 2000).
[9] A "statute of frauds" is a law requiring contracts to be in
writing in order to be enforceable. Most, if not all, states have some
version of such a statute. Strictly speaking, as the Comptroller
General has noted, there is no federal statute of frauds. 39 Comp.
Gen. 829, 831 (1960). See also 55 Comp. Gen. 833 (1976).
[10] The FAR defines "contracts" as including "all types of
commitments that obligate the Government to an expenditure of
appropriated funds and that, except as otherwise authorized, are in
writing." This provision also provides that "in writing, writing, or
written means any worded or numbered expression that can be read,
reproduced, and later communicated, and includes electronically
transmitted and stored information." 48 C.F.R. § 2.101 (2005).
[11] As cases such as 63 Comp. Gen. 129 illustrate, there can be many
variations on the basic indefinite-quantity theme.
[12] This discussion addresses the amount to be recorded when the
amount of the liability is undefined, and is not to be confused with a
discussion of contingent liabilities. For example, for an indefinite-
delivery, indefinite-quantity contract, any liability in excess of the
government's minimum commitment, as defined in the contract, is a
contingent liability—that is, contingent on the government placing
future orders with the contractor. For that reason, at the time the
government enters into the contract, the government has no liability
above the minimum specified in the contract, and thus incurs no
obligation for future orders. We discuss contingent liabilities in
section C of this chapter.
[13] Title 7, § 3.5.D (Washington, D.C.: May 18, 1993).
[14] The decision in 50 Comp. Gen. 589 is offered here as an example
of a methodology for estimating obligations. Beginning with fiscal
year 1977 the Judiciary has received no-year appropriations to pay
court appointed attorneys. See Departments of State, Justice, and
Commerce, the Judiciary, and Related Agencies Appropriation Act, 1977,
Pub. L. No. 94-362, title IV, 90 Stat. 937, 953 (July 14, 1976);
Consolidated Appropriations Act, 2005, Pub. L. No. 108-447, div. B,
title III, 118 Stat. 2809, 2892 (Dec. 8, 2004).
[15] Subsequently, Congress passed legislation clarifying the method
by which the Corporation should record obligations, authorizing the
Corporation to record as an obligation an estimate based on a formula
that takes into consideration historical rates of enrollment in the
program. Pub. L. No. 108-45, § 2(b), 117 Stat. 844 (July 3, 2003). See
also 149 Cong. Rec. S8163-64 (2003) (statement of Sen. Bond).
[16] Beginning with fiscal year 1978, the appropriation to compensate
land commissioners was switched from the Justice Department to the
Judiciary and since then has been a no-year appropriation. See the
appropriation entitled "Fees of Jurors and Commissioners" in the
Judiciary Appropriation Act, 1978, Pub. L. No. 95-86, title IV, 91
Stat. 419, 434-35 (Aug. 2, 1977), and in the Consolidated
Appropriations Act, 2005, Pub. L. No. 108-447, div. B, title III, 118
Stat. 2809, 2892-93 (Dec. 8, 2004). We retain the above summary here
to illustrate the analysis and because it may have use by analogy in
similar situations.
[17] The determination of whether an interagency agreement is
"binding" for purposes of recording under 31 U.S.C. § 1501(a)(1) is
made in the same manner as if the contract were with a private party—
examining precisely what the parties have "committed" themselves to do
under the terms of the agreement. However, an agreement between two
government agencies cannot be legally "enforced" against a defaulting
agency in the sense of compelling performance or obtaining damages.
Enforcement against another agency is largely a matter of comity and
good faith. Thus, the term "binding" in the context of interagency
agreements reflects the undertakings expressed in the agreement
without regard to the legal consequences (or lack thereof) of
nonperformance.
[18] See Chapter 5, section B for a discussion of the bona fide needs
rule.
[19] 42 U.S.C. § 4101(A) (1970 and Supp. V 1975).
[20] Ch. 288, 63 Stat. 377 (June 30, 1949).
[21] The fact that the replacement stock will not be used until the
following year will not defeat an otherwise valid obligation. See 73
Comp. Gen. 259 (1994); 44 Comp. Gen. 695 (1965).
[22] The Coast Guard has virtually identical authority in 14 U.S.C. §
151.
[23] The term "approved projects," as used in 41 U.S.C. § 23, has no
special meaning. It refers simply to "projects that have been approved
by officials having legal authority to do so." B-171049-0.M., Feb. 17,
1972.
[24] Thus 41 U.S.C. § 23 predates enactment of § 1311 of the
Supplemental Appropriations Act of 1955, now codified at 31 U.S.C. §
1501, and, like the Economy Act, provides an early statutory authority
to obligate an appropriation on the basis of an interagency
transaction.
[25] The FCRA applies to new direct loan obligations incurred on or
after October 1, 1991. The budgetary and obligational treatment of
guaranteed and insured loans is discussed in Chapter 11, section B.
[26] See B-300192, Nov. 13, 2002, regarding the constitutionality of
this and related statutory provisions.
[27] 42 U.S.C. § 3153 (1976 and Supp. IV 1980).
[28] Apart from the considerations discussed here, pending litigation
as well as potential litigation and other legal claims, may require
disclosure as a contingent liability in an agency's financial
statements. See generally Federal Accounting Standards Advisory Board,
Accounting for Liabilities of the Federal Government, SFFAS No. 5, 33,
35-42 (Dec. 20, 1995), as amended by SFFAS No. 12 (December 1998),
available at www.fasab.gov/codifica.html (last visited September 15,
2005).
[29] This section does not apply to travel incident to employee
transfers. The rules for employee transfers are set forth separately
in section B.7.g of this chapter.
[30] If the government ships the goods, the obligation occurs when a
carrier picks up the goods pursuant to a government bill of lading. If
separate bills of lading are issued covering different segments of the
shipment, each bill of lading is a separate and distinct obligation.
E.g., 31 Comp. Gen. 471 (1952).
[31] Prior to the 1982 recodification of title 31, United States Code,
section 1501(a)(7) included public utilities as well as employment and
travel expenses. The recodification logically separated public
utilities into a new subsection since it is unrelated to the other
items. Thus, pre-1982 materials refer to eight subsections whereas
there are now nine.
[32] The military departments have authority to enter into utility
service contracts for up to 50 years in connection with the conveyance
of a utility system from the department to the service provider. See
10 U.S.C. § 2688(c)(3).
[33] GAO, A Glossary of Terms Used in the Federal Budget Process, GAO-
05-734SP (Washington, D.C.: September 2005), at 35 (emphasis added).
[34] Outside the framework of 31 U.S.C. § 1501, however, Congress has
provided special treatment for certain contingent liabilities in order
to better capture their budgetary impact. Most notably, the Federal
Credit Reform Act of 1990, 2 U.S.C. §§ 661-661, changed the normal
budgetary treatment of loans and loan guarantees by establishing that
for most programs, loan guarantee commitments cannot be made unless
the Congress has appropriated budget authority in advance to cover
their estimated losses (known as "credit subsidy costs"). See Chapter
11, section B, for a detailed discussion of the budgetary and
obligational treatment of loan and loan guarantee programs under the
Federal Credit Reform Act.
[35] See 7 GAO-PPM § 3.5.F; B-238201, Apr. 15, 1991 (nondecision
letter).
[36] See Pub. L. No. 83-663, § 1311(b), 68 Stat. 800, 830 (Aug. 26,
1954).
[37] See GAO, Policy and Procedures Manual for Guidance of Federal
Agencies, title 7, § 3.8.A (Washington, D.C.: May 18, 1993) (hereafter
GAO-PPM).
[38] H.R. Rep. No. 83-2663, 18 (1954), quoted in Financial Management
in the Federal Government, S. Doc. No. 87-11, 88 (1961), and in 50
Comp. Gen. 857, 862 (1971).
[39] See GAO, A Glossary of Terms Used in the Federal Budget Process,
GAO-05-734SP (Washington, D.C.: September 2005), at 44 and 85.
[End of Chapter 7]
Chapter 8: Continuing Resolutions:
A. Introduction:
1. Definition and General Description:
2. Use of Appropriation Warrants:
B. Rate for Operations:
1. Current Rate:
2. Rate Not Exceeding Current Rate:
3. Spending Pattern under Continuing Resolution:
a. Pattern of Obligations:
b. Apportionment:
4. Liquidation of Contract Authority:
5. Rate for Operations Exceeds Final Appropriation:
C. Projects or Activities:
D. Relationship to other Legislation:
1. Not Otherwise Provided For:
2. Status of Bill or Budget Estimate Used as Reference:
3. More Restrictive Authority:
4. Lack of Authorizing Legislation:
E. Duration:
1. Duration of Continuing Resolution:
2. Duration of Appropriations:
3. Impoundment:
A. Introduction:
1. Definition and General Description:
The term "continuing resolution" may be defined as follows:
"An appropriation act that provides budget authority for federal
agencies, specific activities, or both to continue in operation when
Congress and the President have not completed action on the regular
appropriation acts by the beginning of the fiscal year."[Footnote 1]
For the most part, continuing resolutions are temporary appropriation
acts. With a few exceptions to be noted later, they are intended by
Congress to be stop-gap measures enacted to keep existing federal
programs functioning after the expiration of previous budget authority
and until regular appropriation acts can be enacted. B-300673, July 3,
2003. Congress resorts to the continuing resolution when there is no
regular appropriation for a program or agency, perhaps because the two
houses of Congress have not yet agreed on common language, because
authorizing legislation has not yet been enacted, or because the
President has vetoed an appropriation act passed by Congress. 58 Comp.
Gen. 530, 532 (1979). Also, given the size and complexity of today's
government, the consequent complexity of the budget and appropriations
process, and the occasionally differing policy objectives of the
executive and legislative branches, it sometimes becomes difficult for
Congress to enact all of the regular appropriation acts before the
fiscal year ends.
Continuing resolutions are nothing new GAO has found administrative
decisions discussing them as far back as the 1880s.[Footnote 2] At one
time, they were called "temporary resolutions." The term "continuing
resolution" came into widespread use in the early 1960s.[Footnote 3]
In the 20 years from fiscal years 1962 to 1981, 85 percent of the
appropriation bills for federal agencies were enacted after the start
of the fiscal year and thus necessitated continuing resolutions. GAO
has discussed the problems inherent in this situation in several
reports. See, e.g., GAO, Updated Information Regarding Funding Gaps
and Continuing Resolutions, GAO/PAD-83-13 (Washington, D.C.: Dec. 17,
1982); Funding Gaps Jeopardize Federal Government Operations, PAD-81-
31 (Washington, D.C.: Mar. 3, 1981). In 24 of the fiscal years between
fiscal years 1977 and 2004, Congress and the President did not
complete action on a majority of the 13 regular appropriations by the
start of the fiscal year. In eight of those years, they did not finish
any of the bills by the start of the new fiscal year.[Footnote 4]
Twenty-one continuing resolutions were enacted for fiscal year 2001.
The periodic experience of government "shutdowns," or partial
shutdowns, when appropriations bills have not been enacted has led to
proposals for an automatic continuing resolution. The automatic
continuing resolution, however, is an idea for which the details are
critically important. Depending on the detailed structure of such a
continuing resolution, the incentive for policymakers—some in the
Congress and the President—to negotiate seriously and reach agreement
may be lessened. If the goal of the automatic continuing resolution is
to provide a little more time for resolving issues, it could be
designed to permit the incurrence of obligations to avoid a funding
gap, but not the outlay of funds to liquidate the new obligations.
This would allow agencies to continue operations for a period while
the Congress completes appropriations actions. GAO, Budget Process:
Considerations for Updating the Budget Enforcement Act, GAO-01-991T
(July 19, 2001). Funding gaps and the legal problems they present are
discussed in greater detail in Chapter 6, section C.6.
Continuing resolutions are enacted as joint resolutions making
continuing appropriations for a certain fiscal year or portion of the
fiscal year. Although enacted in this form rather than as an "act,"
once passed by both houses of Congress and approved by the President,
a continuing resolution becomes a public law and has the same force
and effect as any other statute. Oklahoma v. Weinberger, 360 F. Supp.
724, 726 (WD. Okla. 1973); B-152554, Dec. 15, 1970. Since a continuing
resolution is a form of appropriation act, it often will include the
same types of restrictions and conditions that are commonly found in
regular appropriation acts. See, e.g., B-210603, Feb. 25, 1983 (ship
construction appropriation in continuing resolution making funds
available "only under a firm, fixed price type contract"). Indeed,
continuing resolutions typically incorporate by reference restrictions
and conditions from regular appropriations acts. See, e.g., Pub. L.
No. 108-309, § 102, 118 Stat. 1137, 1138 (Sept. 30, 2004). Having said
this, however, it is necessary to note that continuing resolutions, at
least those in what GAO considers the "traditional form," differ
considerably from regular appropriation acts.
Continuing resolutions may take different forms. The "traditional"
form, used consistently except for a few years in the 1980s, employs
essentially standard language and is clearly a temporary measure. An
example of this form is Public Law 108-309, the first continuing
resolution for fiscal year 2005, which provided funding authority from
October 1 through November 20, 2004. Section 101 appropriates:
"Such amounts as may be necessary under the authority and conditions
provided in the applicable appropriations Act for fiscal year 2004 for
continuing projects or activities including the costs of direct loans
and loan guarantees (not otherwise specifically provided for in this
joint resolution) which were conducted in fiscal year 2004, at a rate
for operations not exceeding the current rate, and for which
appropriations, funds, or other authority was made available in the
following appropriations Acts ..."
Section 101 then references most of the regular appropriation acts for
fiscal year 2004.
Public Law 108-309 also contains a number of additional typical
provisions, including the following:
"SEC. 102. Appropriations made by section 101 shall be available to
the extent and in the manner which would be provided by the pertinent
appropriations Act."
"SEC. 104. No appropriation or funds made available or authority
granted pursuant to section 101 shall be used to initiate or resume
any project or activity for which appropriations, funds, or other
authority were not available during fiscal year 2004."
"SEC. 107. Unless otherwise provided for in this joint resolution or
in the applicable appropriations Act, appropriations and funds made
available and authority granted pursuant to this joint resolution
shall be available until (a) enactment into law of an appropriation
for any project or activity provided for in this joint resolution, or
(b) the enactment into law of the applicable appropriations Act by
both Houses without any provision for such project or activity, or (c)
November 20, 2004, whichever first occurs."
When enacting continuing resolutions in this form, there is clear
indication that Congress intends and expects that the normal
authorization and appropriation process will eventually produce
appropriation acts which will replace or terminate the budget
authority contained in the resolution. Thus, a continuing resolution
of this type generally provides that funds appropriated for an
activity by the resolution will no longer be available for obligation
if the activity is later funded by a regular appropriation act, or
Congress indicates its intent to end the activity by enacting an
applicable appropriation act without providing for the activity. 58
Comp. Gen. at 532. See also section 107 of Public Law 108-309, quoted
above. Obligations already incurred under the resolution, however, may
be liquidated.
GAO's decision in B-300673, July 3, 2003, illustrates the interplay
between funding under a continuing resolution and a later-enacted
regular appropriation. The fiscal year 2003 appropriation act for the
legislative branch authorized the House of Representatives Chief
Administrative Officer to use that Office's salaries and expenses
appropriation to pay certain expenses of the House Child Care Center
for "fiscal year 2003 and each succeeding fiscal year." Pub. L. No.
108-7, § 108, 117 Stat. 11, 355 (Feb. 20, 2003). Previously, a
revolving fund paid those expenses. However, since Public Law 108-7
was not enacted until February 20, 2003, fiscal year 2003 expenses for
the Child Care Center were initially charged to the revolving fund
under continuing resolutions. With enactment of Public Law 108-7, GAO
held that the Chief Administrative Officer's salaries and expenses
appropriation should fund the Child Care Center expenses retroactive
to the beginning of fiscal year 2003 and that this appropriation
should reimburse the revolving fund for the fiscal year 2003 expenses
initially charged to it under the continuing resolutions. The decision
stated that the fact that payments were initially made during a period
covered by a continuing resolution was not significant since the
regular appropriation, once enacted, supersedes the continuing
resolution and governs the amount and period of availability.
Unlike regular appropriation acts, continuing resolutions in their
traditional form do not usually appropriate specified sums of money.
Rather, they usually appropriate "such amounts as may be necessary"
for continuing projects or activities at a certain "rate for
operations." The rate for operations may be the amount provided for
the activity in an appropriation act that has passed both houses of
Congress but has not become law; the lower of the amounts provided
when each house has passed a different act; the lower of the amounts
provided either in an act which has passed only one house or in the
administration's budget estimate; the amount specified in a particular
conference report; the lower of either the amount provided in the
budget estimate or the "current rate"; or simply the current rate.
Therefore, in order to determine the sum of money appropriated for any
given activity by this type of continuing resolution, it is necessary
to examine documents other than the resolution itself. Some continuing
resolutions have used a combination of "formula appropriations" of the
types described in this paragraph and appropriations of specific
dollar amounts. An example is the fiscal year 1996 continuing
resolution, Pub. L. No. 104-69, 109 Stat. 767 (Dec. 22, 1995).
There are times when Congress acknowledges at the outset that it is
not likely to enact one or more regular appropriation acts during the
current fiscal year.[Footnote 5] See, for example, the 1980 continuing
resolution, Pub. L. No. 96-86, 93 Stat. 656 (Oct. 12, 1979), which
provided budget authority for the legislative branch for the entire
fiscal year.
For a few years in the 1980s, Congress used a very different form of
continuing resolution, simply stringing together the complete texts of
appropriation bills not yet enacted and enacting them together in a
single "omnibus" package. This approach reached its extreme in the
1988 continuing resolution, Pub. L. No. 100-202, 101 Stat. 1329 (Dec.
22, 1987), which included the complete texts of all 13 of the regular
appropriation bills. This form of continuing resolution differs from
the traditional form in two key respects:
* Unlike the traditional continuing resolution, the "full text"
version amounts to an acknowledgment that no further action on the
unenacted bills will be forthcoming, and consequently provides funding
for the remainder of the fiscal year.
* When the entire text of an appropriation bill is incorporated into a
continuing resolution, the appropriations are in the form of specified
dollar amounts, the same as if the individual bill had been enacted.
The "full text" format generally does not raise the same issues of
statutory interpretation that arise under the traditional format.
However, it produces new ones. For example, in a continuing resolution
which consolidates the full texts of what would otherwise have been
several separate appropriation acts, GAO has construed the term "this
act" as referring only to the individual "appropriation act" in which
it appears rather than to the entire continuing resolution. B-230110,
Apr. 11, 1988.
While the omnibus approach of the 1988 resolution may appear
convenient, it generated considerable controversy because, among other
reasons, it is virtually "veto-proof-—the President has little choice
but to sign the bill or bring the entire government to an abrupt halt.
See Presidential Remarks on the Signing of the Continuing
Appropriations for Fiscal Year 1988 and the Omnibus Budget
Reconciliation Act of 1987 Into Law, 23 Weekly Comp. Pres. Doc. 1546,
1547 (Dec. 22, 1987).
There was no continuing resolution for fiscal year 1989. All 13 of the
appropriation bills were enacted on time, for what was reported to be
the first time in 12 years.[Footnote 6] For fiscal year 1990, Congress
reverted to the traditional type of continuing resolution. See Pub. L.
No. 101-100, 103 Stat. 638 (Sept. 29, 1989). Nor were there any
continuing resolutions for fiscal years 1995 and 1997. The start of
the 1997 fiscal year was met with an omnibus appropriations act which
added five regular appropriations bills to a sixth regular
appropriations bill. Pub. L. No. 104-208, 110 Stat. 3009 (Sept. 30,
1996). The remaining seven bills were enacted separately.
Questions arising under continuing resolutions can be grouped loosely
into two broad categories. First are questions in which the fact that
a continuing resolution is involved is purely incidental, in other
words, questions which could have arisen just as easily under a
regular appropriation act. For example, one of the issues considered
in B-230110, Apr. 11, 1988, was whether certain provisions in the 1988
resolution constituted permanent legislation. Cases in this category
are included with their respective topics throughout this publication
and are not repeated in this chapter.
Second are issues that are unique to continuing resolutions, and these
are the focus of the remainder of this chapter. For the most part, the
material deals with the traditional form of continuing resolution as
it is this form that uses concepts and language found only in
continuing resolutions.
One point that should emerge from the GAO decisions and opinions is
the central role of legislative intent. To be sure, legislative intent
cannot change the plain meaning of a statute; Congress must enact what
it intends in order to make it law. However, there are many cases in
which the statutory language alone does not provide a clear answer,
and indications of congressional intent expressed in well-established
methods, viewed in light of the purpose of the continuing resolution,
will tip the balance.
In one case, for example, a continuing resolution provided a lump-sum
appropriation for the National Oceanic and Atmospheric
Administration's research and facilities account, and provided further
for the transfer of $1.8 million from the Fisheries Loan Fund. The
first continuing resolution for 1987 included the transfer provision
and was signed into law on October 1, 1986. The Fisheries Loan Fund
was scheduled to expire at "the close of September 30, 1986." Under a
strictly technical reading, the $1.8 million ceased to be available
once the clock struck midnight on September 30. However, the
Comptroller General found the transfer provision effective, noting
that a contrary result would "frustrate the obvious intent of
Congress." B-227658, Aug. 7, 1987.
Similarly, appropriations for the United States Commission on Civil
Rights contained in a fiscal year 1992 continuing resolution were
found to have extended the existence of the Commission beyond its
termination on September 30, 1991. "When viewed in their entirety,
legislative actions on the Commission's reauthorization and
appropriation bills, together with their legislative history, clearly
manifest an intent by Congress for the Commission to continue to
operate after September 30, 1991." 71 Comp. Gen. 378, 381 (1992).
While many of the continuing resolution provisions to be discussed
will appear highly technical (because they are highly technical),
there is an essential logic to them, evolved over many years, which is
more readily seen from the perspective not of a specific case or
problem, but of the overall goals and objectives of continuing
resolutions and their relationship to the rest of the budget and
appropriations process.
2. Use of Appropriation Warrants:
Funds, including funds appropriated under a continuing resolution, are
drawn from the Treasury by means of an appropriation warrant (FMS
Form 6200).[Footnote 7] A warrant is the official document issued
pursuant to law by the Secretary of the Treasury upon enactment of an
appropriation that establishes the amount of money authorized to be
withdrawn from the Treasury.[Footnote 8] Under 31 U.S.C. § 3323(a),
warrants authorized by law are to be signed by the Secretary of the
Treasury and countersigned by the Comptroller General. However, under
the authority of section 3326(a) of title 31, United States Code, the
Secretary of the Treasury and the Comptroller General have issued
several joint regulations phasing out the countersignature
requirement.[Footnote 9] First, Department of the Treasury-General
Accounting Office Joint Regulation No. 5 (Oct. 18, 1974) waived the
requirement for all appropriations except continuing resolutions.
Next, Treasury-GAO Joint Regulation No. 6 (Oct. 1, 1983) further
simplified the process by requiring issuance of a warrant and
countersignature under a continuing resolution only once, for the
total amount appropriated, unless a subsequent resolution changed the
annual amount. Finally, Treasury-GAO Joint Regulation No. 7, effective
January 1, 1991, eliminated the countersignature requirement
completely.
B. Rate for Operations:
1. Current Rate:
The current rate, as that term is used in continuing resolutions, is
equivalent to the total amount of money which was available for
obligation for an activity during the fiscal year immediately prior to
the one for which the continuing resolution is enacted.
The term "current rate" is used in continuing resolutions to indicate
the level of spending which Congress desires for a program. For
example, a resolution may appropriate sufficient funds to enable a
program to operate at a rate for operations "not in excess of the
current rate," or at a rate "not in excess of the lower of the current
rate" or the rate provided in a certain bill. It is possible to read
the term "current rate" as referring to either the amount of money
available for the program in the preceding year, or an amount of money
sufficient to enable continuation of the program at the level of the
preceding year. The two can be very different.
As a general proposition, GAO regards the term "current rate" as
referring to a sum of money rather than a program level. See, e.g., 58
Comp. Gen. 530, 533 (1979); B-194362, May 1, 1979. Thus, when a
continuing resolution appropriates in terms of the current rate, the
amount of money available under the resolution will be limited by that
rate, even though an increase in the minimum wage may force a
reduction in the number of people participating in an employment
program (B-194063, May 4, 1979), or an increase in the mandatory level
of assistance will reduce the number of meals provided under a meals
for the elderly program (B-194362, May 1, 1979).
The term "current rate" refers to the rate of operations carried on
within the appropriation for the prior fiscal year. B-152554, Dec. 6,
1963. The current rate is equivalent to the total appropriation, or
the total funds which were available for obligation, for an activity
during the previous fiscal year. Edwards v. Bowen, 785 F.2d 1440 (9th
Cir. 1986); B-300167, Nov. 15, 2002; B-255529, Jan. 10, 1994; 64 Comp.
Gen. 21 (1984); 58 Comp. Gen. 530, 533 (1979); B-194063, May 4, 1979;
B-194362, May 1, 1979. Funds administratively transferred from the
account during the fiscal year, under authority contained in
substantive legislation, should not be deducted in determining the
current rate. B-197881, Apr. 8, 1980; B-152554, Nov. 4, 1974.
It follows that funds transferred into the account during the fiscal
year pursuant to statutory authority should be excluded. B-197881,
Apr. 8, 1980.
In those instances in which the program in question has been funded by
1-year appropriations in prior years, the current rate is equal to the
total funds appropriated for the program for the previous fiscal year.
See, e.g., B-271304, Mar. 19, 1996; 64 Comp. Gen. at 22; 58 Comp. Gen.
530; B-194362, May 1, 1979. In those instances in which the program
has been funded by multiple year or no-year appropriations in prior
years, the current rate is equal to the total funds appropriated for
the previous fiscal year plus the total of unobligated budget
authority carried over into that year from prior years. 58 Comp. Gen.
530; B-152554, Oct. 9, 1970.
One apparent deviation from this calculation of current rate occurred
in 58 Comp. Gen. 530, a case involving the now obsolete Comprehensive
Employment and Training Act program. In that decision, the Comptroller
General, in calculating the current rate under the 1979 continuing
resolution, included funds appropriated in a 1977 appropriation act
and obligated during 1977. Ordinarily, only funds appropriated by the
fiscal year 1978 appropriation act, and carry-over funds unobligated
at the beginning of fiscal year 1979, would have been included in the
current rate. However, Congress did not appropriate funds for this
activity in the fiscal year 1978 appropriation act. In this instance
the funds appropriated in 1977 were included because it was clear from
the legislative history of the appropriation act that Congress
intended these funds to be an advance of appropriations for fiscal
year 1978. Thus, in order to ascertain the actual amount available for
the activity for fiscal year 1978, it was necessary to include the
advance funding provided by the 1977 appropriation act. The rationale
used in this decision would apply only when it is clear that Congress
was providing advance funding for the reference fiscal year in an
earlier year's appropriation act.
Where funding for the preceding fiscal year covered only a part of
that year, it may be appropriate to "annualize" the previous year's
appropriation in order to determine the current rate. This was the
result in 61 Comp. Gen. 473 (1982), in which the fiscal year 1981
appropriation for a particular program had been contained in a
supplemental appropriation act and was intended to cover only the last
quarter of the fiscal year. The current rate for purposes of the
fiscal year 1982 continuing resolution was four times the fiscal year
1981 figure.
Prior year supplemental appropriations also count in calculating the
current rate. In this regard, section 103 of Public Law 108-309, 118
Stat. 1137, 1138 (Sept. 30, 2004), discussed above, provides: "The
appropriations Acts listed in section 101 shall be deemed to include
miscellaneous and supplemental appropriation laws enacted during
fiscal year 2004."
There are exceptions to the rule that current rate means a sum of
money rather than a program level. For example, GAO construed the
fiscal year 1980 continuing resolution as appropriating sufficient
funds to support an increased number of Indochinese refugees in view
of explicit statements by both the Appropriations and the Budget
Committees that the resolution was intended to fund the higher program
level. B-197636, Feb. 25, 1980. Also, the legislative history of the
fiscal year 1981 continuing resolution (Pub. L. No. 96-369, 94 Stat.
1351 (Oct. 1, 1980)) indicated that in some instances current rate
must be interpreted so as to avoid reducing existing program levels.
It is always preferable for the exception to be specified in the
resolution itself. Starting with the first continuing resolution for
fiscal year 1983 (Pub. L. No. 97-276, 96 Stat. 1186 (Oct. 2, 1982)),
Congress began appropriating for the continuation of certain programs
"at a rate to maintain current operating levels." GAO has construed
this language as meaning sufficient funds to maintain the program in
question at the same operating level as at the end of the immediately
preceding fiscal year. B-209676, Apr. 14, 1983; B-200923, Nov. 16,
1982 (nondecision letter). Recent continuing resolutions have included
similar language for entitlement and other mandatory payments:
"activities shall be continued at the rate to maintain program levels
under current law."[Footnote 10]
2. Rate Not Exceeding Current Rate:
When a resolution appropriates funds to continue an activity at a rate
for operations "not in excess of the current rate," the amount of
funds appropriated by the resolution is equal to the current rate less
any unobligated balance carried over into the present year.
As discussed in the preceding section, the current rate is equivalent
to the total amount of funds that was available for obligation for a
project or activity in the preceding fiscal year. When the continuing
resolution appropriates funds to continue an activity at a rate for
operations "not in excess of the current rate," it is the intent of
Congress that the activity have available for obligation in the
present fiscal year no more funds than it had available for obligation
in the preceding fiscal year. Therefore, if there is a balance of
unobligated funds which can be carried over into the present fiscal
year because the funds are multiple year or no-year funds, this
balance must be deducted from the current rate in determining the
amount of funds appropriated by the continuing resolution. If this
were not done, the program would be funded at a higher level in the
present year than it was in the preceding year, which is not permitted
by the language of the resolution. See 58 Comp. Gen. 530, 535 (1979).
For example, suppose a continuing resolution for fiscal year 2006 were
to appropriate sufficient funds to continue an activity at a rate not
exceeding the current rate, and the current rate, or the total amount
which was available for obligation in fiscal year 2005, is $1,000,000.
Of this amount, suppose $100,000 of multiple year funds remains
unobligated at the end of fiscal year 2005, and is available for
obligation in fiscal year 2006. If the activity is to operate at a
rate not to exceed the current rate, $1,000,000, then the resolution
appropriates no more than the difference between the current rate and
the carryover from 2005 to 2006, or $900,000. If the resolution were
interpreted as appropriating the full current rate, then a total of
$1,100,000 would be available for fiscal year 2006, and the activity
would be able to operate at a rate in excess of the current rate, a
result prohibited by the language of the resolution.
An unobligated balance which does not carry over into the present
fiscal year (the more common situation) does not have to be deducted.
B-152554, Nov. 4, 1974.
A commonly encountered form of continuing resolution formula
appropriation is an amount not in excess of the current rate or the
rate provided in some reference item, whichever is lower. The
reference item may be an unenacted bill, a conference report, the
President's budget estimate, etc. When the current rate produces the
lower figure—the situation encountered in 58 Comp. Gen. 530—the above
rule applies and an unobligated carryover balance must be deducted to
determine the amount appropriated by the continuing resolution.
However, when the current rate is not the lower of the two referenced
items, the rule does not necessarily apply.
To illustrate, a continuing resolution appropriated funds for the
Office of Refugee Resettlement at a rate for operations not in excess
of the lower of the current rate or the rate authorized by a bill as
passed by the House of Representatives. The rate under the House-
passed bill was $50 million. The current rate was $77.5 million, of
which $39 million remained unobligated at the end of the preceding
fiscal year and was authorized to be carried over into the current
fiscal year. If the continuing resolution had simply specified a rate
not in excess of the current rate, or if the rate in the House-passed
bill had been greater than the current rate, it would have been
necessary to deduct the $39 million carryover balance from the
$77.5 million current rate to determine the maximum funding level for
the current year. Here, however, the rate in the House-passed bill was
the lower of the two.
Reasoning that the current rate already includes an unobligated
carryover balance, if any, whereas the rate in the House-passed bill
did not include a prior year's balance, and supported by the
legislative history of the continuing resolution, the Comptroller
General concluded that the amount available for the current year was
the amount appropriated by the resolution, $50 million, plus the
unobligated carryover balance of $39 million, for a total of $89
million. 64 Comp. Gen. 649 (1985). The decision distinguished 58 Comp.
Gen. 530, stating that "the rule with respect to deduction of
unobligated balances in 58 Comp. Gen. 530 is not applicable where the
lower of two referenced rates is not the current rate." Id. at 652-53.
The case went to court, and the Ninth Circuit Court of Appeals reached
the same result. Edwards v. Bowen, 785 F.2d 1440
(9th Cir. 1986).
In sum, if a continuing resolution appropriates the lower of the
current rate or the rate in some reference item, you compare the two
numbers to determine which is lower before taking any unobligated
carryover balance into account. If the current rate is lower, you then
deduct the carryover balance to determine the funding level under the
continuing resolution. If the rate in the reference item is lower, the
funding level is the reference rate plus the carryover balance unless
it is clear that this is not what was intended.
3. Spending Pattern under Continuing Resolution:
a. Pattern of Obligations:
An agency may determine the pattern of its obligations under a
continuing resolution so long as it operates under a plan which will
keep it within the rate for operations limit set by the resolution. If
an agency usually obligates most of its annual budget in the first
month or first quarter of the fiscal year, it may continue that
pattern under the resolution. If an agency usually obligates funds
uniformly over the entire year, it will be limited to that pattern
under the resolution, unless it presents convincing reasons why its
pattern must be changed in the current fiscal year.
Continuing resolutions are often enacted to cover a limited period of
time, such as a month or a calendar quarter. The time limit stated in
the resolution is the maximum period of time during which funds
appropriated by the resolution are available for obligation.
However, this limited period of availability does not affect the
amount of money appropriated by the resolution. The rate for
operations specified in the resolution, whether in terms of an
appropriation act which has not yet become law, a budget estimate, or
the current rate, is an annual amount. The continuing resolution, in
general, regardless of its period of duration, appropriates this full
annual amount. See B-271304, Mar. 19, 1996; B-152554, Nov. 4, 1974.
Because the appropriation under a continuing resolution is the full
annual amount, an agency may generally follow any pattern of
obligating funds, so long as it is operating under a plan which will
enable continuation of activities throughout the fiscal year within
the limits of the annual amount appropriated. Thus, under a resolution
with a duration of one month, and which appropriates funds at a rate
for operations not in excess of the current rate, the agency is not
necessarily limited to incurring obligations at the same rate it
incurred them in the corresponding month of the preceding year if the
agency can establish that it is operating under a flexible plan that
would enable continuation of activities throughout the fiscal year. B-
152554, Dec. 6, 1963. The same principle applies when the resolution
appropriates funds at a rate to maintain current operating levels. B-
209676, Apr. 14, 1983.
However, the pattern of obligations in prior years does provide a
framework for determining the proper pattern of obligations under the
continuing resolution. For example, if the activity is a formula grant
program in which nearly all appropriated funds are normally obligated
at the beginning of the fiscal year, then the full annual amount
should be made available to the agency under the resolution, even
though the resolution may be in effect for only 1 month. However, if
the activity is salaries and expenses, in which funds are normally
obligated uniformly throughout the year, then the amount made
available to the agency should be only one-twelfth of the annual
amount under a 1-month resolution or one-fourth of the annual amount
under a calendar quarter resolution. B-152554, Feb. 17, 1972.
For example, GAO determined that OMB properly apportioned, and the
State Department properly obligated, 75 percent of funds appropriated
by a fiscal year 1994 continuing resolution (Pub. L. No. 103-88, 107
Stat. 977 (Sept. 30, 1993)) for payments to the United Nations. It was
State Department policy to defer payment of the United States' general
assessment of United Nations contributions to the fourth quarter of
the calendar year, which is the first quarter of the fiscal year. As a
matter of normal practice, the State Department also made peacekeeping
payments when bills were received to the extent funds were available.
We found that the advance apportionment and obligation for the United
Nations assessment and peacekeeping payments with funds appropriated
by the fiscal year 1994 continuing resolution did not violate either
the continuing resolution or the provisions of title 31, United States
Code, controlling apportionment of funds. B-255529, Jan. 10, 1994.
Congress can, of course, alter the pattern of obligations by the
language of the resolution. For example, if the resolution limits
obligations in any calendar quarter to one-fourth of the annual rate,
the agency is limited to that one-fourth rate regardless of its normal
pattern of obligations. B-152554, Oct. 16, 1973. Further, even if the
resolution itself does not have such limitations, but the legislative
history clearly shows the intent of Congress that only one-fourth of
the annual rate be obligated each calendar quarter, only this amount
should be made available unless the agency can demonstrate a real need
to exceed that rate. B-152554, Nov. 4, 1974.
Beginning with fiscal year 1996, Congress to date has included the
following two provisions in continuing resolutions:
"... for those programs that had high initial rates of operation or
complete distribution of funding at the beginning of the fiscal year
in fiscal year [1995] because of distributions of funding to States,
foreign countries, grantees, or others, similar distributions of funds
for fiscal year [1996] shall not be made and no grants shall be
awarded for such programs funded by this resolution that would impinge
on final funding prerogatives."
"This joint resolution shall be implemented so that only the most
limited funding action of that permitted in the resolution shall be
taken in order to provide for continuation of projects and activities."
Pub. L. No. 104-31, §§ 113, 114, 109 Stat. 278, 281 (Sept. 30, 1995).
[Footnote 11]
GAO considered these provisions in B-300167, Nov. 15, 2002. That
decision involved the Federal Highway Administration's (FHWA)
distribution of federal aid to highways funds to the states under a
continuing resolution for fiscal year 2003, Pub. L. No. 107-229, 116
Stat. 1465 (Sept. 30, 2002).
FHWA had determined its distributions to the states at 4/365ths of the
current rate of $31.8 billion since that was the previous fiscal
year's obligation limitation under the 2002 Department of
Transportation appropriations act referenced by the continuing
resolution. FHWA's consistent historical practice was to allocate
funds to the states on a pro-rata basis by multiplying the percentage
of the year covered by the continuing resolution by the rate for the
continuing resolution (at the time the anticipated length of the
continuing resolution was 4 days, hence FHWA's 4/365ths distribution).
OMB, however, apportioned a total amount of $27.7 billion to FHWA
during the term of the continuing resolution to refrain from
"impinging on final funding prerogatives" per the first provision
quoted above, thereby reducing the amount FHWA had available for
allocation to the states from 4/365ths of $31.8 billion to 4/365ths of
$27.7 billion. OMB reasoned that because the program traditionally
makes available all of the budgetary resources subject to limitation
for allocation to the states at the beginning of the fiscal year, had
OMB apportioned the full amount of the fiscal year 2002 level, then
any subsequent effort by Congress to enact an obligation limitation of
less than $31.8 billion could have been compromised.
GAO found that OMB had no basis to further reduce the level of highway
spending below the current rate established in fiscal year 2002. Based
on the plain language of the first provision above, it only applies to
programs that (1) had "high initial rates of operation or a complete
distribution" of funds at the beginning of the prior fiscal year
(assuming the normal appropriations process), and where (2) a "similar
distribution of funds" under the continuing resolution would impinge
on Congress's final funding prerogatives. In other words, the
provision can only be applied to reduce or limit the distribution of
the current rate for a program (as defined in the continuing
resolution) if both prongs of the two-part test are met. Since FHWA's
long-standing practice of distributing highway funds under a
continuing resolution on a pro-rata basis fully protects congressional
funding prerogatives, and does so in a manner that is consistent with
the second provision (and is far more restrictive than would be true
under the first provision), GAO concluded that OMB was not justified
under the two provisions to set the level of highway spending at $27.7
billion.
Congress subsequently resolved the dispute between OMB and FHWA by
including a specific provision in its second amendment to the
continuing resolution establishing an annual rate of operations of
$31.8 billion for FHWA provided that total obligations for the program
not exceed $27.7 billion while operating under the resolution, Pub. L.
No. 107-240, § 137, 116 Stat. 1492, 1495 (Oct. 11, 2002).
b. Apportionment:
The requirement that appropriations be apportioned by the Office of
Management and Budget, imposed by the Antideficiency Act, applies to
funds appropriated by continuing resolution as well as regular
appropriations.[Footnote 12] See generally OMB Circular No. A-11,
Preparation, Submission, and Execution of the Budget, pt. 4, § 120.1
(June 21, 2005).
Typically, OMB has permitted some continuing resolution funds to be
apportioned automatically. OMB Cir. No. A-11, § 123.5. For example, if
a given continuing resolution covers 10 percent of a fiscal year, OMB
may permit 10 percent of the appropriation to be apportioned
automatically, meaning that the agency can obligate this amount
without seeking a specific apportionment. Under such an arrangement,
if program requirements produced a need for additional funds, the
agency would have to seek an apportionment from OMB for the larger
amount.
Apportionment requirements may vary from year to year because of
differences in duration and other aspects of applicable continuing
resolutions. A device OMB has commonly used to announce its
apportionment requirements for a given fiscal year is an OMB Bulletin
reflecting the particular continuing resolution for that year.
[Footnote 13]
4. Liquidation of Contract Authority:
When in the preceding fiscal year Congress has provided an agency with
contract authority, the continuing resolution must be interpreted as
appropriating sufficient funds to liquidate that authority to the
extent it becomes due during the period covered by the continuing
resolution.
When an activity operates on the basis that in one year Congress
provides contract authority to the agency and in the next year
appropriates funds to liquidate that authority, then a continuing
resolution in the second year must be interpreted as appropriating
sufficient funds to liquidate the outstanding contract authority. The
term "contract authority" means express statutory authority to incur
contractual obligations in advance of appropriations.[Footnote 14]
Thus, there is no "rate for operations" limitation in connection with
the liquidation of due debts based on validly executed contracts
entered into under statutory contract authority. In this context, rate
for operations limitations apply only to new contract authority for
the current fiscal year. B-114833, Nov. 12, 1974.
5. Rate for Operations Exceeds Final Appropriation:
If an agency operating under a continuing resolution incurs
obligations within the rate for operations limit, but Congress
subsequently appropriates a total annual amount less than the amount
of these obligations, the obligations remain valid. B-152554, Feb. 17,
1972.
For example, a continuing resolution for a period of 1 month may have
a rate for operations limitation of the current rate. The activity
being funded is a grant program and the agency obligates the full
annual amount during the period of the resolution. Congress then
enacts a regular appropriation act which appropriates for the activity
an amount less than the obligations already incurred by the agency.
Under these circumstances, the obligations incurred by the agency
remain valid obligations of the United States.
Having established that the "excess" obligations remain valid, the
next question is how they are to be paid. At one time, GAO took the
position that an agency finding itself in this situation must not
incur any further obligations and must attempt to negotiate its
obligations downward to come within the amount of the final
appropriation. B-152554, Feb. 17, 1972. If this is not possible, the
agency would have to seek a supplemental or deficiency appropriation.
This position was based on a provision commonly appearing in
continuing resolutions along the following lines:
"Expenditures made pursuant to this joint resolution shall be charged
to the applicable appropriation, fund, or authorization whenever a
bill in which such applicable appropriation, fund, or authorization is
contained is enacted into law."[Footnote 15]
However, the 1972 opinion failed to take into consideration another
provision commonly included in continuing resolutions:
"Appropriations made and authority granted pursuant to this joint
resolution shall cover all obligations or expenditures incurred for
any program, project, or activity during the period for which funds or
authority for such project or activity are available under this joint
resolution."[Footnote 16]
When these two provisions are considered together, it becomes apparent
that the purpose of the first provision is merely to emphasize that
the funds appropriated by the continuing resolution are not in
addition to the funds later provided when the applicable regular
appropriation act is enacted. Accordingly, GAO modified the 1972
opinion and held that funds made available by a continuing resolution
remain available to pay validly incurred obligations which exceed the
amount of the final appropriation. 62 Comp. Gen. 9 (1982). See also 67
Comp. Gen. 474 (1988); B-207281, Oct. 19, 1982.
Thus, obligations under a continuing resolution are treated as follows:
"When an annual appropriation act provides sufficient funding for an
appropriation account to cover obligations previously incurred under
the authority of a continuing resolution, any unpaid obligations are
to be charged to and paid from the applicable account established
under the annual appropriation act. Similarly, to the extent the
annual act provides sufficient funding, those obligations which were
incurred and paid during the period of the continuing resolution must
be charged to the account created by the annual appropriation act. On
the other hand, to the extent the annual appropriation act does not
provide sufficient funding for the appropriation account to cover
obligations validly incurred under a continuing resolution, the
obligations in excess of the amount provided by the annual act should
be charged to and paid from the appropriation account established
under authority of the continuing resolution. [Footnote omitted.] Thus
the funds made available by the resolution must remain available to
pay these obligations."
62 Comp. Gen. 9, 11-12 (1982). Thus, as GAO had advised in 1972,
agencies are still required to make their best efforts to remain
within the amount of the final appropriation. The change recognized in
62 Comp. Gen. 9 is that, to the extent an agency is unable to do so,
the appropriation made by the continuing resolution remains available
to liquidate the "excess" obligations.
C. Projects or Activities:
"Projects or activities" as used in continuing resolutions may have
two meanings. When determining which government programs are covered
by the resolution, and the rate for operations limit, the term
"project or activity" refers to the total appropriation rather than to
specific activities. When determining whether an activity was
authorized or carried out in the preceding year, the term "project or
activity" may refer to the specific activity. The following paragraphs
will elaborate.
The term "projects or activities" is sometimes used in continuing
resolutions to indicate which government programs are to be funded and
at what rate. Thus a resolution might appropriate sufficient funds to
continue "projects or activities provided for" in a certain
appropriation bill "to the extent and in the manner" provided in the
bill or as provided for in prior year appropriation acts. See, e.g.,
Pub. L. No. 108-309, §§ 101, 102, 118 Stat. 1137-38 (Sept. 30, 2004).
Occasionally Congress will use only the term "activities" by
appropriating sufficient funds "for continuing the following
activities, but at a rate for operations not in excess of the current
rate." See, e.g., Pub. L. No. 97-51, § 101(d), 95 Stat. 958, 961 (Oct.
1, 1981). When used in this context, "projects or activities" or
simply "activities" does not refer to specific items contained as
activities in the administration's budget submission or in a committee
report. Rather, the term refers to the appropriation for the preceding
fiscal year. B-204449, Nov. 18, 1981.[Footnote 17] Thus, if a
resolution appropriates funds to continue projects or activities under
a certain appropriation at a rate for operations not exceeding the
current rate, the agency is operating within the limits of the
resolution so long as the total of obligations under the appropriation
does not exceed the current rate. Within the appropriation, an agency
may fund a particular activity at a higher rate than that activity was
funded in the previous year and still not violate the current rate
limitation, assuming of course that the resolution itself does not
provide to the contrary.
An exception to the interpretation that projects or activities refers
to the appropriation in existence in the preceding fiscal year
occurred in 58 Comp. Gen. 530 (1979). In prior years, Comprehensive
Employment and Training Act (CETA)[Footnote 18] programs had been
funded in two separate appropriations, Employment and Training
Assistance and Temporary Employment Assistance. The individual
programs under the two appropriations differed only in that the number
of jobs provided under Temporary Employment Assistance depended on the
condition of the national economy.
Concurrently with the enactment of the 1979 continuing resolution,
Congress amended the CETA authorizing legislation so that certain
programs previously operating under the Temporary Employment
Assistance appropriation were to operate in fiscal year 1980 under the
Employment and Training Assistance appropriation. Under these
circumstances, if the phrase "activities under the Comprehensive
Employment and Training Act" in the continuing resolution had been
interpreted as referring to the two separate appropriations made in
the preceding year, and the current rates calculated accordingly,
there would have been insufficient funds available for the now
increased programs under the Employment and Training Assistance
appropriation, and a surplus of funds available for the decreased
programs under the Temporary Employment Assistance appropriation. To
avoid this result, the Comptroller General interpreted the 1979
continuing resolution as appropriating a single lump-sum amount for
all CETA programs, based on the combined current rates of the two
appropriation accounts for the previous year. See 58 Comp. Gen. at 535-
36.
Of course, as we noted earlier, continuing resolutions are really just
short term appropriations that bridge the gaps that occasionally arise
between the end of appropriations for one fiscal year and the start of
appropriations for the next.[Footnote 19] For this reason, continuing
resolutions usually refer only to those projects and activities for
which annual funding has expired—on account of which funding is being
provided. It should be remembered that most, but not all, of the
government is funded under annual appropriations. Those projects and
activities which are funded by multiple year and no-year
appropriations are not usually directly affected by continuing
resolutions. Thus, it would be a mistake to read the failure of a
continuing resolution to address funding for the rest of the
government as an implicit prohibition on undertaking other projects or
activities that are, in fact, funded from other appropriations not
covered by the continuing resolution.[Footnote 20]
The term "projects or activities" has also been used in continuing
resolutions to prohibit the use of funds to start new programs. Thus,
many resolutions have contained a section stating that no funds made
available under the resolution shall be available to initiate or
resume any project or activity which was not conducted during the
preceding fiscal year. When used in this context, the term "projects
or activities" refers to the individual program rather than the total
appropriation. See 52 Comp. Gen. 270 (1972); 35 Comp. Gen. 156 (1955).
One exception to this interpretation occurred in B-178131, Mar. 8,
1973. In that instance, in the previous fiscal year funds were
available generally for construction of buildings, including plans and
specifications. However, a specific construction project was not
actually under way during the previous year. Nonetheless it was
decided that, because funds were available generally for construction
in the previous year, this specific project was not a new project or
activity and thus could be funded under the continuing resolution.
[Footnote 21]
In more recent years, Congress has resolved the differing
interpretations of "project or activity" by altering the language of
the new program limitation. Rather than limiting funds to programs
which were actually conducted in the preceding year, the more recent
resolutions prohibit use of funds appropriated by the resolution for
"any project or activity for which appropriations, funds, or other
authority were not available" during the Continuing Resolutions
preceding fiscal year.[Footnote 22] Thus, if an agency had authority
and sufficient funds to carry out a particular program in the
preceding year, that program is not a new project or activity
regardless of whether it was actually operating in the preceding year.
A variation occurred in 60 Comp. Gen. 263 (1981). A provision of the
Higher Education Act[Footnote 23] authorized loans to institutions of
higher education from a revolving fund, not to exceed limitations
specified in appropriation acts. Congress had not released money from
the loan fund since 1978. The fiscal year 1981 continuing resolution
provided funds to the Department of Education based on its regular
fiscal year 1981 appropriation bill as passed by the House of
Representatives. The House-passed version included $25 million for the
higher education loans. Since the continuing resolution did not
include a general prohibition against using funds for projects not
funded during the preceding fiscal year, the $25 million from the loan
fund was available under the continuing resolution, notwithstanding
that the program had not been funded in the preceding year.
Another variation can be seen in In re Uncle Bud's, Inc., 206 B.R. 889
(Bankr. M.D. Tenn., 1997). In a fiscal year 1997 continuing
resolution, Pub. L. No. 104-99, title II, § 211, 110 Stat. 26, 37-38
(Jan. 26, 1996), Congress amended the Bankruptcy Code to require the
U.S. Trustee to impose and collect a new quarterly fee as part of the
bankruptcy process. Uncle Bud's, 206 B.R. at 897. Some debtors argued
that the new fee was barred because it constituted a "new activity."
The bankruptcy court disagreed, noting that, while the fee itself was
new, the U.S. Trustee had long been required to collect other fees
imposed by law. The court reasoned that the continuing resolution
language was intended to limit spending to previous year levels. The
new fee did not require the expenditure of additional funds—rather, it
brought in more revenues. Accordingly, the bankruptcy court concluded
that collection of the new fee represented, not a new project or
activity, but the continuation of activities undertaken in the
previous year. Id. On appeal, while other parts of the bankruptcy
court's ruling were reversed, this part was upheld and even expanded
when the district court gave retroactive effect to the provision
imposing the new fees. See Vergos v. Uncle Bud's, Inc., No. 3-97-0296
(M.D. Tenn., Aug. 17, 1998).
Under the right set of circumstances, the projects or activities
limitation can also have the effect of blocking existing programs. For
example, in Environmental Defense Center v. Babbitt, 73 F.3d 867 (9th
Cir. 1995), the Secretary of the Interior was sued for failing to
determine whether to list the California red-legged frog under the
Endangered Species Act, 16 U.S.C. § 1533(b)(6)(A). The Secretary
acknowledged that the only actions that remained to be taken before
the frog's status could be settled were the agency's in-house review
and its final decision-making. Babbitt, 73 F.3d at 871-72. However,
the Secretary argued he could not take those steps because, in 1995,
Congress had enacted an appropriations rider which rescinded some of
that fiscal year's funds and barred the remaining funds for that year
from being used to make any determination that a species was
threatened or endangered.[Footnote 24] See Emergency Supplemental
Appropriations and Rescissions for the Department of Defense to
Preserve and Enhance Military Readiness Act of 1995, Pub. L. No. 104-
6, 109 Stat. 73, 86 (Apr. 10, 1995). Although the supplemental rider
applied only to fiscal year 1995 funds, the ban was effectively
continued into fiscal year 1996 by the projects or activities
limitation in the continuing resolution under which the government was
being funded when the lawsuit was brought. Babbitt, 73 F.3d at 870.
Continuing Resolutions can carry over restrictions on projects and
activities that applied under prior year appropriations riders. The
court held that neither the appropriations rider nor the projects or
activities limitation repealed the Secretary's duty to determine
whether the California red-legged frog is endangered, but they did bar
the Secretary from complying with that duty by denying him funding for
that purpose. Id. at 871-72. As the court explained:
"Even though completion of the process may require only a slight
expenditure of funds, ... taking final action on the California red-
legged frog listing proposal would necessarily require the use of
appropriated funds. The use of any government resources—whether
salaries, employees, paper, or buildings—to accomplish a final listing
would entail government expenditure. The government cannot make
expenditures, and therefore cannot act, other than by appropriation."
Id.
D. Relationship to other Legislation:
1. Not Otherwise Provided For:
Continuing resolutions often appropriate funds to continue projects
"not otherwise provided for." This language limits funding to those
programs which are not funded by any other appropriation act. Programs
which received funds under another appropriation act are not covered
by the resolution even though the authorizing legislation which
created the program is mentioned specifically in the continuing
resolution. See B-183433, Mar. 28, 1979. For example, if a resolution
appropriates funds to continue activities under the Social Security
Act, and a specific program under the Social Security Act has already
been funded in a regular appropriation act, the resolution does not
appropriate any additional funds for that program.
2. Status of Bill or Budget Estimate Used as Reference:
When a continuing resolution appropriates funds at a rate for
operations specified in a certain bill or in the administration's
budget estimate, the status of the bill or estimate on the date the
resolution passes is controlling, unless the resolution specifies some
other reference date.
A continuing resolution will often provide funds to continue
activities at a rate provided in a certain bill that has passed one or
both houses of Congress, or at the rate provided in the
administration's budget estimate. In such instances, the resolution is
referring to the status of the bill or budget estimate on the date the
resolution became law. B-164031(2).17, Dec. 5, 1975; B-152098, Jan.
30, 1970.
For example, the resolution may provide that activities are to be
continued at the current rate or at the rate provided in the budget
estimate, whichever is lower. The budget estimate referred to is the
one in existence at the time the resolution is enacted, and the rate
for operations cannot be increased by a subsequent upward revision of
the budget estimate. B-164031(2).17, Dec. 5, 1975.
Similarly, if a resolution provides that activities are to continue at
the rate provided in a certain appropriation bill, the resolution is
referring to the status of the bill on the date the resolution is
enacted. A later veto of the bill by the President would not affect
the continuation of programs under the resolution. B-152098, Jan. 15,
1973.
Where a continuing resolution provides funds based on a reference
bill, this includes restrictions or limitations contained in the
reference bill, as well as the amounts appropriated, unless the
continuing resolution provides otherwise. 33 Comp. Gen. 20 (B-116069,
July 10, 1953);[Footnote 25] B-199966, Sept. 10, 1980. In National
Treasury Employees Union v. Devine, 733 F.2d 114 (D.C. Cir. 1984), the
court construed a provision in a reference bill prohibiting the
implementation of certain regulations, accepting without question the
restriction as having been "enacted into law" by a continuing
resolution which provided funds "to the extent and in the manner
provided for" in the reference bill. See also Environmental Defense
Center v. Babbitt, 73 F.3d 867 (9th Cir. 1995); Connecticut v.
Schweiker, 684 F.2d 979 (D.C. Cir. 1982), cert. denied, 459 U.S. 1207
(1983). Obviously, the same result applies under a "full text"
continuing resolution, that is, a continuing resolution that enacts
the full text of a reference bill "to be effective as if" the
reference bill "had been enacted into law as the regular appropriation
Act." B-221694, Apr. 8, 1986.
A provision in a continuing resolution using a reference bill may
incorporate legislative history, in which event the specified item of
legislative history will determine the controlling version of the
reference bill. For example, an issue in American Federation of
Government Employees v. Devine, 525 F. Supp. 250 (D.D.C. 1981), was
whether the 1982 continuing resolution prohibited the Office of
Personnel Management from funding coverage of therapeutic abortions in
government health plans. The resolution funded employee health
benefits "under the authority and conditions set forth in H.R. 4121 as
reported to the Senate on September 22, 1981." An earlier version of
H.R. 4121 had included a provision barring the funding of therapeutic
abortions. However, the bill as reported to the full Senate by the
Appropriations Committee on September 22, 1981, dropped the provision.
Accordingly, the court held that the continuing resolution could not
form the basis for refusing to fund therapeutic abortions in the
plaintiff's 1982 health plan. Devine, 525 F. Supp. at 254.
In previous years, it was also not uncommon for a continuing
resolution to appropriate funds as provided in a particular reference
bill at a rate for operations provided for in the conference report on
the reference bill. See, e.g., Pub. L. No. 99-103, § 101(c), 99 Stat.
471, 472 (Sept. 30, 1985). At a minimum, this will include items on
which the House and Senate conferees agreed, as reflected in the
conference report. If the resolution also incorporates the "joint
explanatory statement" portion of the conference report, then it will
enact those amendments reported in "technical disagreement" as well.
See B-221694, Apr. 8, 1986; B-205523, Nov. 18, 1981; B-204449, Nov.
18, 1981.
3. More Restrictive Authority:
The "more restrictive authority," as that term is used in continuing
resolutions, is the version of a bill which gives an agency less
discretion in obligating and disbursing funds under a certain program.
Continuing resolutions will often appropriate funds to continue
projects or activities at the rate provided in either the version of
an appropriation act that has passed the House or the version that has
passed the Senate, whichever is lower, "or under the more restrictive
authority." Under this language, the version of the bill which
appropriates the lesser amount of money for an activity will be
controlling. If both versions of the bill appropriate the same amount,
the version which gives the agency less discretion in obligating and
disbursing funds under a program is the more restrictive authority and
will be the reference for continuing the program under the resolution.
B-210922, Mar. 30, 1984; B-152098, Mar. 26, 1973; B-152554, Dec. 15,
1970.
However, this provision may not be used to amend or nullify a
mandatory provision of prior permanent law. To illustrate, the Federal
Housing Administration was required by a provision of permanent law to
appoint an Assistant Commissioner to perform certain functions. The
position subsequently became controversial. For the first month of
fiscal year 1954, the agency operated under a continuing resolution
which included the "more restrictive authority" provision. Language
abolishing the position had been contained in one version of the
reference bill, but not both. The bill, when subsequently enacted,
abolished the position.
Under a strict application of the "more restrictive authority"
provision, it could be argued that there was no authority to continue
the employment of the Assistant Commissioner during the month covered
by the continuing resolution. Noting that "laws are to be given a
sensible construction where a literal application thereof would lead
to unjust or absurd consequences, which should be avoided if a
reasonable application is consistent with the legislative purpose,"
the Comptroller General held that the Assistant Commissioner could be
paid his salary for the month in question. B-116566, Sept. 14, 1953.
The decision concluded:
"Manifestly the [more restrictive authority] language... was not
designed to amend or nullify prior permanent law which theretofore
required, or might thereafter require, the continuance of a specific
project or activity during July 1953....
"... Accordingly, it is concluded that the words 'the lesser amount or
the more restrictive authority' as used in [the continuing resolution]
had reference to such funds and authority as theretofore were provided
in appropriations for [the preceding fiscal year], and which might be
changed, enlarged or restricted from year to year."
In addition, continuing resolutions frequently provide that a
provision "which by its terms is applicable to more than one
appropriation" and which was not included in the applicable
appropriation act for the preceding fiscal year, will not be
applicable to funds or authority under the resolution unless it was
included in identical form in the relevant appropriation bill as
passed by both the House and the Senate. Thus, in 52 Comp. Gen. 71
(1972), a provision in the House version of the 1973 Labor Department
appropriation act prohibited the use of "funds appropriated by this
Act" for Occupational Safety and Health Act (OSHA)[Footnote 26]
inspections of firms employing 25 persons or less. The Senate version
contained the identical version except that "15" was substituted for
"25." The continuing resolution for that year contained both the "more
restrictive authority" and the "applicable to more than one
appropriation" provisions. The Comptroller General concluded that,
even though the House provision was more restrictive, the OSHA
provision did not apply to funds under the continuing resolution since
it had not been contained in the 1972 appropriation act and by its
terms it was applicable to more than one appropriation (i.e., it
applied to the entire appropriation act). See also B-210922, Mar. 30,
1984; B-142011, Aug. 6, 1969.
For purposes of the "applicable to more than one appropriation"
provision, GAO has construed the "applicable appropriation act for the
preceding fiscal year" as meaning the regular appropriation act for
the preceding year and not a supplemental. B-210922, Mar. 30, 1984.
(The cited decision also illustrates some of the complexities
encountered when the appropriation act for the preceding year was
itself a continuing resolution.)
4. Lack of Authorizing Legislation:
In order for a government agency to carry out a program, the program
must first be authorized by law and then funded, usually by means of
regular appropriations. This section deals with the relationship of
continuing resolutions to programs whose authorization has expired or
is about to expire. The common issue is the extent to which a
continuing resolution provides authority to continue the program after
expiration of the underlying authorization.
As the following discussion will reveal, there are no easy answers.
The cases frequently involve a complex interrelationship of various
legislative actions (or inactions) and are not susceptible to any
meaningful formulation of simple rules. For the most part, the answer
is primarily a question of intent, circumscribed of course by
statutory language and aided by various rules of statutory
construction.
We start with a fairly straightforward case. Toward the end of fiscal
year 1984, Congress was considering legislation (S. 2456) to establish
a commission to study the Ukrainian famine of 1932-33. The bill passed
the Senate but was not enacted into law before the end of the fiscal
year. The fiscal year 1985 continuing resolution provided that "there
are hereby appropriated $400,000 to carry out the provisions of S.
2456, as passed by the Senate on September 21, 1984.[Footnote 27] If
this provision were not construed as authorizing the establishment and
operation of the commission as well as the appropriation of funds, it
would have been absolutely meaningless. Accordingly, GAO concluded
that the appropriation incorporated the substantive authority of S.
2456. B-219727, July 30, 1985. The result was supported by clear and
explicit legislative history.
In a 1975 case, GAO held that the specific inclusion of a program in a
continuing resolution will provide both authorization and funding to
continue the program despite the expiration of the appropriation
authorization legislation. Thus, for example, if the continuing
resolution specifically states that the School Breakfast Program is to
be continued under the resolution, the program may be continued
although funding authorization legislation for the program expires
prior to or during the period the resolution is in effect. 55 Comp.
Gen. 289 (1975). The same result would follow if the intent to
continue the program was made particularly clear in legislative
history. 65 Comp. Gen. 318, 320-21 (1986).
The result in 55 Comp. Gen. 289 flows from two concepts. First, the
continuing resolution, as the later enactment, is the more recent
expression of congressional intent. Second, if Congress can
appropriate funds in excess of a specific ceiling in authorizing
legislation, which it can, then it should be able to appropriate funds
to continue a program whose funding authorization is about to expire,
at least where the authorization of appropriations is not a legal
prerequisite to the appropriation itself.
However, the "rule" of 55 Comp. Gen. 289 is not an absolute and the
result in any given case will depend on several variables. Although
not spelled out as such in any of the decisions, the variables may
include: the degree of specificity in the continuing resolution; the
apparent intent of Congress with respect to the expired program;
whether what has expired is an authorization of appropriations or the
underlying program authority itself; and the duration of the
continuing resolution (short-term versus full fiscal year).[Footnote
28]
In one case, for example, "all authority" under the Manpower
Development and Training Act (MDTA)[Footnote 29] terminated on June
30, 1973. The program was not specifically provided for in the 1974
continuing resolution, and the authority in fact was not reestablished
until enactment of the Comprehensive Employment and Training Act
(CETA)[Footnote 30] six months later. Under these circumstances, the
Claims Court held that, in the absence of express language in the
continuing resolution or elsewhere, contracts entered into during the
gap between expiration of the MDTA and enactment of CETA were without
legal authority and did not bind the government. Consortium Venture
Corp. v. United States, 5 Cl. Ct. 47 (1984), aff'd mem., 765 F.2d 163
(Fed. Cir. 1985).
In another case, recent Defense Department authorization acts,
including the one for fiscal year 1985, had authorized a test program
involving payment of a price differential to "labor surplus area"
contractors. The test program amounted to an exemption from permanent
legislation prohibiting the payment of such differentials. The 1985
provision expired, of course, at the end of fiscal year 1985. The 1986
continuing resolution made no specific provision for the test program
nor was there any evidence of congressional intent to continue the
test program under the resolution. (This lack of intent was confirmed
when the 1986 authorization act was subsequently enacted without the
test program provision.) GAO found that the Defense Logistics Agency's
failure to apply the price differential in evaluating bids on a
contract awarded under the continuing resolution (even though the
differential had been included in the solicitation issued prior to the
close of fiscal year 1985) was not legally objectionable. 65 Comp.
Gen. 318 (1986).
A more difficult case was presented in B-207186, Feb. 10, 1989.
Congress enacted two pieces of legislation on December 22, 1987. One
was a temporary extension of the Solar Bank, which had been scheduled
to go out of existence on September 30, 1987. Congress had enacted
several temporary extensions while it was considering reauthorization,
the one in question extending the Bank's life to March 15, 1988. The
second piece of legislation was the final continuing resolution for
1988 which funded the government for the remainder of the fiscal year.
The resolution included a specific appropriation of $1.5 million for
the Solar Bank, with a 2-year period of availability.
If the concept of 55 Comp. Gen. 289 were applied, the result would
have been that the specific appropriation in the continuing
resolution, in effect, reauthorized the Solar Bank as well. However,
the "later enactment of Congress" concept has little relevance when
both laws are enacted on the same day. In addition, in contrast to 55
Comp. Gen. 289, there was no indication of congressional intent to
continue the Solar Bank beyond the March 1988 expiration date.
Therefore, GAO distinguished prior cases,[Footnote 31] found that the
two pieces of legislation could be reconciled, and concluded that the
resolution merely appropriated funds for the Bank to use during the
remainder of its existence.
Another case involving a sunset provision is 71 Comp. Gen. 378 (1992).
The legislation establishing the United States Commission on Civil
Rights provided for the Commission to terminate on September 30, 1991.
During fiscal year 1991, Congress was working on the Commission's
reauthorization and its regular fiscal year 1992 appropriation.
Although both bills passed both houses of Congress, neither was
enacted into law by September 30. The first continuing resolution for
fiscal year 1992, with a cutoff date of October 29, 1991, expressly
provided funds for activities included in the Commission's yet-
unenacted 1992 appropriations bill. It was clear from all of this that
Congress intended the Commission to continue operating beyond
September 30. Thus, the continuing resolution effectively suspended
the sunset date and authorized the Commission to operate until October
28, 1991, when the regular 1992 appropriation act was enacted, at
which time the regular appropriation provided similar authority until
November 26, when the reauthorization was enacted.
Appropriation bills sometimes contain provisions malting the
availability of the appropriations contingent upon the enactment of
additional authorizing legislation. If a continuing resolution used a
bill with such a provision as a reference, and if the authorizing
legislation was not enacted, the amount contained in the appropriation
bill, and therefore the amount appropriated by the continuing
resolution, would be zero. To avoid this possibility, a continuing
resolution may contain a provision suspending the effectiveness of
such "contingency" provisions for the life of the resolution.[Footnote
32] Such a suspension provision will be applicable only until the
referenced appropriation bill is enacted into law. 55 Comp. Gen. at
294.
E. Duration:
1. Duration of Continuing Resolution:
Continuing resolutions generally provide that the budget authority
provided for an activity by the resolution shall remain available
until (a) enactment into law of a regular appropriation for the
activity, (b) enactment of the applicable appropriation by both houses
of Congress without provision for the activity, or (c) a fixed cutoff
date, whichever occurs first.[Footnote 33] Once either of the first
two conditions occurs, or the cutoff date passes, funds appropriated
by the resolution are no longer available for obligation and new
obligations may be incurred only if a regular appropriation is made or
if the termination date of the resolution is extended.
The period of availability of funds under a continuing resolution can
be extended by Congress by amending the fixed cutoff date stated in
the resolution. B-165731(1), Nov. 10, 1971; B-152098, Jan. 30, 1970.
The extension may run beyond the session of Congress in which it is
enacted. B-152554, Dec. 15, 1970.
Thus, some fiscal years have seen a series of continuing resolutions,
informally designated "first," "second," etc., up to "final." This
happens as Congress extends the fixed cutoff date for short time
periods until either all the regular appropriation acts are enacted or
Congress determines that some or all of the remaining bills will not
be enacted individually, in which event relevant portions of the
resolution will continue in effect for the remainder of the fiscal
year.
The second condition of the standard duration provision—enactment of
the appropriation by both houses of Congress without provision for the
activity—will be considered to have occurred only when it is clear
that Congress intended to terminate the activity. Thus, in B-
164031(1), Mar. 14, 1974, although regular and supplemental
appropriation acts had been enacted without provision for a program,
the Comptroller General decided that funds for the program were still
available under the continuing resolution. In this case, the
legislative history indicated that in enacting the regular
appropriation act, Congress was providing funding for only some of the
programs normally funded by this act and was deferring consideration
of other programs, including the one in question. Therefore, the
second condition was not applicable. Moreover, because supplemental
appropriations are intended to provide funding only for new or
additional needs, omission of the program from the supplemental did
not trigger the second cutoff provision.
As discussed previously, once the applicable appropriation is enacted
into law, expenditures made under the continuing resolution are
charged to that appropriation, except that valid obligations incurred
under the continuing resolution in excess of the amount finally
appropriated are charged to the account established under the
continuing resolution.
2. Duration of Appropriations:
For the most part, the duration (period of obligational availability)
of an appropriation under a short-term continuing resolution does not
present problems. If you have, say, only 1 month to incur obligations
under a continuing resolution, it matters little that the
corresponding appropriation in a regular appropriation act might be a
multiple year or no-year appropriation. Also, once the regular
appropriation is enacted, it supersedes the continuing resolution and
governs the period of availability.
B-300673, July 3, 2003. Questions may arise, however, under continuing
resolutions whose duration is the balance of the fiscal year.
For example, the continuing resolution for fiscal year 1979 included
the standard duration provision described above, with a cutoff date of
September 30, 1979, the last day of the fiscal year. However, a
provision in the Comprehensive Employment and Training Act (CETA), 29
U.S.C. § 802(B) (1976), stated that "notwithstanding any other
provision of law, unless enacted in specific limitation of the
provisions of this subsection," appropriations to carry out the CETA
program shall remain available for 2 years. Applying the principle
that a specific provision governs over a more general one, it was held
that funds appropriated for CETA under the continuing resolution were
available for obligation for 2 years in accordance with the CETA
provision. B-194063, May 4, 1979; B-115398.33, Mar. 20, 1979.
A few years earlier, the United States District Court for the District
of Columbia had reached the same result in a case involving grants to
states under the Elementary and Secondary Education Act. Pennsylvania
v. Weinberger, 367 E Supp. 1378, 1384-85 (D.D.C. 1973). The court
stated, "it is a basic premise of statutory construction that in such
circumstances the more specific measure ... is to be held controlling
over the general measure where inconsistencies arise in their
application." Id. at 1385.
Application of the same principle produced a similar result in B-
199966, Sept. 10, 1980. The 1980 continuing resolution appropriated
funds for foreign economic assistance loans by referencing the regular
1980 appropriation bill which had passed the House but not the Senate.
For that type of situation, the resolution provided for continuation
of projects or activities "under the appropriation, fund, or authority
granted by the one House [which had passed the bill]." The House-
passed bill gave the economic assistance loan funds a 2-year period of
availability. The continuing resolution also included the standard
duration provision with a cutoff date of September 30, 1980. Since the
duration provision applied to the entire resolution whereas the
provision applicable to the loan funds had a narrower scope, the
latter provision was the more specific one and the loan funds were
therefore held to be available for 2 years. See also 60 Comp. Gen. 263
(1981) for further discussion of similar continuing resolution
language.
In some instances, an extended period of availability is produced by a
specific exemption from the standard duration provision. For example,
the 1983 continuing resolution provided foreign assistance funds
"under the terms and conditions" set forth in the Foreign Assistance
Appropriation Act of 1982, and further exempted that appropriation
from the duration provision. Since under the 1982 act, appropriations
for the African Development Fund were to remain available until
expended, appropriations to the Fund under the continuing resolution
were also no-year funds. B-212876, Sept. 21, 1983. In view of the
express exemption from the duration provision, there was no need to
apply the "specific versus general" rule because there was no
conflict. See also B-210922, Mar. 30, 1984.
3. Impoundment:
The duration of a continuing resolution is relevant in determining the
application of the Impoundment Control Act. Impoundment in the context
of continuing resolutions was discussed in a letter to the Chairman of
the House Budget Committee, B-205053, Dec. 31, 1981. Generally, a
withholding from obligation of funds provided under a continuing
resolution would constitute an impoundment. Where the continuing
resolution runs for only part of the fiscal year, the withholding,
even if proposed for the duration of the continuing resolution, should
be classified as a deferral rather than a rescission. Withholding
funds during a temporary continuing resolution is different from
withholding them for the life of a regular annual appropriation in
that, in the former situation, Congress is still deliberating over the
regular funding levels. Also, deferred funds are not permanently lost
when a continuing resolution expires if a subsequent funding measure
is passed.
Under this interpretation, classification as a rescission would
presumably still be appropriate where a regular appropriation is never
passed, the agency is operating under continuing resolution authority
for the entire fiscal year, and the timing of a withholding is such
that insufficient opportunity would remain to utilize the funds. See B-
115398, May 9, 1975.
Impoundment issues under continuing resolutions may arise in other
contexts as well. See, e.g., 64 Comp. Gen. 649 (1985) (failure to make
funds available based on good faith disagreement over treatment of
carryover balances in calculating rate for operations held not to
constitute an illegal rescission); B-209676, Apr. 14, 1983 (no
improper impoundment where funds were apportioned on basis of budget
request although continuing resolution appropriated funds at rate to
maintain program level, as long as apportionment was sufficient to
maintain requisite program level).
Chapter 8 Footnotes:
[1] GAO, A Glossary of Terms Used in the Federal Budget Process, GAO-
05-734SP (Washington, D.C.: September 2005), at 35-36.
[2] 4 Lawrence, First Comp. Dec. 116 (1883); 3 Lawrence, First Comp.
Dec. 213 (1882).
[3] For a brief historical sketch, see Library of Congress,
Congressional Research Service, Budget Concepts and Terminology: The
Appropriations Phase, No. GGR 74-210, ch. V (1974), at 31-32, which
identifies what may have been the first continuing resolution, an 1876
resolution (ch. 157, 19 Stat. 65 (June 30, 1876)) requested by
President Grant.
[4] Library of Congress, Congressional Research Service (CRS), The
Congressional Appropriations Process: An Introduction, No. 97-6845
(Dec. 6, 2004), at 15. See also CRS, Duration of Continuing
Resolutions in Recent Years, No. RL32614 (Apr. 22, 2005); CRS,
Continuing Appropriations Acts: Brief Overview of Recent Practices,
No. RL30343 (Jan. 10, 2005).
[5] In November 1995, perhaps anticipating numerous continuing
resolutions for fiscal year 1996, for example, Congress suspended for
the remainder of that session the requirement in 1 U.S.C. § 107 that
the resolutions be printed on parchment for presentation to the
President. Pub. L. No. 104-56, title II, § 201, 109 Stat. 548, 553
(Nov. 20, 1995).
[6] Irvin Molotsky, AU Spending Bills Completed on Time, N.Y. Times,
Oct. 2, 1988, at 27.
[7] TFM 2-2025 (Dec. 15, 2004).
[8] GAO, A Glossary of Terms Used in the Federal Budget Process, GAO-
05-734SP (Washington, D.C.: September 2005), at 101.
[9] Treasury-GAO Joint Regulations are included in Appendix II to
Title 7 of the GAO Policy and Procedures Manual for Guidance of
Federal Agencies (Washington, D.C.: May 18, 1993). Because of their
nature, they are not published in the Federal Register. Some of the
earlier ones, but not those noted in the text, were published in the
annual "Comp. Gen." volumes. Title 7 of the Policy and Procedures
Manual is the only GAO reference in which the regulations and
amendments can be found together in a single location, available at
www.gao.govispecial.pubs/ppm.html (last visited September 15, 2005).
[10] Pub. L. No. 108-309, § 126 (first continuing resolution for
fiscal year 2005). See also Pub. L. No. 108-84, § 112, 117 Stat. 1042,
1044 (Sept. 30, 2003) (first continuing resolution for fiscal year
2004).
[11] See also Pub. L. No. 108-309, §§ 110, 111, 118 Stat. 1137, 1138-
39 (Sept. 30, 2004). Our review did not reveal any relevant
legislative history concerning the intent of Congress in adopting
these provisions.
[12] For a more general discussion of apportionment, see Chapter 6,
section C.4.
[13] See, e.g., OMB Bulletin No. 04-05, Apportionment of the
Continuing Resolution(s) for Fiscal Year 2005 (Sept. 30, 2004). For a
detailed review of apportionment of funds appropriated or authority
granted by the fiscal year 2003 continuing resolution, see B-300373,
Dec. 20, 2002.
[14] GAO, A Glossary of Terms Used in the Federal Budget Process, GAO-
05-734SP (Washington, D.C.: September 2005), at 21.
[15] E.g., Pub. L. No. 108-309, § 108, 118 Stat. 1137, 1138 (Sept. 30,
2004). Comparable provisions have been included in continuing
resolutions for over a century See, for example, the fiscal year 1883
continuing resolution ( Pub. L. No. 38, 22 Stat. 384 (June 30, 1882))
discussed in 3 Lawrence, First Comp. Dec. 213 (1882).
[16] E.g., Pub. L. No. 108-309, § 105.
[17] This position also follows from decisions such as B-162447, Mar.
8, 1971, read in conjunction with decisions on the availability of
lump-sum appropriations. Of course, if the appropriation for the
preceding fiscal year was a line-item appropriation, then the scope of
"project or activity" will be defined accordingly. See 66 Comp. Gen.
484 (1987) (Special Defense Acquisition Fund, a revolving fund made
available by annual "limitation on obligations" provisions, held a
"project or activity" for purposes of appropriating language in a
continuing resolution).
[18] Pub. L. No. 93-203, 87 Stat. 839 (Dec. 28, 1973).
[19] See GAO, A Glossary of Terms Used in the Federal Budget Process,
GAO-05-734SP (Washington, D.C.: September 2005) at 35-36 (definition
of "Continuing Appropriation/Continuing Resolution").
[20] See 19 Op. Off. Legal Counsel 278 (1995) (requester was
proceeding from the mistaken belief that a continuing resolution
implicitly prohibits all obligations or expenditures except those
expressly provided for in the resolution itself; activity at issue was
funded by a no-year appropriation).
[21] For this exception to work, however, the previous appropriation
must have afforded adequate authority to undertake the construction.
See 4 Lawrence, First Comp. Dec. 116 (1883), which concluded that
Howard University violated the Antideficiency Act while operating
under a continuing resolution. The University undertook building
repairs that were not authorized by the outgoing appropriation or the
continuing resolution, and could not defend its violation by pointing
to new authority pending (and eventually enacted) during the
continuing resolution that would have authorized the repairs.
[22] See, e.g., Pub. L. No. 108-309, § 104 (first continuing
resolution for fiscal year 2005, discussed above).
[23] Pub. L. No. 96-374, § 731, 94 Stat. 1367, 1475 (Oct. 3, 1980).
[24] For a further discussion of the effect of appropriations riders,
see Chapter 1, section B, and the update of that section in GAO,
Principles of Federal Appropriations Law: Annual Update of the Third
Edition, GAO-05-354SP (Washington, D.C.: March 2005), available at
www.gao.gov/legal.htm (last visited September 15, 2005).
[25] Two decisions begin on the same page, hence the variation in
citation format.
[26] Pub. L. No. 91-596, 84 Stat. 1590 (Dec. 29, 1970).
[27] Pub. L. No. 98-473, § 136, 98 Stat. 1837, 1973 (Oct. 12, 1984).
[28] See also 71 Comp. Gen. 378, 380-81 (1992):
"While the outcome in these cases varies, they are all grounded in the
same principle. The Congress may revive or extend an act by any form
of words which makes clear its intention to do so. Kersten v. United
States, 161 F.2d 337 (10th Cir. 1947), cert. denied, 331 U.S. 851.
Furthermore, when the Congress desires to extend, amend, suspend or
repeal a statute, it can accomplish its purpose by including the
requisite language in an appropriations or other act of Congress. The
whole matter depends on the intention of Congress as expressed in
statute. United States v. Will, 449 U.S. 200, 221-222 (1980) and
United States v. Burton, 888 F.2d 682, 685 (10th Cir. 1989)."
[29] Pub. L. No. 87-415, 76 Stat. 23 (Mar. 15, 1962).
[30] Pub. L. No. 93-203, 87 Stat. 839 (Dec. 28, 1973).
[31] GAO had also applied the concept of 55 Comp. Gen. 289 in 65 Comp.
Gen. 524 (1986), holding that a specific provision in a regular
appropriation act permitted the continuation of an activity whose
organic authority had expired at the end of the preceding fiscal year.
See also B-164031(3), Jan. 3, 1973.
[32] E.g., Pub. L. No. 102-109, § 109, 105 Stat. 551, 553 (Sept. 30,
1991) (1992 continuing resolution).
[33] E.g., Pub. L. No. 108-309, § 107, 118 Stat. 1137, 1138 (Sept. 30,
2004).
[End of Chapter 8]
Chapter 9: Liability and Relief of Accountable Officers:
A. Introduction:
B. General Principles:
1. The Concepts of Liability and Relief:
a. Liability:
b. Surety Bonding:
c. Relief:
2. Who Is an Accountable Officer?
a. Certifying Officers:
b. Disbursing Officers:
c. Cashiers:
d. Collecting Officers:
e. Other Agents and Custodians:
3. Funds to Which Accountability Attaches:
a. Appropriated Funds:
(1) Imprest funds:
(2) Flash rolls:
(3) Travel advances:
b. Receipts:
c. Funds Held in Trust:
d. Items Which Are the Equivalent of Cash:
4. What Kinds of Events Produce Liability?
5. Amount of Liability:
6. Effect of Criminal Prosecution:
a. Acquittal:
b. Order of Restitution:
C. Physical Loss or Deficiency:
1. Statutory Provisions:
a. Civilian Agencies:
b. Military Disbursing Officers:
2. Who Can Grant Relief?
a. 31 U.S.C. § 3527(a):
b. 31 U.S.C. § 3527(b):
c. Role of Administrative Determinations:
3. Standards for Granting Relief:
a. Standard of Negligence:
b. Presumption of Negligence/Burden of Proof:
c. Actual Negligence:
d. Proximate Cause:
e. Unexplained Loss or Shortage:
f. Compliance with Regulations:
g. Losses in Shipment:
h. Fire, Natural Disaster:
i. Loss by Theft:
(1) Burglary: forced entry:
(2) Robbery:
(3) Riot, public disturbance:
(4) Evidence less than certain:
(5) Embezzlement:
j. Agency Security:
k. Extenuating Circumstances:
D. Illegal or Improper Payment:
1. Disbursement and Accountability:
a. Statutory Framework: Disbursement Under Executive Order No. 166:
b. Automated Payment Systems:
c. Statistical Sampling:
d. Provisional Vouchers and Related Matters:
e. Facsimile Signatures and Electronic Certification:
f. GAO Audit Exceptions:
2. Certifying Officers:
a. Duties and Liability:
b. Applicability of 31 U.S.C. § 3528:
c. Relief:
3. Disbursing Officers:
a. Standards of Liability and Relief:
b. Some Specific Applications:
(1) Fraudulent travel claims:
(2) Other cash payments fraudulently obtained:
(3) Military separation vouchers:
(4) Assignment of contract payments:
(5) Improper purpose/payment beyond scope of legal authority:
4. Check Losses:
a. Check Cashing Operations:
b. Duplicate Check Losses:
c. Errors in Check Issuance Process:
5. Statute of Limitations:
E. Other Relief Statutes:
1. Statutes Requiring Affirmative Action:
a. United States Court of Federal Claims:
b. The Legislative and Judicial Branches:
c. Savings Bond Redemption Losses:
2. Statutes Providing "Automatic" Relief:
a. Waiver of Indebtedness:
b. Compromise of Indebtedness:
c. Foreign Exchange Transactions:
d. Check Forgery Insurance Fund:
e. Secretary of the Treasury:
f. Other Statutes:
F. Procedures:
1. Reporting of Irregularities:
2. Obtaining Relief:
3. De Minimis Rule: Payments of $100 or Less:
4. Relief versus Grievance Procedures:
G. Collection Action:
1. Against Recipient:
2. Against Accountable Officer:
H. Restitution, Reimbursement, and Restoration:
1. Restitution and Reimbursement:
2. Restoration:
a. Adjustment Incident to Granting of Relief:
b. Other Situations:
A. Introduction:
The concept that a person should be held accountable for funds in his
or her care is not peculiar to the government. If you get a job as a
cashier at your local supermarket and come up short at the end of the
day, you will probably be forced to make up the shortage from your own
pocket. The store manager does not have to prove the loss was your
fault. The very fact that the money is not there is sufficient to make
you liable. Of course, if your cash register is emptied by an armed
robber and you are in no way implicated, you will be off the hook.
Just like a private business enterprise, the government can lose money
in many ways. For example, it can be physically lost, stolen, paid out
improperly, or embezzled. Sometimes the money is recovered; often it
is not. If government funds are lost because of some employee's
misconduct or carelessness, and if the responsible employee is not
required to make up the loss, the result is that the taxpayer ends up
paying twice for the same thing, or paying for nothing.
When you accept the job at the supermarket, you do so knowing
perfectly well that you will be potentially liable for losses. There
is no reason why the government should operate any differently. If
anything, there is a stronger case for the liability of government
employees since they are, in effect, trustees for the taxpayers
(themselves included). As the Comptroller General once stated, "A
special trust responsibility exists with regard to public monies and
with this special trust goes personal financial responsibility." B-
161457, Oct. 30, 1969. This chapter will explore these concepts—the
liability and relief of government officers and employees who are
entrusted with public funds or who have certain specific
responsibilities in their disbursement. In government language, they
are called "accountable officers."[Footnote 1]
B. General Principles:
1. The Concepts of Liability and Relief:
a. Liability:
The concept of accountability for public funds in the form of strict
personal liability evolved during the nineteenth century. Its origins
can be traced to a number of congressional enactments, some dating
back to the Nation's infancy. The legislation establishing the
Department of the Treasury in 1789 included a provision requiring the
Comptroller of the Treasury to "direct prosecutions for all
delinquencies of officers of the revenue.[Footnote 2] A few years
later, in 1795, Congress authorized the Comptroller to require "any
person who has received monies for which he is accountable to the
United States" to render "all his accounts and vouchers, for the
expenditure of the said monies," and to commence suit against anyone
failing to do so.[Footnote 3]
In 1846, Congress mandated that all government officials safeguard
public funds in their custody. The statute provided that:
"all public officers of whatsoever character, be, and they are hereby,
required to keep safely, without loaning, using, depositing in banks,
or exchanging for other funds than as allowed by this act, all the
public money collected by them, or otherwise at any time placed in
their possession and custody, till the same is ordered, by the proper
department or officer of the government, to be transferred or paid out
...."
Act of August 6, 1846, ch. 90, § 6, 9 Stat. 59, 60. This statute still
exists, in modernized form, at 31 U.S.C. § 3302(a).
These are civil provisions. Congress also addressed fiscal
accountability in a variety of criminal statutes. An important one is
the Act of June 14, 1866, ch. 122, 14 Stat. 64, which declared it to
be the duty of disbursing officers to use public funds entrusted to
them "only as ... required for payments to be made ... in pursuance of
law," and made it a felony for a disbursing officer to, among other
things, "apply any portion of the public money intrusted to him" for
his own use or for any purpose not prescribed by law.[Footnote 4]
The strict liability of accountable officers became firmly established
in a series of early Supreme Court decisions. In 1845, the Court
upheld liability in a case where money had been stolen with no fault
or negligence on the part of the accountable officer. In an often-
quoted passage, the Court said:
"Public policy requires that every depositary of the public money
should be held to a strict accountability. Not only that he should
exercise the highest degree of vigilance, but that 'he should keep
safely' the moneys which come to his hands. Any relaxation of this
condition would open a door to frauds, which might be practiced with
impunity. A depositary would have nothing more to do than to lay his
plans and arrange his proofs, so as to establish his loss, without
laches on his part. Let such a principle be applied to our
postmasters, collectors of the customs, receivers of public moneys,
and others who receive more or less of the public funds, and what
losses might not be anticipated by the public?"
United States v. Prescott, 44 U.S. (3 How.) 578, 588-89 (1845). While
some might view this passage as unduly cynical of human nature, it
makes the important point that the laws relating to the liability and
relief of accountable officers are intended not only to give the
officers incentive to guard against theft by others, but also to
protect against dishonesty by the officers themselves.
An 1872 case, United States v. Thomas, 82 U.S. (15 Wall.) 337,
recognized that the liability announced in Prescott, while strict, was
not absolute. In that case, the Court refused to hold a customs
official liable for funds which had been forcibly taken by Confederate
forces during the Civil War.
In formulating its conclusion, the Court recognized two exceptions to
the strict liability rule:
"No rule of public policy requires an officer to account for moneys
which have been destroyed by an overruling necessity, or taken from
him by a public enemy, without any fault or neglect on his part."
Id. at 352. The exceptions, however, are limited. In Smythe v. United
States, 188 U.S. 156 (1903), the Court reviewed its precedents,
including Prescott and Thomas, and upheld the liability of a Mint
official for funds that had been destroyed by fire, finding the loss
attributable neither to "overruling necessity" nor to a public enemy.
The standard that has evolved from the cases and statutes noted is one
of strict liability. It is often said that an accountable officer is,
in effect, an "insurer" of the funds in his or her charge. E.g., B-
258357, Jan. 3, 1996; 64 Comp. Gen. 303, 304 (1985); 54 Comp. Gen.
112, 114 (1974); 48 Comp. Gen. 566, 567 (1969); 6 Comp. Gen. 404, 406
(1926). See also United States v. Heller, 1 F. Supp. 1, 6 (D. Md.
1932). The liability is automatic and arises by operation of law at
the moment a physical loss occurs or an erroneous payment is made.
E.g., B-291001, Dec. 23, 2002; 70 Comp. Gen. 12, 14 (1990); 54 Comp.
Gen. at 114.
In addition to the applicable statutory provisions, courts have
sometimes cited public policy considerations as a basis for an
accountable officer's strict liability. E.g., Prescott, 44 U.S. at 587-
88 ("The liability of the defendant ... arises out of ... principles
which are founded upon public policy"); Heller, 1 F. Supp. at 6
(strict liability "is imposed as a matter of public policy").
As discussed in section B.2 of this chapter, accountable officer
liability does not attach to individuals who are not accountable
officers even if they played a part—even a crucial part—in causing an
improper payment. By the same token, an accountable officer's
liability is not diminished because other individuals induced—or even
ordered—the improper payment. For example, in B-271021, Sept. 18,
1996, an official of the Equal Employment Opportunity Commission
(EEOC) submitted a memorandum to the director of an EEOC district
office asking the district director to provide a travel advance in
order to enable a nongovernment witness to appear in an agency
proceeding. The official concluded his request as follows: "If there
is a subsequent determination that the funds should not have been
disbursed for the aforementioned purpose, I will assume liability for
repayment of the funds." The district director ordered the travel
advance to be made; his order was passed on to an accountable officer,
Mr. Guthrie, who complied with it and issued the travel advance. EEOC
headquarters later determined that the payment was unauthorized and
disallowed it. GAO affirmed the disallowance, stating:
"The fact that Mr. Guthrie may have received instructions from
superiors to make the improper payment does not relieve him of
responsibility for the deficiency in his account resulting from the
improper payment. See 55 Comp. Gen. 297 (1975); 49 Comp. Gen. 38
(1969)."
B-271021 at 4. The other EEOC official's statement offering to assume
liability if the payment proved to be erroneous was equally unavailing
to Mr. Guthrie. The decision observed:
"This statement ... has no effect on the liability of Mr. Guthrie for
the deficiency in his account, which is fixed by statute and
regulation. The government, accordingly, need look no further than Mr.
Guthrie for restitution of the deficiency."
Id. at 5.
Similarly, a long line of GAO decisions holds that an accountable
officer is liable even where his or her subordinates actually made the
improper payment. See, e.g., B-274364, B-276306, Apr. 23, 1997; B-
260369, June 5, 1995; B-241019.2, Feb. 7, 1992; B-246418, Feb. 7,
1992, and decisions cited.[Footnote 5] As these decisions point out,
however, relief from liability is appropriate where the supervising
accountable officer maintained and ensured effective implementation of
an adequate system of procedures and controls to avoid errors.
b. Surety Bonding:
The early cases also based liability on the accountable officer's
bond. Prior to 1972, the fidelity bonding of accountable officers was
required by law.
See, e.g., 22 Comp. Gen. 48 (1942); 21 Comp. Gen. 976 (1942). As an
examination of the statement of the case in decisions such as United
States v. Prescott, 44 U.S. (3 How.) 578 (1845), United States v.
Thomas, 82 U.S. (15 Wall.) 337 (1872), and Smythe v. United States,
188 U.S. 156 (1903), demonstrates, the terms of the bond were very
similar to, and in fact were derived from, the 1846 "keep safely"
legislation quoted above. Thus, while the bond gave the government a
more certain means of recovery, it did not impose upon accountable
officers any duties that were not already required by statute.
[Footnote 6]
In a 1962 report, GAO concluded that bonding was not cost-effective,
[Footnote 7] and recommended legislation to repeal the bonding
requirement. GAO, Review of the Bonding Program for Employees of the
Federal Government, B-8201 (Washington, D.C.: Mar. 29, 1962). Congress
repealed the requirement in 1972, and accountable officers are no
longer bonded. Indeed, 31 U.S.C. § 9302 generally prohibits federal
agencies from requiring or obtaining surety bonds to cover their
officers and employees in carrying out official duties. The last
sentence of 31 U.S.C. § 9302 specifically states that the prohibition
against surety bonds "does not affect the personal financial
liability" of individual officers or employees. Thus elimination of
the bonding requirement has no effect on the legal liability of
accountable officers. 54 Comp. Gen. 112 (1974); B-191440, May 25, 1979.
c. Relief:
The early cases and statutes previously noted made no mention of
relief from liability.[Footnote 8] "Relief' in this context means an
action, taken by someone with the legal authority to do so, which
absolves an accountable officer from liability for a loss. Prior to
the World War II period, with limited exceptions for certain
accountable officers of the armed forces, an accountable officer had
but two relief options available. First, a disbursing officer could
bring an action in what was then the Court of Claims (now the United
States Court of Federal Claims) under 28 U.S.C. § 2512.[Footnote 9] Of
course, the officer would probably need legal representation and would
incur other expenses, none of which were reimbursable. Second, and
this became the most common approach, was private relief legislation,
a burdensome process for amounts which were often relatively small.
There was no mechanism for providing relief at the administrative
level, however meritorious the case. 4 Comp. Gen. 409 (1924); 27 Comp.
Dec. 328 (1920).
Starting in 1941, Congress enacted a series of relief statutes, and
there is now a comprehensive statutory scheme for the administrative
relief of accountable officers who are found to be without fault. The
major portion of this chapter deals with the application of this
legislation.
It is important to distinguish between liability and relief. It is not
the denial of relief that makes an accountable officer liable. As
noted previously, the basic legal liability of an accountable officer
arises automatically by virtue of the loss and is not affected by any
lack of fault or negligence on the officer's part. Relief is a
separate process and may take lack of fault into consideration to the
extent authorized by the governing statute.[Footnote 10] B-291001,
Dec. 23, 2002; 54 Comp. Gen. 112 (1974); B-167126, Aug. 28, 1978.
2. Who Is an Accountable Officer?
An accountable officer is any government officer or employee who by
reason of his or her employment is responsible for or has custody of
government funds. B-288163, June 4, 2002; 62 Comp. Gen. 476, 479
(1983); 59 Comp. Gen. 113, 114 (1979); B-257068, Oct. 22, 1994; B-
188894, Sept. 29, 1977. Accountable officers encompass such officials
as certifying officers, disbursing officers, collecting officers, and
other employees who by virtue of their employment have custody of
government funds.
Clearly, the relevant statutory provisions are the first place one
looks for the source of authority conferring the status of
"accountable officer" and establishing the responsibilities and
liabilities that go with it. Does this leave any room for agencies to
create "accountable officers" by administrative action? Until
recently, GAO decisions indicated that agencies could impose
accountable officer status and liability so long as they did so by
specific regulation. See B-247563.3, Apr. 5, 1996; B-260369, June 15,
1995; 72 Comp. Gen. 49, 52 (1992); B-241856, Sept. 23, 1992, and
decisions cited. These decisions reasoned that such liability, duly
imposed by regulation, could be regarded as part of the employee's
"employment contract." However, in B-280764, May 4, 2000, GAO
reconsidered its position and held that accountable officer status and
liability can only be created by statute. The 2000 decision overruled
prior inconsistent decisions.[Footnote 11]
The decision in B-280764 concerned a Defense Department regulation
that authorized the Department's certifying officers to designate as
"accountable officials" certain employees engaged in developing,
verifying, approving, and processing salary payments. Specifically,
the regulation defined "accountable officials" as "DOD military and
civilian personnel, who are designated in writing and not otherwise
accountable under applicable law, who provide source information, data
or service ... to a certifying or disbursing officer in support of the
payment process." Id. at 3. The regulation further provided that these
employees would be pecuniarily liable for erroneous payments resulting
from negligence in performing their duties. Id.
In analyzing the validity of the regulation in B-280764, GAO invoked
the "unassailable proposition" that the federal employment
relationship is primarily governed by statute rather than contract or
common law concepts, and that this is equally true when it comes to
disciplining or penalizing employees. Id. at 3. In this regard, the
decision cited a number of judicial opinions, including Bush, v.
Lucas, 462 U.S. 367 (1983); United States v. Gilman, 347 U.S. 507
(1954); and United States v. Standard Oil Co., 332 U.S. 301 (1947).
Applying these principles, GAO concluded that the Defense Department
regulation could not stand since it lacked the necessary statutory
authorization:
"Here, as in the cases noted above, Congress has not spoken to the
issue of the liability of government employees who provide information
to certifying officers that they rely on when performing their
statutory function.... Yet Congress has clearly legislated in detail
on many features of the certifying and disbursing function as well as
the government's employer-employee relationship. With respect to the
certifying and disbursing function, Congress has specifically provided
for the personal pecuniary liability of certifying and disbursing
officers, but, significantly, has not extended liability beyond these
officers to those governmental employees whose work supports these
functions.... Pecuniary liability for negligent conduct,
administratively imposed, is no less a penalty than would be an
employee's judicially created obligation to indemnify the government
for losses resulting from his negligent conduct. As noted above, the
Supreme Court counseled in Gilman, Standard Oil Co. and Bush, v. Lucas
that these issues are for Congress to resolve. We think the same holds
true for administrative extensions of personal liability beyond the
existing statutory parameters."
B-280764, May 4, 2000, at 5-6 (footnotes omitted).
In B-280764, GAO did not question the merits of extending
accountability and potential pecuniary liability to more Defense
Department employees, only the means of accomplishing that objective.
In 2002, Congress added a new section 2773a to title 10, United States
Code, which supplied the Department with the requisite statutory
authority to designate additional accountable officials.[Footnote 12]
Certifying officers play a significant role in the accountability for
public funds. A certifying officer is a government officer or employee
whose job is or includes certifying vouchers (including voucher
schedules or invoices used as vouchers) for payment. B-280764, May 4,
2000. A certifying officer differs from other accountable officers in
one key respect: the certifying officer has no public funds in his or
her physical custody. Rather, accountability is statutorily prescribed
because of the nature of the certifying function. A certifying
officer's liability, discussed in detail later in this chapter, is
established by 31 U.S.C. § 3528. In brief, certifying officers are
responsible for the legality of proposed payments and are liable for
the amount of illegal or improper payments resulting from their
certifications.
Prior to enactment of the National Defense Authorization Act for
Fiscal Year 1996, Pub. L. No. 104-106, 110 Stat. 186 (Feb. 10, 1996),
the military departments were subject to a different system of
accountability. The certifying officer provisions in section 3528 of
title 31 of the United States Code did not apply to them. See 31
U.S.C. § 3528(d) (1994). Instead, the military departments operated
under a system of subordinate and supervisory disbursing officers.
Supervisory disbursing officers (often called "finance and accounting
officers") had responsibility and liability for the correctness of
payments similar to that of a certifying officer in a civilian agency.
See B-266001, May 1, 1996, for a general description of this system.
Section 913 of Public Law 104-106 amended various provisions of titles
10, 31, and 37 of the United States Code to change the system of
accountability of the military departments. Among other things,
section 913 authorized the designation and appointment of certifying
officers within the military departments. The purpose of this
authorization was to strengthen internal controls within the military
departments by providing a separation of duties between officials who
authorized payments (certifying officers) and those who made payments
(disbursing officers), thereby placing the military departments more
in line with financial procedures in the civilian agencies. S. Rep.
No. 104-112, at 279 (1995).
A great many government officials make official "certifications" of
one type or another, but this does not make them certifying officers
for purposes of accountability and liability. E.g., B-247563.4, Dec.
11, 1996 (voucher auditors who "certified" invoices for payment by
accountable officers did not thereby become authorized certifying
officers themselves). As discussed above, this status can only be
conferred by statute. Thus, the concepts of accountability and relief
discussed in this chapter apply only to "authorized certifying
officers" who certify vouchers upon which moneys are to be paid out by
disbursing officers in discharging a debt or obligation of the
government. 23 Comp. Gen. 953 (1944). This may in appropriate
circumstances include the head of a department or agency. 31 U.S.C.
§ 3325(a)(1); 21 Comp. Gen. 976, 979 (1942). An authorized certifying
officer must be so designated in writing. 31 U.S.C. § 3325(a)(1); I
TFM § 4-1140 (Aug. 18, 1997).
Thus, an employee who "certified" overtime assignments in the sense of
a timekeeper verifying that employees worked the hours of overtime
claimed could not be held liable for resulting overpayments under an
accountable officer theory. B-197109, Mar. 24, 1980. The same approach
applies to various post-certification administrative actions, the rule
being that once a voucher has been duly certified by an authorized
official, subsequent administrative processing does not constitute
certification for purposes of 31 U.S.C. § 3528. 55 Comp. Gen. 388, 390
(1975). For example, the Comptroller General has held that 31 U.S.C. §
3528 does not apply to an "approving officer" who approves vouchers
after they have been duly certified. 21 Comp. Gen. 841 (1942).
b. Disbursing Officers:
A disbursing officer is an officer or employee of a federal department
or agency, civilian or military, designated to disburse moneys and
render accounts in accordance with laws and regulations governing the
disbursement of public funds. The term is essentially self-defining.
As one court has stated:
"We do not find the term 'disbursing officer' statutorily defined,
probably because it is self-definitive. It can mean nothing except an
officer who is authorized to disburse funds of the United States."
Romney v. United States, 167 F.2d 521, 526 (D.C. Cir.), cert. denied,
334 U.S. 847 (1948).
Whether an employee is a disbursing officer depends more on the nature
of the person's duties than on the title of his or her position. In
some cases, the job title will be "disbursing officer." This is the
title for the disbursing officers of the Treasury Department who
disburse funds for most civilian agencies under 31 U.S.C. § 3321. For
the military departments, which generally do their own disbursing, the
title may be "finance and accounting officer." As a general
proposition, any employee to whom public funds are entrusted for the
purpose of making payments from those funds will be regarded as a
disbursing officer. See B-151156, Dec. 30, 1963.
There may be more than one disbursing officer for a given transaction.
Military disbursing operations, at least as they existed prior to
enactment of the National Defense Authorization Act for Fiscal Year
1996,[Footnote 13] provide an example. The account was often held in
the name of a supervisory official such as a Finance and Accounting
Officer, with the actual payment made by some subordinate (agent,
cashier, deputy, etc.). Both were regarded as disbursing officers for
purposes of liability and relief although, as we will discuss later,
the standards for relief differ. E.g., B-261312, Feb. 5, 1995;
62 Comp. Gen. 476, 479-80 (1983); B-248532, Oct. 26, 1992; B-245127,
Sept. 18, 1991; B-240280, May 22, 1991. The principle of joint
liability in the case of multiple disbursing officers applies outside
the military departments as well. See B-288163, June 4, 2002 (clerk
and deputy clerk of a bankruptcy court).
c. Cashiers:
A cashier is a federal officer or employee who has been designated as
a cashier by an official delegated authority to make such designations
and who is thereby authorized to perform limited cash disbursing
functions or other cash operations. Department of the Treasury
Financial Management Service, Manual of Procedures and Instructions
for Cashiers (hereafter Cashier's Manual), § IV (April 2001), at 4.
Cashiers are designated in writing. Id. § DI, at 3 (cashier is
appointed by completing a specified form).
Cashiers who are authorized to make payments from funds advanced to
them are regarded as a category of disbursing officer. They deal
primarily with petty cash funds known as "imprest funds.[Footnote 14]
Cashiers outside the military departments exercise disbursing
functions pursuant to a delegation of authority from the Secretary of
the Treasury under 31 U.S.C. § 3321(b). Cashier's Manual, § II, at 2.
With respect to disbursing functions under 31 U.S.C. § 3321, cashiers
are divided into five categories: (1) Class A Cashier (may not advance
imprest funds to another cashier except to an alternate); (2) Class B
Cashier (may advance imprest funds to alternate or subcashier); (3)
Class D Cashier (receives funds solely for change-making purposes);
(4) Subcashier (may receive imprest funds from a Class B or D
cashier); and (5) Alternate to a Cashier or Subcashier (functions
during short absences of the cashier but may act simultaneously if
required by workload). Cashier's Manual, § IV, at 4; § V, at 12-13;
App. 1, at 16-17.
Cashiers are personally liable for any loss or shortage of funds in
their custody unless relieved by proper authority. Like other
accountable officers, they are regarded as "insurers" and are subject
to strict liability. B-258357, Jan. 3, 1996. Further discussion of the
role and responsibilities of cashiers may be found in sections IV and
V of the Cashier's Manual.
For the most part, a cashier will be operating with funds advanced by
his or her own employing agency. In some situations, however, such as
an authorized interagency agreement, the funds may be advanced by
another agency. Liability and relief are the same in either case. 65
Comp. Gen. 666, 675-77 (1986).
d. Collecting Officers:
Collecting officers are those who receive or collect money for the
government, such as Internal Revenue collectors or Customs collectors.
Collecting officers are accountable for all money collected. E.g., 59
Comp. Gen. 113, 114 (1979); 3 Comp. Gen. 403 (1924); 1 Comp. Dec. 191
(1895); B-201673 et al., Sept. 23, 1982. For example, an Internal
Revenue collector is responsible for the physical safety of taxes
collected, must pay over to the government all taxes collected, and
must make good any money lost or stolen while in his or her custody
unless relieved. E.g., 60 Comp. Gen. 674 (1981). However, under a
lockbox arrangement whereby tax payments are mailed to a financial
institution at a post office box and then wired to a Treasury account,
Internal Revenue Service officials are not accountable for funds in
the possession of the financial institution since they do not gain
custody or control over those funds. B-223911, Feb. 24, 1987.
The clerk of a bankruptcy court, if one has been appointed under 28
U.S.C. § 156(b), is the accountable officer with respect to fees paid
to the court, as prescribed by 28 U.S.C. § 1930, by parties commencing
a case under the Bankruptcy Code. 28 U.S.C. § 156(f). This provision,
added in 1986, essentially codified the result of two GAO decisions
issued the previous year, 64 Comp. Gen. 535 (1985) and B-217236, May
22, 1985. See also B-288163, June 4, 2002, for a more recent decision
following the same approach.
In some situations, certain types of receipts may be collected by a
contractor. Since the contractor is not a government officer or
employee, the various accountable officer statutes discussed
throughout this chapter do not apply, and the contractor's liability
is governed by the terms of the contract. For example, a parking
service contract with the General Services Administration required the
contractor to collect parking fees at certain government buildings and
to remit those fees to GSA on a daily basis. One day, instead of
remitting the receipts, an official of the contractor took the money
home in a paper bag and claimed to have been robbed in a parking lot
near her residence. When GSA withheld the amount of the loss from
contract payments, the contractor tried to argue that the risk of loss
should fall upon the government. The Claims Court disagreed. Since the
contract terms were clear and the contractor failed to comply, the
contractor was held responsible for the loss. Miracle Contractors,
Inc. v. United States, 5 CL Ct. 466 (1984).
The Department of Agriculture has statutory authority to use
volunteers to collect user fees in national forests. The volunteers,
private individuals, are to be bonded, with the cost of the bonds paid
by the Department. 16 U.S.C. § 4601-6a(k). In 68 Comp. Gen. 470
(1989), GAO concurred with the Department that the volunteers could be
regarded as agents of the Forest Service and, as such, eligible for
relief for non-negligent losses. The practical significance of this
decision is that it would be difficult to recruit volunteers if they
faced potential liability for non-negligent losses, a possibility that
would exist even under a surety bond. Id. at 471.
e. Other Agents and Custodians:
Officers and employees who do not fit into any of the preceding
categories, and who may not even be directly involved in government
fiscal operations, are occasionally given custody of federal funds and
thereby become accountable officers for the funds placed in their
charge. Note in this connection that the "safekeeping" mandate of 31
U.S.C. § 3302(a) (made unmistakably clear by reference to the original
1846 language quoted in section B.1.a of this chapter) applies to any
government employee, regardless of job description, to whom public
funds are entrusted in connection with the performance of government
business. See, e.g., B-170012, Feb. 3, 1972.
Examples of employees in this general custodial category include: a
messenger sent to the bank to cash checks, B-226695, May 26, 1987; a
Department of Energy special counsel with control over petroleum
overcharge refunds, B-200170, Apr. 1, 1981; State Department employees
responsible for packaging and shipping funds to an overseas embassy, B-
193830, Oct. 1, 1979; a special messenger delivering cash to another
location, B-188413, June 30, 1977; and an officer in charge of a
laundry operation on an Army base who had been advanced public funds
to be held as a change fund, B-155149, Oct. 21, 1964.
As with disbursing officers, there may be more than one accountable
officer in a given case, and the concept of accountability is not
limited to the person in whose name the account is officially held nor
is it limited to the person or persons for whom relief is officially
requested. For example, accounts in the regional offices of the U.S.
Customs Service are typically held in the name of the Regional
Commissioner. While the Regional Commissioner is therefore an
accountable officer with respect to that account, subordinate
employees who actually handle the funds are also accountable officers.
B-197324, Mar. 7, 1980; B-193673, May 25, 1979. The same principle
applies to the various service centers of the Internal Revenue
Service. E.g., 60 Comp. Gen. 674 (1981).
As demonstrated by the Customs and Internal Revenue Service
situations, as well as the many cases involving military finance and
accounting officers, a supervisory official will be an accountable
officer if that official has actual custody of public funds, or if the
account is held in the official's name, regardless of who has physical
custody. B-271017, Aug. 12, 1996. Absent these factors, however, a
supervisor is not an accountable officer and does not become one
merely because he or she supervises one. E.g., B-266245, Oct. 24,
1996; 72 Comp. Gen. 49, 51-52 (1992); B-214286, July 20, 1984; B-
194782, Aug. 13, 1979.[Footnote 15]
In each case, it is necessary to examine the particular facts and
circumstances to determine who had responsibility for or custody of
the funds during the relevant stages of the occurrence or transaction.
In B-193830, Oct. 1, 1979, money shipped from the State Department to
the American Embassy in Paraguay never reached its destination. While
the funds were chargeable to the account of the Class B cashier at the
Embassy, the State Department employees responsible for packaging and
shipping the funds were also accountable officers with respect to that
transaction. In another case, a new Class B cashier had been
recommended at a Peace Corps office in Western Samoa, and had in fact
been doing the job, but his official designation was not made until
after the loss in question. Since the new cashier, even though not yet
formally designated, had possession of the funds at the time of the
loss, he was an accountable officer. However, since the former cashier
retained responsibility for the imprest fund until formally replaced,
he too was an accountable officer. B-188881, May 8, 1978.
In sum, any government officer or employee who physically handles
government funds, even if only occasionally, is accountable for those
funds while in his or her custody.
It may be impossible, in rare cases, to specify exactly who the proper
accountable officer is. For example, the Drug Enforcement
Administration used a flash roll of 650 $100 bills and discovered that
15 bills had been replaced by counterfeits scattered throughout the
roll. (The "roll" was actually a number of stacks.) The roll had been
used in a number of investigations and in each instance, the
transactions (transfers from cashier to investigators, returns to
cashier, transfers between different groups of investigators) were
recorded on receipts and the money was counted. While it was thus
possible to determine precisely who had the roll on any given day,
there was no way to determine when the substitution took place and
hence to establish to whom the loss should be attributed. B-191891,
June 16, 1980. See also B-288284.2, Mar. 7, 2003 ("The lack of a paper
trail makes assignment of responsibility for the improper payment
impossible. In situations like this, where there is no basis for
attributing a loss or improper payment to one particular individual,
we have determined that no one can be held liable."); B-235368, Apr.
19, 1991 ("Failure to follow ... procedures for transferring the fund
to the alternate cashier makes assignment of responsibility for the
loss impossible; there is no audit trail permitting placement of
accountability, and no individual had exclusive control over the
fund.").
3. Funds to Which Accountability Attaches:
a. Appropriated Funds:
When we talk about the liability of accountable officers, we
deliberately use the broad term "public funds." As a general
proposition, for purposes of accountability, "public funds" consist of
three categories: appropriated funds, funds received by the government
from nongovernmental sources, and funds held in trust. It is important
to emphasize that when we refer to certain funds as "nonaccountable"
in the course of this discussion, all we mean is that the funds are
not subject to the laws governing the liability and relief of
accountable officers. Liability for losses may still attach on some
other basis.
Appropriated funds are accountable funds. The funds may be in the
Treasury, which is where most appropriated funds remain pending
disbursement, or they may be in the form of cash advanced to a
government officer or employee for some authorized purpose.
(1) Imprest funds:
As noted previously, the definitions of the various types of cashier
refer primarily to the use of "imprest funds." An imprest fund is
essentially a petty cash fund. More specifically, it is a fixed-cash
fund (i.e., a fixed dollar amount) advanced to a cashier for cash
disbursements or other cash requirement purposes as specifically
authorized. An imprest fund may be either a stationary fund, such as a
change-making fund, or a revolving fund. Department of the Treasury
Financial Management Service, Manual of Procedures and Instructions
for Cashiers (hereafter Cashier's Manual), App. 1 (April 2001), at 17
(definition of "imprest fund").
Historically, imprest funds were commonly used for such things as
small purchases, travel advances, and authorized emergency salary
payments. On November 9, 1999, however, the Treasury Department's
Financial Management Service issued a policy directive that required
federal agencies to eliminate imprest funds by October 1, 2001, except
for certain waived payments.[Footnote 16] According to the directive's
preamble, the main impetus for eliminating imprest funds was the
strong preference for making payments by electronic funds transfer
(EFT). Specifically, the National Performance Review had issued a
report recommending the elimination of imprest funds in favor of using
EFT transactions.[Footnote 17] Furthermore, the Debt Collection
Improvement Act of 1996 generally mandated the use of EFT payments as
of January 1, 1999, subject to waiver by the Secretary of the Treasury
under certain circumstances.[Footnote 18]
Under the Treasury policy directive, two conditions must be met in
order for imprest funds to be used after October 1, 2001. First, the
use of funds must qualify for waiver of the statutory prohibition
against non-EFT payments under standards prescribed in 31 C.F.R. §
208.4. Second, the payment must meet additional standards for waiver
specified in the policy directive. Given the waiver authorities,
imprest funds have not been completely eliminated. Thus, the
discussion that follows retains some relevance.
Current guidance on the use of imprest funds is contained primarily in
the Cashier's Manual and in the Federal Acquisition Regulation (FAR),
48 C.F.R. §§ 13.305-1-13.305-4. Agencies using imprest funds are
required to issue their own implementing regulations as well. FAR, 48
C.F.R. § 13.305-2(c). Except to the extent specified in an agency's
own regulations (e.g., B-220466 et al., Dec. 9, 1986), there are no
special subject matter limitations on the kinds of services payable
from imprest funds. 65 Comp. Gen. 806 (1986); B-242412, July 22, 1991.
Of course, like any other appropriated funds, imprest funds may not be
used for a purpose that is not authorized under the applicable
appropriation. B-243411, July 30, 1991 (imprest fund not available for
purchase of electric shoe polisher).
Imprest funds of the revolving type are replenished to the fixed
amount as spent or used. As replenishments are needed, replenishment
vouchers are submitted through the certifying officer to the
disbursing officer. Replenishment vouchers must be supported by
receipts or other evidence of the expenditures.
At any given time, an imprest fund may consist of cash, uncashed
government checks, and other documents such as unpaid reimbursement
vouchers, sales slips, invoices, or other receipts for cash payments.
An imprest fund cashier must at all times be able to account for the
full amount of the fund. Cashier's Manual, § IV at 8. For example, if
a cash box containing a $1,000 imprest fund disappears, and at the
time of disappearance the box contained $500 in cash and $500 in
receipts for which reimbursement vouchers had not yet been issued, the
loss to the government is the full $1,000 and the cashier is
accountable for that full amount. A cashier's failure to keep adequate
records, thus making proper reconciliation impossible, is negligence.
B-189084, Jan. 15, 1980.
Loss of a replenishment check before it reaches the cashier is not a
situation requiring relief of the cashier. The proper procedure in
such a situation is to report the loss to the disbursing office that
issued the check to obtain a replacement. B-203025, Oct. 30, 1981.
If it is in the government's interests, a checking account may be set
up in a private bank for imprest fund disbursements as long as
adequate control procedures are developed. B-117566, Apr. 29, 1959.
Use of depositary accounts must be approved by the agency head or
designee and is authorized only for cash withdrawal transactions.
Cashier's Manual, § IV at 10-11. The account may be interest-bearing,
in which event any interest earned must be deposited in the Treasury
as miscellaneous receipts. Id. at 11.
The method of imprest fund accountability changed starting with fiscal
year 1985. Prior to that time, funds advanced to cashiers by Treasury
disbursing officers were not "charged" to the agency's appropriations
at the time of the advance but were carried on the disbursing
officers' records of accountability. The cashiers were regarded as
agents of the disbursing officers. In fact, it was common to refer to
cashiers as "agent cashiers." E.g., A-89775, Mar. 21, 1945. Charges
were made to the applicable appropriation or fund accounts only when
replenishment checks were issued. Relief requests had to be submitted
through the Treasury's Chief Disbursing Officer.
In 1983, the Treasury Department proposed removing imprest fund
advances from the disbursing officers' accountability inasmuch as the
transactions were beyond the disbursing officers' control. GAO
concurred. B-212819-0.M., May 25, 1984. The current procedures are
discussed in 70 Comp. Gen. 481 (1991). In brief, the charge to the
agency's appropriation is now made at the time of the initial advance.
However, since the advance does not qualify as an obligation under 31
U.S.C. § 1501, the charge must be in the form of a "commitment" or
"reservation." In general, the actual obligation occurs when the
advance is used and the cashier seeks replenishment. The preliminary
charge is necessary to protect against violating the Antideficiency
Act. Except for certain procedural matters (relief requests are no
longer processed through the applicable disbursing officer), the
changes have no effect on the cashier's liability as an accountable
officer.
An alternative approach to managing imprest funds is the "third-party
draft" procedure described in I TFM § 4-3000 (Aug. 3, 2000). In brief,
an agency may retain a contractor to provide the agency with payment
instruments, not to exceed certain amounts, drawn on the contractor's
account. The face value of an individual third-party draft generally
may not exceed $10,000, and third-party drafts for routine imprest
payments are limited to $2,500. Id. § 4-3020.10. The agency then uses
these drafts for its imprest fund transactions and reimburses the
contractor for properly payable drafts that the contractor has paid.
Since the funds being disbursed from the imprest fund under the third-
party draft system are not government funds, personal liability does
not attach to the cashier who issues the draft. Id. § 4-3020; GAO,
Policy and Procedures Manual for Guidance of Federal Agencies, title
7, § 6.8.B (Washington, D.C.: May 18, 1993); B-247563.4, Dec. 11,
1996; B-247563.3, Apr. 5, 1996. However, this obviously does not mean
that third-party drafts can or should be used to circumvent
restrictions on the use of appropriated funds.
(2) Flash rolls:
Law enforcement officers on undercover assignments frequently need a
supply of cash to support their operations, for example, to purchase
contraband or to use as a gambling stake. This money, often advanced
from an imprest fund, is called a "flash roll." By the very nature of
the activities involved, flash roll money is at high risk to begin
with.
It is clear that a flash roll in the hands of a law enforcement agent
retains its status as government funds. Garcia v. United States, 469
U.S. 70 (1984) (flash roll held to be money of the United States for
purposes of 18 U.S.C. § 2114, which makes it a criminal offense to
assault a custodian of government money). However, flash roll money
will be accountable in some situations and nonaccountable in others,
depending on the nature of the loss. If the loss is within the risk
inherent in the operation, such as the suspect absconding with the
money, it is not viewed as an "accountable officer" loss but may be
handled internally by the agency. If the agency, under its internal
investigation procedures, finds the agent with custody of the funds to
have been negligent, it should hold the agent liable to the extent
provided in its regulations. Otherwise, it may simply record the loss
as a necessary expense against the appropriation which financed the
operation. If, on the other hand, the loss occurs in the course of the
operation but is unrelated to carrying out its purpose, the
accountable officer laws apply. The decision first recognizing this
distinction is 61 Comp. Gen. 313 (1982), applying it in the context of
Drug Enforcement Administration undercover operations.[Footnote 19]
The fact pattern in the Garcia case illustrates the nonaccountable
situation. A Secret Service agent had been given a flash roll to buy
counterfeit currency from suspects in Miami. The agent met the
suspects in a park. One of the suspects pulled a semi-automatic pistol
and demanded the money. Other Secret Service agents rushed to the
scene and apprehended the suspects, one of whom was trying to run off
with the money. Of course there was no loss since the money was
recovered. If the second suspect had gotten away with the money,
however, the loss could have been treated as an expense of the
operation, without the need to seek relief for anyone. GAO decisions
finding flash roll losses "nonaccountable" under the standards of 61
Comp. Gen. 313 are B-238222, Feb. 21, 1990 (suspect stole flash roll
during drug arrest); B-232253, Aug. 12, 1988 (informant stole money
provided to rent undercover apartment); and B-205426, Sept. 16, 1982
(federal agent robbed at gunpoint while trying to purchase illegal
firearms).
An example of a case which remains subject to the accountable officer
laws is B-218858, July 24, 1985. A federal agent, posing as a
narcotics trafficker, stopped at a telephone booth to make a call. Two
women approached the booth, which did not have a door. One diverted
the agent's attention while the other picked his pocket. The loss,
while certainly incident to the undercover operation, was unrelated to
its central purpose. Relief was granted. Other cases are:
* Agent set shoulder bag containing flash money on airport counter and
left it unattended for several minutes while making ticket
arrangements; relief denied. 64 Comp. Gen. 140 (1984).
* Briefcase containing funds stolen when agent set it down in coffee
shop for 15-20 seconds to remove jacket; relief granted. B-210507,
Apr. 4, 1983.
* Agent left funds in glove compartment while making phone call in
high crime area; agent found negligent. B-220492, Dec. 10, 1985.
As 64 Comp. Gen. 140 and B-210507 point out, losses which occur while
flash money is being transported to the location where it is intended
to be used are at best incidental to the operation and are thus
governed by the accountable officer laws.
The conspicuous display of a flash roll is not in and of itself
negligence where necessary to the agent's undercover role. B-194919,
Nov. 26, 1980.
(3) Travel advances:
Travel advances are authorized by 5 U.S.C. § 5705. The statute
expressly directs the recovery, from the traveler or from his or her
estate, of advances not used for allowable travel expenses. Like
imprest funds, travel advances can still be used but their use is now
the exception rather than the common practice. Section 2 of the Travel
and Transportation Reform Act of 1998, Pub. L. No. 105-264, 112 Stat.
2350 (Oct. 19, 1998), 5 U.S.C. § 5701 note, generally mandates the use
of government contractor-issued travel charge cards for payment of
official government travel. Under the General Services Administration
regulations implementing this statute, travel advances are authorized
only if an exemption from use of a travel charge card has been
granted. 41 C.F.R. §§ 301-51.1, 301-51.5.
A travel advance is "based upon the employee's prospective entitlement
to reimbursement" (B-178595, June 27, 1973) and is essentially for the
convenience of the traveler. Travel advances in the hands of the
traveler are regarded as nonaccountable and hence not governed by the
accountable officer laws. Rather, they are treated as loans for the
personal benefit of the traveler. As such, if the funds are lost or
stolen while in the traveler's custody, regardless of the presence or
absence of fault attributable to the traveler, the funds must be
recovered as provided by 5 U.S.C. § 5705, and the accountable officer
relief statutes do not apply. 54 Comp. Gen. 190 (1974); B-206245, Apr.
26, 1982; B-183489, June 30, 1975; B-254089, Sept. 10, 1993
(nondecision letter). The same principle applies to traveler's checks.
64 Comp. Gen. 456, 460 (1985).
In many cases, a messenger or some other clerical employee picks up
the funds for the traveler. If the funds are lost or stolen while in
the intermediary's custody, and use of the intermediary was the
traveler's choice, the intermediary is the agent of the traveler and
the traveler, having constructively received the funds, remains
liable. B-204387, Feb. 24, 1982; B-200867, Mar. 30, 1981. However, if
use of the intermediary is required by agency or local policy, then
the intermediary is the agent of the government and the traveler is
not liable. 67 Comp. Gen. 402 (1988).
Even though the accountable officer relief statutes do not apply, it
may be possible to effectively "relieve" the non-negligent traveler by
considering a claim under the Military Personnel and Civilian
Employees' Claims Act of 1964, 31 U.S.C. § 3721, to the extent
permissible under the agency's implementing regulations. B-208639,
Oct. 5, 1982; B-197927, Sept. 12, 1980.
Travel advances returned to government custody for reasons such as
postponement of the travel regain their status as accountable funds,
and an employee receiving custody of these funds is governed by the
laws relating to the liability and relief of accountable officers. B-
200404, Feb. 12, 1981; B-170012, Mar. 14, 1972; B-170012, May 3, 1971.
Also, where an advance greatly exceeds the employee's legitimate
travel expense needs and it is clear that the excess is intended to be
used for operational purposes, the excess over reasonable needs may be
treated as accountable funds and not part of the "loan." B-196804,
July 1, 1980.
b. Receipts:
In our definitions of governmental receipts and offsetting collections
in Chapter 2, we noted that the government receives funds from
nongovernment sources (a) from the exercise of its sovereign powers
(e.g., tax collections, customs duties, court fines), and (b) from a
variety of business-type activities (e.g., sale of publications).
These collections, whether they are to be deposited in the Treasury as
miscellaneous receipts or credited to some agency appropriation or
fund, are accountable funds from the moment of receipt. Some examples
are: B-288163, June 4, 2002, and 64 Comp. Gen. 535 (1985) (both cases
involved registry funds and fees paid to bankruptcy court); 60 Comp.
Gen. 674 (1981) (tax collections); B-200170, Apr. 1, 1981 (petroleum
overcharge refunds); and B-194782, Aug. 25, 1980 (recreational fee
collections).
c. Funds Held in Trust:
When the government holds private funds in a trust capacity, it is
obligated, by virtue of its fiduciary duty, to pay over those funds to
the rightful owners at the proper time. Thus, although the funds are
not appropriated funds, they are nevertheless accountable funds. The
principle has been stated as follows:
"The same relationship between an accountable officer and the United
States is required with respect to trust funds of a private character
obtained and held for some particular purpose sanctioned by law as is
required with respect to public funds."
6 Comp. Gen. 515, 517 (1927). See also Woog v. United States, 48 Ct.
Cl. 80 (1913).
A common example is the Department of Veterans Affairs (VA) "Personal
Funds of Patients" (PFOP) account. Patients, upon admission to a VA
hospital, may deposit personal funds in this account for safekeeping
and use as needed. Upon release, the balance is returned to the
patient. Patient funds in the PFOP account have been consistently
treated as accountable funds. 68 Comp. Gen. 600 (1989); 68 Comp. Gen.
371 (1989); B-226911, Oct. 19, 1987; B-221447, Apr. 2, 1986; B-215477,
Nov. 5, 1984; B-208888, Sept. 28, 1984.
Another example is private funds of litigants deposited in a registry
account of a court of the United States, to be held pending
distribution by order of the court in accordance with 28 U.S.C. §§
2041 and 2042. These are also accountable funds under the trust
capacity concept. B-288163, June 4, 2002; 64 Comp. Gen. 535 (1985); 6
Comp. Gen. 515 (1927); B-200108, B-198558, Jan. 23, 1981. See also
Osborn v. United States, 91 U.S. 474 (1875) (court can summarily
compel restitution of funds improperly withdrawn from registry account
by former officers).
Other situations applying the trust capacity concept are B-288284.2,
Mar. 7, 2003, and B-288284, May 29, 2002 (embassy employees' funds
held on their behalf in a Suspense Deposit Abroad account administered
by the State Department); B-238955, Apr. 3, 1991 (Overseas Consular
Service fund from which embassy consular officers authorize payment
for funerals and other expenses); 67 Comp. Gen. 342 (1988) (Indian
trust accounts administered by Bureau of Indian Affairs); 17 Comp.
Gen. 786 (1938) (United States Naval Academy laundry fund); B-190205,
Nov. 14, 1977 (foreign currencies accepted in connection with
accommodation exchanges authorized by 31 U.S.C. § 3342); and A-22805,
Nov. 30, 1929 (funds taken from prisoners at the time of their
confinement, to be held in their behalf). See also B-239955, June 18,
1991 (Treasury Department personnel are held accountable for loss of
damaged currency held in Treasury mailroom pending replacement); 69
Comp. Gen. 314 (1990) (BIA may contract with private bank for
ministerial aspects of trust fund disbursements, but government
disbursing officer must retain responsibility for managerial and
judgmental aspects).
Not all nongovernment funds in the custody of a government official
are held in a trust capacity. For example, in B-164419-0.M., May 20,
1969, GAO distinguished between funds of a foreign government held by
the United States incident to a cooperative agreement (trust capacity
funds), and funds of a private contractor held by a government
official for safekeeping as a favor to the contractor. The latter
situation was a mere bailment for the benefit of the contractor, and
the official was not an accountable officer with respect to those
funds.
d. Items Which Are the Equivalent of Cash:
The concepts of accountability and liability discussed in this chapter
apply primarily to money. However, for reasons which should be
apparent, accountability also attaches to certain noncash items which
are negotiable by the bearer or are otherwise the equivalent of cash.
Examples are:
* Food stamps. B-221580, Oct. 24, 1986 (nondecision letter).
* Government Transportation Requests. B-239387, Apr. 24, 1991.
* Military payment certificates. B-127937-0.M., Aug. 2, 1956.
* Receipts signed by employees acknowledging that they were advanced
funds to make small purchases. B-288014, May 17, 2002.
* Traveler's checks in the custody of an accountable officer. 64 Comp.
Gen. 456 (1985); B-235147.2, Aug. 14, 1991.
* Treasury bonds with interest coupons attached. B-190506, Nov. 28,
1977, aff'd on reconsideration, B-190506, Dec. 20, 1979.
In the reconsideration of B-190506, Dec. 20, 1979, it was contended
that loss of the bonds did not really result in a loss to the
government because neither the bonds nor the coupons had been cashed
and a "stop notice" had been placed with the Federal Reserve Bank. GAO
could not agree, however, since the bonds were bearer bonds and the
stop notice does not completely extinguish the government's liability
to pay on them. (The Treasury Department no longer issues coupon
bonds, although many older ones are still outstanding.)
4. What Kinds of Events Produce Liability?
The generic term for losses which trigger an accountable officer's
liability is "fiscal irregularity." See GAO, Policy and Procedures
Manual for Guidance of Federal Agencies, title 7, § 8.2 (Washington,
D.C.: May 18, 1993). Fiscal irregularities are divided into two broad
categories: (1) physical loss or deficiency, and (2) illegal or
improper payment. Since, as we will see, the relief statutes are
expressly tied to these categories, the proper classification of a
fiscal irregularity is the essential first step in determining which
statute to apply.
A working definition of "physical loss or deficiency" may be found in
B-202074, July 21, 1983:
"In sum, 'physical loss or deficiency' includes such things as loss by
theft or burglary, loss in shipment, and loss or destruction by fire,
accident, or natural disaster. It also includes the totally
unexplained loss, that is, a shortage or deficiency with absolutely no
evidence to explain the disappearance.... Finally, ... losses
resulting from fraud or embezzlement by subordinate finance personnel
may ... be treated as physical losses."
This definition has been repeated in several subsequent decisions such
as 70 Comp. Gen. 616, 621 (1991) and 65 Comp. Gen. 881, 883 (1986). A
loss resulting from a bank failure would also be treated as a physical
loss. See 18 Comp. Gen. 639 (1939).
The second type of fiscal irregularity is the "illegal, improper, or
incorrect payment." 31 U.S.C. §§ 3527(c), 3528(a)(4). The key word
here is "payment"—-"the disbursement of public funds by a disbursing
officer or his subordinate." B-202074, July 21, 1983. Improper
payments include such things as payments obtained by fraud, whether by
nongovernment persons or by government employees other than
subordinate finance personnel; erroneous payments or overpayments
resulting from human or mechanical error attributable to the
government; payments prohibited by statute; and disbursements for
unauthorized purposes. The legislative history of 31 U.S.C. § 3527(c),
the improper payment relief statute for disbursing officers, describes
an improper payment as a payment "which the Comptroller General finds
is not in strict technical conformity" with the law. Excerpts from the
pertinent committee reports are quoted in 49 Comp. Gen. 38, 40 (1969)
and in B-202074, cited above.
A loss resulting from an uncollectible personal check may be an
improper payment or a physical loss, depending on the circumstances.
If the loss results from an authorized check-cashing transaction, it
is an improper payment because government funds were disbursed to the
bearer. 70 Comp. Gen. 616 (1991). However, if the check is tendered to
pay an obligation owed to the United States or to purchase something
from the government, the loss, to the extent an accountable loss
exists, would be a physical loss. In this connection, Treasury
regulations provide:
"Government officers accept checks received subject to collection. If
a check cannot be collected in full or is lost or destroyed before
collection, the agency making the deposit must obtain the proper
payment. Payment by check is not effective until the full proceeds are
received."
I TFM § 5-2010 (Oct. 4, 2001). If a personal check is accepted subject
to collection, and if the government does not exchange value for the
check, any resulting loss is not a loss within the scope of the
accountable officer laws and may be adjusted administratively by the
agency. If, however, an accountable officer purports to accept a
personal check in satisfaction of an obligation due the United States
(rather than for collection only), or if the government parts with
something of value in exchange for the check (e.g., sale of government
property), a resulting loss is treated as a physical loss. B-201673 et
al., Sept. 23, 1982. See also 3 Comp. Gen. 403 (1924); A-44019, Mar.
15, 1934; A-24693, Oct. 30, 1929. The distinction is summarized in the
following passage from B-201673:
"If a check tendered in payment of a fine, duty, or penalty becomes
uncollectible, it may be argued that the Government incurs a loss in
the sense that it does not have money to which it was legally
entitled, but it has not lost anything that it already had. When the
check is in exchange for property, the Government has lost the
property, the value of which is measured by the agreed-upon sales
price. Of course, recovery of the property will remove or mitigate the
loss."
The concept of B-201673 has also been applied to a check seized as
forfeiture under 31 U.S.C. §§ 5316 and 5317(b), and subsequently
returned as uncollectible. B-208398, Sept. 29, 1983.
A conceptually similar case is B-216279, Oct. 9, 1984. A teller at a
Customs Service auction gave a receipt to a customer and negligently
failed to collect the tendered funds. It was suggested that there was
no loss because the teller never had physical possession of the funds.
However, the applicable relief statute (31 U.S.C. § 3527) uses the
terms "physical loss or deficiency" in the disjunctive, and there was
clearly a deficiency in the teller's account to the extent of the
property turned over in exchange for the lost payment.
While every fiscal irregularity by definition involves a loss or
deficiency for which someone is accountable, not every loss or
deficiency is a fiscal irregularity which triggers accountability. For
example, an accountable officer is not liable for interest lost on
collections which should have been deposited promptly but were not. 64
Comp. Gen. 303 (1985) (failure to deposit collections in designated
depositary); B-190290, Nov. 28, 1977 (increased interest charges on
funds borrowed from Treasury, no net loss to United States).
Also, losses resulting from the imperfect exercise of judgment in
routine business operations, where no law has been violated, do not
create accountable officer liability. 65 Comp. Gen. 881 (1986) (loss
to Internal Revenue Service Tax Lien Revolving Fund caused by sale of
property for substantially less than amount for which it had been
redeemed).
5. Amount of Liability:
As a general proposition, the amount for which an accountable officer
is liable is easy to determine: It is the amount of the physical loss
or improper payment, reduced by any amounts recovered from the
recipient (thief, improper payee, etc.). E.g., 65 Comp. Gen. 858
(1986); B-194727, Oct. 30, 1979.
There is an exception, discussed in 65 Comp. Gen. at 863-64, in which
amounts recovered from the recipient should not be used to reduce the
amount of the accountable officer's liability. A loss may result from
a series of transactions spanning several years, each transaction
giving rise to a separate debt. By the time the loss is discovered,
recovery from the accountable officer may be partially barred by the 3-
year statute of limitations found in 31 U.S.C. § 3526(c). This,
however, does not affect the indebtedness of the recipient which, in
this situation, will exceed the liability of the accountable officer.
Under the Federal Claims Collection Standards,[Footnote 20] a debtor
owing multiple debts may specify the allocation of a voluntary partial
payment. If the recipient/debtor fails to so specify, or if payment is
involuntary, the collecting agency may allocate the money among the
various debts in accordance with the best interests of the United
States. 31 C.F.R. § 901.3(c)(4). Generally, "the best interests of the
United States are clearly served by applying payments made by the
recipients to the class of debt for which only the recipients are
liable" (65 Comp. Gen. at 864), that is, those for which recovery from
the accountable officer is time-barred. Thus, in this type of
situation, partial recoveries from the recipient should first be
applied to the time-barred debt of the accountable officer until any
such amounts have been recouped, and only thereafter used to reduce
the accountable officer's remaining liability.
A judgment obtained against some third party (improper payee, thief,
etc.) is only "potential unrealized value" and does not reduce the
accountable officer's liability until it is actually collected. B-
147747, Dec. 28, 1961; B-194727, Oct. 30, 1979 (nondecision letter).
The liability of an accountable officer does not include interest and
penalties assessed against the recipient. 64 Comp. Gen. 303 (1985); B-
235037, Sept. 18, 1989.
The liability of an accountable officer resulting from the payment of
fraudulent travel claims is the amount of the fraudulent payment and
does not include nonfraudulent amounts paid for the same day(s). 70
Comp. Gen. 463 (1991). Previously GAO had included both, under the so-
called "tainted day" rule.[Footnote 21] The 1991 decision
distinguishes fraudulent payees from fraudulent claimants, concluding
that the tainted day rule does not apply to paid claims. That decision
was modified in 72 Comp. Gen. 154 (1993) to make clear that rejected
use of the tainted day rule was to be applied prospectively only from
the date of the prior decision, May 6, 1991.
When determining the amount of a loss for which an accountable officer
is to be held liable, the government does not "net" overages against
shortages. In GAO's view, such "netting" would weaken internal
controls over the accounting for cash balances. B-212370, Nov. 15,
1983; B-199447, Mar. 17, 1981.[Footnote 22] As noted in B-199447,
overages must generally be deposited in the Treasury as miscellaneous
receipts.
In almost all cases, the amount of an accountable officer's liability
is precisely determinable at the outset. It may be reduced by
recoveries, but it will not increase. One exception is illustrated in
B-239387, Apr. 24, 1991, in which an agency held an employee
accountable for a booklet of missing or stolen Government
Transportation Requests. Because the amount of the government's loss
could not be known until the GTRs were actually used and the
government forced to honor them, additional liability accrued as each
GTR was used over time.
6. Effect of Criminal Prosecution:
As we noted previously, the body of law governing the liability and
relief of accountable officers is designed not only to induce proper
care but also to protect against dishonesty by the officers
themselves. This section summarizes the relationship between criminal
prosecution and civil liability.
a. Acquittal:
Acquittal in a criminal proceeding does not extinguish civil liability
and does not bar subsequent civil actions to enforce that liability as
long as they are remedial rather than punitive. Helvering v. Mitchell,
303 U.S. 391 (1938). The reason is the difference in burden of proof.
Acquittal means only that the government was unable to prove guilt
beyond a reasonable doubt, a standard higher than that for civil
liability "That acquittal on a criminal charge is not a bar to a civil
action by the Government, remedial in its nature, arising out of the
same facts on which the criminal proceeding was based has long been
settled." Id. at 397. See also B-239134, Apr. 22, 1991 (nondecision
letter) (conviction on only a portion of the loss).
The rules are the same for acquittal (or reversal of a conviction) by
a military court-martial. B-235048, Apr. 4, 1991. See also Serrano v.
United States, 612 F.2d 525 (Ct. Cl. 1979) (acquittal held not to bar
agency from imposing civil liability and withholding pay of
accountable officer).
It follows that an accountable officer's civil liability will be
unaffected by the fact that a grand jury has refused to return an
indictment. B-186922, Apr. 8, 1977.
b. Order of Restitution:
A court may order a defendant to make monetary restitution to the
victim, either as part of the sentence (18 U.S.C. § 3556) or as a
condition of probation (18 U.S.C. § 3563(b)(2)). In either case, the
relevant terms and procedures are governed by 18 U.S.C. §§ 3663 and
3664. Restitution may be ordered in a lump sum or in installments. 18
U.S.C. § 3664(f)(3). These are general criminal statutes and would
apply fully where the defendant is an accountable officer and the
United States is the victim as well as the prosecutor.
The statutory scheme clearly recognizes the possibility of subsequent
civil proceedings by the United States as victim against the
accountable officer. Any amounts paid to a victim under a restitution
order must be set off against amounts recovered in a subsequent civil
action. 18 U.S.C. § 3664(j)(2). In such an action, the previously
convicted defendant cannot deny the "essential allegations" of the
offense. 18 U.S.C. § 3664(k)(1).
Where restitution is ordered in full, payable in installments, it has
been held that the victim may nevertheless obtain a civil judgment for
the unpaid balance, even though there has been no default in the
installment payments. Teachers Insurance and Annuity Association v.
Green, 636 F. Supp. 415 (S.D.N.Y. 1986). "Future payments that do not
fully compensate a victim in present value terms cannot be a bar to a
civil judgment." Id.
Where restitution is ordered in an amount less than the full amount of
the loss, civil liability for the balance would remain, subject to the
statutory setoff requirement. See 64 Comp. Gen. 303 (1985), reaching
this result under a prior version of the legislation. The decision
further suggests that, if the record indicates that the court thought
it was ordering restitution in full, it might be desirable to seek
amendment of the restitution order. Obviously, the fact of conviction
precludes any consideration of administrative relief. Id. at 304.
The preceding paragraphs are presented from the perspective of
restitution by the accountable officer. Similar principles would apply
with respect to restitution by a responsible party other than the
accountable officer. See, e.g., B-193673, May 25, 1979, modified on
other grounds by B-201673 et al., Sept. 23, 1982 (partial restitution
by thief reduces amount of accountable officer's liability). See also
B-270863, June 17, 1996. For example, where the Department of Justice
enters into a settlement with a culpable third party compromising a
claim of the government, the liability of the accountable officer is
terminated for any amounts of the claim in excess of the settlement.
See B-235048, Apr. 4, 1991.
C. Physical Loss or Deficiency:
1. Statutory Provisions:
The two principal statutes authorizing administrative relief from
liability for the physical loss or deficiency of public funds are 31
U.S.C. §§ 3527(a) and 3527(b). Subsection (a) applies to the civilian
agencies and subsection (b) applies to accountable officers of the
armed forces.
a. Civilian Agencies:
The physical loss or deficiency relief statute applicable to
accountable officers generally, 31 U.S.C. § 3527(a), was originally
enacted in 1947. Pub. L. No. 321, ch. 441, 61 Stat. 720 (Aug. 1,
1947). Its justification, similar to that for all relief statutes, was
summarized by the Senate Committee on Expenditures in the Executive
Departments as follows:
"The justification ... is that, at the present time, relief of the
kind with which this bill is concerned is required to be granted
either through passage of a special relief bill by the Congress or by
the filing of suit by the responsible person in the United States
Court of Claims, the latter to be done at the personal expense of the
responsible person. Both methods are costly and time consuming."
S. Rep. No. 80-379, at 1 (1947).
Before the actual relief mechanism is triggered, two threshold
conditions must be satisfied. First, the loss must be a physical loss
or deficiency and not an improper payment. 31 U.S.C. § 3527(a)(2).
Second, the person for whom relief is desired must be an "accountable
officer."[Footnote 23] The legislative history confirms that this
includes the general custodial category:
"There are many agents of the Government who do not disburse but who,
nevertheless, are fully responsible for funds ... entrusted to their
charge and, for that reason, the committee bill has been broadened to
include that class of personnel."
S. Rep. No. 80-379, at 2.
Once it has been determined that there has been a physical loss or
deficiency of "public money, vouchers, checks, securities, or records"
for which an accountable officer is liable, the statute authorizes the
Comptroller General to grant relief from that liability if the head of
the agency involved makes two administrative determinations (31 U.S.C.
§ 3527(a)(1)), and if the Comptroller General agrees with those
determinations (31 U.S.C. § 3527(a)(3)). E.g., B-288014, May 17, 2002.
First, the agency head must determine that the accountable officer was
carrying out official duties at the time of the loss, or that the loss
was attributable to the act or omission of a subordinate of the
accountable officer. B-241820, Jan. 2, 1991. Note that this is stated
in the disjunctive. The second part, loss attributable to a
subordinate, is designed to cover the situation, found in several
agencies such as the Internal Revenue Service and the Customs Service,
in which the account is in the name of a supervisory official who does
not actually handle the funds. In this situation, both persons are
accountable, and relief of one does not necessarily mean relief of the
other. See B-270863, June 17, 1996; B-265853, Jan. 23, 1996.
Second, the agency head must determine that the loss was not
attributable to fault or negligence on the part of the accountable
officer. This determination is necessary regardless of which part of
the first determination applies. Thus, while lack of fault does not
affect the automatic imposition of liability, it does provide the
basis for relief. See, e.g., B-288166, Mar. 11, 2003; B-258357, Jan.
3, 1996.
Generally, the requirement that the accountable officer must have been
acting in the discharge of official duties does not present problems.
Thus, in the typical case, the central question becomes whether GAO is
able to concur with the administrative determination that the loss
occurred without fault or negligence on the part of the accountable
officer. In reviewing relief cases over the years, GAO has developed a
number of standards, the application of which to a given case requires
a careful analysis of the particular facts. Many factors may bear on
the conclusion in any given case, and the result will be determined by
the interrelationship of these factors.
Section 3527(a) applies to accountable officers of "an agency,"
defined in 31 U.S.C. § 101 as any "department, agency, or
instrumentality of the United States Government." Thus, section
3527(a) has been construed as applicable to the judicial branch (B-
200108, B-198558, Jan. 23, 1981; B-197021, May 9, 1980; B-191440, May
25, 1979; B-185486, Feb. 5, 1976), and to agencies of the legislative
branch (B-192503-0.M., Jan. 8, 1979, denying relief to a GAO
employee). GAO has not specifically considered whether it applies to
the Senate or House of Representatives. Section 3527(a) has also been
construed as applicable to those government corporations which are
subject to GAO's accounts settlement authority. B-88578, Aug. 21,
1951; B-88578-0.M., Aug. 21, 1951.
b. Military Disbursing Officers:
The need for physical loss relief authority for military disbursing
officers became highlighted during World War I when several ships were
sunk with funds and records on board. The first permanent
administrative relief statute was enacted in 1919 and applied only to
the Navy.[Footnote 24] The Army received similar statutory authority
in 1944.[Footnote 25] The two were combined in 1955 and expanded to
cover all of the military departments.[Footnote 26] The legislation
was later codified at 31 U.S.C. § 3527(b). The origins of the 1919 law
are described in 7 Comp. Gen. 374, 377-78 (1927); the statutory
evolution is detailed in B-202074, July 21, 1983. The statute applies
to both civilian and military personnel of the various military
departments. B-151156, Dec. 30, 1963. As discussed later, section
3527(b) was further amended in 1996 to expand the coverage of the
section to all military accountable officials and to include erroneous
payments. However, since the requirements and procedures regarding
physical loss or deficiency were not altered, we retain the discussion
of the earlier version of section 3527(b) to give context to our
decisions predating the 1996 amendments.
As with section 3527(a), two threshold conditions had to be satisfied
before the relief mechanism came into play. First, like section
3527(a), the pre-1996 section 3527(b) applied only to physical losses
or deficiencies and not to improper payments. 31 U.S.C. §
3527(b)(1)(B); 7 Comp. Gen. 374 (1927); 2 Comp. Gen. 277 (1922); B-
202074, July 21, 1983. The statute was intended to authorize relief in
appropriate cases for losses "such as losses by fire, ship sinkings,
thefts or physical losses resulting from enemy action or otherwise." B-
75978, June 1, 1948. Thus, a loss in shipment was cognizable under
section 3527(b). B-200437, Oct. 21, 1980. However, the making of a
travel advance to an employee who terminated his employment without
accounting for the advance was not a physical loss but rather "a
payment voluntarily made by the disbursing officer in the course of
his duties." B-75978, June 1, 1948.
Second--and here the two statutes differ--section 3527(b) applied only
to disbursing officers and not to nondisbursing accountable officers.
B-194782, Aug. 13, 1979; B-194780, Aug. 8, 1979; B-151156, Dec. 30,
1963; B-144467, Dec. 19, 1960 ("while all disbursing officers are
accountable officers, all accountable officers are not disbursing
officers"). As each of the cited cases points out, physical loss
relief for nondisbursing accountable officers of the military
departments had to be sought under 31 U.S.C. § 3527(a).
Section 3527(b) was also similar to section 3527(a) in that, once it
had been determined that a loss is properly cognizable under the
statute, the applicable agency head must determine that (1) the
disbursing officer was carrying out official duties at the time of the
loss or deficiency (prior versions of the statute, and hence many GAO
decisions, use the military term "line of duty status"), and (2) the
loss occurred without fault or negligence on the part of the
disbursing officer. The first determination, 31 U.S.C. §
3527(b)(1)(A), did not expressly include the "loss attributable to
subordinate" clause found in section 3527(a). However, it was applied
in the same manner. See B-155149, Oct. 21, 1964; B-151156, Dec. 30,
1963.
The administrative determinations under section 3527(b)(2) were
conclusive on GAO. 31 U.S.C. § 3527(b)(2). Thus, once the
determinations were made, the granting of relief was mandatory, and
GAO had no discretion in the matter. Under section 3527(a), agency
determinations on the threshold issues—what is a physical loss and who
is a disbursing officer—were not conclusive. B-151156, Dec. 30, 1963.
As noted above and in sections B.2 and C.2.b of this chapter, the
statutory scheme for military accountable officers was changed by
section 913 of Public Law No. 104-106, div. A, title IX, subtitle B,
110 Stat. 186, 410-12 (Feb. 10, 1996). Section 913 amended a number of
provisions in titles 10, 31, and 37 of the United States Code to
authorize the designation and appointment of certifying and disbursing
officials within the Department of Defense (including military
departments, defense agencies, and field activities) to clearly
delineate a separation of duties and accountabilities between
personnel who authorize payments (certifying officers) and personnel
who make payments (disbursing officers). In doing so, section 913 also
amended 31 U.S.C. § 3527(b) to apply to all accountable officials of
the armed forces, not just disbursing officers,[Footnote 27] and
included a new section 3527(b)(1)(B) to provide relief for erroneous
payments.
2. Who Can Grant Relief?
a. 31 U.S.C. § 3527(a):
The statute confers the authority to grant relief on the Comptroller
Genera1.[Footnote 28] At one time, every case, no matter how small the
amount, involved an exchange of correspondence—a letter from the
agency to GAO requesting relief, and a letter from GAO back to the
agency granting or denying it. By 1969, after 20 years of experience
under the statute, a set of standards had developed, and it became
apparent that there was no need for GAO to actually review every case.
In that year, GAO inaugurated the practice of setting a dollar amount,
initially $150, below which GAO delegated its authority to the
agencies to apply the standards and to grant or deny relief
accordingly without the need to obtain formal concurrence from GAO.
GAO has raised the amount several times over the years and has used
various formats to announce the increase.[Footnote 29] The current
ceiling is $3,000. See B-243749, Oct. 22, 1991. The authorization
applies to all physical losses or deficiencies; however, with a few
exceptions to be noted later, it does not extend to improper
payments.[Footnote 30] 61 Comp. Gen. 646 (1982); 59 Comp. Gen. 113
(1979). As stated in 61 Comp. Gen. at 647:
"For the most part, the law governing the physical loss or deficiency
of Government funds is clear, and most cases center around the
determination of whether there was any contributing negligence on the
part of the accountable officer. Our numerous decisions in this area
should provide adequate guidance to agencies in resolving most smaller
losses."
The $3,000 limitation applies to "single incidents or the total of
similar incidents which occur about the same time and involve the same
accountable officer." 7 GAO-PPM § 8.9.C. Thus, two losses arising from
the same theft, one under the limit and one over, should be combined
for purposes of relief. B-189795, Sept. 23, 1977. In B-193380, Sept.
25, 1979, an imprest fund cashier discovered a $300 shortage while
reconciling her cash and subvouchers. A few days later, her
supervisor, upon returning from vacation, found an additional $500
missing. Since the losses occurred under very similar circumstances,
GAO agreed with the agency that they should be treated together for
purposes of seeking relief. Another case, B-187139, Oct. 25, 1978,
involved losses of $1,500, $60, and $50. Since there was no indication
that the losses were related, the agency was advised to separately
resolve the $60 and $50 losses administratively. (The ceiling was $500
at the time of B-193380 and B-187139.) Likewise, in B-260862, June 6,
1995, GAO granted relief to an imprest fund cashier from liability for
the loss of $3,939 missing from a safe, apparently due to theft, but
did not grant relief for an $820 shortage allegedly due to a
bookkeeping error discovered the day prior to the theft. The $820
shortage was referred back to the agency for resolution since it was
under the $3,000 limit.
Thus, in cases of physical loss or deficiency, it is necessary to
request relief from GAO only if the amount involved is $3,000 or more.
For below-ceiling losses, GAO's concurrence is, in effect, granted
categorically provided the matter is properly cognizable under the
statute, the agency makes the required determinations, and the
administrative resolution is accomplished in accordance with the
standards set forth in the GAO decisions. E.g., B-252809, Apr. 7,
1993; B-206817, Feb. 10, 1983; B-204740, Nov. 25, 1981.
Each agency should maintain a central control record of its below-
ceiling resolutions, should document the basis for its decisions, and
should retain that documentation for subsequent internal or external
audit or review. 7 GAO-PPM § 8.9.C. Also, agencies should ensure the
independence of the official or entity making the relief decisions. B-
243749, Oct. 22, 1991.
If an agency inadvertently submits a relief request to GAO for a below-
ceiling loss, GAO's policy is simply to return the case with a brief
explanation. E.g., B-214086, Feb. 2, 1984. GAO will also provide any
further guidance that may appear helpful. See, e.g., B-249796, Feb. 9,
1993.
As a practical matter, GAO's authorization for below-ceiling
administrative resolution is relevant only where the agency believes
relief should be granted. In these cases, the need for an exchange of
correspondence is eliminated, and the relief process is quicker, more
streamlined, and less costly. If the agency believes relief should not
be granted, its refusal to support relief effectively ends the matter
regardless of the amount. GAO will not review an agency's refusal to
grant relief in a below-ceiling case. B-247581, June 4, 1992; 59 Comp.
Gen. 113, 114 (1979).
b. 31 U.S.C. § 3527(b):
Like 31 U.S.C. § 3527(a), section 3527(b) also specifies the
Comptroller General as the relieving authority. However, by virtue of
the mandatory nature of section 3527(b), the monetary ceiling concept
used in civilian relief cases has much less relevance to military
disbursing officer losses.
By circular letter B-198451, Feb. 5, 1981, GAO notified the military
departments of a change in procedures under the pre-1996 version of 31
U.S.C. § 3527(b) pertaining to relief for physical loss or deficiency
of funds. Since GAO has no discretion with respect to the agency
determinations and relief is mandatory as long as the determinations
are made, there is no need for GAO to review any of those
determinations on a case-by-case basis. Thus, there is no need for the
agency to submit a formal request for relief regardless of the amount
involved. As long as the case is properly cognizable under 31 U.S.C. §
3527(b) (i.e., it involves a disbursing officer and a physical loss or
deficiency), it is sufficient for purposes of compliance with the
statute for the agency to make the required determinations and to
retain the documentation on file for audit purposes. See B-303671,
Dec. 3, 2004. Of course, should there be a question as to whether a
particular case is properly cognizable under the statute, GAO is
available to provide guidance.
As noted above and in sections B.2 and C.1.b of this chapter, the
statutory scheme for military accountable officers was changed by
section 913 of Public Law No. 104-106, div. A, title IX, subtitle B,
110 Stat. 186, 410-12 (Feb. 10, 1996). Section 913 amended a number of
provisions in titles 10, 31, and 37 of the United States Code to
authorize the designation and appointment of certifying and disbursing
officials within the Department of Defense (including military
departments, defense agencies, and field activities) to clearly
delineate a separation of duties and accountabilities between
personnel who authorize payments (certifying officers) and personnel
who make payments (disbursing officers). In doing so, section 913 also
amended 31 U.S.C. § 3527(b) to apply to all accountable officials of
the armed forces, not just disbursing officers,[Footnote 31] and
included a new section 3527(b)(1)(B) to provide relief for erroneous
payments made by military accountable officials. As in the case of a
physical loss or deficiency, the finding of the Secretary involved
regarding whether the circumstances warrant relief is conclusive on
the Comptroller General. GAO has not yet addressed relief of military
accountable officials for erroneous payments under the revised section
3527(b).
c. Role of Administrative Determinations:
Both of the relief statutes described above require two essentially
identical administrative determinations as prerequisites to granting
relief. It is the making of those determinations that triggers the
ability to grant relief. If the agency cannot in good faith make those
determinations, the legal authority to grant administrative relief
simply does not exist, regardless of the amount involved and
regardless of who is actually granting relief in any given case. GAO
will not review an agency's refusal to make the determinations under
either statute, and has no authority to "direct" an agency to make
them. In this sense, an agency's refusal to make the required
determinations is final. The best discussion of this point is found in
59 Comp. Gen. 113 (1979) (case arose under section 3527(a) but point
applies equally to both statutes).
While GAO's role under section 3527(a) is somewhat broader than under
section 3527(b), that role is still limited to concurring with
determinations made by the agency. GAO cannot make those
determinations for the agency. If they are absent, whatever the
reason, relief cannot be granted regardless of the apparent merits of
the case. There are numerous decisions to this effect. A few of them
are B-248804.2, July 5, 1994; B-217209, Dec. 11, 1984; B-204464, Jan.
19, 1982;[Footnote 32] and B-197616, Mar. 24, 1980. The determinations
are as much required in below-ceiling cases as they are in cases
submitted to GAO. 72 Comp. Gen. 49 (1992); 59 Comp. Gen. 113 (1979); B-
247581, June 4, 1992.
On occasion GAO has been willing to infer a determination that the
loss occurred while the accountable officer was carrying out official
duties where that determination was not expressly stated but the facts
make it clear and there is no question that relief would be granted.
E.g., B-244723, Oct. 29, 1991; B-235180, May 11, 1989; B-199020, Aug.
18, 1980; B-195435, Sept. 12, 1979. However, the determination of no
contributing fault or negligence will not be inferred but must be
expressly stated. B-241478, Apr. 5, 1991. It is not sufficient to
state that the investigative report did not produce affirmative
evidence of fault or negligence. B-167126, Aug. 9, 1976. Nor is it
sufficient to state that there is "no evidence of willful misconduct."
B-217724, Mar. 25, 1985. See also 70 Comp. Gen. 389, 390 (1991) ("The
mere administrative determination that there is no evidence of fault
or negligence will not adequately rebut the presumption of
negligence.").
As a practical matter, it will simplify the relief process if the
agency's request explicitly states all required determinations. It is
best simply to follow the wording of the statute.
Agency determinations required by a relief statute must be made by an
agency official authorized to do so. E.g., B-184028, Oct. 24, 1975.
Section 3527(a) requires determinations by the "head of the agency."
Section 3527(b) specifies the "appropriate Secretary." Of course in most
cases the authority under either statute will be delegated. It has
been held that, absent a clear expression of legislative intent to the
contrary, the authority to make determinations under these statutes
may be delegated only to officials authorized by law to act in place
of the agency head, or to an Assistant Secretary. 29 Comp. Gen. 151
(1949). Many agency heads have separate statutory authority to
delegate and redelegate, and this of course will be sufficient. See,
e.g., 22 U.S.C. § 2651a(a)(4) (Secretary of State). As far as GAO is
concerned, the form of the delegation is immaterial although it
should, of course, be in writing. Documentation of delegations need
not be furnished to GAO, nor need it be specified in relief requests,
but should be available if requested. See GAO, Policy and Procedures
Manual for Guidance of Federal Agencies, title 7, § 8.9.B (Washington,
D.C.: May 18, 1993).
If, under agency procedures, the determinations are made in the first
instance by someone other than the designated official (e.g., a board
of inquiry), the relief request must explicitly state the designated
official's concurrence. B-207062, July 20, 1982.
3. Standards for Granting Relief:
a. Standard of Negligence:
Again, it is important to distinguish between liability and relief.
The presence or absence of negligence has nothing to do with an
accountable officer's basic liability. The law is not that an
accountable officer is liable for negligent losses. The officer is
strictly liable for all losses, but may be relieved if found to be
free from fault or negligence. It has frequently been stated that an
accountable officer must exercise "the highest degree of care in the
performance of his duty." E.g., 48 Comp. Gen. 566, 567-68 (1969); B-
186922, Aug. 26, 1976. See also 72 Comp. Gen. 49, 53 (1992) ("high
standard of care"). Statements of this type, however, have little
practical use in applying the relief statutes.
In evaluating the facts to determine whether or not an accountable
officer was negligent, GAO applies the standard of "reasonable care."
54 Comp. Gen. 112 (1974); B-196790, Feb. 7, 1980. This is the standard
of simple or ordinary negligence, not gross negligence. 54 Comp. Gen.
at 115; B-158699, Sept. 6, 1968. The standard has been stated as what
the reasonably prudent and careful person would have done to take care
of his or her own property of like description under like
circumstances. B-288166, Mar. 11, 2003 (failure to record checks
mailed for deposit "not a common practice for many reasonably prudent
and careful people handling their own collections"); B-257120, Dec.
13, 1994 (leaving cash under truck seat not "an action that a
reasonably prudent and careful person would have taken"). This is an
objective standard, that is, it does not vary with such factors as the
age and experience of the particular accountable officer. See, e.g.,
70 Comp. Gen. 389, 390 (1991). Likewise, inadequate training or
supervision does not affect the standard. B-257120, Dec. 13, 1994.
The doctrine of comparative negligence (allocating the loss based on
the degree of fault) does not apply under the relief statutes. B-
211962, July 20, 1983; B-190506, Nov. 28, 1977.
b. Presumption of Negligence/Burden of Proof:
The mere fact that a loss or deficiency has occurred gives rise to a
presumption of negligence on the part of the accountable officer. The
presumption may be rebutted by evidence to the contrary, but it is the
accountable officer's burden to produce the evidence. The government
does not have to produce evidence to establish that the accountable
officer was at fault in order to hold the officer liable. Rather, to
be entitled to relief, the accountable officer must produce evidence
to show that there was no contributing fault or negligence on his or
her part, that is, that he or she exercised the requisite degree of
care.
This rule originated in decisions of the Court of Claims under 28 U.S.C.
§ 2512, before any of the administrative relief statutes existed, and
has been consistently followed. An early statement is the following
from Boggs v. United States, 44 Ct. Cl. 367, 384 (1909):
"There is at the outset a presumption of liability, and the burden of
proof must rest upon the officer who has sustained the loss."
A later case quoting and applying Boggs is O'Neal v. United States, 60
Ct. Cl. 413 (1925). More recently, the court said:
"The Government does not have the burden of proving fault or
negligence on the part of plaintiff; plaintiff has the sole burden of
proving that he was without fault or negligence in order to qualify
for [relief]."
Serrano v. United States, 612 F.2d 525, 532-33 (Ct. Cl. 1979).
GAO follows the same rule, stating it in literally dozens of relief
cases. E.g., B-288014, May 17, 2002; B-271896, Mar. 4, 1997; 72 Comp.
Gen. 49, 53 (1992); 67 Comp. Gen. 6 (1987); 65 Comp. Gen. 876 (1986);
54 Comp. Gen. 112 (1974); 48 Comp. Gen. 566 (1969).[Footnote 33]
The amount and types of evidence that will suffice to rebut the
presumption vary with the facts and circumstances of the particular
case. However, there must be affirmative evidence. It is not enough to
rely on the absence of implicating evidence, nor is the mere
administrative determination that there was no fault or negligence,
unsupported by evidence, sufficient to rebut the presumption. E.g., B-
272613, Oct. 16, 1996 (assertions of "the absence of negligence, or
mere administrative determinations that there was no fault or
negligence on the part of the accountable officer are not sufficient
to rebut the presumption of negligence when unsupported by the
evidence."); B-257120, Dec. 13, 1994 (accountable officer "must rebut
presumption with convincing evidence that the loss was not caused by
the accountable officer's negligence or lack of reasonable care."); B-
242830, Sept. 24, 1991 (mere absence of evidence implicating the
accountable officer in the loss is not sufficient to rebut the
presumption of negligence.). See also 70 Comp. Gen. 12, 14 (1990); B-
204647, Feb. 8, 1982; B-167126, Aug. 9, 1976.
If the record clearly establishes that the loss resulted from burglary
or robbery, the presumption is easily rebutted. See, e.g., B-288014,
May 17, 2002; B-265856, Nov. 9, 1995, and cases cited therein. But the
evidence does not have to explain the loss with absolute certainty. If
the evidence is not all that clear, the accountable officer may still
be able to rebut the presumption by presenting evidence tending to
corroborate the likelihood of theft or showing that some factor beyond
his or her control was the proximate cause of the loss. If such
evidence exists, and if the record shows that the accountable officer
complied fully with all applicable regulations and procedures, the
agency's determination of no fault or negligence will usually be
accepted and relief granted. See, e.g., B-260862, June 6, 1995; B-
242830, Sept. 24, 1991.
GAO will consider the results of a polygraph (lie detector) test as an
additional factor in the equation, but does not regard those results,
standing alone, as dispositive. This applies whether the results are
favorable (B-260862, June 6, 1995; B-206745, Aug. 9, 1982, rev'd on
submission of additional evidence, B-206745, May 11, 1983; B-204647,
Feb. 8, 1982; B-142326, Mar. 31, 1960; B-182829-0.M., Feb. 3, 1975) or
unfavorable (B-209569, Apr. 13, 1983. See also B-192567, Aug. 4, 1983,
aff'd upon reconsideration, B-192567, June 21, 1988).
Another situation in which the presumption is easily rebutted is where
the accountable officer does not have control of the funds at the time
of the loss. An example is losses occurring while the accountable
officer is on leave or duty absence. As a practical matter, relief
will be granted unless there is evidence of actual contributing
negligence on the part of the accountable officer. B-196960, Nov. 18,
1980; B-184028, Mar. 2, 1976; B-175756-0.M., June 14, 1972. Of course,
where contributing negligence exists, relief will be denied and the
role of the presumption never comes into play. B-182480, Feb. 3, 1975.
The presumption of negligence may be criticized as unduly harsh. It
is, however, necessary both in order to preserve the concept of
accountability and to protect the government against dishonesty as
well as negligence. See B-191440, May 25, 1979; B-167126, Aug. 28,
1978. As stated in one decision, the presumption of negligence:
"is a reasonable and legal basis for the denial of relief where the
accountable officers have control of the funds and the means available
for their safekeeping but the shortage nevertheless occurs without
evidence of forcible entry or other conclusive explanation which would
exclude negligence as the proximate cause of the loss."
B-166519, Oct. 6, 1969. Indeed, if liability is strict and automatic,
a legal presumption against the accountable officer is virtually
necessary as a starting point.
c. Actual Negligence:
If the facts indicate negligence on the part of the accountable
officer, and if it appears that the negligence was the proximate cause
of the loss, then relief must be denied.
One group of cases involves failure to lock a safe. It is negligence
for an accountable officer to place money in a safe in an area which
is accessible to others, and then leave the safe unlocked for a period
of time when he or she is not physically present. E.g., B-190506, Nov.
28, 1977; B-139886, July 2, 1959. It is also negligence to leave a
safe unattended in a "day lock" position. B-199790, Aug. 26, 1980; B-
188733, Mar. 29, 1979, affd, B-188733, Jan. 17, 1980; B-187708, Apr.
6, 1977. Compare these cases with B-180863, Apr. 24, 1975, in which an
accountable officer who had left a safe on "day lock" was relieved in
view of her lack of knowledge or instruction regarding the day lock
mechanism. Thus, an accountable officer who leaves a safe unlocked
(either by leaving the door open or closing the door but not rotating
the combination dial), and then leaves the office for lunch or for the
night will be denied relief. B-204173, Jan. 11, 1982, aff'd, B-204173,
Nov. 9, 1982; B-183559, Aug. 28, 1975; B-180957, Apr. 24, 1975; B-
142597, Apr. 9, 1960; B-181648-0.M., Aug. 21, 1974.
Merely being physically present may not be enough. A degree of
attentiveness, dictated by the circumstances and common sense, is also
required. In B-173710-0.M., Dec. 7, 1971, relief was denied where the
cashier did not lock the safe while a stranger, posing as a building
maintenance man, entered the cashier's cage ostensibly to repair the
air conditioning system and erected a temporary barrier between the
cashier and the safe.
Another group involves the failure to use available security
facilities. As we will see in our discussion of agency security, a
good rule of thumb for the accountable officer is: You do the best you
can with what is available to you. Failure to do so, without
compelling justification, does not meet the standard of reasonable
care. Some examples in which relief was denied are:
* Accountable officer left unlocked cash box in safe to which several
other persons had access. B-172614-0.M., May 4, 1971; B-167596-0.M.,
Aug. 21, 1969.
* Cashier left funds overnight in locked desk drawer instead of safe
provided for that purpose. B-177730-0.M., Feb. 9, 1973.
* Cashier left funds in unlocked drawer while at lunch instead of
locked drawer provided for that purpose. B-161229-0.M., Apr. 20, 1967.
* Funds disappeared from bar-locking file cabinet. Combination safe
was available but not used. B-192567, June 21, 1988.
Inattentiveness or simple carelessness which facilitates a loss may
constitute negligence and thus preclude relief. 64 Comp. Gen. 140
(1984) (shoulder bag with money left unattended on airport counter for
several minutes); B-257120, Dec. 13, 1994 (cash left under a truck
seat); B-233937, May 8, 1989 (bag with money set on ledge in crowded
restaurant); B-208888, Sept. 28 1984 (evidence suggested that funds
were placed on desk and inadvertently knocked into trash can); B-
127204, Apr. 13, 1956 (pay envelopes left on top of desk in cashier's
cage 19 inches from window opening on hallway to which many persons
had access).
The best way to know how much cash you have is to count it. Failure to
do so where reasonable prudence would dictate otherwise is negligence.
B-247581, June 4, 1992 (alternate cashier failed to count cash upon
receipt from principal or upon return to principal); B-206820, Sept.
9, 1982 (accountable officer handed money over to another employee
without counting it or obtaining receipt); B-193380, Sept. 25, 1979
(cashier cashed checks at bank and failed to count the cash received).
A deficiency in an accountable officer's account caused by the
acceptance of a counterfeit note constitutes a physical loss for
purposes of 31 U.S.C. § 3527(a). B-140836, Oct. 3, 1960; B-108452, May
15, 1952; B-101301, July 19, 1951. Whether accepting counterfeit money
is negligence depends on the facts of the particular case, primarily
whether the counterfeit was readily detectable. B-271895, Sept. 3,
1996 ("super-dollars"). See also B-239724, Oct. 11, 1990; B-191891,
June 16, 1980; B-163627-0.M., Mar. 11, 1968. (Relief was granted in
these four cases.) If the quality of the counterfeit is such that a
prudent person in the same situation would question the authenticity
of the bill, relief should not be granted. B-155287, Sept. 5, 1967.
Also, failure to check a bill against a posted list of serial numbers
will generally be viewed as negligence. B-155287, Sept. 5, 1967; B-
166514-0.M., July 23, 1969. Finally, failure without compelling
justification to use an available counterfeit detection machine is
negligence. B-243685, July 1, 1991.
Other examples of conduct which does or does not constitute negligence
are scattered throughout this chapter, for example, in the sections on
compliance with regulations and agency security. In all cases,
including those which cannot be neatly categorized, the approach is to
apply the standard of reasonable care to the conduct of the
accountable officer in light of all surrounding facts and
circumstances. For example, in B-196790, Feb. 7, 1980, a patient at a
then Veterans Administration hospital, patient "X," had obtained a
cashier's check from a bank on May 9, 1978. On September 12, 1978,
another patient, patient "Y," presented the check at the hospital for
deposit to patient X's personal funds account. On the following day,
patient X withdrew the money and left. The bank refused to honor the
check because, unknown to hospital personnel, patient X had gone to
the bank on May 17, stated that he had never received the check, and
the bank had refunded its face value. As noted in the decision,
patient X had "cleverly managed to double his bank account by
collecting the same funds twice." The issue was whether it was
negligence for the hospital cashier to accept the check dated four
months earlier or to permit patient X to withdraw the funds the day
after the check was deposited. GAO considered the nature of a
cashier's check, noted the absence of applicable regulations, applied
the reasonable care standard, and granted relief, but recommended that
the agency pursue further collection efforts against the bank.
d. Proximate Cause:
An accountable officer may be found negligent and nevertheless
relieved from liability if it can be shown that the negligence was not
the "proximate cause" of the loss or shortage. E.g., B-272613, Oct.
16, 1996, fn. 2; B-235147, Aug. 14, 1991. A precise definition of the
term "proximate cause" does not exist.[Footnote 34] The concept means
that, first, there must be a cause-and-effect relationship between the
negligence and the loss. In other words, the negligence must have
contributed to the loss. However, as one authority notes, the cause of
an event can be argued in a philosophical sense to "go back to the
dawn of human events" and its consequences can "go forward to
eternity." Prosser and Keeton, § 41. Obviously a line must be drawn
someplace. Thus, the concept also means that the cause-and-effect
relationship must be reasonably foreseeable; that is, a reasonably
prudent person should have anticipated that a given consequence could
reasonably follow from a given act.
Before proceeding, we must refer again to the accountable officer's
burden of proof. The Court of Claims said, in Serrano v. United
States, 612 F.2d 525, 531-32 (Ct. CL 1979):
"It is argued that the ... fault or negligence involved must be the
proximate cause of the loss. Thus the Secretary... could not deny
relief unless the loss was proximately attributable to plaintiff. This
argument has no merit. If such an argument were to be accepted by this
court, it would shift the burden of proof ... to the Government...
"Shifting of the burden of proof, and forcing the Government to prove
that plaintiffs conduct was a proximate cause of the loss, would be
intolerable. This shift would negate the special responsibility that
disbursing officers have in handling public funds." (Emphasis in
original.)
Thus, the government does not have to prove causation any more than it
has to prove negligence. Rather, the accountable officer who has been
negligent must, in order to be eligible for relief, show that some
other factor or combination of factors was the proximate cause of the
loss, or at least that the totality of evidence makes it impossible to
fix responsibility. B-272613, Oct. 16, 1996 (relief denied when
accountable officer failed to provide plausible evidence that some
factor other than his negligence was the proximate cause of the loss).
In analyzing proximate cause, it may be helpful to ask certain
questions. First, if the accountable officer had not been negligent,
would the loss have occurred anyway? If the answer to this question is
yes, the negligence is not the proximate cause of the loss and relief
will probably be granted. However, it may not be possible to answer
this question with any degree of certainty. If not, the next question
to ask is whether the negligence was a "substantial factor" in
bringing about the loss. If this question is answered yes, relief will
probably be denied. A couple of simple examples will illustrate:
* An accountable officer leaves cash visible and unguarded on a desk
top while at lunch, during which time the money disappears. There can
be no question that the negligence was the proximate cause of the loss.
* As noted previously, failure to count cash received at a bank window
is negligence. Suppose, however, that the accountable officer is
attacked and robbed by armed marauders while returning to the office.
The failure to count the cash, even though negligent, would not be the
proximate cause of the loss since presumably the robbers would have
taken the entire amount anyway.
Another good illustration is B-201173, Aug. 18, 1981. Twelve armed men
in two Volkswagen minibuses broke into the West African Consolidated
Services Center at the American Embassy in Lagos, Nigeria. They
forcibly entered the cashier's office and proceeded to carry the safe
down the stairs. The burglars dropped the safe while carrying it, the
safe opened upon being dropped, and the burglars took the money and
fled. The reason the safe opened when dropped was that the cashier had
not locked it, clearly an act of negligence. However, even if the safe
had been locked, the burglars would presumably have continued to carry
it away, loaded it onto their minibus, and forcibly opened it
somewhere else. Thus, the cashier's failure to lock the safe, while
negligent, was not the proximate cause of the loss.
Proximate cause considerations are often relevant in cases involving
weaknesses in agency security, and the topic is explored further under
the Agency Security heading in section C.3.j of this chapter.
The following are a few additional examples of cases in which relief
was granted even though the accountable officer was or may have been
negligent, because the negligence was found not to be the proximate
cause of the loss or deficiency.
* Accountable officer left safe combination in unlocked desk drawer.
Burglars found combination and looted safe. Had this been the entire
story, relief could not be granted. However, burglars also pried open
locked desk drawers throughout the office. Thus, locking the desk
drawer would most likely not have prevented the theft. B-229587, Jan.
6, 1988.
* Accountable officer in Afghanistan negligently turned over custody
of funds to unauthorized person. Money was taken by rioters in severe
civil disturbance. Relief was granted because negligence was not the
proximate cause of the loss. (Whether the person holding the funds was
or was not an authorized custodian was not a matter of particular
concern to the rioters.) B-144148-0.M., Nov. 1, 1960.
* Cashier discovered loss upon return from 2-week absence. It could
not be verified whether she had locked the safe when she left.
However, time of loss could not be pinpointed, other persons worked
out of the same safe, and it would have been opened daily for normal
business during her absence. Thus, even if she had failed to lock the
safe (negligence), proximate cause chain was much too conjectural. B-
191942, Sept. 12, 1979.
Even if there is a clearly identified intervening cause, relief may
still be denied depending on the extent to which the accountable
officer's negligence facilitated the intervening cause or contributed
to the loss. In such a case, the negligence will be viewed as the
proximate cause notwithstanding the intervening cause. The following
cases will illustrate.
* Accountable officer failed to make daily deposits of collections as
required by regulations. Funds were stolen from locked safe in
burglary. Relief was denied because officer's negligence was proximate
cause of loss in that funds would not have been in the safe to be
stolen if they had been properly deposited. B-71445, June 20, 1949.
See also B-203726, July 10, 1981; B-164449, Dec. 8, 1969; B-168672-
0.M., June 22, 1970.
* Accountable officer negligently left safe on "day lock" position
(door closed, dial or handle partially turned but not rotated, so that
partial turning in one direction, without knowledge of combination,
will permit door to open). Thief broke into premises, opened safe
without using force, and stole funds. Relief was denied because
negligence facilitated theft by making it possible for thief to open
safe without force or knowledge of combination. B-188733, Mar. 29,
1979, aff'd, B-188733, Jan. 17, 1980.
* Although cash was stolen, negligence by the accountable officer in
placing the cash under the seat of a truck while she went shopping
enabled the theft to occur and was thus the proximate cause of the
loss. Accordingly, relief was denied. B-257120, Dec. 13, 1994.
e. Unexplained Loss or Shortage:
The cases cited under the Actual Negligence heading all contained
clear evidence of negligence on the part of the accountable officer.
Absent a proximate cause issue, these cases are relatively easy to
resolve. Such evidence, however, is not necessary in order to deny
relief in the situation we refer to as the "unexplained loss or
shortage." In the typical case, a safe is opened at the beginning of a
business day and money is found missing, or an internal audit reveals
a shortage in an account. There is no evidence of negligence or
misconduct on the part of the accountable officer; there is no
evidence of burglary or any other reason for the disappearance. All
that is known with any certainty is that the money is gone. In other
words, the loss or shortage is totally unexplained. In many cases, a
formal investigation confirms this conclusion.
The presumption of negligence has perhaps its clearest impact in the
unexplained loss situation. If the burden of proof is on the
accountable officer to establish eligibility for relief, the denial of
relief follows necessarily. Since there is no evidence to rebut the
presumption, there is no basis on which to grant relief. See, e.g., B-
272613, Oct. 16, 1996; 70 Comp. Gen. 389 (1991); B-238955, Apr. 3,
1991. The presumption and its application to unexplained losses were
discussed in 48 Comp. Gen. 566, 567-68 (1969) as follows:
"While there is no positive or affirmative evidence of negligence on
the part of [the accountable officer] in connection with this loss, we
have repeatedly held that positive or affirmative evidence of
negligence is not necessary, and that the mere fact that an
unexplained shortage occurred is, in and of itself, sufficient to
raise an inference or presumption of negligence. A Government official
charged with the custody and handling of public moneys ... is expected
to exercise the highest degree of care in the performance of his duty
and, when funds ... disappear without explanation or evident reason,
the presumption naturally arises that the responsible official was
derelict in some way. Moreover, granting relief to Government
officials for unexplained losses or shortages of this nature might
tend to make such officials lax in the performance of their duties."
[Footnote 35]
The rationale is fairly simple. Money does not just get up and walk
away. If it is missing, there is an excellent chance that someone took
it. If the accountable officer exercised the requisite degree of care
and properly safeguarded the funds, it is unlikely that anyone else
could have taken the money without leaving some evidence of forced
entry. Therefore, where there is no evidence to explain a loss, the
leading probabilities are that the accountable officer either took the
money or was negligent in some way that facilitated theft by someone
else. Be that as it may, denial of relief in an unexplained loss case
is not intended to imply dishonesty by the particular accountable
officer; it means merely that there was insufficient evidence to rebut
the applicable legal presumption. See B-122688, Sept. 25, 1956. See
also B-258357, Jan. 3, 1996 (loss of receipts creates "unexplained
loss" from imprest fund for which cashier is liable).
Despite the strictness of the rule, there are many unexplained loss
cases in which the presumption can be rebutted and relief granted.
See, e.g., B-242830, Sept. 24, 1991. By definition, the evidence will
not be sufficient to "explain" the loss; otherwise there would not be
an unexplained loss to begin with. There is no simple formula to apply
in determining the kinds or amount of evidence that will rebut the
presumption. It is necessary to evaluate the totality of available
evidence, including statements by the accountable officer and other
agency personnel, investigation reports, and any relevant
circumstantial evidence. Compare B-206745, Aug. 9, 1982 (denial of
relief in "unexplained loss" case), with B-206745, May 11, 1983
(reversing on submission of additional evidence B-206745, Aug. 9,
1982).
In some cases, for example, it may be possible to reasonably conclude
that any negligence that may have occurred was not the proximate cause
of the loss. These cases tend to involve security weaknesses and are
discussed under the Agency Security heading, section C.3.j of this
chapter. The evidence, in conjunction with the lack of any evidence to
the contrary and the agency's "no fault or negligence" determination,
supports the granting of relief. For example, relief from an
unexplained loss was granted in B-271896, Mar. 4, 1997, when a cashier
was forced to operate in a lax security environment. In this case,
agency management allowed other employees access to the cash area of
the cashier's office, failed to fix a safe combination lock that had
been broken for over a week, and failed to heed repeated warnings to
correct the security deficiencies. See also B-235147.2, Aug. 14, 1991
(proximate cause of loss was "general lack of concern and sense of
laxity" that pervaded agency).
Since the burden of proof rests with the accountable officer, the
accountable officer's own statements take on a particular relevance in
establishing due care, and relief should never be denied without
obtaining and carefully analyzing them. Naturally, the more specific
and detailed the statement is, and the more closely tied to the time
of the loss, the more helpful it will be. While the accountable
officer's statement is obviously self-serving and may not be enough if
there are no other supporting factors, it has been enough to tip the
balance in favor of granting relief when combined with other evidence,
however slight or circumstantial, which by itself would not have been
sufficient.[Footnote 36]
f. Compliance with Regulations:
If a particular activity of an accountable officer is governed by a
regulation, failure to follow that regulation will be considered
negligence. If that failure is the proximate cause of a loss or
deficiency, relief must be denied. 70 Comp. Gen. 12 (1990); 54 Comp.
Gen. 112, 116 (1974). The relationship of this rule to the standard of
reasonable care discussed earlier is the premise that the prudent
person exercising the requisite degree of care will become familiar
with, and will follow, applicable regulations. Indeed, it has been
stated that accountable officers have a duty to familiarize themselves
with pertinent Treasury Department and agency rules and regulations. B-
229207, July 11, 1988; B-193380, Sept. 25, 1979.
Treasury Department regulations on disbursing, applicable to all
agencies for which Treasury disburses under 31 U.S.C. § 3321, are
found in volume I of the Treasury Financial Manual, especially part 4,
"Disbursing," and part 5, "Deposit Regulations." The Treasury
regulations establish general requirements for sound cash control, and
failure to comply may result in the denial of relief. E.g., 70 Comp.
Gen. 12 (1990) (cashier kept copy of safe combination taped to
underside of desk pull-out panel).[Footnote 37]
The same principle applies with respect to violations of individual
agency regulations and written instructions. E.g., B-193380, Sept. 25,
1979 (cashier violated agency regulations by placing the key to a
locked cash box in an unlocked cash box and then leaving both in a
locked safe to which more than one person had the combination). The
decision further pointed out that oral instructions to the cashier to
leave the cash box unlocked could not be considered to supersede
published agency regulations. However, if agency regulations are
demonstrably ambiguous, relief may be granted. B-169848-0.M., Dec. 8,
1971. See also B-288166, Mar. 11, 2003 (accountable officer granted
relief when he complied with agency regulations).
Negligence will not be imputed to an accountable officer who fails to
comply with regulations where full compliance is prevented by
circumstances beyond his or her control. This recognizes the fact that
compliance is sometimes up to the agency and beyond the control of the
individual. For example, violating a regulation which requires that
funds be kept in a safe is not negligence where the agency has failed
to provide the safe. B-78617, June 24, 1949. Note, however, that
instructions from superiors to disregard regulations do not, in
themselves, relieve an accountable officer of responsibility to follow
those regulations. See, e.g., B-271021, Sept. 18, 1986 (improper
payment case).
Also, as with other types of negligence, failure to follow regulations
will not prevent the granting of relief if the failure was not the
proximate cause of the loss or deficiency. B-229207, July 11, 1988; B-
229587, Jan. 6, 1988; B-185666, July 27, 1976. See also Libby v.
United States, 81 F. Supp. 722, 727 (Ct. Cl. 1948). In B-185666, for
example, a cashier kept her cash box key and safe combination in a
sealed envelope in an unlocked desk drawer, in violation of the
Cashier's Manual. Relief was nevertheless granted because the seal on
the envelope had not been broken and the negligence could therefore
not have contributed to the loss.
While failure to comply with regulations is generally considered
negligence, the converse is not always true. To be sure, the fact that
an accountable officer has complied with all applicable regulations
and instructions is highly significant in evaluating eligibility for
relief. It is not conclusive, however, because the accountable officer
might have been negligent in a matter not covered by the regulations.
In a 1979 case, an accountable officer accepted a $10,000 personal
check at a Customs auction sale and turned over the property without
attempting to verify the existence or adequacy of the purchaser's
account. The check bounced. It was not clear whether existing
regulations applied to that situation. Even without regulations,
however, accepting a personal check for a large amount without
attempting verification was viewed as not meeting the standard of
reasonable care, and relief was denied. B-193673, May 25, 1979,
modified on other grounds, B-201673 et al., Sept. 23, 1982.
g. Losses in Shipment:
Government funds are occasionally lost or stolen in shipment. The
Postal Service or other carrier is the agent of the sender, and funds
in shipment remain in the "custody" of the accountable officer who
shipped them until delivered, notwithstanding the fact that they are
in the physical possession of the carrier. B-185905-0.M., Apr. 23,
1976. Thus, a loss in shipment is a physical loss for which an
accountable officer is liable.
For the most part, relief for losses in shipment is the same as relief
for other losses, and the rules discussed in this chapter with respect
to negligence and proximate cause apply. For example, relief was
denied in one case because transmitting cash by ordinary first-class
mail rather than registered or certified mail was held not to meet the
reasonable care standard. B-164450-0.M., Sept. 5, 1968.
However, relief for losses in shipment differs from relief for other
losses in one important respect. A loss in shipment is not viewed as
an "unexplained loss" and there is no presumption of negligence. B-
164450-0.M., Sept. 5, 1968. The reason for this distinction is that
there is no basis to infer negligence when a loss occurs while funds
are totally beyond the control of the accountable officer. Thus, where
funds are lost in shipment, in the absence of positive evidence of
fault or negligence, an accountable officer will be relieved if he or
she conformed fully with applicable regulations and procedures for the
handling and safeguarding of the funds and they were nevertheless lost
or stolen. B-142058, Mar. 18, 1960; B-126362, Feb. 21, 1956; B-119567,
Jan. 10, 1955; B-95504, June 16, 1950.
The Government Losses in Shipment Act (GLISA), 40 U.S.C. §§
1730117309, authorizes agencies to file claims with the Treasury
Department for funds or other valuables lost or destroyed in shipment.
See generally B-244473.2, May 13, 1993. The Treasury Department has a
revolving fund for the payment of these claims and has issued
regulations, found at 31 C.F.R. parts 361 and 362, to implement the
statute. The Treasury Department will generally disallow a claim
unless there has been strict compliance with the statute and
regulations. See, e.g., B-200437, Oct. 21, 1980.
If a loss in shipment occurs, the agency should first consider filing
a claim under GLISA, and should seek relief only if this fails. 70
Comp. Gen. 9 (1990). Denial of a GLISA claim should prompt further
inquiry since it suggests the possibility that someone at the point of
shipment may have been negligent, but it will not automatically
preclude the granting of relief. For example, it is possible for a
claim to be denied for reasons that do not suggest negligence. In B-
126362, Feb. 21, 1956, the accountable officer had reimbursed the
government from personal funds, and a claim under GLISA was denied
because there was no longer any loss. GAO nevertheless granted relief
and the accountable officer was reimbursed.
Disallowance of a GLISA claim for failure to strictly comply with the
regulations carries with it an even stronger suggestion of negligence,
but it is still appropriate to examine the facts and circumstances of
the particular case to evaluate the relationship of the noncompliance
to the loss. For example, GAO granted relief in B-191645, Oct. 5,
1979, despite the denial of a GLISA claim, because there was no
question that the funds had arrived at their initial destination
although they never reached the intended recipient. Even if there had
been negligence at the point of shipment, it could not have been the
proximate cause of the loss. See also B-193830, Oct. 1, 1979, and B-
193830, Mar. 30, 1979 (both cases arising from the same loss).
h. Fire, Natural Disaster:
Earlier in this chapter, we noted the Supreme Court's conclusion in
United States v. Thomas, 82 U.S. (15 Wall.) 337, 352 (1872), that
strict liability (and hence the need for relief) would not attach in
two situations: funds destroyed by an "overruling necessity" and funds
taken by a "public enemy," provided there is no contributing fault or
negligence by the accountable officer. The Court gave only one example
of an "overruling necessity":
"Suppose an earthquake should swallow up the building and safe
containing the money, is there no condition implied in the law by
which to exonerate the receiver from responsibility?"
Id. at 348. We are aware of no subsequent judicial attempts to further
define "overruling necessity," although some administrative
formulations have used the term "acts of God." E.g., 48 Comp. Gen.
566, 567 (1969). Thus, at the very least, assuming no contributing
fault or negligence, an accountable officer is not liable for funds
lost or destroyed in an earthquake, and hence there is no need to seek
relief. Contributing negligence might occur, for example, if an
accountable officer failed to periodically deposit collections and
funds were therefore on hand which should not have been. See B-71445,
June 20, 1949.
GAO granted relief in one case involving an earthquake, B-229153, Oct.
29, 1987, in which most of the funds were recovered. While arguably
there was no need to seek relief in that case, it makes no difference
as a practical matter since relief would be granted as a matter of
routine unless there is contributing negligence, in which event the
accountable officer would be liable even under Thomas.
More recently, GAO relieved an accountable officer from liability for
the loss of the "confidential fund" of the Secret Service field office
resulting from the destruction of the World Trade Center on Sept. 11,
2001. B-300677, June 19, 2003. See also B-249372, Aug. 13, 1992
(rioting forced evacuation of the American embassy in Somalia,
resulting in loss of funds in safe).
Whatever the scope of the "overruling necessity" exception, it is
clear that it does not extend to destruction by fire, even though
money destroyed by fire is no longer available to be used by anyone
else and can be replaced simply by printing new money. In Smythe v.
United States, 188 U.S. 156, 173-74 (1903), the Supreme Court declined
to apply Thomas and expressly rejected the argument that an
accountable officer's liability for notes destroyed by fire should be
limited to the cost of printing new notes. See also 1 Comp. Dec. 191
(1895), in which the Comptroller of the Treasury similarly declined to
apply the Thomas exception to a loss by fire. Thus, a loss by fire is
a physical loss for which the accountable officer is liable, but for
which relief will be granted under 31 U.S.C. § 3527 if the statutory
conditions are met. Examples are B-212515, Dec. 21, 1983, and B-
203726, July 10, 1981.
i. Loss by Theft:
If money is taken in a burglary, robbery, or other form of theft, the
accountable officer will be relieved of liability if the following
conditions are met:
* There is sufficient evidence that a theft took place;[Footnote 38]
* There is no evidence implicating, or indicating contributing
negligence by, the accountable officer; and;
* The agency has made the administrative determinations required by
the relief statute.
The fact patterns tend to fall into several well-defined categories.
(1) Burglary: forced entry:
Forced entry cases tend to be fairly straightforward. In the typical
case, a government office is broken into while the office is closed
for the night or over a weekend, and money is stolen. Evidence of the
forced entry is clear. As long as there is no evidence implicating the
accountable officer, no other contributing fault or negligence, and
the requisite administrative determinations are made, relief is
granted. A few examples follow:[Footnote 39]
* Burglars broke into the welding shop at a government laboratory,
took a blowtorch and acetylene tanks to the administrative office and
used them to cut open the safe. B-242773, Feb. 20, 1991.
* Cashier's office was robbed over a weekend. Office had been forcibly
entered, but there was no evidence of forced entry into the safe.
Federal Bureau of Investigation found no evidence of negligence or
breach of security by any government personnel associated with the
office. B-193174, Nov. 29, 1978. See also B-260862, June 6, 1995.
* Persons unknown broke front door lock of Bureau of Indian Affairs
office in Alaska and removed safe on sled. Sled tracks led to an
abandoned building in which the safe was found with its door removed.
B-182590, Feb. 3, 1975.
* Unsecured bolt cutters found on premises used to remove safe
padlock. No contributing negligence because there was no separate
facility in which to secure the tools. B-202290, June 5, 1981.
The same principles apply to theft from a hotel room. 69 Comp. Gen.
586 (1990); B-229847, Jan. 29, 1988. Note, however, that relief was
not granted in the case of a theft of cash stashed under the front
seat of a locked vehicle left in an area where several vehicles had
been broken into recently, since leaving cash in such a manner was not
a prudent way to safeguard the funds. B-257120, Dec. 13, 1994.
(2) Robbery:
In this situation, one or more individuals, armed or credibly
pretending to be armed, rob an accountable officer. Again, as long as
there is no evidence implicating the accountable officer and no
contributing negligence, relief is granted. The accountable officer is
not expected to risk his or her life by resisting. Depending on the
circumstances, it is not necessary that the thief be, or pretend to
be, armed. An example is the common purse-snatching incident. B-
197021, May 9, 1980; B-193866, Mar. 14, 1979. Some illustrative
robbery cases follow:[Footnote 40]
* Armed robber forced cashier to open the safe at gunpoint, shot the
cashier, and stole the funds. B-261261, Aug. 31, 1995.
* Gunman entered cashier's office, knocked cashier unconscious, and
robbed safe. B-235458, Aug. 23, 1990.
* Man entered cashier's office in a veterans hospital and handed
cashier a note demanding all of her $20 bills. Although he did not
display a weapon, he said he was armed. B-191579, May 22, 1978. A very
similar case is B-237420, Dec. 8, 1989 (man gave cashier note
indicating bomb threat; upon running off with the money, he left a
second note saying "no bomb").
(3) Riot, public disturbance:
This category includes the popular pastime of ransacking American
embassies. The Supreme Court's second exception in United States v.
Thomas, 82 U.S. (15 Wall.) 337 (1872) (see Fire, Natural Disaster in
section C.3.h of this chapter) to an accountable officer's strict
liability is funds taken by a "public enemy." That case concerned the
Civil War. As with the "overruling necessity" exception, we are aware
of no further definition of "public enemy" in this context, and the
cases cited here have consistently been treated as accountable officer
losses. In any event, relief is routinely granted unless there is
contributing negligence. Thus, GAO granted relief in the following
cases:[Footnote 41]
* Armed soldiers forced entry into U.S. Information Agency compound in
Beirut, Lebanon, and looted safe. B-195435, Sept. 12, 1979.
* Cash equivalents stolen when embassy in Belgrade, Federal Republic
of Yugoslavia, was ransacked. B-288014, May 17, 2002.
* Funds taken during attack on American Embassy in Tehran, Iran. B-
229753, Dec. 30, 1987; B-194666, Aug. 6, 1979 (separate attacks, both
occurring in 1979).
* Loss of Secret Service confidential funds resulting from terrorist
attack on World Trade Center on September 11, 2001. B-300677, June 19,
2003.
* Safes looted by Cuban detainees during prison riot. B-232252, Jan.
5, 1989; B-230796, Apr. 8, 1988.
(4) Evidence less than certain:
In all of the cases cited above dealing with forced entry, armed
robbery, or rioting, the fact that a theft had taken place was beyond
question. However, there are many cases in which the evidence of theft
is not all that clear. The losses are unexplained in the sense that
what happened cannot be determined with any certainty. The problem
then becomes whether the indications of theft are sufficient to
classify the loss as a theft and thereby to rebut the presumption of
negligence.
These tend to be the most difficult cases to resolve. The difficulty
stems from the fact, which we have noted previously, that the
accountable officer laws are designed to protect the government
against dishonesty as well as negligence. On the one hand, an
accountable officer who did all he or she could to safeguard the funds
should be relieved of liability. But on the other hand, the
application of the relief statutes should not provide a blueprint for
(or absolution from) dishonesty. Recognizing that complete certainty
is impossible in many if not most cases, the decisions try to achieve
a balance between these two considerations. Thus, GAO gives weight to
the administrative determinations and to statements of the individuals
concerned, but these factors cannot be conclusive and the decision
will be based on all of the evidence. Other relevant factors include
how and where the safe combination was stored, when it was last
changed, whether the combination dial was susceptible of observation
while the safe was being opened, access to the safe and to the
facility itself, and the safeguarding of keys to cash boxes.
For example, in B-198836, June 26, 1980, funds were kept in the bottom
drawer of a four-drawer file cabinet. Each drawer had a separate key
lock and the cabinet itself was secured by a steel bar and padlock.
Upon arriving at work one morning, the cashier found the bottom drawer
slightly out of alignment with several pry marks on its edges. A
police investigation was inconclusive. GAO viewed the evidence as
sufficient to support a conclusion of burglary and, since the record
contained no indication of negligence on the part of the cashier,
granted relief.
In another case, a safe was found unlocked with no signs of forcible
entry. However, there was evidence that a thief had entered the office
door by breaking a window. The accountable officer stated that he had
locked the safe before going home the previous evening, and there was
no evidence to contradict this or to indicate any other negligence.
GAO accepted the accountable officer's uncontroverted statement and
granted relief. B-188733, Mar. 29, 1979. See also B-260862, June 6,
1995; B-242830, Sept. 24, 1991; B-210017, June 8, 1983.
In B-170596-0.M., Nov. 16, 1970, the accountable officer stated that
she had found the padlock on and locked in reverse from the way she
always locked it. Her statement was corroborated by the agency
investigation. In addition, the lock did not conform to agency
specifications, but this was not the cashier's responsibility. She had
used the facilities officially provided for her. Relief was granted.
Relief was also granted in B-170615-0.M., Nov. 23, 1971, reversing
upon reconsideration B-170615-0.M., Dec. 2, 1970. In that case, there
was some evidence that the office lock had been pried open but there
were no signs of forcible entry into the safe. This suggested the
possibility of negligence either in failing to lock the safe or in not
adequately safeguarding the combination. However, the accountable
officer's supervisor stated that he (the supervisor) had locked the
safe at the close of business on the preceding workday, and two safe
company representatives provided statements that the safe was
vulnerable and could have been opened by anyone with some knowledge of
safe combinations. See also B-242830, Sept. 24, 1991.
The occurrence of more than one loss under similar circumstances
within a relatively short time will tend to corroborate the likelihood
of theft. B-199021, Sept. 2, 1980; B-193416, Oct. 25, 1979. In B-
199021, two losses occurred in the same building within several weeks
of each other. All agency security procedures had been followed and
the record indicated that the cashier had exercised a very high degree
of care in safeguarding the funds. In B-193416, the first loss was
totally unexplained, and the entire cash box disappeared a week later.
The safe combination had been kept in a sealed envelope in a "working
safe" to which other employees had access. Although the seal on the
envelope was not broken, an investigation showed that, while the
combination could not be read by holding the envelope up to normal
light, it could be read by holding it up to stronger light. In neither
case was there any evidence of forcible entry or of negligence on the
part of the accountable officer. Balancing the various relevant
factors in each case, GAO granted relief.
The disappearance of an entire cash box will also be viewed as an
indication of theft. However, this factor standing alone will not be
conclusive since there is nothing to prevent a dishonest employee from
simply taking the whole box rather than a handful of money from it.
Signs of forced entry to the safe or file cabinet will naturally
reinforce the theft conclusion. E.g., B-229136, Jan. 22, 1988; B-
186190, May 11, 1976. Far more difficult are cases in which a cash box
disappears with no signs of forcible entry to the container in which
it was kept. Note the various additional factors viewed as relevant in
each of the following cases:
* Police were able to open file cabinet with a different key, and
other thefts had occurred around the same time. Relief granted. B-
223602, Aug. 25, 1986.
* Safe was not rated for burglary protection and could have been
opened fairly easily by manipulating the combination dial. Relief
granted. B-189658, Sept. 20, 1977.
* Supervisor's secretary maintained a log of all safe and bar-lock
combinations, a breach of security which could have resulted in the
compromise of the combination. Relief granted. B-189896, Nov. 1, 1977.
* Cashier locked safe and checked it in the presence of a guard.
Several other employees had access to the safe combination. Relief
granted. B-173133-0.M., Dec. 10, 1973. Multiple access also
contributed to the granting of relief in B-241201.2, Apr. 15, 1992; B-
235167, Jan. 8, 1990; B-217945, July 23, 1985; and B-212605, Apr. 19,
1984.[Footnote 42]
* Safe was malfunctioning at time of loss. Relief granted. B-183284,
June 17, 1975.
* Extensive security violations attributable to agency. Relief
granted. B-211649, Aug. 2, 1983. See also B-235167, Jan. 8, 1990; B-
197799, June 18, 1980.
* Some evidence of forced entry to door of cashier's office but not to
safe or safe drawer. Cash box later found in men's room. Negligence by
cashier in improperly storing keys and safe combination in unlocked
desk drawer not proximate cause of loss since seal on envelope was
found intact. Relief granted. B-185666, July 27, 1976. Compare 70
Comp. Gen. 12 (1990) (cashier denied relief because she negligently
stored the cash box key, not in an envelope, in the back of her top
center desk drawer which did not lock and kept a copy of the safe
combination taped to the underside of an accessible pull-out panel on
her desk).
* Cash box disappeared during 2-week absence of cashier. Even assuming
cashier negligently failed to lock safe prior to her absence, there
was no way to establish this as the proximate cause of the loss since
box had been kept in a "working safe" which would have been opened
daily in her absence. Relief granted. B-191942, Sept. 12, 1979.
* Cashier went on leave without properly securing key to file cabinet or
entrusting it to an alternate. Relief denied. B-182480, Feb. 3, 1975.
* Cashier had been experiencing difficulty trying to lock the safe and
stated she might have left it unlocked inadvertently. Relief denied. B-
184028, Mar. 2, 1976.
To summarize the "cash box" cases, the disappearance of an entire cash
box suggests theft but is not conclusive. In such cases, even though
the cause of the loss cannot be definitely attributed, relief will
probably be granted if there is uncontroverted evidence that the safe
was locked, no other evidence of contributing fault or negligence on
the part of the accountable officer, and especially if there are other
factors present tending to corroborate the likelihood of theft. In no
case has relief been granted based solely on the fact that a cash box
disappeared; without more, it is simply another type of unexplained
loss for which there is no basis for relief.
(5) Embezzlement:
The term "embezzlement" means the fraudulent misappropriation of
property by someone to whom it has lawfully been entrusted. Black's
Law Dictionary 540 (71h ed. 1999). Losses due to embezzlement or
fraudulent acts of subordinate finance personnel, acting alone or in
collusion with others, are treated as physical losses and relief will
be granted if the statutory conditions are met. B-260563, Mar. 31,
1995; B-244113, Nov. 1, 1991; B-202074, July 21, 1983, at 6; B-211763,
July 8, 1983; B-133862-0.M., Nov. 29, 1957; B-101375-0.M., Apr. 16,
1951.
An illustrative group of cases involves the embezzlement of tax
collections, under various schemes, by employees of the Internal
Revenue Service (IRS). In each case the IRS pursued the perpetrators,
and most were prosecuted and convicted. The IRS recovered what it
could from the (now former) employees, and sought relief for the
balance for the pertinent supervisor in whose name the account was
held. In each case, GAO agreed with the "no fault or negligence"
determination and granted relief. B-270863, June 17, 1996; B-265853,
Jan. 23, 1996; B-260563, Mar. 31, 1995; B-244113, Nov. 1, 1991; B-
226214 et al., June 18, 1987; B-215501, Nov. 5, 1984; B-192567, Nov.
3, 1978; B-191722, Aug. 7, 1978; B-191781, June 30, 1978.
The accountable officer in each of the IRS cases was a supervisor who
did not actually handle the funds. The approach to evaluating the
presence or absence of negligence when the accountable officer is a
supervisor is to review the existence and adequacy of internal
controls and procedures and to ask whether the accountable officer
provided reasonable supervision. If internal controls and management
procedures are reasonable and were being followed, relief will be
granted. As noted in B-226214 et al., June 18, 1987, the standard does
not expect perfection and recognizes that a clever criminal scheme can
outwit the most carefully established and supervised system. See also
B-270863, June 17, 1996; B-260563, Mar. 31, 1995.
Losses resulting from the fraudulent acts of other than subordinate
finance personnel (e.g., payments on fraudulent vouchers) are not
physical losses but must be treated as improper payments. See B-
287043, May 29, 2001; 2 Comp. Gen. 277 (1922); B-248517, Oct. 20,
1992; B-202074, July 21, 1983; B-76903, July 13, 1948; B-133862-0.M.,
Nov. 29, 1957.
j. Agency Security:
In evaluating virtually any physical loss case, physical security—the
existence, adequacy, and use of safekeeping facilities and procedures—
is a crucial consideration. The Department of the Treasury Financial
Management Service's Manual of Procedures and Instructions for
Cashiers (hereafter Cashier's Manual) (April 2001) sets forth many of
the requirements.[Footnote 43] For example, the Cashier's Manual
provides that safe combinations should be changed annually, whenever
there is a change of cashiers, or when the combination has been
compromised, and prescribes procedures for safeguarding the
combination. It also reflects what is perhaps the most fundamental
principle of sound cash control—that an employee with custody of
public funds should have exclusive control over those funds. In
addition, agencies should have their own specific regulations or
instructions tailored to individual circumstances. Cashier's Manual, §
VI at 14.
The first step in analyzing the effect of a security violation or
deficiency is to determine whether the violation or deficiency is
attributable to the accountable officer or to the agency. Two
fundamental premises drive this analysis: (1) the accountable officer
is responsible for safeguarding the funds in his or her custody; and
(2) the agency is responsible for providing adequate means to do so.
Adequate means includes both physical facilities and administrative
procedures.
Basically, if the accountable officer fails to use the facilities and
procedures that have been provided, this failure will be viewed as
negligence and, unless some other factor appears to be the proximate
cause of the loss, will preclude the granting of relief. Several
examples have been previously cited under the Actual Negligence
heading, section C.3.c of this chapter.
Another element of the accountable officer's responsibility is the
duty to report security weaknesses to appropriate supervisory
personnel. E.g., 63 Comp. Gen. 489, 492 (1984), rev'd on other
grounds, 65 Comp. Gen. 876 (1986). If the agency fails to respond, a
loss attributable to the reported weakness is not the accountable
officer's fault. E.g., B-235147.2, Aug. 14, 1991; B-208511, May 9,
1983.
Ultimately, an accountable officer can do no more than use the best
that has been made available, and relief will not be denied for
failure to follow adequate security measures which are beyond the
accountable officer's control. E.g., B-226947, July 27, 1987 (U.S.
Mint employees stole coins from temporarily leased facility which was
incapable of adequate security); B-207062, May 12, 1983 (agent kept
collections in his possession because, upon returning to office at
4:30 p.m., he found all storage facilities locked and all senior
officials had left for the day); B-210245, Feb. 10, 1983 (lockable gun
cabinet was the most secure item available); B-186190,
May 11, 1976 (funds kept in safe with padlock because combination
safe, which had been ordered, had not yet arrived); B-78617, June 24,
1949 (agency failed to provide safe). Of course, the accountable
officer is expected to act to correct weaknesses that are subject to
his or her control. B-127204, Apr. 13, 1956.
The principle that relief will be granted if the agency fails to
provide adequate security and that failure is viewed as the proximate
cause of the loss manifests itself in a variety of contexts. One group
of cases involves multiple violations. In B-182386, Apr. 24, 1975,
imprest funds were found missing when a safe was opened for audit. The
accountable officer was found to be negligent for failing to follow
approved procedures. However, the agency's investigation disclosed a
number of security violations attributable to the agency. Two cashiers
operated from the same cash box; transfers of custody were not
documented; the safe combination had not been changed despite several
changes of cashiers; at least five persons knew the safe combination.
The agency, in recommending relief, concluded that the loss was caused
by "pervasive laxity in the protection and administration of the funds
... on all levels." GAO agreed, noting that the lax security
"precludes the definite placement of responsibility" for the loss, and
granted relief.
In several later unexplained loss cases (no sign of forcible entry, no
indication of fault or negligence on the part of the accountable
officer), GAO has regarded overall lax security on the part of the
agency, similar to that in B-182386, as the proximate cause of the
loss and thus granted relief.
B-271896, Mar. 4, 1997; B-243324, Apr. 17, 1991; B-229778, Sept. 2,
1988; B-226847, June 25, 1987; B-217876, Apr. 29, 1986; B-211962, Dec.
10, 1985; B-211649, Aug. 2, 1983. All of these cases involved numerous
security violations beyond the accountable officer's control, and
several adopt the "pervasive laxity" characterization of B-182386.
However, in order for relief to be granted, security weaknesses
attributable to the agency need not rise to the level of "pervasive
laxity" encountered in the cases cited in the preceding paragraph.
Thus, relief will usually be granted where several persons other than
the accountable officer have access to the funds through knowledge of
the safe combination since "multiple access" makes it impossible to
attribute the loss to the accountable officer. B-241201.2, Apr. 15,
1992; B-235368, Apr. 19, 1991; B-235072, July 5, 1989; B-228884, Oct.
13, 1987; B-214080, Mar. 25, 1986; B-211233, June 28, 1983; B-209569,
Apr. 13, 1983; B-196855, Dec. 9, 1981; B-199034, Feb. 9, 1981.
Additional cases are cited in our earlier discussion of missing cash
boxes.
If multiple access to a safe will support the granting of relief for
otherwise unexplained losses, it follows that multiple access to a
cash box or drawer will have the same effect. The Cashier's Manual
provides that cashiers should never work out of the same cash box or
drawer. Cashier's Manual, § VI at 14. Violation of this requirement,
where beyond the control of the accountable officer, is a security
breach that, in appropriate cases, has supported the granting of
relief. B-227714, Oct. 20, 1987; B-204647, Feb. 8, 1982. If it is
necessary for more than one cashier to work out of the same safe, the
safe should preferably have separate built-in locking drawers rather
than removable cash boxes. B-191942, Sept. 12, 1979.
The following security deficiencies have also contributed to the
granting of relief:
* Cash box could be opened with other keys. B-203646, Nov. 30, 1981; B-
197270, Mar. 7, 1980.
* Crimping device used to seal cash bags did not use sequentially
numbered seals and was accessible to several employees. B-246988, Feb.
27, 1992.
* Failure to change safe combination as required by Treasury
regulations. B-211233, June 28, 1983; B-196855, Dec. 9, 1981. (Both
cases also involve multiple access.)
* Safe combination and key to cash drawer were kept in an unlocked
desk drawer. B-177963-0.M., Mar. 21, 1973. (The result would most
likely be different if the violation were the fault of the accountable
officer or if the accountable officer passively acquiesced in the
breach. See B-185666, July 27, 1976.)
* Safe combination could be read through the sealed envelope in which
it was kept. B-243324, Apr. 17, 1991.
* Safe malfunctioning, defective, or otherwise not secure. B-271896,
Mar. 4, 1997; B-221447, June 1, 1987; B-215477, Nov. 5, 1984; B-
183284, June 17, 1975.
The preceding cases are mostly unexplained losses. It naturally
follows that security violations of the type noted will contribute to
rebutting the presumption of negligence in cases where there is clear
evidence of theft. In B-184493, Oct. 8, 1975, for example, there was
evidence of forced entry to the office door but not to the safe. The
record showed that, despite the accountable officer's best efforts, it
was impossible for him to shield the dial from observation while
opening the safe. In view of the office layout, the position of the
safe, and the number of persons allowed access to the office, GAO
granted relief.[Footnote 44] Other examples are: B-241201.2, Apr. 15,
1992, B-243324, Apr. 17, 1991, and B-180664-0.M., Apr. 23, 1974
(multiple access to safe); and B-170251-0.M., Oct. 24, 1972 (insecure
safe).
If there is evidence of negligence on the part of the accountable
officer in conjunction with security deficiencies attributable to the
agency, the accountable officer's negligence must be balanced against
the agency's negligence. Relief may be granted or denied based largely
on the proximate cause analysis. As with the unexplained loss cases,
relief has been granted in a number of cases where the agency's
violations could be said to amount to "pervasive laxity." B-235147.2,
Aug. 14, 1991; B-197799, June 19, 1980; B-182386, Apr. 24, 1975; B-
169756-0.M., July 8, 1970. Similarly, agency security violations which
do not amount to pervasive laxity may support the granting of relief.
Such violations must either be the proximate cause of the loss or make
it impossible to attribute the loss to the accountable officer. In a
1971 case, for example, a cashier kept the combinations to three safes
on an adding machine tape in her wallet. The agency failed to change
the combinations after the wallet was stolen. Also, safe company
representatives stated that one safe was vulnerable and could readily
have been opened. The fact that only the vulnerable safe had been
robbed supported the conclusion that the stolen combinations had not
been used. B-170615-0.M., Nov. 23, 1971. Other cases in which agency
security violations were found to override negligence by the
accountable officer are B-232744, Dec. 9, 1988 (safe combination not
changed despite several requests by accountable officer following
possible compromise); B-205985, July 12, 1982 (multiple access, safe
combination not changed as required); B-199128, Nov. 7, 1980 (multiple
access); B-191440, May 25, 1979 (two cashiers working out of same
drawer).
The result in these cases should not be taken too far. Poor agency
security does not guarantee relief; it is merely another factor to
consider in the proximate cause equation. Another relevant factor is
the nature and extent of the accountable officer's efforts to improve
the situation.
Where security weaknesses exist, a supervisor will normally be in a
better position to take or initiate corrective action, and a
supervisor who is also an accountable officer may be found negligent
for failing to do so. 63 Comp. Gen. 489 (1984), rev'd upon
reconsideration, 65 Comp. Gen. 876 (1986) (new evidence presented); 60
Comp. Gen. 674, 676 (1981). However, a new supervisor should not be
held immediately responsible for the situation he or she inherited. B-
209715, Apr. 4, 1983 (supervisor relieved in pervasive laxity
situation where loss occurred only a week after he became accountable).
A close reading of the numerous security cases reveals the somewhat
anomalous result that an accountable officer who works in a sloppy
operation stands a much better chance of being relieved than one who
works in a well-managed office. True as this may be, it would be wrong
to hold accountable officers liable for conditions beyond their
control. Rather, the solution lies in the proper recognition and
implementation of the responsibility of each agency, mandated by the
Federal Managers' Financial Integrity Act of 1982, 31 U.S.C. §
3512(c)(1), to safeguard its assets against loss and misappropriation.
k. Extenuating Circumstances:
Since relief under 31 U.S.C. §§ 3527(a) and (b) is a creature of
statute, it must be granted or denied solely in accordance with the
statutory conditions. When Congress desires that "equitable" concerns
be taken into consideration, it expressly so states. Examples are
waiver statutes such as 5 U.S.C. § 5584 and 10 U.S.C. § 2774.[Footnote
45] In contrast, the physical loss relief statutes do not authorize
the granting of relief on the basis of equitable considerations or
extenuating or mitigating circumstances.
Thus, where an accountable officer has been found negligent, the
following factors have been held not relevant, nor are they sufficient
to rebut the presumption of negligence:
* Acceptance of extra duties by the accountable officer; shortage of
personnel. B-186127, Sept. 1, 1976.
* Financial hardship of having to repay loss. B-239387, Apr. 24, 1991;
B-241478, Apr. 5, 1991; B-216279.2, Dec. 30, 1985.
* Good work record; long period of loyal and dependable service;
evidence of accountable officer's good reputation and character. B-
241478, Apr. 5, 1991; B-204173, Nov. 9, 1982; B-170012, Aug. 11, 1970;
B-158699, Sept. 6, 1968.
* Heavy work load. 67 Comp. Gen. 6 (1987); 48 Comp. Gen. 566 (1969); B-
241201, Aug. 23, 1991, reed on reconsideration, B-241201.2, Apr. 15,
1992 (reversed on other grounds—new evidence submitted indicating
multiple access).
* Inexperience; inadequate training or supervision. 70 Comp. Gen. 389
(1991); B-257120, Dec. 13, 1994; B-189084, Jan. 3, 1979; B-191051,
July 31, 1978.
D. Illegal or Improper Payment:
1. Disbursement and Accountability:
In order to understand the laws governing liability and relief for
improper payments, and how the application of those laws evolved over
the last quarter of the twentieth century, it is helpful to start by
summarizing, from the accountability perspective, a few points
relating to how the federal government disburses its money.
a. Statutory Framework: Disbursement Under Executive Order No. 6166:
For most of the nineteenth century and the early decades of the
twentieth century, federal disbursement was decentralized. Each agency
had its own disbursing office(s), and the function was performed by a
small army of disbursing officers and clerks (who were accountable
officers) scattered among the various agencies and throughout the
country. In part, the reason for this was the primitive state of
communication and transportation then existing. One of the weaknesses
of this system was that, in many cases, vouchers were prepared,
examined, and paid by the same person. 20 Comp. Dec. 859, 869 (1914).
This resulted in the growth of large disbursing offices in several
agencies, some of which exceeded in size that of the Treasury
Department. GAO, Annual Report of the Comptroller General of the
United States for the Fiscal Year Ended June 30, 1939 (Washington,
D.C.: 1939), at 98.
From the perspective of accountability for improper payments, the
modern legal structure of federal disbursing evolved in three major
steps. First, Congress enacted legislation on August 23, 1912,
[Footnote 46] the remnants of which are found at 31 U.S.C. § 3521(a),
to prohibit disbursing officers from preparing and auditing their own
vouchers. With this newly mandated separation of voucher preparation
and examination from actual payment, payment was accomplished by
having some other administrative official "certify" the correctness of
the voucher to the disbursing officer. The 1912 legislation was thus
the genesis of what would later become a new class of accountable
officer—the certifying officer.
Disbursing officers remained accountable for improper payments, the
standard now reflecting the more limited nature of the function. Since
1912 law was intended to prohibit the disbursing officer from
duplicating the detailed voucher examination already performed by the
certifying officer, disbursing officers were held liable only for
errors apparent on the face of the voucher, as well as, of course,
payments prohibited by law or for which no appropriation was
available. 20 Comp. Dec. 859 (1914). In a sense, the 1912 statute
operated in part as a relief statute, with credit being allowed or
disallowed in the disbursing officer's account based on the
application of this standard. E.g., 4 Comp. Gen. 991 (1925); 3 Comp.
Gen. 441 (1924).
The second major step in the evolution was section 4 of Executive
Order No. 6166, signed by President Roosevelt on June 10, 1933 (see
note at 5 U.S.C. § 901). The first paragraph of section 4, codified at
31 U.S.C. § 3321(a), consolidated the disbursing function in the
Treasury Department, eliminating the separate disbursing offices of
the other executive departments. The second paragraph, codified at 31
U.S.C. § 3321(b), authorizes Treasury to delegate disbursing authority
to other executive agencies for purposes of efficiency and economy.
The third paragraph gave new emphasis to the certification function:
"The Division of Disbursement [Treasury Department] shall disburse
moneys only upon the certification of persons by law duly authorized
to incur obligations upon behalf of the United States. The function of
accountability for improper certification shall be transferred to such
persons, and no disbursing officer shall be held accountable therefor."
The following year, Executive Order No. 6728, May 29, 1934 (see note at
5 U.S.C. § 901), exempted the military departments from the
centralization. This exemption, an exemption for the United States
Marshals Service which originated in a 1940 reorganization plan, and
an exemption for certain expenditures of the Coast Guard[Footnote 47]
are codified at 31 U.S.C. § 3321(c). Executive Order No. 6166 provided
the framework for the disbursing system still in effect today. Apart
from the specified exemptions, the certifying officer is now an
employee of the spending agency, and the disbursing officer is an
employee of the Treasury Department.
Disbursing officers continued to be liable for their own errors, as
under the 1912 legislation. E.g., 13 Comp. Gen. 469 (1934). However, a
major consequence of Executive Order No. 6166 was to make the
certifying officer an accountable officer as well. The certifying
officer became liable for improper payments "caused solely by an
improper certification as to matters not within the knowledge of or
available to the disbursing officer." 13 Comp. Gen. 326, 329 (1934).
See also 15 Comp. Gen. 986 (1936); 15 Comp. Gen. 362 (1935).
Over the next few years, confusion and disagreement developed as to
the precise relationship of certifying officers and disbursing
officers with respect to liability for improper payments. In the
Annual Report of the Comptroller General of the United States for the
Fiscal Year Ended June 30, 1940 (Washington, D.C.: 1941) at pages 63-
66, GAO summarized the problem and recommended legislation to specify
the allocation of responsibilities "to provide the closest possible
relationship between liability and fault" (id. at 64).
The third major evolutionary step was the enactment of Public Law No.
77389, ch. 641, 55 Stat. 875 (Dec. 29, 1941) to implement GAO's
recommendation. Section 1, 31 U.S.C. § 3325(a), reflects the substance
of the third paragraph of Executive Order No. 6166, § 4, quoted above.
It requires that a disbursing officer disburse money only in
accordance with a voucher certified by the head of the spending agency
or an authorized certifying officer who, except for some interagency
transactions, will also be an employee of the spending agency. As with
the amended Executive Order No. 6166 itself, section 3325(a) does not
apply to disbursements of the military departments or certain expenses
of the Coast Guard. 31 U.S.C. § 3325(b). The rest of the statute,
which we will discuss in detail later, delineates the responsibilities
of certifying and disbursing officers and provides a mechanism for the
administrative relief of certifying officers. (Comparable authority to
relieve disbursing officers from liability for improper payments was
not to come about until 1955.) Further detail on the federal
disbursement system may be found in the Treasury Financial Manual,
volume I, part 4 (2004), and GAO's Policy and Procedures Manual for
Guidance of Federal Agencies, title 7, chapter 6 (Washington, D.C.:
May 18, 1993).
It should be apparent that control of the public treasury must repose
in the hands of federal officials. However, this does not mean that
every task in the disbursement process must be performed by a
government employee. For example, GAO has advised that the Bureau of
Indian Affairs is authorized as a matter of law to contract with a
private bank to perform certain ministerial or operational aspects of
disbursing Indian trust fund money, such as printing checks,
delivering checks to payees, and debiting amounts from accounts.
However, in order to comply with 31 U.S.C. §§ 3321 and 3325, a federal
disbursing officer must retain managerial and judgmental
responsibility. 69 Comp. Gen. 314 (1990). The decision concluded:
"We see no reason to object to a contractual arrangement whereby a
private contractor provides disbursement services, so long as a
government disbursing officer remains responsible for reviewing and
overseeing the disbursement operations through agency installed
controls designed to assure accurate and proper disbursements."
Id. at 319. To intrude further into this responsibility would require
clear statutory authority. E.g., B-210545-0.M., June 6, 1983 (Indian
Health Service would need statutory authority to use fiscal
intermediaries to pay claims by providers; memorandum cites examples
of such authority in Medicare legislation).
b. Automated Payment Systems:
The statutory framework we have just described came into existence at
a time when all disbursing was done manually. The certifying officer
and his or her staff would review the supporting documentation for
each payment voucher. The certifying officer would then sign the
voucher, certifying to its legality and accuracy, and send it on to
the disbursing officer. The increased use of automated payment systems
has changed the way certifying officers must operate. Perhaps the
clearest example is payroll certification. A certifying officer may be
asked to certify a grand total accompanied by computer tapes
containing payrolls involving millions of dollars. There is no way the
certifying officer can verify that each payment is accurate and legal.
Even if it were reasonably possible, the cost of doing it would be
prohibitive.
With the onslaught of the computer age, it was natural and inevitable
to ask how accountability would function in a computerized
environment. Since many of the assumptions of a manual system were
unrealistic under an automated system, something had to change. GAO
reviewed the impact of computerization in a report entitled New
Methods Needed for Checking Payments Made by Computers, FGMSD-76-82
(Washington, D.C.: Nov. 7, 1977). The report recognized that, while
the certifying officer's basic legal liability remains, the conditions
in which a certifying officer may be relieved under an automated
payment system must be different to reflect the new realities. The
approach to relief in this context stems from the following premises
discussed in the report:
* In automated systems, evidence that the payments are accurate and
legal must relate to the system rather than to individual transactions.
* Certifying and disbursing officers should be provided with
information showing that the system on which they are largely
compelled to rely is functioning properly.
* Reviews should be made at least annually, supplemented by interim
checks of major system changes, to determine that the automated
systems are operating effectively and can be relied on to produce
payments that are accurate and legal.
The report then concluded:
"In the future, when a certifying or disbursing officer requests
relief from an illegal, improper, or incorrect payment made using an
automated system, GAO will continue to require the officer to show
that he or she was not negligent in certifying payments later
determined to be illegal or inaccurate. However, consideration will be
given to whether or not the officer possessed evidence at the time of
the payment approval that the system could be relied on to produce
accurate and legal payments. In cases in which the designated
assistant secretary or comparable official provides the agency head
and GAO with a written statement that effective system controls could
not be implemented prior to voucher preparation and certifies that the
payments are otherwise proper, GAO will not consider the absence of
such controls as evidence of negligence in determining whether the
certifying official should be held liable for any erroneous payment
prior to receipt of an advance decision. Of course, the traditional
requirements that due care be exercised in making the payments and
that diligent effort be made to recoup any erroneous payments will
still be considered in any requests for waiver of liability. Also,
should the certifying official fail to take reasonable steps to
establish adequate controls for future payments, the reasons for such
failure will be taken into account in any requests for waiver of
liability concerning such future payments."
FGMSD-76-82, at 17-18.
A few years later, the concepts and premises of the GAO report were
explored and reported, with implementing recommendations, in a key
study by the Joint Financial Management Improvement Program entitled
Assuring Accurate and Legal Payments—The Roles of Certifying Officers
in Federal Government (Washington, D.C.: June 1980).[Footnote 48]
Further guidance from the internal control perspective may be found in
GAO, Public Key Infrastructure: Examples of Risks and Internal Control
Objectives Associated with Certification Authorities, GAO-04-1023R
(Washington, D.C.: Aug. 10, 2004); GAO, Streamlining the Payment
Process While Maintaining Effective Internal Control, GAO/AIMD-21.3.2
(Washington, D.C.: May 1, 2000); GAO, Policy and Procedures Manual for
Guidance of Federal Agencies (hereafter GAO-PPM), title 7 (Washington,
D.C.: May 18, 1993); OMB Circular No. A-123, Management Accountability
and Control (June 21, 1995); and OMB Circular No. A-127, Financial
Management Systems (July 23, 1993). See also a GAO publication
entitled Critical Factors in Developing Automated Accounting and
Financial Management Systems, Document Accession No. 132042
(Washington, D.C.: January 1987).
Thus, in considering requests for relief under an automated payment
system where verification of individual transactions is impossible as
a practical matter, the basic question will be the reasonableness of
the certifying officer's reliance on the system to continually produce
legal and accurate payments. B-178564, Jan. 27, 1978 (confirming the
conceptual feasibility of using automated systems to perform preaudit
functions under various child nutrition programs). See also B-201965,
June 15, 1982. Contexts in which system reliance is relevant are
discussed in B-291001, Dec. 23, 2002 (proposed time and attendance
system); 59 Comp. Gen. 85 (1989) (automated "ZIP plus 4" address
correction system); 59 Comp. Gen. 597 (1980) (electronic funds
transfer program). Regardless of what system is used, there is of
course no authority to make known overpayments. B-205851, June 17,
1982; B-203993-0.M., July 12, 1982.
c. Statistical Sampling:
Statistical sampling is a procedure whereby a random selection of
items from a universe is examined, and the results of that examination
are then projected to the entire universe based on the laws of
probability. In 1963, the Comptroller General held that reliance on a
statistical sampling plan for the internal examination of vouchers
prior to certification would not operate to relieve a certifying
officer from liability for improper or erroneous payments. 43 Comp.
Gen. 36 (1963). GAO recognized in the decision that an adequate
statistical sampling plan could produce overall savings to the
government, but was forced to conclude that it was not authorized
under existing law.
In response to this, Congress enacted legislation in 1964, now found
at 31 U.S.C. §§ 3521(b)-(d). The statute authorizes agency heads, upon
determining that economies will result, to prescribe the use of
adequate and effective statistical sampling procedures in the
prepayment examination of disbursement vouchers.
As originally enacted, 31 U.S.C. § 3521(b) was limited to vouchers not
exceeding $100. A 1975 amendment to the statute removed the $100 limit
and authorized the Comptroller General to prescribe maximum dollar
limits. The current limit is $2,500. GAO, Policy and Procedures Manual
for Guidance of Federal Agencies (hereafter GAO-PPM), title 7, § 7.4.E
(Washington, D.C.: May 18, 1993). For further guidance, see 7 GAO-PPM
App. DI, and GAO, Using Statistical Sampling, GAO/PEMD-10.1.6
(Washington, D.C.: May 2, 1992). For vouchers over the prescribed
limit, unless GAO has approved an exception (7 GAO-PPM App. III, § B),
43 Comp. Gen. 36 would continue to apply.
The relevance of all this to accountable officers is spelled out in
the statute. A certifying or disbursing officer acting in good faith
and in conformity with an authorized statistical sampling procedure
will not be held liable for any certification or payment on a voucher
which was not subject to specific examination because of the
procedure. However, this does not affect the liability of the payee or
recipient of the improper payment, and relief may be denied if the
agency has not diligently pursued collection action against the
recipient. 31 U.S.C. §§ 3521(c)-(d). See B-254436, Mar. 1, 1994, where
GAO found that disbursing and certifying officers are not liable for
payments made on unaudited vouchers under the statistical sampling
procedure provided that the agency carries out diligent collection
actions on any improper payment.
GAO has approved the use of statistical sampling to test the
reliability of accelerated payment or "fast pay" systems. See, e.g.,
GAO, Streamlining the Payment Process While Maintaining Effective
Internal Control, GAO/AIMD-21.3.2 (Washington, D.C.: May 1, 2000); 60
Comp. Gen. 602, 606 (1981). In 67 Comp. Gen. 194 (1988), GAO for the
first time considered the use of statistical sampling for post-payment
audit in conjunction with "fast pay" procedures. The question arose in
connection with a General Services Administration proposal to revise
its procedures for paying and auditing utility invoices. GAO approved
the proposal in concept, subject to several conditions: (1) the
economic benefit to the government must exceed the risk of loss; (2)
the plan must provide for a meaningful sampling of all invoices not
subject to 100 percent audit; and (3) the plan must provide a reliable
and defensible basis for the certification of payments. GAO then
considered and approved GSA's specific plan in 68 Comp. Gen. 618
(1989). As a general proposition, however, approaching the problem
through system improvements is preferable to an alternative that
involves relaxing controls or audit requirements. 7 GAO-PPM § 7.4.E
d. Provisional Vouchers and Related Matters:
Apart from questions of automation or statistical sampling, proposals
arise from time to time, prompted by a variety of legitimate concerns,
to expedite or simplify the payment process. Proposals of this type
invariably raise the potential for overpayments or erroneous payments.
Therefore, their consequences in terms of the liability and relief of
certifying and disbursing officers must always be considered.
A 1974 case involved a proposal by the Environmental Protection Agency
for the certification of "provisional vouchers" for periodic payments
under cost-type contracts. Under the proposal, monthly vouchers
certified for payment would be essentially unaudited except for basic
mathematical and cumulative cost checks, subject to adjustment upon
audit when the contract is completed. Under this system, as with
statistical sampling, some errors could escape detection. However,
certifying officers would not have the benefit of the protection
afforded by the statistical sampling legislation. Since there would be
a complete audit upon contract completion, the provisional vouchers
could be certified upon a somewhat lesser standard of prepayment
examination, but GAO pointed out that any such system should provide,
at a minimum, for periodic audit of the provisional vouchers. To
better protect the certifying officers, GAO suggested following a
Defense Department procedure under which "batch audits" of accumulated
vouchers are conducted as frequently as deemed necessary based on the
reliability of each contractor's accounting and billing procedures,
but not less than annually, again subject to final audit upon contract
completion. B-180264, Mar. 11, 1974.
In order to meet processing deadlines, time and attendance forms are
often "certified" by appropriate supervisory personnel before the end
of the pay period covered, raising the possibility that information
for the latter days of the pay period may turn out to be erroneous.
Since necessary adjustments can easily be made in the subsequent pay
period and since the risk of loss to the government is viewed as
remote, the provisional certification of payroll vouchers based on
these "provisional" time and attendance records is acceptable. B-
145729, Aug. 17, 1977 (internal memorandum).
Simplification plans may be prompted by nothing more exotic than
understaffing of audit resources. In B-201408, Apr. 19, 1982, an
agency proposed an "audit resources utilization plan" whereby it would
(1) attempt to identify high risk contractors through preaward
questionnaires; (2) for low risk contracts below a monetary limit,
substitute desk audits for field contract audits; and (3) encourage
the use of systems audits where possible. GAO found no "conceptual
objection" to the proposal, noting that the final audits discussed in
B-180264, Mar. 11, 1974, did not necessarily have to be field audits,
but emphasized that high risk contractors should be subject to
contract audits in all cases. The decision also discusses the
certifying officer's role.
Another type of simplification proposal involves lessening the degree
of scrutiny on small payments. For example, the Department of Veterans
Affairs (VA) is authorized to reimburse certain low-cost supplies
furnished to veterans under statutory training and rehabilitation
programs. Experience taught the VA that participants could reasonably
be expected to incur at least $35 of reimbursable supply expenses. The
VA proposed to waive documentation and review requirements on invoices
of up to $35 for miscellaneous supplies, and to pay essentially
unsupported invoices up to that amount.[Footnote 49] GAO concurred,
but added that the VA should be able to demonstrate that prior audits
have not revealed a significant number of false or inappropriate
claims, and that it has internal controls adequate to detect multiple
claims for the same individual. B-221949, June 30, 1987. An unstated
consequence of the decision is that a certifying officer who relied on
the system, assuming it was set up in accordance with the specified
criteria, would be relieved from liability should any of the payments
turn out to be erroneous.
e. Facsimile Signatures and Electronic Certification:
Signature devices other than the traditional pen-and-ink signature are
called "facsimile signatures." The term has been defined as "an
impression of a signature made by a rubber stamp, metal plate, or
other mechanical contrivance." B-194970, July 3, 1979. As a general
proposition, there is no prohibition on the use of facsimile
signatures on financial documents as long as adequate controls and
safeguards are observed. The rule was stated as follows in B-48123,
Nov. 5, 1965 (nondecision letter):
"Generally, an acceptable facsimile of a signature may be made by a
rubber stamp impression or may be reproduced on a metal plate or by
other mechanical contrivances, the validity of which is derived from a
signed original. An otherwise proper document may be so authenticated
mechanically with the knowledge and consent or under an express
delegation of authority from the signer of the original provided that
appropriate safeguards are observed in those respects."
The rule has statutory recognition. In any federal statute unless
otherwise specified, the term "signature" includes "a mark when the
person making the same intended it as such." 1 U.S.C. § 1; 71 Comp.
Gen. 109 (1991) (definition of writing in 1 U.S.C. § 1 encompasses
electronic data interchange technologies); 65 Comp. Gen. 806, 810
(1986).
When facsimile signatures are to be used by government officials, the
safeguards should include:
* Standards for the authorization of the use of facsimile signatures,
* An enumeration of the types of documents on which facsimile
signatures may be used,
* Physical control of the signature device to prevent unauthorized
use, and;
* Notification to officials authorized to use facsimile signatures
that use of a signature device in no way lessens their responsibility
or liability.
B-140697, Oct. 28, 1959 (approving use of facsimile signatures in the
execution of contracts). Other cases approving the use or acceptance
of facsimile signatures are 40 Comp. Gen. 5 (1960) (use by Air Force
on purchase orders for small purchases); 33 Comp. Gen. 297 (1954)
(certification of invoice bearing only rubber stamp signature of
vendor); B-194970, July 3, 1979 (certification of voucher/purchase
order bearing only facsimile signature of contracting officer); B-
150395, Dec. 21, 1962 (use by Navy on purchase orders); B-126776-0.M.,
Mar. 5, 1956 (use by Army on certificates of availability of
government quarters and/or mess in support of military travel
vouchers); B-104590, Sept. 12, 1951 (use on vouchers in federal
educational grant programs).[Footnote 50]
A more recent case held that payment could be certified on the basis
of a contractor's facsimile ("fax") invoice, again provided that the
agency has adequate internal controls to guard against fraud and
overpayments and it determines that accepting facsimiles is beneficial
to and cost-effective for the government. See B-242185, Feb. 13, 1991,
citing several cases authorizing the acceptance of carbon copies.
One place where facsimile signatures are not permitted is the Standard
Form 210, the signature/designation card for certifying officers which
must be filed with the Treasury Department and which must bear the
certifying officer's original, manual signature. 1 TFM 4-1125.
Most of the cases cited thus far have involved relatively primitive
devices such as rubber stamps or signature machines. When we move into
the realm of computerized data transmission, the equipment is far more
sophisticated but the underlying principles are the same—there is no
prohibition but there must be adequate safeguards.
In the 1980s, GAO and the Treasury Department began to consider the
feasibility of electronic certification of payment vouchers. In a 1984
memorandum to one of GAO's audit divisions, GAO's General Counsel
agreed with the Treasury Department that there is no specific legal
requirement that a certifying officer's certification be limited to
writing on paper. Then, applying the precedent of the earlier rubber
stamp cases, the memorandum concluded that electronic certification,
with adequate safeguards, was not legally objectionable. The
"signature" could be an appropriate symbol adopted by the certifying
officer, which should be unique, within the certifying officer's sole
control or custody, and capable of verification by the disbursing
officer. B-216035-0.M., Sept. 20, 1984.
Treasury subsequently developed a proposal for a prototype electronic
certification system, which GAO found to adequately satisfy the
statutory requirements for voucher certification and payment. B-216035-
0.M., Sept. 25, 1987.[Footnote 51] In 1998, Congress enacted
legislation that required executive agencies to implement procedures
for the use and acceptance of electronic signatures. Government
Paperwork Elimination Act, Pub. L. No. 105-277, § 1703, 112 Stat.
2681, 2681-749 (Oct. 21, 1998), at 44 U.S.C. § 3504 note. The E-
Government Act of 2002 contains a provision to ensure the
compatibility of executive agency methods for use and acceptance of
electronic signatures.[Footnote 52] Treasury issued guidelines in 1998
for the full implementation of an electronic certification system as
the required method of submission of vouchers and schedule of payments
to the Financial Management Service. 1 TFM 4-2030.10. The guidelines
provide that an authorized ECS (electronic certifying system)
certifying officer "will be held responsible for the correctness of
the facts stated on the voucher or its supporting documents, and to
the effect that payment is proper from the appropriations shown on the
basic voucher or voucher-schedule." 1 TFM 4-2040.10.
f. GAO Audit Exceptions:
"Taking an exception" is a device GAO uses to formally notify an
accountable officer of a fiscal irregularity which may result in
personal liability. Today, this device is very rarely used. At one
time, accountable officers had to submit all of their account
documents to GAO, and GAO "settled" the accounts (31 U.S.C. § 3526(a))
by physically examining each piece of paper. Exceptions were common
during that era. The nature of the process has evolved in recent
decades in recognition of the increased responsibility of agencies in
establishing their own financial systems and controls. Account
settlement now is more a matter of systems evaluation and the review
of administrative surveillance and the effectiveness of collection and
disbursement procedures. Examination of individual transactions by GAO
is minimal. See GAO, Policy and Procedures Manual for Guidance of
Federal Agencies (hereafter GAO-PPM), title 7, § 8.5 (Washington,
D.C.: May 18, 1993). However, fiscal irregularities still come to
GAO's attention in various ways (through its normal audit activities,
agency irregularity reports, etc.), and GAO may invoke the exception
procedure when warranted by the circumstances. The process is
summarized in 7 GAO-PPM § 8.6. Examples are noted in 65 Comp.
Gen. 858, 861 (1986), modified by 70 Comp. Gen. 463 (1991) (massive
travel fraud scheme), and B-194727, Oct. 30, 1979 (fraudulent
misappropriation of mass transit grant funds by government employee).
The first step in the exception process is the issuance of a "Notice
of Exception" to the agency concerned. The issuance of a Notice of
Exception does not itself constitute a definite determination of
liability. It has been described as "in the nature of a challenge to
the propriety of a certifying officer's action in certifying the
voucher for payment." B-69611, Oct. 27, 1947. The certifying or
disbursing officer, through his or her agency, then has the
opportunity to respond to the exception. It is the accountable
officer's responsibility to establish the propriety of the payment. 13
Comp. Gen. 311 (1934). If the reply to the exception is satisfactory,
the exception is withdrawn. E.g., B-78091, Nov. 2, 1948. If the reply
does not provide a satisfactory basis to remove the exception, the
item is "disallowed" in the account.
Technically, the term "disallowance" applies only to disbursing
officers since a certifying officer does not have physical custody of
funds and does not have an "account" in the same sense that a
disbursing officer does. Thus, strictly speaking, GAO "disallows an
expenditure" in the account of a disbursing officer and "raises a
charge" against a certifying officer. See 32 Comp. Gen. 499, 501
(1953); A-48860, Apr. 14, 1950. For account settlement purposes, a
certifying officer's "account" consists of the certified vouchers and
supporting documents on the basis of which payments have been made by
a disbursing officer and included in the disbursing officer's account
for a particular accounting period. B-147293-0.M., Feb. 21, 1962.
The taking of an exception does not preclude submission of a relief
request under applicable relief legislation. As a practical matter, if
the agency has been unable to respond satisfactorily to the Notice of
Exception, the likelihood of there being adequate basis for relief is
diminished correspondingly. However, as in 65 Comp. Gen. 858, it can
happen, and the possibility should therefore not be dismissed.
2. Certifying Officers:
a. Duties and Liability:
As we have seen, a certifying officer is the official who certifies a
payment voucher to a disbursing officer. The responsibility and
accountability of certifying officers are specified in 31 U.S.C. §
3528(a), part of the previously noted 1941 legislation enacted to
clarify the roles of accountable officers under Executive Order No.
6166, June 10, 1933 (see note at 5 U.S.C. § 901). The certifying
officer is responsible for (1) the existence and correctness of the
facts stated in the certificate, voucher, and supporting
documentation; (2) the correctness of computations on the voucher; and
(3) the legality of a proposed payment under the appropriation or fund
involved. The statute further provides that a certifying officer will
be accountable for the amount of any "illegal, improper, or incorrect"
payment resulting from his or her false or misleading certification,
as well as for any payment prohibited by law or which does not
represent a legal obligation under the appropriation or fund involved.
There is a recurring appropriation act provision, discussed in section
C.4.b of Chapter 4 under the heading "Employment of Aliens," which
bars the use of appropriated funds to pay the compensation of a
government employee who is not a United States citizen, subject to
certain exceptions. The provision applies only to employees whose post
of duty is in the continental United States. Thus, a certifying
officer (or disbursing officer) in the continental United States must
be a U.S. citizen unless one of the exceptions applies. There is no
comparable requirement applicable to employees outside the continental
United States. B-206288-0.M., Aug. 4, 1982.
A certifying officer must normally be an employee of the agency whose
funds are being spent, but may be an employee of another agency under
an authorized interagency transaction or agreement. 72 Comp. Gen. 279
(1993); 59 Comp. Gen. 471 (1980); 44 Comp. Gen. 100 (1964).
A certifying officer is liable the moment an improper payment is made
as the result of an erroneous or misleading certification. E.g., 54
Comp. Gen. 112, 114 (1974). This is true whether the certification
involves a matter of fact, a question of law, or a mixed question of
law and fact.
55 Comp. Gen. 297, 298 (1975) (citing several other cases). As a
general proposition, the government looks first to the certifying
officer for reimbursement even though some other agency employee may
be liable to the certifying officer under administrative regulations.
32 Comp. Gen. 332 (1953); 15 Comp. Gen. 962 (1936). The fact that a
certifying officer receives instructions from superiors to make the
improper payment does not relieve him from liability. B-271021, Sept.
18, 1996. Also, the certifying officer's liability does not depend on
the government's ability or lack of ability to recoup from the
recipient of the improper payment. 31 Comp. Gen. 17 (1951); 28 Comp.
Gen. 17, 20 (1948). What this means is that the government is not
obligated to seek first to recoup from the recipient, although it
frequently does so, and of course any recovery from the recipient will
reduce the certifying officer's liability, at least in most cases.
Occasionally there may be two certifying officers involved with a
given payment, so-called "successive certifications." The rule is that
the responsibility of the certifying officer certifying the basic
voucher is not diminished by the subsequent action. GAO stated the
principle as follows in a letter to the Secretary of the Treasury, B-
142380, Mar. 30, 1960:
"Where the certifying officer who certifies the voucher and schedule
of payments is different from the certifying officer who certifies the
basic vouchers, ... the certifying officer who certifies the basic
vouchers is responsible for the correctness of such vouchers and the
certifying officer who certifies the voucher-schedule is responsible
only for errors made in the preparation of the voucher-schedule."
See also 67 Comp. Gen. 457 (1988).
An illustration of how this principle may apply is 55 Comp. Gen. 388
(1975), involving the liability of General Services Administration
certifying officers under interagency service and support agreements
with certain independent agencies. Under the arrangement in question,
the agency would assume certification responsibility for the basic
expenditure vouchers, but they would be processed for final payment
through GSA, with GSA preparing and certifying a master voucher and
schedule to be accompanied by a master magnetic tape. Again quoting
the above passage from B-142380, GAO concluded that the legal
liability of the GSA certifying officer would be limited to errors
made in the final processing. See also 72 Comp. Gen. 279 (1993), where
a State Department certifying officer could certify an "emergency
extraordinary expense voucher," submitted by a Defense Attaché, which
was not accompanied by supporting documentation because of security
considerations. The certifying officer was only responsible for errors
made on his own processing of the voucher and not for the underlying
propriety of the certification by the Defense Attaché.
Similarly, the statutory accountability does not apply to an official
who certifies an "adjustment voucher" used to make adjustments between
accounts or funds in the Treasury in respect of an obligation already
paid and which therefore does not involve paying money out of the
Treasury to discharge an obligation. 23 Comp. Gen. 953 (1944).
Although certification even in this situation should not be reduced to
a "matter of form," the accountability would attach to the certifying
officer who certified the basic payment voucher. See 23 Comp. Gen.
181, 183-84 (1943).
The function of certification is not perfunctory, but involves a high
degree of responsibility. 55 Comp. Gen. 297, 299 (1975); 20 Comp. Gen.
182, 184 (1940). This responsibility is not alleviated by the press of
other work. B-147747, Dec. 28, 1961.[Footnote 53] It also involves an
element of verification, the extent of which depends on the
circumstances. For example, a voucher for goods or services should be
supported by evidence that the goods were received or the services
performed. 39 Comp. Gen. 548 (1960). Agencies are authorized to
implement fast pay processes using certain controls to pay vendors
subject to post-payment verification of the receipt and acceptance of
goods and services ordered and the accuracy of invoices received.
Federal Acquisition Regulation (FAR), 48 C.F.R. pt. 13 (2005); GAO,
Policy and Procedures Manual for Guidance of Federal Agencies, title
7, § 7.4.D (Washington, D.C.: May 18, 1993). Generally, an independent
investigation of the facts is not contemplated. E.g., B-257334, June
30, 1995; 28 Comp. Gen. 571 (1949). Similarly, where proper
administrative safeguards exist, certifying officers need not examine
time, attendance, and leave records in order to certify the
correctness of amounts shown on payrolls submitted to them. 31 Comp.
Gen. 17 (1951).[Footnote 54] A 1982 decision, 61 Comp. Gen. 477,
reviewed the safeguards proposed by a Bonneville Power Administration
certifying officer for certifying recurring payments to a regional
planning body and found them adequate to satisfy 31 U.S.C. § 3528. In
the case of a compensatory damages award in settlement of an employee
discrimination claim, certifying officers needed to ensure that all
the items covered in the lump sum payment were statutorily
permissible, that the amount of the payment did not exceed statutory
limits, and that correct administrative procedures were followed. B-
257334, June 30, 1995.
An example of the role of a certifying officer in verifying a payment
is in B-301184, Jan. 15, 2004, in which certifying officers twice
questioned payment for the cost of food at a program that was offered
to employees at their permanent duty station for which appropriated
funds were not available. In the decision, it was stated that:
"In matters such as this, we carefully consider the views of
certifying officers who request a decision pursuant to 31 U.S.C. §
3529(a)(2), in addition to those positions advanced by the agency's
program officials, because the agency's certifying officers are the
agency officials who, statutorily, are responsible for the propriety
of all expenditures. 31 U.S.C. § 3528(a)(3) CA certifying official
certifying a voucher is responsible for ... the legality of a proposed
payment under the appropriation or fund involved'). Unlike other
agency officials, certifying officers are personally financially
liable for improper payments that they certify. 31 U.S.C. § 3528(a)(4)
CA certifying official certifying a voucher is responsible for ...
repaying a payment ... (A) illegal, improper or incorrect because of
an inaccurate or misleading certificate; (B) prohibited by law; or (C)
that does not represent a legal obligation under the appropriation or
fund involved')."
Whatever else the certifying officer's verification burden may or may
not involve, it certainly involves questioning items on the face of
vouchers or supporting documents, which simply do not look right. For
example, a certifying officer who certifies a voucher for payment in
the full amount claimed, disregarding the fact that the accompanying
records indicate an outstanding indebtedness to the government against
which the sum claimed is available for offset, is accountable for any
resulting overpayment. 28 Comp. Gen. 425 (1949). Similarly, certifying
a voucher in the full amount within a prompt payment discount period
without taking the discount will result in liability for the amount of
the lost discount. However, a certifying officer is not liable for
failing, even if negligently, to certify a voucher within the time
discount period. 45 Comp. Gen. 447 (1966).
A clear illustration of a certifying officer's responsibility and
liability occurred when a Department of Transportation employee
fraudulently misappropriated more than $850,000 in 1977. The fraud was
discovered by virtue of the employee's ostentatious purchases,
including several luxury automobiles and a "topless" bar in
Washington, D.C. The employee was found guilty and sent to jail.
However, investigation revealed negligence on the part of a Department
certifying officer. The employee had perpetrated the fraud by
inserting his own name on six payment vouchers for Urban Mass
Transportation Administration grants. Each voucher contained a list of
approximately ten payees with individual amounts, and the total
amount, and each had been certified by the certifying officer. The
negligence occurred in one of two ways. If the employee inserted his
own name and address on the voucher before presenting it to the
certifying officer, the certifying officer was negligent in not
spotting the name of an individual (whose name he should have known)
with an address in suburban Maryland on a list of payees the rest of
which were mass transit agencies. If the employee presented a partial
voucher and added his own name after it was certified, the total as
presented to the certifying officer could not have agreed with the sum
of the individual amounts, and the certifying officer was negligent in
not verifying the computation. GAO raised exceptions to the certifying
officer's account, and advised the Department of Transportation that
it must proceed with collection action against the certifying officer
for the full amount of the excepted payments less any amounts
recovered from the employee or through the sale of assets, like the
topless bar, which the Justice Department seized. See B-194727,
Oct. 30, 1979. Apparently in view of the clear negligence, relief was
never requested.
At this point, it should be noted that no one involved in the process
remotely expects that the government will be able to recover several
hundred thousand dollars from a certifying officer, or from any other
accountable officer, except perhaps one who has him(her)self stolen
the money. However, the burden of having to repay even a portion in
cases of losses of this size sends an important message and reinforces
the certain if indeterminable deterrent effect of the statute.
Certifying officers should not certify payment vouchers that are
unsupported by pertinent documentation indicating that procedural
safeguards regarding payment have been observed. Vouchers that are
deficient in this regard should be returned to the appropriate
administrative officials for proper approvals and supporting
documents. B-257334, June 30, 1995; B-179916, Mar. 11, 1974.
An area in which a certifying officer's duty to question is minimal is
payments to a contractor determined under a statutory or contractual
disputes procedure. In the absence of fraud or bad faith by the
contractor, a payment determination made under a disputes clause
procedure is final and conclusive and may not be questioned by a
certifying officer, GAO, or the Justice Department. S&E Contractors,
Inc. v. United States, 406 U.S. 1 (1972); B-201408, Apr. 19, 1982. It
does not follow that any administrative settlement is entitled to the
same effect. In B-239592, Aug. 23, 1991, GAO found that an "informal
settlement" of a personnel action between an agency and one of its
employees was without legal authority and found the certifying officer
liable for the unauthorized payments. (A subsequent letter, B-
239592.2, Sept. 1, 1992, clarified that this meant the authorized
certifying officer, not an official who had signed certain documents
as "approving official" but was not responsible for determining the
legality of the payment.)
A different issue involving an administrative settlement arose in
67 Comp. Gen. 385 (1988). After an investigation by federal and state
officials, the Forest Service determined that it was responsible for a
fire in a national forest in Oregon, and reimbursed the state for fire
suppression expenses incurred under a cooperative agreement.
Subsequently, a private landowner sued for damages resulting from the
same fire, and the court made a finding of fact that the Forest
Service was not liable. The certifying officer was concerned that the
court's finding might have the effect of invalidating the prior
payment to Oregon and making him liable for an erroneous payment. The
decision concluded that the payment was proper when made, and that the
court finding did not impose any duty on the certifying officer to
reopen and reexamine it. See also B-262110, Mar. 19, 1997, where the
Environmental Protection Agency used a cooperative agreement to
provide for payment of the costs of travel and related expenses by
nonfederal attendees of an EPA conference. If EPA had used a
procurement agreement, as required, these costs would not have been
allowable. Relief was granted the certifying officer and recipient of
the funding because both acted in good faith in fulfilling obligations
and had no basis for questioning the use of the inappropriate
agreement.
A certifying officer has the statutory right to seek and obtain an
advance decision from the Comptroller General regarding the lawfulness
of any payment to be certified. 31 U.S.C. § 3529.[Footnote 55] This
procedure will insulate the certifying officer against liability.
Following the advice of agency counsel, on the other hand, does not
guarantee protection against liability. E.g., 55 Comp. Gen. 297
(1975). Having said this, we do not wish to imply that consulting
agency counsel is a pointless gesture. See B-257893, June 1, 1995
(certifying officer's good faith was demonstrated, in part, by
reliance on agency counsel approval of settlement agreement). On the
contrary, it is to be encouraged. Seeking internal legal advice prior
to certification of matters on which the certifying officer is unsure
will in many cases obviate any need for an advance decision. In other
cases it may help define those situations in which consulting GAO may
be desirable.
As a final note, the Treasury Department has published a supplement to
the Treasury Financial Manual entitled Now That You're a Certifying
Officer (revised March 2005), which can be found at
www.fmstreas.gov/publications.html (last visited September 15, 2005).
Written expressly for certifying officers, it provides a good overview
of the importance of the job and the responsibilities which accompany
it.
b. Applicability of 31 U.S.C. § 3528:
There are two major exceptions to 31 U.S.C. § 3528(a). First, it
applies only to the executive branch. While section 3528(a) is not
limited by its terms to the executive branch, 31 U.S.C. § 3325(a), the
basic requirement that disbursing officers disburse only upon duly
certified vouchers, is expressly limited to the executive branch, and
sections 3325(a) and 3528(a) originated as sections 1 and 2 of the
same 1941 enactment. Thus, GAO has concluded that 31 U.S.C. § 3528(a)
does not apply to the legislative branch. 21 Comp. Gen. 987 (1942); B-
191036, July 7, 1978; B-236141.2, Feb. 23, 1990 (internal memorandum).
See also B-39695, Mar. 27, 1945. It has also been held that 31 U.S.C.
§ 3325(a) does not apply to the judicial branch. B-6061, A-51607, Apr.
27, 1942. It follows that section 3528(a) would be equally
inapplicable to the judicial branch. B-236141.2, cited above. In 1996,
the United States Code was amended to authorize the designation and
appointment of certifying and disbursing officers within the
Department of Defense. See National Defense Authorization Act for
Fiscal Year 1996, Pub. L. No. 104-106, thy. A, title IX, subtitle B, §
913, 110 Stat. 186, 410-12 (Feb. 10, 1996). Previously, 31 U.S.C. §
3528 specifically exempted military departments from its applicability
except for departmental pay and expenses in the District of Columbia.
Some legislative branch agencies now have their own legislation
patterned after 31 U.S.C. § 3528. See statutes listed in section E.1.b
of this chapter. Until recently, GAO decisions indicated that agencies
that do not have their own legislation, including legislative branch
agencies, nevertheless had the authority, within their discretion, to
create their own certifying officers and to make them accountable by
administrative regulation. The 1990 memorandum cited above, B-
236141.2, contains a detailed discussion. See also B-247563.3, Apr. 5,
1996; B-260369, June 15, 1995; 21 Comp. Gen. at 989. These decisions
reasoned that such liability, duly imposed by regulation, could be
regarded as part of the employee's "employment contract." However, in
B-280764, May 4, 2000, GAO reconsidered its position in a case
involving the Department of Defense (DOD) and held that accountable
officer status and liability can only be created by statute. GAO found
no authority that would permit DOD to impose pecuniary liability by
regulation on officials whom it refers to as "accountable officials"
(but who are not certifying or disbursing officers) for erroneous
payments resulting from information that they "negligently provide" to
certifying officers. The 2000 decision overruled prior inconsistent
decisions, which would include those applying to legislative branch
agencies. There is a further discussion of B-280764 in section B.2 of
this chapter.
c. Relief:
Informally known as the Certifying Officers' Relief Act, 31 U.S.C. §
3528(b) establishes a mechanism for the administrative relief of
certifying officers governed by 31 U.S.C. § 3528(a).[Footnote 56]
There are two standards for relief. The Comptroller General may
relieve a certifying officer from liability for an illegal, improper,
or incorrect payment upon determining that:
* the certification was based on official records and the certifying
officer did not know, and by reasonable diligence and inquiry could
not have discovered, the actual facts; or;
* the obligation was incurred in good faith, the payment was not
specifically prohibited by statute, and the United States received
value for the payment.
Under either standard, relief may be denied if the agency fails to
diligently pursue collection action against the recipient of the
improper payment. 31 U.S.C. § 3528(b)(2).
Unlike the physical loss relief statutes previously discussed, 31 U.S.C.
§ 3528(b) does not require administrative determinations by the agency
as a prerequisite to relief. The determinations under section 3528(b)
are made by the Comptroller General. Also, the relief standards under
section 3528(b) are stated in the alternative; relief may be granted
if either of the two standards can be established. It makes no
difference whether the improper payment is discovered by GAO or the
agency concerned. B-137435-0.M., Oct. 14, 1958. Relief is
discretionary (the statute says "may relieve"), although no case has
been discovered in which a certifying officer who met either of the
standards was not relieved.
There is no special form of request under 31 U.S.C. § 3528(b). Relief
may be requested by the agency on behalf of the certifying officer, or
directly by the certifying officer. See, e.g., 31 Comp. Gen. 653
(1952) (example of the latter). Relief requests must present
sufficient information to permit GAO to make one of the required
findings. E.g., B-288284, May 29, 2002; B-251994, Sept. 24, 1993; B-
191900, July 21, 1978.
One of the objectives of 31 U.S.C. § 3528(b) was to reduce the volume
of private relief legislation recommended on behalf of certifying
officers. The legislative history of the statute indicates that an
agency should seek relief from GAO before considering relief
legislation. As to those "less meritorious cases" in which relief may
be denied, relief legislation remains an available option. 30 Comp.
Gen. 298 (1951).
The first relief standard, 31 U.S.C. § 3528(b)(1)(A), relates
essentially to the certification of incorrect facts, and permits
relief if the certification was based on official records and if the
certifying officer did not know, and could not reasonably have
learned, the actual facts. GAO has never attempted to formulate a
general rule as to what acts may support relief from the certification
of incorrect facts. Rather, the approach is as stated
in 55 Comp. Gen. 297, 299-300 (1975):
"We have sought to apply the relief provisions by considering the
practical conditions and procedures under which certifications of fact
are made. Consequently, the diligence to be required of a certifying
officer before requests for relief under the act will be considered
favorably is a matter of degree dependent upon the practical
conditions prevailing at the time of certification, the sufficiency of
the administrative procedures protecting the interest of the
Government, and the apparency of the error."
For example, Social Security Administration certifying officers who
certify large numbers of awards each month may, apart from obvious
errors, rely on the award documents presented for certification. B-
119248-0.M., Apr. 14, 1954. Moreover, in B-247563.3, Apr. 5, 1996, we
recognized that certifying officers located at automated finance
centers at the Department of Veterans Affairs rely, necessarily, on
the integrity of the automated payment system as a whole and do not
physically examine hard copy documentation (vouchers) in each and
every case. The reasonableness of the certifying officer's reliance on
an automated payment system must be based on a "showing that the
system on which they rely is functioning properly and reviews should
be made at least annually to determine that the automated payment
system is operating effectively and can be relied upon to make
accurate and legal payments." Id.
In B-237419, Dec. 5, 1989, relief was granted to a Forest Service
certifying officer who certified the refund of a timber purchaser's
cash bond deposit without knowing that the refund had already been
made. The certifying officer had followed proper procedures by
checking to see if the money had been refunded, but did not discover
the prior payment because it had not been properly recorded. Also, the
agency was pursuing collection efforts against the payee.
In B-254385, Mar. 22, 1994, relief was granted to a certifying officer
at the National Science Foundation (NSF) who certified a payment to
the wrong contractor because an incorrect code had been entered into
NSF's automated payment system. We noted that because of the high
volume of payments, it would be an undue burden to require the
certifying officer to examine the supporting materials of each
payment. GAO's Policy and Procedures Manual for Guidance of Federal
Agencies recognizes the impracticality of requiring accountable
officers to examine, personally, each transaction and advises that
accountable officers may rely on the adequacy of automated systems and
controls and the personnel who operate these systems and process
individual transactions. GAO, Policy and Procedures Manual for
Guidance of Federal Agencies, title 7, § 7.2(A), (Washington, D.C.:
May 18, 1993).
Another case in which relief was granted under 31 U.S.C. §
3528(b)(1)(A) is B-246415, July 28, 1992. A certifying officer paid a
contract invoice to a financing institution to which payments had been
assigned under the Assignment of Claims Act without discovering that
the contract file contained a prior assignment. The contracting
officer had erroneously acknowledged the second assignment when he
should have either rejected it or invalidated the first one. The
agency remained liable to the first assignee and was unable to recover
the improper payment from the second. The certifying officer had
checked the contract file, and neither agency procedures nor
reasonable diligence required her to keep looking once she found what
appeared on its face to be a properly acknowledged assignment. The
case also illustrates how an agency (the Panama Canal Commission in
this case) should respond to a loss—by reviewing its procedures to
determine if they can be improved, within reason, to prevent
recurrence. In this instance, the agency began requiring that contract
files include a "milestone" log and that assignments be tabbed in the
file and reviewed prior to acknowledgment. See also B-287043, May 29,
2001.
In B-288284.2, Mar. 7, 2003, due to widespread violence in the
Republic of the Congo, the staff of the American Embassy in Kinshasa
was evacuated to the Embassy in Brazzaville in June 1993. During this
crisis, Air Afrique apparently threatened to cut off its
transportation services to embassy personnel unless a payment was made
for evacuating embassy pets during a similar crisis in 1991. The
certifying officer certified the payment, relying on fiscal data
provided over the telephone by Kinshasa staff. (This same certifying
officer had not authorized the 1991 payment, questioning it as being
personal expenses of embassy staff.) We granted relief to the
certifying officer under 31 U.S.C. § 3528(b)(1)(A), noting that given
the circumstances in the Congo at that time and the urgency of the
need to evacuate government employees and their families from a
dangerous situation, it would have been an undue burden to require
that the certifying officer seek further documentation or personally
examine supporting materials behind the Kinshasa official's
authorization and transmission of fiscal data.
As a general rule, however, a certifying officer may not escape
liability for losses resulting from improper certification merely by
stating either that he was not in a position to determine that each
item on a voucher was correctly stated, or that he must depend on the
correctness of the computations of his subordinates. A certifying
officer who relies upon statements and computations of subordinates
must assume responsibility for the correctness of their statements and
computations, unless it can be shown that neither the certifying
officer nor his or her subordinates, in the reasonable exercise of
care and diligence, could have known the true facts. 55 Comp. Gen.
297, 299 (1975); 26 Comp. Gen. 578 (1947); 20 Comp. Gen. 182 (1940).
In 49 Comp. Gen. 486 (1970), a certifying officer asked if he would be
held accountable where his own agency would not tell him exactly what
he was being asked to certify. The agency took the position that the
expenses in question were confidential and could be disclosed only to
those with a need to know, which did not include the certifying
officer. GAO disagreed. The situation would be different if the agency
were operating under "unvouchered expenditure" authority such as 31
U.S.C. § 3526(e)(2). Under that type of authority, a certifying
officer who is not informed of the object or purpose of the
expenditure is not accountable for its legality. 24 Comp. Gen. 544
(1945). In the case at hand, however, the agency had no such
authority. Therefore, the certifying officer would not be protected
against liability if he certified a voucher without knowing what it
represented. As GAO pointed out several years later, any other answer
would defeat the purpose of the certification requirement, which is to
protect the United States against illegal or erroneous payments. 55
Comp. Gen. 297, 299 (1975). Except for statutorily authorized
unvouchered expenditures, "I don't know and they wouldn't tell me"
cannot be sufficient.
The second relief standard, 31 U.S.C. § 3528(b)(1)(B), contains three
elements, all of which must be satisfied—obligation incurred in good
faith, payment not specifically prohibited, United States received
value for the payment. If a certifying officer qualifies for relief
under this standard, it becomes irrelevant whether he or she could
also have qualified under the first standard. This is particularly
useful because, in many cases, what would constitute reasonable
diligence and inquiry for purposes of the first standard is far from
clear.
There is no simple formula for determining good faith. An important
factor in evaluating good faith for purposes of 31 U.S.C. § 3528 is
whether the certifying officer had, or reasonably should have had,
doubt regarding the propriety of the payment and, if so, what he or
she did about it. Whether the certifying officer reasonably should
have been in doubt depends on a weighing of all surrounding facts and
circumstances and cannot be resolved by any "hard and fast rule." 70
Comp. Gen. 723, 726 (1991). In many cases, good faith is found simply
by the absence of any evidence to the contrary Id. See also B-262110,
Mar. 19, 1997.
At one time, the failure to obtain an advance decision from GAO on
matters considered doubtful was viewed as an impediment to
establishing good faith. E.g., 14 Comp. Gen. 578, 583 (1935).
Depending on the circumstances, following the advice or instructions
of some administrative official in lieu of seeking an advance decision
may not constitute "reasonable inquiry" under the first relief
standard of 31 U.S.C. § 3528. 31 Comp. Gen. 653 (1952). However, it
has become increasingly recognized that consulting agency counsel is a
relevant factor in demonstrating good faith under the second standard.
B-191900, July 21, 1978; B-127160, Apr. 3, 1961. In B-250884, Mar. 18,
1993, GAO granted relief to a certifying officer who relied, not on
agency counsel directly, but on agency guidelines, which had been
reviewed by agency counsel. (GAO also noted in that decision that
agency guidelines had been subsequently revised.) Similarly, in B-
257893, June 1, 1995, GAO found that the certifying officer's good
faith was demonstrated, in part, by reliance on a settlement agreement
which had been approved by agency counsel.
To understand the second element-—"no law specifically prohibited the
payment"—-it is helpful to note the language of the original 1941
enactment, which was "the payment was not contrary to any statutory
provision specifically prohibiting payments of the character
involved." Pub. L. No. 389, ch. 641, 55 Stat. 875-76 (Dec. 29, 1941).
This means statutes that expressly prohibit payments for specific
items or services. 70 Comp. Gen. 723, 726 (1991); B-191900, July 21,
1978. In B-300192, Nov. 13, 2002, we described section 117 of Public
Law No. 107-229, 116 Stat. 1465, 1468 (Sept. 30, 2002) (the fiscal
year 2003 continuing resolution) as amended, as such a statute.
Section 117 prohibits the use of fiscal year 2003 appropriated funds
to pay for printing of the budget of the United States other than by
the Government Printing Office. Other examples are 31 U.S.C. § 1348(a)
(telephones in private residences) and 44 U.S.C. § 3702 (newspaper
advertisements without prior written authorization).
Under this interpretation, the phrase "no law specifically prohibited
the payment" is not the same as the more general "payment prohibited
by law." It does not include violations of general fiscal statutes
such as the Antideficiency Act (31 U.S.C. § 1341) or the general
purpose statute (31 U.S.C. § 1301(a)). B-142871-0.M., Sept. 15, 1961.
[Footnote 57]
The third element, value received, normally implies the receipt of
goods or services with a readily determinable dollar value. E.g., B-
241879, Apr. 26, 1991 (automatic data processing equipment maintenance
contract extended without proper delegation of procurement authority,
services were performed). But cf. B-303177, Oct. 20, 2004 (certifying
officer denied relief where government did not receive any value as a
result of the erroneous payments). However, in appropriate
circumstances, an intangible item may constitute value received where
the payment in question has achieved a desired program result. In B-
257893, June 1, 1995, for example, the National Archives and Records
Administration received the benefits associated with avoiding
litigation and related costs by entering into a settlement agreement,
despite the fact that the agreement had improperly included the
payment of attorney fees. See also B-250884, Mar. 18, 1993; B-191900,
July 21, 1978; B-127160, Apr. 3, 1961.
3. Disbursing Officers:
a. Standards of Liability and Relief:
As with certifying officers, the responsibilities and accountability
of disbursing officers are mandated by statute. A disbursing officer
in the executive branch must (1) disburse money only in accordance
with vouchers certified by the head of the spending agency or an
authorized certifying officer, and (2) examine the vouchers to the
extent necessary to determine that they are (a) in proper form, (b)
certified and approved, and (c) correctly computed on the basis of the
facts certified. The disbursing officer is accountable for these
functions, except that accountability for the correctness of
computations lies with the certifying officer. 31 U.S.C. § 3325(a).
Disbursing officers render their accounts quarterly. 31 U.S.C. §
3522(a)(1).
The administrative relief provision for nonmilitary disbursing
officers is 31 U.S.C. § 3527(c), enacted in 1955.[Footnote 58] The
Comptroller General is authorized to relieve present or former
disbursing officers from liability for deficiencies in their accounts
resulting from illegal, improper, or incorrect payments, upon
determining that the payment was not the result of bad faith or lack
of reasonable care by the disbursing officer. The determination may be
made by the agency and concurred in by GAO, or it may be made by GAO
on its own initiative. As in the case of certifying officers, relief
may be denied if the agency concerned fails to diligently pursue
collection action against the recipient of the improper payment.
The statute further provides that the granting of relief under
section 3527(c) does not affect the liability or authorize the relief
of the beneficiary or recipient of the improper payment nor does it
diminish the government's duty to pursue collection action against the
beneficiary or recipient. 31 U.S.C. § 3527(d)(2).
In contrast with the certifying officer relief statute, 31 U.S.C. §
3527(c) is not limited to the executive branch. E.g., B-288163, June
4, 2002; B-200108, B-198558, Jan. 23, 1981 (judicial branch).
The relief statute contemplates the consideration of individual cases
and does not authorize the blanket relief of unknown disbursing
officers for unknown amounts. B-165743, May 11, 1973.
Once it is determined that there has been an improper payment for
which a disbursing officer is accountable, and that relief is desired,
the primary issue is whether the payment was or was not the result of
bad faith or lack of reasonable care on the part of the disbursing
officer. "Bad faith" is difficult to define with any precision. It is
somewhere between negligence and actual dishonesty, and closer to the
latter. Bad faith cases tend to be relatively uncommon. Far more
common are cases involving the reasonable care standard. This standard—
whether the disbursing officer exercised reasonable care under the
circumstances—is the legal definition of negligence and is the same
standard applied in physical loss cases. 65 Comp. Gen. 858, 861-62
(1986); 54 Comp. Gen. 112 (1974).
The determination of whether a payment was or was not the result of
bad faith or lack of due care must be made on the basis of the facts
and circumstances surrounding the particular payment in question. A
high error rate in the disbursing office involved does not
automatically establish lack of due care in the making of a particular
payment nor does a low error rate and a record of an exemplary
operation automatically establish due care. B-141038-0.M., Nov. 17,
1959; B-136027-0.M., June 13, 1958. The continued existence of an
"inherently dangerous" procedure, however, does indicate lack of due
care on the part of the responsible disbursing officer. B-162629-0.M.,
Nov. 9, 1967.
It is difficult, if not impossible, to state hard and fast rules
applicable inflexibly to all cases involving relief under the
provisions of 31 U.S.C. § 3527(c). What may be considered good faith
and the exercise of due care in one set of circumstances may not be so
considered in another. However, it may be stated generally that GAO
will grant relief where (1) the agency has made proper efforts to
collect from the recipient of the improper payment, (2) the agency has
determined that the payment was not the result of bad faith or lack of
due care on the part of the disbursing officer, and (3) no evidence to
the contrary is available. Also, relief may be granted without the
administrative determination where due care and the absence of bad
faith are evident from the facts.
Actual negligence which contributes to an improper payment will, of
course, preclude the granting of relief. For example, making a payment
on the basis of documents which have been obviously altered, without
first seeking clarification, is not the exercise of due care. B-
233276, Oct. 31, 1989, aff'd upon reconsideration, B-233276, June 20,
1990; B-138593-0.M., Feb. 18, 1959; B-135910-0.M., July 14, 1958.
Similarly, relief was denied in the following cases:
* Disbursing officer made duplicate payments on voucher schedule
covering payments already made. Disbursing officer had requested
guidance on new procedures, and "duplicate" schedule with instructions
had been sent to her in response to that request, with a cover letter
clearly stating that the schedule covered payments previously made.
The payment could only have been due to lack of due care. B-142051,
Mar. 22, 1960.
* Disbursing officer continued to pay New Mexico gasoline tax after
State Attorney General and Judge Advocate General had both concluded
that the United States was not liable for the tax. Although the
disbursing officer was aware of the rulings, he claimed that he had
not received specific instructions to stop paying. B-135811, May 29,
1959.
* Disbursing officer reimbursed imprest fund on the basis of
fictitious requisitions not supported by dealers' invoices or delivery
slips. B-137723-0.M., Dec. 10, 1958.
As with physical losses, failure to follow applicable regulations is
generally regarded as negligence, and if an improper payment is
attributable to that failure, relief will be denied. For example, in B-
271608, June 21, 1996, relief was denied a disbursing officer who
failed to exercise due care, as evidenced by his failure to follow
prescribed procedures. See also 54 Comp. Gen. 112, 116 (1974); 44
Comp. Gen. 160 (1964).
In B-271021, Sept. 18, 1996, a disbursing officer failed to follow
regulations and was denied relief, even though the disbursing officer
had received instructions from superiors to make the improper payment.
Compliance with regulations will help establish due care, but the mere
fact of compliance with regulations which are clearly insufficient may
not always satisfy the standard. B-192558, Dec. 7, 1978.
The concept of proximate cause is also applicable, and relief is
appropriate where any negligence that may have existed was not the
proximate cause of the improper payment. In one case, for example,
local operating procedures at a military installation were found
inadequate because they permitted personal checks to be cashed without
checking identification cards. However, since the cashiers checked ID
cards on their own initiative, and did so in the case for which relief
was sought, the inadequacy could not have contributed to the loss. B-
221415, Mar. 26, 1986. Also, in B-288163, June 4, 2002, a bankruptcy
judge had ordered a disbursing officer to pay funds to a false
claimant. In that case, we found that the disbursing officer's error
was not the proximate cause of the loss because the judge had ordered
the payment. For other examples, see B-227436, July 2, 1987, and B-
217663, July 16, 1985.
The essence of negligence is the existence of a duty to exercise
reasonable care in a particular situation and the violation of that
duty. In B-188744, July 15, 1977, a Bureau of Indian Affairs
disbursing officer erroneously made a payment to the wrong heir.
Unknown to him, the probate and title determinations on which he had
based the payment had been reopened and revised. Under established
procedures, the disbursing officer was neither required nor expected
to verify inheritance determinations. Since the verification was not
within the scope of his duty, and was not something anyone in his
position would reasonably be expected to do, there was no lack of due
care. See also B-137223-0.M., Jan. 18, 1960. Thus, negligence will
generally not be imputed to a disbursing officer where payment is made
on the basis of facts of record upon which the disbursing officer is
or reasonably can be expected to rely, even though such facts are
subsequently found to be erroneous. This assumes that there is nothing
on the face of the documents presented to the disbursing officer which
should reasonably have alerted him or her that something appeared to
be wrong.
A disbursing officer is accountable for payments made by his or her
subordinates. However, relief may be granted under 31 U.S.C. § 3527(c)
if the improper payment was not the result of bad faith or lack of due
care attributable to the disbursing officer personally. B-141038-0.M.,
Nov. 17, 1959. Where the actual disbursement is made by a subordinate,
relief for the supervisory disbursing officer requires a showing that
the disbursing officer exercised adequate supervision. Adequate
supervision in this context means that the disbursing officer (1)
maintained an adequate system of controls and procedures to avoid
errors, and (2) took appropriate steps to ensure that the system was
effective and was being followed at the time of the payment in
question. E.g., 62 Comp. Gen. 476, 480 (1983). A relief request must
contain sufficient information to enable an independent evaluation. B-
235037, Sept. 18, 1989.
GAO has not attempted to define the elements of an adequate
supervisory system. There can in fact be no fixed formula, as the
system will vary based on such factors as the size of the disbursing
operation and the types of payments or transactions involved.
Nevertheless, several elements which commonly appear in good systems
can be identified (although no single case lists them as such):
* Compliance with agency regulations. For example, a disbursing office
at an American embassy will need to ensure compliance with any
pertinent directives or financial management regulations of the State
Department. See B-271896, Mar. 4, 1997.
* Locally developed instructions (often called standard operating
procedures or SOPs) tailored to the needs of the particular disbursing
office. Relief requests should include copies of any relevant SOPs. In
B-241019, Aug. 19, 1991, we initially denied relief to a supervisory
disbursing officer because the record did not contain evidence either
that (1) the officer maintained an adequate system of procedures and
controls (SOPs were inadequate), or (2) that the officer took steps to
ensure that the procedures were implemented effectively. (This case
was reversed upon reconsideration in B-241019.2, Feb. 7, 1992, when
additional information pertaining to the procedures was provided to
GAO.) While SOPs are extremely helpful, the lack of a written SOP will
not in and of itself cause a system to "flunk" the relief standard.
E.g., B-215226, Apr. 16, 1985.
* Training. This includes both initial training for new personnel and
periodic refresher training, again tailored to the needs of the
particular office. Training in this context does not necessarily mean
formal classroom training, but may be in the form of on-the-job
training and may include such devices as reading files which are
circulated periodically and especially when pertinent changes occur.
* Periodic review or inspection by the supervisor. The forms this may
take will vary with the size and nature of the operation.
The adequacy of a supervisory system is not, nor could it
realistically be, measured against a zero-error standard. Many cases
have made the point that a skillfully executed criminal scheme can
occasionally outwit an adequate and well-supervised system. E.g., B-
241880, Aug. 14, 1991; B-202911, June 29, 1981. Similarly, human error
will occur even in the most carefully established and supervised
system. The best system cannot be expected to eliminate or detect
every clerical error by a subordinate. E.g., B-224961, Sept. 8, 1987;
B-212336, Aug. 8, 1983.
The cases also recognize that, in a large operation, the supervisory
disbursing officer cannot reasonably be expected to personally review
every check that is issued or every cash payment that is made. E.g., B-
215734, Nov. 5, 1984 (check cashed with fraudulent endorsement); B-
194877, July 12, 1979 (amounts of two payments inadvertently switched,
resulting in overpayment to one payee); B-187180, Sept. 21, 1976
(wrong amounts inserted on checks). See also B-266001, May 1, 1996.
Thus, it is possible for a supervisor to be relieved for an error by a
subordinate which, if attributable to the disbursing officer
personally, would have resulted in the denial of relief. We previously
cited several cases denying relief for payments made on the basis of
obviously altered documents. These were cases in which the disbursing
officer saw or should have seen the documents. Relief has been granted
for similar losses occurring in otherwise adequate systems under which
the supervisor was not required to see, and in fact did not see, the
altered document. B-141038-0.M., Nov. 17, 1959.
Where the subordinate who made the payment is also an accountable
officer (a cashier, for example), the standard for relieving the
subordinate is whether the individual complied with established
procedures and whether anything occurred which should reasonably have
made the individual suspicious that something was wrong. E.g., B-
246418, Feb. 3, 1992; B-233997.3, Nov. 25, 1991; B-241880, Aug. 14,
1991. Depending on the particular facts, in cases involving two
disbursing officers accountable for a payment, one a supervisor and
the other a subordinate, it is possible for relief to be granted to
both, denied to both, or granted to one and denied to the other.
Examples of cases applying the above standards in which relief was
granted to both the supervisor and the subordinate disbursing officer
are B-271017, Aug. 12, 1996, and B-260753, Jan. 11, 1996. Examples of
cases applying the above standards in which relief was granted to the
supervisor but not the subordinate are: B-260369, June 15, 1995
(cashier failed to follow procedures); B-231503, June 28, 1988
(cashier failed to observe annotations on voucher); and B-214436, Apr.
6, 1984 (agency declined to seek relief for subordinate who had failed
to follow established procedures).
In our coverage of physical loss cases, we emphasized the importance
of statements by the accountable officer. The principle applies
equally in improper payment cases. The existence of adequate controls
and procedures is usually documented, but this is not always the case,
and the passage of time may make it impossible to locate a copy of the
specific version of the SOPs in effect at the time of the payment.
Also, testimony of the accountable officer(s) and other involved
persons is often the only way of establishing how the controls and
procedures were being implemented at the time of the payment. While
the disbursing officer's own statement is obviously not disinterested
and cannot be regarded as conclusive, it is always given appropriate
weight and, as with unexplained loss cases, has often been enough to
tip the balance in favor of relief where the record contains no
controverting evidence or where documentary evidence is no longer
available. Examples are B-234962, Sept. 28, 1989; B-215226, Apr. 16,
1985; B-217637, Mar. 18, 1985; B-216726, Jan. 9, 1985; B-215833, Dec.
21, 1984; and B-212603 et al., Dec. 12, 1984.
Finally, a disbursing officer has the same statutory right as a
certifying officer to obtain an advance decision from the Comptroller
General. 31 U.S.C. § 3529.[Footnote 59] See B-270801, Mar. 19, 1996.
Obviously, if the decision is to serve the purpose of protecting the
disbursing officer, the request must include the facts which gave rise
to the doubt. 20 Comp. Gen. 759 (1941). Following administrative
advice in lieu of seeking a GAO decision may, depending on the
circumstances, bear upon the issue of whether the disbursing officer
exercised due care. E.g., 49 Comp. Gen. 38 (1969). We previously noted
that consulting agency counsel will help a certifying officer
establish good faith. There is no reason why it should not equally
help a disbursing officer establish good faith and due care, although
it may not be enough if the advice received flies in the face of
contrary information in the hands of the disbursing officer. E.g., 65
Comp. Gen. 858 (1986), aff'd upon reconsideration, B-217114.5, June 8,
1990, modified on other grounds, 70 Comp. Gen. 463 (1991). Whichever
course of action is chosen, the disbursing officer faced with a
doubtful payment needs to do something. The road to relief will be
very difficult if a disbursing officer who is admittedly in doubt
proceeds to make the payment without consulting either GAO or
appropriate agency officials. See 23 Comp. Gen. 578 (1944).
b. Some Specific Applications:
The federal government disburses money in an immense variety of
situations—payments to employees (salary, allowances, awards),
payments to contractors, payments under assistance programs, payments
to various claimants, etc. Every situation in which proper payments
can be made presents the potential for improper payments, resulting
from such things as fraud, government error, or the misapplication of
legal authority or limitations. To illustrate some of the situations
that may arise, we present here a selection of improper payments for
which relief has been sought under 31 U.S.C. § 3527(c). In each case,
the relief question was approached by applying the principles and
standards discussed in the previous
section D.3.a. As noted above in sections B.2, C.1.b, and C.2.b of
this chapter, the statutory scheme for military accountable officers
was changed by section 913 of Public Law No. 104-105, div. A, title
IX, subtitle B, 110 Stat. 186, 410-12 (Feb. 10, 1996). Section 913
amended 31 U.S.C. § 3527(b) to apply to all accountable officials of
the armed forces and included a new section 3527(b)(1)(B) providing
relief for erroneous payments made by military accountable officials.
As in the case of a physical loss or deficiency, the finding of the
Secretary involved regarding whether the circumstances warrant relief
is conclusive on the Comptroller General. GAO has not yet addressed
relief of military accountable officials for erroneous payments under
the revised section 3527(b). Nevertheless, consideration of the
principles addressed in the following cases is still useful.
(1) Fraudulent travel claims:
Cases under this heading range from single payments to massive
schemes. They involve two distinct situations—fraudulently obtained
travel advances and payments based on fraudulent travel vouchers.
In B-240654, Feb. 6, 1991, an imposter, using falsified travel orders
and a phony military identification card, obtained travel advances at
six Air Force bases totaling nearly $74,000. The Air Force was able to
identify the imposter and he was arrested, but committed suicide
before trial. See also B-248532, Oct. 26, 1992; B-248251, June 30,
1992. In another case, an individual stole an identification card from
an athletic locker at the Pentagon and used it to obtain travel
advances at several Army installations. The fraud was successful
because the thief bore a sufficient resemblance to the card's owner. B-
217440, B-217440.2, Apr. 16, 1985; B-217440, Feb. 13, 1985. The losses
in these cases were attributed to skillfully executed criminal
activities. Other cases involving fraudulently obtained travel
advances include B-261312, Feb. 5, 1995; B-246371, June 23, 1992; B-
234962, Sept. 28, 1989; B-221395, Mar. 26, 1986.
The second group of cases is similar except that the fraudulent
document is a travel voucher rather than a travel order. Several
related cases involve a conspiracy carried out over several years by
employees of the Army Corps of Engineers. Basically, the employees
presented vouchers based on fraudulent lodging receipts, often
provided by friends or relatives. The scheme eluded detection for
several years until it was discovered that the providers of the
receipts, who had "verified" the accuracy of the receipts to the
Corps, were themselves participants in the fraud. The disbursing
officer in one district was relieved in part, but relief was denied
for payments made after he had received information putting him on
notice of the possibility of fraud. 65 Comp. Gen. 858 (1986). In
another district, the disbursing officer stopped making payments
immediately upon being advised of the investigation, and was relieved
in full. B-217114.2, Feb. 3, 1988.
A simpler situation is B-215737, Nov. 5, 1984, in which an individual
presented to an Army cashier a travel voucher which had been issued to
someone else. Relief was granted to the Finance and Accounting
Officer, but denied to the cashier because she failed to compare the
name on the presenter's identification card with the (different) name
on the voucher. Some additional fraudulent travel voucher cases are B-
241880, Aug. 14, 1991; B-229274, Jan. 15, 1988; B-222915, Sept. 16,
1987; B-213824, July 13, 1987; and B-224832, July 2, 1987.
(2) Other cash payments fraudulently obtained:
It may be noted, somewhat cynically, that if there is a way to obtain
cash from the federal government, someone will try to do it
fraudulently. In some cases, losses can be prevented by the exercise
of due care. In 68 Comp. Gen. 371 (1989), for example, an individual
deposited two "Greenback Money Drafts" in the patients' account at a
Department of Veterans Affairs hospital. These are drafts, resembling
checks, which the issuing bank provides to various public places. A
person with an account in the issuing bank can sign one of the forms
and cash it elsewhere. The back of the form explicitly states, "You
must call [the issuing bank] before cashing," so that the bank can
verify the existence of the account and the sufficiency of funds. In
this instance, the cashier accepted the drafts without calling the
issuing bank, the patient withdrew the funds shortly thereafter, and
it was subsequently discovered that the drafts had been fraudulently
negotiated. Relief was denied because of the cashier's negligent
failure to follow the explicit printed instructions.
In another case, relief was denied to a cashier who made a cash
payment to a courier without requiring any identification. The courier
turned out to be an imposter. B-178953, Aug. 8, 1973.
In many cases, due care will not prevent the loss, and relief is
granted. illustrative cases involving miscellaneous military cash
payments, similar to the travel advance cases noted above, are B-
245127, Sept. 18, 1991 (transient/reaccession payment); B-226174, June
18, 1987 (casual payment); B-215226, Apr. 16, 1985 (special
reenlistment bonus); and B-209717.2, July 1, 1983 (military pay
voucher with separation orders).
Relief was denied to a cashier in another casual payment case,
B-227209, Aug. 5, 1987, for neglecting to spot inconsistencies on the
face of the voucher.
(3) Military separation vouchers:
The cases under this heading involve overpayments on military
separation vouchers attributable to government error rather than fraud
on the part of the recipient. In each case, the supervisory disbursing
officer was relieved, illustrating the previously noted proposition
that even a well-established and carefully supervised system of
controls and procedures cannot be expected to totally eliminate human
error.
In B-230842, Apr. 13, 1988, and B-227412, July 2, 1987, a cashier made
an overpayment by using the amount from the wrong block on the
voucher. In B-228946, Jan. 15, 1988, the cashier failed to clear a
previous transaction from her adding machine. In all three cases, the
agency sought relief for the supervisor while holding the cashier
liable. Similar cases are B-222685, June 20, 1986; B-221453, June 18,
1986; and B-212293, Nov. 21, 1983. Relief has been granted to the
cashier in cases where the cashier followed applicable procedures and
the error was attributable to someone else. E.g., B-226614, May 6,
1987; B-221471, Jan. 7, 1986.
(4) Assignment of contract payments:
Under the Assignment of Claims Act, 31 U.S.C. § 3727 and 41 U.S.C. §
15, when a contractor assigns future contract payments to a financing
institution (assignee), the assignee must file written notice of the
assignment and a copy of the assignment with the pertinent disbursing
officer. Once this is done, the government's obligation is to make
future payments to the assignee, and payments made directly to the
contractor are erroneous. In B-270715, July 23, 1996, an assignment
bound the government, even though notice of the assignment was not
given to the agency as required under the Act, because the agency was
fully aware of the assignment and had "recognized" the assignment.
In B-213720, Oct. 2, 1984, an assignment under an Army Corps of
Engineers contract was properly filed with the disbursing officer, who
acknowledged receipt but neglected to retain a copy. Also, a copy was
inexplicably not placed in the contract file. A few months later, an
invoice was submitted clearly stating that payment should be made to
the assignee bank. A voucher examiner functioning as a certifying
officer failed to make appropriate inquiry to confirm the existence of
the assignment and instead followed the advice of the purchasing agent
to pay the contractor. The disbursing officer then made payment to the
contractor, notwithstanding the information on the face of the invoice
indicating the existence of an assignment. Since the Army voucher
examiner was not a statutory certifying officer, primary liability
remained with the disbursing officer. Given the disbursing officer's
failure to retain a copy of the assignment and to verify the proper
payee, relief was denied.
However, in B-270801, Mar. 19, 1996, a disbursing officer was relieved
of liability for payment to a contractor, although there had been an
assignment made to a financial corporation. The corporation had mailed
a copy of the assignment to the disbursing office, as required, but
the mailroom apparently lost the copy. The disbursing officer had
followed established procedures and did not have actual notice of the
assignment.
In other cases in which a military finance and accounting officer is
responsible for both certifying and disbursing functions, relief has
been granted where the errors are solely those of subordinates and
there is no lack of due care attributable to the disbursing officer
personally. B-216246, May 22, 1985 (voucher examiner/certifying
officer failed to follow standard operating procedures, nothing on
face of voucher to suggest existence of assignment); B-214273, Dec.
11, 1984 (unknown clerk had misfiled notice of assignment, office
processed over 3,000 vouchers a month and could pre-audit only on
random basis).
(5) Improper purpose/payment beyond scope of legal authority:
Most improper purpose and similar cases will be certifying officer
cases. Those that involve disbursing officers are either military
cases or disbursements by imprest fund cashiers.[Footnote 60] The
point to remember is that relief is governed by the standards of 31
U.S.C. § 3527(c), and the fact that a payment is unauthorized does not
automatically indicate lack of due care.
Several imprest fund cashiers have been relieved where the vouchers
were proper on their face and included approvals by appropriate agency
officials, including a contracting officer. B-221940, Oct. 7, 1987
(refreshments at seminar); B-211265, June 28, 1983 (air purifier); B-
203553, Feb. 22, 1983 (air purifier). Prior approvals of similar
purchases may also be relevant in establishing due care. 61 Comp. Gen.
634, 637 (1982). Note that the purchase in each case was not plainly
illegal. Refreshments may be authorized under the Government Employees
Training Act and air purifiers are authorized in some situations.
[Footnote 61] Also, in B-302993, June 25, 2004, GAO considered whether
particular expenditures that were once viewed as personal expenses of
the employee may in certain circumstances be considered an official
expense of the agency.
In B-217668, Sept. 12, 1986, relief was denied to an Army Finance and
Accounting Officer who purchased beer for troops engaged in a joint
military exercise. While the beer could have been purchased with
nonappropriated funds (or—dare we suggest—paid for by the individuals
who drank it), it is not an appropriate use of the taxpayers' money.
The decision recognized that relief might nevertheless be possible if
the standards for relief of a supervisor under 31 U.S.C. § 3527(c)
were met, but the record did not contain sufficient information to
enable an independent judgment.
4. Check Losses:
a. Check Cashing Operations:
Check cashing by disbursing officers is governed by 31 U.S.C. § 3342.
Subsection (a) authorizes disbursing officers to:
"(1) cash and negotiate negotiable instruments payable in United
States currency or currency of a foreign country;
"(2) exchange United States currency, coins, and negotiable
instruments and currency, coins, and negotiable instruments of foreign
countries; and;
"(3) cash checks drawn on the Treasury to accommodate United States
citizens in a foreign country, but only if:
"(A) satisfactory banking facilities are not available in the foreign
country; and;
"(B) a check is presented by the payee who is a United States citizen."
Transactions under subsections (a)(1) and (a)(2) are authorized for
official purposes or to accommodate certain classes of persons,
including government personnel and their dependents under certain
circumstances, hospitalized veterans, contractors working on
government projects, authorized nongovernmental agencies operating
with government agencies, federal credit unions, and members of the
military forces of an allied or coalition nation participating in a
combined operation, combined exercise, or combined humanitarian or
peacekeeping mission with the U.S. military if certain conditions are
met. 31 U.S.C. § 3342(b). These are sometimes called "accommodation
transactions." The statute applies to legislative branch (and
presumably judicial branch) agencies as well as executive branch
agencies. 64 Comp. Gen. 152 (1984). The Treasury Department is
authorized to issue implementing regulations and may delegate that
authority to other agencies. 31 U.S.C. § 3342(d).
In 1999, the Treasury Department directed agencies to eliminate most
imprest funds, so accommodation transactions are now limited mainly to
Department of Defense and Department of State overseas offices.
[Footnote 62] Furthermore, internal Defense Department and State
Department regulations allow accommodation transactions only if local
commercial banking facilities are not available or are inadequate.
Department of Defense Financial Management Regulation No. 7000.14-R,
vol. 5, ch. 4, Check Cashing Service (January 2004); Department of
State Foreign Affairs Handbook, 4-FAH-3 H361.2, Guidelines for
Authorizing Accommodation Exchange.
Of particular relevance here are 31 U.S.C. §§ 3342(c)(2) and (c)(4):
"(2) The head of an agency having jurisdiction over a disbursing
official may offset, within the same fiscal year, a deficiency
resulting from a transaction under subsection (a) of this section with
a gain from a transaction under subsection (a). A gain in the account
of a disbursing official not used to offset deficiencies under
subsection (a) shall be deposited in the Treasury as miscellaneous
receipts.
"(4) Amounts necessary to adjust for deficiencies in the account of a
disbursing official because of transactions under subsection (a) of
this section are authorized to be appropriated."
One important application of the offsetting authority of 31 U.S.C.
§ 3342(c)(2) is losses resulting from certain foreign currency
exchange transactions, and cases involving this application are noted
later in this chapter. However, nothing in the statute limits it to
foreign exchange transactions. The offsetting authority applies by its
terms to "a deficiency resulting from a transaction under subsection
(a)," and this includes check cashing operations as authorized by
subsections (a)(1) and (b).
Decisions rendered shortly after the statute was enacted applied it to
uncollectible checks cashed over forged endorsements and explicitly
recognized the statute as a form of relief. The first such case was 27
Comp. Gen. 211 (1947), stating at 213:
"Since the cashing of a check is an operation authorized under the
act, any loss arising out of such transaction properly may be
considered as coming within the purview of the term 'any deficiencies'
for which relief is contemplated under the act."
This holding was followed in 27 Comp. Gen. 663 (1948). The original
version of 31 U.S.C. § 3342, enacted in 1944,[Footnote 63] did not
include the offsetting authority. See B-39771, Sept. 26, 1950. It was
added in 1953.[Footnote 64] Thus, the "relief" referred to in 27 Comp.
Gen. 211 and 27 Comp. Gen. 663 was simply the authority to use agency
appropriations to adjust the deficiencies. Both cases involved the
Army, which at the time received annual appropriations for this
purpose. The Army was thus in a position to invoke the statute, and
the adjustments had the effect of relieving the disbursing officers.
For the next four decades, the principles established by 27 Comp. Gen.
211 saw little use, and check cashing losses during that period were
mostly treated as improper payments requiring relief under whatever
authorities were available (31 U.S.C. § 3527(c) since 1955). A 1991
decision to the Air Force, 70 Comp. Gen. 616, changed this and, in
effect, reverted to the approach of 27 Comp. Gen. 211, now augmented
by the offsetting authority. After reviewing precedent and legislative
history, the decision concluded that:
"section 3342 may be applied to check cashing losses. Thus, an agency
may use section 3342 to offset losses from cashing uncollectible
checks with gains from other section 3342(a) activities."
Offsetting under section 3342(c)(2) is done on a fiscal-year basis. An
uncollectible check becomes a deficiency not when it is cashed by the
disbursing officer, but when it is dishonored and returned to be
charged to the disbursing officer's account. If these events occur in
different fiscal years, the deficiency is chargeable to the latter
year. B-120737, Dec. 27, 1954. If an item is charged as a deficiency
in one year and collected in a subsequent year, the collection should
be charged to the fiscal year account in which the collection is made
regardless of the fiscal year in which the deficiency was charged. Id.
For checks cashed within the authority of 31 U.S.C. § 3342, following
the procedures of that statute eliminates the need to pursue relief
under 31 U.S.C. § 3527(c). If there is a net gain in an account for a
given fiscal year, the net gain is deposited in the Treasury as
miscellaneous receipts and that ends the matter. If there is a net
loss, and the agency is able to make an adjustment from an available
appropriation, the adjustment clears the disbursing officer's account
and similarly ends the matter. A net loss resulting from the
application of 31 U.S.C. § 3342(c) is not an Antideficiency Act
violation. 61 Comp. Gen. 649 (1982).
It must be emphasized that 31 U.S.C. § 3342 does not make an agency's
appropriations available for these adjustments. It merely authorizes
appropriations for that purpose. For disbursing officers within the
Department of Defense, permanent authority exists to use appropriated
funds for "losses in the accounts of disbursing officials and agents in
accordance with law." 10 U.S.C. § 2781(2). Civilian agencies will need
comparable authority which may be in the form of permanent
legislation, specific appropriations, or specific language in a lump-
sum appropriation (for example, "including adjustments as authorized
by 31 U.S.C. § 3342").
The July 1991 decision made two other very important points. First,
the offsetting authority of 31 U.S.C. § 3342 is discretionary. An
agency is not required to use it, but retains the option of refusing
to adjust a disbursing officer's account, in which event the relief
avenue of 31 U.S.C. § 3527(c) remains available.
Second, while good faith and due care are prerequisites to relief
under 31 U.S.C. § 3527(c), section 3342 contains no comparable
requirement. Thus, the use of section 3342 does not require findings
of good faith and due care. Decisions stating or implying the
contrary, such as 27 Comp. Gen. 211, were modified to that extent. Be
that as it may, it is undesirable as a matter of policy to use 31
U.S.C. § 3342 to relieve a disbursing officer for losses attributable
to bad faith or lack of due care, and an agency is well within its
discretion to decline use of those procedures in such cases.
The discretion to use 31 U.S.C. § 3342 applies only to checks cashed
within the scope of the statute. Losses resulting from checks cashed
beyond the scope of that authority (i.e., not for an official purpose
or for a person not within one of the classes specified in subsection
3342(b)) may not be offset or adjusted under the authority of section
3342, but are improper payments for which administrative relief is
available only under 31 U.S.C. § 3527(c). 70 Comp. Gen. 420 (1991); B-
127608-0.M., May 28, 1956.
The losses under consideration—-uncollectible check losses resulting
from check cashing operations-—fall into several distinct but related
fact patterns. Cases cited below which predate GAO's July 1991
decision are all section 3527(c) relief cases resolved under the
principles and standards previously discussed; all could now be
resolved under the offset and adjustment authority of 31 U.S.C. § 3342.
* Uncollectible personal check. Cases in this category tend to involve
either of two general situations:
- Thief steals someone else's personal checks and cashes them in
conjunction with stolen or fraudulent identification. B-246418, Feb.
3, 1992; B-240440, Mar. 27, 1991; B-212588, Aug. 14, 1984.
- Thief cashes checks from a fraudulently established checking account
in the name of some other real or fictitious person. B-229827, Jan.
14, 1988; B-221415, Mar. 26, 1986; B-220737, B-220981, Dec. 10, 1985.
* Fraudulent endorsement of government check. In this situation, a
thief steals a legitimately issued government check (paycheck, tax
refund check, etc.) and cashes it with the aid of stolen or fraudulent
identification. E.g., B-227436, July 2, 1987; B-216726, Jan. 9, 1985;
B-214436, Apr. 6, 1984.
* Fraudulent alteration of amount on government check. If the amount
is fraudulently raised by the payee, the liability of the disbursing
officer is the difference between the original amount and the
fraudulent amount. B-228859, Sept. 11, 1987. If the amount is altered
and the check cashed by someone other than the payee, the disbursing
officer's liability is the full amount of the payment. B-221144, Apr.
22, 1986. The opportunity for fraudulent alteration of amounts
naturally decreases when the amount is also spelled out in words on
the face of the check. 62 Comp. Gen. 476, 481 (1983). However,
spelling the amount out in words is not required on government checks,
and Treasury checks generally do not do so. See I TFM § 4-5035.50d. If
a disbursing officer is in compliance with the TFM and applicable
agency regulations, relief will not be denied solely because the
amount is not written out in words. 65 Comp. Gen. 299 (1986); B-
209697, Nov. 21, 1983.
* Postal money order. The authority of 31 U.S.C. § 3342(a)(1) is not
limited to checks but applies to "negotiable instruments" generally,
which includes postal money orders. E.g., B-217663, July 16, 1985
(fraudulent alteration of amount); B-213874, Sept. 6, 1984 (forged
endorsement).
The Department of Defense has established strict internal controls for
accommodation transactions, which aim to virtually preclude fraudulent
transactions and thus limits the grounds for granting relief to a
disbursing officer who cashes a forged instrument. Department of
Defense Financial Management Regulation No. 7000.14-R, vol. 5, ch. 4,
Check Cashing Service (January 2004).
b. Duplicate Check Losses:
A duplicate check loss, as we use the term here, is a loss resulting
when (1) a payee claims nonreceipt of an original check, (2) the
government issues a replacement check, and (3) both checks are
negotiated.
Replacement checks are issued under the authority of 31 U.S.C. § 3331.
If an original check "is lost, stolen, destroyed in any part, or is so
defaced that the value to the owner or holder is impaired," the
Secretary of the Treasury may issue a replacement check, and may
delegate that authority to other agencies. 31 U.S.C. §§ 3331(b) and
(g). The Secretary has discretionary authority to require an
indemnification agreement from the owner or holder prior to issuing
the replacement check. Id. § 3331(e).
The current system for issuing replacement checks, developed by the
Treasury Department in the mid-1980s, is reflected in 31 C.F.R. parts
245 and 248 and I TFM chapter 4-7000.[Footnote 65] In brief, upon
receipt of a claim for loss or nonreceipt of an original check, the
spending agency may certify a new payment. 31 C.F.R. § 245.5. In
agencies for which Treasury disburses, an agency certifying officer
certifies the replacement check to a Treasury disbursing officer. For
agencies which do their own disbursing, most notably the military
departments, the "recertification" is an internal procedure based on
agency as well as Treasury regulations. The replacement check, which
has a different serial number from the original check, is called a
"recertified check." Formerly, most replacement checks were
"substitute checks" with the same serial number as the original check.
With the implementation of the recertification procedure, Treasury
announced that substitute checks would generally no longer be
available.[Footnote 66]
The Treasury regulations specify the responsibilities of the payee. If
the original check shows up before the claimant receives the
replacement check, the claimant should notify the agency and follow
the agency's instructions. 31 C.F.R. § 245.8(a). If the original check
shows up after receipt of the replacement check, the claimant is to
return the original to the issuing agency. "Under no circumstances
should both the original and replacement checks be cashed." Id. §
245.8(b).
Payees do not always read Treasury regulations, however, and sometimes
cash both checks. Since the agency's obligation is to make payment
once, cashing both checks results in an erroneous payment for which
some accountable officer is liable unless relieved. In the most common
situation, the payee cashes both checks. The first check satisfies the
government's original obligation, and issuing the replacement check is
an authorized transaction. Thus, the loss occurs "when the second
check is wrongfully presented and paid. (The actual sequence in which
the payee negotiates the original check and the replacement check is
immaterial.)" 62 Comp. Gen. 91, 94 (1982). Depending on the agency and
the nature of the error, the proper relief statute will be either 31
U.S.C. § 3528 (certifying officer) or 31 U.S.C. § 3527(c) (disbursing
officer). For the military departments, even though they may employ a
"recertification" procedure, the proper statute is section 3527(c). 66
Comp. Gen. 192, 194 (1987).
GAO's first relief decision under the recertification procedure was
65 Comp. Gen. 811 (1986). Relief for a duplicate check loss is granted
if (1) the accountable officer followed applicable regulations and
procedures, (2) there is no indication of bad faith, and (3) the
agency has pursued or is pursuing adequate collection action to
recover the overpayment. Id. at 812. This is essentially the same
standard that had been applied under the former "substitute check"
system. E.g., 65 Comp. Gen. 812, 813 (1986); 62 Comp. Gen. 91, 97
(1982). A few more recent cases applying this standard are B-260753,
Jan. 11, 1996 (Air Force); 70 Comp. Gen. 298 (1991) (Navy); B-237343,
Jan. 23, 1991 (Army); and B-232773, Jan. 12, 1989 (Defense Logistics
Agency). Of course, relief cannot be granted until a loss actually
occurs. 70 Comp. Gen. 9, 12 (1990); 66 Comp. Gen. 192, 194 (1987). The
documentation required to support a relief request in a duplicate
check case is spelled out in B-221720, May 8, 1986, and includes such
things as copies of both checks, the claim of nonreceipt, the agency's
stop payment request, Treasury's debit voucher, and documentation of
collection efforts.
If the disbursing officer is a supervisor and the duplicate check is
actually issued by a subordinate, both are accountable officers for
purposes of liability and relief. B-271017, Aug. 12, 1996; B-260639,
June 15, 1995; 62 Comp. Gen. 476, 479-80 (1983). The relief standards
are those set forth in section D.3.a of this chapter for improper
payments generally. As with other relief situations, lack of due care,
failure to follow established procedures for example, will not
preclude relief if it was not the proximate cause of the loss. 70
Comp. Gen. 298 (1991); B-225932, Mar. 27, 1987.
Treasury regulations encourage, but do not require, the agency to
obtain a signed statement from the claimant before issuing or
certifying a replacement check. I TFM § 4-7060.20a. If the agency's
own regulations require the statement, failure to obtain it will
generally be regarded as lack of due care. Relief is granted or denied
depending upon whether lack of due care was the proximate cause of the
improper payment. B-225932, Mar. 27, 1987. If the statement is
obtained but turns out to be a misrepresentation, it is not the
accountable officer's fault. B-247062, June 9, 1992. In 70 Comp. Gen.
9 (1990), GAO advised the Navy that it could waive its own requirement
for claimant statements where a box containing over 4,600 checks was
lost en route to the Philippines, and obtaining individual statements
prior to issuing replacement checks would have caused undue delay and
hardship.
GAO has expressed concern over issuing replacement checks prematurely,
that is, without giving the original check a reasonable time to
arrive. While the timing is essentially a matter of agency discretion,
it is also a factor which may bear upon the issue of due care. 63
Comp. Gen. 337 (1984). Timing should include risk assessment. Thus, a
shorter waiting period may be appropriate where the payee has a
continuing relationship with the agency and recoupment by offset is
therefore presumably easier. I TFM § 4-7060.20e; B-226116, Feb. 20,
1987. As a general proposition, GAO has said that it will not raise a
question solely on the basis of a 3-day waiting period, but it might
be a factor to be considered in determining whether a disbursing
officer has exercised due care. 63 Comp. Gen. 337; I TFM § 4-7060.20a.
For checks mailed prior to the actual payment date, the 3-day period
may include mailing days. B-230658, June 14, 1988. A waiting period of
less than 3 days needs to be specifically justified. See B-215433, B-
215515, July 2, 1984. A good example is B-246369, Feb. 3, 1992 (payee
who was in Virginia could not have received original check
inadvertently mailed to Florida).
It is possible, although the cases are (and should be) rare, for
duplicate check losses to occur with checks issued to a bank under
direct deposit procedures. Recoupment efforts should be directed
against the bank which made the error, leaving it to the bank to then
recover from the individual depositor as an independent transaction. B-
215431, B-215432, Jan. 2, 1985. Related decisions arising from the
same set of losses are B-215432.3, Aug. 22, 1991 (finally granting
relief upon documentation of collection efforts), and B-215432 et al.,
July 6, 1984.
An agency's internal controls and procedures form an important line of
defense against duplicate check losses. One agency, for example, will
issue a recertified check prior to obtaining the status of the
original check only if the employee has sufficient funds in his or her
retirement account to cover a potential loss, and requires specific
clearances upon termination of employment. These procedures, GAO
commented, "will better safeguard federal funds." B-232615, Sept. 28,
1988. Agencies should also develop guidelines for dealing with persons
requesting several replacement checks within a relatively short time
period. Three replacement check requests within an 11-month period,
for example, should trigger some concern. B-221398, Sept. 19, 1986.
Guidelines may include such things as counseling employees to take
advantage of direct deposit procedures and delaying recertification
until the status of the original check has been determined. The exact
content of any such guidelines is up to the agency. B-217947, B-
226384, Mar. 27, 1987; B-220500, Sept. 12, 1986. Indemnification
agreements may be desirable in some circumstances, even where not
required. See 66 Comp. Gen. 192, 194-95 (1987). Chargeback data
received from Treasury should be processed and forwarded to the
pertinent finance office as promptly as possible. B-226316 et al.,
Apr. 9, 1987.
Cases occasionally present variations on the factual theme, but the
basic relief approach is the same. E.g., B-226769, July 29, 1987
(agency issued replacement for wrong amount); B-195396, Oct. 1, 1979
(agency inadvertently issued two replacement checks).
In our coverage of physical losses, we discussed the dollar amount GAO
has established, currently $3,000, below which agencies may grant
relief without the need for GAO involvement. In October 1991, GAO
started extending the limit selectively to certain categories of
improper payments, one of which is duplicate check losses. For
duplicate check losses not exceeding $3,000, agencies may grant or
deny relief administratively, without the need for GAO concurrence, in
accordance with applicable statutes, regulations, and GAO decisions. B-
243749, Oct. 22, 1991 (civilian); B-244972, Oct. 22, 1991 (military).
[Footnote 67] Section C.2 of this chapter contains more detail on how
the $3,000 limit operates.
In the cases cited and discussed thus far, it was the payee who
negotiated both checks. Where the original check is fraudulently
negotiated by someone else, the situation is a bit different. Here,
the replacement check rather than the original check satisfies the
government's obligation to the payee, and the loss results from
negotiating the original check 66 Comp. Gen. 192, 194 (1987). More
precisely, the loss results from payment on the original check since
there is nothing improper or incorrect in issuing the original check.
Id. If forgery is established, Treasury will seek to recover from the
bank which negotiated the check. See B-232772, Oct. 17, 1989.
c. Errors in Check Issuance Process:
The October 1991 decisions just cited authorizing administrative
resolution of duplicate check losses not exceeding $3,000 extended the
authorization to another category of erroneous payments—those
resulting from "mechanical and/or clerical errors during the check
issuance process." Thus, agencies may grant or deny relief for losses
in this category within the monetary ceiling, as with duplicate check
losses, in accordance with applicable statutes, regulations, and GAO
decisions. B-243749, Oct. 22, 1991(civilian); B-244972, Oct. 22, 1991
(military). The relief standards are the same as those previously
discussed for other types of improper or erroneous payments.
Cases under this heading may result from any type of check payment—
salary payments, payments to contractors, benefit payments, etc.—and
include a variety of fact patterns. A few cases involving erroneous
tax refund checks will illustrate. In each case, the disbursing
officer was a director of one of Treasury's regional financial centers
(formerly called disbursing centers), a supervisory official. In B-
241098, B-241137, Dec. 27, 1990, the printing system rejected two
checks and automatically produced substitutes; the printing operator
failed to remove and void the original checks; the originals and
substitutes were issued and cashed by the payees. In B-187180, Sept.
21, 1976, a keypunching error transposed two numerals, resulting in
issuance of a check for $718 instead of the correct amount of $178. In
B-235037, Sept. 18, 1989, an overpayment was made due to an error
during the "typing operation and proof reading process." Relief was
granted in the first two cases by applying the standards for relieving
a supervisor; in the third, it was denied because the request
contained neither a description of relevant controls and procedures
nor statements by the individuals concerned.
As demonstrated in B-241098, B-241137 (where the IRS printing system
rejected two tax refund checks and automatically produced substitutes
and the printing operator failed to void the originals), most
mechanical errors are not purely mechanical, but involve human error
as well, such as failure to spot the error during a verification
process. Also, many of these cases involve the issuance of duplicate
checks, the difference between these and the previously discussed
duplicate check losses being that these losses do not result from a
claim of nonreceipt but from the simultaneous issuance of duplicate
checks attributable to government error. Similar cases involving other
types of payments are B-239371, June 13, 1990; B-239094, June 13,
1990; B-237082 et al., May 8, 1990; B-235044 et al., Mar. 20, 1990;
and B-235036, Oct. 17, 1989. Some factual variations follow:
* Machine that stuffs checks into envelopes was misaligned, obscuring
the names and addresses. Treasury decided to shred the original checks
and reissue them. One of the originals was inadvertently delivered
rather than shredded, causing a duplicate payment. B-245586, Nov. 12,
1991 (relief granted).
* Due to mechanical failure, a check printing machine failed to
advance a voucher schedule and a second check was issued to a person
with the same name but different middle initial than the correct
payee. A clerk failed to notice the error during verification. In view
of the volume of work at the disbursing center, the error was viewed
as the type that will occasionally escape even in a well-established
and carefully supervised system. B-195106, July 12, 1979 (relief
granted).
* Malfunction of feed mechanism on printing machine caused one check
to skip, printing the inscription on the next check. The first check
was replaced without noticing the duplicate; both checks were issued.
Relief was granted on the same basis as in B-195106. B-212431, Nov.
21, 1983.
"Clerical error" means human error without contributing mechanical
malfunction. Relief standards remain the same. The cases noted in the
following groupings, as with the last three tax refund cases cited
above, are intended to illustrate factual variations.
* Payment of wrong amount. The person preparing a check for a military
separation voucher misread a dollar sign as the number "8," and
printed a check for $899 instead of the correct amount of $99. B-
238863, July 11, 1991 (relief granted). A voucher examiner preparing a
partial payment to a contractor erroneously used the total amount due
on the contract instead of the amount of the partial payment. B-
227410, Aug. 18, 1987 (relief granted).
* Payment to wrong person. A clerk consolidating two contract payment
vouchers in a single check payable to a credit union erroneously
listed only one account number, causing an overpayment to one
contractor and necessitating a replacement check to the other. B-
238802, Dec. 31, 1990 (relief granted). Further examples are: B-
254385, Mar. 22, 1994 (incorrect processing code generated payment to
wrong contractor; relief granted); B-234197, Mar. 15, 1989 (misreading
of documents resulted in payment to subcontractor instead of prime
contractor; relief granted); B-212336, Aug. 8, 1983 (voluntary child
support allotment paid to wrong person due to error in assignment of
organization code; relief granted); B-192109, June 3, 1981 (check
issued to wrong person with slightly different name than correct
payee; relief granted); and B-194877, July 12, 1979 (amounts of two
checks inadvertently switched; relief granted).
* Duplicate payment. Treasury Financial Center was issuing
replacements for a batch of mutilated checks. One mutilated check
became separated from the rest and was erroneously released along with
its replacement. A computer operator had failed to verify each
replacement check against the corresponding mutilated check. Because
controls were in place which would have prevented the error had they
been followed, and considering the large volume of work at the
disbursing center, relief was granted to the disbursing officer, the
center's director. (The computer operator is not an accountable
officer.) B-231551, Sept. 12, 1988 (relief granted).
Most duplicate payments are recovered, but many either are not or
involve the expense of collection action or litigation. Especially in
the area of payments to contractors, duplicate payment losses can
involve large amounts. Duplicate payments are considered improper
payments, reportable under the Improper Payments Information Act, Pub.
L. No. 107300, 116 Stat. 2350 (Nov. 26, 2002). GAO has emphasized the
importance of adequate internal controls, as well as strong support
and active involvement from agency management, the administration, and
Congress, in reducing duplicate payments and other types of improper
payments. See GAO, Financial Management: Status of the Governmentwide
Efforts to Address Improper Payment Problems, GAO-04-99 (Washington,
D.C.: Oct. 17, 2003); General Services Administration Needs to Improve
Its Internal Controls to Prevent Duplicate Payments, GAO/AFMD-85-70
(Washington, D.C.: Aug. 20, 1985); Strengthening Internal Controls
Would Help the Department of Justice Reduce Duplicate Payments,
GAO/AFMD85-72 (Washington, D.C.: Aug. 20, 1985). A case involving a
duplicate payment to a contractor in which relief was granted on the
basis of adequate controls is B-241019.2, Feb. 7, 1992.
5. Statute of Limitations:
The accounts of accountable officers must be settled by GAO within
3 years "after the date the Comptroller General receives the account."
31 U.S.C. § 3526(c)(1). Once this 3-year period has expired, no
charges may be raised against the account except for losses due to
fraud or criminal action on the part of the accountable officer. Id. §
3526(c)(2). Enacted in 1947,[Footnote 68] this legislation effectively
operates as a limitation on establishing an accountable officer's
liability for improper expenditures. As the Defense Department pointed
out in recommending the legislation, a time limitation is desirable
because passage of time diminishes the chances of recovering from the
payee or recipient, leaving the liability solely with the accountable
officer. S. Rep. No. 80-99 (1947).
Unlike other statutes of limitations which merely affect the remedy
(for example, by barring the commencement of legal proceedings), 31
U.S.C. § 3526(c) completely eliminates the debt. B-181466, Nov. 19,
1974 (nondecision letter). Once an account has been settled, it cannot
be reopened (except for fraud or criminality, as noted above), and the
authority to grant or deny relief no longer exists. Thus, an accountable
officer can escape liability for an improper expenditure if the
government does not raise a charge against the account within the 3-
year period. E.g., 62 Comp. Gen. 498 (1983); B-223372, Dec. 4, 1989; B-
198451.2, Sept. 15, 1982. Once an accountable officer's liability has
been timely established, section 3526(c) does not limit the
government's recovery from that officer. 31 U.S.C. § 3526(c)(4)(B). An
accountable officer's liability can be established by the officer's
agreement to repay the erroneous payment or by a denial of relief made
by the agency. 70 Comp. Gen. 616 (1991); B-258735, Dec. 15, 1994.
The statute of limitations of 31 U.S.C. § 3526(c) applies only to
improper payments and not to physical losses or deficiencies. B-
260563, Mar. 31, 1995; 60 Comp. Gen. 674 (1981). An accountable
officer's liability for a physical loss or deficiency is wholly
independent of anyone's "raising a charge" against that officer's
account.
The original version of 31 U.S.C. § 3526(c) was enacted at a time when
accounts were physically transmitted to GAO for settlement, GAO
reviewed every piece of paper, and then issued a certificate of
settlement to the accountable officer, "disallowing" credit for
questionable items. As a result of changes in audit methods, this is
no longer done. Rather, accounts are now retained by the various
agencies, and an account is regarded as settled by operation of law at
the end of the 3-year period except for unresolved items. GAO, Policy
and Procedures Manual for Guidance of Federal Agencies, title 7, § 8.7
(Washington, D.C.: May 18, 1993) (hereafter GAO-PPM).
To reflect these changes in audit procedures, the date a
"substantially complete" account is in the hands of the agency and
available for audit is now generally considered as the point from
which the 3-year period begins to run. E.g., B-258735, Dec. 15, 1994.
Assuming that supporting documents are available at the end of the
time period covered by an accountable officer's statement of
accountability, this will usually mean the date on which that
statement of accountability is certified. 7 GAO-PPM § 8.7. For
example, in B-251994, Sept. 24, 1993, the agency's disbursing officer
prepared monthly statements of accountability, and thus the 3-year
period for both the disbursing and certifying officer would begin on
the last day of the month covered by the accountability statement that
included the improper payment.[Footnote 69]
There are situations, however, in which the 3-year period does not
begin to run until some later date. Where a loss is due to fraud, the
period begins when the loss is discovered and reported to appropriate
agency officials. B-272615, May 19, 1997; B-270442.2, Feb. 12, 1996.
Where an agency has no way of knowing that an improper payment has
occurred until it receives a debit voucher from the Treasury
Department (duplicate check losses, for example), the 3-year period
begins to run when the agency receives the debit voucher. B-226393,
Apr. 29, 1988. If the date of receipt cannot be determined, the date
of the debit voucher is used.[Footnote 70] Id.
If an irregularity has not been resolved by the agency within 2 years
from the time the statute of limitations begins to run, the
irregularity should at that time be reported to GAO. This may be in
the form of a relief request or a copy of the agency's irregularity
report. This is designed to provide adequate time to consider a relief
request or to otherwise prevent expiration of the statute of
limitations where necessary. 7 GAO-PPM § 8.4.C. See also 62 Comp. Gen.
476, 480 (1983); B-227538, July 8, 1987; B-217741, Oct. 15, 1985. Of
course, nothing prevents an agency from seeking relief sooner if
appropriate.
As noted above, the 3-year limitation does not apply to losses
attributable to fraud or other criminal action by the accountable
officer. 31 U.S.C. § 3526(c)(2). It is automatically suspended during
war. Id. § 3526(c)(3). And it may be suspended by the Comptroller
General with respect to a specific item to get additional evidence or
explanation necessary to settle an account. Id. § 3526(g). This may be
in the form of a timely Notice of Exception (B-226176, May 26, 1987),
or other written notification (B-272615, May 19, 1997; B-270715, July
23, 1996). The mere submission of a relief request within the 3-year
period, however, is not sufficient to toll the 3-year statute of
limitations. 62 Comp. Gen. 91, 98 (1982); B-220689, Sept. 24, 1986.
Finally, 31 U.S.C. § 3526(c) deals solely with the liability of an
accountable officer. It has no effect on the liability of the payee or
recipient of an improper payment. It does not establish a limitation
on recoveries against the improper payee or recipient nor does it
affect the agency's obligation to pursue collection action against the
payee or recipient. 31 U.S.C. § 3526(c)(4)(A); Arnold v. United
States, 404 F.2d 953 (Ct. Cl. 1968); B-205587, June 1, 1982. Nor does
31 U.S.C. § 3526(c) affect an agency's ability to pay a voluntary
creditor's claim for reimbursement, which is governed by 31 U.S.C. §
3702. B-278805, July 21, 1999.
E. Other Relief Statutes:
The relief statutes discussed thus far--31 U.S.C. §§ 3527(a), (b),
(c), and 3528-—are the ones most commonly encountered and will cover
the vast majority of cases. Several others exist, however. Our listing
here is not intended to be complete.
1. Statutes Requiring Affirmative Action:
The statutes in this group are similar to 31 U.S.C. §§ 3527 and 3528
in that they require someone to actually make a relief decision.
a. United States Court of Federal Claims:
The relief authority of the Court of Federal Claims is found in two
provisions of law:
"The United States Court of Federal Claims shall have jurisdiction to
render judgment upon any claim by a disbursing officer of the United
States or by his administrator or executor for relief from
responsibility for loss, in line of duty, of Government funds,
vouchers, records or other papers in his charge."
28 U.S.C. § 1496.
"Whenever the United States Court of Federal Claims finds that any
loss by a disbursing officer of the United States was without his
fault or negligence, it shall render a judgment setting forth the
amount thereof, and the [Government Accountability Office] shall allow
the officer such amount as a credit in the settlement of his accounts."
28 U.S.C. § 2512.
These provisions, which originated together in legislation enacted in
1866,[Footnote 71] predate all of the other relief statutes and were
once the only relief mechanism available apart from private relief
legislation. The Supreme Court has termed this legislation "a very
curious provision" in that it permits a disbursing officer to
establish a defense to a claim which "the government can only
establish judicially in some other court." United States v. Clark, 96
U.S. (6 Otto) 37, 43 (1877). In effect, it authorizes the Court of
Federal Claims to render a declaratory (as opposed to money) judgment.
Ralcon, Inc. v. United States, 13 Cl. Ct. 294, 300 (1987). Now, in
view of the comprehensive scheme of administrative relief that
Congress has enacted, this statute is rarely used.
b. The Legislative and Judicial Branches:
Since 31 U.S.C. § 3728, the primary certifying officer relief statute,
does not apply to the legislative or judicial branches, Congress has
enacted specific statutes for several legislative branch agencies and
for the judicial branch authorizing or requiring the designation of
certifying officers, establishing their accountability, and
authorizing the Comptroller General to grant relief. Patterned after
31 U.S.C. § 3728, they are: 2 U.S.C. § 142b (Library of Congress), 2
U.S.C. § 142e (Congressional Budget Office), 2 U.S.C. § 1421 (Office
of Compliance), 2 U.S.C. § 1904 (Capitol Police), and 44 U.S.C. § 308
(Government Printing Office). The relevant provision for the judicial
branch is 28 U.S.C. § 613.
c. Savings Bond Redemption Losses:
Losses resulting from the redemption of savings bonds are replaced
from the fund used to pay claims under the Government Losses in
Shipment Act. 31 U.S.C. § 3126(a). The statute further provides that
"an officer or employee of the Department of the Treasury is relieved
from liability to the United States Government for the loss when the
Secretary [of the Treasury] decides that the loss did not result from
the fault or negligence of the... officer, or employee." Relief is
mandatory if the government does not give the officer or employee
written notice of his or her liability or potential liability within
10 years from the date of the erroneous payment. Id.
2. Statutes Providing "Automatic" Relief:
The statutes in this group either (1) provide that taking a certain
authorized action which might otherwise be regarded as creating a loss
will not result in accountable officer liability, or (2) authorize the
resolution of certain losses in such a manner as not to produce
liability.
a. Waiver of Indebtedness:
Many statutes authorize the government to waive the recovery of
indebtedness resulting from various overpayments or erroneous payments
if certain conditions are met. Waiver statutes commonly include a
provision to the effect that accountable officers will not be held
liable for any amounts waived. For example, the statutes authorizing
waiver of overpayments of pay and allowances require that full credit
be given in the accounts of accountable officers for any amounts
waived under the statute. 5 U.S.C. § 5584(d) (civilian employees); 10
U.S.C. § 2774(d) (military personnel); 32 U.S.C. § 716(d) (National
Guard). Once waiver is granted, the payment is deemed valid and there
is no need to consider the question of relief. E.g., B-184947, Mar.
21, 1978. This result applies even where relief has been denied under
the applicable relief statute. B-177841-0.M., Oct. 23, 1973.
Examples of comparable provisions in other waiver statutes are 5
U.S.C. § 8129(c) (overpayments under Federal Employees Compensation
Act), 38 U.S.C. § 5302(d) (overpayment of veterans' benefits), and 42
U.S.C. § 404(c) (Social Security Act).
b. Compromise of Indebtedness:
Under the Federal Claims Collection Act as amended, if a debt claim is
compromised in accordance with the statute and implementing
regulations, no accountable officer will be held liable for the
portion unrecovered by virtue of the compromise. 31 U.S.C. § 3711(c).
c. Foreign Exchange Transactions:
Earlier in this chapter we discussed 31 U.S.C. § 3342(c), which
authorizes, with respect to activities authorized under section
3342(a), losses to be offset against gains on a fiscal-year basis, and
also authorizes appropriations to make adjustments for net losses. Our
prior discussion was in the context of check cashing operations.
Another important use of 31 U.S.C. § 3342(c) is accounting for certain
foreign exchange losses. To implement this authority in the foreign
exchange area, the Treasury Department has issued regulations in I TFM
part 4, chapter 9000, and has established an account entitled "Gains
and Deficiencies on Exchange Transactions." See I TFM § 4-9065.10. As
with the check cashing context, the relevant point here is that the
use of 31 U.S.C. § 3342(c) accomplishes the necessary account
adjustment and obviates the need to seek relief for any accountable
officer. B-249796, Feb. 9, 1993.
One use of the Gains and Deficiencies account is the adjustment of
losses due to exchange rate fluctuations. E.g., 70 Comp. Gen. 616
(1991) (agency has discretion whether to offset gains and losses); 64
Comp. Gen. 152 (1984) (restoration of losses in Library of Congress
foreign currency accounts attributable to currency devaluations); 61
Comp. Gen. 649 (1982) (determination of proper exchange rate); B-
245760, Jan. 16, 1992 (devaluation of Laotian currency). However, in
order to use the Gains and Deficiencies account, losses must result
from "disbursing officer transactions" of the type authorized by 31
U.S.C. § 3342(a). 45 Comp. Gen. 493 (1966). In that case, the American
Embassy in Cairo had made a payment for certain property in Egyptian
pounds. The sales agreement was not executed and the money was
refunded. At the time of the refund, the exchange rate had changed and
the same amount of Egyptian pounds was worth less in U.S. dollars,
resulting in a loss to the account. GAO agreed with the Treasury
Department that the loss resulted from an administrative collection
and not from a disbursing officer transaction, and should therefore be
borne by the relevant program appropriation rather than the Gains and
Deficiencies account.
GAO has also considered the use of the Gains and Deficiencies account
in a number of cases involving Vietnamese and Cambodian currency after
the American evacuation from those countries in the mid-1970s. 56
Comp. Gen. 791 (1977). See also 61 Comp. Gen. 132 (1981) (piaster
currency physically abandoned or left in accounts in Vietnam
chargeable to Gains and Deficiencies); B-197708, Apr. 8, 1980
(Vietnamese and Cambodian currency received by Treasury from U.S.
disbursing officers at exchange rate in effect at time of evacuation
subsequently became valueless; loss held to be of the type
contemplated by 31 U.S.C. § 3342(c)). However, U.S. currency which was
thought to have been burned but which subsequently turned up in the
United States had to be treated as a physical loss. 56 Comp. Gen. at
793-96. (Relief was granted for this loss under 31 U.S.C. § 3527(a) in
B-209978, July 18, 1983.)
d. Check Forgery Insurance Fund:
The Check Forgery Insurance Fund is a revolving fund the purpose of
which is to make replacement payments to payees whose Treasury checks
have been lost or stolen and cashed over a forged endorsement in
limited situations.31 U.S.C. § 3343. Before the Fund may be used,
three conditions must be satisfied: (1) the check is lost or stolen
without fault of the payee; (2) the check is subsequently negotiated
over the payee's forged endorsement; and (3) the payee did not
participate in any part of the proceeds of the check. Id. § 3343(b).
Any recoveries from a forger, a transferee, or party on the check are
restored to the Fund. Id. § 3343(d).
A forged endorsement for purposes of the statute has been held to
include an unauthorized endorsement purported to be made in a
representative capacity. Strann v. United States, 2 Cl. Ct. 782 (1983)
(plaintiff's attorney endorsed tax refund check without authority).
The third condition, participation in the proceeds, does not require a
knowing participation. Koch, v. Department of Health,, Education, and
Welfare, 590 F.2d 260 (8th Cir. 1978); Duden v. United States, 467
F.2d 924 (Ct. CL 1972). In Duden, for example, the plaintiff's former
husband endorsed her name on a tax refund check and subsequently paid
her part of the proceeds for support. She had no way of knowing that
the payment came from those proceeds. While the endorsement was held
not to be a forgery under the facts involved, the court also noted
that the plaintiff's participation in the proceeds would preclude
recovery from the Check Forgery Insurance Fund. Duden, 467 F.2d at 930.
The bank presenting a check to the Treasury for payment guarantees the
genuineness of prior endorsements. 31 C.F.R. § 240.3. Thus, in many
cases, the government will be able to recover from the presenting
bank. E.g., Olson v. United States, 437 F.2d 981, 986-87 (Ct. CL),
cert. denied, 404 U.S. 939 (1971).
There is no mention of accountable officers in 31 U.S.C. § 3343.
However, a payment from the Check Forgery Insurance Fund means that
only one payment is charged to the appropriations of the agency
incurring the original obligation, with the effect that no accountable
officer of that agency incurs any liability. See B-10929, Feb. 1, 1972.
e. Secretary of the Treasury:
Enacted in 1947,[Footnote 72] 31 U.S.C. § 3333 provides that the
Secretary of the Treasury will not be liable for payments made "in due
course and without negligence" of checks drawn on the Treasury or a
depositary, or other obligations guaranteed or assumed by the United
States, and that the Comptroller General "shall credit" the
appropriate accounts for such payments. At one time, many duplicate
check losses were handled under 31 U.S.C. § 3333. See 62 Comp. Gen. 91
(1982). It was Treasury's practice to accumulate the cases and submit
them in groups, for example, B-115388, Oct. 12, 1976, and B-71585,
Sept. 22, 1955, with credit being allowed as a matter of routine. With
the development of Treasury's previously discussed recertification
procedure, much of the need to invoke 31 U.S.C. § 3333 evaporated.
While many of the earlier cases involved an exchange of correspondence
between Treasury and GAO, nothing in the statute requires it,
especially since GAO no longer maintains accounts and "relief' is
mandatory anyway.
f. Other Statutes:
There are several other statutes affecting the liability of accountable
officers in a variety of contexts. A few of them are:
* 5 U.S.C. § 8321. Accountable officers are not liable for payments in
violation of statutes prescribing forfeiture of retirement annuities
or retired pay as long as the payments are made "in due course and
without fraud, collusion, or gross negligence." The reason for this
statute was to avoid having to deny relief under 31 U.S.C. § 3528(b)
for payments made in good faith solely because the payments are
specifically prohibited by law. B-122068, Mar. 18, 1955.
* 31 U.S.C. § 3521(c). Previously noted, this statute protects
accountable officers from liability for losses under an authorized
statistical sampling procedure to audit vouchers.
* 31 U.S.C. § 3528(c). Certifying officials are not liable for
overpayments made to a common carrier if the overpayment occurred only
because the administrative audit before payment did not verify
transportation rates, freight classifications, or land-grant
deductions and the Administrator of General Services has determined
that verification by a prepayment audit would not adequately protect
the interests of the government.
* 42 U.S.C. § 659(f). Disbursing officers are not liable for a payment
under a garnishment process for enforcement of child support and
alimony obligations which is "regular on its face" and in compliance
with 42 U.S.C. § 659. See 73 Comp. Gen. 194 (1994); 61 Comp. Gen. 229
(1982).
F. Procedures:
1. Reporting of Irregularities:
Agencies are required to document each fiscal irregularity that
affects the account of an accountable officer whose accounts are
required to be settled by GAO under 31 U.S.C. § 3526, regardless of
how it is discovered. The report is retained as part of the account
records and a copy provided to the accountable officer and to GAO if
the irregularity is not resolved within 2 years after the date the
accounts are made available for audit. GAO, Policy and Procedures
Manual for Guidance of Federal Agencies, title 7, § 8.4.B (Washington,
D.C.: May 18, 1993) (hereafter GAO-PPM). The contents of the report
are set forth in 7 GAO-PPM § 8.12.A, and include such things as a
description of how the irregularity occurred and a description of any
known procedural deficiencies and corrective action.
The agency's next job is to attempt to resolve the irregularity, most
importantly by pursuing collection action against the improper payee
or recipient where possible. Recovery of the funds of course ends the
matter. If the funds cannot be recovered and the case is one in which
the agency may grant relief without GAO involvement, consideration of
relief is the next step. If the matter is resolved administratively in
either of these ways, the record should be further documented as
specified in 7 GAO-PPM § 8.12.B (required administrative
determinations, etc.). There is no need to report resolved
irregularities to GAO.
If the irregularity cannot be resolved administratively within 2 years
after the date the account is available for audit, and if the loss
exceeds the monetary limit established for administrative resolution,
the agency should then submit to GAO a copy of the updated
irregularity report and a relief request if appropriate. 7 GAO-PPM §
8.4.C. This 2-year guideline is especially important for improper
payments in view of the 3-year statute of limitations of 31 U.S.C. §
3526(c).[Footnote 73] Thus, below-ceiling losses need not be reported
to GAO at all; above-ceiling losses should be reported only if
unresolved at the end of the 2-year period. Of course, the agency may
request relief sooner if desired.
2. Obtaining Relief:
The GAO official designated to exercise the Comptroller General's
authority under the various relief statutes is the Managing Associate
General Counsel for Goal 3, Office of General Counsel, who is
responsible for appropriations law matters. Relief requests where GAO
action is necessary should be addressed to GAO's Office of General
Counsel. The request may be in simple letter format and should include
all items specified in GAO, Policy and Procedures Manual for Guidance
of Federal Agencies, title 7, § 8.12.0 (Washington, D.C.: May 18,
1993). These include a copy of the irregularity report, a description
of collection actions taken, and any required administrative
determinations. Of particular importance is a written statement by the
accountable officer or a notation that the accountable officer chooses
not to submit a separate statement. The accountable officer's
liability arises by operation of law and the government is not
required to prove negligence. Therefore, it is important that all
accountable officers be given the opportunity to include a statement
in their relief requests because they have the burden of demonstrating
that the loss occurred without any fault or negligence on their part.
Id. Relief will be granted or denied in the form of a letter addressed
to the official who submitted the request.
In any case in which GAO has denied relief, the agency, or the
accountable officer through appropriate administrative channels, may
ask GAO to reconsider. GAO will not hesitate to reverse a decision
shown to be wrong. Any request for reconsideration should set forth
the errors which the applicant believes have been made and should
include evidence (not mere unsupported allegations) to support the
basis for relief, for example, that the original denial failed to
consider certain evidence or to give it appropriate weight or relied
too heavily on other evidence in the record. Denials of relief are
often based not so much on the merits of the case but simply on the
failure of the original request to include sufficient information to
enable an independent evaluation. Of course, if the agency cannot or
is unwilling to make a required statutory determination, there is
nothing GAO can do and a request for reconsideration is pointless.
3. De Minimis Rule: Payments of $100 or Less:
In B-161457, July 14, 1976, a circular letter to all department and
agency heads, and disbursing and certifying officers, the Comptroller
General advised as follows:
"In lieu of requesting a decision by the Comptroller General for items
of $25 or less, disbursing and certifying officers may hereafter rely
upon written advice from an agency official designated by the head of
each department or agency. A copy of the document containing such
advice should be attached to the voucher and the propriety of any such
payment will be considered conclusive on the General Accounting Office
in its settlement of the accounts involved."
The amount has since been raised to $100. GAO, Policy and Procedures
Manual for Guidance of Federal Agencies, title 7, § 8.3 (Washington,
D.C.: May 18, 1993). This does not preclude a certifying or disbursing
officer from seeking a decision if deemed necessary since the
entitlement to advance decisions is statutory, but it does provide a
means for simplifying the payment of very small amounts. An
accountable officer is not liable for a payment made under this
authority even if the payment is later found to be improper or
erroneous. The $100 threshold applies equally to questions arising
after payment has been made. 61 Comp. Gen. 646, 648 (1982).
4. Relief versus Grievance Procedures:
Federal employees have the right to organize and to bargain
collectively with respect to conditions of employment. 5 U.S.C. §
7102. Collective bargaining agreements may include negotiated
grievance procedures, which may in turn provide for dispute resolution
by binding arbitration. Id. § 7121. The Federal Labor Relations
Authority (FLRA) decides questions of an agency's duty to bargain in
good faith under 5 U.S.C. § 7105(a)(2)(E). Agencies have a duty to
bargain in good faith to the extent not inconsistent with federal law.
Id. § 7117. The FLRA also decides appeals alleging that an arbitration
award is contrary to federal law. Id. § 7122.
Since the authority to relieve accountable officers is provided by
statute, both GAO and the FLRA have determined that negotiated
grievance procedures may not be used as a substitute for making the
relief decision. B-213804, Aug. 13, 1985; National Treasury Employees
Union and Internal Revenue Service, 14 F.L.R.A. 65 (1984). The same
result applies to the State Department's separate statutory grievance
procedures. 67 Comp. Gen. 457 (1988).
However, a grievance procedure may encompass an agency head's
determination that an accountable officer is negligent, as
distinguished from the actual relief decision. See National Treasury
Employees Union and Internal Revenue Service, 33 F.L.R.A. 229 (1988),
citing 59 Comp. Gen. 113 (1979) for the proposition that GAO's
statutory role does not arise until after the agency head has made the
requisite determination under section 3527 for disbursing officials.
G. Collection Action:
1. Against Recipient:
A person who receives money from the government to which he or she is
not entitled, however innocently, has no right to keep it. The
recipient is indebted to the government, and the agency making the
improper or erroneous payment has a duty to attempt to recover the
funds, wholly independent of any question of liability or relief of an
accountable officer. The duty to aggressively pursue collection action
and the means of doing so are found primarily in the Federal Claims
Collection Act as amended by the Debt Collection Improvement Act of
1996, at 31 U.S.C. § 3711, and the implementing regulations in the
Federal Claims Collection Standards, 31 C.F.R. parts 900-904,[Footnote
74] the details of which are covered elsewhere in this publication.
Indeed, many of the statutes we have previously discussed emphasize
that the relief process does not diminish this duty. E.g., 31 U.S.C.
§§ 3333(b), 3343(g), 3526(c)(4), 3527(d)(2).
Recovery from the improper payee or recipient removes the accountable
officer's liability regardless of whether relief has or has not been
sought because there is no longer any loss. However, merely "flagging"
the retirement account of an employee who has received an overpayment,
for possible collection at some unpredictable future time, is not
enough as it would delay indefinitely the final settlement of the
account. 31 Comp. Gen. 17 (1951).
In a sense, the recipient and the unrelieved accountable officer share
an element of joint liability. The occasional decision has referred to
this as "joint and several" liability, but it has been pointed out
that this is incorrect. E.g., B-228946, Jan. 15, 1988. If two debtors
are "jointly and severally" liable, the creditor has the option of
collecting the full amount from either, with the debtor who pays then
having a right of contribution against the remaining debtor(s).
Certainly no one would suggest that someone who has defrauded the
government and repays the debt has any right of contribution against
the accountable officer. Also, under joint and several liability, the
creditor may seek to collect a portion from each debtor. The agency in
an accountable officer loss has no such option. B-212602, Apr. 5,
1984. The agency's first obligation is to seek recovery from the
recipient. The recipient of an improper payment is liable for the full
amount, with any amounts collected used to reduce the accountable
officer's liability. Id.; 30 Comp. Gen. 298, 300 (1951). See also 62
Comp. Gen. 476, 478-79 (1983); 54 Comp. Gen. 112, 114 (1974).
So strong is this duty to seek recovery from the improper payee or
recipient that the two primary relief statutes for improper payments
explicitly authorize GAO to deny relief if the agency has failed to
diligently pursue collection action against the recipient. 31 U.S.C.
§§ 3527(c) (disbursing officers), 3528(b)(2) (certifying officers).
See also B-271017, Aug. 12, 1996. GAO is extremely reluctant to deny
relief solely on the basis of inadequate collection action because
often the failure is attributable to the agency rather than the
accountable officer. However, it has been done. E.g., B-234815, Oct.
3, 1989 (disbursing officer failed to initiate collection action
despite repeated advice from agency counsel).
Adequate collection action means compliance with the Federal Claims
Collection Act and Standards. 62 Comp. Gen. 476, 478-79 (1983); B-
233870, May 30, 1989. Accordingly, once it has been determined that
the improper payments were not the result of bad faith or a lack of
reasonable care on the part of the accountable officer, the issue is
whether the agency undertook diligent collection agency. B-270715,
July 23, 1996. A single demand letter is generally not enough, and an
agency should pursue additional means of collection if there is no
response to the letter. 62 Comp. Gen. 91, 98 (1982). See also 31
C.F.R. § 901.2. Resort to the Federal Claims Collection Act and
Standards includes those collection measures, as and to the extent
authorized, which result in collection of less than the full amount,
for example, compromise. A compromise, including one by the Justice
Department, not only resolves the claim against the recipient but
operates as well to relieve the accountable officer for any amounts
unrecovered because of the compromise. 31 U.S.C. § 3711(d);
65 Comp. Gen. 371 (1986). Whether or not the accountable officer is
entitled to relief does not affect the compromise authority. B-154400-
0.M., Jan. 29, 1968. However, 31 U.S.C. § 3711(c) does not apply to
any liability which may fall upon one who is not an accountable
officer. B-235048, Apr. 4, 1991. The authority to suspend or terminate
collection action is also available, but only in accordance with the
claims collection act and regulations. 67 Comp. Gen. 457, 464 (1988);
B-253582, Dec. 13, 1993; B-212337, Feb. 17, 1984; B-211660, Dec. 15,
1983. Unlike a compromise, the termination of collection action
against the recipient does not eliminate the accountable officer's
liability for any unrecovered balance. 67 Comp. Gen. at 464.
Adequate collection action also requires referral of the claim to the
appropriate collection office within the agency without undue delay.
GAO has advised the Army, for example, that a delay of more than 3
months will generally not be regarded as diligent. 65 Comp. Gen. 811
(1986); B-227187, June 16, 1987; B-227218, June 5, 1987.
While diligent collection action is a necessary element of the relief
equation, the fact that collection efforts have been unsuccessful,
however diligent, does not by itself provide the basis for relieving
the accountable officer. B-141838, Feb. 8, 1960; B-114042, Oct. 31,
1956.
2. Against Accountable Officer:
If a loss cannot be recovered from the thief or other improper payee
or recipient, and relief cannot be granted to the accountable officer,
the accountable officer becomes indebted to the government for the
amount involved. At that point, it is the agency's responsibility to
initiate collection action against the accountable officer in
accordance with the Federal Claims Collection Act and Standards. E.g.,
B-223726, June 26, 1987; B-177430, Oct. 30, 1973.
If the accountable officer is still employed by the government,
additional statutes come into play. Offset against salary is
prescribed by 5 U.S.C. § 5512(a):
"The pay of an individual in arrears to the United States shall be
withheld until he has accounted for and paid into the Treasury of the
United States all sums for which he is liable."
This statute does not apply to ordinary debtors but only to
accountable officers. 37 Comp. Gen. 344 (1957); 23 Comp. Gen. 555
(1944); B-248376, Jan. 11, 1993. It has also been held that the
provisions of 5 U.S.C. § 5512(a) are mandatory and cannot be waived.
64 Comp. Gen. 606 (1985); 39 Comp. Gen. 203 (1959); 19 Comp. Gen. 312
(1939).
The application of 5 U.S.C. § 5512(a) to certain military accountable
officers is limited by 37 U.S.C. § 1007(a), which prohibits
withholding the pay "of an officer" under section 5512 unless the
indebtedness is "admitted by the officer or shown by the judgment of a
court, upon a special order issued in the discretion of the Secretary
of Defense,[Footnote 75] or upon denial of relief of an officer under
31 U.S.C. § 3527." Subsection 1007(a) applies to "officers," meaning
commissioned or warrant officers, and not to enlisted personnel or
civilian accountable officers. 37 Comp. Gen. 344, 348 (1957). The
admission may be oral or written but, if oral, a certificate of a
commissioned officer that the accountable officer clearly and
unequivocally admitted the shortage would be sufficient evidence. 42
Comp. Gen. 83 (1962). The discretion to apply 5 U.S.C. § 5512(a)
exists only in the absence of an admission or court judgment. Id.
The original version of 5 U.S.C. § 5512(a), enacted in 1828,[Footnote
76] provided that "no money shall be paid" to the person in arrears
until the debt is repaid. Thus, several early decisions exist for the
somewhat barbaric proposition that the statute requires complete
stoppage of pay. E.g., 9 Comp. Gen. 272 (1930); 7 Comp. Gen. 4 (1927).
While these and similar early decisions have not been explicitly
overruled, the current view is that the statute will be satisfied by
withholding in reasonable installments. 64 Comp. Gen. 606 (1985); B-
180957-0.M., Sept. 25, 1979. The amount of the installment payments
will be determined by the agency. B-241478, Apr. 5, 1991. Collection
in installments is also authorized when operating under 37 U.S.C. §
1007(c) for members of the uniformed services. For employees no longer
on the payroll, offset under 5 U.S.C. § 5512(a) has been held to
embrace collection from retirement funds to the extent authorized.
Parker v. United States, 187 Ct. Cl. 553, 559 (1969); 39 Comp. Gen.
203, 206 (1959). GAO has also approved "flagging" the retirement
account of an accountable officer still on the payroll. B-217114, Feb.
29, 1988.
When applying 5 U.S.C. § 5512(a) or 37 U.S.C. § 1007(a), the
procedures to be followed are those prescribed by 31 C.F.R. § 901.3
for administrative offsets under 31 U.S.C. § 3716. 64 Comp. Gen. 142
(1984).
If pay is withheld under 5 U.S.C. § 5512(a), the statute provides a
means to obtain judicial review of the indebtedness. Under 5 U.S.C. §
5512(b), GAO is required, upon the request of the individual or his or
her agent or attorney to immediately report the balance due to the
Attorney General, and the Attorney General is required within 60 days
to order suit to be commenced against the individual. This provision
was part of the original 1828 legislation, several decades prior to
either the Tucker Act or the establishment of the Court of Claims, at
a time when there was no other means available for the accountable
officer to initiate judicial proceedings. It now exists as one way
among several. Installment deductions are not required to stop during
the litigation; if the accountable officer prevails, amounts collected
are refunded. 64 Comp. Gen. 606, 608 (1985). Examples of referrals
under 5 U.S.C. § 5512(b) are included at 64 Comp. Gen. 605 (1985); B-
217114.7, May 6, 1991; and B-220492, Dec. 10, 1985.
H. Restitution, Reimbursement, and Restoration:
1. Restitution and Reimbursement:
In the present context, restitution means the repayment of a loss by
an accountable officer from personal funds; reimbursement means the
refunding to an accountable officer of amounts previously paid in
restitution. Prior to 1955, there was no statutory authority to permit
the reimbursement of an accountable officer who had made restitution
to the government for a physical loss. Once an accountable officer
made restitution (if, for example, the agency required it), the
decisions held that there was no longer a deficiency in the account
for which relief could be considered. 27 Comp. Gen. 404 (1948); B-
101301, July 19, 1951.
Legislation in 1955 amended what is now 31 U.S.C. § 3527(a) and 31
U.S.C. § 3527(b) to expressly authorize reimbursement of the
accountable officer for any amounts paid in restitution, if relief is
granted.[Footnote 77] Accordingly, restitution by the accountable
officer in physical loss cases is no longer an impediment to the
granting of relief. E.g., B-155149, Oct. 21, 1964; B-126362, Feb. 21,
1956. The 1955 legislation amended only the physical loss relief
statutes. There is no comparable reimbursement authority in the
improper payment relief statutes, 31 U.S.C. §§ 3527(c) and 3528. B-
226393, Apr. 29, 1988; B-223840, Nov. 5, 1986; B-128557, Sept. 21,
1956.
An obvious limitation on the reimbursement authority was illustrated
in B-187021, Jan. 19, 1978. An imprest fund cashier sought
reimbursement, claiming that she had discovered money missing from her
cash box and replaced it from personal funds. However, by virtue of
her actions in initially concealing the loss, she was unable to show
that the loss had in fact ever occurred. Since the loss could not be
established, reimbursement was denied. Thus, an accountable officer
should always report a loss before malting restitution.
2. Restoration:
Restoration of an account suffering a loss or deficiency-—an
accounting adjustment to restore the shortage with funds from some
other source-—is authorized under two provisions of law, 31 U.S.C. §§
3527(d) and 3530. The Comptroller General is required by 31 U.S.C. §
3530(c) to prescribe implementing regulations. These are found in
title 7 of GAO's Policy and Procedures Manual for Guidance of Federal
Agencies, § 8.14 (Washington, D.C.: May 18, 1993).
a. Adjustment Incident to Granting of Relief:
If relief is granted under either 31 U.S.C. § 3527(a) or 31 U.S.C. §
3527(c), GAO may authorize restoration of the account. Under
subsection (d), restoration is accomplished by charging either an
appropriation specifically available for that purpose or, if there is
no such appropriation, the appropriation or fund available for the
accountable function. See B-288163, June 4, 2002. The charge is made
to the fiscal year in which the adjustment is made, and not the fiscal
year in which the loss occurred. Subsection (d) applies only to
subsections (a) and (c), and not to subsection (b) (military
disbursing officers). However, the military departments have separate
authority in 10 U.S.C. §§ 2777(b) and 2781. There is no restoration
provision in 31 U.S.C. § 3528, which sets out the responsibilities and
relief from liability for certifying officials.
Whenever account adjustment is deemed necessary, the agency should
include in its relief request a citation (account symbol) to the
appropriation it proposes to charge. GAO, Policy and Procedures Manual
for Guidance of Federal Agencies, title 7, § 8.14.A (Washington, D.C.:
May 18, 1993) (hereafter GAO-PPM). In cases where agencies are
authorized to grant relief without GAO involvement, they may also
exercise the restoration authority of 31 U.S.C. § 3527(d) without GAO
involvement. 7 GAO-PPM § 8.14.C.
A 1957 decision, 37 Comp. Gen. 224, considered the application of 31
U.S.C. § 3527(d) where one agency is disbursing funds on behalf of
other agencies. State Department disbursing officers overseas, acting
under delegations from the Treasury Department, were authorized to
receive and disburse funds on behalf of other government agencies as
well as the State Department. If the services were sufficiently
extensive to warrant reimbursement, State charged the "user" agencies.
Construing 31 U.S.C. § 3527(d), the Comptroller General held that
losses in such a situation for which relief was granted but which
could not be related to the functions of any particular agency or
agencies should be charged to State Department appropriations because
they were the appropriations available for the accountable function.
"This phraseology clearly is intended to mean the appropriation of the
department or agency to which the expenses of carrying on the
particular disbursing function are chargeable." 37 Comp. Gen. at 226.
Such adjustments could then be considered as part of the costs of the
disbursing function for purposes of determining charges assessed
against the user agencies and thus distributed to all user agencies in
the same manner as other costs. Id. Twenty years later, GAO reached
the same result with respect to losses of United States currency
incident to the 1975 evacuation from Vietnam. 56 Comp. Gen. 791, 796-
97 (1977).
b. Other Situations:
If a loss is due to fault or negligence by an accountable officer, and
the agency head determines that the loss is uncollectible, the amount
of the loss may be restored by a charge to the appropriation or fund
available for the expenses of the accountable function. 31 U.S.C. §
3530(a). Uncollectible includes uncollectible from the accountable
officer. E.g., B-177910, Feb. 20, 1973. As with adjustments under 31
U.S.C. § 3527(d), section 3530(a) requires the loss to be charged to
the appropriation available for the fiscal year in which the
adjustment is made (appropriation "currently available"). This
authority applies (1) where relief is denied, or (2) where the agency
does not seek relief, the uncollectibility determination being
required in either event. Representative cases are B-271608, June 21,
1996; B-235405, Mar. 19, 1990; B-219246, Sept. 9, 1985; B-188715, Jan.
31, 1978; and B-167827, Feb. 4, 1975.
Assuming the statutory conditions are met, adjustments under 31 U.S.C.
§ 3530 are made directly by the agency with no need for specific
authorization or concurrence from GAO. GAO, Policy and Procedures
Manual for Guidance of Federal Agencies, title 7, § 8.14.D
(Washington, D.C.: May 18, 1993). Restoration under section 3530 is
merely an accounting adjustment and does not affect the accountable
officer's personal liability. 31 U.S.C. § 3530(b). Thus, although the
adjustment is premised on a determination of uncollectibility,
collection efforts should resume if warranted by future developments.
B-241725, Feb. 19, 1991.
The statutes described above, 31 U.S.C. §§ 3527(d) and 3530, will
cover most situations in which restoration is needed in that relief is
mostly either granted or denied or not sought. There are, however,
situations in which neither statute applies. For example, a thief
fraudulently obtained over $10,000 from the patients trust account at
a Department of Veterans Affairs (VA) hospital. He was convicted and
ordered to make restitution. The restitution order was lifted 3 years
later, but the VA had by then recovered only a small portion of the
loss. The VA decided that pursuing the thief any further would be
fruitless, and it had previously determined that there had been no
fault or negligence by the accountable officer.
The VA was faced with a dilemma. Clearly the loss had to be restored
since the trust account consisted of money belonging to patients, and
just as clearly VA's operating appropriations were the only available
source. The problem was how to get there. Since the 3-year statute of
limitations on account settlement (31 U.S.C. § 3526(c)) had expired,
relief could no longer be considered, so 31 U.S.C. § 3527(d) could not
be used. Equally unavailing was 31 U.S.C. § 3530 since the loss did
not result from the accountable officer's fault or negligence.
However, since the VA had an undisputed obligation as trustee to
return the trust funds to their rightful owners upon demand, the loss
could be viewed as an expense of managing the trust fund. The solution
therefore was to restore funds from the unobligated balance of VA's
operating appropriation for the fiscal year in which the loss
occurred. 68 Comp. Gen. 600 (1989). See also B-239955, June 18, 1991.
The authority to make adjustments from the unexpended balances of
prior years' appropriations is now found in 31 U.S.C. § 1553(a). Once
an account has been closed, generally five fiscal years after
expiration,[Footnote 78] 31 U.S.C. § 1553(b) requires that the
adjustment be charged, within certain limits, to current
appropriations. Thus, the authority now found in 31 U.S.C. § 1553 may
provide an alternative if neither 31 U.S.C. § 3527(d) nor 31 U.S.C. §
3530 is available. Of course, if the account to be restored has itself
been closed pursuant to 31 U.S.C. §§ 1552(a) or 1555, restoration is
no longer possible.
Chapter 9 Footnotes:
[1] This chapter deals solely with accountability for funds by those
classified as accountable officers. Other types of accountability—
accountability by employees who are not accountable officers or
accountability for property other than funds—are covered in Chapter 13
in volume III of the second edition of Principles of Federal
Appropriations Law.
[2] Act of September 2, 1789, ch. XII, § 3, 1 Stat. 65, 66.
[3] Act of March 3, 1795, ch. XLVIII, § 1, 1 Stat. 441.
[4] This statute also still exists and is found at 18 U.S.C. § 653.
Other criminal provisions relevant to accountable officers include 18
U.S.C. § 643 (failure to render accounts), 18 U.S.C. § 648 (misuse of
public funds), and 18 U.S.C. § 649 (failure to deposit). The four
provisions of title 18 of the United States Code cited in this note
apply to "all persons charged with the safe-keeping, transfer, or
disbursement of the public money." 18 U.S.C. § 649(b).
[5] As discussed in section B.2.b of this chapter, where more than one
accountable officer is involved—for example, a subordinate cashier who
actually made an improper payment and a supervising accountable
officer in whose name the account is held—both are liable.
[6] The bonding requirement had been for the protection of the
government, not the accountable officer. Under the bonding system, if
the United States was compensated for a loss by the bonding company,
the company succeeded to the rights of the United States and could
seek reimbursement from the accountable officer. 68 Comp. Gen. 470,
471 (1989); B-186922, Apr. 8, 1977.
[7] Originally, accountable officers had to pay for their own bonds.
33 Comp. Gen. 7 (1953). Legislation effective January 1, 1956,
authorized the government to pay. Pub. L. No. 84-323, ch. 683, 69
Stat. 618 (Aug. 9, 1955).
[8] The "public enemy" situation dealt with in United States v.
Thomas, 82 U.S. (15 Wall.) 337 (1872), discussed in section B.La of
this chapter, is not an example of relief. It is an example of a
situation in which liability did not attach to begin with.
[9] Section 2512, which had its origins in the early 1900s, provides:
"Whenever the United States Court of Federal Claims finds that any
loss by a disbursing officer of the United States was without his
fault or negligence, it shall render a judgment setting forth the
amount thereof, and the [Government Accountability Office] shall allow
the officer such amount as a credit in the settlement of his accounts."
28 U.S.C. § 2512. While the statute is still on the books, it has not
been applied in over 50 years.
[10] The passage of time, however, can eliminate the government's
ability to enforce liability in improper payment cases, even without
relief. See, for example, section D.5 of this chapter, discussing the
3-year statute of limitations that generally applies to holding
accountable officers liable for erroneous payments, and B-287043, May
29, 2001. Therefore, in order to protect the government's position,
agencies should move promptly to address an accountable officer's
liability. Implications in a few cases such as 70 Comp. Gen. 616,
62223 (1991), that an agency can never enforce an accountable
officer's liability for an improper payment unless it has first
submitted the matter to GAO are misleading. See GAO, Policy and
Procedures Manual for Guidance of Federal Agencies, title 7, ch. 8
(Washington, D.C.: May 18, 1993), which describes agencies' specific
responsibilities in this area.
[11] Among the prior inconsistent decisions specifically mentioned
were 72 Comp. Gen. 49 (1992) and B-241856, Sept. 23, 1992.
[12] This provision was enacted by section 1005 of the Bob Stump
National Defense Authorization Act for Fiscal Year 2003, Pub. L. No.
107-314, 116 Stat. 2458, 2631-32 (Dec. 2, 2002).
[13] Pub. L. No. 104-106, 110 Stat. 186 (Feb. 10, 1996); see
discussion of this statute in section B.2.a of this chapter.
[14] See section B.3.a of this chapter for a discussion of imprest
funds.
[15] Note that, in light of B-280764, May 4, 2000, discussed
previously, 72 Comp. Gen. 49 and B-266245 are no longer controlling to
the extent they suggest that an agency can impose liability on
supervisors solely by regulation, without specific statutory authority.
[16] This policy directive and its accompanying preamble can be found
at www.fms.treas.gov/imprest/regulations.html (last visited September
15, 2005).
[17] National Performance Review, "From Red Tape to Results: Creating
A Government That Works Better And Costs Less," The Report on the
Elimination of Imprest Funds in the Federal Government Through the Use
of Electronic Commerce, Department of the Treasury, Financial
Management Service (January 1996).
[18] 31 U.S.C. § 3332(f), added by the Debt Collection Improvement Act
of 1996, Pub. L. No. 104-134, title BI, § 31001(x)(1)(A), 110 Stat.
1321, 1321-376 (Apr. 26, 1996).
[19] Prior decisions, such as B-192010, Aug. 14, 1978, which had
treated all flash roll losses as accountable officer losses, were
modified accordingly. 61 Comp. Gen. at 316.
[20] Current Federal Claims Collection Standards, issued jointly by
the Departments of Justice and Treasury, are in 31 C.F.R. parts 900-
904 (2005).
[21] Under the tainted day rule, a fraudulent claim for reimbursement
for any part of a single day's subsistence expenses "taints" the
entire day's claim with fraud and thus precludes reimbursement for
nonfraudulent items as well. 70 Comp. Gen. at 465. This rule carries a
punitive element that is appropriate for those who defraud the
government but not for accountable officers who are victims of the
fraud. See 72 Comp. Gen. 154, 156 (1993).
[22] A statutorily authorized instance of "netting" gains and
deficiencies in an account is 31 U.S.C. § 3342(c)(2) (certain check-
cashing and exchange transactions), discussed later in this chapter in
section D.4.
[23] This statute will not apply to certifying officers since they do
not have actual custody of funds. However, a certifying officer could
conceivably have other duties or supervisory responsibilities and thus
be accountable, and eligible for relief under 31 U.S.C. § 3527(a), in
that capacity.
[24] Pub. L. No. 8, ch. 9, 41 Stat. 131, 132 (July 11, 1919).
[25] Pub. L. No. 476, ch. 552, 58 Stat. 800 (Dec. 13, 1944).
[26] Pub. L. No. 365, ch. 803, 69 Stat. 687 (Aug. 11, 1955).
[27] As discussed earlier in section B.2 of this chapter, the
Department of Defense has been given the authority to hold other
"departmental accountable officers," besides certifying and disbursing
officers, liable financially for illegal or erroneous payments
resulting from their negligence. 10 U.S.C. § 2773a. This would include
employees whose duty it was to provide information, data, or services
that are directly relied upon by a certifying official in the
certification of vouchers for payment.
[28] The Department of Justice has opined that the provisions of 31
U.S.C. §§ 3527 and 3528 are unconstitutional insofar as they authorize
the Comptroller General, an officer of the legislative branch, to
relieve executive branch officials from liability. See, e.g.,
Comptroller General's Authority to Relieve Disbursing and Certifying
Officials from Liability, 15 Op. Off. Legal Counsel 80 (1991). We are
aware of no judicial opinion addressing the constitutionality of 31
U.S.C. §§ 3527 and 3528. Other than sections 3527 and 3528, there are
no statutes granting federal administrative officers the authority to
relieve accountable officers.
[29] The $150 authorization was established by B-161457, Aug. 1, 1969
(circular letter). It was raised to $500 in 1974. B-161457, Aug. 14,
1974 (circular letter); 54 Comp. Gen. 112 (1974). A 1983 revision to
title 7 of GAO, Policy and Procedures Manual for Guidance of Federal
Agencies (hereafter referred to as GAO-PPM), § 8.9.0 (Washington,
D.C.: July 14, 1983) raised it to $750, and another revision on
February 12, 1990, raised it to $1,000. The Manual was last revised on
May 18, 1993.
[30] For example, losses resulting from mechanical or clerical errors
during the check issuance process were included in the authorization.
B-245586, Nov. 12, 1991.
[31] As discussed earlier in section B.2 of this chapter, the
Department of Defense has been given the authority to hold other
"departmental accountable officers," besides certifying and disbursing
officers, liable financially for illegal or erroneous payments
resulting from their negligence. 10 U.S.C. § 2773a. This would include
employees whose duty it was to provide information, data, or services
that are directly relied upon by a certifying official in the
certification of vouchers for payment.
[32] In this case relief was later granted when the agency provided
GAO with the requisite determinations. B-204464, May 12, 1983.
[33] Many decisions prior to 1970, such as 48 Comp. Gen. 566, dealt
with postal employees. Since enactment of the Postal Reorganization
Act of 1970, responsibility for the relief of postal employees is with
the United States Postal Service. 39 U.S.C. § 2601; 50 Comp. Gen. 731
(1971); B-164786, Oct. 8, 1970. While the Comptroller General no
longer relieves postal employees, the principles enunciated in the
earlier decisions are nonetheless applicable to other accountable
officers.
[34] "There is perhaps nothing in the entire field of law which has
called forth more disagreement, or upon which the opinions are in such
a welter of confusion." Prosser and Keeton, The Law of Torts, § 41
(5th ed. 1984). See Fedorczyk v. Caribbean Cruise Lines, 82 F.3d 69,
73 (3rd Cir. 1996).
[35] A few additional examples are 70 Comp. Gen. 389 (1991); B-213427,
Dec. 13, 1983, affd upon reconsideration, B-213427, Mar. 14, 1984; B-
159987, Sept. 21, 1966.
[36] E.g., B-242830, Sept. 24, 1991 (cashier's statement supported by
another employee; safe had been opened for only one transaction in
early afternoon); B-214080, Mar. 25, 1986 (cashier made sworn and
unrefuted statement to local police and Secret Service); B-210017,
June 8, 1983 (cashier's statement corroborated by witness); B-188733,
Mar. 29, 1979, aff'd Jan 17, 1980 (forcible entry to office but not to
safe itself; cashier's statement that he locked safe on day of robbery
accepted).
[37] Losses by agency cashiers typically involve "imprest funds." As
discussed above, in 1999, Treasury required that federal agencies
eliminate agency imprest funds by Oct. 1, 2001. Department of the
Treasury, "Imprest Fund Policy Directive," Nov. 9, 1999. (Exceptions
may be made only for certain payments typically involving national
security, law enforcement, small payments, overseas payments, or
emergencies. See 31 C.F.R. § 208.) Guidance regarding those imprest
funds for which a waiver has been granted is contained in Department
of the Treasury, Financial Management Service, Manual of Procedures
and Instructions for Cashiers (Cashier's Manual) (April 2001). See the
further discussion of imprest funds and the Cashier's Manual in
section B.3.a of this chapter.
[38] The mere designation of a loss as a "burglary" without supporting
evidence is not enough to remove it from the "unexplained loss"
category. E.g., B-210358, July 21, 1983.
[39] There are numerous forced entry cases in which GAO granted relief
under similar circumstances. A few additional examples are B-241820,
Jan. 2, 1991; B-239780, June 18, 1990; B-230607, June 20, 1988; B-
205428, Dec. 31, 1981; B-201651, Feb. 9, 1981.
[40] Some other examples are B-260915, Apr. 3, 1995; B-217773, Mar.
18, 1985; B-211945, July 18, 1983; and B-201126, Jan. 27, 1981.
[41] Further examples are B-249372, Aug. 13, 1992 (Somalia); B-
230606.2, Sept. 6, 1988 (Iran); B-227422, June 18, 1987 (Tripoli); B-
207059, July 1, 1982 (Chad); and B-190205, Nov. 14, 1977 (Zaire).
[42] A key inquiry in this type of case, and a crucial factor in
deciding whether to grant or deny relief, is the extent to which the
accountable officer is responsible for the nonexclusive access to the
safe combination.
[43] See also the discussion of the Cashier's Manual and imprest funds
in sections B.2.c and B.3.a of this chapter.
[44] An explanation of this type may or may not be sufficient,
depending on the particular facts. See B-170012, Aug. 11, 1970; B-
127204, Apr. 13, 1956.
[45] These statutory provisions authorize, in certain circumstances,
the waiver of claims against federal employees and service members for
recovery of erroneous payments of pay and allowances "the collection
of which would be against equity and good conscience and not in the
best interests of the United States."
[46] Pub. L. No. 299, ch. 350, 37 Stat. 375.
[47] The Coast Guard exemption was added by Pub. L. No. 104-201, div.
A, title X, § 1009(a)(1), 110 Stat. 2422, 2633 (Sept. 23, 1996).
[48] The JFMIP was a joint undertaking of GAO, the Office of
Management and Budget, the Treasury Department, and the Office of
Personnel Management, working in cooperation with each other and other
federal agencies to improve financial management practices in the
federal government. Leadership and program guidance were provided by
the four principals of JFMIP—the Comptroller General, the Secretary of
the Treasury, and the Directors of OMB and OPM. Although JFMIP ceased
to exist as a stand-alone organization as of December 1, 2004, the
JFMIP principals continue to meet at their discretion.
[49] Invoices may be used in place of vouchers to support
disbursements as long as they contain all required information. GAO,
Policy and Procedures Manual for Guidance of Federal Agencies, title
7, § 6.2.0 (Washington, D.C.: May 18, 1993); I TFM 4-2025.20.
[50] An early case, B-36459, Apr. 6, 1944, suggesting that use of
facsimile signatures somehow required GAO approval has not been
followed and should be disregarded.
[51] A related issue is the use of electronic technology in creating
obligations under 31 U.S.C. § 1501. For more information on this
topic, see the discussion in Chapter 7.
[52] Pub. L. No. 107-347, § 203, 116 Stat. 2899, 2912 (Dec. 17, 2002),
at 44 U.S.C. § 3501 note.
[53] But see B-138601, Jan. 18, 1960, in which the volume of work was
taken into consideration in a somewhat extreme case.
[54] Many of the cases noted in the text, such as 31 Comp. Gen. 17,
arose under manual systems. While they would still apply under a
manual system, it is important to keep in mind the previously
discussed differences in approach between manual and automated systems.
[55] The General Accounting Office Act of 1996, Pub. L. No. 104-316,
title II, § 204, 110 Stat. 3826, 3845-46, (Oct. 19, 1996), amended the
Comptroller General's authority under 31 U.S.C. § 3529 and transferred
the authority to issue advance decisions with respect to transferred
settlement functions under the Act to the Director of OMB, who in turn
delegated specific functions to the Departments of Defense and
Treasury, the General Services Administration, and the Office of
Personnel Management. The Comptroller General retains the authority to
issue decisions to disbursing or certifying officers and heads of
agencies on matters involving the use of appropriated funds that do
not involve settling a claim or other functions transferred to OMB. In
addition, the Comptroller General retains the authority under 31
U.S.C. §§ 3527 and 3528 to grant relief to disbursing and certifying
officers. See B-275605, Mar. 17, 1997.
[56] For a discussion of military certifying officers as of 1996, see
sections B.2, C.1.b, and C.2.b.
[57] One case, B-222048, Feb.10, 1987, implying that an Antideficiency
Act violation would preclude relief under 31 U.S.C. § 3528(b)(1)(B),
is inconsistent with the weight of authority as discussed in the text.
[58] Pub. L. No. 365, ch. 803, 69 Stat. 687 (Aug. 11, 1955). See also
section B.2.b, including the discussion of military disbursing
officers.
[59] Effective on the date of enactment, section 204 of the General
Accounting Office Act of 1996, Pub. L. No. 104-316, 110 Stat. 3826,
3845-46 (Oct. 19, 1996), amended the Comptroller General's authority
under 31 U.S.C. § 3529 and transferred the authority to issue advance
decisions with respect to the claims settlement functions transferred
by section 211 of the Act to the Director of OMB or to the agency to
which the function was delegated. The Comptroller General retains the
authority to issue decisions to disbursing or certifying officers and
heads of agencies on matters involving the use of appropriated funds
that do not involve settling a claim or other function transferred to
OMB.
[60] On November 9, 1999, Treasury issued a policy directive requiring
that federal agencies eliminate agency imprest funds, with certain
exceptions, by October 1, 2001. See section B.3.a of this chapter for
more information on imprest funds.
[61] See the discussion of refreshments in section C.5.b and air
purifiers in section C.13.c of Chapter 4.
[62] See the discussion of Treasury's November 9, 1999, policy
directive on imprest funds in section B.3.a of this chapter.
[63] Pub. L. No. 554, ch. 716, 58 Stat. 921 (Dec. 20, 1944).
[64] Pub. L. No. 61, ch. 115, § 2, 67 Stat. 61, 62 (June 16, 1953).
[65] Prior approaches had produced complex problems and were
unsatisfactory. See 62 Comp. Gen. 91 (1982); GAO, Millions Paid Out in
Duplicate and Forged Government Checks, AFMD-81-68 (Washington, D.C.:
Oct. 1, 1981).
[66] The regulations now use the term "substitute check" only in 31
C.F.R. part 248 in the context of "depositary checks," checks drawn on
accounts maintained in depositary banks in U.S. territories or foreign
countries.
[67] The process actually started with a limited authorization for the
Army, B-214372, Oct. 9, 1987, which was revoked by the more inclusive
B-244972.
[68] Pub. L. No. 72, ch. 78, 61 Stat. 101 (May 19, 1947).
[69] Unlike disbursing officers, certifying officers are not
custodians of public funds, and thus do not have accounts and
statements of accountability in the same manner disbursing officers
do. For purposes of audit and settlement, GAO considers the certifying
officer's account to be the certified vouchers and supporting papers
relating to payments made by a disbursing officer over a particular
accounting period. In other words, for payments comprising a
disbursing officer's statement of accountability, the 3-year period is
essentially the same for the disbursing officer and for the certifying
officers on whose certifications the disbursing officer relied. B-
251994, Sept. 24, 1993.
[70] Prior decisions had not been entirely clear on precisely which
date to use. E.g., B-220689, Sept. 24, 1986 (date of debit voucher); B-
213874, Sept. 6, 1984 (inclusion in statement of accountability). B-
226393 established the propositions stated in the text and modified
prior decisions accordingly.
[71] Act of May 9, 1866, ch. 75, 14 Stat. 44.
[72] Pub. L. No. 333, ch. 455, 61 Stat. 730 (Aug. 4, 1947).
[73] The 3-year limitation period begins to run when the agency's
accounts are substantially complete for audit purposes (i.e., when
various documents supporting the applicable statement of
accountability are available to the agency and GAO for audit). See 7
GAO-PPM § 8.7.
[74] The Standards were previously promulgated jointly by the
Department of Justice and GAO and were published at 4 C.F.R. parts 101-
105. However, the Secretary of the Treasury was subsequently added as
a co-promulgator and the Comptroller General removed. See Debt
Collection Improvement Act of 1996, Pub. L. No. 104-134, §
31001(d)(2)(A), 110 Stat. 1321, 1321-359 (Apr. 26, 1996); General
Accounting Office Act of 1996, Pub. L. No. 104-316, § 115(g)(1), 110
Stat. 3826, 3834-35 (Oct. 19, 1996).
[75] The special order is issued in the discretion of the Secretary of
Homeland Security in the case of an officer of the Coast Guard when
the Coast Guard is operating as a service in the Navy. 37 U.S.C. §
1007(a).
[76] Act of January 25, 1828, ch. 2, 4 Stat. 246.
[77] Pub. L. No. 334, ch. 694, 69 Stat. 626 (Aug. 9, 1955).
[78] see 31 U.S.C. § 1552(a).
[End of Chapter 9]
Chapter 10: Federal Assistance: Grants and Cooperative Agreements:
A. Introduction:
B. Grants versus Procurement Contracts:
1. Judicial and GAO Decisions on the Nature of Grants:
a. Contractual Aspects of Grants:
b. Differences between Grants and Contracts:
c. Grants as "Hybrids":
2. The Federal Grant and Cooperative Agreement Act:
a. Purposes and Provisions of the Act:
b. Agency Implementation of the Act:
c. Decisions Interpreting the Act:
3. Competition for Discretionary Grant Awards:
C. Some Basic Concepts:
1. The Grant as an Exercise of Congressional Spending Power:
a. Constitutionality of Grant Conditions:
(1) Conditions must be in pursuit of the general welfare and related
to the purpose of the expenditure:
(2) Conditions must be unambiguous:
(3) Conditions must be otherwise constitutional:
b. Effect of Grant Conditions:
2. Availability of Appropriations:
a. Purpose:
b. Time:
c. Amount:
3. Agency Regulations:
a. General principles:
b. Office of Management and Budget Circulars and the "Common Rules":
c. The Federal Financial Assistance Management Improvement Act:
d. The "Cognizant Agency" Concept:
4. Contracting by Grantees:
5. Liability for Acts of Grantees:
a. Liability to Grantee's Contractors:
b. Liability for Grantee Misconduct:
6. Types of Grants: Categorical versus Block:
7. The Single Audit Act:
D. Funds in Hands of Grantee: Status and Application of Appropriation
Restrictions:
E. Grant Funding:
1. Advances of Grant/Assistance Funds:
2. Cash Management of Grants:
a. General Rule on Interest on Grant Advances:
b. State Governments and Interest on Grant Advances:
(1) Intergovernmental Cooperation Act:
(2) Decisions under the Intergovernmental Cooperation Act:
c. Other Cash Management Requirements:
3. Program Income:
4. Cost-Sharing:
a Local or Matching Share:
(1) General principles:
(2) Hard and soft matches:
(3) Matching one grant with funds from another:
(4) Relocation allowances:
(5) Payments by other than grantor agency:
b. Maintenance of Effort:
F. Obligation of Appropriations for Grants:
1. Requirement for Obligation:
2. Changes in Grants:
G. Grant Costs:
1. Allowable versus Unallowable Costs:
a. The Concept of Allowable Costs:
b. Grant Cost Cases:
(1) Scope of judicial review:
(2) Court case examples:
(3) GAO case examples:
c. Note on Accounting:
2. Pre-Award Costs (Retroactive Funding):
H. Recovery of Grantee Indebtedness:
1. Government's Duty to Recover:
2. Offset and Withholding of Claims Under Grants:
A. Introduction:
The federal government provides assistance in many forms, financial
and otherwise. Assistance programs are designed to serve a variety of
purposes. Objectives may include fostering some element of national
policy, stimulating private sector involvement, or furnishing aid of a
type or to a class of beneficiaries the private market cannot or is
unwilling to otherwise accommodate. The term "assistance" is
statutorily defined in many federal laws. For example, the Federal
Program Information Act broadly defines "assistance" as "the transfer
of anything of value for a public purpose of support or stimulation
authorized by [law]." 31U.S.C. § 6101(3). A similar definition of
"assistance" is found in the Intergovernmental Cooperation Act, which
adds the qualification, for purposes of that act, that the federal
government provide such a transfer through grant or contractual
arrangements. 31 U.S.C. § 6501(1). Another definition is provided in
the Single Audit Act, which defines "Federal financial assistance" as
"assistance that nonfederal entities receive or administer in the form
of grants, loans, loan guarantees, property, cooperative agreements,
interest subsidies, insurance, food commodities, direct
appropriations, or other assistance." 31 U.S.C. § 7501(a)(5).[Footnote
1]
Grants constitute one form of federal assistance. 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. 31 U.S.C. § 6501(4)(A) and (B). The act
defines eligible beneficiaries as including state and local
governments as well as certain private nonprofit organizations. Id.
The act specifically excludes from this definition such things as a
loan, shared revenue, and payments under a research and development
procurement contract. Id. § 6501(4)(C). Similarly, GAO's budget
glossary defines a grant as a "federal financial assistance award
making payment in cash or in kind for a specified purpose," adding:
"The term 'grant' is used broadly and may include a grant to
nongovernmental recipients as well as one to a state or local
government, while the term `grant-in-aid' is commonly used to refer
only to a grant to a state or local government."[Footnote 2]
Thus, a federal grant is a form of assistance authorized by statute in
which a federal agency (the grantor) transfers something of value to a
party (the grantee) for a purpose, undertaking, or activity of the
grantee that the government has chosen to assist. The "thing of value"
is usually money, but may, depending on the program legislation, also
include property or services.[Footnote 3] The grantee, again depending
on the program legislation, may be a state or local government, a
nonprofit organization, or a private individual or business entity.
Federal grants to state and local governments comprise the largest
category, involving federal outlays of more than $406 billion in
fiscal year 2004, which constituted 17.7 percent of total federal
outlays and 3.5 percent of Gross Domestic Product.[Footnote 4]
The past four decades have witnessed a dramatic growth in federal
grants, both in absolute dollar terms and as a proportion of total
federal spending. The domestic Working Group's recent publication,
Guide to Opportunities for Improving grant Accountability (Washington,
D.C.: October 2005), at 1-2, illustrates this growth.[Footnote 5] The
Guide focuses on grants to state and local governments, which make up
about 80 percent of all federal grants. In 1960, such grants amounted
to approximately $7 billion, representing about 7 percent of the total
federal outlays. In the President's budget request for fiscal year
2006, about $450 billion was included to fund over 700 grant programs.
As noted above, this represents over 17 percent of total federal
outlays.
"Cooperative agreements" constitute another form of federal assistance
relationship. As we will discuss in section B of this chapter,
cooperative agreements are very much like grants in that they are used
to transfer something of value to the recipient in order to accomplish
a public purpose as authorized by law. The key difference is that the
federal agency providing the assistance has more involvement with the
recipient in carrying out the activity being funded under a
cooperative agreement than it does in the case of a grant. Given the
similarity between these two forms of assistance, our discussion of
grants in the remainder of this chapter applies as well to cooperative
agreements except as otherwise noted. Indeed, the distinction between
grants and cooperative agreements is rarely, if ever, the focus of GAO
and judicial decisions. Rather, as discussed hereafter, the decisions
typically involve issues concerning the use of procurement contracts
versus assistance relationships.
In July 2005, according to the most recent information available from
the Catalog of Federal Domestic Assistance,[Footnote 6] 58 federal
agencies administered 1,621 assistance programs. To be sure, a large
number of these are not grant programs since the Catalog includes loan
and loan guarantee programs plus certain types of nonfinancial
assistance. Nevertheless, it is a safe statement that there are
hundreds of federal grant programs administered by dozens of agencies.
Grant programs typically are governed by detailed legislation and even
more detailed regulations. As a result, many judicial and
administrative grant cases are not amenable to broad treatment in this
chapter since they hinge on specific statutory or regulatory
provisions having limited general applicability. Nevertheless, it is
still possible to extract a number of principles of "grant law" from
the perspective of the availability and use of appropriated funds.
Before we do so, it is necessary to discuss the differences and
similarities of grants, cooperative agreements, and procurement
contracts.
B. Grants versus Procurement Contracts:
From the perspective of legal analysis, what precisely is a grant and
when is it the appropriate funding vehicle for a federal agency to
use? How do grants differ from contracts and what do they have in
common? This section will explore these and related questions. We will
first discuss judicial and GAO case law that often applies some basic
contract law principles to grants but also recognizes significant
differences between grants and contracts, particularly federal
procurements. (As noted previously, grants are essentially the same as
cooperative agreements for purposes of these cases.) We will then
discuss statutory and administrative principles that have been
developed to clarify the distinctions among grants, contracts, and
cooperative agreements and when each should be used by a federal
agency.
1. Judicial and GAO Decisions on the Nature of Grants:
a. Contractual Aspects of Grants:
Courts frequently look to contract law principles to define the rights
and obligations of the parties to a federal grant. In particular, the
courts view the acceptance of a grant of federal funds subject to
conditions that must be met by the grantee as creating a "contract"
between the United States and the grantee. The "grant as a type of
contract" approach evolved from early Supreme Court decisions. In what
may be the earliest case on the subject, the government had made a
grant of land to a state on the condition that the state would use the
land, or the proceeds from its sale, for certain reclamation purposes.
The Court stated:
"It is not doubted that the grant by the United States to the State
upon conditions, and the acceptance of the grant by the State,
constituted a contract. All the elements of a contract met in the
transaction—competent parties, proper subject-matter, sufficient
consideration, and consent of minds."
McGee v. Mathis, 71 U.S. (4 Wall.) 143, 155 (1866). See also United
States v. Northern Pacific Railway Co., 256 U.S. 51, 63-64 (1921).
The Supreme Court has consistently followed this approach in upholding
conditions that Congress imposes upon recipients of federal grants.
See, e.g., Jackson v. Birmingham Board of Education, 544 U.S.____, 125
S. Ct. 1497 (2005); Davis v. Monroe County Board of Education, 526
U.S. 629 (1999); Pennhurst State School & Hospital v. Halderman, 451
U.S. 1 (1981). Consistent with the analogy to contract principles, the
key consideration in many of these cases is whether the grantee was
sufficiently aware of the condition to constitute acceptance of it. As
the Court observed in Jackson, 125 S. Ct. at 1509:
"When Congress enacts legislation under its spending power, that
legislation is 'in the nature of a contract: in return for federal
funds, the States agree to comply with federally imposed conditions.'
Pennhurst State School and Hospital v. Halderman, 451 U.S. 1, 17, 101
S. Ct. 1531, 67 L.Ed.2d 694 (1981). As we have recognized, 'there
can... be no knowing acceptance [of the terms of the contract] if a
State is unaware of the conditions [imposed by the legislation on its
receipt of funds].' Ibid."[Footnote 7]
Lower courts also have applied contract principles to grants in
various contexts: to enforce grantee compliance with grant conditions;
[Footnote 8] to determine jurisdiction under the Tucker Act (28 U.S.C.
§ 1491) for claims against the United States;[Footnote 9] and to
analyze the nature of the government's obligations under a particular
grant statute or agreement?[Footnote 10]
GAO decisions likewise analogize grants to contracts for certain
purposes. E.g., B-303927, June 7, 2005; 68 Comp. Gen. 609 (1989); 50
Comp. Gen. 470 (1970); 42 Comp. Gen. 289, 294 (1962); 41 Comp. Gen.
134, 137 (1961); B-232010, Mar. 23, 1989; B-167790, Jan. 15, 1973. In
50 Comp. Gen. 470, for example, a medical teaching facility, recipient
of a reimbursement-type construction grant under a federal statute,
was caught in a cash flow crisis because disbursement of grant funds
was much less frequent than its contractor's need for progress
payments. The question was whether the grant could be regarded as a
"contract or claim" so the recipient could assign future grant
proceeds to a bank in return for an interim loan, pursuant to the
Assignment of Claims Act, 41 U.S.C. § 15. Under the Assignment of
Claims Act, any party that has or will have a right to payment of
$1,000 or more under a contract with the U.S. government may assign
this right to a bank, trust company, or other financing company,
assuming the party meets all the requirements of the Act. Id. § 15(b).
Noting that the accepted grant constituted a "valid contract" and that
assignment was not prohibited by the program legislation, regulations
of the grantor agency, or the terms of the grant agreement, GAO
concluded that assignment under the Assignment of Claims Act was
permissible.
b. Differences between Grants and Contracts:
As indicated above, the researcher will find a body of judicial and
GAO case law standing for the proposition that there are certain
contractual aspects to a grant relationship. It does not follow,
however, nor has GAO or (to our knowledge) any court suggested, that
all of the trappings of a procurement contract somehow attach to a
grant. While grant relationships have certain "contractual"
relationships, the contract analogy has its limits.
Take, for example, the issue of consideration. While the typical grant
agreement may well include sufficient legal consideration from the
standpoint of supporting a legal obligation, it may be quite different
from the consideration found in procurement contracts. As noted
earlier in this chapter, a grant is a form of assistance to a
designated class of recipients authorized by statute to meet
recognized needs. Grant needs, by definition, are not needs for goods
or services required by the federal government itself. The needs are
those of a nonfederal entity, whether public or private, which the
Congress has decided to assist as being in the public interest.
An illustration of where this distinction on the issue of
consideration can lead is 41 Comp. Gen. 134 (1961). That decision
involved a statutory provision authorizing grants to states for the
construction of sewage treatment works, up to a stated percentage of
estimated costs, with the grantee to pay all remaining costs. Strong
demand for limited funds meant that grants were frequently awarded for
amounts less than the permissible ceiling. The question was whether
these grants could be amended in a subsequent fiscal year to increase
the amount to, or at least closer to, the statutory ceiling. If a
straight "grant equals contract" approach had been applied, the answer
would have been no, unless the government received additional
consideration. However, GAO concluded that the amendments were
authorized, noting that the "consideration" flowing to the government
under these grants (in sharp contrast with procurement contracts)
consisted only of "the benefits to accrue to the public and the United
States" through use of the funds to construct the desired facilities.
Id. at 137.
In recognition of the essential distinctions between a grant agreement
and a procurement contract, the Supreme Court has stated:
"Although we agree ... that ... [the] grant agreements [at issue] had
a contractual aspect, ... the program cannot be viewed in the same
manner as a bilateral contract governing a discrete transaction....
Unlike normal contractual undertakings, federal grant programs
originate in and remain governed by statutory provisions expressing
the judgment of Congress concerning desirable public policy."
Bennett v. Kentucky Department of Education, 470 U.S. 656, 669 (1985).
The state in that case had argued that, since the grant was "in the
nature of a contract," the Court should apply the principle, drawn
from contract law, that ambiguities in the grant agreement should be
resolved against the government as the drafting party. Id. at 666.
Based on the analysis summarized in the quoted passage, the Supreme
Court declined to do so.
Similarly, the contract law doctrine of "impossibility of performance"
has been held inapplicable to a grant. Maryland Department of Human
Resources v. United States Department of Health & Human Services, 762
F.2d 406 (4th Cir. 1985). In that case, the government had imposed a
zero error standard on states under a grant program. The state argued
that error-free administration was impossible. While agreeing with
that factual proposition, the court nevertheless held that the zero
tolerance level was permissible under the governing statute and
regulations. The impossibility of performance doctrine, said the
court, "relates to commercial contracts and not to grant in aid
programs." Id. at 409.
A 1971 decision, 51 Comp. Gen. 162, illustrates another distinction.
In that case, the Comptroller General concluded that an ineligible
grantee could not be reimbursed for expenditures under quantum meruit
principles. Quantum meruit is a "contract-implied-in law" theory
founded on the principle that a party who receives a tangible benefit
from another is entitled to compensation. In the typical grant
situation, the grantee's activities are not performed solely for the
direct benefit of the government and the government does not receive
any measurable, tangible benefit in the traditional contract sense.
Similarly, the courts are reluctant to apply the "contract implied in
fact" concept in the grant context. E.g., Capitol Boulevard Partners
v. United States, 31 Fed. Cl. 758 (1994); Blaze Construction, Inc. v.
United States, 27 Fed. CL 646 (1993); Eubanks v. United States, 25 Cl.
Ct. 131 (1992); Somerville Technical Services v. United States, 640
F.2d 1276 (Ct. Cl. 1981). The reasoning, in part, is that a grant is a
sovereign act binding the government only to the extent of its express
undertakings.
In American Hospital Association v. Schweiker, 721 F.2d 170 (7th Cir.
1983), cert. denied, 466 U.S. 958 (1984), the court rejected the
contention that otherwise valid regulations of the Department of
Health and Human Services impaired contractual rights of grantees
under the Hill-Burton hospital assistance program:
"The relationship between the government and the hospitals here cannot
be wholly captured by the term 'contract' and the analysis
traditionally associated with that term. ... The contract analogy thus
has only limited application."
721 F.2d at 182-83. Additionally, the court in United States v.
Kensington Hospital, 760 F. Supp. 1120 (E.D. Pa. 1991), refused to
apply the Anti-Kickback Act of 1986[Footnote 11] to government claims
for fraud under the Medicare and Medicaid programs, finding that the
government's relationship with its grantees under these programs could
not be characterized as "prime contracts" for purposes of the Act.
Finally, appropriations law restrictions may not apply to grants in
the same manner as they apply to contracts. Thus, GAO has held that
the principle of "severability," as embodied in the bona fide needs
rule for purposes of contracts, is irrelevant to assistance
agreements. See B-289801, Dec. 30, 2002 (dealing with multiple year
Education Department grants); B-229873, Nov. 29, 1988 (dealing with
Small Business Administration cooperative agreements). These cases are
discussed in section C.1 of this chapter.
c. Grants as “Hybrids”:
Perhaps most aptly, some courts have described grants as "hybrid"
instruments in view of both their similarities to and differences from
contracts. Mayor and City Council of Baltimore v. Browner, 866 F.
Supp. 249, 252 (D. Md. 1994); Town of Fallsburg v. United States, 22
Cl. Ct. 633, 642 (1991). In this regard, the court in Browner stated:
"Essentially, grants are contracts with statutory and regulatory terms
superimposed upon them." 866 F. Supp. at 252. The court held that the
appropriate standard of judicial review depended on the nature of the
dispute before it. If the issues arose under the grant statute or
regulations (as they did in this case), the court would review the
agency's actions under an abuse of discretion standard; other issues
would be considered contractual and subject to de novo review applying
contract law principles. Fallsburg, which the Browner court followed,
took the same approach in determining the appropriate standard for
judicial review. See also, to the same effect, United States v.
Hatcher, 922 F.2d 1402, 1406-07 (9th Cir. 1991), in which the court
reviewed the federal funding agency's actions under the Administrative
Procedure Act rather than contract law principles since the issues
arose under the program statute (in this case a program of individual
scholarships).
Other cases have followed the same approach without specifically
referring to grants as hybrids. These cases emphasize that the rights
and obligations of the parties, while contractual in nature, cannot be
determined solely by reference to the terms of the grant agreement
itself. Rather, the court must also look to such sources as the
applicable grant statute, its legislative history, the grantor
agency's regulations, and applicable Office of Management and Budget
guidance. See, e.g., Westside Mothers v. Haveman, 289 F.3d 852, 858
(6th Cir.), cert. denied, 537 U.S. 1045 (2002); Institute for
Technology Development v. Brown, 63 F.3d 445, 449 (5th Cir. 1995).
In sum, it is clear that the many varied rules and principles of
contract law will not be automatically applied to grants.
Nevertheless, it is equally clear that the creation of a grant
relationship results in certain legal obligations flowing in both
directions (grantor and grantee) that will be enforceable by the
application of some basic contract rules. As the then Claims Court
(now Court of Federal Claims) stated:
"[A] notice of a federal grant award in return for the grantee's
performance of services can create cognizable obligations to the
extent of the government's undertakings therein."
Community Relations-Social Development Commission v. United States, 8
Cl. Ct. 723, 725 (1985). Thus, if a grantee does what it has committed
itself to do and incurs allowable costs, the government is obligated
to pay. E.g., B-181332, Dec. 28, 1976. Conversely, the government has
a right to expect that the grantee will use the grant funds only for
authorized grant purposes and only in accordance with the terms and
conditions of the grant. The right of a grantor agency to oversee the
expenditure of funds by the grantee to ensure that the money is used
only for authorized purposes, and the grantee's corresponding duty to
account to the grantor for its use of the funds, are implicit in the
grant relationship and are not dependent upon specific language in the
authorizing legislation. See, e.g., B-303927, June 7, 2005; 64 Comp.
Gen. 582 (1985).
2. The Federal Grant and Cooperative Agreement Act:
a. Purposes and Provisions of the Act:
Long-standing confusion and concern over federal agency use of grant
relationships versus procurement relationships led the Commission on
Government Procurement, in its 1972 report, to recommend the enactment
of legislation to distinguish assistance from procurement and to
further refine the concept of assistance by clearly distinguishing
grants from cooperative agreements.[Footnote 12] While Congress did
not enact all of the Commission's recommendations, it did enact these
two in the form of the Federal Grant and Cooperative Agreement Act of
1977, Pub. L. No. 95-224, 92 Stat. 3 (Feb. 3, 1978), codified at 31
U.S.C. §§ 6301-6308. Referring to the Commission's findings, the
report on this legislation by the then Senate Committee on
Governmental Affairs (now the Senate Committee on Homeland Security
and Governmental Affairs) observed:
"No uniform statutory guideline exists to express the sense of
Congress on when executive agencies should use either grants,
cooperative agreements or procurement contracts. Failure to
distinguish between procurement and assistance relationships has led
to both the inappropriate use of grants to avoid the requirements of
the procurement system, and to unnecessary red tape and administrative
requirements in grants."
S. Rep. No. 95-449, at 6 (1977).
The Federal Grant and Cooperative Agreement Act was enacted to:
"prescribe criteria for executive agencies in selecting appropriate
legal instruments to achieve:
(A) uniformity in their use by executive agencies;
(B) a clear definition of the relationships they reflect; and;
(C) a better understanding of the responsibilities of the parties to
them."
31 U.S.C. § 6301(2). To achieve these purposes, the act established
standards that agencies are to use in selecting the most appropriate
funding vehicle: a procurement contract, a grant, or a cooperative
agreement. The standards are contained in sections 4, 5, and 6 of the
act, codified at 31 U.S.C. §§ 6303-6305, which are summarized below:
* 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." 31 U.S.C. § 6303
(emphasis added).
* 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, etc.] to the recipient "to carry out a
public purpose of support or stimulation authorized by a law of the
United States instead of acquiring (by purchase, lease, or barter)
property or services for the direct benefit or use of the United
States Government," and "substantial involvement is not expected"
between the agency and the recipient when carrying out the
contemplated activity. 31 U.S.C. § 6304 (emphasis added).
* Cooperative agreements. An agency is to use a cooperative agreement
when the principal purpose of the relationship is to transfer a thing
of value to the recipient "to carry out a public purpose of support or
stimulation authorized by a law of the United States instead of
acquiring (by purchase, lease, or barter) property or services for the
direct benefit or use of the United States Government," and
"substantial involvement is expected" between the agency and the
recipient when carrying out the contemplated activity. 31 U.S.C. §
6305 (emphasis added).
The Federal Grant and Cooperative Agreement Act authorizes the
Director of the Office of Management and Budget (OMB) to provide
additional guidance in interpreting the act to "promote consistent and
efficient use of procurement contracts, grant agreements, and
cooperative agreements." 31 U.S.C. § 6307(1). OMB published such
guidance on August 18, 1978 (43 Fed. Reg. 36860), which is still in
effect.[Footnote 13]
The Federal Grant and Cooperative Agreement Act's basic criterion on
when to use a procurement contract rather than one of the two
assistance arrangements (a grant or cooperative agreement) is clear
and turns on the underlying purpose of the arrangement: If the federal
agency's primary purpose is to acquire goods or services for the
direct benefit or use of the government, then a procurement contract
must be used. On the other hand, the act calls for use of a grant or a
cooperative agreement when the agency's primary purpose is to provide
assistance for the recipient to use in order to accomplish a public
objective authorized by law. Thus, procurement contracts differ from
either grants or cooperative agreements in terms of their basic
purpose.
Under the act, a grant and a cooperative agreement are closely related
assistance arrangements with essentially the same basic purpose: to
encourage the recipient of funding to carry out activities in
furtherance of a public goal. The difference is the degree of
involvement between the federal agency and the recipient in the
performance of the activity being funded. When the involvement is
expected to be "substantial," the act requires use of a cooperative
agreement rather than a grant. The act does not define "substantial"
in this context. However, the Senate report on the Federal Grant and
Cooperative Agreement Act provided the following examples of
situations that might require substantial federal involvement:
* federal project management or federal program or administrative
assistance would be helpful due to the novelty or complexity involved
(for example, in some construction, information systems development,
and demonstration projects);
* federal/recipient collaboration in performing the work is desirable
(for example, in collaborative research, planning or problem solving);
* federal monitoring is desirable to permit specified kinds of
direction or redirection of the work because of interrelationships
among projects in areas such as applied research; and;
* federal involvement is desirable in the early stages of ongoing
programs, such as welfare or law enforcement programs, where standards
are being developed or the application of standards requires a period
of adjustment until recipient capability has been developed.
S. Rep. No. 95-449, at 9-10. The OMB guidance expands on what
substantial involvement means. See 43 Fed. Reg. at 36863.
It should be emphasized that substantial involvement here refers to
federal participation in the performance of the funded activity. This
should not be taken to imply that a federal grantor agency lacks an
oversight role when lack of substantial involvement calls for the use
of a grant.[Footnote 14] Quite the contrary, GAO has held that grantor
agencies have an affirmative duty to oversee grant performance and
that, "as a matter of law, a grantor agency may not disassociate
itself from the performance of its grant." B-303927, June 7, 2005, at
8-9. The decision in B-303927 cited a provision of the Single Audit
Act, 31 U.S.C. § 7504(a)(1) ("Each Federal agency shall, in accordance
with guidance issued by the Director [of the Office of Management and
Budget], ... monitor non-federal entity use of Federal awards"), as
well as GAO and judicial decisions that emphasize the contractual
nature of grant obligations.
The Federal Grant and Cooperative Agreement Act authorizes OMB to
exempt a transaction or program of an executive agency from its
application. Id. § 6307(2). The original act provided this exemption
authority only on a temporary basis. However, Congress later made the
authority permanent. Pub. L. No. 97-162, 96 Stat. 23 (Apr. 1, 1982).
The legislative history of Public Law 97-162 noted that OMB had used
the exemption authority sparingly (only for nonmonetary grants and
certain revenue sharing programs) and stated the expectation that
future exemptions would likewise be few in number and limited to
individual transactions or programs. S. Rep. No. 97-180, at 2 (1981).
Specific legislation may also exempt programs from the Federal Grant
and Cooperative Agreement Act's requirements. This was the case in B-
279338, Jan. 4, 1999, where a provision of the Indian Self-
Determination and Education Assistance Act, 25 U.S.C. § 450e-1, made
such an exemption. In view of this exemption, the Comptroller General
upheld the Interior Department's use of a contract, rather than a
grant, to fund a land acquisition for an Indian tribe using authority
in the Self-Determination Act that ordinarily applied to a grant
program.
b. Agency Implementation of the Act:
In determining the correct funding instrument to use, the threshold
question to consider is whether the agency has statutory authority to
engage in assistance transactions at all. While federal agencies
generally have "inherent" authority to enter into contracts to procure
goods or services for their own use, there is no comparable inherent
authority to enter into assistance relationships, that is, to give
away the government' s money or property, either directly or by the
release of vested rights, to benefit someone other than the
government. 65 Comp. Gen. 605, 607 (1986); B-210655, Apr. 14, 1983.
Therefore, the relevant legislation must be studied to determine
whether an assistance relationship is authorized at all, and if so,
under what circumstances and conditions. See, e.g., 64 Comp. Gen. 582,
584 (1985); 59 Comp. Gen. 1, 8 (1979).
It is important to note that the Federal Grant and Cooperative
Agreement Act does not expand an agency's substantive authority in
this regard. While the act provides criteria for examining whether an
arrangement should be a contract, grant, or cooperative agreement,
determinations of whether an agency has authority to enter into such
arrangements in the first instance must be based on the agency's
authorizing or program legislation. Once the necessary underlying
authority is found, the legal instrument (contract, grant, or
cooperative agreement) that fits the arrangement as contemplated must
be used, using the statutory definitions for guidance as to which
instrument is appropriate.
The analysis of the agency's program authority is not a matter of
discretion; the requisite authority either is there or it is not. In
this regard, however, the focus should be on the substance of an
agency's program authority rather than the particular labels used or
not used. In this connection, a Senate Committee on Governmental
Affairs report stated:
"[The Federal Grant and Cooperative Agreement Act] was never intended
to be an independent grant of authority to agencies to enter into
assistance or contractual relationships where no such authority can be
found in authorizing legislation. Rather, it was and is intended to
force agencies to use a legal instrument that, according to the
criteria established by the Act, matches the intended and authorized
relationship—regardless of the terminology used in existing
legislation to characterize the instrument to be used in the
transaction."[Footnote 15]
Further discussion on this point may be found in B-196872-0.M., Mar.
12, 1980, and a GAO report entitled Agencies Need Better Guidance for
Choosing Among Contracts, Grants, and Cooperative Agreements, GGD-81-
88 (Washington, D.C.: Sept. 4, 1981).
c. Decisions Interpreting the Act:
It is important that an agency identify the appropriate funding
instrument because procurement contracts are subject to a variety of
statutory and regulatory requirements that generally do not apply to
assistance transactions. If the type of relationship is not determined
properly, assistance arrangements could be used to evade competition
and other legal requirements applicable to procurement contracts.
Conversely, legitimate assistance awards should not be burdened by all
of the formalities of procurement contracts. The following decisions
illustrate how the act's criteria have been applied.
In 61 Comp. Gen. 428 (1982), GAO agreed with the Department of
Energy's use of a cooperative agreement with a private company to
design and construct a "prototype solar parabolic dish/sterling engine
system module," finding that the proposal's primary purpose was to
encourage development and early market entry rather than to acquire
the particular item for its own use, although it would eventually have
governmental applications. Therefore, GAO held that the arrangement
did not constitute a procurement contract requiring competition.
In contrast, some decisions have held that a procurement contract is
the appropriate instrument. For example, the Comptroller General
determined in B-262110, Mar. 19, 1997, that the Environmental
Protection Agency should have acquired conference support services
using a procurement contract rather than a cooperative agreement
because the support services were a direct benefit to the agency.
Similarly, the Comptroller General concluded in B-257430, Sept. 12,
1994, that the Office of Personnel Management (OPM) should have used a
procurement contract to obtain survey services because the services
directly benefited OPM by providing OPM assistance in performing the
agency's statutory duty and because OPM exercised significant
influence over the survey arrangements.[Footnote 16]
The issue of whether an agency was improperly using an assistance
instrument instead of a procurement contract has also been raised in
judicial decisions. The court in Chem Service, Inc. v. Environmental
Monitoring Systems Laboratory, 12 F.3d 1256 (3rd Cir. 1993), after
reviewing the relevant authorizing legislation and its legislative
history, held that the plaintiff company could challenge whether a
cooperative research and development agreement between the
Environmental Protection Agency and a private laboratory actually
constituted a procurement contract that should have been subject to
competition requirements under federal law.
One common situation in which the question of the principal purpose of
the funding relationship is raised is the so-called "third party" or
"intermediary" situation where a federal agency provides assistance to
specified recipients by using an intermediary. In these situations, it
is necessary to examine the agency's program authority to determine
the authorized forms of assistance. The agency's relationship with the
intermediary should normally be a procurement contract if the
intermediary is not itself a member of a class eligible to receive
assistance from the government. In other words, if an agency program
contemplates provision of technical advice or services to a specified
group of recipients, the agency may provide the advice or services
itself or hire an intermediary to do it for the agency. In that case,
the proper vehicle to fund the intermediary is a procurement contract.
The agency is "buying" the services of the intermediary for its own
purposes, to relieve the agency of the need to provide the advice or
services with its own staff. Thus, it is acquiring the services for
"the direct benefit or use of the United States Government," which
mandates the use of a procurement contract under the Federal Grant and
Cooperative Agreement Act.
On the other hand, if the program purpose contemplates support to
certain types of intermediaries to provide consultation or other
specified services to third parties, the Comptroller General has
approved the agency's choice of a grant rather than a contract as the
preferred funding vehicle. Thus, in 58 Comp. Gen. 785 (1979), the
Comptroller General found that the Department of Commerce could
properly award a noncompetitive grant to an intermediary organization
to provide management and technical assistance to minority business
firms. Although the point was not detailed in the decision, the agency
clearly had the requisite program authority to provide grant
assistance to the intermediary.
The Comptroller General came to the opposite conclusion in 61 Comp.
Gen. 637 (1982). In that case, the Department of Housing and Urban
Development had awarded a cooperative agreement to a nonprofit
organization to provide technical assistance to certain block grant
recipients. While the department's authority to provide technical
assistance to the block grant recipients was clear, there was no
authority to provide assistance to the intermediary organization. The
essence of the intermediary transaction was the acquisition of
services for ultimate delivery to authorized recipients. Thus, the
Comptroller General concluded that a procurement contract should have
been used.
The Senate committee report on legislation that amended the original
Federal Grant and Cooperative Agreement Act addressed the intermediary
issue and agreed with GAO's interpretation:
"The choice of instrument for an intermediary relationship depends
solely on the principal federal purpose in the relationship with the
intermediary. The fact that the product or service produced by the
intermediary may benefit another party is irrelevant. What is
important is whether the federal government's principal purpose is to
acquire the intermediary's services, which may happen to take the form
of producing a product or carrying out a service that is then
delivered to an assistance recipient, or if the government's principal
purpose is to assist the intermediary to do the same thing. Where the
recipient of an award is not receiving assistance from the federal
agency but is merely used to provide a service to another entity which
is eligible for assistance, the proper instrument is a procurement
contract."
S. Rep. No. 97-180, at 3 (1981).
The foregoing cases deal with the specific issue of which funding
instrument to use, procurement contract versus assistance agreement.
However, the analysis required by the Federal Grant and Cooperative
Agreement Act may also be relevant when the main issue concerns the
applicability of other federal laws to a particular funding
instrument. The following cases provide examples.
In B-196690, Mar. 14, 1980, the Interior Department asked whether it
could use its 1978 and 1979 appropriations to fund expenses of the
American Samoan Judiciary related to entertainment and the purchase of
motor vehicles. Using the guidelines of the Federal Grant and
Cooperative Agreement Act, the Comptroller General reviewed the
relationship between the Interior Department and the American Samoan
Judiciary and concluded that it was essentially a grant relationship.
Therefore, restrictions such as those relating to entertainment and
motor vehicles that would apply to the direct expenditure of
appropriations by the federal government or through a contractor did
not apply to expenditures by the grant recipient, absent some
provision to the contrary in the appropriation, agency regulations, or
grant agreement.[Footnote 17] For fiscal year 1980, Congress changed
the statutory language to specifically appropriate funds "for grants
to the judiciary in American Samoa," thus removing any doubt that the
Samoan Judiciary is a grant recipient. Pub. L. No. 96-126, 93 Stat.
954, 965 (Nov. 27, 1979).
In 59 Comp. Gen. 424 (1980), the Comptroller General viewed the
Environmental Protection Agency's public participation program of
providing financial assistance to certain intervenors in proceedings
before the agency as essentially a grant relationship rather than a
contractual one. Accordingly, the decision held that 31 U.S.C. § 3324,
which generally prohibits the government from making payments for
goods or services in advance of delivery,[Footnote 18] did not to
preclude participants from receiving funds in advance of the
completion of their participation, subject to the provision of
adequate fiscal controls.
In another case, B-290900, Mar. 18, 2003, the Comptroller General held
that the general requirement under 44 U.S.C. § 501 that the Government
Printing Office perform printing and binding "for the government" did
not apply to the publication of an educational brochure about the
Michigan Lighthouse Project that the Bureau of Land Management (BLM)
had helped to fund. The Michigan Lighthouse Project involved a
cooperative agreement between BLM and other federal, state, and
nonprofit entities to preserve historical lighthouses. While the
decision did not refer specifically to the Federal Grant and
Cooperative Agreement Act, it did apply reasoning similar to the
analysis called for by the act. The decision noted that the brochure
was published as part of the cooperative agreement and thus generally
benefited all of the parties to the agreement. Accordingly, for the
same reason that the transaction did not involve work "for the
government" within the meaning of 44 U.S.C. § 501, it did not
represent the acquisition of services principally "for the direct
benefit or use of the United States Government."
Judicial decisions also have considered the Federal Grant and
Cooperative Agreement Act in considering the applicability of other
laws. In Hammond v. Donovan, 538 F. Supp. 1106 (WD. Mo. 1982), the
court held that the relationship between the Labor Department and a
state employment office was a grant, and therefore not subject to a
statute requiring that certain procurement contracts contain an
affirmative action for veterans provision. The court in Partridge v.
Reich, 141 F.3d 920 (9th Cir. 1998), reached the same conclusion in
rejecting the contention that a grant was subject to the same statute
considered in Hammond.
Before leaving the subject of the Federal Grant and Cooperative
Agreement Act, it is worth highlighting some judicial decisions that
have considered the act in relation to a topic discussed in the
previous section: whether and to what extent grants and cooperative
agreements should be regarded as contracts.
The issue in several of the cases is whether assistance agreements can
give rise to enforceable contract rights and obligations. The Tucker
Act gives the Court of Federal Claims jurisdiction over claims against
the United States "founded ... upon any express or implied contract
with the United States ..." 28 U.S.C. § 1491(a)(1). In Trauma Service
Group, Ltd. v. United States, 33 Fed. Cl. 426 (1995), the court
determined that a memorandum of agreement (MOA) between the Defense
Department and a health care provider was a cooperative agreement
within the meaning of the Federal Grant and Cooperative Agreement Act.
Reasoning that all federal agreements must fall into one of the act's
three categories, the court reasoned that the MOA, therefore, could
not be a contract for purposes of the Tucker Act. Trauma Service
Group, 33 Fed. Cl. at 429-30. Accordingly, the court dismissed the
claim.
Another judge of the same court came to the opposite conclusion in a
case decided just a few months later, Thermalon Industries, Ltd. v.
United States, 34 Fed. Cl. 411 (1995). The Thermalon court held that a
National Science Foundation research grant could give rise to contract
rights enforceable under the Tucker Act so long as the grant embodied
the traditional elements of a contract: offer, acceptance by an
officer having authority to bind the United States, and consideration.
The court rejected the agency's argument that the Federal Grant and
Cooperative Agreement Act precluded treating the grant as a contract
for Tucker Act purposes:
"There is no suggestion in the [Federal Grant and Cooperative
Agreement Act] that procurement contracts are the only type of
contracts enforceable under the Tucker Act or that grant agreements
that satisfy all of the ordinary requirements for a government
contract should not be classified as contracts enforceable under the
Tucker Act."
Thermalon, 34 Fed. CL at 417. Considering the Federal Grant and
Cooperative Agreement Act's legislative history, the court viewed that
act as addressing "a very different set of concerns" than Tucker Act
contract jurisdiction. Id. at 418. To the extent that its
interpretation of the act was inconsistent with the analysis in Trauma
Service Group, the court "respectfully disagreed with that analysis."
Id. at fn. 4.
Later, in Trauma Service Group, Ltd. v. United States, 104 F.3d 1321
(1997), the Court of Appeals for the Federal Circuit affirmed the
Federal Claims Court's dismissal in that case, but actually sided with
the Thermalon decision's analysis on the Federal Grant and Cooperative
Agreement Act point. The Federal Circuit determined that the plaintiff
in Trauma Service Group had not established a violation of any duty
owed to it under the terms of the MOA; thus, there could be no breach
of contract. However, the Federal Circuit rejected the lower court's
conclusion that a cooperative agreement could never be a contract for
purposes of the Tucker Act:
"Any agreement can be a contract within the meaning of the Tucker Act,
provided that it meets the requirements for a contract with the
Government, specifically: mutual intent to contract including an offer
and acceptance, consideration, and a Government representative who had
actual authority to bind the Government. See City of El Centro, 922
F.2d at 820; Thermalon, 34 Fed.Cl. at 414. As such, contrary to the
opinion of the trial court, a MOA can also be a contract—whether this
one is, we do not decide."
104 F.3d at 1326. Most recently, the Court of Federal Claims in
Pennsylvania Department of Public Welfare v. United States, 48 Fed.
Cl. 785, 790-91 (2001), reiterated in dicta that a grant could confer
jurisdiction under the Tucker Act if it contained all of the elements
of a contract. In this regard, the court cited its prior decision in
Trauma Service Group as well as the Thermalon decision and a number of
cases that preceded the enactment of Federal Grant and Cooperative
Agreement Act. However, the court held that the grant in the case
before it did not include the necessary elements of a contract.
Other courts have also declined to interpret the Federal Grant and
Cooperative Agreement Act as precluding the treatment of assistance
agreements as contracts for purposes unrelated to determining the
appropriate funding instrument for a federal agency to use. See Henke
v. Department of Commerce, 83 F.3d 1445 (D.C. Cir. 1996) (Privacy Act
disclosure exemption, 5 U.S.C. § 552a(k)(5), pertaining to "Federal
contracts" applied to a National Science Foundation grant that
embodied the essential elements of a contract); United States v.
President & Fellows of Harvard College, 323 F. Supp. 2d 151 (D. Mass.
2004) (cooperative agreements between the Agency for International
Development and Harvard were contracts for purposes of a breach of
contract action initiated by the United States).
By way of summary, the Federal Grant and Cooperative Agreement Act
provides criteria that agencies must use in deciding which funding
instrument to use from among contracts, grants, and cooperative
agreements. This choice assumes, of course, that the agency has the
requisite statutory authority to enter into assistance relationships
in the form of a grant or cooperative agreement. The Federal Grant and
Cooperative Agreement Act does not in itself supply such authority.
Legal issues concerning the choice of instrument invariably focus on
procurement versus assistance relationships, with the underlying
concern often being whether competition requirements should apply. The
Comptroller General and the courts may also look to the criteria in
the Federal Grant and Cooperative Agreement Act to classify a funding
transaction for purposes of determining the applicability of other
laws. In this context, however, the clear weight of authority is that
the act's classifications are not mutually exclusive. Thus, something
that is clearly a "grant" for purposes of the act still may be a
"contract" or at least have contract features for purposes of other
laws.[Footnote 19]
3. Competition for Discretionary Grant Awards:
Grant programs are either mandatory or discretionary. In a mandatory
grant program, Congress directs awards to one or more classes of
prospective recipients who meet specific criteria for eligibility, in
specified amounts. These grants, sometimes called "entitlement" or
"formula" grants, are often awarded on the basis of statutory
formulas.[Footnote 20] While the grantor agency may disagree on the
application of the formula, it has no basis to refuse to make the
award altogether. City of Los Angeles v. Coleman, 397 F. Supp. 547
(D.D.C. 1975). Thus, questions of grantee selection, and hence of
competition, do not arise. The concept of competition can only apply
when the grantor has discretion to choose one applicant over another.
Therefore, the following discussion is limited to discretionary grants.
The Federal Grant and Cooperative Agreement Act encourages competition
in assistance programs where appropriate, in order to identify and
fund the best possible projects to achieve program objectives. 31
U.S.C. § 6301(3). This, however, is merely a statement of purpose.
There are few other legislative pronouncements specifying how this
objective is to be achieved, certainly nothing approaching the detail
and specificity of statutes applicable to procurement contracts such
as the Competition in Contracting Act of 1984.[Footnote 21] Statutory
requirements for competition in grantee selection do exist in certain
contexts, but they tend to be very general and do not specify actual
procedures. Two examples involving the Department of Defense are 10
U.S.C. § 2361(a)(1) (competitive procedures required for Defense
Department research and development grants to colleges and
universities), and 10 U.S.C. § 2196(i)(competitive procedures also
required for Defense Department manufacturing engineering education
grants).
In view of the essential differences between grants and procurement
contracts, GAO has declined to use its bid protest mechanism,
prescribed to assure the fairness of awards of contracts, to rule on
the propriety of individual grant awards.[Footnote 22] That is, GAO
will not consider a complaint by a rejected applicant that it should
have received the grant rather than the recipient to whom it was
actually awarded. See, e.g., B-203096, May 20, 1981; B-199247, Aug.
21, 1980; B-199147, June 24, 1980; B-190092, Sept. 22, 1977. This does
not affect GAO's jurisdiction to render decisions on the legality of
federal expenditures, however, so GAO can and will render decisions on
the legality of grant awards in terms of compliance with applicable
statutes and regulations. Of course, GAO may also evaluate competition
in grant awards from an audit perspective. One such evaluation is GAO,
Discretionary Grants: Opportunities to Improve Federal Discretionary
Award Practices, GAO/HRD-86-108 (Washington, D.C.: Sept. 15, 1986).
GAO has adopted a similar position with respect to cooperative
agreements. See, e.g., B-255780, Nov. 23, 1993, in which the
Comptroller General dismissed a protest against the Small Business
Administration's use of a cooperative agreement to obtain management
and technical assistance services because a provision in the Small
Business Act gave the agency the discretion to choose whether to
provide such services through grants, cooperative agreements, or
procurement contracts. GAO will not consider a "protest" against the
award of a cooperative agreement unless it appears that a conflict of
interest exists or that the agency is using the cooperative agreement
to avoid the competition requirements of the procurement laws and
regulations (i.e., in violation of the Federal Grant and Cooperative
Agreement Act). See, e.g., B-281439.3, 281439.4, Mar. 23, 1999; B-
260514, June 16, 1995; 64 Comp. Gen. 669 (1985); 61 Comp. Gen. 428
(1982); B-258267, Dec. 21, 1994; B-256586, B-256586.2, May 9, 1994; B-
255780, Nov. 23, 1993; B-216587, Oct. 22, 1984. Again, this refers to
review under GAO's "bid protest" jurisdiction and does not affect
review under GAO's other available authorities.
In summary, assuming the proper instrument has been selected, GAO will
not question funding decisions in discretionary federal assistance
programs. B-228675, Aug. 31, 1987 (denial of an application for
funding renewal was held to be a policy matter within the grantor
agency's discretion because nothing in the program legislation
provided otherwise and the agency had complied with all the applicable
procedural requirements. See also City of Sarasota v. Environmental
Protection Agency, 813 F.2d 1106 (11th Cir. 1987) (court declined to
review agency refusal to award grant for construction of a wastewater
treatment project); Massachusetts Department of Correction v. Law
Enforcement Assistance Administration, 605 F.2d 21 (1st Cir. 1979)
(court upheld agency's refusal to award grant, finding that procedural
deficiencies, even though they amounted to "sloppiness," were not
sufficiently grave as to deprive the applicant of fair consideration).
C. Some Basic Concepts:
A number of principles have evolved that are unique to grant law.
These will be discussed in subsequent sections of this chapter. Many
cases, however, involve the application of principles of law which are
not unique to grants. As a general proposition, the fundamental
principles of appropriations law discussed in preceding chapters apply
to grants just as they apply to other expenditures. This section is
designed to highlight a few of these areas, each of which is covered
in detail elsewhere in this publication, and to show how they may
apply in assistance contexts.
1. The Grant as an Exercise of Congressional Spending Power:
When Congress enacts grant legislation and provides appropriations to
fund the grants, it is exercising the spending power conferred upon it
by the Constitution.[Footnote 23] As such, it is clear that Congress
has the power to attach terms and conditions to the availability or
receipt of grant funds, either in the grant legislation itself or in a
separate enactment. Oklahoma v. Civil Service Commission, 330 U.S. 127
(1947) (provision of Hatch Act prohibiting political activity by
employees of state or local government agencies receiving federal
grant funds upheld as within congressional power). See also West
Virginia v. United States Department of Health, & Human Services, 289
F.3d 281 (4th Cir. 2002) (upholding amendment to Medicaid legislation
requiring states to recoup expenses from estates of deceased
beneficiaries).
In South, Dakota v. Dole, 483 U.S. 203, 207 (1987) (citations
omitted), the Supreme Court observed:
"The power of Congress to authorize expenditure of public moneys for
public purposes is not limited by the direct grants of legislative
power found in the Constitution.' Thus, objectives not thought to be
within Article I's 'enumerated legislative fields' ... may
nevertheless be attained through the use of the spending power and the
conditional grant of federal funds."
a. Constitutionality of Grant Conditions:
The Supreme Court and lower courts have repeatedly affirmed the power
of Congress to attach conditions to grant funds provided that the
conditions are (1) in pursuit of the general welfare, (2) expressed
unambiguously, (3) reasonably related to the purpose of the
expenditure, and (4) not in violation of other constitutional
provisions. New York v. United States, 505 U.S. 144, 171-72 (1992). In
this case, the Supreme Court upheld the constitutionality of statutory
grant conditions that imposed on states milestones for disposing of
radioactive waste, although it declared unconstitutional another
aspect of the statute. The following are additional examples of cases
upholding grant conditions: United States v. American Library
Association, 539 U.S. 194 (2003) (requiring public libraries to use
Internet filters in order to receive federal subsidies); South Dakota
v. Dole, 483 U.S. 203, 207-08 (1987) (withholding a percentage of
federal highway funds from states that do not adopt a minimum drinking
age of 21); Nevada v. Skinner, 884 F.2d 445 (9th Cir. 1989), cert.
denied, 493 U.S. 1070 (1990) (conditioning the receipt of federal
highway funds on state adoption of the national speed limit). The
following cases illustrate application of the criteria for grant
conditions set forth in New York v. United States.[Footnote 24]
(1) Conditions must be in pursuit of the general welfare and related
to the purpose of the expenditure:
These two criteria tend to overlap. In Hodges v. Thompson, 311 F.3d
316 (4th Cir. 2000), cert. denied sub nom., 540 U.S. 811 (2003), the
court found that both criteria were satisfied by a statutory provision
requiring states develop and maintain automated child support
enforcement data processing systems as a condition to receipt of funds
under the Temporary Assistance to Needy Families (TANF) program. As to
the "general welfare" criterion, the court agreed with the lower court
that "Congress made a considered judgment that the American people
would benefit significantly from the enhanced enforcement of child-
support decrees and the diminution of the number of parents who are
able to avoid their obligations simply by moving across local or state
lines." Hodges, 311 F.3d at 316. As to the "reasonably related"
criterion, the court recognized "a complementary relationship between
efficient child support enforcement and the broader goals of providing
assistance to needy families through the TANF program." Id. In Sabri
v. United States, 541 U.S. 600 (2004), the Supreme Court sustained the
constitutionality of a federal criminal statute that proscribed
bribery of officials of state or local government agencies that
received at least $10,000 annually in federal funds. In rejecting a
challenge that the statute exceeded Congress's spending power because
it did not require a nexus between the bribe and a use of federal
funds, the Court observed:
"Congress has authority under the Spending Clause to appropriate
federal monies to promote the general welfare ... and it has
corresponding authority under the Necessary and Proper Clause ... to
see to it that taxpayer dollars appropriated under that power are in
fact spent for the general welfare, and not frittered away in graft or
on projects undermined when funds are siphoned off or corrupt public
officers are derelict about demanding value for dollars. ... It is
true, just as Sabri says, that not every bribe or kickback offered or
paid to agents of governments covered by [the statute] will be
traceably skimmed from specific federal payments, or show up in the
guise of a quid pro quo for some dereliction in spending a federal
grant.... But this possibility portends no enforcement beyond the
scope of federal interest, for the reason that corruption does not
have to be that limited to affect the federal interest. Money is
fungible, bribed officials are untrustworthy stewards of federal
funds, and corrupt contractors do not deliver dollar-for-dollar value."
Sabri, 541 U.S. at 605-06.
(2) Conditions must be unambiguous:
As discussed before in section B.1, the Supreme Court has
characterized conditions Congress attaches to federal grants as "much
in the nature of a contract." Pennhurst State School & Hospital v.
Halderman, 451 U.S. 1, 17 (1981). Consistent with the contract
analogy, it is particularly important that grant conditions be
expressed with sufficiently clarity to establish knowing acceptance on
the part of the grantees. As the Court stated in Pennhurst:
"The legitimacy of Congress' power to legislate under the spending
power ... rests on whether the [recipient] voluntarily and knowingly
accepts the terms of the 'contract.' ... There can, of course, be no
knowing acceptance if a [recipient] is unaware of the conditions or is
unable to ascertain what is expected of it. Accordingly, if Congress
intends to impose a condition on the grant of federal moneys, it must
do so unambiguously."
Id. at 17.
One recent case on this point is Jackson v. Birmingham Board of
Education, 544 U.S._____, 125 S. Ct. 1497 (2005). The plaintiff in
Jackson, a male and former coach of a high school girls' basketball
team, sued the school board under a federal statute prohibiting "sex
discrimination" by recipients of education grant funds. He alleged
that his firing was in retaliation for complaining that the girls'
team was not receiving equal access to athletic equipment and
facilities. The school board countered that it lacked adequate notice
that it could be held liable under the statute, which did not
explicitly prohibit retaliation against persons who complained about
discrimination. The Court rejected the school board's argument on the
basis that the board should have been on notice of a series of prior
Supreme Court decisions that consistently construed the statute
broadly to encompass diverse forms of intentional discrimination, and
that retaliation was clearly a form of intentional discrimination.
Jackson, 125 S. Ct. at 1509-10. See also Garrett v. University of
Alabama at Birmingham Board of Trustees, 344 F.3d 1288 (11th Cir.
2003), holding that a statutory provision unambiguously conditioned
the receipt by states of federal grant funds on a waiver of their
Eleventh Amendment immunity to certain claims and that, by continuing
to accept federal funds, the state agencies waived their immunity.
By contrast, an en banc decision in Commonwealth of Virginia
Department of Education v. Riley, 106 F.3d 559 (4th Cir. 1997), held
that a statutory provision was not sufficiently clear to impose a
binding condition on the use of grant funds. Riley involved a
provision of the Individuals with Disabilities in Education Act that
required recipients of grant funds under the act to ensure all
children with disabilities the right to a free appropriate public
education. 20 U.S.C. § 1412(1) (Supp. 1996). The federal Department of
Education determined that the state of Virginia's policy of
discontinuing free public education for students (both disabled and
nondisabled) who were expelled or suspended for a lengthy period
violated this provision of the act. When the state appealed, a Fourth
Circuit panel agreed with the Education Department. However, the
court, en banc, held that the statute was insufficiently unambiguous
to require that the state, as a condition of receiving the grant
funds, continue to provide education for expelled or suspended
students. Which interpretation of the statute was better in the
abstract was not the question, said the court. Rather, citing South
Dakota v. Dole and Pennhurst, the court held:
"The question is whether, in unmistakably clear terms, Congress has
conditioned the States' receipt of federal funds upon the provision of
educational services to those handicapped students expelled for
misconduct unrelated to their handicap: UN Congress desires to
condition the States' receipt of federal funds, it 'must do so
unambiguously ....'"
Riley, 106 F.3d at 566 (emphasis in original).[Footnote 25]
(3) Conditions must be otherwise constitutional:
Grant conditions obviously may not violate other federal
constitutional provisions. While courts rarely strike down grant
conditions on constitutional grounds, they have done so in two recent
cases. In Legal Services Corp. v. Velasquez, 531 U.S. 533 (2001), the
Supreme Court held that a statutory provision prohibiting Legal
Service Corporation grantees from representing clients in efforts to
amend or otherwise challenge existing welfare law violated the First
Amendment by interfering with the free speech rights of the clients.
The court in American Civil Liberties Union v. Mineta, 319 F. Supp. 2d
69 (D.D.C. 2004), declared unconstitutional a statutory provision that
prohibited the use of federal mass transit grant funds for any
activity that promoted the legalization or medical use of marijuana.
Relying on Legal Services Corp. v. Velasquez, the court held that the
provision constituted "viewpoint discrimination" in violation of the
First Amendment. Mineta, 319 F. Supp. 2d at 83-87.
Even if a grant condition satisfies all of the New York v. United
States criteria as discussed above, could it still be
unconstitutionally coercive? Although it appears that no court has
ever invalidated a federal grant condition on grounds of pure
"coerciveness," this possibility is frequently discussed in the case
law. A leading example is West Virginia v. United States Department of
Health, & Human Services, 289 F.3d 281 (4th Cir. 2002). In that case,
West Virginia challenged on Tenth Amendment grounds a statutory
provision requiring that as a condition to participating in the
Medicaid program, states implement a program to recover certain
expenditures from the estates of deceased Medicaid beneficiaries.
Failure to comply could result in a loss of all or part of the state's
federal Medicaid reimbursement.[Footnote 26] The state did not contend
that the condition violated any of the criteria in New York v. United
States. Rather, West Virginia viewed the estate recovery program as
"bad public policy" but maintained that it had no practical option to
reject it. The state had participated in Medicaid for almost 30 years
before "Congress changed the rules of the game" and mandated the
estate recovery program. Withdrawal of its federal Medicaid funds at
this stage would cause its health care system to "effectively
collapse."
The court struggled with this argument. It cited several Supreme Court
decisions in suggesting that compliance with the New York v. United
States criteria might not be enough to immunize a grant condition from
constitutional jeopardy:
"The Supreme Court has cautioned that 'in some circumstances the
financial inducement [to comply with a condition imposed upon the
receipt of federal funds] offered by Congress might be so coercive as
to pass the point at which pressure turns into compulsion.' ... Thus,
while Congress may use its spending powers to encourage the states to
act, it may not coerce the states into action. If the Congressional
action amounts to coercion rather than encouragement, then that action
is not a proper exercise of the spending powers but is instead a
violation of the Tenth Amendment."
West Virginia, 289 F.3d at 286-87. The opinion then discussed at
length decisions from the Fourth Circuit and other circuits that
differed, largely on a conceptual level, as to whether there was a
viable "coercion theory" applicable to federal grant conditions. It
concluded in this regard:
"We are aware of no decision from any court finding a conditional
grant to be impermissibly coercive. Although the Supreme Court has
more than once referred to the existence of the coercion theory ...
its cases have provided little guidance for determining when the line
between encouragement and coercion is crossed."
Id. at 289. In fact, it noted that "most courts faced with the
question have effectively abandoned any real effort to apply the
coercion theory"
Id. at 290. Ultimately, the court rejected West Virginia's coercion
argument on the basis that the federal government was unlikely to take
drastic action against the state:
"If the government in fact withheld the entirety of West Virginia's
[Medicaid funding] because of the state's failure to implement an
estate recovery program, then serious Tenth Amendment questions would
be raised. ... In reality, however, the government threatened to
withhold 'all or part of [West Virginia's] Federal financial
participation in the State's Medicaid Program.' ... This small
difference in language makes all the difference in our analysis."
Id. at 291-92 (emphasis added).
b. Effect of Grant Conditions:
A valid grant condition imposed by or pursuant to a federal statute is
binding on the recipient and will prevail over inconsistent state law:
"There is of course no question that the Federal Government, unless
barred by some controlling constitutional prohibition, may impose the
terms and conditions upon which its money allotments to the States
shall be disbursed, and that any state law or regulation inconsistent
with such federal terms and conditions is to that extent invalid."
King v. Smith,, 392 U.S. 309, 333 n.34 (1968); see also Townsend v.
Swank, 404 U.S. 282 (1971) (state statute inconsistent with
eligibility criteria of Aid to Families with Dependent Children
legislation held invalid); United States v. Miami University, 294 F.3d
797, 808 (6th Cir. 2002) (federal government has inherent power to sue
to enforce conditions imposed on the recipients of federal grants);
State of Kansas v. United States, 214 F.3d 1196 (10th Cir.), cert.
denied, 531 U.S. 1035 (2000) (rejecting a state challenge to
restrictions imposed on child support enforcement program under
federal law); S.J. Groves & Sons v. Fulton County, 920 F.2d 752, 76364
(11th Cir.), cert. denied, 501 U.S. 1252 and 500 U.S. 959 (1991)
(valid grantor agency regulations may preempt state law).
When Congress has imposed a valid condition on the receipt of grant
funds, the condition is, in effect, a "condition precedent" to the
recipient's participation in the program.[Footnote 27] Unless
permitted under the program legislation, the condition may not be
waived or omitted even though a given state may not be able to
participate because state law or the state constitution precludes
compliance. North, Carolina ex rel. Morrow v. Califano, 445 F. Supp.
532 (E.D.N.C. 1977), aff'd mem., 435 U.S. 962 (1978). See also Hodges
v. Thompson, 311 F.3d 316 (4th Cir. 2002), cert. denied sub nom., 540
U.S. 811 (2003)(program requirement that state approved plan include
automated data processing and information retrieval system was not
coercive and agency has no discretion to deviate from the statutory
noncompliance penalty provisions); 43 Comp. Gen. 174 (1963).
Once federal conditions attach, there are limits to what a grantee can
do to "de-federalize" the funded project or activity in order to free
itself of the condition. In Ross v. Federal Highway Administration,
162 F.3d 1046 (10th Cir. 1998), the state of Kansas had been working
on a federally funded highway project for many years. However, one
segment of the project had been stalled for 3 years because of
environmental concerns and the ability of the parties to finalize a
supplemental environmental impact statement. To resolve the impasse,
state and local officials decided to proceed with this segment using
only nonfederal funds. The Federal Highway Administration agreed and
initiated action to terminate the environmental impact statement
process on the basis that this segment of the project was no longer a
"major federal action." This strategy failed, however, when
environmentalists sued and the court in Ross held that completion of
the segment continued to be a major federal action even if locally
funded:
"At the advanced stage of the trafficway project, it was simply too
late for the state of Kansas to convert the eastern segment into a
local project. Since 1986, local, state and federal authorities
scheduled, programmed and worked on the trafficway as a joint federal-
state project. The federal nature of the trafficway was so pervasive
that the Kansas authorities could not rid the project of federal
involvement simply by withdrawing the last segment of the project from
federal funding."
162 F.3d at 1052-53. The court acknowledged that the state had the
right to select which of its highway projects would receive federal
assistance, but said that this option could not be used to circumvent
federal environmental laws. Id. at 1053. Ross cited and followed two
very similar decisions: Scottsdale Mall v. State of Indiana, 549 F.2d
484 (7th Cir. 1977), cert. denied, 434 U.S. 1008 (1978), and San
Antonio Conservation Society v. Texas Highway Dept., 446 F.2d 1013
(5th Cir. 1971), cert. denied, 406 U.S. 933 (1972).
2. Availability of Appropriations:
As with obligations and expenditures in general, a federal agency may
provide financial assistance only to the extent authorized by law and
available appropriations. Thus, the three elements of legal
availability—purpose, time, and amount—apply equally to assistance
funds.
a. Purpose:
As stated in 31 U.S.C. § 1301(a), appropriations may be used only for
the purpose(s) for which they were made.[Footnote 28] One of the ways
in which this fundamental proposition manifests itself in the grant
context is the principle that grant funds may be obligated and
expended only for authorized grant purposes. What is an "authorized
grant purpose" is determined by examining the relevant program
legislation, legislative history, and appropriation acts.
GAO considered this issue in a recent decision, B-303927, June 7,
2005. Congress appropriated funds to the Department of Labor to assist
in response and recovery following the September 11, 2001, terrorist
attacks on the United States. The appropriation earmarked $125 million
for the purpose of payment to the New York Workers' Compensation Board
for "processing of claims related to the terrorist attacks." The Labor
Department distributed the funds to the Board through a grant. The
Board did not use the funds to process claims, but gave them to other
New York state entities to reimburse those entities for claims they
had paid on behalf of victims. GAO held that use of the funds for this
purpose was inconsistent with the language of the appropriation. By
contrast, GAO held in another "purpose" case, B-248111, Sept. 9, 1992,
that grant funds were available for the activities in question based
on the language of the authorizing statute and its legislative history.
Disaster relief assistance legislation, found at 42 U.S.C. §§ 5122-
5206, authorizes, among other things, federal financial contributions
to state and local governments for the repair or replacement of public
facilities damaged by a major disaster. Decisions under a prior
version of this legislation had construed public facilities as
including municipal airports (42 Comp. Gen. 6 (1962)), including
airport facilities that had been leased to private parties for the
purpose of generating income for airport maintenance (49 Comp. Gen.
104 (1969)). Assistance could also extend to a sewage treatment plant,
but not one which was not completed, and thus not in operation, at the
time of the damage. 45 Comp. Gen. 409 (1966). Unlike the earlier
legislation, the current statute defines "public facility," 42 U.S.C.
§ 5122(8), and specifically includes airport and sewage treatment
facilities.
The following are additional examples of decisions dealing with the
purpose availability of grant funds:
* Airport development grants under Federal Airport Act may include
runway sealing projects which are shown to be part of reconstruction
or repair rather than normal maintenance. 35 Comp. Gen. 588 (1956).
See also B-60032, Sept. 9, 1946 (grants under same legislation may be
made for acquisition of land or existing privately owned airports, to
be used as public airports, regardless of whether construction or
repair work is immediately contemplated).
* Mining Enforcement and Safety Administration is authorized to make
grants to a labor union to fund emergency medical technician training
program for coal miners since the proposal bears a sufficiently close
relationship to coal mine safety to come within the scope of the
governing program legislation, 30 U.S.C. § 951 (1970). B-170686, Nov.
8, 1977.
* Public Health Service grants for support of research training were
found authorized under the Public Health Service Act, as amended.
[Footnote 29] B-161769, June 30, 1967.
Grant funds provided by lump-sum appropriation are subject to the
usual rule that an agency may reallocate discretionary funds within
that appropriation as long as it uses those funds for purposes
authorized under the applicable appropriation and program
statute.[Footnote 30] The court's decision in Illinois Environmental
Protection Agency v. EPA, 947 F.2d 283 (7th Cir. 1991), illustrates
this point. Under the Clean Air Act, the Environmental Protection
Agency (EPA) could prescribe plans to implement air quality standards
for states that failed to submit adequate plans. The act also
authorized air pollution control grants to states, funded under EPA's
lump-sum Abatement, Control, and Compliance appropriation. Under its
regulations, EPA divided available funds into nonmandatory annual
allotments for each state. The regulations also authorized EPA to set
aside a portion of the unawarded allotments to support federal
implementation programs where required because of the absence of
adequate state programs. One state argued that the set-aside policy
amounted to a diversion of funds from their intended purpose and,
therefore, violated 31 U.S.C. § 1301(a). The court first upheld the
regulation as a permissible interpretation of EPA's authority under
the Clean Air Act. The court then found that there was no purpose
violation because (a) the relevant appropriation act did not earmark
any specific amount for grants to states, and (b) EPA was still using
the set-aside funds for air pollution abatement programs, which was
their intended purpose.
The Comptroller General has applied essentially the same reasoning in
several decisions dealing with grant funds. For example, in B-157356,
Aug. 17, 1978, the then Department of Health, Education, and Welfare's
Office of Human Development Services (OHD) received a lump-sum
appropriation covering a number of grant programs administered by
various OHD components. The department wanted to make what it termed
"cross-cutting" grants to fund research or demonstration projects that
would benefit more than one target population (e.g., aged, children,
Native Americans). To do this, each OHD component receiving grant
funds under the lump-sum appropriation was asked to contribute a
portion of its grant funds to a pool that would be used for approved
cross-cutting grants. Since the lump-sum appropriation did not
restrict the department's internal allocation of funds for any given
program, GAO approved the concept, provided that the grants were
limited to projects within the scope of grant programs funded by the
lump-sum appropriation, a condition necessary to assure compliance
with 31 U.S.C. § 1301(a). See also B-258000, Aug. 31, 1994, in which
GAO held that a lump-sum Forest Service appropriation could be used to
make a congressionally earmarked grant in a specific amount to the
Texas Reforestation Foundation where the proviso containing the
earmark did not identify who should make the grant or the source of
funds to be used.
Funds provided for specific grants in the form of earmarked line-item
appropriations cannot be diverted to other purposes. In 72 Comp. Gen.
317 (1993), GAO held that the General Services Administration lacked
authority to establish a "reserve account" for the expenses of
administering a grant program through a percentage set aside from line-
item appropriations of grant funds that had been awarded to various
grantees. Since Congress provided specific amounts for specific
purposes, the agency could not reduce the amount of the line-itemed
grants in order to cover the cost of administration, notwithstanding
post-enactment "approval" by a congressional subcommittee.
b. Time:
Funds must be obligated by the grantor agency within their period of
availability.[Footnote 31] The period of availability of appropriated
funds is the period of time provided by law in which the administering
agency has to obligate the funds. B-271607, June 3, 1996. The
statutory requirement for recording obligations extends to all actions
necessary to constitute a valid obligation, and includes, of course,
grant obligations (31 U.S.C. § 1501(a)(5)).[Footnote 32] Proper
recording of grant obligations facilitates compliance with the "time
of obligation" requirement by ensuring that agencies have adequate
budget authority to cover their obligations. See B-300480, Apr. 9,
2003, aff'd in B-300480.2, June 6, 2003.
In the context of discretionary grants, the obligation generally
occurs at the time of award. See, e.g., B-289801, Dec. 30, 2002; 31
Comp. Gen. 608 (1952).[Footnote 33] Thus, in B-300480, Apr. 9, 2003,
affd in B-300480.2, June 6, 2003, GAO held that an obligation arises
when the Corporation for National and Community Service awards grants
authorizing the grantees to enroll a specified number of participants
into the education programs it funds. At that time, the Corporation
incurs a recordable obligation in the amount of its maximum liability
for those benefits since, at that point, the grantee rather than the
Corporation controls the actual level of participant enrollment. Id.
An obligation under a discretionary grant program generally does not
exist absent a binding grant award. Thus, GAO concluded that a valid
grant never came into existence when an "offer of grant" made by the
Economic Development Administration to a Connecticut municipality was
accepted by a town official who did not have authority to accept the
grant, and the funds expired for obligation purposes before the town
was able to ratify the unauthorized acceptance. B-220527, Dec. 16,
1985. The town later submitted a claim for reimbursement of its
expenses, based on an "equitable estoppel" argument. Since the
nonexistence of the grant was attributable to the town's actions and
not those of the federal agency, the claim could not be allowed. B-
220527, Aug. 11, 1987. See also B-206244, June 8, 1982.
The "bona fide needs rule," which is a basic principle of time
availability, holds that an appropriation is available for obligation
only to fulfill a genuine or bona fide need of the period of
availability for which the appropriation was made.[Footnote 34] This
rule applies to grants and cooperative agreements as well as to other
types of obligations or expenditures. See, e.g., 73 Comp. Gen 77
(1994); 64 Comp. Gen. 359 (1985); B-229873, Nov. 29, 1988. However, as
discussed hereafter, the manner in which the rule applies differs
somewhat in the context of grants and other assistance transactions,
as opposed to transactions in which the federal government is
obtaining goods and services by contract.
The specific issue that arises in the grant decisions is whether the
principle of "severability," a key element in applying the bona fide
needs rule to contracts, has any relevance to assistance transactions.
The principle of severability requires determining whether services
that an agency seeks to obtain (usually by contract) are part of a
single undertaking that fulfills an agency need of the fiscal year
charged, or whether the services are severable in nature and fulfill a
recurring need of the agency from fiscal year to fiscal year. If the
services are severable, the bona fide needs rule restricts use of the
appropriation to obtaining that portion of the services needed during
its period of availability.
In a 1985 decision, 64 Comp. Gen. 359, GAO applied the severability
principle to National Institutes of Health (NIH) research grants. The
decision concluded that the grants in question were severable, and
therefore, NIH violated the bona fide needs rule by awarding them for
3 years using 1-year appropriations. The decision did express some
reservations about this result:
"We recognize that there are fundamental differences between a
contract for materials or services and a research grant. The
severability concept is not altogether analogous to the NIH research
grants, which resemble subsidies rather than contracts for services."
64 Comp. Gen. at 365. Another decision, 73 Comp. Gen. 77 (1994),
applied the severability principle to cooperative agreements. This
decision held that certain cooperative agreements providing for the
periodic issuance of project-specific research work orders were
nonseverable and, therefore, could not be funded incrementally from 1-
year appropriations.
In B-229873, Nov. 29, 1988, however, GAO held that the Small Business
Administration (SBA) did not violate the bona fide needs rule when it
used a 1-year appropriation on the last day of the fiscal year to
award cooperative agreements to Small Business Development Centers,
even though the Centers would not use the money until the next fiscal
year. Contrasting these cooperative agreements to service contracts
that were subject to the severability principle, the decision observed:
"The purpose of the Small Business Development Centers appropriation
is to fund an assistance program for nonfederal entities which, in
turn, are expected to use the funds, together with some of their own,
to fulfill a public purpose. Although the purpose of the program is to
provide assistance to Centers for a 1-year period, it really does not
matter when the Center begins or completes its tasks. The statutory
purpose was fulfilled once a grant or cooperative agreement was
awarded during the period of availability of the appropriation for
obligation; in other words, the award constitutes the obligation, and
upon award, the funds belong to the awardee."
The decision in B-229873 distinguished 64 Comp. Gen. 359 rather than
overruling it.
A more recent decision, B-289801, Dec. 30, 2002, seems to lay to rest
any vestiges of the severability principle as applied to grants or
cooperative agreements. In approving the Education Department's
practice of awarding certain education grants for 5 years using 1-year
appropriations, this decision stated flatly that "for grants, the
principle of severability is irrelevant to a bona fide need
determination." Elaborating upon this conclusion, the decision
explained:
"We believe the application of the bona fide need rule found in the
SBA case [B-229873] is the correct approach. It expressly recognizes
the fundamental difference between a contract and a grant or
cooperative agreement and the significance this difference has on a
bona fide need analysis. Contracts and grants are transactions that
fulfill significantly different needs of an agency, the former to
acquire goods and services and the latter to provide financial
assistance. B-222665, July 2, 1986 (principal purpose of a grant is to
transfer something of value to the recipient to carry out a
legislatively established public policy instead of acquiring goods or
services for the direct benefit or use of the United States). ...
"The SBA decision is also more in keeping with past decisions, where
we have routinely permitted agencies to award grants using fiscal year
funds irrespective of the fact that the funds would not be expended
until some time after the end of the fiscal year."
The decision observed that the relevant consideration was not the
principle of severability but the applicable program legislation, and
concluded in this regard:
"In our opinion, Education's award of 5-year grants is both consistent
with program objectives and within its discretion under the program
legislation. Under the program legislation, Education is not merely
required to provide financial assistance, it is to ensure through
various ways that students who have received services under the ...
program continue to receive those services from year-to-year until
completion of high school. Awarding grants 5 years in duration will
aid in ensuring the continuity of grantee services to ... students
which the programs legislation seeks to provide. Therefore, Education
is fulfilling its bona fide need under this program when it awards
these 5-year grants."
Appropriations for grant programs are generally subject to the same
time availability rules as other appropriations. Thus, for example,
when Congress expressly provides that a grant appropriation "shall
remain available until expended" (no-year appropriation), the funds
remain available until they are obligated and expended by the grantor
agency subject to the account closing statute, 31 U.S.0 § 1555. It
should be emphasized that the time availability of grant
appropriations governs the grantor agency's obligation and expenditure
of the funds; it does not limit the time in which the grantee must use
the funds once it has received them. Id. Of course, the grant statute
or the grantor agency may impose time limits on a grantee's use of
funds. See City of New York v Shalala, 34 F.3d 1161 (2nd Cir. 1994);
Mayor and City Council of Baltimore v. Browner, 866 F. Supp. 249 (D.
Md. 1994).
c. Amount:
The Antideficiency Act, 31 U.S.C. § 1341(a), among other things,
requires that federal agencies avoid incurring obligations in excess
of the amount available in their appropriations.[Footnote 35] Of
course, grant obligations and expenditures are subject to the act.
Restrictions on the availability of a lump-sum appropriation are not
legally binding unless incorporated expressly or by reference in the
appropriation act itself. Thus, a plan to award fewer National
Institutes of Health biomedical research grants, funded under a lump-
sum appropriation, than the number of grants provided for in
congressional committee reports was not unlawful, as long as all the
funds were properly obligated for authorized grant purposes. 64 Comp.
Gen. 359 (1985). See also B-157356, Aug. 17, 1978.
Minimum earmarks (e.g., "not less than" or "shall be available only")
in an authorization act were found controlling where a later-enacted
appropriation act provided a lump sum considerably less than the
amount authorized but nevertheless sufficient to meet the earmark
requirements. 64 Comp. Gen. 388 (1985).[Footnote 36] The grantor
agency will have more discretion where the earmark is a maximum ("not
to exceed") or where it is expressed only in legislative history B-
171019, Mar. 2, 1977. See also 72 Comp. Gen. 317 (1993) (General
Services Administration may not divert a portion of earmarked grants
to cover administrative costs); compare Association of Metropolitan
Water Agencies v. Browner, 24 F. Supp. 2d 83 (D.D.C. 1998) (agency was
not obligated to set aside funds for health effects research earmarked
in an authorization act where Congress never clearly made an
appropriation pursuant to the specific authorization containing the
earmark).
In the absence of a contrary provision in the applicable program
statute, regulations, or grant agreement, there is no basis to object
to a grantee's allocation of grant funds as long as the funds were
spent for eligible grant activities. B-260990, June 13, 1996; 69 Comp.
Gen. 600 (1990). See also 71 Comp. Gen. 310 (1992) (allowing grantees
to retain reasonable profit or fees under Small Business
Administration policy directive).
As the cases cited below illustrate, a federal institution is
generally not eligible to receive grant funds from another federal
source unless the program legislation so provides. The reason is that
the grant funds would improperly augment the appropriations of the
receiving institution. For example:
* Federal grant funds for nurse training programs could not be
allotted to St. Elizabeths Hospital since it was already receiving
appropriations to maintain and operate its nursing school. 23 Comp.
Gen. 694 (1944).
* Haskell Indian Junior College, fully funded by the Bureau of Indian
Affairs, was not eligible to receive grant funds from federal agencies
other than the Bureau of Indian Affairs since Congress had already
provided for its needs by direct appropriations. B-114868, Apr. 11,
1975.
The Office of Education could not make a library support grant to the
National Commission on Libraries and Information Science as it would
be an improper augmentation of the Commission's appropriations. 57
Comp. Gen. 662, 664 (1978).
3. Agency Regulations:
a. General principles:[Footnote 37]
Legislation establishing an assistance program frequently will define
the program objectives and leave it to the administering agency to
fill in the details by regulation. Thus, agency regulations are of
paramount importance in assessing the parameters of grant authority.
These regulations, if properly promulgated and within the bounds of
the agency's statutory authority, have the force and effect of law and
may not be waived on a retroactive or ad hoc basis. See generally B-
300912, Feb. 6, 2004. See also 57 Comp. Gen. 662 (1978) (eligibility
standards); B-163922, Feb. 10, 1978 (grantee's liability for improper
expenditures); B-130515, July 17, 1974; B-130515, July 20, 1973
(matching share requirements). However, the prohibition against waiver
does not necessarily apply to regulations that are merely "internal
administrative guidelines" as long as the government's interests are
adequately protected. See 60 Comp. Gen. 208, 210 (1981).
The operation of several of these principles is illustrated in B-
203452, Dec. 31, 1981. The Federal Aviation Administration (FAA)
revised its regulations to permit indirect costs to be charged to
Airport Development Aid Program grants. A grantee filed a claim for
reimbursement of indirect costs incurred prior to the change in the
FAA regulations, arguing that the charging of indirect costs was
required by a Federal Management Circular (superseded by OMB
Circulars) even before FAA recognized it in its own regulations. GAO
first pointed out that Federal Management Circulars are internal
management tools. They do not have the binding effect of law so as to
permit a third party to assert them against a noncomplying agency.
This being the case, there was no impediment to FAA's revising its
regulations without making the revision retroactive as long as both
the old and the new regulations were within the scope of FAA's legal
authority. See also Pueblo Neighborhood Health Centers, Inc. v. United
States Department of Health & Human Services, 720 F.2d 622, 625-26
(10th Cir. 1983) (department's grant application manual is an internal
agency publication rather than a regulation with force and effect of
law, so that deviations from it, in this case use of an ineligible
member on a funding review panel, did not require reversal of agency
action).
Regulations of the grantor agency will generally be upheld as long as
they are within the agency's statutory authority, issued in compliance
with applicable procedural requirements, and not arbitrary or
capricious. The courts have sustained grant regulations in many
contexts. See, e.g., Southeast Kansas Community Action Program, Inc.
v. Secretary of Agriculture, 967 F.2d 1452 (10th Cir. 1992) (upholding
a regulatory amendment to eliminate appeal procedures for nonrenewal
of a grant program administrator's contract); Gallegos v. Lyng, 891
F.2d 788 (10th Cir. 1989) (upholding the authority of the Department
of Agriculture to impose by regulation strict liability on states for
lost or stolen food stamp coupons). Similarly, it was within the
discretion of the Environmental Protection Agency under the Clean
Water Act to prescribe regulations making wastewater treatment grants
available only for the construction of new facilities and not for the
acquisition of preexisting facilities. Cole County Regional Sewer
District v. United States, 22 Cl. Ct. 551 (1991). See also Mayor &
City Council of Baltimore v. Browner, 866 E Supp. 249 (D. Md. 1994)
(upholding agency's enforcement of cut-off dates for completion of
city's federally funded sewerage facilities). Another illustration is
American Hospital Association v. Schweiker, 721 F.2d 170 (7th Cir.
1983), cert. denied, 466 U.S. 958 (1984), upholding regulations
imposing community service and uncompensated care requirements on
recipients of Hill-Burton hospital construction grants.
The informal rulemaking requirements (notice and comment) of the
Administrative Procedure Act (APA) do not apply to grant regulations.
5 U.S.C. § 553(a)(2) (the rulemaking requirements do not apply to "a
matter relating to ... grants..."). Several agencies, however, have
published statements committing themselves to comply with the APA in
developing grant regulations and have thereby effectively waived the
exemption. See, e.g., Thomas Jefferson University v. Shalala, 512 U.S.
504, 512 (1994); Flagstaff Medical Center, Inc. v. Sullivan, 962 F.2d
879, 885 (9th Cir. 1992). Even if an agency has voluntarily waived the
APA exemption for grants, other APA exemptions may still apply. See,
e.g., Chief Probation Officers of California v. Shalala, 118 F.3d 1327
(9th Cir. 1997) (agency rule was interpretive, not legislative and,
thus, not invalid for failure to follow APA rulemaking requirements).
[Footnote 38]
Wholly apart from what the courts might or might not do, an agency's
discretion in funding matters is subject to congressional oversight as
well. Congress, if it disfavors an agency's actual or proposed
exercise of otherwise legitimate discretion, can statutorily restrict
that discretion, at least prospectively, either by amending the
program legislation or by inserting the desired restrictions in
appropriation acts. For an example of the latter, see B-300912, Feb.
6, 2004 (finding that federally granted rights-of-way for construction
of highways constituted a final rule prohibited from taking effect by
appropriations act provision). See also B-238997.4, Dec. 12, 1990.
Also, agency grant regulations may be subject to review by GAO and
Congress under the Congressional Review Act, Pub. L.
No. 104-121, title II, subtitle E, § 251, 110 Stat. 847, 868 (Mar. 29,
1996), codified at 5 U.S.C. §§ 801-808.[Footnote 39]
b. Office of Management and Budget Circulars and the “Common Rules:”
Federal grants and cooperative agreements are typically subject to a
wide range of substantive and other requirements under the particular
program statutes as well as implementing agency regulations and other
guidance that applies to them. However, they are governed as well by
many additional cross-cutting requirements that are common to most
assistance programs. These include federal statutory provisions made
applicable to recipients of federal funds, such as the prohibitions
against lobbying with grant funds under the so-called "Byrd Amendment"
codified at 31 U.S.C. § 1352.[Footnote 40] They also include a number
of administrative requirements dealing with such subjects as audit and
record-keeping and the allowability of costs. The importance of the
cross-cutting agency regulations and centralized management guidance
from the Office of Management and Budget (OMB) is apparent throughout
this chapter. The current structure for these requirements developed
in the late 1980s.
Prior to 1988, each agency issued grant management regulations to
govern grants and cooperative agreements it made, although OMB
Circular No. A-102 did provide some governmentwide guidance for grants
to state and local governments. (Another circular, No. A-110, provided
some guidance for grants to other types of grantees.) In 1987, a
memorandum from the President directed the Office of Management and
Budget (OMB) to revise Circular No. A-102 to specify uniform,
governmentwide terms and conditions for grants to state and local
governments, and directed executive branch departments and agencies to
propose and issue common regulations adopting these terms and
conditions verbatim, modified where necessary to reflect inconsistent
statutory requirements. 23 Weekly Comp. Pres. Doc. 254 (Mar. 12,
1987). The Presidential memorandum observed in part:
"Circular A-102 was a significant step toward the simplification of
grants management at the time. However, after 16 years, some of the
provisions are out of date, there are gaps where the standards do not
cover important areas, and agencies have interpreted the circular in
numerous different ways in their regulations."
Id. at 255. Pursuant to this direction, the first iteration of what
has come to be known as the "common rule" system was published for
comment on June 9, 1987 (52 Fed. Reg. 21820-21862), issued in final on
March 11, 1988 (53 Fed. Reg. 8033-8103), and generally made effective
as of October 1, 1988. Later that year, OMB proposed a similar
revision to Circular No. A-110, dealing with grants to institutions of
higher education, hospitals, and other nonprofit organizations. 53
Fed. Reg. 44710 (Nov. 4, 1988). The structure of each circular was
similar, featuring a brief introduction followed by attachments with
detailed guidance on specific topics.
There are currently a total of six OMB circulars on grants, but only
three apply to any one type of grantee. Their coverage breaks down as
follows:[Footnote 41]
* States, local governments, and Indian Tribes: Circular No. A-87 (May
10, 2004) for cost principles and Circular No. A-102 (Aug. 29, 1997)
for administrative requirements.
* Educational institutions: Circular No. A-21 (May 10, 2004) for cost
principles and Circular No. A-110 (Sept. 30, 1999) for administrative
requirements.
* Nonprofit organizations: Circular No. A-122 (May 10, 2004) for cost
principles and Circular No. A-110 (Sept. 30, 1999) for administrative
requirements.
* All grantees: Circular No. A-133 (June 27, 2003) for audit
requirements.
The OMB circulars provide guidance only to federal grantor agencies;
they do not apply directly to grantees. Therefore, each grantor agency
has issued largely identical sets of regulations that prescribe
requirements that are binding on their grantees. These are technically
the so-called "common rules." At present, each grantor agency has a
set of four common rules. Two of the common rules are based on OMB's
grants management circulars covering cost principles, administrative
requirements, audit, etc. A third common rule deals with the Byrd Anti-
Lobbying Amendment, mentioned previously. The fourth common rule,
discussed hereafter, deals with suspension and debarment and drug-free
workplace requirements.
A compilation showing where each agency's common rule regulations are
codified in the Code of Federal Regulations may be found at
www.whitehouse.gov/omb/grants/chart.html (last visited September 15,
2005). Since the common rule regulations are essentially the same for
each federal grantor agency, we will use the Department of Agriculture
version in the remainder of this chapter when citing to and
illustrating the application of the common rules.[Footnote 42] The
Department of Agriculture's regulations are codified as follows:
* Grants management common rule for states, local governments, and
Indian tribes, 7 C.F.R. pt. 3016 (2005).
* Grants management common rule for universities and nonprofit
organizations, 7 C.F.R. pt. 3019.
* Nonprocurement suspension and debarment and Drug-Free Workplace Act
common rule, 7 C.F.R. pt. 3017.
* Byrd Anti-Lobbying Amendment common rule, 7 C.F.R. pt. 3018.
As noted previously, the common rules establish consistency and
uniformity among federal agencies in the management of grants and
cooperative agreements. They were intended to supersede uncodified
manuals and handbooks unless required by statute or approved by OMB.
Thus, the Department of Agriculture's regulations provide at 7 C.F.R.
§ 3016.5:
"All other grants administration provisions of codified program
regulations, program manuals, handbooks and other nonregulatory
materials which are inconsistent with this part are superseded, except
to the extent they are required by statute, or authorized in
accordance with the [OMB] exception provision in § 3016.6."
With respect to grants and grantees covered by the common rules,
additional administrative requirements are to be in the form of
codified regulations published in the Federal Register. 7 C.F.R. §
3016.6(a).
As noted above, in addition to implementing OMB's grants management
circulars, the common rule format has been used in two other grant-
related contexts. One implements the Byrd Anti-Lobbying Amendment,
discussed previously. The common rule on this subject was issued by 28
grantor agencies on February 26, 1990. 55 Fed. Reg. 6736.
The other common rule implements provisions relating to suspension and
debarment and drug-free workplaces. On February 18, 1986, as part of
the government's effort to combat fraud, waste, and abuse, the
President signed Executive Order No. 12549, which directed the
establishment of a system for debarment and suspension in the
assistance context.[Footnote 43] OMB implemented the executive order
by developing common rule language, entitled "Government-wide
Debarment and Suspension (Nonprocurement)," that was adopted by over
25 grantor agencies and patterned generally on comparable provisions
for procurement contracts in the Federal Acquisition Regulation. This
common rule was originally published at 53 Fed. Reg. 19160 (May 26,
1988). It was revised and republished in 2003 in a version that
incorporates provisions implementing the Drug-Free Workplace Act of
1988 (41 U.S.C. §§ 701-707).[Footnote 44] 68 Fed. Reg. 66,534 (Nov.
26, 2003).
With respect to suspension and debarment, a person (including business
entities and units of government) who is debarred is excluded from
federal assistance and benefits, financial and nonfinancial, under
federal programs and activities for a period of up to 3 years,
possibly longer. Causes of debarment include certain criminal
convictions, antitrust violations, a history of unsatisfactory
performance, and failure to pay a single substantial debt or a number
of outstanding debts owed to the federal government. See generally 7
C.F.R. pt. 3017, subpart H, for provisions relating to debarment.
Suspension is a temporary exclusion, usually pending the completion of
an investigation involving one or more of the causes for debarment.
See generally 7 C.F.R. pt. 3017, subpart G, for provisions relating to
suspension. The General Services Administration (GSA) is responsible
for compiling and distributing a list of debarred or suspended
persons. The list, now called the Excluded Parties List System, is
maintained by GSA's Office of Acquisition Policy and is available
electronically. See generally 7 C.F.R. pt. 3017, subpart E.
c. The Federal Financial Assistance Management Improvement Act:
The Federal Financial Assistance Management Improvement Act of 1999,
Pub. L. No. 106-107 (Nov. 20, 1999), 113 Stat. 1486, 31 U.S.C. § 6101
note, was enacted to improve the management and performance of federal
financial assistance programs. The act required federal agencies to
develop and implement a plan that would, among other things,
streamline and simplify application, administrative, and reporting
procedures for financial assistance programs. Pub. L. No. 106-107, §
5(a). It also required OMB to direct, coordinate, and assist federal
agencies in establishing a common application and reporting system
that would include uniform administrative rules for assistance
programs across different federal agencies. Id. § 6(a)(1)(C).
In furtherance of the act's requirements, OMB is working to
consolidate all six of its grants-related circulars as well as the
agency common rules into a new title 2 of the Code of Federal
Regulations. See 69 Fed. Reg. 26,276 (May 11, 2004). Under this
approach, title 2 will include the full text of each circular. In
their portions of title 2, the grantor agencies will simply adopt by
reference the text of the OMB circulars together with any agency-
specific additions, exceptions, or clarifications. This will avoid the
need for each individual agency to repeat separately the content of
the OMB circulars as they now do in their common rules. 69 Fed. Reg.
at 26,277. OMB began this process by publishing Circular No. A-110 as
2 C.F.R. part 215 (2005). It recently added three more circulars:
numbers A-21, A-87, and A-122. See 70 Fed. Reg. 51,880; 51,910; 51,927
(Aug. 31, 2005).
Apart from providing for regulatory consolidation and streamlining,
the Federal Financial Assistance Management Improvement Act contained
a number of other provisions designed to improve federal assistance
processes and performance. It also imposed additional responsibilities
on the agencies and OMB. Section 7 of Public Law 106-107 mandated a
GAO evaluation of the effectiveness of the act. GAO reported the
results of its evaluation in Grants Management: Additional Actions
Needed to Streamline and Simplify Processes, GAO-05-335 (Washington,
D.C.: Apr. 18, 2005). See also GAO, Federal Assistance: Grant System
Continues to Be Highly Fragmented, GAO-03-718T (Washington, D.C.: Apr.
29, 2003).
d. The "Cognizant Agency" Concept:
Finally, to simplify relations between federal grantees and awarding
agencies, OMB established the "cognizant agency" concept, under which
a single agency represents all others in dealing with grantees in
common areas.[Footnote 45] In this case, the cognizant agency reviews
and approves grantees' indirect cost rates. Approved rates must be
accepted by other agencies, unless specific program regulations
restrict the recovery of indirect costs.
OMB published a list of cognizant agency assignments for some state
agencies, cities and counties on January 6, 1986 (51 Fed. Reg. 552).
The cognizant agency for governmental units not on that list is the
one that provides the most grant funds to the entity. The Department
of Health and Human Services (BHS) is the cognizant agency for all
States and most cities. The cognizant agency for other organizations
is determined by calculating which federal agency provides the most
grant funding. For example, the Department of the Interior is the
cognizant agency for all Indian tribal governments, and for hospitals,
BHS serves as the cognizant agency.
4. Contracting by Grantees:
Grantees commonly enter into contracts with third parties in the
course of performing their grants. While the United States is not a
party to the contracts, the grantee must nevertheless comply with any
requirements imposed by statute, regulation, or the terms of the grant
agreement, in awarding federally assisted contracts. 54 Comp. Gen. 6
(1974). Violation of applicable procurement standards may result in
the loss of federal funding. See Town of Fallsburg v. United States,
22 Cl. Ct. 633 (1991).
For a period of nearly 10 years, GAO undertook a limited review of the
propriety of contract awards made by a grantee in furtherance of grant
purposes, upon request of a prospective contractor. This limited
review role was announced in 40 Fed. Reg. 42406 (Sept. 12, 1975).
(While these reviews were conducted in a manner similar to bid
protests, mentioned previously in section B.4 of this chapter, GAO
called the requests for review "complaints" rather than "protests.")
GAO applied the same limited review to contracts awarded under
cooperative agreements. 59 Comp. Gen. 758 (1980).
GAO's review was designed primarily to ensure that the "basic
principles" of competitive bidding were applied. 55 Comp. Gen. 390,
393 (1975). Numerous decisions were rendered in this area. E.g., 57
Comp. Gen. 85 (1977) (nonapplicability of Buy American Act); 55 Comp.
Gen. 1254 (1976) (state law applicable when indicated in grant); 55
Comp. Gen. 413 (1975) (nonapplicability of Federal Procurement
Regulations).
By 1985, many agencies had developed their own review procedures, and
the number of complaints filed with GAO steadily decreased.
Determining that its review of grantee contracting was no longer
needed, GAO discontinued its limited review in January 1985. 50 Fed.
Reg. 3978 (Jan. 29, 1985); 64 Comp. Gen. 243 (1985). The body of
decisions issued during the 1975-1985 period should nevertheless
remain useful as guidance in this area.
In a 1980 report, GAO reviewed the procurement procedures of selected
state and local government grantees and nonprofit organizations in
five states. The report concluded that the state and local governments
generally had in place and followed sound procurement procedures
(somewhat less so for the nonprofits), but also found a number of weak
spots, many of which are now addressed in OMB directives. See GAO,
Spending Grant Funds More Efficiently Could Save Millions, PSAD-80-58
(Washington, D.C.: June 30, 1980).
With respect to state and local governments, standards for grantee
procurement are set forth in the common rules. Using our Department of
Agriculture example, its version of this rule is 7 C.F.R. § 3016.36.
These rules require, among other things, that grantees and subgrantees
have protest procedures to resolve disputes over their procurements. Id.
§ 3016.36(b)(12). Federal grantor agencies review protests against
grantee and subgrantee awards that involve violations of federal law
or regulations (including the procurement standards in the common
rules) or of the grantee's or subgrantee's protest procedures. Id.
Grantor agencies are authorized, but not required, to review
grantee/subgrantee procurements on other grounds. See Supplementary
Information Statement, 53 Fed. Reg. 8034, 8039 (Mar. 11, 1988).
An agency that has a review procedure for grantee procurement will be
held to established precepts of administrative law in applying those
procedures. For example, in Niro Atomizer, Inc. v. EPA, 682 F. Supp.
1212 (S.D. Fla. 1988), the court instructed the agency to either
follow its established procedures or announce that it was changing
them, giving the parties notice and an opportunity to rebut. However,
the court in A-G-E Corp. v. United States, 968 F.2d 650 (8th Cir.
1992), rejected a challenge that the common rules did not go far
enough in regulating grantee procurements. The plaintiffs objected to
a provision then in the common rules that permitted state grantees to
apply resident preferences to their procurements.[Footnote 46] The
court viewed the common rules as embodying internal executive branch
management directives and held that the plaintiffs lacked standing to
challenge them absent a showing that they were inconsistent with
federal law.
5. Liability for Acts of Grantees:
It is often said that the federal government is not liable for the
unauthorized acts of its agents, "agents" in this context referring to
the government's own officers and employees. If this is true with
respect to those who clearly are agents of the government, it
logically must apply with even greater force to those who are not its
agents. Grantees, for purpose of imposing legal liability on the
United States, are not "agents" of the government. While the
demarcation is not perfect, we divide our discussion into two broad
areas, contractual liability and liability for grantee misconduct.
a. Liability to Grantee’s Contractors:
For the United States to be contractually liable to some other party,
there must be "privity of contract," that is, a direct contractual
relationship between the parties. When a grantee under a federal grant
enters into a contract with a third party (contractor), there is
privity between the United States and the grantee, and privity between
the grantee and the contractor, but no privity between the United
States and the contractor and hence, as a general proposition, no
liability.
Perhaps the leading case in this area is D.R. Smalley & Sons, Inc. v.
United States, 372 F.2d 505 (Ct. Cl.), cert. denied, 389 U.S. 835
(1967). The plaintiff contractor had entered into a highway
construction contract with the state of Ohio. The project was funded
on a cost-sharing basis, with 90 percent of total costs to come from
federal-aid highway funds. The contractor lost nearly $3 million on
the project, recovered part of its loss from the state of Ohio, and
then sued the United States to recover the unpaid balance. The
contractor argued that Ohio was really the agent of the United States
for purposes of the project because, among other things, the contract
had been drafted pursuant to federal regulations, the United States
approved the contract and all changes, and the United States was
funding 90 percent of the costs.
The court disagreed. Since there was no privity of contract between
the United States and the contractor, the government was not liable.
The involvement of the government in various aspects of the project
did not make the state the agent of the federal government for purpose
of creating contractual liability, express or implied. The court
stated:
"The National Government makes many hundreds of grants each year to
the various states, to municipalities, to schools and colleges and to
other public organizations and agencies for many kinds of public
works, including roads and highways. It requires the projects to be
completed in accordance with certain standards before the proceeds of
the grant will be paid. Otherwise the will of Congress would be
thwarted and taxpayers' money would be wasted. ... It would be
farfetched indeed to impose liability on the Government for the acts
and omissions of the parties who contract to build the projects,
simply because it requires the work to meet certain standards and upon
approval thereof reimburses the public agency for the part of the
costs."
Id. at 507. Some later cases applying the Smalley concept are Malone
v. United States, 34 Fed. Cl. 257 (1995); Blaze Construction, Inc. v.
United States, 27 Fed. Cl. 646 (1993); Somerville Technical Services,
Inc. v. United States, 640 F.2d 1276 (Ct. CL 1981); Housing
Corporation of America v. United States, 468 F.2d 922 (Ct. Cl. 1972);
Cofan Associates, Inc. v. United States, 4 Cl. Ct. 85 (1983); 68 Comp.
Gen. 494 (1989).
The Cofan case presented an interesting variation in that the claimant
was a disappointed bidder rather than a contractor, trying to recover
under the theory, well-established in the law of procurement
contracts, that there is an implied promise on the part of the
government to fairly consider all bids. This did not help the
plaintiff, however, since again there was no privity
with the government. In this regard, the court observed:
"It is now firmly established that a person who enters into a contract
with [a grantee] to perform services on a project funded in part by
loans or grants-in-aid from the United States may not thereby be
deemed to have entered into a contract with the United States. Nor is
the result any different because the United States has imposed
guidelines or restrictions on the use of funds, including procurement
procedures."
4 Cl. Ct. at 86. See also Pendleton v. United States, 47 Fed. CL 480
(2000) (federal participation in state reclamation project was not
sufficient to support plaintiffs' claim for compensable Fifth
Amendment taking against the United States).
Another variation occurred in 47 Comp. Gen. 756 (1968). A contractor
had succeeded in recovering increased costs from a state grantee.
Under Smalley, it was clear that the government could not be held
legally liable for the proportionate share of the recovery. However,
it was apparent that the increased costs were due to the fact that
erroneous soil profile information furnished by the state had
contributed to an unrealistically low bid by the contractor. Under
these circumstances, GAO advised that the grantor agency and the state
could enter into a voluntary modification of the grant agreement to
recognize the damage recovery as a project cost. See also B-167310,
July 31, 1969.
In limited circumstances, there is a device that may be available to a
contractor to have its claim considered by the federal government,
illustrated by B-181332, Dec. 28, 1976.[Footnote 47] In that case, an
agency had erroneously refused to fund a grant after it had been
approved and the grantee's contractor had incurred expenses in
reliance on the approval. There clearly was no privity between the
contractor and the United States. However, GAO recognized a procedural
device drawn from the law of procurement contracts, and accepted a
claim filed by the grantee (with whom the United States did have
privity) "for and on behalf or the contractor, in which the grantee
acknowledged liability to the contractor only if and to the extent
that the government was liable to the grantee. In effect, the
contractor was prosecuting the claim in the name of the grantee. This
device is potentially useful only where the government's liability to
the grantee can be established. See also 68 Comp. Gen. 494, 495-96
(1989); 9 Comp. Gen. 175 (1929). A different type of contract, an
employment contract, was the subject of 66 Comp. Gen. 604 (1987), in
which GAO concluded, applying Smalley, that the United States was not
liable to a former employee of a grantee for unpaid salary. The
grantor agency had funded all allowable costs under the grant, and the
grantee's transgression was not the liability of the United States.
As if to provide the adage that anything that can happen will happen,
a 1983 case combined all of the elements noted above. The Agency for
International Development (MD) made a rural development planning grant
to Bolivia. Bolivia contracted with a private American company to
perform certain functions under the grant, and the company in turn
entered into employment contacts with various individuals. The
contract with the private company (but not the grant itself) was
terminated, the company terminated the employment contracts, and the
individuals then sought to recover benefits provided under Bolivian
law. Clearly, MD was not legally liable to the individual claimants.
However, some of the benefits to some of the claimants could qualify
as allowable costs under the grant and could be paid, if approved by
MD and the grantee, to the extent grant funds remained available. B-
209649, Dec. 23, 1983.
b. Liability for Grantee Misconduct:
A number of cases have involved attempts to impose liability on the
United States under the Federal Tort Claims Act.[Footnote 48] The act
makes the United States liable, with various exceptions, for the
tortious conduct of its officers, employees, or agents acting within
the scope of their employment. As a general proposition, a grantee is
not an agent or agency of the government for purposes of tort liability.
An important Supreme Court case is United States v. Orleans, 425 U.S.
807 (1976), holding that a community action agency funded under a
federal grant was not a "federal agency" for purposes of the Federal
Tort Claims Act. The case arose from a motor vehicle accident
involving plaintiff Orleans and an individual acting on behalf of the
grantee. The Court first noted that the Federal Tort Claims Act "was
never intended, and has not been construed by this Court, to reach
employees or agents of all federally funded programs that confer
benefits on people." Orleans, 425 U.S. at 813. The Court then stated,
and answered, the controlling test:
"The question here is not whether the [grantee] receives federal money
and must comply with federal standards and regulations, but whether
its day-to-day operations are supervised by the Federal Government.
"The Federal Government in no sense controls the detailed physical
performance' of all the programs and projects it finances by gifts,
grants, contracts, or loans."
Id. at 815-16.
Thus, the general rule is that the United States is not liable for
torts committed by its grantees. Neither the fact of federal funding
nor the degree of federal involvement encountered in the typical grant
(approval, oversight, inspections, etc.) is sufficient to make the
grantee an agent of the United States of purposes of tort liability.
Liability could result, however, if the federal involvement reached
the level of detailed supervision of day-to-day operations noted in
Orleans. An example is Martarano v. United States, 231 E Supp. 805 (D.
Nev. 1964) (state employee under cooperative agreement working under
direct control and supervision of federal agency).
In another group of cases, attempts have been made to find the United
States liable under the Federal Tort Claims Act for allegedly
negligent performance of its oversight role under a grant. The courts
have found these claims covered by the "discretionary function"
exception to Federal Tort Claims Act liability.[Footnote 49] Mahler v.
United States, 306 F.2d 713 (3rd Cir.), cert. denied, 371 U.S. 923
(1962), followed in Daniel v. United States, 426 F.2d 281 (5th Cir.
1970), and Rayford v. United States, 410 E Supp. 1051 (M.D. Tenn.
1976). See also Rothrock v. United States, 883 E Supp. 333 (S.D. Ind.
1994), aff'd, 62 F.3d 196 (7th Cir. 1995).
In areas not covered by the Federal Tort Claims Act, the potential for
individual liability cannot be disregarded. One such area is the so-
called "constitutional tort," or an action for damages based on an
alleged violation of federal constitutional rights perpetrated under
color of law. For example, an official of the Indian Health Service,
acting jointly with a state official, told a nonprofit intermediary
that further funding would be conditioned on the dismissal of an
employee whom they thought was performing inadequately. The
intermediary fired the employee, who then sued the state official and
the federal official in their individual capacities. The suit against
the federal defendant was based directly on the Fifth Amendment, for
deprivation of a property interest (the plaintiff's job) without due
process. The court first found that there had been a due process
violation, and that the defendants were not entitled to qualified
immunity because their conduct exceeded the scope of their authority.
Merritt v. Mackey, 827 F.2d 1368 (9th Cir. 1987). The court noted that
there was no basis for imposing liability on the United States. Id. at
1373-74. In the second published appellate decision in the case, the
court affirmed a monetary damage award and an award of attorney's fees
against the individual officials. The federal official was personally
liable for the fee award under 42 U.S.C. § 1988 because he had acted
in concert with a state official. Merritt v. Mackey, 932 F.2d 1317
(9th Cir. 1991). See also Downey v. Coalition Against Rape and Abuse,
Inc., 143 F. Supp. 2d 423 (D.N.J. 2001), applying reasoning similar to
Merritt in the context of a state-funded grant.
However, the law concerning constitutional torts is unsettled. The
concept of constitutional torts originated with Bivens v. Six Unknown
Named Agents of the Federal Bureau of Narcotics, 403 U.S. 388 (1971),
and has been applied in many subsequent cases dealing with a range of
constitutional rights. Recently, however, the Supreme Court has taken
a narrow view of this concept. Of particular relevance here, the
Supreme Court held in Correctional Services Corp. v. Malesko, 534 U.S.
61 (2001), that a prisoner could not maintain a constitutional tort
action against a private organization that operated a detention
facility under a federal contract. The Court indicated that
constitutional tort actions under Bivens can be maintained only
against individual federal officers or employees; thus, such actions
do not lie against "private entities acting under color of federal
law" nor do they lie against federal agencies. Malesko, 534 U.S.
at 66-74.
In light of Malesko, it is unclear whether cases like Merritt v.
Mackey, supra, would be decided the same way today. Malesko suggests
that, as a general proposition, federal contractors and grantees and
their employees would not be subject to liability for constitutional
torts. Likewise, federal agencies would not have constitutional tort
liability. It is possible that individual federal employees (like the
one in Merritt) could still be held liable for inducing a grantee to
violate someone's constitutional rights. However, it is questionable
whether a court would impose tort liability on a federal employee who
induced a violation if the party who actually committed the violation
could not be liable. For additional background on this subject, see
Michael B. Hedrick, New Life for a Good Idea: Revitalizing Efforts to
Replace the Bivens Action with a Statutory Waiver of the Sovereign
Immunity of the United States for Constitutional Tort Suits, 71 Geo.
Wash. L. Rev. 1055 (2003).
6. Types of Grants: Categorical versus Block:
A categorical grant is a grant to be used only for a specific program
or for narrowly defined activities. A categorical grant may be
allocated on the basis of a distribution formula prescribed by statute
or regulation ("formula grant"), or it may be made for a specific
project ("project grant"). A block grant is a grant given to a
governmental unit, usually a state, to be used for a variety of
activities within a broad functional area.[Footnote 50] Block grants
are usually formula grants. Under a block grant, the state is
responsible for further distribution of the money. States naturally
prefer block grants because they increase the states' spending
flexibility and at least in theory reduce federal control. See
generally Library of Congress, Congressional Research Service, Federal
Grants to State and Local Governments: Overview and Characteristics,
No. RS20669 (Nov. 27, 2002), at 3-5; GAO, Grant Programs: Design
Features Shape Flexibility, Accountability, and Performance
Information, GAO/GGD-98-137 (Washington, D.C.: June 22, 1998), at 3
("In practice, the 'categorical' and 'block' grant labels and their
underlying definitions represent the ends of a continuum and overlap
considerably in its middle range.")
During the 1960s and 1970s, although some block grant programs were in
existence, the emphasis was largely on categorical grants. The Omnibus
Budget Reconciliation Act of 1981 (OBRA), Pub. L. No. 97-35, 95 Stat.
357 (Aug. 13, 1981), attempted to put a halt to this trend. See
Library of Congress, Congressional Research Service, Federal Grants to
State and Local Governments: A Brief History, No. RL30705 (Feb. 19,
2003), at 10. The act merged and consolidated several dozen
categorical grant programs into block grants. GAO, Block Grants:
Characteristics, Experience, and Lessons Learned, GAO/HEHS-95-74
(Washington, D.C.: Feb. 9, 1995), at 7-9, App. R.
In the mid-1990s, GAO cited the fiscal year 1996 budget resolution in
reporting that Congress had "shown a strong interest in consolidating
narrowly defined categorical grant programs for specific purposes into
broader purpose block grants." GAO, Block Grants: Issues in Designing
Accountability Provisions, GAO/AIMD-95-226 (Washington, D.C.: Sept. 1,
1995), at 1. In 2003, however, GAO testified that, although Congress
had made further efforts to consolidate categorical grant programs
over the years, "each period of consolidation was followed by a
proliferation of new federal programs." GAO, Federal Assistance: Grant
System Continues to Be Highly Fragmented, GAO-03-718T (Washington,
D.C.: Apr. 29, 2003), at 4.
Although GAO could still report in 2003 that block grants were "one
way Congress has chosen to consolidate related programs," GAO also
reported on certain "hybrid" approaches, including "consolidated
categorical" grants, that would consolidate a number of narrower
categorical programs while retaining standards and accountability for
discrete federal performance goals, and "Performance Partnership
Agreements," in which states can shift federal funds across programs
but are held accountable for discrete or negotiated measures of
performance. GAO-03-718T, at 15; GAO, Homeland Security: Reforming
Federal Grants to Better Meet Outstanding Needs, GAO-03-1146T
(Washington, D.C.: Sept. 3, 2003), at 11-13.[Footnote 51]
Block grants reduce federal involvement in that they transfer much of
the decision-making to the grantee and reduce the number of separate
grants that must be administered by the federal government. It is a
misconception, however, to think that block grants are "free money" in
the sense of being totally free from federal "strings." See, e.g.,
GAO/HEHS-95-74, at App. III, "Accountability Requirements of 1981
Block Grants."
Restrictions on the use of block grant funds may derive from the
organic legislation itself. For example, several of the OBRA programs
include such items as limitations on allowable administrative
expenses, prohibitions on the use of funds to purchase land or
construct buildings, "maintenance of effort" provisions, and anti-
discrimination provisions. Other OBRA provisions of general
applicability (Pub. L. No. 97-35, §§ 1741-1745) impose reporting and
auditing requirements, and require states to conduct public hearings
as a prerequisite to receiving funds in any fiscal year. Another more
recent example is the Temporary Assistance for Needy Families (TANF)
block grants, for which Congress established time limits and work
requirements for adults receiving aid. GAO, Welfare Reform: With TANF
Flexibility, States Vary in How They Implement Work Requirements and
Time Limits, GAO-02-770 (Washington, D.C.: July 5, 2002) at 3.
Applicable restrictions are not limited to those contained in the
program statute itself. Other federal statutes applicable to the use
of grant funds must also be followed. See, e.g., Ely v. Velde, 451
F.2d 1130 (4th Cir. 1971), holding that the National Historic
Preservation Act and the National Environmental Policy Act applied to
the then Law Enforcement Assistance Administration in making a block
grant to Virginia under the Safe Streets Act. A later and related
decision in the same case is 497 F.2d 252 (4th Cir. 1974). See also
Forum for Academic & Institutional Rights v. Rumsfeld, 390 F.3d 219
Ord Cir. 2004), cert. granted, 125 S. Ct. 1977 (2005) (reviewing
statute withholding funding to educational institutions that deny U.S.
military access to campus for recruiting purposes); Barbour v.
Washington Metropolitan Area Transit Authority, 374 F.3d 1161 (D.C.
Cir. 2004), cert. denied, 125 S. Ct. 1591 (2005) (public transit
authority's acceptance of federal grant funds resulted in a waiver of
its immunity to a Rehabilitation Act claim); Maryland Department of
Human Resources v. United States Department of Health & Human
Services, 854 F.2d 40 (4th Cir. 1988) (requirement for apportionment
by Office of Management and Budget applicable to funds under Social
Services Block Grant); 6 Op. Off. Legal Counsel 605 (1982) (Uniform
Relocation Assistance Act applicable to Community Development block
grant); 6 Op. Off. Legal Counsel 83 (1982) (various antidiscrimination
statutes applicable to Elementary and Secondary Education and Social
Services block grants).
If applicable, these additional restrictions may impose legal
responsibilities on grantees. See, e.g., GAO, Native American Housing:
Information on HUD's Housing Programs for Native Americans, GAO/RCED-
97-64, (Washington, D.C.: Mar. 28, 1997), at 14 (Indian hiring
preference and Davis-Bacon Act). Thus the block grant mechanism does
not totally remove federal involvement nor does it permit the
circumvention of federal laws applicable to the use of grant funds. In
this latter respect, a block grant is legally no different from a
categorical grant.
The common rule for uniform administrative requirements does not apply
to the OBRA block grants. See, e.g., 7 C.F.R. § 3016.4(a)(2).
7. The Single Audit Act:
We noted in our introduction to this chapter that federal grants to
state and local governments exceed $400 billion a year. With
expenditures of this magnitude, it is essential that there be some way
to assure accountability on the part of the grantees. The traditional
means of assuring accountability has been the audit.
Prior to 1984, there were no statutory uniform audit requirements for
state and local government grantees. Audits were performed on a grant
or program basis and requirements varied with the program legislation.
Under this system, gaps in audit coverage resulted because some
entities were audited infrequently or not at all. Also, overlapping
requirements produced duplication and inefficiency with multiple audit
teams visiting the same entity and reviewing the same financial
records. Congress addressed the problem by enacting the Single Audit
Act of 1984, Pub. L. No. 98-502, 98 Stat. 2327 (Oct. 19, 1984),
codified at 31 U.S.C. §§ 75017507.[Footnote 52]
The 1984 act's objectives were to improve the financial management of
state and local governments receiving federal financial assistance;
establish uniform requirements for audits of federal financial
assistance provided to state and local governments; promote the
efficient and effective use of audit resources; and ensure that
federal departments and agencies, to the extent practicable, rely upon
and use audit work done pursuant to the act. Pub. L. No. 98-502, §
1(b). The 1984 act required each state and local entity that received
$100,000 or more in federal financial assistance (either directly from
a federal agency or indirectly through another state or local entity)
in any fiscal year to undergo a comprehensive, single audit of its
financial operations. The 1984 act also required entities receiving
between $25,000 and $100,000 in federal financial assistance to have
either a single audit or a financial audit required by the programs
that provided the federal funds.[Footnote 53] An informative
discussion of the need for the 1984 legislation, with references to
several reports by GAO and the Joint Financial Management Improvement
Program (JFMIP),[Footnote 54] may be found in H.R. Rep. No. 98-708
(1984).
In 1996, the Single Audit Act of 1984 underwent a major overhaul.
Prior to 1996, state and local governments followed one set of audit
requirements and Indian tribes and nonprofit organizations, including
educational institutions, followed another. The Single Audit Act
Amendments of 1996[Footnote 55] established uniform requirements for
audits of federal awards[Footnote 56] administered by all nonfederal
entities, not just state and local governments. In addition, the 1996
amendments, in order to reduce any burdens on nonfederal entities and
to promote the efficient and effective use of audit resources,
increased the dollar threshold needed to trigger an audit and based
the audit requirement on an amount expended rather than on an amount
received.
As a result, any nonfederal entity, defined as a state, local
government, or nonprofit organization, that expends federal awards
equal to or in excess of $500,00[Footnote 57] in any fiscal year shall
have either a single audit or a program-specific audit for such fiscal
year. Audits are conducted annually. However, biennial audits are
permissible for state and local governments that are required by their
constitution or by a statute, in effect on January 1, 1987, to undergo
audits less frequently than annually. Also any nonprofit organization
that had biennial audits for all biennial periods ending between July
1, 1992, and January 1, 1995, is also permitted to undergo its audits
biennially.
The audit is to be conducted by an independent auditor in accordance
with generally accepted government auditing standards. 31 U.S.C. §
7502(c). These standards are found in GAO's publication Government
Auditing Standards,[Footnote 58] commonly known as the "Yellow Book"
The Director of OMB, after consultation with the Comptroller General,
and appropriate officials from federal, state, and local governments
and nonprofit organizations, is required to prescribe guidance to
implement the Single Audit Act, as amended. 31 U.S.C. § 7505(a).
Guidance for implementing the act can be found in OMB Circular No. A-
133, Audits of States, Local Governments, and Non-Profit Organizations
(June 27, 2003).[Footnote 59]
The annual audit shall either cover the operations of the entire
nonfederal entity or include a series of audits that cover
departments, agencies, and other organizational units as long as the
audit encompasses the financial statements and schedule of
expenditures of the federal awards for each unit. 31 U.S.C. § 7502(d).
If the nonfederal entity expends federal awards only under one program
and is not required otherwise to receive a financial statement audit,
it may elect to have a program-specific audit. 31 U.S.C.
§ 7502(a)(1)(C). Performance audits[Footnote 60] are not required
except as authorized by the Director. 31 U.S.C. §7502(c).
The statute (31 U.S.C. § 7502(e)) requires the auditor to:
* determine whether the financial statements are presented fairly in
all material respects in conformity with generally accepted accounting
principles;
* determine whether the schedule of expenditures of federal awards is
presented fairly in all material respects in relation to the financial
statements taken as a whole;
* with respect to internal controls pertaining to the compliance
requirements for each major program,
- obtain an understanding of such internal controls;
- assess control risk; and;
- perform tests of controls unless the controls are deemed o be
ineffective; and;
* determine whether the nonfederal entity has complied with the
provisions of laws, regulations, and contracts or grants pertaining to
federal awards that have a direct and material effect on each major
program. ("Major programs" are defined in 31 U.S.C. § 7501(a)(12)).
If the audit discloses any audit findings, the nonfederal entity needs
to prepare a corrective action plan to eliminate the audit findings or
a statement explaining why corrective action is not necessary. 31 U.S.C.
§ 7502(i). The corrective action plan needs to be consistent with the
audit resolution standard promulgated by the Comptroller General as
part of the standards for internal controls in the federal government
[Footnote 61] pursuant to 31 U.S.C. § 3512(c). The federal agency that
provided the federal award needs to review the audit to determine
whether prompt and corrective action has been taken regarding the
audit findings. 31 U.S.C. § 7502(f)(1)(B).
GAO has reported over the last few years that more action is needed at
both the nonfederal and federal level to ensure that audit findings
are responded to, corrected, and tracked. See, e.g., GAO, Single
Audit: Actions Needed to Ensure That Findings Are Corrected, GAO-02-
705 (Washington, D.C.: June 26, 2002); Single Audit: Single Audit Act
Effectiveness Issues, GAO-02-877T (Washington, D.C.: June 26, 2002);
Compact of Free Association: Single Audits Demonstrate Accountability
Problems Over Compact Funds, GAO-04-7 (Washington, D.C.: Oct. 7, 2003);
American Samoa: Accountability for Key Federal Grants Needs
Improvement, GAO-05-41 (Washington, D.C.: Dec. 17, 2004).
The nonfederal entity is required to transmit a reporting package,
which shall include the financial statements, auditor opinion, and
corrective action plan, if necessary, to a federal clearinghouse for
public inspection. 31 U.S.C. § 7502(h),(i). Report packages can be
viewed by going to the Federal Audit Clearinghouse Home Page at
http://harvester.census.gov/sac (last visited September 15, 2005).
OMB's guidance in Circular No. A-133 includes criteria for determining
the appropriate charges to federal awards for the cost of audits.
Section 230 of the Circular provides that, unless prohibited by law,
the costs of audits are allowable charges to the federal awards. The
charges may be considered a direct cost or an allocated indirect cost,
as determined in accordance with the provisions of applicable OMB cost
principles circulars, the Federal Acquisition Regulation (48 C.F.R.
pts. 30 and 31), or other applicable cost principles or regulations.
Audits conducted under the Single Audit Act, as amended, are in lieu
of any other financial audit required by the nonfederal entity by any
other federal law or regulation. 31 U.S.C. § 7503(a). However, that
does not prohibit a federal agency from conducting or arranging for
its own audit of the federal award if necessary to carry out the
federal agency's responsibilities under a federal law or regulation;
it only requires that the federal agency pay for the cost of such an
audit. 31 U.S.C. § 7503(b), (e).
The law also requires the Comptroller General to monitor provisions in
bills and resolutions reported by the committees of the Senate and the
House of Representatives that require financial audits of nonfederal
entities that receive federal awards, and report to the appropriate
congressional committees any such provisions that are inconsistent
with the Single Audit Act, as amended. 31 U.S.C. § 7506.
D. Funds in Hands of Grantee: Status and Application of Appropriation
Restrictions:
Expenditures by grantees for grant purposes are not subject to all the
same restrictions and limitations imposed on direct expenditures by
the federal government. For this reason, grant funds in the hands of a
grantee have been said to largely lose their character and identity as
federal funds. The Comptroller General stated the principle as follows:
"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"
43 Comp. Gen. 697, 699 (1964). Thus, except as otherwise provided in
the program statute, regulations,[Footnote 62] or the grant agreement,
the expenditure of grant funds by a state government grantee is
subject to the applicable laws of that state rather than federal laws
applicable to direct expenditures by federal agencies. 16 Comp. Gen.
948 (1937). The rule applies "with equal if not greater force" when
the grantee is another sovereign nation. B-80351, Sept. 30, 1948.
One group of cases[Footnote 63] involves restrictions on employee
compensation and related payments. Examples are:
* Appropriation act provision prohibiting use of federal funds to pay
salaries of persons engaging in a strike against the United States
Government, did not apply to funds granted to states to assist in
enforcing Fair Labor Standards Act[Footnote 64] and Walsh-Healey
Public Contracts Act.[Footnote 65] The funds were not "salaries" as
such; they were grant funds to reimburse states for services of state
employees, and therefore were state rather than federal funds. 28
Comp. Gen. 54 (1948). See also 39 Comp. Gen. 873 (1960).
* Requirement for specific authorizing legislation to use public funds
to pay employer contributions for federal employee's health and life
insurance benefits does not apply to use of federal grant funds to
contribute to state group health and life insurance programs for state
employees. 36 Comp. Gen. 221 (1956).
* Restrictions on retired pay not applicable to retired military
officers working on grant-funded state project. 14 Comp. Gen. 916
(1935), modified on other grounds, 36 Comp. Gen. 84 (1956).
* Federal restrictions on dual compensation for federal employees are
inapplicable to grantee employees. B-153417, Feb. 17, 1964.
The rule has been applied in a variety of other contexts as well. One
example is the area of state and local taxes. Thus, federal immunity
from payment of certain sales taxes does not apply to a state grantee
since the grantee is not a federal agent. The grant funds lose their
federal character and become state funds. Therefore, the state grantee
may pay a state sales tax on purchases made with federal grant funds
if the tax applies equally to purchases made from all nonfederal
funds. 37 Comp. Gen. 85 (1957). See also B-177215, Nov. 30, 1972,
applying the same reasoning for purchases made by a contractor who was
funded by a federal grantee. Similarly, a state tax on the income of a
person paid from federal grant funds involves no question of federal
tax immunity. 14 Comp. Gen. 869 (1935).
The following is a sampling of other restrictions which have been found
inapplicable to grantee expenditures:
* Adequacy of Appropriations Act (41 U.S.C. § 11) and prohibition on
entering into contracts for construction or repair of public
buildings, or other public improvements, in excess of amount
specifically appropriated for that purpose (41 U.S.C. § 12). B-173589,
Sept. 30, 1971.
* Prohibition in 31 U.S.C. § 1343 on purchasing aircraft without
specific statutory authority. 43 Comp. Gen. 697 (1964) (permissible
for grantee under National Science Foundation research grant). See
also B-196690, Mar. 14, 1980 (purchase of motor vehicle). However, an
agency may not acquire excess aircraft or passenger vehicles by
transfer for use by its grantees. 55 Comp. Gen. 348 (1975).
* Prohibition in 31 U.S.C. § 1345 on payment of nonfederal person's
travel and lodging expenses to attend a meeting. 55 Comp. Gen. 750
(1976).
* Requirement for specific authority in order to establish a revolving
fund. (Federal agency would need specific authority in view of
31 U.S.C. § 3302(b)). 44 Comp. Gen. 87(1964).
Where assistance funds are provided to the District of Columbia under
a program of assistance to the states which defines "state" as
including the District of Columbia, statutory restrictions expressly
applicable to the District of Columbia remain applicable with respect
to the assistance funds even though they would not necessarily apply
to the assistance funds in the hands of the other states. 34 Comp.
Gen. 593 (1955); 17 Comp. Gen. 424 (1937); A-90515, Dec. 23, 1937.
When applying the general rule that grantee expenditures are not
subject to the same restrictions as direct federal expenditures, it is
important to keep in mind that grantees are, of course, obligated to
spend grant funds for the purposes and objectives of the grant and
consistent with any statutory or other conditions attached to the use
of the grant funds. See, e.g., B-303927, June 7, 2005; 42 Comp. Gen.
682 (1963); 2 Comp. Gen. 684 (1923). These conditions may include
implied requirements, such as the implied requirement to adhere to
"basic principles" of open and competitive bidding in the case of
grantee contracts. 55 Comp. Gen. 390 (1975). They also include
statutorily authorized requirements, as in the case of the Office of
Personnel Management's authority to establish merit standards for
grantees under 42 U.S.C. § 4728(b) (Intergovernmental Personnel Act of
1970). Statutory restrictions on lobbying with public funds may also
apply to grantee expenditures.
Grant recipients, because they receive federal government assistance,
must comply with several federal statutes that prohibit various types
of discrimination. Title VI of the Civil Rights Act of 1964 (42 U.S.C.
§ 2000d) prohibits discrimination on the basis of race, color, or
national origin under any program or activity receiving federal
financial assistance. The Rehabilitation Act of 1973 (29 U.S.C. § 794)
similarly prohibits discrimination against individuals with
disabilities. The Age Discrimination Act of 1975 further extends
prohibited discrimination (42 U.S.C. § 6102).
Title IX of the Education Amendments of 1972 (20 U.S.C. § 1681)
prohibits sex discrimination in education programs or activities
receiving federal financial assistance. Title VII of the Civil Rights
Act of 1964 (42 U.S.C. § 2000e-2) prohibits employment discrimination
by grantees on the basis of sex as well as race, color, religion, or
national origin for all employers who have 15 or more employees. In
addition, several grant statutes contain their own anti-discrimination
provisions and include sex discrimination. E.g., 42 U.S.C. § 5309
(prohibiting discrimination in federally funded community development
programs); 20 U.S.C. § 7231d(b)(2)(C) (magnet school grant applicants
must provide assurances that they will not discriminate).
Statements in some of the cases to the effect that grant funds upon
being paid over to the grantee are no longer federal funds should not
be taken out of context. The fact that grant funds in the hands of a
grantee are no longer viewed as federal funds for certain purposes
does not mean that they lose their character as federal funds for all
purposes. See In re Universal Security & Protection Service, Inc., 223
B.R. 88,92-93 (Bankr. E.D. La. 1998). It has been held that the
government retains a "property interest" in grant funds until they are
actually spent by the grantee for authorized purposes.[Footnote 66]
This property interest may take the form of an "equitable lien,"
stemming from the government's right to ensure that the funds are used
only for authorized purposes, or a "reversionary interest" (funds that
can no longer be used for grant purposes revert to the government). In
re Alpha Center, Inc., 165 B.R. 881,884-85 (Bankr. S.D. Ill. 1994). By
virtue of this property interest, the funds, and property purchased
with those funds to the extent unrestricted title has not vested in
the grantee, are not subject to judicial process without the
government's consent. E.g., Henry v. First National Bank of
Clarksdale, 595 F.2d 291,308-09 (5th Cir. 1979), cert. denied, 444
U.S. 1074 (1980).
Likewise, in Department of Housing and Urban Development v.
K Capolino Construction Corp., No. 01 Civ. 390 (JGK) (S.D.N.Y., May 7,
2001), the court granted the agency's request for an injunction to
prevent the use of federal low-income housing grant funds to satisfy a
judgment in a defamation action against the grantee:
"The Supreme Court held in Buchanan v. Alexander, 45 U.S. (4 How.) 20-
21, (1846), that federal funds in the hands of a grantee remain the
property of the federal government unless and until expended in
accordance with the terms of the grant and are not subject to
attachment or garnishment. That decision, despite its age, remains the
law today....
Unless the federal government consents, sovereign immunity prevents
federal funds from being subject to attachment or garnishment
proceedings."
Slip op. at 4.
The concept is illustrated in two cases from the U.S. Court of Appeals
for the Seventh Circuit. In Palmiter v. Action, Inc., 733 F.2d 1244
(7th Cir. 1984), the court rejected the argument that grant funds lose
their federal character when placed in the grantee's bank account, and
held that federal grant funds in the hands of a grantee are not
subject to garnishment to satisfy a debt of the grantee. The holding
would presumably not apply where the grantee had actually spent its
own money and the federal funds were paid over as reimbursement. Id.
at 1249. The court considered a similar issue in the context of a
bankruptcy petition filed by a grantee under Chapter 7 of the
Bankruptcy Code. In re Joliet-Will County Community Action Agency, 847
F.2d 430 (7th Cir. 1988). The issue was whether grant funds in the
hands of the grantee, as well as personal property purchased with
grant money, were assets of the bankrupt and therefore subject to the
control of the trustee in bankruptcy. Directing the trustee to abandon
the assets, the court held that they remained the property of the
federal government. In the course of reaching this result, the court
noted that unpaid creditors of the bankrupt could, to the extent their
claims were within the scope of the grant, be paid by the grantor
agency out of the recovered funds. Id. at 433-35.
A case discussing both Palmiter and Joliet-Will and reaching a similar
result is In re Southwest Citizens' Organization for Poverty
Elimination, 91 B.R. 278 (Bankr. D.N.J. 1988). A grantee, which had
purchased a number of motor vehicles with Head Start grant funds,
filed a Chapter 11 bankruptcy petition. The Department of Health and
Human Services sought return of the property, contending that the
bankrupt's title was subject to the government's right to require
transfer to another grantee under the program legislation and
regulations. The trustee argued that the motor vehicles were property
of the bankruptcy estate, and that the trustee's interest superseded
any interest of the government. After a detailed review of precedent,
the court directed the trustee to return the vehicles to the federal
grantor, concluding that the government's rights amounted to a
reversionary interest.[Footnote 67]
Another theory occasionally encountered but which appears to have
received little in-depth discussion is the theory that a grantee holds
grant funds, and property purchased with those funds, in the capacity
of a trustee. For example, in Joliet-Will, 847 F.2d at 432, the court
held that the grantee was essentially "a trustee, custodian, or other
intermediary,
who ... is merely an agent for the disbursal of funds belonging to
another," and that the grantee's "ownership" was nominal, like that of
a trustee. The trust concept finds support in an early Supreme Court
decision, Stearns v. Minnesota, 179 U.S. 223, 249 (1900), a land grant
case in which the Court discussed the grant in trust terms.
However, this trust theory cannot create a federal interest where one
does not logically exist. In one case, Transit Express, Inc. v.
Ettinger, 246 F.3d 1018 (7th Cir. 2001), a firm that offered to
provide drivers to a grantee sued the Federal Transit Administration
because the grantee did not choose to contract with it to drive vans
that were purchased with the grant funds. The federal grant had been
used only to purchase the vans, not to fund the operations of the
grantee. Thus, the court ruled that the presence of federal grant
funds as a source to finance purchase of the vans under the federal
program was completely irrelevant to the grantee's actions in
obtaining drivers for the vans. Specifically, the court stated that
"federal funds lurking in the background of this case cannot serve as
an independent basis for establishing jurisdiction." Id. at 1026. As a
result, the contractor's complaint was dismissed.
Another area in which grant funds in the hands of a grantee continue
to be treated as federal funds is the application of federal criminal
statutes dealing with theft of money or property belonging to the
United States. There are numerous cases in which the courts have
applied various provisions of the Criminal Code, such as 18 U.S.C. §
641, to the theft or embezzlement of grant funds or grant property in
the hands of grantees. Examples involving a variety of grant programs
are Hayle v. United States, 815 F.2d 879 (2nd Cir. 1987) (violation of
18 U.S.C. § 641); United States v. Harris, 729 F.2d 441 (7th Cir.
1984) (violation of 18 U.S.C. § 657); United States v. Hamilton, 726
F.2d 317 (7th Cir. 1984) (violation of 18 U.S.C. § 665(a)); United
States v. Montoya, 716 F.2d 1340 (10th Cir. 1983) (violation of 18
U.S.C. § 287); United States v. Smith, 596 F.2d 662 (5th Cir. 1979)
(violation of 18 U.S.C. § 641); United States v. Rowen, 594 F.2d 98
(5th Cir.), cert. denied, 444 U.S. 834 (1979) (violation of 18 U.S.C.
§ 641).
In each of these cases, the court rejected the argument that the
statute did not apply because the funds or property were no longer
federal funds or property. It makes no difference whether the funds
are paid to the grantee in advance or by reimbursement (Montoya, 716
F.2d at 1344), or that the funds may have been commingled with
nonfederal funds (Hayle, 815 F.2d at 882). The holdings are based on
the continuing responsibility of the federal government to oversee the
use of the funds. E.g., Hayle, 815 F.2d at 882; Hamilton, 726 F.2d at
321. The result would presumably be different in the case of grant
funds paid over outright with no continuing federal oversight or
supervision. E.g., Smith, 596 F.2d at 664.
Lastly, the presence of federal grant funds had an unusual impact on
an age discrimination case brought against a federally-funded private
organization. The plaintiff in Neukirchen v. Wood County Head Start,
Inc., 53 F.3d 809 (7th Cir. 1995), had obtained a money judgment for
age discrimination against a local Head Start organization. She
attempted to collect the judgment by executing against personal
property the organization owned, including items of property purchased
with grants funds that had a unit acquisition cost of less than
$1,000. The then applicable regulations provided that once such
property was no longer needed for grant purposes, it could be retained
or disposed of by the grantee with no further obligation to the
federal government.[Footnote 68] The plaintiff argued that the federal
government retained no interest in property subject to this provision.
The argument proved unavailing Citing Joliet-Will, supra, the court
stated:
"It is clear in this circuit that property purchased with federal
grant funds constitutes federal property. ... It is also axiomatic
that the doctrine of sovereign immunity prevents a judgment creditor
from attaching federal property, absent consent by the United States."
Neukirchen, 53 F.3d at 811-12. The court was not persuaded that the
rule for property costing less than $1,000 created an exception:
"Given the overwhelming control that the Secretary [of Health and
Human Services] exercises over property purchased with federal funds
and the corresponding lack of discretion on Wood County's part, we do
not believe that the absence of specific regulations requiring Wood
County to reconvey to the United States property costing less than
$1,000 commands a different result. We, therefore, conclude that
Joliet-Will's rationale requires that property purchased with federal
grant funds, including property costing less than $1000, constitutes
federal property."
Id. at 813. The result would be different, the court noted, for
property that was in fact no longer needed; however, that was not true
of the property at issue. Id. at n.4. Thus, even though the grantee
had violated federal law in discriminating against the plaintiff, the
majority of the grantee's assets were immune from execution since they
had been purchased with federal funds, a result that the court
described as "paradoxical, indeed." Id. at 814.
E. Grant Funding:
Trillions of dollars in cash move into and out of the United States
Treasury every year, and the federal government has a responsibility
to the taxpayer to efficiently manage this cash flow in terms of
collection, internal controls, investment, and disbursement. In the
disbursement part of this process, good cash management practices
include not paying the bills too late or too early. Timely
disbursement of funds to resolve current liabilities as they come due
yields positive results for the federal government both by avoiding
late payment penalties and maximizing the time during which the cash
reserves earn a return for the government through short-term
investments.
The need for sound cash management in the federal government plays an
important role in the funding of grants and other assistance awards.
Although grants are not subject to the general prohibition against
advance payment of public funds, they are subject to laws and
regulations intended to prevent grantees from earning interest on cash
reserves at the expense of the federal government. The general rule is
that interest earned on grant funds pending their use for program
purposes belongs to the federal government. Special rules apply to
state governmental grantees under the Intergovernmental Cooperation
Act[Footnote 69] and the Cash Management Improvement Act,[Footnote 70]
discussed in section E.2.b of this chapter. Once the grant funds have
been used for program purposes, however, cash generated by the grant
funds is generally treated as program income that belongs to the
grantee.
In addition to cash management concerns, grant funding also involves
consideration of whether the federal government should bear the entire
cost of program activities or require the grantee to shoulder part of
the financial burden. If the grant program does provide for cost
sharing, this is usually accomplished through either a local/matching
share provision or a maintenance of effort provision.
1. Advances of Grant/Assistance Funds:
The framework for managing cash flow in the federal government
generally prohibits federal agencies from paying for goods or services
before receiving them. However, the general statutory prohibition
against the advance payment of public funds, 31 U.S.C. §
3324,[Footnote 71] does not apply to grants. This is because the
primary purpose of assistance awards is to assist authorized
recipients and not to obtain goods or services for the government.
Thus, the policy behind the advance payment prohibition has much less
force in the case of assistance awards than in the case of procurement
contracts. Accordingly, the Comptroller General has held that 31
U.S.C. § 3324 does not preclude advance funding in authorized grant
relationships; unless restricted by the program legislation or the
applicable appropriation, the authority to make grants is sufficient
to satisfy the requirements of 31 U.S.C. § 3324. 60 Comp. Gen. 208
(1981); 59 Comp. Gen. 424 (1980); 41 Comp. Gen. 394 (1961). As stated
in 60 Comp. Gen. at 209, "the policy of payment upon receipt of goods
or services is simply inconsistent with assistance relationships where
the Government does not receive anything in the usual sense."
This does not mean that there can never be an advance payment problem
in a grant case. Because the authority to advance funds must, at least
in a general sense, be founded on the program legislation, advance
payments would probably not be authorized under an assistance program
that provided for payment by reimbursement. Also, the Comptroller
General found advance payment violations in two grant-related cases
from the 1970s involving the College Work-Study Program: 56 Comp. Gen.
567 (1977) and B-159715, Aug. 18, 1972. Under the College Work-Study
Program as it existed in the 1970s when these two cases were decided,
a student was placed with an employer, which might have been a federal
agency. The student's salary was paid from two sources: 80 percent was
paid by the college under a Department of Education grant, and the
remaining 20 percent was paid by the employer. In the 1972 case, an
employing federal agency proposed to advance pay the college's 80
percent share of the student's salary and then seek reimbursement of
this amount at a later date from the college. The Comptroller General
found this advance payment arrangement to violate 31 U.S.C. § 3324.
Five years later, in 56 Comp. Gen. 567 the Comptroller General found a
violation of the same statute when the agency/employer proposed to
advance its 20 percent share to the college, which would in turn place
the funds in an escrow account for payment to the student after the
work was performed.
2. Cash Management of Grants:
a. General Rule on Interest on Grant Advances:
One problem with the advance funding of assistance awards is that the
recipient may draw down funds before the funds are actually needed. This
is a matter of concern for several reasons. For one thing, advances
under an assistance program are intended to accomplish the program
purposes and not to profit the recipient other than in the manner and
to the extent specified in the program. But there is another reason.
When money is drawn from the Treasury before it is needed, or in
excess of current needs, the federal government loses the use of the
money. The principle was expressed as follows:
"When Federal receipts are insufficient to meet expenditures, the
difference is obtained through borrowing; when receipts exceed
expenditures, outstanding debt can be reduced. Thus, advancing funds
to organizations outside the Government before they are needed either
unnecessarily increases borrowings or decreases the opportunity to
reduce the debt level and thereby increases interest costs to the
Federal Government."
B-146285, Oct. 2, 1973, at 3. Thus, premature drawdown not only
profits the grant recipient, but does so at the expense of the rest of
the taxpayers.
To reduce premature drawdowns and thus promote efficient cash
management in the federal government in its grant funding, yet not
discourage advance funding of grants in appropriate circumstances, a
default rule has developed. The Comptroller General has consistently
held that, except as otherwise provided by law, interest earned by
grantees on funds advanced by the United States under an assistance
agreement pending their application to grant purposes belongs to the
United States rather than to the grantee. Such interest is to be
accounted for as funds of the United States and must be deposited in
the Treasury as miscellaneous receipts under 31 U.S.C. § 3302(b). For
example, in B-251863, Aug. 27, 1993, the Comptroller General applied
this rationale in refusing to approve the proposal of the Fish and
Wildlife Service to provide $584,930 to a nonprofit grantee over a 5-
year period by advancing the grantee $500,000 and allowing the grantee
to earn $84,930 in interest during that time to retain and use for
grant purposes. See also 71 Comp. Gen. 387 (1992); 69 Comp. Gen. 660
(1990); 42 Comp. Gen. 289 (1962); 40 Comp. Gen. 81 (1960); B-203681,
Sept. 27, 1982; B-192459, July 1, 1980; B-149441, Apr. 16, 1976; B-
173240, Aug. 30, 1973.[Footnote 72]
If the grantee is unable to document the actual amount of interest
earned on the grant advances, the general rule is that the grantor
agency should use the "Treasury tax and loan account" rate prescribed
by 31 U.S.C. § 3717 for debts owed to the United States. 69 Comp. Gen.
660 (1990). If, however, the grantee is a state, then interest will be
determined in accordance with 31 U.S.C. § 6503(c)(1), discussed
hereafter.
Except for states, discussed separately in the section immediately
following, the general rule that the United States owns interest
earned on grant advances applies whether the grantee is a public or
private entity. The rationale for the rule is that unless expressly
provided otherwise, funds are paid out to a grantee to accomplish the
grant purposes, not for the grantee to invest the money and earn
interest at the expense of the Treasury. Thus, grant funds are to be
applied promptly to the grant purposes. 1 Comp. Gen. 652 (1922).
In 40 Comp. Gen. 81 (1960), the Comptroller General held that interest
on foreign currencies advanced by the Department of Agriculture under
cooperative agreements, earned between the time the funds were
advanced and the time they were used, could not be retained for
program purposes but had to be returned to the Treasury for deposit in
the General Fund as miscellaneous receipts. In 42 Comp. Gen. 289
(1962), the rule was applied with respect to State Department grants
to American-sponsored schools and libraries overseas. The Comptroller
General stated, "there can be no doubt that only the Congress is
legally empowered to give away the property or money of the United
States." Id. at 293. The decision further concluded that the enabling
legislation did not provide sufficient authority to use the grant
funds to establish a permanent interest-bearing endowment fund. In B-
149441, Feb. 17, 1987, the Comptroller General found that since the
National Endowment for the Humanities had no authority in its program
legislation to permit its grantees to establish an endowment fund with
grant moneys, the Endowment could not authorize its grantees to
accomplish the same purpose with matching funds.
Citing both 42 Comp. Gen. 289 and B-149441, discussed immediately
above, the Comptroller General held in 70 Comp. Gen. 413 (1991) that
legislative authority would be required for a "debt for equity swaps"
proposal whereby the United States Information Agency (USIA) would
purchase discounted foreign debt from commercial lenders and transfer
the notes to grantees in the foreign country, who would in turn
exchange the notes for local currency or local currency denominated
bonds and use the income thus generated for program activities.
However, since USIA has statutory authority to accept conditional
gifts, the Comptroller General held that USIA could accept a donation
of foreign debt and use the principal and income for authorized
activities in accordance with the conditions specified.
The rule does not apply, however, if earning interest is consistent
with the grant purposes. Thus, in B-230735, July 20, 1988, where use
of grant funds to establish an endowment trust was authorized by law,
the Comptroller General concluded that the grantee could use income
from the endowment as nonfederal matching funds on other grants, as
long as such use was consistent with the terms and conditions of the
grant agreement.
In B-192459, July 1, 1980, a grantee transferred grant funds to a
trustee under a complex construction financing arrangement. The
trustee was independent, that is, not an agent of the grantee, and the
grantee could not get the funds back upon demand. The Comptroller
General determined that the transfer to the trustee was in the nature
of a disbursement for grant purposes. Therefore, interest earned by
the trustee after the transfer could be treated as grant income and
retained under the terms of the grant agreement. However, interest on
grant funds placed in bank accounts and certificates of deposit by the
grantee prior to transfer to the trustee had to be returned to the
Treasury. The grantor agency lacked the authority to permit the
grantee to retain interest earned on grant funds prior to their
application to grant purposes.
In 64 Comp. Gen. 103 (1984), the Agency for International Development
advanced grant funds to the government of Egypt, which in turn
advanced these funds to certain local and provincial elements of that
government. Since the purpose of the grant was to assist Egypt in its
efforts to decentralize certain governmental functions by developing
experience at the local level in managing and financing selected
projects, the Comptroller General concluded that the advances of funds
by the government of Egypt to the local and provincial entities could
legitimately be viewed as disbursements for grant purposes. Thus, the
subgrantees could retain interest earned on those advances. However,
in another 1984 case also involving the Agency for International
Development, the Comptroller General found that subgrantees could not
retain interest on funds advanced to them by the grant recipient under
a cooperative agreement whose purpose was to help develop certain
technologies because the grantor agency had advanced these funds to
the grantee before the grantee had a legitimate program need for the
funds. 64 Comp. Gen. 96 (1984). Both decisions followed the approach
set forth in B-192459, July 1, 1980, summarized above.
In evaluating the disposition of interest income, an important
determinant is whether the interest was earned before or after the
grant funds were applied to authorized grant purposes. The key word
here is "authorized."
For example, under the Community Development Block Grant program,
grantee cities and counties may use the funds to make loans for
certain community projects. Grantees may retain interest earned on
those loans for grant-related uses as a type of "program income," that
is, grant-related income, which is discussed in more detail in section
E.4 of this chapter. However, if a loan is later found to be
ineligible under the program, the funds were never used for an
authorized grant purpose, and interest earned by the grantee must be
paid over to the United States for deposit as miscellaneous receipts.
71 Comp. Gen. 387 (1992).
Congress can, of course, legislatively make exceptions to the rule by
providing assistance in the form of an unconditional gift or by other
appropriate statutory provisions. See, e.g., 44 Comp. Gen. 179 (1964)
(provision in appropriation act exempting educational institutions
from liability for interest under certain Public Health Service Act
grants); B-175155, June 11, 1975 (interest rule not applicable with
respect to "grants" to Amtrak).[Footnote 73]
b. State Governments and Interest on Grant Advances:
(1) Intergovernmental Cooperation Act:
Prior to 1968, the prohibition on retention of interest income applied
to states as well as to other grantees. 20 Comp. Gen. 610 (1941); 3
Comp. Gen. 956 (1924); 26 Comp. Dec. 505 (1919); 24 Comp. Dec. 403
(1918); A-46031, Jan. 16, 1933. There was no reason to draw a
distinction. This, of course, was premised on the absence of any
statutory guidance.
The treatment of interest on grant advances to state governments is
now governed by the Intergovernmental Cooperation Act of 1968, Pub. L.
No. 90-577, 82 Stat. 1098 (Oct. 16, 1968), codified at 31 U.S.C. §§
6501-6508. The law evolved in two stages. The original
Intergovernmental Cooperation Act created what was to be, for 22
years, the major exception to the rule that interest on grant advances
belongs to the United States. The 1968 statute first codified the
requirement for federal grantor agencies to schedule the transfer of
grant funds so as to minimize the time elapsing between transfer and
grantee disbursement.[Footnote 74] The statute then provided: "States
shall not be held accountable for interest earned on grant-in-aid
funds, pending their disbursement for program purposes." Pub. L. No.
90-577, § 203.
The theory behind the Intergovernmental Cooperation Act was that
federal grantor agencies could control the release of grant funds and
thereby preclude situations from arising in which state grantees would
be in a position to earn excessive interest on grant advances. If the
timing of the release of funds was properly managed, interest the
state might earn would be too small to be a matter of concern. The
statutory exception was not intended to create a windfall for state
grantees. See Pennsylvania Office of Budget v. Department of Health, &
Human Services, 996 F.2d 1505 (3rd Cir.), cert. denied, 510 U.S. 1010
(1993).[Footnote 75]
The original statutory exception for interest on grant advances did
not prove satisfactory, however. Grantor agencies complained of
premature drawdown of grant advances while grantee states complained
of slow federal payment in reimbursement situations. Congress
responded by amending 31 U.S.C. § 6503 in section 5 of the Cash
Management Improvement Act of 1990, Pub. L. No. 101-453, 104 Stat.
1058, 1059 (Oct. 24, 1990). The 1990 amendment was intended to address
both the federal and state concerns. Thus, the House report on the
legislation, H.R. Rep. No. 101-696, at 3-4 (1990), stated:
"Under current law, the States need not account to the Federal
Government for interest earned on Federal funds disbursed to the
States prior to payment to program beneficiaries. However, when the
Federal Government complains of undue profits made by the States as a
result of early drawdown of Federal funds, the States are quick to
point out numerous instances where they lose interest opportunities
because the Federal Government is slow to reimburse them for the
monies the States advance to fund Federal programs. This bill seeks to
provide a fair and equitable resolution to these differences between
the Federal Government and the States."
The Cash Management Improvement Act retained the general requirement
of 31 U.S.C. § 6503 to minimize the time elapsing between transfer of
funds from the Treasury to the grantee and grantee disbursement of
those funds for program purposes. It also provided sanctions to
enforce this requirement. These provisions are discussed further in
section E.2.c of this chapter. With respect to interest, the act
amended 31 U.S.C. § 6503(c) to provide that for advance payment
programs, unless inconsistent with program purposes the state must pay
interest to the United States from the time the funds are transferred
to the state's account to the time they are paid out by the state for
program purposes. Interest payments are to be deposited in the
Treasury as miscellaneous receipts. For reimbursement programs, the
United States must pay interest to the state from the time of payout
by the state to the time the federal funds are deposited in the
state's bank account. 31 U.S.C. § 6503(d). Interest in both directions
(i.e., from states to the federal government under 31 U.S.C. § 6503(c)
and from the federal government to states under 31 U.S.C. § 6503(d))
is to be paid annually, at a rate based on the yield of 13-week
Treasury bills, using offset to the extent provided in Treasury
regulations. Id. §§ 6503(c), (d), (i).[Footnote 76]
(2) Decisions under the Intergovernmental Cooperation Act:
(i) State entities covered:
The original Intergovernmental Cooperation Act applied only to states
and their agencies or instrumentalities; it did not extend to
"political subdivisions" of states, such as cities, towns, counties,
or special districts created by state law. Pub. L. No. 90-577, § 102,
82 Stat. 1098, 1099 (Oct. 16, 1968), codified at 31 U.S.C. §§ 6501-
6508. The Cash Management Improvement Act, Pub. L. No. 101-453, 104
Stat. 1058 (Oct. 24, 1990), expanded the relevant definition to apply
to "an agency, instrumentality, or fiscal agent" of a state, including
territories and the District of Columbia, but the definition retains
the exclusion for "a local government of a State," such as a city,
county, or town. 31 U.S.C. § 6501(9). Thus, GAO decisions under the
original Intergovernmental Cooperation Act should remain relevant in
determining which entities are "states" in this context. What
constitutes a covered state entity under the act is further refined in
implementing Treasury Department regulations at 31 C.F.R. § 205.2
(2005).
In 56 Comp. Gen. 353 (1977), the Comptroller General addressed how to
determine which state entities were covered by the Intergovernmental
Cooperation Act, concluding as follows:
"[A] Federal grantor agency is not required by the Intergovernmental
Cooperation Act of 1968 and its legislative history to accept the
Bureau of the Census' classification of an entity ... in determining
whether that entity is a State agency or instrumentality or a
political subdivision of the State. It is bound by the classification
of the entity in State law. Only in the absence of a clear indication
of the status of the entity in State law may it make its own
determination based on reasonable standards, including resort to the
Bureau of the Census' classifications."
Id. at 357. If the classification under state law is not clear and
unambiguous, the grantee may be required to obtain a legal opinion
from the state Attorney General in order to assist in making the
determination. Id.
In a more recent case dealing with the current statutory definition,
the Federal Circuit found that the Massachusetts Bay Transportation
Authority (MBTA) was an instrumentality of the Commonwealth of
Massachusetts and was therefore entitled under 31 U.S.C. § 6503(d) to
interest on reimbursement payments from the federal government.
Massachusetts Bay Transportation Authority v. United States, 129 F.3d
1226, 1236-37 (Fed. Cir. 1997). In arriving at this conclusion, the
court noted that the MBTA was located within the state's Executive
Office of Transportation and Construction and that the members of
MBTA's board of directors were appointed and removed by the state's
governor. The court also found it significant that the MBTA had been
defined as a state instrumentality in a Comptroller General decision
(56 Comp. Gen. 353 (1977)) and in an opinion of the Massachusetts
Attorney General.
(ii) Grants covered by the former interest exemption:
The exception to the prohibition against retention of interest income
by state grantees in the original Intergovernmental Cooperation Act
was held to apply to pass-through situations where states are the
primary recipients of grant funds, which are then passed on to
subgrantees. In B-171019, Oct. 16, 1973, the Comptroller General
concluded that the exception applied to political subdivisions, which
were subgrantees of states. The Justice Department reached the same
conclusion in 6 Op. Off. Legal Counsel 127 (1982). Subsequent
decisions applied the exception to nongovernmental subgrantees as
well, recognizing that there was no basis to distinguish between
governmental and nongovernmental subgrantees. 59 Comp. Gen. 218
(1980), affd, B-196794, Feb. 24, 1981.
Other cases under the version of the Intergovernmental Cooperation Act
that predated the Cash Management Improvement Act may remain relevant
as well. For example, the statute does not necessarily apply to funds
in contexts other than those specified. Thus, in 62 Comp. Gen. 701
(1983), the Comptroller General concluded that a subgrantee under a
Labor Department grant to a state was not entitled to retain interest
it had earned by investing funds received from the Internal Revenue
Service as a refund of Federal Insurance Contributions Act (social
security) taxes. In North Carolina v. Heckler, 584 E Supp. 179
(E.D.N.C. 1984), the court found the statute inapplicable in a
situation in which the state had wrongfully obtained federal funds and
earned interest on them pending repayment to the government.
In two recent judicial decisions, courts agreed with the federal
government that the act's exemption did not apply because the
transactions at issue did not constitute grants covered by the act. In
California State University v. Riley, 74 F.3d 960, 964-65 (9th Cir.
1996), the Ninth Circuit held that, contrary to the state's
contention, "Pell grants" were not "grants" under the act's
definition. Paraphrasing the language of 31 U.S.C. § 6501(4), which
remains the same today, the court stated:
"The 'grants' that are the subject of the ICA [Intergovernmental
Cooperation Act] are grants to states, local governments, or
beneficiaries under a state plan or program administered by the state."
Riley, 74 F.3d at 964 (emphasis in original). Under the Pell grant
program, the state university did not administer the grants but acted
merely as a conduit for disbursing the Pell grants, which were
provided directly from the federal government to students meeting the
eligibility requirements. Similarly, the court in New York Department
of Social Services v. Shalala, 876 E Supp. 29 (S.D.N.Y. 1994), aff'd,
50 F.3d 179 (2nd Cir. 1995), determined that a state agency could not
retain interest earned on payments received from the federal
government as reimbursement for administering federal Social Security
disability programs. The court held that the payments did not
constitute a "grant" for purposes of the Intergovernmental Cooperation
Act since the statute specifically excludes from its definition of a
grant "a payment to a State or local government as complete
reimbursement for costs incurred in paying benefits or providing
services to persons entitled to them under a law of the United
States." Id. at 33. See 31 U.S.C. § 6501(4)(C)(vii).
c. Other Cash Management Requirements:
Our discussion up to now has focused exclusively on the treatment of
interest earned on federal grant funds. However, there are other
important cash management considerations and additional relevant
requirements in the Cash Management Improvement Act, Pub. L. No. 101-
453, 104 Stat. 1058 (Oct. 24, 1990), and its implementing
regulations.[Footnote 77] Some of these are highlighted below.
Section 4 of the act added a new section 3335 to title 31, United
States Code, which imposes a general requirement for federal agencies
to provide for the "timely disbursement" of federal funds to eligible
recipients in accordance with regulations prescribed by the Secretary
of the Treasury. 31 U.S.C. § 3335(a).[Footnote 78] If an agency fails
to comply with this requirement, the Secretary may collect from the
agency a charge in an amount the Secretary determines to be the cost
to the general fund of the Treasury caused by the noncompliance. 31
U.S.C. § 3335(b). The charge is to be deposited into the Treasury as
miscellaneous receipts and is to be derived, to the maximum extent
possible, from funds available to the offending agency for
administrative operations rather than from program accounts. Id.
§§ 3335(c) and (d). The Secretary's authority to collect charges is
permissive rather than mandatory and, according to the legislative
history, is to be "restricted to cases of egregious or repeated
noncompliance, and [not to] be used in a routine manner to finance
interest costs incurred by the Federal Government." H.R. Rep. No. 101-
696, at 7 (1990).
Section 5 of the Cash Management Improvement Act also amended 31
U.S.C. § 6503 to provide more specific requirements that apply to
assistance programs administered by the states. Section 6503, as so
amended, directs both federal grantor agencies and state grantees,
consistent with Treasury regulations, 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 the state grantee for program purposes. 31 U.S.C. § 6503(a).
Furthermore, it requires the Secretary of the Treasury to enter into
an agreement with each state receiving grant funds that prescribes
fund transfer methods and procedures, as chosen by the state and
approved by the Secretary. 31 U.S.C. § 6503(b). If an agreement cannot
be reached with a particular state, the Secretary is authorized to
establish default procedures for that state by regulation. 31 U.S.C. §
6503(b)(3).
The Treasury Department's regulations implementing the Cash Management
Improvement Act are codified at 31 C.F.R. parts 205 and 206 (2005).
Part 205 contains those provisions most relevant to assistance
programs. See, e.g., 31 C.F.R. §§ 205.8 (default procedures in the
absence of a Treasury-state agreement); 205.11 and 205.33
(requirements for fund transfers and drawdowns); 205.19 (calculation
of interest); 205.34 (federal oversight and compliance
responsibilities).
The crux of the government's policy related to timeliness, as stated in
31 C.F.R. §§ 205.11 and 205.33, is that federal agencies must limit a
funds transfer to a state to the minimum amounts needed by the state
and must time the disbursement to be in accord with the actual,
immediate cash requirements of the State in carrying out a federal
assistance program. Similarly, a state must minimize the time between
the drawdown of federal funds from the federal government and their
disbursement for federal program purposes. In B-244617, Dec. 24, 1991
(nondecision letter), GAO concurred with a determination by the Social
Security Administration that a period of 15 months between a state's
drawdown and disbursement of federal funds for state employee
retirement contributions did not meet the latter requirement.
Although the above discussion focuses on state grantees, the same cash
management concerns apply, of course, with respect to other recipients
of federal assistance. Thus, similar requirements for other grantees
can be found in Office of Management and Budget circulars and agency
regulations. See, for example, the cash management provisions of the
Department of Agriculture's common rules applicable to local
government grantees as well as states (7 C.F.R. § 3016.20) and those
applicable to institutions of higher education and nonprofit
organizations (7 C.F.R. §§ 3019.21 and 22).
The authority of a state to require its own grantees to account to it
for funds it makes available to them is generally a matter within the
discretion of the state. See B-196794, Jan. 28, 1983 (nondecision
letter) (observing that each state "has the primary responsibility for
employing whatever form of organization and management procedures it
feels is necessary to assure proper and efficient administration of
the funds advanced"). However, the common rules include some minimal
internal control and accountability standards for state grantees in
relation to their subgrantees. For example, the Department of
Agriculture common rule in 7 C.F.R. § 3016.20(b)(7) provides, in part,
with respect to cash management:
"Grantees must establish reasonable procedures to ensure the receipt
of reports on subgrantees' cash balances and cash disbursements in
sufficient time to enable them to prepare complete and accurate cash
transactions reports to the awarding agency. When advances are made by
letter-of-credit or electronic transfer of funds methods, the grantee
must make drawdowns as close as possible to the time of making
disbursements. Grantees must monitor cash drawdowns by their
subgrantees to assure that they conform substantially to the same
standards of timing and amount as apply to advances to the grantees."
3. Program Income:
Once grant funds have been applied to their grant purposes, they still
can generate income, directly or indirectly, in various ways. This, as
distinguished from interest on grant advances, is called "program
income." Program income is defined broadly under the common rules as
"gross income received by the grantee or subgrantee directly generated
by a grant supported activity, or earned only as a result of the grant
agreement during the grant period." See, e.g., 7 C.F.R. § 3016.25(b)
(2005). Program income may include such things as income from the sale
of commodities, fees for services performed, and usage or rental fees.
See, e.g., 7 C.F.R. § 3016.25(a). Grant-generated income may also
include investment income, although this will be uncommon. See B-
192459, July 1, 1980.
Although included in the broad common rule definition of program
income, income from the sale of real property receives special
treatment and is governed instead by the common rule on real property.
See, e.g., 7 C.F.R. §§ 3016.25(f), 3016.31, 3019.24(g). This
difference was important in B-290744, Sept. 13, 2002, in which the
Comptroller General found that the Transportation Equity Act for the
21st Century[Footnote 79] did not alter the common rule related to
program income and the proceeds of the sale of real property that the
grantee no longer needs for the originally authorized purpose. The
decision thus concluded that the federal government had retained its
percentage interest in the proceeds Massachusetts had earned from the
sale of excess property acquired with Federal Highway Trust funds. The
Comptroller General determined that the 1998 statute did not remove
the federal character of the federal interest in the real property
that was sold.
In contrast to income earned on grant advances, program income (other
than proceeds from real property sales) does not automatically acquire
a federal character and is not required to be deposited in the
Treasury as miscellaneous receipts. It may, unless the grant provides
otherwise, be retained by the grantee for grant-related use. 44 Comp.
Gen. 87 (1964); 41 Comp. Gen. 653 (1962); B-192459, July 1, 1980; B-
191420, Aug. 24, 1978. In 44 Comp. Gen. 87, the Comptroller General
concluded that a grantee could establish a revolving fund with grant
income in the absence of a contrary provision in the grant agreement.
However, the initial amount of a revolving fund established from
either the principal of a grant or the income generated under the
grant, when returned to the grantor agency upon completion of the
grant, may not be considered a return of grant funds for further use
by the grantor but must be deposited in the Treasury as miscellaneous
receipts. B-154996, Nov. 5, 1969.
Under the common rules, there are three generally recognized methods
for the treatment of program income:
* Deduction. Deduct program income from total allowable costs to
determine net costs on which grantor and grantee shares will be based.
This approach results in savings to the federal government because the
income is used to reduce contributions rather than to increase program
size.
* Addition. Add income to the funds committed to the project, to be
used for program purposes. This approach increases program size.
* Cost-sharing or matching. Use income to finance any applicable
nonfederal matching requirements. Under this approach, the federal
contribution and program size remain the same.
See, e.g., 7 C.F.R. §§ 3016.25(g), 3019.24(b).
Although the common rules provide for three alternative treatments of
program income, the deduction method is the default rule with the
methods or a combination of them being used only if specified by the
applicable federal agency regulations or grant agreement. See, e.g., 7
C.F.R. § 3016.25(g). The rule further provides:
"In specifying alternatives, the Federal agency may distinguish
between income earned by the grantee and income earned by subgrantees
and between the sources, kinds, or amounts of income. When Federal
agencies authorize the alternatives in paragraphs (g)(2) and (3) of
this section, program income in excess of any limits stipulated shall
also be deducted from outlays."
Id.
The common rules provide that the deduction method is the default rule
for program income earned by state and local government grantees as
described above. The common rules likewise make deduction the default
in the treatment of program income for most other grantees, the
exception being research grants for which addition is the default.
See, e.g., 7 C.F.R. §§ 3019.24(b)-(d); 2 C.F.R. §§ 215.24(b)-(d). An
illustration of the application of the deduction method can be found
in Pennsylvania Department of Public Services v. Health & Human
Services, 80 F.3d 796 (3rd Cir. 1996), which involved revenue the
state earned from a fee charged for filing a child support case in the
state. The court held that the fee revenue was program income, which
the state had to deduct from the total allowable program costs in
order to determine the net costs on which the federal and state shares
were to be based.
Some types of program income are subject to special rules:
* Proceeds from the sale of real and personal property provided by the
federal government or purchased in whole or in part with federal
funds. Special rules are set forth in the common rules. See, e.g., 7
C.F.R. §§ 3016.25(f), 3016.31, 3016.32, 3019.24(g), 3019.32, 3019.34.
See also B-290744, Sept. 13, 2002.
* Royalties received as a result of copyrights or patents produced
under a grant. A special rule states that this income may be treated
as other program income if specified in applicable agency regulations
or the grant agreement. See 7 C.F.R. §§ 3016.25(e), 3019.24(h). See
also B-186284, June 23, 1977; GAO, Administration of the Science
Education Project 'Man: A Course of Study" (MACOS), MWD-76-26
(Washington, D.C.: Oct. 14, 1975).
4. Cost-Sharing:
Federal grant funds constitute a significant portion of the total
expenditures of state and local governments. In fiscal year 2004,
federal grants made up 25 percent of the total expenditures of state
and local governments. Analytical Perspectives, Budget of the United
States Government for Fiscal Year 2006 (Feb. 7, 2005), at 131. When
the federal government chooses to provide financial assistance to some
activity, it may also choose to fund the entire cost, but it is not
required to do so. City of New York v. Richardson, 473 F.2d 923, 928
(2nd Cir.), cert. denied sub nom., 412 U.S. 950 (1973). "The judgment
whether to [provide assistance], and to what degree, rests with
[Congress]." Id. Thus, a program statute may provide for full funding,
or it may provide for "cost-sharing," that is, financing by a mix of
federal and nonfederal funds. Reasons for cost-sharing range from
budgetary considerations to a desire to stimulate increased activity
on the part of the recipient. The two primary cost-sharing devices are
"matching share" provisions and "maintenance of effort" provisions.
For a detailed analysis and critique of both devices, see GAO, Federal
Grants: Design Improvements Could Help Federal Resources Go Further,
GAO/AIMD-97-7 (Washington, D.C.: Dec. 18, 1996). See also GAO, Block
Grants: Issues in Designing Accountability Provisions, GAO/AIMD-95-226
(Washington, D.C.: Sept. 1, 1995).
a. Local or Matching Share:
(1) General principles:
A matching share provision is one under which the grantee is required
to contribute a portion of the total project cost. The "match" may be
50-50, or any other mix specified in the governing legislation. A
matching share provision typically prescribes the percentages of
required federal and nonfederal shares. However, the legislation need
not provide explicitly for a nonfederal share. A statute authorizing
assistance not in excess of a specified percentage of project costs
will normally be interpreted as requiring a local share of nonfederal
funds to make up the difference. (The rest of the money has to come
from someplace.)
As discussed in more detail in section E.5.a of this chapter, a
grantee generally may not use funds received under one federal grant
program to meet its nonfederal share under another federal grant
program. See B-270654, May 6, 1996 (private nonprofit corporation
could not use general support funds it received from the State
Department as the nonfederal match for other federal grants it
received from the Agency for International Development and the United
States Information Agency); B-214278, Jan. 25, 1985 (funds from the
Farmers Home Administration's Water and Waste Disposal Development
Grant Program could not be used to satisfy the nonfederal match
requirement of the Environmental Protection Agency's treatment works
construction grant program). Congress can, of course, enact a
statutory exception that expressly permits this method of funding the
nonfederal share. See, e.g., B-239907, July 10, 1991 (Community
Development Block Grants (CDBG) can constitute the nonfederal share
because one of the statutorily authorized activities for CDBG funds is
providing the nonfederal share for other federal grant programs that
are listed in the community's annual CDBG application document).
When a federal agency enters into an assistance agreement with an
eligible recipient, an entire project or program is approved. Where a
local share is required, this agreement includes an estimate of the
total costs, that is, a total that will exceed the amount to be borne
by the federal government. The additional contribution that is needed
to supply full support for the anticipated costs is the local, or
nonfederal, matching share. Once the agreement is accepted, the
assistance recipient is committed to providing the nonfederal share if
it wishes to continue with the grant. E.g., B-130515, July 20, 1973.
Failure to meet this commitment may result in the disallowance of all
or part of otherwise allowable federal share costs.
Matching share requirements are often intended to "assure local
interest and involvement through financial participation." 59 Comp.
Gen. 668, 669 (1980). Such requirements may also serve to hold down
federal costs. The theory behind the typical matching share
requirement may be summarized as follows:
"In theory, the fiscal lure of Federal grants entices State and local
governments into allocating new resources to satisfy the non-Federal
match for programs they otherwise would not have funded on their own.
While State and local jurisdictions may not be willing or able to
fully fund a program from their own resources, they would most likely
agree to spend new resources on the same project if most of the
project costs were paid by the Federal Government."
GAO, Proposed Changes in Federal Matching and Maintenance of Effort
Requirements for State and Local Governments, GGD-81-7 (Washington,
D.C.: Dec. 23, 1980), at 9. This approach has been termed "cooperative
federalism." E.g., King v. Smith, 392 U.S. 309, 316 (1968). It is also
known as the "federal carrot." See City of New York v. Richardson, 473
F.2d 923, 928 (2nd Cir.), cert. denied sub nom., 412 U.S. 950 (1973).
Matching requirements are most commonly found in the applicable
program legislation. However, they may also be found in appropriation
acts. E.g., 58 Comp. Gen. 524 (1979); 31 Comp. Gen. 459 (1952). A
matching provision in an appropriation act, like any other provision
in an appropriation act, will apply only to the fiscal year(s) covered
by the act or the appropriation to which it applies, unless otherwise
specified. 58 Comp. Gen. at 527.
If a program statute authorizes grants but neither provides for nor
prohibits cost-sharing, the grantor agency may in some cases be able
to impose a matching requirement administratively by regulation. The
test is the underlying congressional intent. If legislative history
indicates an intent for full federal funding, then the statute will
generally be construed as requiring a 100 percent federal share. B-
226572, June 25, 1987; B-169491, June 16, 1980. However, cost-sharing
regulations have been regarded as valid when the statute was silent
and it could reasonably be concluded that Congress left the matter to
the judgment of the administering agency. B-130515, July 17, 1974; B-
130515, July 20, 1973. Such regulations may be waived uniformly and
prospectively, but may not be waived on a retroactive and ad hoc
basis. Id.
Matching funds, as with the federal assistance funds themselves, can
be used only for authorized grant purposes. B-230735, July 20, 1988; B-
149441, Feb. 17, 1987. In the latter case, the Comptroller General
concluded that the National Endowment for the Humanities (NEH) could
not divert state matching funds to establish private endowments that,
under existing authorities, could not have been created by a direct
award of NEH funds. See also 42 Comp. Gen. 289, 295 (1962). Also,
unless otherwise specified in the governing legislation, a grantee may
match only a portion of the funds potentially available to it, and
thereby receive a correspondingly smaller grant. 16 Comp. Gen. 512
(1936).
Under a cost-sharing assistance program funded by advance payments of
the federal contribution, the Comptroller General has held that the
advances may be made prior to the disbursement of the nonfederal share
as long as adequate assurances exist (e.g., by contractual
commitments) that the local share will be forthcoming. 60 Comp. Gen.
208 (1981). See also 23 Comp. Gen. 652 (1944) (payment by federal
agency of local share under cooperative agreement, subject to
contractual agreement to reimburse).
Where the statute authorizing federal assistance specifies the federal
share of an approved program as a specific percentage of the total
cost, the grantor agency is required to make awards to the extent
specified and has no discretion to provide a lesser (or greater)
amount. Manatee County, Florida v. Train, 583 F.2d 179, 183 (5th Cir.
1978); 53 Comp. Gen. 547 (1974); B-197256, Nov. 19, 1980. However,
where the federal share is defined by statutory language that
specifies a maximum federal contribution but no minimum, the agency
can provide a lesser amount. 50 Comp. Gen. 553 (1971).
Although most cost-sharing programs are in terms of a fixed federal
share, some programs may provide for a declining federal share. Under
a declining share program in the Regional Rail Reorganization Act, the
Comptroller General concluded that the federal share could be
determined in the year the grant was made, notwithstanding the fact
that the grantee would not actually incur the costs until the
following fiscal year. B-175155, July 29, 1977. Another cost-sharing
variation is the "aggregate match," in which the nonfederal share is
determined by cumulating the grantee's contributions from prior time
periods. An example is discussed in 58 Comp. Gen. 524 (1979).
(2) Hard and soft matches:
The program statute may define or limit the types of assets that may
be applied to the nonfederal share. A provision limiting the
nonfederal share to cash contributions is called a "hard match." In 31
Comp. Gen. 459 (1952), the matching share was described in the
appropriation act that required it as an "amount available." In the
absence of legislative history to support a broader meaning, the
Comptroller General concluded that the matching share must be in the
form of money and that the value of other nonmonetary contributions
could not be considered. A more explicit "hard match" requirement is
discussed in 52 Comp. Gen. 558 (1973), in which the Comptroller
General concluded that the matching share, while it must be in the
form of money, could include donated funds as well as grantee funds.
While the program discussed in 52 Comp. Gen. 558 no longer exists, the
case remains useful for this point and for the detailed review of
legislative history illuminating the purpose and intent of the "hard
match" provision.
Congress continues to include hard match requirements in laws
providing for cost sharing with federal grants. For example, the
Transportation Equity Act for the 21st Century established job access
and reverse commute grants, which require that the grantee provide at
least 50 percent of the funding for each project and that the
nonfederal share:
"(i) shall be provided in cash from sources other than revenues from
providing mass transportation, but may include amounts received under
a service agreement; and;
"(ii) may be derived from amounts appropriated to or made available to
a department or agency of the Federal Government (other than the
Department of Transportation) that are eligible to be expended for
transportation."
Pub. L. No. 105-178, § 3037(h), 112 Stat. 107, 390 (June 9, 1998)
(emphasis added).
The program legislation may expressly authorize the inclusion of
assets other than cash in the nonfederal contribution. See 56 Comp.
Gen. 645 (1977). An example is found in the Klamath River Basin
Fishery Resources Restoration Act, Pub. L. No. 99-552, 110 Stat. 3080
(Oct. 27, 1986), codified at 16 U.S.C. §§ 460ss-460ss-6, which
requires that at least 50 percent of the cost of developing and
implementing the program come from nonfederal sources but explicitly
states that noncash assets may count toward the nonfederal share. That
statute specifically states:
"In addition to cash outlays, the Secretary [of the Department of
Interior] shall consider as financial contributions by a non-federal
source the value of in kind contributions and real and personal
property provided by the source for purposes of implementing the
program."
16 U.S.C. § 460ss-5(b)(2).
If, however, the legislation is silent with respect to the types of
assets that may be counted, the statute will generally be construed as
permitting an "in-kind" or "soft" match, that is, the matching share
may include the reasonable value of property or services as well as
cash. 52 Comp. Gen. 558, 560 (1973); B-81321, Nov. 19, 1948. The
valuation of in-kind contributions can get complicated. An example is
31 Comp. Gen. 672 (1952) (value of land could not include the cost or
value of otherwise unallowable improvements to the land previously
added by the grantee).
Current valuation standards for state and local governments are found
in the common rule captioned "Matching or Cost Sharing." See, e.g., 7
C.F.R. § 3016.24. For institutions of higher education, hospitals, and
other nonprofit organizations, such standards can be found in 7 C.F.R.
§ 3019.23, also captioned "Cost Sharing or Matching."
(3) Matching one grant with funds from another:
As noted in the preceding section, an important and logical principle
is that neither the federal nor the nonfederal share of a particular
grant program may be used by a grantee to match funds provided under
another federal grant program unless specifically authorized by law.
In other words, a grantee may not (1) use funds received under one
federal grant as the matching share under a separate grant, nor may it
(2) use the same grantee dollars to meet two separate matching
requirements. B-270654, May 6, 1996; 56 Comp. Gen. 645 (1977); 47
Comp. Gen. 81 (1967); 32 Comp. Gen. 561 (1953); 32 Comp. Gen. 141
(1952); B-214278, Jan. 25, 1985; B-212177, May 10, 1984; B-130515,
July 20, 1973; B-229004-0.M., Feb. 18, 1988; B-162001-0.M., Aug. 17,
1967. See also the common rule at 7 C.F.R. § 3016.24(b). A contrary
rule would largely nullify the cost-sharing objective of stimulating
new grantee expenditures.[Footnote 80]
Normally, exceptions to the rule are in the form of express statutory
authority. A prominent example is section 105(a)(9) of the Housing and
Community Development Act of 1974, as amended, 42 U.S.C. § 5305(a)(9),
which authorizes community development block grant funds to be used as
the nonfederal share under any other grant undertaken as part of a
community development program. See 59 Comp. Gen. 668 (1980);
56 Comp. Gen. 645 (1977); B-239907, July 10, 1991. The 1991 opinion
concluded that community development block grant regulations no longer
apply once the funds have been applied as a match under another grant
program, at least where applying the regulations would substantially
interfere with use of the funds under the receiving grant. See also 52
Comp. Gen. 558, 564 (1973); 32 Comp. Gen. 184 (1952).
In 59 Comp. Gen. 668, GAO considered a conflict between two statutes,
the Housing and Community Development Act, 42 U.S.C. §§ 5301-5321,
which, as noted, permits federal grant funds to fill a nonfederal
matching requirement, and the Coastal Zone Management Act of 1972, as
amended, which provides for cost-sharing grants but expressly
prohibits the use of federal funds received from other sources to pay
a grantee's matching share. 16 U.S.C. §§ 1454, 1455, and 1464(c).
Finding that the statutory language could not be reconciled, and
noting further that there was no helpful legislative history under
either statute, the Comptroller General concluded, as the most
reasonable result consistent with the purposes of both statutes, that
community development block grant funds were available to pay the
nonfederal share of Coastal Zone Management Act grants for projects
properly incorporated as part of a grantee's community development
program. See also B-229004-0.M., Feb. 18, 1988, which essentially
followed 59 Comp. Gen. 668 and concluded that community development
block grant funds could be used for the matching share of certain
grants under the Stewart B. McKinney Homeless Assistance Act, Pub. L.
No. 100-77, 101 Stat. 482 (July 22, 1987).
A somewhat less explicit exception is discussed in 57 Comp. Gen. 710
(1978), holding that funds distributed to states under Title II of the
Public Works Employment Act of 1976, as amended, 42 U.S.C. §§ 6721-
6736 (called the "countercyclical revenue sharing program"), may be
applied to the states' matching share under the Medicaid program. GAO
agreed with the Treasury Department that Title II payments amounted to
"general budget support as opposed to categorical or block grants or
contracts" (57 Comp. Gen. at 711), a form of revenue sharing, and thus
should be construed in the context of the (since repealed) General
Revenue Sharing Program. General Revenue Sharing was characterized by
a "no strings on local expenditures" policy, evidenced by the fact
that a provision in the original legislation barring the use of funds
as the nonfederal share in other federal programs had been repealed.
Stressing the strong analogy between Title II and General Revenue
Sharing, the decision concluded that implicit in the "no strings"
policy was the authority to apply Title II funds to a state's matching
share under Medicaid. For a description of the former General
Revenue Sharing Program, see, for example, GAO, Federal Assistance:
Temporary State Fiscal Relief, GAO-04-736R (Washington, D.C.: May 7,
2004) and Federal Grants: Design Improvements Could Help Federal
Resources Go Further, GAO/AIMD-97-7 (Washington, D.C.: Dec. 18, 1996).
It should also be noted that where any federal assistance funds are
used as nonfederal matching funds for another grant, such use must be
consistent with the grant under which they were originally awarded as
well as the grant they are intended to implement. 59 Comp. Gen. 668;
57 Comp. Gen. at 715; B-230735, July 20, 1988.
Funds received by a property owner from a federal agency as just
compensation for property taken by eminent domain belong to the owner
outright and do not constitute a "grant." Therefore, they may be used
as the nonfederal share of a grant from another federal agency, even
where the taking and the grant relate to the same project. B-197256,
Nov. 19, 1980.
(4) Relocation allowances:
Federally assisted programs which result in the displacement of
individuals and business entities may, apart from eminent domain
payments, result in the payment of relocation allowances under the
Uniform Relocation Assistance and Real Property Acquisition Policies
Act of 1970, as amended 42 U.S.C. §§ 4601-4655. Under the statute,
authorized relocation payments provided by a state incident to a
federally assisted project which results in relocations are to be
treated in the same manner as other project costs.
Thus, under a program statute which provides for a 90 percent federal
contribution, 90 percent of authorized relocation payments will be
reimbursable as an allowable program cost. In other words, any
applicable matching share requirement will apply equally to the
relocation payments. B-215646, Aug. 7, 1984.
(5) Payments by other than grantor agency:
Of course there is nothing wrong with grantees receiving funds from
more than one federal source, including other federal grants for which
they are eligible. If the grants are administered by different
agencies, each agency is making payments under its own program.
Occasionally, an agency is asked to make payments not associated with
any of its own assistance programs, to a grantee or grant beneficiary
under some other agency's program. The cases fall into two groups.
The first situation involves services performed by an assistance
beneficiary to an agency other than the grantor agency. Under the
College Work-Study Program, not to exceed 75, or 90 in certain cases,
percent of the student's salary is paid by the college under a
Department of Education grant, with the remainder paid by the
employer. 42 U.S.C. § 2753(b)(5). The "employer" may be another
federal agency. 46 Comp. Gen. 115 (1966). In addition to the salary
contribution, the employing agency may pay unreimbursed administrative
costs such as social security taxes and compensation insurance. 50
Comp. Gen. 553 (1971); 46 Comp. Gen. 115. However, an agency may not,
without statutory authority, participate in a work-study program
authorized by state law and not coordinated with the federal program.
B-159715, Dec. 18, 1978.
The authority to pay administrative costs under the work-study program
is based on the cost-sharing nature of that program. Absent comparable
cost-sharing provisions, there is no authority to pay administrative
costs. 61 Comp. Gen. 242 (1982) (agency to which employee had been
assigned under former Comprehensive Employment and Training Act lacked
authority to reimburse grantee for retirement contributions).
The second group of cases involves projects which benefit other
federal facilities. Under program legislation which does not give the
grantor agency discretion to reduce the federal share, the grantor
agency is not authorized to exclude from total cost a portion of an
otherwise eligible project solely because that portion would provide
service to another federal facility. 59 Comp. Gen. 1 (1979). Where the
grantor agency has reduced its contribution because a portion of the
project would serve another federal facility, the "benefited agency"
normally would not be authorized to make up the shortfall without
receiving additional consideration above and beyond the improved
service it would have received anyway. B-189395, Apr. 27, 1978.
However, if Congress chooses to appropriate funds to the benefited
agency to make up the shortfall, the benefited agency may make
otherwise proper contributions without requiring additional legal
consideration as long as its contribution, when added to the amount
contributed by the grantor agency, does not exceed the statutorily
specified federal share. 59 Comp. Gen. 1; B-198450, Oct. 2, 1980; B-
199534, B-200086, Oct. 2, 1980.
The illustration given in 59 Comp. Gen. 1 may help to clarify these
principles. Suppose the statutory federal share is 75 percent and the
total project cost is $10 million. The federal share is 75 percent of
$10 million, or $7.5 million. Now suppose the grantor agency
determines that 20 percent of the project will serve another federal
facility. Under 59 Comp. Gen. 1, it is improper for the grantor agency
to reduce total cost by 20 percent (i.e., from $10 million to $8
million) and to then contribute only 75 percent of the $8 million, for
a federal share of $6 million. The correct federal share should have
remained 75 percent of $10 million.
Suppose further that the grantor agency has made the reduction and
Congress appropriates money to the benefited agency to make up the
shortfall. Using the same hypothetical figures, the benefited agency
may contribute $1.5 million (20 percent of the federal share of $7.5
million) as the federal share of that portion of the project
attributable to its use, without further legal consideration. However,
as mentioned above, its contribution, when added to the contribution
of the grantor agency, may not exceed the specified statutory share
unless further legal consideration is received by the government.
The decision at 59 Comp. Gen. 1 and the two October 1980 decisions
resulted from a disagreement between GAO and the Environmental
Protection Agency over grant funding policy under the Federal Water
Pollution Control Act, commonly known as the Clean Water Act, codified
at 33 U.S.C. §§ 1251-1387. The Act authorized EPA to make 75 percent
[Footnote 81] construction grants for wastewater treatment systems.
EPA construed the statute as permitting it to proportionately reduce
its contribution to the extent a project benefits other federal
facilities. As noted, GAO concluded that EPA lacked authority to
reduce its contribution below 75 percent, and that the benefited
agencies could not make up the shortfall. EPA disagreed, and to
resolve the funding impasse, Congress, apparently as a temporary
expedient, provided funds to certain agencies, specifically the Army
and the Navy. However, Congress did not provide funds for the Air
Force to offset the reduced grants, and the issue arose again in B-
194912, Aug. 24, 1981. The Comptroller General reaffirmed GAO's
position and concluded that, absent specific congressional approval,
the appropriations of the Air Force were not available to make up for
the reduced grant amounts.
b. Maintenance of Effort:
Suppose the state of New Euphoria spends around a million dollars a
year for the control of noxious pests. After several years, the
continued proliferation of noxious pests leads Congress to conclude
that the program is not going as well as everyone might like, and that
federal financial assistance is in order. Congress therefore enacts
legislation and appropriates funds to provide annual pest-control
grants of half a million dollars to each affected state.
New Euphoria applies for and receives its grant. Like most other
states, however, New Euphoria is strapped for money and faced with
various forms of taxpayer revolt. While the state government certainly
believes that noxious pests merit control, it would, if it had free
choice in the matter, rather use the money on what it regards as
higher priority programs. The state uses the $500,000 federal grant
for its pest control program; it has no choice because it has
contractually committed itself with the federal government to do so as
a condition of receiving the grant. However, it then takes $500,000 of
its own money away from pest control and applies it to other programs.
If the purpose of the federal grant legislation is simply to provide
general financial support to New Euphoria, that purpose has been
accomplished and the state has clearly benefited. But if the federal
purpose is to fund an increased level of pest control activity, the
objective has just as clearly been frustrated.
When Congress wants to avoid this result, a device it commonly uses is
the "maintenance of effort" requirement. Under a maintenance of effort
provision, the grantee is required, as a condition of eligibility for
federal funding, to maintain its financial contribution to the program
at not less than a stated percentage (which may be 100 percent or
less) of its contribution for a prior time period, usually the
previous fiscal year. The purpose of maintenance of effort is to
ensure that the federal assistance results in an increased level of
program activity, and that the grantee, as did New Euphoria, does not
simply replace grantee dollars with federal dollars. GAO has observed
that maintenance of effort, since it requires a specified level of
grantee spending, "effectively serves as a matching requirement."
GAO, Proposed Changes in Federal Matching and Maintenance of Effort
Requirements for State and Local Governments, GAO/GGD-81-7
(Washington, DC: Dec. 23, 1980), at 2.
GAO has also observed that a grant for something the grantee is
already spending its own money on is, without maintenance of effort,
little more than another form of revenue sharing.
"When Federal grant money is used to substitute for ongoing or planned
State and local expenditures, the ultimate effect of the Federal
program funds is to provide fiscal relief for recipient States and
localities rather than to increase service levels in the program area.
When fiscal substitution occurs, narrow-purpose categorical Federal
programs enacted to augment service levels are transformed, in effect,
into broad purpose fiscal assistance like revenue sharing. Maintenance
of effort provisions, if effective, can prevent substitution and
ensure that the Federal grant is used by the grantee for the specific
purpose intended by the Congress."
GAO/GGD-81-7, at 48-49. See also GAO, Block Grants: Issues in
Designing Accountability Provisions, GAO/AIMD-95-226, (Washington,
D.C.: Sept. 1, 1995), at 17-18.
One type of maintenance of effort requirement is illustrated by the
following provision from the Clean Air Act, 42 U.S.C. § 7405(c)(1):
"No [air pollution control] agency shall receive any grant under this
section during any fiscal year when its expenditures of non-Federal
funds for recurrent expenditures for air pollution control programs
will be less than its expenditures were for such programs during the
preceding fiscal year...."
A variation is found in 20 U.S.C. § 7901, which is applicable to
certain education grants. The basic requirement is in section 7901(a):
"A local educational agency may receive funds under a covered program
for any fiscal year only if the State educational agency finds that
either the combined fiscal effort per student or the aggregate
expenditures of the agency and the State with respect to the provision
of free public education by the agency for the preceding fiscal year
was not less than 90 percent of the combined fiscal effort or
aggregate expenditures for the second preceding fiscal year."
Maintenance of effort statutes will invariably provide fiscal
sanctions if the grantee does not meet its commitment. Sanction
provisions are of two types. Under one version, the grantee's
allocation of federal funds is reduced in the same proportion as its
contribution fell below the required level. For example, 20 U.S.C. §
7901(b)(1) provides:
"The State educational agency shall reduce the amount of the
allocation of funds under a covered program in any fiscal year in the
exact proportion by which a local educational agency fails to meet the
requirement of subsection (a) of this section by falling below 90
percent of both the combined fiscal effort per student and aggregate
expenditures (using the measure most favorable to the local agency)."
The second and more severe version is illustrated by the Clean Air Act
provision quoted above and discussed in B-209872-0.M., Mar. 23, 1984,
an internal GAO memorandum. Under this version, the grantee, falling
short of its maintenance of effort commitment, loses all grant funds
under the program for that fiscal year. GAO has endorsed the enactment
of legislation making proportionate reduction the standard rather than
total withdrawal. GAO/GGD-81-7, at 71.
Some maintenance of effort statutes authorize the administering agency
to waive the requirement for a specified time period if some natural
disaster or other unforeseen event caused the funding shortfall. An
illustration is 20 U.S.C. § 7901(c):
"The Secretary may waive the requirements of this section if the
Secretary determines that a waiver would be equitable due to:
(1) exceptional or uncontrollable circumstances, such as a natural
disaster; or;
(2) a precipitous decline in the financial resources of the local
educational agency."
If a grantee fails to meet its commitment and the noncompliance cannot
be waived, any disbursement of federal funds in excess of the amount
permitted by the program statute must generally be recovered. 51 Comp.
Gen. 162 (1971). Failure to require repayment of such funds "would, in
effect, constitute the giving away of United States funds without
authority of law." Id. at 165.[Footnote 82]
A variation of the maintenance of effort provision is the so-called
"nonsupplant" provision, which requires that federal funds be used to
supplement, and not supplant, nonfederal funds which would otherwise
have been made available. Nonsupplant is sometimes used in conjunction
with maintenance of effort. For example, in addition to coverage under
the maintenance of effort provision at 20 U.S.C. § 7901, quoted above,
certain education grant programs are also covered under 20 U.S.C. §
6321(b)(1):
"A State educational agency or local educational agency shall use
Federal funds received under this part only to supplement the funds
that would, in the absence of such Federal funds, be made available
from non-Federal sources for the education of pupils participating in
programs assisted under this part, and not to supplant such funds."
GAO has reported on the difficulty with monitoring and enforcing
nonsupplant provisions. See GAO, Disadvantaged Students: Fiscal
Oversight of Title I Could Be Improved, GAO-03-377 (Washington, D.C.:
Feb. 28, 2003); Welfare Reform: Challenges in Maintaining a Federal-
State Fiscal Partnership, GAO-01-828 (Washington, D.C.: Aug. 10, 2001);
GAO/GGD-81-7, at 71.[Footnote 83] These reports noted that in flexible
grant environments, a strong maintenance of effort provision may prove
more useful than a traditional nonsupplant requirement. While a
nonsupplant provision might limit the intended breadth of a block
grant by locking states into a pre-established funding priorities, a
strong maintenance of effort provision might both limit substituting
federal funds for state and local funds while providing greater state
discretion. GAO-03-377, at 25; GAO-01-828, at 47.
F. Obligation of Appropriations for Grants:
1. Requirement for Obligation:
As with any other type of expenditure, the expenditure of federal
assistance program funds requires an obligation that is proper in
terms of purpose, time, and amount, and the obligation must be
properly recorded.[Footnote 84] With respect to recording of the
obligation in the grant or subsidy context, 31 U.S.C. § 1501(a)(5)
requires that the obligation be supported by documentary evidence of a
grant payable:
"(A) from appropriations made for payment of, or contributions to,
amounts required to be paid in specific amounts fixed by law or under
formulas prescribed by law;
"(B) under an agreement authorized by law; or;
"(C) under plans approved consistent with and authorized by law."
Briefly stated, the "obligational event" for a grant generally occurs
at the time of grant award. Therefore, this is when the grantor agency
must record an obligation under 31 U.S.C. § 1501(a)(5), not when the
grantee draws down the funds or when the grantee incurs its own
obligations. See B-300480, Apr. 9, 2003, aff'd, B-300480.2, June 6,
2003.
2. Changes in Grants:
Changes in grants may come about for a variety of reasons: the
original grantee may be unable to perform, the grant amount may be
increased, there may be a redefinition of objectives, etc. If the
change occurs in the same fiscal year (or longer period if a multiple
year appropriation is involved) in which the original grant was made,
there is no obligation problem as long as the amount of the
appropriation available for obligation is not exceeded. If, however,
the change occurs in a later fiscal year, the question becomes whether
the amended grant remains chargeable to the appropriation initially
obligated or whether it constitutes a new obligation chargeable to
appropriations current at the time the change is made. As pointed out
in 58 Comp. Gen. 676, 680 (1979), the cases have identified three
closely related areas of concern that must be satisfied before a
change may be viewed as a so-called "replacement grant," that is, not
as creating a new obligation that must be charged to the current
appropriation:
* the bona fide need for the grant project must continue;
* the purpose of the grant from the government's standpoint must
remain the same; and;
* the revised grant must have the same scope.
The "scope" of a grant, as stated in 58 Comp. Gen. at 681:
"grows out of the grant purposes. These purposes must be referred to
in order to identify those aspects of a grant that make up the
substantial and material features of a particular grant which in turn
fix the scope of the Government's obligation."
As a general proposition, a grant amendment which changes the scope of
the grant or which makes the award to an entirely different grantee
(not a successor to the original grantee), and which is executed after
the appropriation under which the original grant was made has ceased
to be available for obligation, may not be charged to the original
appropriation. 58 Comp. Gen. 676 (1979). If the amendment amounts to a
substitute grant, it extinguishes the old obligation and creates a new
one. Id. at 678. The new obligation is chargeable to the appropriation
available at the time the new obligation is created. Id. There are
also situations where a grant amendment creates a new obligation
chargeable to the later appropriation without extinguishing the
original obligation. Id. In either event, if the grantor agency does
not recognize that the change creates a new obligation when the change
is made, there is a potential Antideficiency Act violation. On the
other hand, a change which qualifies as a "replacement grant" remains
chargeable to the original appropriation. 57 Comp. Gen. 205, 208-09
(1978). Of course, an agency with the requisite program authority can
change the scope of a grant if current appropriations are used.
60 Comp. Gen. 540, 543 (1981).
The clearest example of a change that creates a new obligation is
where the amount of the award is increased. If the grantee has no
legal right stemming from the original grant agreement to compel
execution of the amendment, the increase in amount is a new obligation
chargeable to appropriations current when the change is made. 41 Comp.
Gen. 134 (1961); 39 Comp. Gen. 296 (1959); 37 Comp. Gen. 861 (1958).
However, an upward adjustment in a "provisional indirect cost rate"
contained in a grant award, which contemplated a possible increase in
the indirect cost rate at a later date, does not constitute an
additional or new award. 48 Comp. Gen. 186 (1968). Payments resulting
from such an adjustment are chargeable to the appropriation originally
obligated by the grant. Id. Similarly, the increase in a grant award
to cover the cost of audits that were required under the original
grant agreement was within the scope of the grant awards. 72 Comp.
Gen. 175 (1993). Payments necessary to cover the audit costs can be
made out of the expired appropriations that were originally obligated
for the grants. Id.
As a general rule, when a recipient of a grant is unable to implement
the grant as originally contemplated, and an alternative grantee is
designated subsequent to the expiration of the period of availability
for obligation of the grant funds, the award to the alternative
grantee must be treated as a new obligation and is not properly
chargeable to the appropriation current at the time the original grant
was made. B-164031(5), June 25, 1976; B-114876, A-44014, Jan. 21, 1960.
However, it is possible in certain situations to make an award to an
alternative grantee after expiration of the period of availability for
obligation where the alternative award amounts to a "replacement
grant" and is substantially identical in scope and purpose to the
original grant. 57 Comp. Gen. 205 (1978); B-157179, Sept. 30, 1970. In
the latter decision, the Comptroller General did not object to the use
of unexpended grant funds originally awarded to the University of
Wisconsin to engage Northwestern University in a new fiscal year to
complete the unfinished project. Approval was granted because the
project director had transferred from the University of Wisconsin to
Northwestern University and he was viewed by all the parties as the
only person capable of completing the work. The decision also noted
that the original grant was made in response to a bona fide need then
existing, and that the need for completing the project continued to
exist.[Footnote 85]
GAO has also indicated that it might be possible in certain situations
to develop procedures to designate an alternate grantee at the time an
award is made to the principal grantee, provided that all of the
criteria for selection of the principal and required administrative
action are also met concerning the alternate, with the sole exception
that the award to the alternate is not mailed to it pending a
determination as to whether the principal actually complies with the
terms of the award. The validity of any such procedure would have to
be assessed on a case-by-case basis. B-114876, July 29, 1960; B-
114876, Mar. 15, 1960.
A shift in the community to be served by the grant may constitute a
new obligation depending on the circumstances. Thus, in B-164031(5),
June 25, 1976, the original grantee ran into financial difficulties
and was unable to utilize a hospital modernization award under the
Hill-Burton program. The Comptroller General found that a proposal to
shift the award to another hospital would constitute a new undertaking
rather than a replacement grant since the hospitals were over 100
miles apart and served essentially different communities.
An enlargement of the community to be served will not necessarily
constitute a new obligation. The grant in 58 Comp. Gen. 676 (1979) was
to set up a demonstration community service volunteer program. The
grant defined the number of participants deemed necessary to generate
the desired test results. The geographic site for which the grant was
awarded was expected to produce the necessary number of volunteers,
but did not. It was held that the geographical area could be expanded
to produce the desired number of volunteers. The modification in these
circumstances would not constitute a new and separate undertaking and
could be funded from the appropriation originally obligated.
A change in the research objectives of a grant will constitute a new
obligation notwithstanding that some aspects of the original grant and
the modification may be related. 57 Comp. Gen. 459 (1978). See also 39
Comp. Gen. 296 (1959).
A 1969 decision involved amendments by the National Institute of
Mental Health which would change the use of grant funds from
construction to renovation and vice-versa beyond the period of
obligational availability. Since the amendments met the statutory
eligibility criteria, since they would still accomplish the original
grant objectives, and since they involved neither a change in grantees
nor an increase in amount, they were held permissible under the
original obligations. B-74254, Sept. 3, 1969.
G. Grant Costs:
1. Allowable versus Unallowable Costs:
a. The Concept of Allowable Costs:
Recipients of assistance awards are expected to use the assistance
funds for the purposes for which they were awarded, subject to any
conditions that may attach to the award Expenditures or costs that
meet the grant purposes and conditions are termed "allowable costs."
An expenditure which is not for grant purposes or is contrary to a
condition of the grant is not an allowable cost and may not be
properly charged to the grant.
Allowable costs are determined on the basis of the relevant program
legislation, regulations, including OMB circulars and the common
rules, and the terms of the grant agreement. First and foremost, of
course, is the program statute. Thus, where the legislation and
legislative history of a program clearly limited the purposes for
which grant funds could be used, grantees could not use grant funds
for nonspecified purposes, including one for which Congress had
provided funds under a separate appropriation. 35 Comp. Gen. 198
(1955). In 55 Comp. Gen. 652 (1976), however, a statute prohibiting
certain costs was held to apply only to direct costs and, absent
legislative history to the contrary, did not preclude use of standard
indirect cost rates even though technically a percentage of the
indirect cost rates could be attributed to the prohibited items.
The role of agency regulations is illustrated by California v. United
States, 547 F.2d 1388 (9th Cir.), cert. denied, 434 U.S. 824 (1977).
Under the Federal-Aid Highway Act, 23 U.S.C. § 120, the United States
pays 90 percent of the "total cost" of certain highway construction,
with "cost" being defined to include the cost of right-of-way
acquisition. The Federal Highway Administration had issued a policy
memorandum stating that program funds would not be used to pay
interest on any portion of a condemnation award or settlement for more
than 30 days after the money is deposited with the court. California
challenged the restriction. The court said:
"Certainly, Congress must have intended that the statutory obligation
to pay 90 percent of the total cost must include some corresponding
right to impose reasonable limitations upon such costs, rather than to
leave the Federal Treasury at the mercy of unfettered discretion by
the State as to what expenditures may be made and charged accordingly."
Id. at 1390. The court saw no need to decide whether the policy
memorandum rose to the level of a "regulation." Either way, it was a
reasonable exercise of the agency's authority to administer the
program. See also Louisiana Department of Highways v. United States,
604 F.2d 1339 (Ct. Cl. 1979) (Federal Highway Administration
regulation disallowing costs of grantee settlements of worthless
claims).
Several GAO decisions illustrate the significance of the grant
agreement. For example, where a grant application specified that
certain costs would be incurred and the program legislation was
ambiguous as to whether those costs should be allowed, the grantor
agency was held bound by the grant agreement, that is, by its
acceptance of the application. B-118638.101, Oct. 29, 1979.
As discussed previously, the Office of Management and Budget (OMB)
prescribes guidance on federal assistance cost principles. This
guidance is found in a series of OMB Circulars: No. A-21, Cost
Principles for Educational Institutions (May 10, 2004); No. A-87, Cost
Principles for State, Local, and Indian Tribal Governments (May 10,
2004); and No. A-122, Cost Principles for Non-profit Organizations
(May 10, 2004). These circulars are incorporated in the common rules
issued by the individual grantor agencies. The Department of
Agriculture common rules, for example, reference the OMB cost
principles at 7 C.F.R. § 3016.22(b) (2005).[Footnote 86]
As explained in OMB Circular No. A-87, Attachment A (General
Principles for Determining Allowable Costs), allowable costs are of
two types, direct and indirect.[Footnote 87] Direct costs are items
that are specifically identifiable and attributable to a particular
final cost objective. Id. § E.1. In other words, direct costs are
obligations or expenditures of a recipient which can be tied to a
particular award. For example, if a recipient purchases an item of
equipment necessary to carry out a particular award, the purchase
price is a direct cost under that award. Id. § E.2.c. Indirect costs
are costs incurred for common objectives which cannot be directly
charged to any single cost objective. Id. § E1. A common example is
depreciation. The concept of indirect costs is essentially an
accounting device to permit the allocation of overhead in proportion
to benefit. See B-203681, Sept. 27, 1982.
The over-allocation of indirect costs is unauthorized and therefore
unallowable. The reason is that 31 U.S.C. § 1301(a) restricts the use
of appropriated funds to the purposes for which they were
appropriated, and payment of the over-allocation would not serve the
purposes of the appropriation. B-203681, Sept. 27, 1982.
A grantee may generally substitute other allowable costs for costs
which have been disallowed, subject to any applicable cost ceiling. If
additional funds become available as the result of a cost
disallowance, those funds should be used to pay any "excess" allowable
costs which could not be paid previously because of the ceiling. 68
Comp. Gen. 247, 248-49 (1989). The courts have also applied this
concept in one form or another. In Institute for Technology
Development v. Brown, 63 F.3d 445, 450-52 (5th Cir. 1995), the court
explicitly followed the GAO approach and allowed cost-substitution.
The court in New York v. Riley, 53 F.3d 520 (2nd Cir. 1995), referred
to a similar administrative practice by the Department of Education,
which it called "equitable offset," whereby the Department could
permit a grantee to substitute allowable costs for disallowed costs
that could have been—but never were—charged to a grant. However, the
court described this practice as embodying "concepts of equity, not
entitlement as a matter of right." Id. at 522. In any event, its
applicability was a moot point in this case since the grantee could
not document any potential allowable costs to substitute for costs
that had been disallowed. Id.
The familiar cost overrun is not the exclusive province of the
government contractor. Assistance recipients may also incur overruns.
A claim resulting from an overrun under a cooperative agreement was
denied in B-206272.5, Mar. 26, 1985, because, under the agreement, the
agency was not obligated to fund overruns unless it chose to amend the
agreement and, in its discretion, it had declined to do so. Cf. B-
209649, Dec. 23, 1983 (labor benefits awarded by court to employees of
grantee's contractor could be regarded as indirect costs under grant
terms, as long as applicable ceiling on indirect costs was not
exceeded).
Issues concerning allowable grant costs often involve technical
disputes over accounting principles and practices that take place far
from the public spotlight However, a major and very public controversy
arose in the early 1990s centering on questionable items that
universities were claiming as indirect "overhead" costs under federal
research grants. These problems are detailed in Lynn McGuire, Federal
Research Grant Funding at Universities: Legislative Waves From
Auditors Diving Into Overhead Cost Pools, 23 Journal of College and
University Law 563 (Winter 1997). Inquiries into alleged improper
charges, which were spearheaded by the House Committee on Energy and
Commerce's Subcommittee on Oversight and Investigations, included a
series of congressional hearings, GAO reviews, audits by executive
branch agencies, and a report on the ABC television program 20/20. The
allegations involved many of the nation's leading academic
institutions such as Harvard Medical School, Stanford University, the
University of California at Berkeley, and the Massachusetts Institute
of Technology. Alleged improper charges included depreciation for a 72-
foot yacht, a public relations trip to Paris, a Nile River cruise, a
Saint Patrick's Day party, football tickets for potential university
donors, and the purchase of an antique commode for the residence of a
retired university chancellor. The problems resulted from what GAO
described as "breakdowns in several key areas of the system dealing
with indirect costs." GAO, Federally Sponsored Research: Indirect
Costs Charged by Selected Universities, GAO/T-RCED-92-20 (Washington,
D.C.: Jan. 29, 1992), at 9. In that testimony, GAO identified the main
areas of breakdown as follows:
* Inadequate criteria in OMB Circular No. A-21 for determining
allowable costs and how to allocate them among university functions;
* Inadequate university systems and controls to ensure that only
allowable indirect costs were charged to the federal government; and;
* Lax oversight on the part of cognizant federal agencies that were
responsible for auditing particular universities.[Footnote 88]
Remedial actions at the federal level included major revisions to
enhance the guidance contained in OMB Circular No. A-21 and improved
auditing procedures by the cognizant federal agencies. See McGuire, 23
J.C. & U.L. at 576-80.
Where a cost is not allowable, as far as the government is concerned,
the recipient still has the funds. If the grant funds have already
been paid over to the grantee and no allowable costs of an equal
amount are subsequently incurred, the recipient is required to return
the amount of the improper charge to the government. E.g., Utah, State
Board for Vocational Education v. United States, 287 F.2d 713 (10'
Cir. 1961). The United States "has a reversionary interest in the
unencumbered balances of such grants, including any funds improperly
applied." 42 Comp. Gen. 289, 294 (1962). See also B-198493, July 7,
1980. This requirement cannot be waived. B-171019, June 3, 1975. Thus,
the Comptroller General has held that an agency cannot waive its
statutory regulations to relieve a grantee of its liability for
improper expenditures. B-163922, Feb. 10, 1978. Similarly, an agency
may not amend its regulations to relieve a grantee's liability for
expenditures for administrative costs in excess of a statutory
limitation. B-178564, July 19, 1977, affd, 57 Comp. Gen. 163 (1977).
The courts have endorsed the principle that the federal government has
a reversionary interest in grant funds until they are properly applied
and accounted for. Citing Buchanan v. Alexander, 45 U.S. (4 How.) 20
(1846), one court observed that a federal agency "has a strong and
surprisingly ancient claim for its right to require the repayment of
all funds which cannot be proven to have been spent on legitimate,
allowable costs." City of New York v. Sullivan, No. 91 Civ. 2959
(RWS), (S.D.N.Y. Jan. 4, 1993), slip op. at 11, reed on other grounds
sub nom., 34 F.3d 1161 (2nd Cir. 1994). The court elaborated on this
point as follows:
"Since federal money belongs to the federal government until actually
spent on allowable costs, the [agency's] decision-—that the City must
present source documentation which proves to [the agency's]
satisfaction that the money was drawn down to cover ... [appropriate
costs] or else return the money to the federal government-—is not
capricious or arbitrary."
City of New York v. Sullivan, slip op. at 11. Other recent decisions
applying the reversionary interest concept in different contexts are
In re Universal Security and Protection Service, Inc., 223 B.R. 88, 91-
92 (Bankr. E.D. La. 1998); In re Alpha Center, Inc., 165 B.R. 881, 884
(Bankr. S.D. R1 1994); and Department of Housing and Urban Development
v. K Capolino Construction Corp., No. 01 Civ. 390 (JGK), (S.D.N.Y.
2001), slip. op. at 4-6.
While not directed specifically at the problems described above,
Congress enacted two laws during the 1990s to streamline, simplify,
and thereby improve auditing and administration of federal assistance
programs: the Single Audit Act Amendments of 1996, Pub. L. No. 104-
156, 110 Stat. 1396 (July 5, 1996), amending 31 U.S.C. §§ 7501-7507,
and the Federal Financial Assistance Management Improvement Act of
1999, Pub. L. No. 106-107, 113 Stat. 1486 (Nov. 20, 1999).[Footnote 89]
GAO has continued to review issues relating to the appropriateness of
grant costs and the processes by which they are determined. Examples
include: Grants Management: EPA Actions Taken against Nonprofit Grant
Recipients in 2002, GAO-04-383R (Washington, D.C.: Jan. 30, 2004);
Disadvantaged Students: Fiscal Oversight of Title I Could Be Improved,
GAO-03-377 (Washington, D.C.: Feb. 28, 2003); Environmental
Protection: EPA's Oversight of Nonprofit Grantees' Costs Is Limited,
GA0-01-366 (Washington, D.C.: Apr. 6, 2001); Federal Research Grants:
Compensation Paid to Graduate Students at the University of
California, GAO/OSI-99-8 (Washington, D.C.: June 22, 1999); Department
of Transportation: University Research Activities Need Greater
Oversight, GAO/RCED-94-175 (Washington, D.C.: May 13, 1994); and
Federal Research: Minor Changes Would Further Improve New NSF Indirect
Cost Guidance, GAO/RCED-93-140 (Washington, D.C.: June 3, 1993).
b. Grant Cost Cases:
Grant cost cases are extremely difficult to categorize because what is
allowable under one assistance program may not be allowable under
another. Also, the cases frequently turn on complex accounting and
factual issues that are unique to the particular case. Accordingly,
summaries of a number of cases are given below with little further
attempt to generalize However, it is first important to describe one
recurring theme that runs through most of the cases and often appears
to have a decisive effect on the outcome: the high degree of judicial
deference accorded to agency findings of fact and interpretations of
the applicable statutes and regulations.
(1) Scope of judicial review:
Grant cost cases typically come to the courts in the form of appeals
from an agency determination that often follows an administrative
hearing by an agency appeals board.[Footnote 90] These court cases are
generally governed by the judicial review provisions of the
Administrative Procedure Act (APA), 5 U.S.C. §§ 701-706. Under the
most relevant scope of review standards, an agency action will be
sustained unless it is arbitrary, capricious, an abuse of discretion,
not otherwise in accordance with law, procedurally flawed, or
unsupported by substantial evidence. See 5 U.S.C. §§ 706(2)(A), (D),
(E). Likewise, the courts will generally accord considerable deference
to the agency's interpretation of the applicable statutes and
regulations, although the precise extent of deference varies.[Footnote
91] One recent grant cost case described the standards of review as
follows:
"Under the APA, we may set aside agency action only if it was
arbitrary, capricious, an abuse of discretion, or otherwise not in
accordance with law. The standard is a narrow one, and the reviewing
court may not substitute its judgment for that of the agency. However,
the agency must articulate a rational connection between the facts
found and the conclusions made. Also, we must give substantial
deference to an agency's interpretation of its own regulations."
Public Utility District No. 1 of Snohomish, County, Washington v.
Federal Emergency Management Agency, 371 F.3d 701, 706 (9th Cir. 2004)
(citations and internal quotation marks omitted).
Concerning the deference due agency regulatory interpretations, the
court in Public Utility District No. 1 cited Thomas Jefferson
University v. Shalala, 512 U.S. 504 (1994). In Thomas Jefferson
University, the Supreme Court sustained the agency's interpretation of
a regulation dealing with the reimbursement of costs under the
Medicare program, applying the following standards:
"The APA ... commands reviewing courts to hold unlawful and set aside
agency action that is arbitrary, capricious, an abuse of discretion,
or otherwise not in accordance with law. 5 U.S.C. § 706(2)(A). We must
give substantial deference to an agency's interpretation of its own
regulations. Our task is not to decide which among several competing
interpretations best serves the regulatory purpose. Rather, the
agency's interpretation must be given controlling weight unless it is
plainly erroneous or inconsistent with the regulation. In other words,
we must defer to the Secretary's interpretation unless an alternative
reading is compelled by the regulation's plain language or by other
indications of the Secretary's intent at the time of the regulation's
promulgation."
512 U.S. at 512 (citations and internal quotation marks omitted).
Another grant cost case that also cited Thomas Jefferson University
illustrates the decisive role that deference to agency interpretations
can play. In Alabama v. Shalala, 124 F. Supp. 2d 1250 (M.D. Ala.
2000), the court acknowledged that both the grantee and the federal
agency presented reasonable interpretations of the applicable cost
criteria, but concluded that the agency's interpretation must take
precedence since it was "reasonable and not arbitrary or capricious."
Id. at 1259.
Of course, even an agency determination that might otherwise be within
its discretion will be overturned if it is procedurally defective. For
example, the court in Arizona v. Thompson, 281 F.3d 248 (D.C. Cir.
2002), did not question the authority of the Department of Health and
Human Services (BHS) to direct the allocation of common administrative
costs among the multiple grant programs that they benefited, in
accordance with a general principle in the then-current OMB Circular
No. A-87 (Aug. 27, 1997), at Attachment A, § C.3.a. However, the court
rejected the department's directive because it rested on the faulty
premise that the Temporary Assistance for Needy Families (TANF)
program statute mandated this cost allocation method:
"[The] determination was made in reliance on BHS' mistaken belief that
the statute gave it no choice in the matter. Although nothing we have
said necessarily precludes BHS, in the exercise of its discretion,
from relying on the principles of Circular A-87 to determine the most
appropriate cost allocation rule to apply to TANF, that is not the
course the Department followed in this case."
281 F.3d at 259. See also Nebraska Department of Health, & Human
Services v. United States Department of Health, & Human Services,
340 F. Supp. 2d 1 (D.D.C. 2004) (rejecting a similar cost allocation
directive on the basis that it constituted a substantive rule issued
without the notice-and-comment rulemaking required by the
Administrative Procedure Act).
(2) Court case examples:
With the scope of review considerations in mind, we turn to some
specific case examples.
Under the cost principles OMB Circular No. A-87, contributions to a
reserve for self-insurance are an allowable grant cost if certain
conditions are met. However, Alabama violated OMB Circular No. A-87 by
transferring the federal share of excess self-insurance reserves from
its state insurance fund to its general treasury fund to be used for
purposes unrelated to the federal grants that supplied the insurance
contributions. Alabama v. Shalala, 124 F. Supp. 2d 1250 (M.D. Ala.
2000), affirming a decision of the Department of Health and Human
Services Departmental Appeals Board (DAB).[Footnote 92] The court
rejected Alabama's argument that appropriate costs were incurred, and
the transaction was in effect complete once the grant funds were
initially paid into the state insurance fund. Instead, the court held
that the insurance contributions retained their character as federal
funds and remained subject to OMB Circular No. A-87 until they were
disbursed by the state insurance fund. Id. at 1257-60.[Footnote 93]
The court also rejected Alabama's argument that a subsequent amendment
to Circular No. A-87 which specifically prohibited the transfer of the
federal share of insurance contributions to other state funds
demonstrated that such transfers were appropriate before the
amendment. Id. at 1257, fn. 9 ("the amendments may have made more
explicit requirements that had always existed under the cost
principles and other sources of federal appropriations law").[Footnote
94]
In a case very similar to Alabama v. Shalala, the court in Oklahoma ex
rel. Office of State Finance v. United States, 292 F.3d 1261 (10th
Cir. 2002), cert. denied, 537 U.S. 1188 (2003), affirmed the DAB's
disallowance of a portion of federal contributions for the health
benefits of state employees who administered federal programs. The
disallowance was triggered by the state's transfer of the funds from
an insurance reserve fund to a general fund to be used for state
educational expenditures rather than state employee health benefits.
The court held that the amended version of OMB Circular No. A-87 was
dispositive and "singularly fatal" to the state's appeal:
"OMB [Circular No.] A-87's definition of 'cost' excludes `transfers to
a general or similar fund.' ... Federal monies forwarded to Oklahoma's
Clearing Fund represent unrecoverable 'transfers to a general or
similar fund.' Thus, there is no need to ascertain when federal money
loses its federal nature, or even if the monies Oklahoma is
attempting to be reimbursed for are necessary and reasonable
expenditures. The money diverted to the Clearing Fund fails to qualify
as a reimbursable cost in the first instance."
Oklahoma, 292 F.3d at 1264.
The Federal Emergency Management Agency (FEMA) acted reasonably in
reducing a grantee's fringe benefit overhead reimbursement for
overtime labor from a uniform rate of 36 percent to about 10 percent,
which approximated the actual overtime labor costs to the grantee.
Public Utility District No. 1 of Snohomish County, Washington v.
Federal Emergency Management Agency, 371 F.3d 701 (9th Cir. 2004). The
grantee utility district argued that FEMA was attempting to "rewrite"
the grant conditions by reducing the reimbursement rate based on a
post-award audit by the agency's inspector general since use of the 36
percent flat rate constituted a common accounting practice that was
not prohibited by the grant terms. The court rejected this argument,
holding that the language in OMB Circular No. A-87 making fringe
benefits allowable costs "to the extent that the benefits are
reasonable and are required by law" provided a basis for reducing the
costs via a post-award audit:
"We need not ponder whether the District's use of a uniform fringe
benefit overhead rate is a 'proper' or commonly-accepted method of
accounting for such expenses. This fact remains: the District has
never challenged FEMM contention that the District's actual fringe
benefit expenses for overtime labor for work attributable to the 1995
and 1996 storms was about ten percent, as opposed to the thirty-six
percent billed by the District.
"The District's use of the thirty-six percent rate resulted in a
sizable windfall—in excess of $600,000—for the District. That this
windfall may have resulted from the District's use of an accepted
accounting practice is of no consequence. ... FEMA did not act in an
arbitrary and capricious manner by challenging the District's use of
the thirty-six percent fringe benefit rate, where the use of the rate
resulted in FEMA paying District expenses having nothing to do with
the disasters for which federal relief was given."
Public Utility, 371 F.3d at 710. The court also sustained FEMA's
reduction of other costs reimbursed to the grantee based on the
results of the inspector general audit, concluding that the
disallowances were not arbitrary or capricious. Id. at 711-13.
The court affirmed a Department of Health and Human Services DAB
decision upholding the denial of reimbursement for interest costs
incurred by the state in acquiring computer equipment to be used to
administer several social service programs partly funded by federal
grants. New York v. Shalala, 959 E Supp. 614 (S.D.N.Y. 1997), aff'd,
143 F.3d 119 (2nd Cir. 1998). Again, the court held that the
disallowances constituted a valid application of the cost principles
embodied in OMB Circular No. A-87 and, in turn, incorporated into
Department of Health and Human Services regulations. Among other
things,[Footnote 95] the state argued that (1) the applicable statutes
provided for reimbursement of "necessary" expenses, (2) interest was a
necessary expense, and (3) therefore, the circular's exclusion of
interest violated the statutes. However, the court held that, since
the relevant statutes did not specifically address reimbursement of
interest, the federal agencies had discretion to determine whether and
to what extent interest constituted a "necessary" expense:
"[The state's] ... interpretation ... may be as reasonable as the
Secretary's; however, this is not the standard the Court applies in
reviewing an agency's construction of a statute. Even where the State
offers a reasonable alternative interpretation of a statute, the
decision of where to 'draw the line' with respect to reimbursing costs
is left to the discretion of the agency. HEIS's interpretation of the
Statutes need only be reasonable—it need not be the only reasonable
interpretation."
New York, 959 E Supp. at 620-21 (emphasis in original; citations
omitted).
The court in Delta Foundation, Inc. v. United States, 303 F.3d 551
(5th Cir. 2002), affirmed a DAB decision that sustained a series of
cost disallowances arising from an inspector general audit of community
development block grants. The case is quite fact-specific, but it
illustrates the principles of deference to agency findings and
interpretations discussed previously. It also demonstrates the
importance of grantee compliance with record-keeping and cost-
documentation requirements. For example, the court observed with
reference to certain disallowed costs:
"As the Board correctly noted, the Circular [OMB Circular No. A-122]
requires that Delta supply time records reflecting `the distribution
of activity of each employee' and 'account for the total activity for
which employees are compensated.' ... The Board's refusal to accept
Delta's 'good word' in place of the required documentation is
certainly not arbitrary and capricious."
Delta Foundation, 303 F.3d at 570. But see Institute for Technology
Development v. Brown, 63 F.3d 445, 454-58 (5th Cir. 1995) (decision is
somewhat unusual since the court rejected the agency's determination
that depreciation did not constitute an allowable cost under the
applicable regulations and grant agreements, prompting a dissent
criticizing the majority for not deferring to the agency on this
point).
In Missouri Department of Social Services v. United States Department
of Education, 953 F.2d 372 (8th Cir. 1992), the court affirmed the
agency's right to recover excess salary costs paid to the grantee. The
court agreed that the grantee did not maintain adequate accounting
procedures and records to apportion its employees' salaries between
time relating to the federal grants and time spent on nongrant
activities, as required by federal regulations. The court also upheld
the agency's determination that the grantee's circumstances did not
meet the requirements of a regulation excusing the repayment of
unallowable costs in the presence of "mitigating circumstances." Id.
at 376.
Board of Trustees of Public Employees' Retirement Fund of Indiana v.
Sullivan, 936 F.2d 988 (7th Cir. 1991), cert denied, 502 U.S. 1072
(1992), affirmed a decision by the DAB that the grantee was reimbursed
excess payments for the retirement benefits of state employees who
administered federal grant programs. An audit had determined that the
state made retirement contributions on behalf of state employees
administering federal grants that were greater than its contributions
for state employees who performed only nonfederal activities and were
wholly state funded. The court agreed that this violated the federal
cost principle that, in order to be allowable, a cost must be
consistent with policies, regulations, and procedures that apply
uniformly to both federally assisted and other activities of the
grantee:
"Whatever the state actually pays to state workers is the benchmark
for measuring the federal government's share. Indiana pays its public
workers partly in cash and partly in promises. Indiana is free to make
that choice for itself but may not claim 100% in cash up front from
the federal government if it is unwilling to put the retirement
program for other state employees on an equivalently well-funded
basis."
Sullivan, 936 F.2d at 992.
Litigation costs incurred by grantees in suing the United States were
found unallowable under the Nuclear Waste Policy Act of 1982, 42 U.S.C.
§§ 10101-10226. Nevada v. Herrington, 827 F.2d 1394 (9th Cir. 1987).
(3) GAO case examples:
GAO has also had occasion over the years to consider grant cost
issues. The following are examples of GAO decisions discussing various
grant programs.
GAO held that the Asia Foundation may not use its general support
grant funds from the Department of State to match other federal grants
from the Agency for International Development and the United States
Information Agency. Generally, funds derived from other federal grants
do not qualify as matching funds unless statutorily authorized. The
Asia Foundation does not have specific statutory authority to use
grant funds to match other federal grants. B-270654, May 6, 1996.
Under applicable OMB Circulars, the cost of grant audits is an
allowable cost. Therefore, the National Endowment for the Humanities
could provide grant funds to nonprofit institutions to cover such
audit costs, and could increase a grant award to accommodate such
costs where the initial award was inadequate for this purpose. 72
Comp. Gen. 175, 177 (1993).
Recovery of antitrust damages by a state grantee stemming from a grant-
financed project serves to reduce the actual costs of the grantee and
must be accounted for to the government. This is true even where the
United States has declined to participate in the cost of the antitrust
action. 57 Comp. Gen. 577 (1978). However, the United States is not
entitled to share in treble damages. Id.; 47 Comp. Gen. 309 (1967).
Out-of-pocket expenses incurred by the state in effecting the recovery
should be shared by the federal government in the same proportion as
the recovered damages. B-162539, Oct. 11, 1967.
Where a grantee paid a nondiscriminatory sales tax on otherwise proper
expenditures with grant funds, the taxes are not taxes imposed on the
United States and are allowable. 37 Comp. Gen. 85 (1957). However,
property taxes were held not allowable under a construction grant
because they represent operating costs rather than construction costs.
B-166506, Feb. 14, 1973.
The payment of expert witness fees was found unrelated to the purposes
of a research grant. 42 Comp. Gen. 682 (1963).
Construction of a bridge could not be paid for out of federal aid
highway funds where the construction was necessitated by a flood
control project and not as a highway project. 41 Comp. Gen. 606 (1962).
Buses acquired by a city under a "mass transportation" grant could be
used for charter service, an unauthorized grant purpose, where such
use was merely incidental to the primary use of the buses for
authorized mass transit purposes. B-160204, Dec. 7, 1966.
The salary of an individual hired to evaluate the Upward Bound Program
at a grantee college was disallowed as a grant cost, because the grant
document contained no provision for such an expenditure and the
applicable program guidelines specified that evaluation was not an
allowable expense. B-161980, Nov. 23, 1971.
The cost of a luncheon for top officials of the Department of Human
Resources, District of Columbia Government, was disallowed as an
improper administrative expense under a social services program grant
under Title XX of the Social Security Act, 42 U.S.C. § 1397a. B-
187150, Oct. 14, 1976.
Ordinarily, increased project costs resulting from grantee negligence
giving rise to justified claims for damages would not be allowable.
However, a damage award was viewed as a recognizable cost element
where the grantee's error had contributed to an unrealistically low
initial cost, but an amendment to the grant was required before the
increased costs could be allowed. 47 Comp. Gen. 756 (1968).
Under a Federal Airport Act (Act of May 13, 1946, ch. 251, 60 Stat.
170) program providing for federal payment of a specified percentage
of allowable project costs, the fair value of land and equipment
donated to the grantee could be treated as an allowable cost because
failure to do so would, in effect, penalize the grantee for the
contributions of "public spirited citizens." B-81321, Nov. 19, 1948.
c. Note on Accounting:
Cost principles on which a grant award is conditioned are binding on
the grantee. B-203681, Sept. 27, 1982. It is the grantee's
responsibility to maintain adequate fiscal records to support the
allowable costs claimed. With respect to the common rules applicable
to state and local governments, see generally 7 C.F.R. § 3016.20.
Section 452(a) of the General Education Provisions Act, as amended, 20
U.S.C. § 1234a(a), illustrates the importance of compliance with
record-keeping requirements. It provides that the Secretary of
Education's burden of establishing a prima facie case for recovery of
misspent grant funds is satisfied where the grantee fails to maintain
records required by law or fails to afford the Secretary access to
such records.
As a number of the cases discussed above demonstrate, the courts tend
to require strict adherence to grantee cost documentation and record-
keeping requirements. Thus, the court observed in Montgomery County v.
United States Department of Labor, 757 F.2d 1510, 1512-13 (4th Cir.
1985):
"The County contends that it is inequitable to equate its record-
keeping failure with a misspending of federal monies and to require it
to repay virtually all of the funds expended by its subgrantee ... In
support of its contention, the County asserts that the purposes of
CETA [the Comprehensive Employment and Training Act] were met by [the
subgrantee's] performance and cites corrective steps which the County
has since taken. ... We are unpersuaded.
"Record keeping is at the heart of the federal oversight and
evaluation provisions of CETA and its implementing regulations. Only
by requiring documentation to support expenditures is the [Department
of Labor] able to verify that billions of federal grant dollars are
spent for the purposes intended by Congress. Unless the burden of
producing the required documentation is placed on recipients, federal
grantees would be free to spend funds in whatever way they wished and
obtain virtual immunity from wrongdoing by failing to keep required
records. Neither CETA nor the regulations permit such anomalous
results."
The above passage was quoted with approval in Louisiana Department of
Labor v. United States Department of Labor, 108 F.3d 614, 618 (5th
Cir.), cert. denied, 522 U.S. 823 (1997). The court in this case
reached a similar result, adding:
"We conclude that the final decision of the Secretary is based on
substantial evidence, and that the state and the [grantee] and its
subgrantees cavalierly disregarded the accounting requirements and
procurement procedures specified by the JTPA [Job Training Partnership
Act] and the accompanying regulations. Federal grant recipients who
are entrusted with public funds are bound to fulfill that public trust
by discharging their duties in strict compliance with the requirements
established by Congress. Accordingly, we emphasize that the procedural
requirements of the JTPA are not merely hortatory ideals; they are
obligatory duties. Grant recipients who ... fail to honor these
procedural requirements, dishonor and disserve the public trust."
108 F.3d at 620. See also City of Newark v. United States Department
of Labor, 2 F.3d 31, 34-35 (3rd Cir. 1993), to the same effect.
In one case, GAO did concur in a proposal by a grantor agency to adopt
a method of calculation that disallowed less than the entire amount of
a grant where the grantee had maintained inadequate records. B-186166,
Aug. 26, 1976. In this case, a university had received a series of
federal research grants spanning a number of years. The university had
no records to document its disposition of grant funds for periods
prior to fiscal year 1974. Audits of available university records for
grant expenditures in fiscal years 1974 and 1975 disclosed certain
unallowable costs. The GAO decision held that the grantor agency had
discretion to disallow the same proportion of funds for the years for
which no documentation was available as were disallowed for the
periods for which records existed.
In a variety of cases involving the Medicare and Medicaid programs,
courts have approved cost reimbursement disallowances on the basis of
error rate statistical data, such as errors imputed from a quality
control system. In Georgia v. Califano, 446 F. Supp. 404, 409-10 (N.D.
Ga. 1977), the court upheld the determination of overpayments under
the Medicaid program on the basis of statistical sampling, in view of
the "practical impossibility" of individual claim-by-claim audit. The
court also noted that, under the pertinent federal regulations, the
state was given the opportunity to present evidence before the
disallowance became final. See also Ratanasen v. California Department
of Health Services, 11 F.3d 1467, 1469-71 (9th Cir. 1993); Chaves
County Home Health Service, Inc. v. Sullivan, 931 F.2d 914 (D.C. Cir.
1991), cert. denied, 502 U.S. 1091 (1992); Webb v. Shalala, 49 F.
Supp. 2d 1114, 1123 (WD. Ark 1999) and cases cited. Likewise, random
sampling has been sustained as an audit technique to identify improper
expenditures of vocational rehabilitation grant funds. Michigan
Department of Education v. United States Department of Education,
875 F.2d 1196, 1205 (6th Cir. 1989) ("audit of the thousands of cases
comprising the universe of cases would be impossible.... [and] ... a
final determination is not made until the state has had an opportunity
to present its own evidence of an error in the audit").
In Maryland v. Mathews, 415 F. Supp. 1206 (D.D.C. 1976), a case
involving the then Aid to Families with Dependent Children program,
the court held that an agency can establish by regulation a
withholding of federal financial participation in a specified amount
set by a tolerance level, as long as the tolerance level is reasonable
and supported by an adequate factual basis. The regulation involved in
the specific case, however, did not meet the test and was found to be
arbitrary and therefore invalid. It also has been held that, if
setting a tolerance level is discretionary, the agency can set it at
zero. Maryland Department of Human Resources v. United States
Department of Health & Human Services, 762 F.2d 406 (4th Cir. 1985);
California v. Settle, 708 F.2d 1380 (9th Cir. 1983). See also United
States v. Texas, 507 U.S. 529 (1993), which involved statutory and
regulatory provisions that required states to reimburse the federal
government for a portion of the replacement costs of lost or stolen
food stamps exceeding specified tolerance levels. (The validity of
these requirements was not contested in this case.)
2. Pre-Award Costs (Retroactive Funding):
"Retroactive funding" means the funding of costs incurred by a grantee
before the grant was awarded. Three separate situations arise: (1)
costs incurred prior to award but after the program authority has been
enacted and the appropriation became available; (2) costs incurred
prior to award and after program authority was enacted but before the
appropriation became available; and (3) costs incurred prior to both
program authority and appropriation availability.
Situation (1): In this situation, the grantee seeks to charge costs
incurred before the grant was awarded (in some cases even before the
grantee submitted its application) but after both the program
legislation and the implementing appropriation were enacted.
There is no rule or policy that generally restricts allowable costs to
those incurred after the award of a grant. However, agencies may adopt
such a policy by regulation. B-197699, June 3, 1980. Thus, in a number
of cases, grant-related costs incurred prior to award, but after the
program was authorized and appropriated funds were available for
obligation, have been allowed where (a) there was no contrary
indication in the language or legislative history of the program
statute or the appropriation, (b) allowance was not prohibited by the
regulations of the grantor agency, and (c) the agency determined that
allowance would be in the best interest of carrying out the statutory
purpose. 32 Comp. Gen. 141 (1952); 31 Comp. Gen. 308 (1952); B-197699,
June 3, 1980; B-133001, Mar. 9, 1979; B-75414, May 7, 1948. (The above
criteria are not specified as such in any of the cases cited but are
derived from viewing all of the cases as a whole.)
Situation (2): In this situation, pre-award costs are incurred after
program legislation has been enacted, but before an appropriation
becomes available.
Prior to the Comptroller General's decision in 56 Comp. Gen. 31
(1976), a "general rule" was commonly stated to the effect that absent
some indication of contrary intent, an appropriation could not be used
to pay grant costs where the grantee's obligation arose before the
appropriation implementing the enabling legislation became available.
45 Comp. Gen. 515 (1966); 40 Comp. Gen. 615 (1961); 31 Comp. Gen. 308
(1952); A-71315, Feb. 28, 1936.
In 56 Comp. Gen. 31, the Comptroller General reviewed the earlier
decisions and concluded that there was no legal requirement for a
general rule prohibiting the use of grant funds to pay for costs
incurred prior to the availability of the applicable appropriation.
Rather, the determination should be made on a case-by-case basis.
Thus, the decision announced:
"We would prefer to base each decision from now on on the statutory
language, legislative history, and particular factors operative in the
particular case in question, rather than on a general rule."
Id. at 35.
In reviewing the earlier decisions, the Comptroller General found that
each had been correctly decided on its own facts. Thus, retroactive
funding was prohibited in 40 Comp. Gen. 615 (1961), 31 Comp. Gen. 308
(1952), and A-71315, Feb. 28, 1936. However, in each of those cases,
there was some manifestation of an affirmative intent that funds be
used only for costs incurred subsequent to the appropriation. For
example, 31 Comp. Gen. 308 concerned grants to states under the
Federal Civil Defense Act.[Footnote 96] The committee reports and
debates on a supplemental appropriation to fund the program contained
strong indications that Congress did not intend that the money be used
to retroactively fund expenses incurred by states prior to the
appropriation. By way of contrast, there were no such indications in
the situation considered in 56 Comp. Gen. 31 (matching funds provided
to states under the Land and Water Conservation Fund Act of 1965
[Footnote 97]). Accordingly, 56 Comp. Gen. 31 did not overrule the
earlier decisions, but merely modified them to the extent that GAO
would no longer purport to apply a "general rule" in this area.
In determining whether retroactive funding is authorized, relevant
factors are evidence and clarity of congressional intent, the degree
of discretion given the grantor agency, and the proximity in time of
the cost being incurred to the grant award. As in Situation (1),
significant factors also include the agency's own regulations and the
agency's determination that funding the particular costs in question
will further the statutory purpose. Accordingly, the authority will be
easier to find where an agency has broad discretion and favorable
legislative history. With this approach, retroactive funding authority
may be found to exist (as in 56 Comp. Gen. 31), or not to exist (as in
40 Comp. Gen. 615).
If an agency wishes to recognize retroactive funding in limited
situations in its regulations, it must, in order to avoid potential
Antideficiency Act problems, make it clear that no obligation on the
part of the government can arise prior to the availability of an
appropriation. Of course, the grant itself cannot be made until the
appropriation becomes available. 56 Comp. Gen. at 36.
Situation (3): In this situation, the grantee seeks to charge costs
incurred not only before the appropriation became available, but also
before the program authority was enacted.
Costs incurred prior to both the program authorization and the
availability of the appropriation may generally not be funded
retroactively. See 56 Comp. Gen. 31(1976); 32 Comp. Gen. 141 (1952); B-
11393, July 25, 1940. GAO recognizes that there may possibly be
exceptions even to this rule (56 Comp. Gen. at 35), but thus far there
are no decisions identifying any.
One final situation deserves mention. In each of the retroactive
funding cases cited above, the grant was in fact subsequently awarded.
In B-206244, June 8, 1982, a state had applied for an Interior
Department grant under the Youth Conservation Corps Act, 16 U.S.C. §§
1701-1706 (1976), and later withdrew its application due to funding
uncertainties. The state then filed a claim for various expenses it
had incurred in anticipation of the grant. GAO held that payment would
violate both the program legislation and the purpose statute, 31
U.S.C. § 1301(a). Interior's appropriation was intended to accomplish
grant purposes, but the state's expenses did not accomplish any grant
purposes since the grant was never made.
H. Recovery of Grantee Indebtedness:
1. Government's Duty to Recover:
This section is intended to summarize the application of "debt
collection law" in the context of assistance programs, and to
highlight a few issues in which the fact that a grant is involved may
be of special relevance.[Footnote 98]
Claims in favor of the United States against an assistance recipient
may arise for a variety of reasons. As a general proposition, it has
been the view of both GAO and the executive branch that the United
States has not only a right but a duty to recover amounts owed to it,
and that this duty exists without the need for specific statutory
authority. This applies to assistance recipients just as it would
apply to other debtors. The Federal Claims Collection Standards
require each agency to "aggressively collect all debts arising out of
activities of, or referred or transferred for collection services to,
that agency." 31 C.F.R. § 901.1(a) (2005).[Footnote 99] See, e.g., 7
C.F.R. § 3016.52(a) (the Department of Agriculture's common rule on
collection of amounts due):
"Any funds paid to a grantee in excess of the amount to
which the grantee is finally determined to be entitled under the terms
of the award constitute a debt to the Federal Government. If not paid
within a reasonable period after demand, the Federal agency may reduce
the debt by:
"(1) Making an administrative offset against other requests for
reimbursements,
"(2) Withholding advance payments otherwise due to the grantee, or.
"(3) Other action permitted by law."
For example, grant funds erroneously awarded to an ineligible grantee
must be recovered by the agency responsible for the error, including
expenditures the grantee incurred before receiving notice that the
agency's initial determination had been made in error. 51 Comp. Gen.
162 (1971); B-146285, B-164031, Apr. 19, 1972. The cited decisions
recognize that there might be exceptional circumstances in which full
recovery might not be required, but exceptions would have to be
considered on an individual basis. See also 18 Op. Off. Legal Counsel
74, 76 (1994) ("In the ... context of federal grants to state and
local agencies, courts have stated that the federal government may use
principles of restitution to recover monies that were granted for
specific purposes and then used in contravention of those purposes,
even in the absence of statutory authority expressly permitting such
recovery.").
In a recent case, federal grant funds given by the U.S. Department of
Labor to the New York Workers' Compensation Board to meet its expenses
related to the September 11, 2001, terrorist attack on the World Trade
Center were improperly transferred by the Board to other New York
State entities. B-303927, June 7, 2005. Despite the fact that both the
Department and the Board contributed to the misunderstandings that
resulted in the payments to the other entities, GAO concluded that the
Department should seek recovery of the funds improperly transferred
unless the Secretary of Labor seeks and obtains congressional
ratification of the grant expenditures to date. Id. at 10.
Similarly, where an agency misapportions formula grant funds so that
some states receive excess funds, the excess must be recovered. If the
misapportionment resulted in other states receiving less than their
formula amount, the apportionments of all of the states involved must
be appropriately adjusted. B-275490, Dec. 5, 1996, at fn. 10; 41 Comp.
Gen. 16 (1961).
Courts have upheld the authority of federal agencies to seek recovery
of assistance payments where the grantee has not used those payments
for authorized purposes within a prescribed period or where the
grantee has not accounted for the funds within a reasonable period of
time. In Mayor and City Council of Baltimore v. Browner, 866 F. Supp.
249 (D. Md. 1994), the court rejected the city's challenge to the
Environmental Protection Agency's authority to impose cut-off dates
for use of grant funds for construction of sewage treatment facilities:
"The City argues that the imposition of cut-off dates is inappropriate
absent specific authority in the Clean Water Act, the regulations
pertaining to the administration of grants, or the terms of the grant
offer or acceptance forms. However the presence of project period
start and finish dates on each grant award and the repeated references
throughout the regulations to time limits and schedules for grant-
funded projects anticipate such actions....
"Although the establishment of cut-off dates is not explicitly
provided for in the relevant regulations, they are obviously implied
and required to lend force to the provisions regulating the timing of
grant-funded projects. Otherwise, the establishment of time limits
would be a meaningless exercise for grantor and grantee. EPA must have
a method to attain reimbursement of funds already disbursed when a
project exceeds its time limit. Cut-off dates are simply the
enforcement of the limits specifically provided for in the regulations
in the context of grant funds disbursed proactively. The regulations
in question are not 'arbitrary, capricious, or manifestly contrary' to
[the Clean Water Act] and a policy of imposing cut-off dates for grant
funding is not invalid."
866 E Supp. at 251-52 (footnotes omitted).
City of New York v. Shalala, 34 F.3d 1161 (2nd Cir. 1994), concerned
Head Start grant funds paid to the city and distributed by the city to
its constituent agencies over a period of years but which the
constituent agencies had not yet disbursed for valid program purposes.
The Department of Health and Human Services eventually disallowed
these accumulated balances. The Departmental Appeals Board sustained
the department's disallowances. The Head Start statute did not
specifically empower the department to disallow accumulated balances
on the basis of their age and lack of documentation that the funds had
been properly disbursed. City of New York, 34 F.3d at 1166-67.
Nevertheless, the court held that the department "acted reasonably in
deciding that, after a certain period of time, the City was no longer
entitled to postpone its accounting obligations." Id. at 1168. The
court also rejected the city's argument that the department could not
apply a rule treating accounts receivable as bad debt once they became
more than two years old. Id. at 1170.
Where, under an assistance program, the government is authorized or
required to recover funds for whatever reason, the Federal Claims
Collection Act of 1966, as amended, 31 U.S.C. §§ 3711-3720E,[Footnote
100] and the joint Treasury Department-Justice Department implementing
regulations (Federal Claims Collection Standards, 31 C.F.R. parts 900-
904) apply unless the program legislation under which the claim arises
or some other statute provides otherwise. See 31 C.F.R. § 900.1(a).
Indebtedness to the United States may also result from the misuse of
grant funds. E.g., Utah, State Board for Vocational Education v.
United States, 287 F.2d 713 (10th Cir. 1961); Mass Transit Grants:
Noncompliance and Misspent Funds by Two Grantees in UMTA's New York
Region, GAO/RCED-92-38 (Washington, D.C.: Jan. 23, 1992). The cases
usually arise when the grantor agency disallows certain costs. Here
again the government's position has been that the right to recover
exists independent of statute, supplemented or circumscribed by any
statutory provisions that may apply. See, e.g., B-198493, July 7,
1980; B-163922, Feb. 10, 1978. As discussed hereafter, the
government's right to recover has come under attack by recipients,
particularly during the 1980s, but such attacks rarely succeed.
What we present here is by no means an exhaustive cataloging of the
cases. Our selection is designed to serve three purposes: (1)
summarize what the law appears to be as of the date of this
publication; (2) reflect any discernible trends; and (3) point out
some issues that may be of more general relevance. As a general
proposition, the courts have looked first to the program legislation
and usually have concluded that adequate authority to support the
government's right of recovery can be found in, or deduced from, the
enabling statute.
The cases we selected for purposes of illustration are drawn largely
from two massive grant programs (perhaps more accurately described as
collections of programs) that have operated in various forms and under
many statutory iterations for decades: Title I of the Elementary and
Secondary Education Act (ESEA), and the Comprehensive Employment and
Training Act (CETA).[Footnote 101] Both of these programs have
undergone extensive legislative changes over the years. The most
recent major amendments to ESEA were enacted by the No Child Left
Behind Act of 2001, Pub. L. No. 107-110, 115 Stat. 1425 (Jan. 8,
2002). CETA was replaced in 1982 by the Job Training Partnership Act,
Pub. L. No. 97-300, 96 Stat. 1322 (Oct. 13, 1982). The most recent
major amendments to this program were enacted by the Workforce
Investment Act of 1998, Pub. L. No. 105-220, 112 Stat. 936 (Aug. 7,
1998). We chose these programs because they both generated a large
volume of litigation on a variety of relevant topics. Apart from
whatever value specific cases may have by analogy to other programs,
the material illustrates the kinds of issues that have arisen and the
approach the courts, including the Supreme Court, have taken in
resolving them.
ESEA included a provision, very common in grant program legislation,
requiring the states to provide adequate assurances to the Department
of Education that grant funds would be used only on qualifying
programs. In addition, the law was amended in 1978 to give the
Secretary of Education explicit authority to direct the repayment of
misspent grant funds from non-ESEA sources. 20 U.S.C. § 2835(b)
(1982).[Footnote 102] Prior to this amendment, the statute had
provided simply that payments under Title I shall take into account
the extent to which any previous payment to the same state was greater
or less than it should have been.
Two states argued that the 1978 amendments did not apply to misspent
funds prior to 1978, and that the government's sole remedy with
respect to pre-1978 funds was to withhold future grant funds, in which
event the state would simply undertake a smaller Title I program. The
government argued that the right to recover existed both under the pre-
1978 law and under the common law. The Supreme Court held that the pre-
1978 version of the law clearly gave the government the right to
recover misspent funds. Bell v. New Jersey, 461 U.S. 773 (1983). The
pre-1978 language in question provided that ESEA payments:
"shall take into account the extent (if any) to which any previous
payment to such State educational agency under this title (whether or
not in the same fiscal year) was greater or less than the amount which
should have been paid to it."
Pub. L. No. 89-10, § 207(a)(1). The Court held that the plain terms of
this language as well as its legislative history recognized the
federal government's right to recover misused funds. It rejected as
"no more than remotely plausible" the state's alternative
interpretation that this language merely authorized the government to
reduce future grants. The Court described the consequences of the
state's interpretation, which it clearly considered untenable, as
follows:
"The Federal Government recovers nothing: it pays less, but it
receives correspondingly less in the way of Title I programs. Under
that reading, the State would have no liability to the Federal
Government for misspent funds."
Bell, 461 U.S. at 783, fn. 8. Apart from the holding itself and its
significance with respect to any program statutes with similar
language,[Footnote 103] two other points from this decision are
noteworthy:
* The existence and amount of the state's debt are to be determined
administratively by the agency in the first instance, subject to
judicial review. Id. at 791-92. (This is the same approach used in the
Federal Claims Collection Standards for debt collection generally.)
* Because the Court found adequate authority in the statute, it
declined to rule on the existence of a common-law right. Id. at 782 n.7.
In a 1981 case, a lower court had found a common-law right of recovery
along with the ESEA statutory right. West Virginia v. Secretary of
Education, 667 F.2d 417 (4th Cir. 1981). A 1987 case also upheld the
government's common-law right of recovery, at least to the extent of
overallocations or other erroneous payments. California Department of
Education v. Bennett, 829 F.2d 795, 798 (9th Cir. 1987).
Two years after Bell, the Supreme Court considered another issue
arising from the same litigation and held that the 1978 amendments to
ESEA were not retroactive for purposes of determining whether funds
had been misspent. Bennett v. New Jersey, 470 U.S. 632 (1985). What is
important here is the more general rule the Court announced, namely,
that substantive rights and obligations under federal grant programs
are to be determined by reference to the law in effect when the grants
were made. Id. at 638-41.
The Court also rejected an argument that recovery would be inequitable
because the state acted in good faith. The role of the reviewing court
is to determine if the proper legal standards are applied. If they
are, a court has "no independent authority to excuse repayment based
on its view of what would be the most equitable outcome." Id. at 646.
In any event, said the Court, "we find no inequity in requiring
repayment of funds that were spent contrary to assurances provided by
the State in obtaining the grants." Id. at 645.
In Bennett v. Kentucky Department of Education, 470 U.S. 656 (1985),
decided on the same day as Bennett v. New Jersey, the Court reaffirmed
the government's right of recovery under ESEA Title I:
"The State gave certain assurances as a condition for receiving the
federal funds, and if those assurances were not complied with, the
Federal Government is entitled to recover amounts spent contrary to
the terms of the grant agreement."
470 U.S. at 663. The Court further concluded that neither "substantial
compliance" by the state nor the absence of bad faith would absolve
the state from its liability. Id. at 663-65. See also B-229068-0.M.,
Dec. 23, 1987, applying Kentucky to grants under Title V of the
Surface Mining Control and Reclamation Act of 1977.[Footnote 104]
Other cases likewise hold that general equitable considerations cannot
override specific agreements and regulations governing grant
transactions. E.g., Missouri Department of Social Services v. United
States Department of Education, 953 F.2d 372, 375-76 (8th Cir. 1992);
Maine v. Shalala, 81 E Supp. 2d 91 (D. Me. 1999). In the latter case,
the court observed:
"Boiled down, Plaintiff contends that to allow the federal government
to recover its overpayments in fiscal years 1993 and 1994, while
denying the State its proposed offset for federal contributions that
should have been made relative to the State's supplemental
contributions from 1982 through 1993, is simply unfair....
"Principles of equity and fairness must, and do, play a fundamental
role in our system of justice.... But the principle of fairness cannot
be the beginning, middle, and end of a legal analysis, especially in a
case such as this where the transactions at issue are specifically and
intricately governed by regulations and statutes. This is not a
contract dispute between two lay people. This is a highly-regulated,
complex legal transaction between a state and the federal government.
In that light, [the state's] reliance on 'broad, nontechnical
principles of substantive fairness and equity' rings hollow."
81 E Supp. 2d at 95. See also Maryland Department of Human Resources
v. United States Department of Agriculture, 976 F.2d 1462, 1480-81
(4th Cir. 1992).
One point in Bell seems to have generated some uncertainty. The Court
noted that the Secretary "has not asked us to decide what means of
collection are available to him, but only whether he is a creditor.
Since the case does not present the issue of available remedies, we do
not address it." Bell, 461 U.S. at 779 n.4. Thus, the Court did not
approve or disapprove of any particular remedy. This led one court to
conclude that the Bell analysis requires two separate questions:
whether the federal government has a right of recovery and, if so,
what remedies are available to it. Maryland Department of Human
Resources v. United States Department of Health & Human Services, 763
F.2d 1441,1455 (D.C. Cir. 1985) (holding that government has statutory
right of recovery under Title XX of Social Security Act[Footnote
105]). However, another court expressed doubt over the existence of
such a dichotomy, construing the Supreme Court's silence in Bennett v.
Kentucky Department of Education as approval of the means of recovery
employed in that case, a direct repayment order. St. Regis Mohawk
Tribe v. Brock, 769 F.2d 37, 49 n.16 (2nd Cir. 1985), cert. denied,
476 U.S. 1140 (1986) (right of recovery under Comprehensive Employment
and Training Act). The St. Regis court went on to conclude that
"Congress left it to the Secretary to establish additional remedial
procedures, consistent with the purposes of the legislation, to insure
compliance by prime sponsors." 769 F.2d at 50.
Another group of cases involves the former CETA program. There is a
strong parallel to the ESEA cases in that the original CETA included
general authority to adjust payments to reflect prior overpayments or
underpayments, and was amended in 1978 to explicitly authorize the
Secretary of Labor to recover misspent funds by ordering repayment
from non-CETA funds.[Footnote 106] Essentially following Bell, a
rather long line of cases upheld the Labor Department's right, under
the pre-1978 CETA, to recover misspent funds and to do so by directing
repayment from non-CETA funds. City of Gary v. United States
Department of Labor, 793 F.2d 873 (7th Cir. 1986); St. Regis Mohawk
Tribe, supra; Mobile Consortium v. United States Department of Labor,
745 F.2d 1416 (11th Cir. 1984); California Tribal Chairman's
Association v. United States Department of Labor, 730 F.2d 1289 (9th
Cir. 1984); North Carolina Commission of Indian Affairs v. United
States Department of Labor, 725 F.2d 238 (4th Cir.), cert. denied, 469
U.S. 828 (1984); Texarcana Metropolitan Area Manpower Consortium v.
Donovan, 721 F.2d 1162 (8th Cir. 1983); Lehigh Valley Manpower Program
v. Donovan, 718 F.2d 99 (3rd Cir. 1983); Atlantic County v. United
States Department of Labor, 715 F.2d 834 (3rd Cir. 1983).
The St. Regis (769 F.2d at 47), California Tribal (730 F.2d at 1292),
and North Carolina (725 F.2d at 240) courts, as had the Supreme Court
in Bell, declined to comment on the existence of a common-law right of
recovery. The Texarcana court noted that its decision was consistent
with prior decisions recognizing the common-law right. 721 F.2d at
1164. None of the cases purported to deny that right. More recently,
the court in Harrod v. Glickman, 206 F.3d 783, 789 (8th Cir. 2000),
similarly endorsed the federal government's broad authority to recover
improper payments:
"The appellants also contend that the agency's attempt to seek
reimbursement of their disaster relief payments in 1994 was untimely,
because the agency action was final when the government paid the
benefits in 1989, and the agency had no authority to seek
reimbursement years after a final agency action. We disagree.
"We have long held that the common law permits the government to
recover funds that its agents wrongfully or erroneously paid, even
absent specific legislation authorizing the recovery. See Collins v.
Donovan, 661 F.2d 705, 708 (8th Cir. 1981); see also Texarkana Metro.
Area Manpower Consortium v. Donovan, 721 F.2d 1162, 1164 (8th Cir.
1983). The Supreme Court has stated, 'Ordinarily, recovery of
Government funds, paid by mistake to one having no just right to keep
the funds, is not barred by the passage of time.' United States v.
Wurts, 303 U.S. 414, 416, 58 S. Ct. 637, 82 L. Ed. 932 (1938). The
government's right to recover funds paid out erroneously 'is not
barred unless Congress has clearly manifested its intention to raise a
statutory barrier.' Id."
The court also held that estoppel ordinarily will not apply against
the federal government in the absence of affirmative evidence of
misconduct. Harrod, 206 F.3d at 789.
Another group of CETA cases concerned a provision which required the
Secretary of Labor to investigate any complaint alleging improprieties
and to issue a final determination not later than 120 days after
receiving the complaint. The consequences of failing to meet the 120-
day deadline became a hotly litigated issue. The lower courts split,
some holding that failure to meet the deadline barred the Labor
Department from attempting to recover misused funds, while others held
that the failure did not bar further action. Using an analysis which
should be useful in a variety of situations, the Supreme Court
resolved the conflict in Brock v. Pierce County, 476 U.S. 253 (1986),
holding that the mere use of the word "shall" in the statute did not
remove the power to act after 120 days.
An additional CETA case that deserves mention is Board of County
Commissioners v. United States Department of Labor, 805 F.2d 366 (10th
Cir. 1986). In that case, the court held that funds embezzled by an
employee of a CETA grantee are "misspent" for purposes of the
government's right of recovery. The grantee had argued that the funds
were not "misspent" because it had never spent them. "No CETA
regulation lists embezzlement as an allowable cost," rejoined the
court. Id. at 368.
Finally, three cases dealing with the transition between CETA and the
statute that immediately followed it—the Job Training Partnership Act
(JTPA)—further illustrate judicial support for the federal
government's right to recover misspent funds. The JTPA contained
language stating that its provisions "shall not affect administrative
or judicial proceedings... begun between October 13, 1982 and
September 30, 1984," under CETA. 29 U.S.C. § 1591(e) (1988). Several
CETA grantees argued that this language barred recovery of misspent
CETA grant funds unless administrative or judicial proceedings were
begun prior to September 30, 1984. This argument drew a decidedly
chilly response from the courts. The opinion in City of Newark v.
United States Department of Labor, 2 F.3d 31, 34 (3rd Cir. 1993) was
typical:
"We can identify no basis for adopting this convoluted construction of
the statute. In particular, Newark has called our attention to no
provision in the JTPA that would, indeed, bar the Secretary from
recovering misspent funds, and which would thereby 'affect'
administrative proceedings commenced after September 30, 1984 in the
manner Newark suggests. In the absence of any such JTPA provision, we
cannot merely presume that Congress used the word 'affect' to mean
'bar' or 'preclude.'
"Indeed, it would appear, to the contrary, that Congress in no way
intended the passage of the JTPA to hinder the Secretary's efforts to
recoup misspent or mismanaged funds granted under CETA."
The court went on to cite congressional committee reports expressing
concern over the abuse of CETA funds and the need to recover them. The
courts reached the same result in Inland Manpower Association v.
Department of Labor, 882 F.2d 343 (9th Cir. 1989), and St. Clair County
CETA, Michigan v. United States Department of Labor, No. 89-3829 (6th
Cir. 1990).[Footnote 107]
Where does all this leave us? Certainly the government's right to
recover under programs with statutory provisions similar to the former
ESEA Title I and CETA programs would seem to be settled. In more general
terms, several lower courts have recognized the government's basic
right to recover under the common law.[Footnote 108] While the Supreme
Court declined to address the common law issue in Bell, its later
decision in West Virginia v. United States, 479 U.S. 305 (1987) seems
instructive.
The issue in West Virginia was whether the United States could recover
"prejudgment interest on a debt arising from a contractual obligation
to reimburse the United States for services rendered by the Army Corps
of Engineers." 479 U.S. at 306. Applying federal common law, a
unanimous Supreme Court held that it could.[Footnote 109] While this
was not a grant case nor was the government's right to collect the
underlying debt in dispute, it would not seem to require a huge leap
in logic to infer a recognition of an inherent right in the government
to recover amounts owed to it.
In sum, the government's assertion of an inherent (i.e., common law)
right to recover sums owed to it under assistance programs thus far
has withstood assault. The issue may be largely moot at this juncture,
however, since the courts invariably find a right to recover in the
provisions of the applicable statutes, regulations, and/or grant
agreements.
2. Offset and Withholding of Claims Under Grants:
Offset and withholding are two closely related remedies. While the
terms are sometimes used interchangeably, they are not the same.
Offset, in the context of grantee indebtedness, refers to a reduction
in grant payments to a grantee who is indebted to the United States
where the debt arises under a separate assistance program or is owed
to an agency other than the grantor agency. Withholding is the act of
holding back funds from the same grant or program in which the
violation or other basis for creating the government's claim occurred.
In a sense, withholding may be viewed as a type of offset.
GAO has adopted a "policy rule" that offset or withholding should not
be used where it would have the effect of defeating or frustrating the
purposes of the grant. E.g., B-171019, Dec. 14, 1976; B-186166, Aug.
26, 1976. The application of this rule depends upon the nature and
purpose of the assistance program. "Individual consideration must be
given to each instance." B-182423, Nov. 25, 1974. Naturally, this
consideration must include any relevant provisions of the program
legislation, agency regulations, or the grant agreement.
In 43 Comp. Gen. 183 (1963), for example, a farmer who was receiving
payments under the Soil Bank Act,[Footnote 110] administered by the
Department of Agriculture, was indebted to the United States for
unpaid taxes. Since the basic purpose of the Soil Bank Act was to
protect and increase farm income, GAO decided that whether those
payments should be applied to the recovery of an independently arising
debt was a matter within Agriculture's discretion, based on
Agriculture's determination "as to the extent to which such
withholding would tend to effectuate or defeat the purposes of the
[Soil Bank Act]." Id. at 185. Similarly, relying heavily on the
Treasury Department's interpretation of the State and Local Fiscal
Assistance Act of 1972[Footnote 111] (general revenue sharing, since
repealed), GAO concluded in B-176781-0.M., Dec. 6, 1974, that offset
against revenue sharing funds payable to a city was inappropriate to
recover an overpayment to that city under a Federal Aviation
Administration grant. Thus, agencies have some discretion in the
matter.
It has been somewhat easier to conclude that offset will frustrate
grant objectives where grant payments are made in advance of grantee
performance. E.g., 55 Comp. Gen. 1329 (1976); B-171019, Dec. 14, 1976.
This is true to the extent the grantee is able to reduce its level of
performance. Take, for example, a grant to construct a hospital. If a
debt is offset against grant advances and the grantee can simply forgo
the project and not build the hospital, there is no meaningful
recovery. The federal government ends up keeping its own money, the
grantee pays nothing, and the losers are the intended beneficiaries of
the assistance, the patients who would have used the hospital. To this
extent, an offset would accomplish nothing. This was the same analysis
used for rejecting offset, for example, in B-171019, Dec. 14, 1976. As
noted previously, the Supreme Court invoked essentially the same
rationale in Bell v. New Jersey, 461 U.S. 773 (1983), in rejecting the
state's argument that future grant payments could be reduced to
satisfy its past indebtedness.
The problem was highlighted in a 1982 GAO report, Federal Agencies
Negligent in Collecting Debts Arising From Audits, AFMD-82-32
(Washington, D.C.: Jan. 22, 1982). The report first noted GAO's policy
and its rationale:
"It is normally inappropriate for the Government to offset debts
against an advance of funds to a grantee unless there is assurance
that the same level of grant performance will be maintained.
"... When the offset is not replaced with non-Federal funds, there
has, in effect, been no repayment. The scope of the program has simply
been reduced and the intended recipient of the benefits loses by the
amount of the audit disallowance."
Id. at 26. The report then recommended that grantor agencies "require
grantee debtors to certify that their payment of audit-related debts
has not reduced the level of performance of any Federal program," and
monitor those assurances through grant management and audit follow-up.
Id. at 28.
The concept also appeared in B-186166, Aug. 26, 1976, in which the
Department of Agriculture was exploring options to recover misapplied
and unaccounted-for funds advanced to a university under research
grants. Agriculture proposed crediting the indebtedness against
allowable indirect grant costs. This would be done by requiring the
university to document that it was expending the amount of earned
indirect costs on approved program grants, thus maintaining the agreed-
upon performance level. GAO concurred cautiously, on the condition
that the grantee voluntarily agree to this approach. Should this
method fail to satisfy the indebtedness, GAO further noted that the
grantee was a state university and advised Agriculture to seek offset
against other amounts owed to the state by the federal government.
Whatever impediments may exist in the case of grant advances, offset
will be more readily available under reimbursement-type grants. E.g.,
55 Comp. Gen. 1329, 1332 (1976). Nevertheless, the general policy rule
still applies. Thus, in B-163922.53, Apr. 30, 1979, the Comptroller
General advised the Departments of Labor and Transportation that
disallowed costs under a Labor Department grant could be offset
against reimbursements due under a Federal Highway Administration
grant, but that Transportation still "must make the determination on a
case-by-case basis as to whether offset will impair the program
objectives."
When the GAO decisions cited in the preceding paragraphs were issued,
the offset referred to was essentially nonstatutory. Administrative
offset received a statutory basis with the enactment of section 10 of
the Debt Collection Act of 1982, 31 U.S.C. § 3716. The corresponding
portion of the Federal Claims Collection Standards, revised at that
time to reflect the 1982 legislation, was 4 C.F.R. § 102.3.
As originally enacted in 1982, the administrative offset provided by
31 U.S.C. § 3716 did not apply to debts owed by state and local
governments. See 31 U.S.C. § 3701(c) (1982). However, the Debt
Collection Improvement Act of 1996, Pub. L. No. 104-134, §
31001(d)(1), 110 Stat. 1321, 1321-358-59 (Apr. 26, 1996), amended 31
U.S.C. § 3701(c) to eliminate the offset exemption for state and local
governments. The 1996 Act also added language to 31 U.S.C. § 3716(d)
providing that nothing in section 3716 prohibits the use of any other
administrative offset under another statute or the common law. Pub. L.
No. 104-134, § 31001(d)(2)(D). See also the current Federal Claims
Collection Standards at 31 C.F.R. § 901.3(a)(3) ("Unless otherwise
provided for by contract or law, debts or payments that are not
subject to administrative offset under 31 U.S.C. 3716 may be collected
by administrative offset under the common law or other applicable
statutory authority.").
As noted above, offset and withholding are technically different. Many
program statutes include withholding provisions. E.g., Perales v.
Heckler, 762 F.2d 226 (2nd Cir. 1985) (withholding provision in
Medicaid legislation may be used to recoup overpayments from state
even though state has not yet recovered from provider).
The theory behind withholding is that where a grantee has misapplied
grant funds, or in other words, where a grantee's costs are
disallowed, the grantee has, in effect, spent its own money and not
funds from the grant. Since the issue frequently comes to light in a
subsequent budget period, withholding may be viewed as the
determination that an amount equal to the disallowed cost remains
available for expenditure by the grantee and is therefore carried over
into the new budget period. Accordingly, the amount of new money that
must be awarded to the grantee to carry on the grant program is
reduced by the amount of the disallowance. This may not be strictly
applicable where the statutory program authority establishes an
entitlement to the funds on the part of the grantee or provides other
specific limitations on the use of withholding.
Under the Federal Claims Collection Standards, an agency to which a
debt is owed is required in most cases to explore the possibility of
collecting by offset from other sources. See generally 31 C.F.R. §
901.3.[Footnote 112] If offset is not available, a withholding
provision may provide the basis to accomplish a similar result, at
least in part. In 55 Comp. Gen. 1329 (1976), for example, the then
Community Services Administration (CSA) was statutorily authorized to
suspend (withhold) grant payments to satisfy certain grantee tax
delinquencies. Under this authority, the CSA could pay the suspended
amounts over to the Internal Revenue Service (IRS) to satisfy a
grantee's tax liability to the extent that it was incurred by the
grantee in carrying out CSA grants. Since funds previously advanced
under the grant should have been used to pay the required taxes in the
first place, transfer of the suspended funds to the IRS amounted to
payment of an authorized grant purpose. See also B-171019, Dec. 14,
1976 (withholding authority of former Law Enforcement Assistance
Administration).
In any event, withholding under a limited statutory withholding
provision does not satisfy the requirement for the agency to seek
offset from other sources to the extent of any remaining liability for
which withholding is not available. B-163922, Feb. 10, 1978.
Statutory withholding provisions may include procedural safeguards,
most typically notice and opportunity for hearing. Any such procedural
requirements must, of course, be satisfied. See B-226544, Mar. 24, 1987;
7 C.F.R. § 3016.43(b). The common rules authorize withholding against
advances. See, e.g., 7 C.F.R. § 3016.52(a)(2).
As with offset, it should be kept in mind that nothing is accomplished
by withholding unless the grantee carries out its program at the same
level as would otherwise have been the case. The Supreme Court made
this point in Bell v. New Jersey, 461 U.S. 773 (1983), discussed
previously. The Court rejected the state's suggestion that the federal
government was free to reduce future grant advances, with the state
then undertaking a smaller program. The Court recognized that, under
this approach, the government would recover nothing and the states
would effectively have no liability for misspent funds. Congress, said
the Court, must have contemplated that the government would receive a
net recovery by paying less for the same program level. Id. at 781 n.5
and 783 n.8.
A 1985 decision of the Court of Appeals for the District of Columbia
Circuit took the analysis one step further. The case is Maryland
Department of Human Resources v. United States Department of Health &
Human Services, 763 F.2d 1441 (D.C. Cir. 1985). After discussing the
Bell analysis, the court went on to conclude:
"Where a statute gives the federal government a right of recovery and
also authorizes prospective withholding [withholding funds for
services not yet rendered] as a remedy, the state remains obligated to
provide all the services that it promised to supply in return for the
funds that were then prospectively withheld in satisfaction of the
state's debt to the federal government. If a state then proceeds to
reduce the size of its federally funded program, the state has
committed a new and independent breach of the funding conditions,
which gives rise to a new debt to the federal government."
Maryland, 763 F.2d at 1455-56. Under this approach, the remedy is
clearly a meaningful one. How far the courts will go in applying it
remains to be seen. Issues still to be resolved are the extent to
which the principle may apply to an offset as opposed to a
withholding, or to a nonstatutory offset or withholding.
In Housing Authority of the County of King v. Pierce, 701 F. Supp. 844
(D.D.C. 1988), modified on other grounds, 711 F. Supp. 19 (D.D.C.
1989), the court considered the recoupment of overpayments under
advance-funded Department of Housing and Urban Development (HUD)
housing subsidies. HUD regulations (but not the program statute)
authorized recoupment by reducing future subsidy payments. The court
upheld HUD's common-law right to recover in the manner specified in
the regulations. The court further commented that the teachings of
Bell and Maryland Department of Human Resources "might and perhaps
should guide HUD in the course of the recovery here," but found those
cases not dispositive because they dealt with statutory rather than
common-law remedies. Pierce, 701 F. Supp. at 850 n.11.
As the above discussion indicates, there is a direct relationship
between the appropriateness of offset or withholding against grant
advances and the grantee's obligation to maintain the agreed-upon
program level. To date, however, the case law does not provide
definitive guidance for sorting through the many legal and practical
issues that this relationship presents. Perhaps future litigation or
legislation will help to flesh out the details of this relationship.
Chapter 10 Footnotes:
[1] The Intergovernmental Cooperation Act and the Single Audit Act are
discussed later in this chapter.
[2] GAO, A Glossary of Terms Used in the Federal Budget Process, GAO-
05-734SP (Washington, D.C.: September 2005), at 60. The drafters of
the Federal Grant and Cooperative Agreement Act of 1977, 31 U.S.C. §§
6301-6308, discussed in section B.2 of this chapter, opted against
including a separate statutory definition for the term "grant-in-aid"
in favor of using the simpler term "grant" to encompass all such
transactions regardless of the identity of the recipient. S. Rep. No.
95-449, at 9 (1977).
[3] The earliest grant programs were land grants. Monetary grants
appear to have entered the stage in 1879, but they are largely a 20th
century development. Madden, The Constitutional and Legal Foundations
of Federal Grants, in Federal Grant Law 9 (M. Mason ed. 1982). One
example of land grants is the Morrill Act of 1862, Pub. L. No. 37-108,
12 Stat. 503 (July 2, 1862), through which Congress assisted states
with higher education by providing land grants to establish
universities focused on agriculture, mechanics, and military science.
Library of Congress, Congressional Research Service, No. RL30705,
Federal Grants to State and Local Governments: A Brief History (Feb.
19, 2003), at 3-4.
[4] Office of Management and Budget, Budget of the United States
Government, Fiscal Year 2006, Historical Tables (Washington, D.C.
2005), at 221.
[5] The Domestic Working Group, chaired by the Comptroller General,
consists of 19 federal, state, and local audit organizations. Its
purpose is to identify current and emerging challenges of mutual
interest and to explore opportunities for greater collaboration within
the intergovernmental audit community. The Guide describes a number of
ideas and best practices to enhance grant management and
administration. It covers several topics that are discussed in this
chapter. An electronic copy of the Guide can be found at
www.epa.gov/oig/dwg/reports (last visited November 5, 2005).
[6] The Catalog of Federal Domestic Assistance is published annually
by the General Services Administration and the Office of Management
and Budget pursuant to 31 U.S.C. § 6104 and OMB Circular No. A-89,
Federal Domestic Assistance Program Information (Aug. 17, 1984). The
Catalog is a governmentwide list of financial and nonfinancial federal
assistance programs, projects, services, and activities administered
by federal agencies that provide assistance or benefits to the
American public. 31 C.F.R. § 205.2 (2005). The most recently updated
print edition and the more frequently updated on-line version can both
be accessed through the Catalog's website at www.cfda.gov (last
visited September 15, 2005).
[7] See section C.1.b of this chapter for further discussion of
congressional use of grants in the exercise of its constitutional
spending power. Congress's spending power is also discussed in Chapter
1, section B.
[8] E.g., United States v. Miami University, 91 F. Supp. 2d 1132, 1142-
44 (S.D. Ohio 2000), affd, 294 F.3d 797 (6th Cir. 2002); United States
v. Frazer, 297 F. Supp. 319, 322-23 (M.D. Ala. 1968); United States v.
Sumter County School District No. 2, 232 E Supp. 945, 950 (E.D.S.C.
1964); United States v. County School Board, 221 F. Supp. 93, 99-100
(E.D. Va. 1963).
[9] E.g., Pennsylvania Department of Public Welfare v. United States,
48 Fed. Cl. 785 (2001); Moore v. United States, 48 Fed. Cl. 394
(2000); Thermalon Industries, Ltd. v. United States, 34 Fed. Cl. 411
(1995); Cole County Regional Sewer District v. United States, 22 Cl.
Ct. 551 (1991); County of Suffolk v. United States, 19 Cl. Ct. 295
(1990); Kentucky ex rel. Cabinet for Human Resources v. United States,
16 Cl. Ct. 755, 762 (1989); Rogers v. United States, 14 Cl. Ct. 39, 44
(1987); Idaho Migrant Council, Inc. v. United States, 9 Cl. Ct. 85, 88-
89 (1985); Missouri Health & Medical Organization, Inc. v. United
States, 641 F.2d 870 (Ct. Cl. 1981); Texas v. United States, 537 E2d
466 (Ct. Cl. 1976). While most of these cases use language carefully
crafted to avoid confusion between a grant agreement and a
"traditional," that is, procurement, contract, the essence of the
jurisdictional finding is that the grant claim is based on some form
of "contract." The Tucker Act cases are discussed in more detail later
in section B.2.c of this chapter in relation to the Federal Grant and
Cooperative Agreement Act.
[10] E.g., Knight v. United States, 52 Fed. Cl. 243 (2002), rev'd on
other grounds, 65 Fed. Appx. 286 (Fed. Cir. 2003); Pennsylvania
Department of Public Welfare v. United States; Henke v. Department of
Commerce, 83 F.3d 1445 (D.C. Cir. 1996); Arizona v. United States, 494
F.2d 1285 (Ct. Cl. 1974). See also City of Manassas Park v. United
States, 633 F.2d 181 (Ct. Cl.), cert. denied, 449 U.S. 1035 (1980)
(claim found to be noncontractual, but agreement referred to as "grant
contract" and grantor-grantee relationship as "privity of contract").
[11] The Anti-Kickback Act of 1986, Pub. L. No. 99-634, § 2 (a), 100
Stat. 3523 (Nov. 7, 1986), codified at 41 U.S.C. §§ 51-58, imposes
criminal and civil sanctions against subcontractors who provide money,
gifts, or other "kickbacks" to prime contractors in order to secure
their subcontracts as part of a larger government contract.
[12] See generally 3 Report of the Commission on Government
Procurement, chs. 1-3 (Dec. 31, 1972).
[13] For two articles discussing the OMB guidance, see Paul G.
Dembling, The Federal Grant and Cooperative Agreement Act: Its Use and
Misuse, 51 Federal Lawyer 12 (February 2004); Kurt M. Rylander,
Scanwell Plus: Challenging the Propriety of a Federal Agency's
Decision to Use a Federal Grant and Cooperative Agreement, 28 Pub.
Cont. L. J. 69 (Fall 1998).
[14] In this regard, OMB guidance specifically states that substantial
involvement refers to performance of the funded activity rather than
oversight. 43 Fed. Reg. at 36863.
[15] S. Rep. No. 97-180, at 4 (1981). This report is on legislation
that amended the original act rather than direct legislative history
on the original act. Nevertheless, it is important as a clear
statement from one of the relevant jurisdictional committees.
[16] Additional decisions holding that a procurement contract rather
than an assistance instrument should have been used are: 67 Comp. Gen.
13 (1987), aff'd upon reconsideration, B-227084.6, Dec. 19, 1988
(operation of research and training programs at a government facility
funded by Maritime Administration); 65 Comp. Gen. 605 (1986) (proposed
study, sponsored by Council on Environmental Quality, of risks and
benefits of certain pesticides, intended for use by federal regulatory
agencies); B-210655, Apr. 14, 1983 (funding by Department of Energy of
college campus forums on nuclear energy).
[17] Of course, similar restrictions on allowable costs can be, and
frequently are, imposed on grantees. For example, entertainment costs
are unallowable grant costs under several OMB circulars. See OMB
Circular No. A-21, Cost Principles for Educational Institutions
(May 10, 2004), Attachment J, § 17; OMB Circular No. A-122, Cost
Principles for Non-profit Organizations (May 10, 2004), Attachment B,
§ 14. Section G of this chapter discusses grant cost issues in more
detail.
[18] For a more detailed explanation of 31 U.S.C. § 3324 and advance
payments in general, see Chapter 5, section C. For more on advance
payments in the grant context, see section E of this chapter.
[19] For additional background on many of the cases and issues
discussed in this section, see Andreas Baltatzis, The Changing
Relationship Between Federal Grants and Federal Contracts, 32 Pub.
Cont. L. J. 611 (Spring 2003); Jeffrey C. Walker, Enforcing Grants and
Cooperative Agreements as Contracts Under the Tucker Act, 26 Pub.
Cont. L. J. 683 (Summer 1997).
[20] See, e.g., B-289801, Dec. 30, 2002, at fn. 1, referring to an
Education Department regulation (now found at 34 C.F.R. § 75.200
(2005)), that describes the difference between discretionary and
formula grants.
[21] Pub. L. No. 98-369, div. B, title VII, 98 Stat. 494, 1175 (July
18, 1984) (codified in scattered sections of titles 10, 31, and 41,
United States Code).
[22] Under various statutory and regulatory authorities, GAO has
served for more than 75 years as an independent forum for the
resolution of disputes (commonly referred to as "bid protests")
concerning the award of federal contracts. See 31 U.S.C. §§ 3551-3556
and 4 C.F.R. pt. 21 (2005), which are the current statutory and
regulatory provisions. For more information on the bid protest
function, see GAO, Bid Protests at GAO: A Descriptive Guide, GAO-03-
539SP (Washington, D.C.: 2003). A copy of the Guide can be found on
the GAO web site at www.gao.gov/decisions/bidpro/bidpro.htm (last
visited September 15, 2005).
[23] U.S. Const. art. I, § 8, cl. 1 is often referred to as the
principal source of congressional spending power. Congress may be
acting under other enumerated powers as well. "Congress is not
required to identify the precise source of its authority when it
enacts legislation." Nevada v. Skinner, 884 E2d 445, 449 n. 8 (9th
Cir. 1989), cert. denied, 493 U.S. 1070 (1990). For additional
background on the congressional "power of the purse," see Chapter 1,
section B.
[24] Cases dealing with the validity of conditions attached to grants
(and other forms of federal spending) also are discussed in Chapter 1,
section B, and the update of that section in GAO, Principles of
Federal Appropriations Law: Annual Update of the Third Edition, GA0-05-
354SP (Washington, D.C.: March 2005), available at
www.gao.gov/legal.htm (last visited September 15, 2005).
[25] Subsequent to the decision in Riley, Congress amended the statute
to explicitly require continuation for children with disabilities "who
have been suspended or expelled from school." 20 U.S.C. §
1412(a)(1)(A).
[26] These provisions are found at 42 U.S.C. §§ 1396p(b)(1)
(requirement) and 1396c (penalty for noncompliance).
[27] Of course, it is also within the power of Congress to authorize
the making of unconditional grants. See B-80351, Sept. 30, 1948.
[28] We discuss the concept of the availability of appropriations as
to purpose in detail in Chapter 4.
[29] Pub. L. No. 86-798, 74 Stat. 1053 (Sept. 15, 1960).
[30] See Chapter 6, section F for a more detailed discussion of agency
discretion under lump-sum appropriations.
[31] See the discussion of the Availability of Appropriations as to
Time in Chapter 5.
[32] See Chapter 7 for a general discussion of recording obligations
and Chapter 7, section B.5 for a specific discussion of recording
requirements for grant obligations.
[33] The particular obligating document varies and can include an
agency's approval of a grant application or a letter of commitment.
See 39 Comp. Gen. 317 (1959); 37 Comp. Gen. 861, 863 (1958). Section
1501(a)(5) of title 31, United States Code, lists three forms of
documentary evidence for grant obligations: (A) an appropriation
providing for payment in a specific amount fixed by law or under a
formula prescribed by law (i.e., a mandatory or formula grant); (B) an
agreement authorized by law; or (C) plans approved consistent with law.
[34] See Chapter 5, section B, for a comprehensive discussion of the
bona fide needs rule.
[35] For a general discussion of the Antideficiency Act, see Chapter
6, section C, and for amount availability, see Chapter 6, section
C.2.e.
[36] See Chapter 2, section C, for a general discussion of the
interplay between authorization and appropriation acts.
[37] See Chapter 3, section C for a general discussion of agency
regulations and administrative law principles applicable to them.
[38] See Chapter 3, section A, for additional discussion of the APA
and the informal rulemaking process.
[39] For a more detailed discussion of the Congressional Review Act,
see Chapter 3, section A.1.c.
[40] For more on the Byrd Amendment, see Chapter 4, section C.11.d.
[41] See www.whitehouse.gov/omb/grants/attach.html (last visited
September 15, 2005).
[42] OMB is in the process of consolidating and streamlining its
circulars and the common rules in title 2 of the Code of Federal
Regulations. See 69 Fed. Reg. 26,276 (May 11, 2004).
[43] Exec. Order No. 12549, Debarment and Suspension, 51 Fed. Reg.
6370 (Feb. 18, 1986).
[44] The provisions of the Drug-Free Workplace Act dealing
specifically with federal grantees appear in 41 U.S.C. § 702.
[45] The information here is taken from OMB's web site at
www.whitehouse.gov/omb/grants/attach.html (last visited September 15,
2005).
[46] The current version of the rule, 7 C.F.R. § 3016.36(c)(2),
provides generally that:
"Grantees and subgrantees will conduct procurements in a manner that
prohibits the use of statutorily or administratively imposed in-State
or local geographical preferences in the evaluation of bids or
proposals, except in those cases where applicable Federal statutes
expressly mandate or encourage geographic preference."
[47] This decision and others described here arose under GAO's former
statutory authority to settle claims by or against the United States.
This authority has been transferred from GAO to executive branch
agencies. See notes following 31 U.S.C. § 3702. However, the
principles stated in the decisions remain relevant.
[48] The act's principal provisions are found at 28 U.S.C. §§ 2671-
2680.
[49] The discretionary function exception excludes from the act's
coverage:
"any claim based upon an act or omission of an employee of the
Government, exercising due care, in the execution of a statute or
regulation, whether or not such statute or regulation be valid, or
based upon the exercise or performance or the failure to exercise or
perform a discretionary function or duty on the part of a federal
agency or an employee of the Government, whether or not the discretion
involved be abused."
28 U.S.C. § 2680(a).
[50] These distinctions are discussed under the definition of "Grant"
in GAO, A Glossary of Terms Used in the Federal Budget Process, GAO-05-
734SP (Washington, D.C.: September 2005), at 60-61.
[51] GAO has issued a number of reports on block grants, including the
following: Early Observations on Block Grant Implementation, GAO/GGD-
82-79 (Washington, D.C.: Aug. 24, 1982); Lessons Learned From Past
Block Grants: Implications for Congressional Oversight, GAO/IPE-82-8
(Washington, D.C.: Sept. 23, 1982); A Summary and Comparison of the
Legislative Provisions of the Block Grants Created by the 1981 Omnibus
Budget Reconciliation Act, GAO/IPE-83-2 (Washington, D.C.: Dec. 30,
1982); Block Grants: Overview of Experiences to Date and Emerging
Issues, GAO/HRD-85-46 (Washington, D.C.: Apr. 3, 1985); and Community
Development: Oversight of Block Grant Needs Improvement, GAO/RCED-91-
23 (Washington, D.C.: Jan. 30, 1991). GAO has also published a
comprehensive catalog of formula grants, intended for use as a
resource document: Grant Formulas: A Catalog of Federal Aid to States
and Localities, GAO/HRD-87-28 (Washington, D.C.: Mar. 23, 1987).
[52] For an early review of the implementation of the original act,
see GAO, Single Audit Act: Single Audit Quality Has Improved but Some
Implementation Problems Remain, GAO/AFMD-89-72 (Washington, D.C.: July
27, 1989).
[53] State and local entities receiving less than $25,000 in federal
funds in any fiscal year were not required to have a financial audit.
[54] On December 1, 2004, the principals of the JFMIP (GAO, Department
of Treasury, Office of Management and Budget (OMB), and Office of
Personnel Management) signed an agreement that reassigned
responsibility for financial management policy and oversight
effectively eliminating JFMIP as a stand-alone organization. OMB
issued a memorandum on December 2, 2004, that discusses in detail the
changes to JFMIP's role, the transfer of JFMIP's Project Management
Office to the CFO Council, the creation of a new Financial Systems
Integration Committee of the CFO Council, and other transition issues.
OMB, Memorandum for Chief Financial Officers Council, Realignment of
Responsibilities for Federal Financial Management Policy and Oversight
(Dec. 2, 2004), available at http://www.whitehouse.gov/omb (last
visited September 15, 2005).
[55] Pub. L. No. 104-156, 110 Stat. 1396 (July 5, 1996).
[56] Federal awards include federal cost-reimbursement contracts,
grants, loans, loan guarantees, property, cooperative agreements,
interest subsidies, insurance, food commodities, direct
appropriations, or other assistance, but does not include amounts
received as reimbursement for services rendered to individuals. 31
U.S.C. § 7501(a)(4), (5).
[57] Every 2 years, the Director of OMB shall review the dollar
threshold amount for requiring the audits and may adjust the dollar
amount consistent with the purposes of the Single Audit Act, as
amended. 31 U.S.C. § 7502(a)(3). In 2004, OMB adjusted the dollar
threshold to $500,000. For fiscal years ending on or before December
30, 2003, the threshold is $300,000. See OMB Web site at
http://www.whitehouse.gov/omb/financial/fm_single_audit.html (last
visited September 15, 2005).
[58] GAO, Government Auditing Standards, GAO-03-673G (Washington,
D.C.: June 2003).
[59] In March 2004, OMB issued a Compliance Supplement to Circular No.
A-133. The supplement can be found at
http://www.whitehouse.gov/omb/circulars/a133_compliance/04/04toc.html
(last visited September 15, 2005).
[60] Performance audits encompass a wide variety of objectives,
including objectives related to assessing program effectiveness and
results; economy and efficiency; internal control; and compliance with
legal or other requirements and are described in more detail in
Chapter 2 of the Government Auditing Standards, GAO-03-673G.
[61] See GAO, Standards for Internal Control in the Federal
Government, AIMD-00-21.3.1 (Washington, D.C.: November 1999).
[62] These regulations include, of course, Office of Management and
Budget circulars and the common rules that implement them. As
discussed in many other portions of this chapter, the circulars and
the common rules impose a number of restrictions on a grantee's use of
funds.
[63] Some of the decisions cited may involve statutory restrictions on
federal expenditures that have been changed or repealed since the
decisions were issued. The cases are cited solely to illustrate the
application of the grant rule and thus remain valid to that extent.
[64] Act of June 25, 1938, ch. 676, 52 Stat. 1066.
[65] Act of June 30, 1936, ch. 881, 49 Stat. 2038.
[66] See section G.1.a. of this chapter for further discussion of this
point in the context of grant costs and accountability.
[67] In a bankruptcy case that considered several of the personal
property cases discussed above, the court held that with regard to
real property, a trustee enjoys the rights of a bona fide purchaser
and is, thus, entitled to notice of another's claim to the real
property. In re Premier Airways, Inc. v. United States Department of
Transportation, 303 B.R. 295 (Bankr. W.D.N.Y. 2003). Therefore, the
court determined that a trustee's interest in real property purchased
with federal grant funds was superior to that of the federal grantor
agency where the grantor agency failed to perfect its interest in the
real property as a matter of record prior to the grantee's
commencement of the bankruptcy proceeding.
[68] See Neukirchen, 53 E3d at 812. As the court noted, this rule is
no longer in effect and has been replaced by more stringent
accountability requirements. Id. at 813, n. 4. For the current common
rules on this subject, see, for example, 7 C.F.R. §§ 3019.32-3019.37.
[69] Pub. L. No. 90-577, 82 Stat. 1098 (Oct. 16, 1968).
[70] Pub. L. No. 101-453, 104 Stat. 1058 (Oct. 24, 1990).
[71] For an in-depth discussion of advance payments, see Chapter 5,
section C.
[72] Limitations on the use of interest earned on advance funds are
also contained in the common rules. See, e.g., 7 C.F.R. §
3016.21(i)(2005) (state and local government grantees); 7 C.F.R. §
3019.22(l) (other grantees). For example, section 3016.21(i) requires
nonexempt grantees and subgrantees to "promptly, but at least
quarterly, remit interest earned on advances to the Federal agency."
However, it does permit them to keep up to $100 per year in interest
to pay administrative expenses.
[73] A conceptually related case is 71 Comp. Gen. 310 (1992), which
upheld a Small Business Administration regulation providing for a
reasonable profit to grantees under the Small Business Innovation
Development Act.
[74] In B-146285, Apr. 10, 1978, the Comptroller General concluded
that the Intergovernmental Cooperation Act did not repeal by
implication a statute which prescribed both the timing schedule and
the amount of payments under a particular assistance program, but
rather was geared primarily to programs without statutory payment
schedules.
[75] The opinion in Pennsylvania Office of Budget provides a useful
discussion of the background, purposes, and legislative history of the
interest exception in the original Intergovernmental Cooperation Act.
See 996 F.2d at 1510-12.
[76] The interest provisions of the Cash Management Improvement Act
took effect during the second half of 1993. Pub. L. No. 101-453, §
5(e), as amended by the Cash Management Improvement Act of 1992, Pub.
L. No. 102-589, § 2, 106 Stat. 5133 (Nov. 10, 1992).
[77] For a summary of the Cash Management Improvement Act and a review
of its initial years in operation, see GAO, Financial Management:
Implementation of the Cash Management Improvement Act, GAO/AIMD-96-4
(Washington, D.C.: Jan. 8, 1996).
[78] Disbursement is to be accomplished through cash, checks,
electronic funds transfer, or any other means identified by the
Treasury Secretary.
[79] Pub. L. No. 105-178, § 1303, 112 Stat. 107, 227 (June 9, 1998).
[80] By way of contrast, this general rule does not apply to federal
loans. The reason is that loans, unlike grants, are expected to be
repaid and the recipient is thus, at least ultimately, using its own
funds. Of course, the proposed use of the funds must be authorized
under the loan program legislation. B-207211-0.M., July 9, 1982. See
also B-214278, Jan. 25, 1985.
[81] Subsequent legislation reduced the percentage of the federal
share under this program. Pub. L. No. 97-117, § 7, 95 Stat. 1623, 1625
(Dec. 29, 1981). See B-207211-0.M., July 9, 1982.
[82] See Chapter 10, section H for a general discussion of recovery of
grantee indebtedness.
[83] The 1980 report also noted:
"Most Federal program officials we contacted agreed that nonsupplant
is difficult, if not impossible, to enforce because it calls for an
external judgment on what grantees would have done if Federal funds
were not available. Basically, this calls for a Federal agency to
assess the motives behind particular changes in State and local plans
or budgets and to judge whether the presence of Federal grant funds
drove the particular State or local action."
GAO/GGD-81-7, at 54.
[84] The purpose, time, and amount requirements are essentially the
same for grants as for other expenditures. What constitutes an
obligation in the grant context, and what will or will not satisfy 31
U.S.C. § 1501(a)(5), are discussed in more detail in section C.2 of
this chapter and in Chapter 7, section B.5.
[85] See section C.2.b of this chapter for a discussion of the
applicability of the bona fide needs rule to grants.
[86] See section C.3.b of this chapter for a discussion of the nature
and evolution of the common rules. As in earlier sections, we will
cite to the Department of Agriculture version of the common rules for
ease of presentation.
[87] Section D of Attachment A of the circular explains that there is
no universal rule for classifying certain costs as either direct or
indirect under every accounting system. "A cost may be direct with
respect to some specific service or function, but indirect with
respect to the Federal award or other final cost objective." Id. §
D.2. The most important requirement is to treat each cost item
consistently in like circumstances as either direct or indirect.
[88] Two other GAO products dealing with this subject are Federal
Research: System for Reimbursing Universities' Indirect Costs Should
be Reevaluated, GAO/RCED-92-203 (Washington, D.C.: Aug. 26, 1992), and
Federally Sponsored Research: Indirect Costs Charged by Stanford
University, GAO/T-RCED-91-18 (Washington, D.C.: Mar. 13, 1991).
[89] These statutes are discussed in section C of this chapter. Public
Law 104-156 was based in part on recommendations contained in GAO,
Single Audit: Refinements Can Improve Usefulness, GAO/AIMD-94-133
(Washington, D.C.: June 21, 1994).
[90] For example, a number of the court cases discussed below are
appeals from decisions of the Department of Health and Human Services
Departmental Appeals Board (DAB). According to the DAB's Web site, it
hears disputes that may involve as much as $1 billion in grant funds
annually. See www.hhs.gov/dab/background.html (last visited September
15, 2005).
[91] See Chapter 3, section B, for a general discussion of the extent
of judicial deference to agency interpretations.
[92] The version of OMB Circular No. A-87 applicable to the transfers
at issue was dated January 28, 1981. Alabama, 124 F. Supp. 2d at 1253,
fn.2. The self-insurance reserve provision in that version was in
Attachment B, § C.4(c). Id. at 1254.
[93] In this regard, the court relied on Pennsylvania Department of
the Budget v. United States Department of Health & Human Services, 996
E2d 1505 (3rd Cir.), cert. denied, 510 U.S. 1010 (1993), discussed
previously in section E of this chapter.
[94] The current version of OMB Circular No. A-87 (May 10, 2004)
retains this prohibition at Attachment B, § 22.d(5) ("Whenever funds
are transferred from a self-insurance reserve to other accounts (e.g.,
general fund), refunds shall be made to the Federal Government for its
share of funds transferred, including earned or imputed interest from
the date of transfer.")
[95] The state also argued, to no avail, that OMB lacked authority to
prescribe government-wide cost principles and that the Department of
Health and Human Services violated the notice and comment provisions
of the Administrative Procedure Act in incorporating the circular into
its own regulations. On the former point, the court stated:
"OMB has been deemed the President's principal arm for the exercise of
his managerial functions.' ... One such managerial function is to
provide federal agencies with consistent, government-wide policy
guidance."
New York, 959 F. Supp. at 618. On the latter point, it observed that
the state was on notice of the circular's provisions and failed to
object to them for at least 20 years. Id. at 619.
[96] Pub. L. No. 81-920, 64 Stat. 1245 (Jan. 12, 1951).
[97] Pub. L. No. 88-578, 78 Stat. 897 (Sept. 3, 1964).
[98] The General Accounting Office Act of 1996, Pub. L. No. 104-316,
110 Stat. 3826 (Oct. 19, 1996), transferred the Comptroller General's
claims settlement authority, and related authorities, to the executive
branch. Thus, executive branch agencies are now primarily responsible
for prescribing guidance on claims collection matters. See B-303906,
Dec. 7, 2004, at 2.
[99] As part of the transfer of claims-related functions referenced in
the preceding footnote, the Attorney General and the Secretary of the
Treasury now prescribe the Federal Claims Collection Standards. See 31
U.S.C. § 3711(d)(2); 31 C.F.R. § 900.1(a).
[100] Major amendments to the original 1966 Act were made by the Debt
Collection Act of 1982, Pub. L. No. 97-365, 96 Stat. 1749 (Oct. 25,
1982), and the Debt Collection Improvement Act of 1996, Pub. L. No.
104-134, 110 Stat. 1321, 1321-358 (Apr. 26, 1996).
[101] The original source of Title I of ESEA was the Elementary and
Secondary Education Act of 1965, Pub. L. No. 89-10, 79 Stat. 27 (Apr.
11, 1965). CETA was originally enacted as the Comprehensive Employment
and Training Act of 1973, Pub. L. No. 93-203, 87 Stat. 839 (Dec. 28,
1973).
[102] See 20 U.S.C. § 7844 for current provisions governing grantee
assurances, and 20 U.S.C. §§ 1234a-1234b for provisions dealing with
recovery of misused grant funds.
[103] The court in Ledbetter v. Shalala, 986 F.2d 428, 433-34 (11th
Cir.), cert. denied, 510 U.S. 1010 (1993), followed Bell, holding that
substantively identical language in the Older Americans Act (42 U.S.C.
§ 3029(a)) likewise conferred a right to recover misspent grant funds.
[104] Pub. L. No. 95-87, 91 Stat. 445, 467 (Aug. 3, 1977).
[105] 42 U.S.C. §§ 1397-1397f.
[106] See 29 U.S.C. § 2934(c)-(d) for the current version of this
authority.
[107] These courts also noted that, in any event, audits had commenced
before September 30, 1984, and held that administrative proceedings
were "begun" for purposes of the statute once audits were initiated.
[108] See, in addition to the cases cited in the text, Tennessee v.
Dole, 749 F.2d 331, 336 (6th Cir. 1984), cert. denied, 472 U.S. 1018
(1985) (Federal-Aid Highway Act); Woods v. United States, 724 F.2d
1444 (9th Cir. 1984) (Food Stamp Act); Mount Sinai Hospital v.
Weinberger, 517 F.2d 329 (5th Cir. 1975), cert. denied, 425 U.S. 935
(1976) (Medicare); Pennsylvania Department of Transportation v. United
States, 643 F.2d 758, 764 (Ct. Cl.), cert. denied, 454 U.S. 826 (1981)
(Federal-Aid Highway Act).
[109] In a subsequent case, United States v. Texas, 507 U.S. 529
(1993), the Court addressed an issue left open in West Virginia and
held that the Debt Collection Act did not limit the government's
common law right to seek pre-judgment interest.
[110] Pub. L. No. 540, ch. 327, 70 Stat. 188 (May 28, 1956), repealed
by Pub. L. No. 89-321, § 601, 79 Stat. 1187, 1206 (Nov. 3, 1965).
[111] Pub. L. No. 92-512, 86 Stat. 919 (Oct. 20, 1972).
[112] 31 C.F.R. § 901.3(a) incorporates a number of statutory
exceptions to offset, but few of these apply to federal assistance
payments. Offset is usually accomplished through the centralized
Treasury Department offset program, although individual agencies may
also effect offsets. See 31 C.F.R. §§ 901.3(b)-(c).
[End of Chapter 10]
Chapter 11: Federal Assistance: Guaranteed and Insured Loans:
A. Introduction:
1. General Description:
2. Sources of Guarantee Authority:
B. Budgetary and Obligational Treatment:
1. Prior to Federal Credit Reform Act:
2. Federal Credit Reform Act of 1990:
a. Post-1991 Guarantee Commitments:
b. Pre-1992 Commitments:
c. Entitlement Programs:
d. Certain Insurance Programs:
C. Extension of Guarantees:
1. Coverage of Lenders (Initial and Subsequent):
a. Eligibility of Lender/Debt Instrument:
b. Substitution of Lender:
c Existence of Valid Guarantee:
d. Small Business Investment Companies:
e. The Federal Financing Bank:
2. Coverage of Borrowers:
a. Eligibility of Borrowers:
b. Substitution of Borrowers:
c. Loan Purpose:
d. Change in Loan Purpose:
3. Terms and Conditions of Guarantees:
a. Introduction:
b. Property Insurance Programs under the National Housing Act:
(1) Maximum amount of loan:
(2) Maximum loan maturity:
(3) Owner/lessee requirement:
(4) Execution of the note:
(5) Reporting requirement:
(6) Payment of premiums:
c. Small Business Administration Business Loan Program:
(1) Payment of guarantee fee:
(2) Notice of default:
D. Rights and Obligations of Government upon Default:
1. Nature of the Government's Obligation:
2. Scope of the Government's Guarantee:
3. Amount of Government's Liability:
4. Liability of the Borrower:
a. Veterans' Home Loan Guarantee Program:
(1) Loans closed prior to 1990:
(2) Loans closed after December 31, 1989:
b. Debt Collection Procedures:
5. Collateral Protection:
Chapter 11: Federal Assistance: Guaranteed and Insured Loans:
A. Introduction:
1. General Description:
The preceding chapter dealt with one of the major forms of federal
financial assistance, the grant. Another major form is credit
assistance, which includes direct loans and, the subject of this
chapter, guaranteed and insured loans. In essence, a guaranteed loan
is a loan or other advance of credit made to a borrower by a
participating lending institution, where the United States government,
acting through the particular federal agency involved, "guarantees"
payment of all or part of the principal amount of the loan, and often
interest, in the event the borrower defaults. A statutory definition
along these lines is found in 2 U.S.C. § 661a(3) as follows:
"The term 'loan guarantee' means any guarantee, insurance, or other
pledge with respect to the payment of all or a part of the principal
or interest on any debt obligation of a non-Federal borrower to a non-
Federal lender, but does not include the insurance of deposits,
shares, or other withdrawable accounts in financial institutions."
[Footnote 1]
Depending on the particular program, the borrower may be a private
individual, business entity, educational institution, or a state,
local, or foreign government. In some cases, the guarantee may be
created when a loan originally made by a government agency is
subsequently sold by the agency to a third party with the government's
assurance of repayment.
Strictly speaking, an insured loan and a guaranteed loan are two
different things. An insured loan is one made initially by the federal
agency and then sold, while a guaranteed loan is a loan made by a
private lender. Occasionally, the agency's program legislation may
draw the distinction. For example, the Department of Agriculture has
authority both to make insured loans and to guarantee loans made by
other lenders. Under 7 U.S.C. § 935, the Department can make insured
loans, defined in subsection 935(b) as loans that are "made, held, and
serviced by the Secretary [of Agriculture], and sold and insured by
the Secretary hereunder." Under 7 U.S.C. § 936, the Department can
guarantee loans which are "initially made, held, and serviced by a
legally organized lending agency.[Footnote 2] Another example is the
Department's rural industrialization loan program established by 7
U.S.C. § 1932, again authorizing both insured and guaranteed loans.
For purposes of this chapter, we use the term "guarantee" to refer to
both guaranteed and insured loans unless otherwise indicated.
The objective of this chapter is to illustrate the kinds of issues and
problems that arise in this area and the approaches used in resolving
them. We have for the most part emphasized several of the better-known
guarantee programs. Naturally, the extent to which any given case will
have more general applicability will depend on the agency's organic
legislation, program regulations, and the particular circumstances.
Since program statutes and regulations are subject to change, the
reader should view the discussion as merely illustrative of the
particular issue involved.
The primary purpose of loan guarantees is to induce private lenders to
extend financial assistance to borrowers who otherwise would not be
able to obtain the needed capital on reasonable terms, if at all. Or,
as a congressional subcommittee put it, loan guarantee programs are
designed to redirect capital resources by intervening in the private
market decision process, in order to further objectives deemed by
Congress to be in the national interest.[Footnote 3] These objectives
may be social (veterans' home loan guarantees), economic (small
business programs), or technological (guarantees designed to foster
emerging energy technologies).
When the federal government guarantees a loan, the guarantee is
extended to the original lender supplying the funds, generally either
a private lender or the Federal Financing Bank, described in detail in
section C.1.e of this chapter, as well as to any subsequent assignees
or purchasers of the guaranteed portion of the loan. The subsequent
purchase of a guaranteed loan from the original lender is called the
"secondary market." See, e.g., 51 Comp. Gen. 474 (1972). Secondary
market purchasers are frequently large investment entities such as
mutual funds or pension funds.
Secondary market purchasers are not always waiting in the wings,
checkbooks in hand. Congress has on several occasions taken action to
help create, stimulate, or facilitate secondary markets by
establishing privately owned but federally chartered corporations
known as "government-sponsored enterprises" (GSEs). Since a GSE is a
creature of Congress, the actions it may take are those authorized in
its enabling legislation. 71 Comp. Gen. 49 (1991) (Federal
Agricultural Mortgage Corporation, or "Farmer Mac"). For discussions
from the programmatic perspective, see GAO, Farmer Mac: Greater
Attention to Risk Management, Mission, Public Purpose, and Corporate
Governance Is Needed, GAO-04-827T (Washington, D.C.: June 2, 2004);
Farmer Mac: Some Progress Made, but Greater Attention to Risk
Management, Mission, and Corporate Governance Is Needed, GAO-04-116
(Washington, D.C.: Oct. 16, 2003); and Farmer Mac: Revised Charter
Enhances Secondary Market Activity, but Growth, Depends on Various
Factors, GAO/GGD-99-85 (Washington, D.C.: May 21, 1999).[Footnote 4]
Under a loan guarantee, the risk against which the guarantee is made
is, for the most part, default by the borrower. In some cases,
however, other risks may be covered as well, and a few examples will
be noted later in this chapter.
The Analytical Perspectives volume of the President's budget
submission for fiscal year 2006 provides extensive background on
credit and insurance activities, including loan guarantee programs and
the operations of GSEs.[Footnote 5] At the end of 2004, the face value
of federal loan guarantees totaled over $1.2 trillion.[Footnote 6]
This represents a dramatic expansion of loan guarantees in recent
decades. In 1970, the total face value of outstanding loan guarantees
was less than $2 billion and slightly higher than the outstanding
value of direct loans. While the aggregate face value of direct loans
has remained fairly consistent since 1970, loan guarantees have
increased exponentially.[Footnote 7] The following are some examples
of major loan guarantee and insured loan programs:[Footnote 8]
* In 2004, the Department of Agriculture provided $3.23 billion of
homeownership loan guarantees through its rural housing programs to
34,800 households, of which 30 percent went to very low- and low-
income families.
* In 2004, the Department of Housing and Urban Development's Federal
Housing Administration insured $107 billion in mortgages for almost
900,000 households.
* In 2004, the Department of Veterans Affairs provided $35 billion in
guarantees to assist 270,571 borrowers through its VA housing program
for veterans, active duty military personnel, and certain reservists.
* The fiscal year 2006 budget proposes more than $25 billion in Small
Business Administration loan guarantees for small businesses and
disaster victims.
In the typical loan guarantee program, the lender is charged a fee by
the agency, prescribed in the program legislation. However, no fee is
charged in some programs. For example, 7 U.S.C. § 936 provides that no
fee shall be charged for rural electrification program loan
guarantees. Where a fee is charged, its disposition is governed by (1)
the Federal Credit Reform Act of 1990, discussed later in this
chapter, or (2) where the Credit Reform Act does not apply, the
applicable program legislation, or (3) in the absence of any guidance
in the program legislation, the miscellaneous receipts statute (31
U.S.C. § 3302).
A guarantee may extend to 100 percent of the amount of the underlying
loan, or some lesser percentage as specified in the program
legislation. E.g., 7 U.S.C. § 936 (rural electrification and telephone
service; 100 percent); 42 U.S.C. § 1472(h)(2) (Doug Bereuter single
family housing loan guarantee program; 90 percent); 15 U.S.C. §
636(a)(2)(A) (small business plant acquisition, construction,
conversion, or expansion; 75 or 85 percent, depending on the loan
balance). Unless otherwise provided, a maximum guarantee percentage
applies only to restrict the amount the administering agency is
authorized to guarantee. E.g., B-137514, Nov. 3, 1958 (no objection to
proposal for borrower to "guarantee" portion of loan not covered by
government guarantee by making "irrevocable deposit" financed by
separate loan, thereby providing lender with 100 percent guarantee).
Banks do not loan money without interest, and the typical loan
guarantee therefore covers accrued but unpaid interest as well as
unpaid principal. The program statute may set a maximum acceptable
rate of interest or may authorize the administering agency to do so by
regulation. Assuming there is nothing to the contrary in the enabling
legislation, an agency may, within its discretion, extend its
guarantees to loans with variable interest rates (rates which rise or
fall with changes in prevailing rates) as well as loans with fixed
interest rates. B-184857, June 11, 1976.
Credit assistance legislation frequently vests considerable discretion
in the administering agency. E.g., B-202568, Sept. 11, 1981
(imposition of "no credit elsewhere" eligibility test to meet funding
shortfall within SBA's broad discretion under section 7(b) of the
Small Business Act,15 U.S.C. § 636(b)); B-134628, Jan. 15, 1958 (the
then Civil Aeronautics Board was authorized within its discretion to
make payments to lender immediately upon debtor's default rather than
after completion of foreclosure proceedings).
While GAO will not, at the request of a rejected applicant, review the
exercise of an agency's discretion in rejecting an application for a
loan guarantee, B-178460, June 6, 1973 (nondecision letter), GAO may
address an agency's use of appropriations for particular purposes and
may review an agency's conduct of a program under its general audit
authority. For example, the Emergency Loan Guarantee Act, Pub. L. 92-
70, 85 Stat. 178 (Aug. 9, 1971), 15 U.S.C. §§ 1841-1852, specifically
authorized GAO to audit any borrower applying for a loan guarantee,
but made no mention of auditing the Emergency Loan Guarantee Board
which administered the program. 15 U.S.C. § 1846(b). An issue arose in
connection with the Lockheed Aircraft Corporation assistance program,
carried out under this statute. GAO took the position that it had the
authority to audit the Board's conduct of the program to evaluate
whether the Board and borrower were complying with the statutory
provisions and whether the government's interests were being
adequately protected. This authority derives from GAO's basic audit
statutes, such as 31 U.S.C. §§ 712 and 717, and does not have to be
repeated in every piece of legislation. B-169300, Sept. 6, 1972; B-
169300, Sept. 21, 1971. Occasionally, however, the program legislation
will specifically authorize or require GAO audits. See, e.g.,
Launching Our Communities' Access to Local Television ("LOCAL TV") Act
of 2000, Pub. L. No. 106-553, title X, § 1006, 114 Stat. 2762, 2762A-
138 (Dec. 21, 2000), at 47 U.S.C. § 1105 (requiring annual GAO audits
of loan guarantee operations under that Act).
2. Sources of Guarantee Authority:
The authority to guarantee the repayment of indebtedness must be
derived from some statutory basis. In most cases, this takes the form
of express statutory authorization. Typically, the statute will
authorize the administering agency to establish the terms and
conditions under which the guarantee will be extended, but may also
impose various limitations. An example is section 108 of the Housing
and Community Development Act of 1974, as amended, 42 U.S.C. § 5308,
which authorizes the Secretary of Housing and Urban Development to
issue loan guarantees to support various community and economic
development activities. Subsection 108(a) provides in part:
"The Secretary is authorized, upon such terms and conditions as the
Secretary may prescribe, to guarantee and make commitments to
guarantee, only to such extent or in such amounts as provided in
appropriation Acts, the notes or other obligations issued by eligible
public entities, or by public agencies designated by such eligible
public entities, for the purposes of financing (1) acquisition of real
property or the rehabilitation of real property owned by the eligible
public entity (including such related expenses as the Secretary may
permit by regulation); (2) housing rehabilitation; (3) economic
development activities ...; (4) construction of housing by nonprofit
organizations for homeownership ...; (5) the acquisition,
construction, reconstruction, or installation of public facilities
(except for buildings for the general conduct of government); or (6)
... public works and site or other improvements. A guarantee under
this section may be used to assist a grantee in obtaining financing
only if the grantee has made efforts to obtain such financing without
the use of such guarantee and cannot complete such financing
consistent with the timely execution of the program plans without such
guarantee. Notes or other obligations guaranteed pursuant to this
section shall be in such form and denominations, have such maturities,
and be subject to such conditions as may be prescribed by regulations
issued by the Secretary."
Subsection 108(a) and the remaining provisions of that section go on
to specify additional authorizations, limitations, terms, and
conditions applicable to the loan guarantees.
Program authority, as in the example cited, is most commonly in the
form of permanent legislation authorizing an ongoing program. In
addition, guarantee programs are occasionally enacted to deal with a
specific crisis of limited duration. One example of this latter type
is the Chrysler Corporation Loan Guarantee Act of 1979.[Footnote 9] A
more recent example is the Air Transportation Safety and System
Stabilization Act,[Footnote 10] which, among other things, authorized
loan guarantees for airlines in the wake of the terrorist attacks of
September 11, 2001. Guarantee programs may also be enacted as part of
appropriation acts. An example is discussed in GAO's report Israel:
U.S. Loan Guaranties for Immigrant Absorption, GAO/NSIAD-92-119
(Washington, D.C.: Feb. 12, 1992).
It is also possible for loan guarantee authority to be derived by
necessary implication from a statutory program of financial
assistance, that is, under program legislation which does not
explicitly use the term "guarantee" or "insure." For example, the
current version of section 7(a) of the Small Business Act, 15 U.S.C. §
636(a), authorizes the Small Business Administration (SBA) to make
loans to small business concerns as follows:
"The Administration is empowered to the extent and in such amounts as
provided in advance in appropriation Acts to make loans for plant
acquisition, construction, conversion, or expansion, including the
acquisition of land, material, supplies, equipment, and working
capital, and to make loans to any qualified small business concern ...
for purposes of this chapter. Such financings may be made either
directly or in cooperation with banks or other financial institutions
through agreements to participate on an immediate or deferred
(guaranteed) basis."
The statute then goes on to list a number of limitations. A 1981
amendment[Footnote 11] added the word "guaranteed." Even before the
amendment, GAO had concluded that a loan guarantee program was within
the SBA's discretion under section 7. 51 Comp. Gen. 474 (1972). An
earlier decision, B-140673, Oct. 12, 1959, had upheld a "deferred
participation" program under section 7(a), under which SBA would
purchase the agreed portion of the deferred participation loan
immediately upon demand and reserve the right to recover from the
lender if SBA subsequently determined that the lender had not
substantially complied with the participation agreement. In view of
the broad discretion granted SBA under the statute, SBA was not
required to make the "substantial compliance" determination before
making payment to the lender.[Footnote 12]
The evolution of SBA's authority to conduct its disaster loan program,
15 U.S.C. § 636(b), followed a similar pattern. In B-121589, Oct. 19,
1954, the Comptroller General tentatively approved a deferred
participation program, strongly urging that the statute be amended to
include "immediate or deferred participation" language patterned after
the pre-1981 version of section 636(a). This was done and, based on 51
Comp. Gen. 474, was found sufficient to authorize SBA to guarantee
disaster loans to eligible borrowers by participating lending
institutions. 58 Comp. Gen. 138, 145 (1978). To remove any doubt, the
same amendment which added the word "guaranteed" to section 636(a)
added it as well to section 636(b).[Footnote 13]
In connection with credit assistance under the Small Business
Investment Act of 1958,[Footnote 14] GAO recognized the SBA's implied
authority to establish a program in which SBA would guarantee loans
made by private lending institutions to small business investment
companies, even though the statute authorized only a direct loan
program. 42 Comp. Gen. 146 (1962). The decision pointed out that the
legislative history of a 1961 amendment to the act clearly
demonstrated that Congress intended to continue the nonstatutory
"standby" guaranteed loan program that had existed for several years,
and concluded therefore that the absence of specific language
authorizing the program was due to the apparent belief by both
Congress and SBA that such language was unnecessary and did not
reflect an intent to deny SBA the authority. See also B-149685, Mar.
20, 1968. The guarantee program is now expressly authorized in 15
U.S.C. § 683.
Authority by necessary implication cannot be derived solely from the
purpose clause of a statute, which sets out the congressional
objectives underlying the legislation, but must be supported by the
operative provisions of the statute. 71 Comp. Gen. 49 (1991).
Regardless of whether a loan guarantee program is established under an
express statutory provision or by necessary implication, the basic
responsibility for administering the program clearly rests with the
agency involved. This includes the authority to determine whether or
not to extend a guarantee in a particular case, and the manner in
which the guarantees are to be handled. The agency has considerable
discretion, subject of course to any applicable statutory requirements
or restrictions.
B. Budgetary and Obligational Treatment:
When a federal agency guarantees a loan, there is no immediate cash
outlay. The need for an actual cash disbursement, apart from
administrative expenses, does not arise unless and until the borrower
defaults on the loan and the government is called upon to honor the
guarantee. Depending on the terms of the loan, this may not happen
until many years after the guarantee is made. It is thus apparent that
loan guarantees require budgetary treatment different from ordinary
government obligations and expenditures. This treatment is prescribed
generally by the Federal Credit Reform Act of 1990 (FCRA). Before
describing the FCRA, it is important to first describe the pre-credit
reform situation because it illustrates the objectives of credit
reform and because FCRA does not cover all programs.
1. Prior to Federal Credit Reform Act:
Prior to credit reform, the authority to guarantee or insure loans
generally was not regarded as budget authority. Indeed, the original
enactment of the Congressional Budget Act of 1974 expressly excluded
loan guarantees from the statutory definition of budget authority.
[Footnote 15] Under this treatment, the extension of a loan guarantee
was an off-budget transaction and was, at the extension stage, largely
not addressed by the budget and appropriations process. If and when
the government had to pay on the guarantee (i.e., upon default), the
administering agency would seek liquidating appropriations, and these
liquidating appropriations counted as budget authority. Of course, by
the time a liquidating appropriation became necessary, the United
States was contractually committed to honor the guarantee, and
Congress had little choice but to appropriate the funds. This is an
example of so-called "backdoor spending." By the time the budget and
appropriations process became involved, there was no meaningful role
for it to play.
When a loan guarantee is committed or issued, it cannot be known with
absolute certainty when or to what extent the government might be
called upon to honor it. Accordingly, and since budget authority was
not provided in advance, the making of a loan guarantee, however
binding on the government the commitment may have been, was treated
only as a contingent liability and did not result in a recordable
obligation for purposes of 31 U.S.C. § 1501(a). A recordable
obligation did not arise until the contingency occurred (default by
the borrower or other event as authorized in the program legislation),
at which time it was recorded against the appropriation or fund
available for liquidation. 65 Comp. Gen. 4 (1985); 60 Comp. Gen. 700,
703 (1981).
Under this approach, the obligation was viewed as "authorized by law"
for purposes of the Antideficiency Act, and there was no violation if
obligations resulting from authorized guarantees exceeded available
budgetary resources. 65 Comp. Gen. 4 (1985); B-226718.2, Aug. 19, 1987.
There was a certain logic to this approach. Many loans are repaid in
whole or in part, with the result that the government is never called
upon to pay under the guarantee, the only disbursements being the
administrative expenses of running the program. To require budget
authority in the full amount being guaranteed would artificially
inflate the budget. The problem was that the pre-credit reform
approach went to the opposite extreme, by reflecting the cost to the
government in the year the guarantee was made as zero. Since there was
no longer any room for discretion by the time liquidating
appropriations became necessary, loan guarantee programs were not
forced to compete with other programs for increasingly scarce
budgetary resources. No one involved in the budget process—Congress,
the Office of Management and Budget, GAO—particularly liked this
system, and reform became inevitable.
At an absolute minimum, GAO strongly encouraged the imposition of
limits, either in the enabling legislation or in appropriation acts,
on the total amount of loans to be guaranteed. E.g., GAO, Legislation
Needed to Establish Specific Loan Guarantee Limits for the Economic
Development Administration, FGMSD-78-62 (Washington, D.C.: Jan. 5,
1979). Ceilings of this type may limit the amount of guarantees that
can be issued in a given fiscal year, or the total amount of
guarantees that can be outstanding at any one time. An example of the
former is discussed in 60 Comp. Gen. 700 (1981).
A device that became common in the 1980s was the granting of loan
guarantee authority only to the extent provided in advance in
appropriation acts. The device was reinforced in 1985 when Congress
(1) added to the Congressional Budget Act a definition of "credit
authority" ("authority to incur direct loan obligations or to incur
primary loan guarantee commitments"), and (2) subjected to a point of
order any bill providing new credit authority unless it also limited
that authority to the extent or amounts provided in appropriation
acts. These provisions are now codified at 2 U.S.C. §§ 622(10) and
651(a)(3), respectively.
While this device provided a measure of congressional control, it
still did not require the advance provision of actual budget
authority. For example, the Chrysler Corporation Loan Guarantee Act,
which predated the 1985 legislation noted above, limited the authority
to guarantee loans to the amounts provided in advance in appropriation
acts. The Comptroller General and the Attorney General both concluded
that this provision did not require advance budget authority, but was
satisfied by an appropriation act provision placing a ceiling on the
total amount of loans that could be guaranteed, that is, on contingent
liability. B-197380, Apr. 10, 1980; Loan Guarantees—Authority of
Chrysler Corporation Loan Guarantee Board to Issue Guarantees, 43 Op.
Att'y Gen. 219, 4A Op. Off. Legal Counsel 12 (1980).
Both opinions also concluded that the appropriation act ceiling
related only to outstanding loan principal, with contingent liability
for loan interest being in addition to the stated amount.
Where loan guarantee authority is limited to amounts provided in
appropriation acts—and we emphasize that we are addressing situations
not governed by the Federal Credit Reform Act—those "amounts," as
noted, are not actual budget authority but ceilings on contingent
liability. Therefore, while exceeding the ceiling may be illegal for
other reasons,[Footnote 16] it does not violate the Antideficiency
Act. 64 Comp. Gen. 282, 288-90 (1985). Analogous to budget authority,
loan guarantee authority must generally be used (i.e., commitments
made) in the fiscal year or years for which it is provided unless the
appropriation act provides otherwise. B-212857, Nov. 8, 1983. Also,
where advance authority in appropriation acts is statutorily required
and Congress does not provide it, the agency's authority to carry out
the program may be effectively suspended for the fiscal year in
question. B-230951, Mar. 10, 1989.[Footnote 17]
Congress may set a minimum program level as well as a ceiling. Again,
for programs not governed by the Credit Reform Act, failure to achieve
the minimum commitment level would not constitute an impoundment since
the commitment amount is not budget authority. B-195437.2, Sept. 17,
1986. However, under a loan insurance program where the loan itself is
made by the agency, failure to achieve a mandated minimum program
level would be an impoundment unless the failure results from
programmatic factors. Id.
2. Federal Credit Reform Act of 1990:
Consideration of various reform proposals during the 1980s centered on
the recognition that there is a "subsidy element" to a government loan
guarantee program. If all loans were repaid, there would be no cost to
the government apart from administrative expenses. Were this the case,
however, there would probably have been no need for the program to
begin with. Since the objective of a loan guarantee program is to
enhance the availability of credit which the private lending market
alone cannot or will not provide, it is reasonable to expect that
there will be defaults, most likely at a higher rate than the private
lending market experiences. It became apparent that credit reform had
to do two things. First, it had to devise a meaningful way of
measuring the true cost to the government; and second, it had to bring
those costs fully within the budget and appropriations process. See,
e.g., GAO, Budget Issues: Budgetary Treatment of Federal Credit
Programs, GAO/AFMD-89-42 (Washington, D.C.: Apr. 10, 1989).
The culmination of these reform efforts was the Federal Credit Reform
Act of 1990 (FCRA), enacted by section 13201(a) of the Omnibus Budget
Reconciliation Act of 1990, Pub. L. No. 101-508, 104 Stat. 1388, 1388-
609 (Nov. 5, 1990), and codified as an amendment to title V of the
Congressional Budget Act at 2 U.S.C. §§ 661-661f. The approach of the
FCRA is to require budget authority to cover the subsidy portion of a
loan guarantee program, with the nonsubsidy portion (i.e., the portion
expected to be repaid) financed through borrowings from the Treasury.
See 2 U.S.C. § 661c(b). The Office of Management and Budget has issued
detailed instructions for implementing the FCRA. These instructions
are now contained in OMB Circular No. A-11, Preparation, Submission,
and Execution of the Budget, part V, "Federal Credit" (June 21, 2005),
and OMB Circular No. A-129, Policies for Federal Credit Programs and
Non-Tax Receivables (November 2000). The FCRA applies to loan
guarantee commitments made on or after October 1, 1991, with
exceptions to be noted later. See 2 U.S.C. §§ 661c(a) and (b). For
accounting guidance concerning the FCRA, see Federal Accounting
Standards Advisory Board, Accounting for Direct Loans and Loan
Guarantees, SFFAS No. 2 (Aug. 23, 1993), as amended by SFFAS No. 18
(May 2000).[Footnote 18]
a. Post-1991 Guarantee Commitments:
One of the major purposes of the Federal Credit Reform Act of 1990
(FCRA) is to "measure more accurately the costs [i.e., the subsidy
element, in essence] of Federal credit programs." 2 U.S.C. § 661(1).
Before the budgetary and appropriations aspects of FCRA can come into
play, the administering agency, working with the Office of Management
and Budget (OMB), must determine the cost of its programs. The law
defines "cost" as the "estimated long-term cost to the Government ...
calculated on a net present value basis, excluding administrative
costs and any incidental effects on governmental receipts or outlays."
Id. § 661a(5)(A). More specifically for purposes of this chapter, the
cost of a loan guarantee is the:
"net present value, at the time when the guaranteed loan is disbursed,
of the following estimated cash flows:
"(i) payments by the Government to cover defaults and delinquencies,
interest subsidies, or other payments; and;
"(ii) payments to the Government including origination and other fees,
penalties and recoveries;
"including the effects of changes in loan terms resulting from the
exercise by the guaranteed lender of an option included in the loan
guarantee contract, or by the borrower of an option included in the
guaranteed loan contract."
Id. § 661a(5)(C).
Historical experience is obviously a relevant factor in determining
cost. Risk assessment is also very important, and OMB requires
agencies to develop risk categories for their credit programs. OMB
Circular No. A-11, Preparation, Submission, and Execution of the
Budget, pt. 5, "Federal Credit," § 185.5(a) (June 21, 2005). Agencies
should not blindly rely on historical experience when the risk factor
has changed. See GAO, SBA Disaster Loan Program: Accounting Anomalies
Resolved but Additional Steps Would Improve Long-Term Reliability of
Cost Estimates, GAO-05409 (Washington, D.C.: Apr. 14, 2005); Loan
Guarantees: Export Credit Guarantee Programs' Long-Run Costs Are High,
GAO/NSIAD-91-180 (Washington, D.C.: Apr. 19, 1991), at 3. For example,
it is not unreasonable to expect the default rate under a guaranteed
student loan program to increase during a recession, resulting in a
higher cost. Established secondary market experience is also relevant
in assessing risk. NSIAD-91-180, at 15-16.
Developing reliable subsidy cost estimates for purposes of FCRA has
proven to be a challenging undertaking. In the 15 years since
enactment of FCRA, GAO has issued numerous reports critiquing agency
practices in this regard. The following are just a few of many
examples: GAO-05-409, above; Credit Reform: Improving Rural
Development's Credit Program Cost Estimates, GAO/AIMD-00-286R
(Washington, D.C.: Aug. 22, 2000); Credit Reform: HUD's Fiscal Year
2000 Credit Subsidy Budget Estimates Were Reasonable, But Could Have
Been Improved, GAO/AIMD-00-60R (Washington, D.C.: Jan. 14, 2000);
Credit Reform: Key Credit Agencies Had Difficulty Making Reasonable
Loan Program Cost Estimates, GAO/AIMD-99-31 (Washington, D.C.: Jan.
29, 1999); and Credit Reform: Greater Effort Needed to Overcome
Persistent Cost Estimation Problems, GAO/AIMD-98-14 (Washington, D.C.:
Mar. 30, 1998).
While dealing primarily with one direct loan program, a recent report
contains a useful general overview of the analytic requirements and
methodologies for developing FCRA cost estimates, as well as a
glossary of relevant terms: GAO, Department of Education: Key Aspects
of the Federal Direct Loan Program's Cost Estimates, GAO-01-197
(Washington, D.C.: Jan. 12, 2001), at 48-53 (Appendix I: Estimating
Credit Program Costs) and 60-62 (Glossary).
The second major purpose of FCRA is to "place the cost of credit
programs on a budgetary basis equivalent to other Federal spending." 2
U.S.C. § 661(2). To accomplish this, 2 U.S.C. § 661c(b), perhaps the
key provision of FCRA, provides:
"Notwithstanding any other provision of law, ... new loan guarantee
commitments may be made for fiscal year 1992 and thereafter only to
the extent that:
"(1) new budget authority to cover their costs is provided in advance
in an appropriations Act;
"(2) a limitation on the use of funds otherwise available for the cost
of a ... loan guarantee program has been provided in advance in an
appropriations Act; or
"(3) authority is otherwise provided in appropriation Acts."
Thus, unless Congress specifically provides otherwise, loan guarantees
may be made only if budget authority to cover their cost has been
provided in advance. The cost of a loan guarantee is regarded as new
budget authority for the fiscal year "in which definite authority
becomes available or indefinite authority is used." 2 U.S.C. §
661c(d)(1).
To implement these concepts, the law defines two accounts for credit
programs, a "program account" and a "financing account." The program
account is the budget account into which appropriations of budget
authority are made. The financing account is a revolving, nonbudget
account from which the guarantees are actually administered. It
receives cost payments from the program account and includes all other
cash flows resulting from the guarantee commitment. 2 U.S.C. §§
661a(6) and (7). Administrative expenses are required to be shown as a
separate and distinct line item within the program account. Id. §
661c(g).
Provisions contained in the Consolidated Appropriations Act, 2005,
Pub. L. No. 108-447, 118 Stat. 2809 (Dec. 8, 2004),[Footnote 19]
illustrate how Congress makes the appropriations contemplated by 2
U.S.C. § 661c. Typically, the provisions include a specific amount for
the loan subsidy costs and state that such costs "shall be as defined
in section 502 of the Congressional Budget Act," that is, 2 U.S.C. §
661a(5)(A), quoted previously. The provisions also include a separate
amount for administrative expense, as required by 2 U.S.C. § 661c(g).
[Footnote 20] Finally, the provisions frequently include a limit on
the aggregate principal amount of loan guarantees. See, for example,
the following provision:
"Minority Business Resource Center Program"
"For the cost of guaranteed loans, $500,000, as authorized by 49
U.S.C. 332: Provided, That such costs, including the cost of modifying
such loans, shall be as defined in section 502 of the Congressional
Budget Act of 1974:
Provided further, That these funds are available to subsidize total
loan principal, any part of which is to be guaranteed, not to exceed
$18,367,000. In addition, for administrative expenses to carry out the
guaranteed loan program, $400,000."
118 Stat. 3200. Other examples of provisions taking this form appear
at 118 Stat. 3305 (Community Development Loan Guarantees Program
Account) and 118 Stat. 3309-10 (Federal Housing Administration's
General and Special Risk Program Account).
Frequently, the appropriation provisions include both loan guarantee
programs and related direct loan programs, which are also subject to
the FCRA. Some of these provisions impose separate limits for direct
loans and loan guarantees. See, e.g., Agricultural Credit Insurance
Fund Program Account (118 Stat. 2822); Rural Housing Insurance Fund
Program Account (118 Stat. 2828); Small Business Administration's
Business Loans Program Account (118 Stat. 2911). Other provisions
combine the direct and guaranteed loan programs, and occasionally
other programs such as grants, under one overall subsidy cost cap. For
example, the Subsidy Appropriation for Export and Investment
Assistance by the Export-Import Bank provides in part:
"For the cost of direct loans, loan guarantees, insurance, and tied-
aid grants as authorized by section 10 of the Export-Import Bank Act
of 1945, as amended, $59,800,000, to remain available until September
30, 2008: Provided, That such costs, including the cost of modifying
such loans, shall be as defined in section 502 of the Congressional
Budget Act of 1974 ..."
118 Stat. 2968. In 72 Comp. Gen. 347, 349 (1993), GAO quoted from the
legislative history of a predecessor version of this appropriation
language to the effect that this language was intended to give the
Bank "the flexibility to determine, in response to demand, the
appropriate mix of direct loans, guaranteed loans, tied-in grants, and
mixed credits and insurance." Other examples of such flexible
provisions can be found with respect to the Renewable Energy Program
(118 Stat. 2831) and the Development Credit Authority (118 Stat.
2974). In addition to allowing agencies to determine the mix of direct
and guaranteed loans, these provisions grant additional flexibility
since they do not separately cap the overall principal amounts of
direct or guaranteed loans. Thus, agencies retain discretion to
determine the total principal amounts assuming, of course, that the
total amounts would not carry estimated subsidy costs exceeding the
budget authority provided pursuant to section 502 of the Congressional
Budget Act.
For loan guarantee programs, the President's annual budget is to
reflect the cost of the program in accordance with 2 U.S.C. § 661a(5)
and the planned level of new guarantee commitments. 2 U.S.C. §
661c(a). Congress then makes an appropriation to cover these costs and
administrative expenses to the program account.
The appropriation of costs "shall constitute an obligation of the
credit program account to pay to the financing account." Id. §
661c(d)(1). When a loan for which a guarantee commitment has been made
is disbursed by the lender, the cost of the guarantee is obligated
against the program account and transferred into the financing
account. Id. § 661c(d)(2). OMB Circular No. A-11, at §§ 185.9-185.31,
contains detailed budget formulation, reporting, and execution
instructions for federal credit programs, including loan guarantees.
For example, like other forms of budget authority, credit program
accounts and financing accounts are subject to apportionment unless
exempted by statute or by OMB. Id. § 185.14.
The law recognizes that estimating costs is not an exact science and
that cost estimates are subject to change over time. Accordingly,
costs generally are to be reestimated annually as long as the loans
are outstanding. OMB Cir. No. A-11, §§ 185.3(y), 185.6. See GAO, SBA
Disaster Loan Program: Accounting Anomalies Resolved but Additional
Steps Would Improve Long-Term Reliability of Cost Estimates, GAO-05-
409 (Washington, D.C.: Apr. 14, 2005), for a description of this
process and issues related to the calculation of interest rates. If a
reestimation results in an increase to the cost estimate, the law
provides permanent indefinite budget authority for the program
account. 2 U.S.C. § 661c(f). The agency requests an apportionment of
this indefinite authority from OMB, and then records an obligation
against the program account and pays the funds into the financing
account. OMB Cir. No. A-11, § 185.17.
The law also provides for the treatment of "modifications." For
purposes of FCRA, a modification is defined as follows:
"The term 'modification' means any Government action that alters the
estimated cost of an outstanding direct loan (or direct loan
obligation) or an outstanding loan guarantee (or loan guarantee
commitment) from the current estimate of cash flows. This includes the
sale of loan assets, with or without recourse, and the purchase of
guaranteed loans. This also includes any action resulting from new
legislation, or from the exercise of administrative discretion under
existing law, that directly or indirectly alters the estimated cost of
outstanding direct loans (or direct loan obligations) or loan
guarantees (or loan guarantee commitments) such as a change in
collection procedures."
2 U.S.C. § 661a(9). See also OMB Cir. No. A-11, § 185.2.
The law prohibits the modification of a loan guarantee commitment "in
a manner that increases its costs unless budget authority for the
additional cost has been provided in advance in an appropriations
Act." 2 U.S.C. § 661c(e). Modifications include such things as
forgiveness, forbearance, reductions in interest rate, prepayments
without penalty, and extensions of maturity, except where permitted
under an existing contract. OMB Cir. No. A-11, § 185.3(r). They also
include the sale of loan assets and actions resulting from new
legislation, such as a statutory restriction on debt collection. Id.
As with reestimates, at the time a modification is made, the agency
records an obligation of the estimated cost increase against the
program account and pays the amount into the financing account.
Id. § 185.7.
If an agency's original cost estimates, reestimates, and modification
estimates have been accurate, the balances of financing accounts for
loan guarantees should always be sufficient to make any required
payments. However, if a balance is not sufficient, the "Secretary of
the Treasury shall ... lend to, or pay to the financing accounts such
amounts as may be appropriate." 2 U.S.C. § 661d(c). The Secretary is
also authorized to borrow or receive amounts from the financing
accounts. Id. All of these transactions between the Treasury and
financing accounts are subject to the apportionment requirements of
the Antideficiency Act. Id.
Under the FCRA structure as outlined above, there are two separate
sets of "obligations"-—obligations against the program account when
budget authority is transferred to the financing account, and
obligations against the financing account when claims are made for
payment under a guarantee.
OMB Circular No. A-11, § 145.3, identifies five actions specific to
credit programs that will result in Antideficiency Act violations:
* Overobligation or overexpenditure of the amounts appropriated or
apportioned for subsidy costs. This includes a modification resulting
in such an overobligation or overexpenditure.
* Overobligation or overexpenditure of the credit level supported by
the enacted subsidy cost appropriation.
* Overobligation or overexpenditure of the amount appropriated for
administrative expenses.
* Obligation or expenditure of the expired unobligated balance of the
cost appropriation, except to correct mathematical or data input
errors in calculating subsidy amounts. However, error correction will
be considered a violation if it exceeds the amount of the expired
unobligated balance.
* Overobligation or overexpenditure of the apportioned borrowing
authority in a financing account.
Finally, the law emphasizes that the provisions of the FCRA are not to
be construed as changing or overriding the administering agency's
authority to determine the terms and conditions of eligibility for, or
amount of, a loan or loan guarantee. 2 U.S.C. § 661d(g).
As a result of FCRA, guarantee programs are no longer unrestricted.
Even if the applicable appropriation act does not explicitly set a
maximum program level, the program level that can be supported by the
enacted cost appropriation, reinforced by the Antideficiency Act,
constitutes an effective ceiling. Programs not governed by FCRA may
have their own ceilings. Although a loan or guarantee may not exceed a
statutory ceiling, it may nevertheless be possible to extend
assistance if the borrower qualifies under another program. For
example, in 35 Comp. Gen. 219 (1955), the Small Business
Administration could not make a disaster loan to a small business
concern which had suffered damage in a flood because SBA had already
used up the applicable ceiling on disaster loans. However, it could
make a business loan to the same borrower if the transaction otherwise
met the criteria under SBA's business loan program.
In addition to providing a new system for setting loan guarantee
program levels, the FCRA also affected other statutory provisions
whose application is tied to such program levels. The decision in 72
Comp. Gen. 347 (1993) provides an example. That decision concerned a
statutory provision, 12 U.S.C. § 635(b)(1)(E)(v), requiring the Export-
Import Bank to "make available, from the aggregate loan, guarantee,
and insurance authority available to it, an amount to finance exports
directly by small business concerns ... which shall be not less than"
a specified percentage of "such authority for each fiscal year." At
the time of the decision the percentage was 10 percent; it is now 20
percent. Prior to enactment of the FCRA, Congress had included in
appropriation acts a total principal amount for annual loans and
guarantees and the Bank used that figure to determine the amount to
reserve for small business concerns under the statute. However, in
implementing FCRA for this program, Congress decided to include only
an annual amount for the program's subsidy cost and not to attach an
overall limit to the principal amount of loans. Under these
circumstances, GAO agreed with the Bank's General Counsel that the
Bank could develop an estimate of the total loan amounts for a given
year starting from the subsidy cost figure in order to apply the small
business reserve:
"Although it is only an extrapolation from cost, the Bank's proposal
to estimate the total projected authorizations for the year based upon
the amount of subsidy appropriated appears to represent a reasonable
starting point. As the General Counsel points out, projections based
on the estimated cost of loan, guarantee and insurance commitments
under credit reform do not directly yield a figure for the Bank's
available aggregate loan, guarantee, and insurance authority.
Furthermore, we have no objection to the Bank, in addition to
estimating total authorizations for the ensuing fiscal year starting
with the amount of subsidy appropriated, using such other reasonable
factors ... as are consistent with the Bank's statutory objectives and
authority."
72 Comp. Gen. at 349-50 (footnote omitted). The decision went on to
hold that the Bank could not divert any of the small business reserve
to other purposes if it appeared that small businesses were unlikely
to use the full reserve for a given fiscal year Id. at 350-51.
b. Pre-1992 Commitments:
The treatment described above applies to loan guarantee commitments
made on or after October 1,1991. Commitments made prior to fiscal year
1992 were made under the rules summarized in section B.1 of this
chapter. Since pre-1992 guarantees were not subject to any requirement
to determine subsidy costs or to obtain advance appropriations of
budget authority, they required different treatment and were addressed
in separate provisions of the Federal Credit Reform Act of 1990 (FCRA).
Three provisions, which remain in the FCRA, are particularly relevant
to pre-1992 commitments. First, the law establishes "liquidating
accounts," defined as budget accounts which include all cash flows to
and from the government resulting from pre-1992 commitments. 2 U.S.C.
§ 661a(8). Second, all collections resulting from pre-1992 guarantee
commitments are to be credited to the liquidating account and are
available to liquidate obligations to the same extent they were under
the applicable program legislation prior to enactment of FCRA. Id. §
661f(b). At least once a year, unobligated balances in the liquidating
account which are in excess of current needs are to be transferred to
the general fund of the Treasury. Id.
Third, 2 U.S.C. § 661d(d)(1) specifies the types of payments resulting
from pre-1992 commitments that can be made from liquidating accounts.
Paragraph (3) of subsection 661d(d) provides:
"If funds in liquidating accounts are insufficient to satisfy
obligations and commitments of such accounts, there is hereby provided
permanent, indefinite authority to make any payments required to be
made on such obligations and commitments."
Thus, for pre-1992 guarantees which are liquidated in accordance with
the terms of the original commitment, payment will still be made from
liquidating appropriations. The main change under FCRA is the
provision of these liquidating appropriations on a permanent,
indefinite basis.
A "modification" to a pre-1992 loan guarantee—the term having the same
meaning as described in section B.2.a of this chapter for post-1991
guarantees—is treated differently. See OMB Circular No. A-11,
Preparation, Submission, and Execution of the Budget, pt. 5, "Federal
Credit," § 185.7(c) (June 21, 2005).
c. Entitlement Programs:
A partial exemption from the Federal Credit Reform Act of 1990 (FCRA)
is found in 2 U.S.C. § 661c(c), which provides that the requirement
for the advance appropriation of budget authority to cover estimated
costs does not apply to (1) a loan guarantee program which constitutes
an entitlement, or (2) programs of the Commodity Credit Corporation
existing on FCREs date of enactment (November 5, 1990). An entitlement
program is one in which the provision of assistance is mandatory with
respect to borrowers and lenders who meet applicable statutory and
regulatory eligibility requirements. The statute gives two examples—
the guaranteed student loan program and the veterans' home loan
guarantee program. Since the exemption is from the appropriation
requirement of 2 U.S.C. § 661c(b) and not the entire act, other
provisions of FCRA and OMB Circular No. A-11 presumably apply to the
extent not inconsistent with the exemption.
The pre-FCRA rules summarized in section B.1 of this chapter form the
starting point with respect to obligational treatment and the
application of the Antideficiency Act. A 1985 decision, 65 Comp. Gen.
4, reiterated these rules in the context of the Guaranteed Student
Loan Program. GAO advised the Department of Education that (1) a
guarantee itself is only a contingent liability and is not recordable
as an obligation; (2) an obligation must be recorded upon occurrence
of one of the contingencies specified in the program legislation which
will require the government to honor the guarantee (in this case, loan
default or the death, disability, or bankruptcy of the borrower); and
(3) the Antideficiency Act does not require that sufficient budget
authority be available at the time the obligation is recorded because,
by virtue of the requirements of the program legislation, incurring
the obligation is "authorized by law" for Antideficiency Act purposes.
For fiscal year 2005, Congress appropriated to the program account for
the veterans' home loan program, for costs as defined in FCRA, "such
sums as may be necessary to carry out the program," together with a
definite (specific dollar amount) appropriation for administrative
expenses.[Footnote 21]
d. Certain Insurance Programs:
Another provision of the Federal Credit Reform Act of 1990 (FCRA), 2
U.S.C. § 661e(a)(1), exempts from the entire act:
"the credit or insurance activities of the Federal Deposit Insurance
Corporation, National Credit Union Administration, Resolution Trust
Corporation, Pension Benefit Guaranty Corporation, National Flood
Insurance, National Insurance Development Fund, Crop Insurance, or
Tennessee Valley Authority."
Thus, to the extent the rules discussed in section B.1 of this chapter
would apply to any of the programs conducted by these entities to
begin with, they continue to apply unaffected by FCRA.
C. Extension of Guarantees:
1. Coverage of Lenders (Initial and Subsequent):
a. Eligibility of Lender/Debt Instrument:
Program legislation may prescribe eligibility criteria for lending
institutions, or may otherwise limit the types of lending institutions
to which guarantees may be extended, either as the initial lender or
as a subsequent transferee, or may address the manner in which the
debt instrument covered by the guarantee may be treated. The safest
generalization in this area, and the common strain throughout the
cases, is that any proposed action must be consistent with the terms
and intent of the agency's statutory authority.
For example, in B-194153, Sept. 6, 1979, GAO considered a proposed
pilot program in which the Economic Development Administration (EDA),
an agency within the Department of Commerce, would guarantee loans
made to private borrowers by participating lending institutions, with
the guaranteed portion of the loan to be subsequently assigned to the
city of Chicago and financed through the issuance of bonds. The
statutory basis for the proposal, since repealed, authorized the
Secretary of Commerce to guarantee up to 90 percent of the outstanding
balance of loans for certain specified purposes "made to private
borrowers by private lending institutions." GAO concluded that
allowing the guarantee to be assigned to an entity that was neither
private nor a lending institution and could not have qualified for a
guarantee initially, would exceed EDA's statutory authority since EDA
would be doing something indirectly-—guaranteeing a loan by a
nonprivate lender—-that the statute would not permit it to do directly.
GAO revisited the issue a few years later and reaffirmed the
ineligibility of public lenders to participate as secondary market
purchasers under the "private lending institution" requirement. Since
a secondary market purchaser effectively becomes the lender, it makes
no difference whether sale to the public lender is contemplated from
the loan's inception or merely occurs in the ordinary course of
secondary market operations. 61 Comp. Gen. 517 (1982).
Another issue in B-194153 was whether EDA could legally allow a
guaranteed loan to be evidenced by two notes, one to be fully
guaranteed and the second with no guarantee. The Comptroller General
found the proposed arrangement within EDA's administrative discretion
under the statute since the two-note arrangement would still conform
to the statutory requirement that no more than 90 percent of a loan be
guaranteed and furthermore was apparently intended to effectuate the
basic legislative purpose. The decision pointed out, however, that
since the two notes represented one loan, their substantive terms such
as maturity dates and interest rates must be the same, and the two-
note mechanism must not increase the government's potential liability.
This portion of the decision was later modified in 60 Comp. Gen. 464
(1981), to the extent that GAO approved use of a "split interest rate"
in which the interest on the EDA-guaranteed note was lower than the
interest rate on the nonguaranteed note. The split-interest scheme was
consistent with programs by other agencies under similar legislation
and would be more favorable to the government.
A related type of question arose under the now defunct New Community
Development Program authorized by the Urban Growth and New Community
Development Act of 1970.[Footnote 22] The legislation authorized
various forms of financial assistance to stimulate the development of
new communities, including the guarantee of obligations of private new
community developers and state development agencies. A question arose
as to whether the Department of Housing and Urban Development was
authorized or required to guarantee the indebtedness of a private
developer to contractors and subcontractors who had supplied goods and
services to the developer. Finding that the intent of the program
legislation was that the Department guarantee only obligations issued
to private investors, the Comptroller General concluded that the
Department was neither required nor authorized to issue guarantees
that would run to a developer's contractors and subcontractors. B-
170971, Aug. 22, 1975; B-170971, July 22, 1975.
b. Substitution of Lender:
As a general proposition, substitution of lenders is permissible as
long as it is not prohibited by the program legislation or regulations
and the "replacement lender" meets any applicable eligibility
requirements.
In 60 Comp. Gen. 700 (1981), GAO considered the effect of a change in
lenders in the rural development loan guarantee program administered
at that time by the then Farmers Home Administration (FmHA).[Footnote
23] The program operated under an annual ceiling, and the specific
question was whether a guarantee could continue to be charged against
the ceiling for the fiscal year in which it was initially approved,
when a change in lenders took place in a subsequent fiscal year. As to
the programmatic significance of the change, the decision stated:
"The basic purpose of the FmHA rural development loan guarantee
program is to provide assistance to eligible borrowers to enable them
to accomplish one or more of the statutory objectives. In other words,
although the guarantee is extended to the lender, it is clear that the
purpose of doing so is not to provide a Federal benefit to the lending
institution but to induce the lender to make the loan to the borrower.
In this sense, the lender is just a conduit or funding mechanism
through which FmHA provides assistance to an eligible borrower so that
the statutory objectives can be realized. Thus, the particular lender
involved is of relatively little consequence."
Id. at 708-09. Therefore, the decision held that where a guarantee is
charged against the ceiling for a particular fiscal year, it can
continue to be charged against the same ceiling notwithstanding a
substitution of lenders in a subsequent fiscal year, provided that the
other relevant terms of the agreement (borrower, loan purpose, and
loan terms) remain substantially the same. Id. at 709. The statement
that the particular lender is of little consequence presumes, as was
in fact the case, that the program legislation does not contain any
specific eligibility requirements for lenders. Any such requirements
(for example, the "private lender" requirement in the Economic
Development Administration cases discussed in section C.1.a of this
chapter) would of course have to be followed.
c. Existence of Valid Guarantee:
In order for a loan guarantee commitment to be valid and hence binding
on the government, the government official making the commitment must
be authorized to do so, and the guarantee must be made to an eligible
lender extending credit to an eligible borrower for an authorized
purpose. Questions as to whether a valid guarantee was ever created
often do not arise until the lender calls upon the government to pay
under the guarantee. The answer depends on the program statute and
regulations, the terms of the guarantee instrument, and the conduct of
the parties.
In 54 Comp. Gen. 219 (1974), GAO considered the authority of the Small
Business Administration (SBA) to reimburse three different lenders. In
each case, the borrower had applied to SBA for financial assistance,
the lender (at the request or with the approval of an SBA official)
had provided interim funds to the borrower, but, for various reasons,
the financial assistance was ultimately not extended.
In the first case, an SBA official who was authorized to approve loan
guarantees advised the bank in writing that the guarantee had been
approved. SBA subsequently issued a formal loan authorization, but
later canceled it because the bank did not comply with all of the
terms and conditions of the guarantee agreement, one of which was that
the bank disburse the loan within 3 months. Although the initial
written approval created a valid guarantee, the bank's noncompliance
caused it to lapse. Therefore, SBA was not obligated to purchase the
interim note, that is, to reimburse the bank for the advance.
In the second case, an authorized SBA official had similarly advised
the bank in writing that the guarantee had been approved. Here,
however, SBA subsequently determined that the borrower was not
eligible for the guarantee, and therefore never issued a formal loan
authorization. Since the bank relied on the prior approval and was not
legally required to comply with the conditions of the guarantee
agreement (such as payment of the guarantee fee) until SBA issued the
formal authorization, the bank was entitled to reimbursement for the
interim loan.
In the third case, SBA had formally approved a direct loan to a
borrower and had issued a written loan authorization. Because of its
inability to immediately disburse the funds, SBA requested a private
lender to disburse the funds on an interim basis, with SBA's assurance
of repayment. SBA later refused to disburse the loan funds because the
borrower had disappeared and his business had become defunct. Under
the circumstances, SBA's written commitment to reimburse the lender
did constitute SBA's "guarantee" of any advances the lender made in
reasonable and justified reliance on it. Therefore, even though the
direct loan by SBA was never disbursed, SBA was authorized to
reimburse the lender.
The decision discussed two earlier cases-—B-178250, Aug. 6, 1973, and
B-164162, Sept. 20, 1968—-involving direct rather than guaranteed
loans. GAO had concluded in these cases that, under the specific
circumstances involved, SBA could not reimburse a lender for losses
suffered on interim disbursements made after SBA had authorized loans
to the borrower. In both cases, the claimant bank was unable to
adequately establish that any SBA official had made a promise or
commitment on which the bank could justifiably rely.
Essentially, the primary theory of recovery in all of these cases,
although not specifically identified as such, was estoppel—conduct by
the government sufficient to later preclude it from denying the
existence of a valid guarantee.[Footnote 24] Several similar cases
specifically raised the estoppel theory. For example, the issue in B-
187445, Jan. 27, 1977, was whether SBA was legally obligated for a
$10,000 loss suffered by a bank on a loan made to a small business
contractor under section 8(a) of the Small Business Act, 15 U.S.C. §
637(a). The bank alleged that the loan was made on the basis of
assurances from an SBA official that the loan would be guaranteed. GAO
found, however, that the loan was not in fact guaranteed since it was
never approved in writing as required by the applicable provision in
the guarantee agreement between SBA and the bank. Also, SBA had no
liability to the bank under an estoppel theory since the bank was
aware that the SBA official involved lacked authority to approve a
loan guarantee or otherwise assure the bank of repayment. Further, the
bank could not demonstrate that it had made the loan primarily in
reliance on the alleged misrepresentations.
In another 1977 case, a bank argued that SBA was liable under an
estoppel theory to reimburse the bank for a loss suffered as a result
of SBA's approval of a direct disaster loan to the borrower. However,
the facts did not support an estoppel since SBA made no
misrepresentations to the bank, and the bank did not make the loan in
reliance on the representations that SBA did make. B-181432, Feb. 4,
1977. A somewhat similar case involving the former Farmers Home
Administration denied the claim of a creditor who alleged that he had
advanced supplies and services to a borrower on the basis of
assurances from a Farmers Home employee that the borrower's obligation
would be guaranteed by the government. Since the regulations then
expressly prohibited employees from guaranteeing repayment of non-
Farmers Home Administration loans, either personally or on behalf of
the government, the creditor was necessarily on notice of the
employee's lack of authority to make such assurances. B-168300,
Dec. 4, 1969; B-168300, Dec. 3, 1969.
Another estoppel case is B-198310, Apr. 23, 1981. SBA had sent a
letter to a borrower confirming approval of a direct handicapped
assistance loan. Allegedly in reliance on this letter, the claimant
bank advanced funds to the borrower. SBA then issued its formal loan
authorization, but canceled it shortly thereafter based on the
borrower's failure to disclose all pertinent information on its loan
application. The bank sought reimbursement on a theory of "promissory
estoppel." The Comptroller General held that SBA was under no
obligation to reimburse the bank for two reasons. First, SBA's letter
had been to the borrower, not to the bank. Thus, SBA had made no
representations to the bank. Second, the bank's reliance on the letter
was not reasonable because the letter contained no mention of the
possibility that the loan might be used to obtain interim financing
nor did the bank attempt to obtain any assurance from SBA that the
borrower would be required to use the proceeds of the SBA loan to
repay the interim loan.
The existence of a valid guarantee also was an issue in 60 Comp. Gen.
700 (1981) in a different context. The then Farmers Home
Administration regulations required written notification to the lender
of the approval or disapproval of a guarantee application. Based on
these regulations, and citing B-187445, Jan. 27, 1977, discussed
above, GAO concluded that oral notification of a loan guarantee
approval was not sufficient to create a valid guarantee for purposes
of charging that guarantee against the annual ceiling. 60 Comp. Gen.
at 709-10.
As the more recent decisions described above indicate, estoppel claims
against the government can rarely succeed. Even those few earlier
cases in which GAO has sanctioned them would have to be reassessed
before being used as precedent in light of the Supreme Court's
decision in Office of Personnel Management v. Richmond, 496 U.S. 414
(1990), which held that estoppel against the government requires, in
addition to the traditional elements such as reasonable and
detrimental reliance, a showing of affirmative misconduct on the part
of government officials.[Footnote 25]
A fairly recent judicial decision involving an SBA loan guarantee,
Frillz, Inc. v. Lader, 104 F.3d 515 (1st Cir.), cert. denied, 522 U.S.
813 (1997), illustrates this point. The SBA approved a loan guarantee
authorization for Frillz that contained a clause requiring receipt by
the lender of "evidence satisfactory to it [the lender] in its sole
discretion" that there had been no unremedied adverse change in
condition subsequent to authorization that would warrant not
disbursing the loan. Frillz suffered temporary business losses between
the time of the authorization and the scheduled loan disbursement. The
lender determined that the problem had been sufficiently resolved and
was prepared to go ahead with the loan. However, SBA disagreed and
declined to approve disbursement of the loan. Frillz then sued SBA for
breach of contract on the basis that the guarantee authorization gave
the lender—not SBA—sole discretion to determine whether there was an
unremedied adverse change. The court ruled in favor of SBA, holding
that, under the applicable program regulations, the SBA official who
signed the guarantee authorization could not delegate the
determination regarding unremedied changes to the lender; thus, the
clause was ineffective. Frillz, Inc., 104 F.3d at 517-18.[Footnote 26]
The court also rejected Frillz's estoppel argument:
"A party seeking to invoke equitable estoppel against the federal
government at a minimum must have reasonably relied on some
affirmative misconduct attributable to the sovereign. Passing the
point that even such reliance may be insufficient, there is absolutely
no evidence of affirmative misconduct by the SBA which might arguably
be sufficient to support an estoppel claim against the government in
this case."
Id. at 518 (citations and internal quotation marks omitted). Wells
Fargo Bank N.A. v. United States, 88 F.3d 1012 (Fed. Cir. 1996), cert.
denied, 520 U.S. 1116 (1997) is also relevant to the issue of whether
a valid guarantee exists. While not an estoppel case, Wells Fargo
involves facts somewhat similar to those in the Frillz case, discussed
above. In Wells Fargo, officials of the then Farmers Home
Administration (FmHA) issued a "conditional commitment" to guarantee a
loan for construction of an ethanol plant under 7 U.S.C. § 1932 and
another statute designed to promote biomass energy projects.[Footnote
27] Among the conditions was a requirement that before the guarantee
was issued:
"the Lender certify that it has no knowledge of any adverse change,
financial or otherwise, in the Borrower, his business, or any parent,
subsidiaries, or affiliates since it requested a Loan Note Guarantee."
Wells Fargo, 88 F.3d at 1020. While Wells Fargo provided this
certification, FmHA determined that adverse changes had occurred and
refused to issue the guarantee. The court ruled in favor of Wells
Fargo in its breach of contract suit, holding that the conditional
commitment constituted a unilateral contract on the part of the
government contingent upon satisfaction of its conditions, and that
all of the conditions were, in fact, satisfied. The court rejected
several arguments advanced by FmHA to the effect that the conditional
commitment was not legally binding:
"The government ... argues that no contract was formed because Under
[Administration] regulations, no Government official, not even one
having authority to sign the guarantee at the proper time, had the
authority to bind the United States to a loan note guarantee prior to
compliance with all the regulatory requirements for issuance of a loan
note guarantee.' As the Court of Federal Claims correctly stated,
however, the issue at this point is not whether these officials had
the authority to grant a guarantee, but whether these officials had
the authority to obligate the [Administration] to a Conditional
Commitment.' ... Administration officials were authorized to execute
conditional commitments under the regulations implementing the
business and industrial loan guarantee program. ... That the guarantee
could not finally be executed until the conditions were fulfilled is
irrelevant in determining the validity of the Conditional Commitment.
"Although Administration regulations characterize the Conditional
Commitment as mere 'advice' to the lender... the document itself shows
that the government is making a binding promise:
"The United States of America acting through the Farmers Home
Administration (FmHA) hereby agrees that ... it will execute Form(s)
FmHA 449-34 'Loan Note Guarantee' subject to the conditions and
requirements specified in said regulations and below."
Wells Fargo, 88 F.3d at 1018-19. Further, the court concluded that the
adverse changes asserted by the government were beyond the scope of
those covered by the conditions set forth in the commitment. Id.
at 1020-21.
d. Small Business Investment Companies:
A "small business investment company" (SBIC) is a private company
organized under the Small Business Investment Act of 1958, as amended
(15 U.S.C. §§ 661-697g), and licensed by the Small Business
Administration (SBA). Its purpose is to provide financial assistance
to small business concerns. For background, see GAO, Small Business:
Update of Information on SBA's Small Business Investment Company
Programs, GAO/RCED-97-55 (Washington, D.C.: Feb. 21, 1997).
A series of decisions in the 1960s upheld SBA's authority to provide
various forms of financial assistance to SBICs. First, SBA may
guarantee loans made to SBICs by private financial institutions. 42
Comp. Gen. 146 (1962). While the guarantee authority was not explicit
at the time of the 1962 decision, it was later added and is now found
at 15 U.S.C. § 683. SBA also has "secondary guarantee" authority,
authority to sell to private investors, with recourse (SBA's
guarantee), debt instruments representing loans SBA had made to SBICs.
44 Comp. Gen. 549 (1965). The proposal considered in 44 Comp. Gen. 549
involved loans with a maturity of 5 or 6 years. Later that same year,
SBA proposed extending its program to loans with 15-year maturities.
GAO again approved, noting that the difference in maturity did not
affect the basic authority. 45 Comp. Gen. 253 (1965). The 15-year
period also is now specified in 15 U.S.C. § 683(g)(1). See also 45
Comp. Gen. 370 (1965) (same holding for similar program under
different provision of Small Business Investment Act).
The Comptroller General concluded further in 45 Comp. Gen. 253 that
SBA could make the sales through an agent or broker with reasonable
compensation if administratively determined to be necessary or more
economical. However, the broker's compensation may not be paid from
the proceeds of the loan sales but must be charged to SBA's
appropriation for administrative expenses.
A small business investment company may be either a corporation or a
limited partnership. 15 U.S.C. § 681(a). The scope of authorized SBA
assistance includes nonrecourse loans to a limited partnership SBIC
(by purchasing or guaranteeing its debentures). B-149685, Jan. 12,
1978. Nonrecourse in this context means that SBA would "waive" its
right to recover, provided under the laws of most states, against the
separate assets of the general partner.
In B-149685, Mar. 25, 1971, GAO considered SBA's authority to sell
guaranteed SBIC debentures to a group of underwriters for resale to
private investors. Under this program, SBA would first purchase $30
million of newly issued debentures from SBICs and then immediately
sell them to private investors, with SBA's guarantee of payment of
principal and interest according to the terms of the instrument. SBA
would act as servicing agent for the holders, receiving payment on the
debentures from the SBICs and then paying the holders in accordance
with the terms of the debentures. The Comptroller General concluded
that the proposed sale and guarantee of debentures in this manner was
within the scope of SBA's statutory authority, provided SBA did not
exceed any existing statutory program level limitations. See also B-
149685, June 3, 1969.
Another issue is whether a small business investment company is
eligible to participate, as a lending institution, in a government
guaranteed loan program. In 49 Comp. Gen. 32 (1969), the Comptroller
General held that SBICs were not eligible lenders for purposes of
SBA's guaranteed loan program under section 7(a) of the Small Business
Act, 15 U.S.C. § 636(a). The decision relied heavily on the
legislative history of the Small Business Investment Act.
Some years later, GAO again considered the eligibility of SBICs to be
guaranteed lenders in SBA's section 7(a) guaranteed loan program as
well as the then Farmers Home Administration's business and industrial
loan program (7 U.S.C. § 1932). SBA's new proposal was somewhat
different from the arrangement considered in 49 Comp. Gen. 32, because
after originating the loan, the SBIC would then immediately sell the
guaranteed portion to another lending institution and remain the
servicing agent. GAO's conclusion remained the same, again based on
the legislative history of the Small Business Investment Act which
indicated that Congress intended SBICs to operate independently of
other federal loan programs. With respect to the then Farmers Home
Administration program, nothing in either the Small Business
Investment Act or the applicable program statute or their legislative
histories supported a different conclusion. 56 Comp. Gen. 323 (1977).
One type of small business investment company is the "minority
enterprise small business investment company," or "MESBIC." As the
name implies, an MESBIC is a small business investment company formed
to aid minority-owned small businesses. In 59 Comp. Gen. 635 (1980),
aff'd on reconsideration, B-197439, Nov. 26, 1980, GAO considered
SBA's authority to "leverage" against federal funds invested in
MESBICs. "Leveraging" means investing on a partial matching basis
through the purchase or guarantee of debentures or the purchase of
preferred securities. The specific issue was whether SBA could
leverage against Federal Railroad Administration investments in
MESBICs. Since the Small Business Investment Act authorizes SBA to
leverage only against private money, the decision concluded that,
absent specific statutory authority, SBA could not leverage against
federal funds invested in MESBICs. The MESBICs took the case to court,
arguing that "private" meant simply "non-SBA." Based on the plain
meaning of the statutory language, the court agreed with GAO. Inner
City Broadcasting Corp. v. Sanders, 733 F.2d 154 (D.C. Cir. 1984).
"Private means private and not governmental." Id. at 157.
GAO and the court had both recognized that leveraging against other
federal funds would be permissible if authorized by the statute under
which those other funds were provided. One such example is community
development block grant funds provided under Title I of the Housing
and Community Development Act of 1974, as amended, 42 U.S.C. §§ 5301-
5321. See 60 Comp. Gen. 210 (1981).
e. The Federal Financing Bank:
The Federal Financing Bank was created by the Federal Financing Bank
Act of 1973.[Footnote 28] Its purpose is to coordinate federal credit
programs with overall government economic and fiscal policies. It is a
corporate instrumentality of the United States government, subject to
the general direction and supervision of the Secretary of the
Treasury. 12 U.S.C. § 2283. The Bank acts essentially as an
intermediary. Its powers include purchasing agency debt securities and
federally guaranteed borrowings. Specifically, it is authorized by 12
U.S.C. § 2285(a) to:
"purchase and sell on terms and conditions determined by the Bank, any
obligation which is issued, sold, or guaranteed by a Federal agency.
Any Federal agency which is authorized to issue, sell, or guarantee
any obligation is authorized to issue or sell such obligations
directly to the Bank."
The Bank obtains funds by issuing its own securities, almost entirely
to the Treasury. Id. §§ 2288(b), (c). The decisions summarized below
illustrate the varying roles the Bank plays in the credit financing
arena.
In 58 Comp. Gen. 138 (1978), GAO considered the Small Business
Administration's (SBA) authority to issue certificates to the Federal
Financing Bank evidencing transfer of title of a number of individual
loans and setting forth SBA's guaranteed assurance of payment, either
in cash or by loan substitution. Even though this arrangement
contemplated the sale of certificates evidencing ownership of a group
of SBA loans rather than individual loans, it was sufficiently similar
to the arrangement upheld in B-149685, Mar. 25, 1971, discussed above
in connection with small business investment companies (SBICs), and
was therefore permissible. Since the certificate did refer to specific
loans and, when transferred to the Bank, would represent a transfer of
ownership of the loans to the Bank, the plan would not constitute
borrowing by SBA, which would have required specific statutory
authority.[Footnote 29]
The same decision, while noting that SBA's authority to sell loans to
the Federal Financing Bank with its guarantee was "neither greater nor
less" than its authority to sell loans to other purchasers (58 Comp.
Gen. at 139), nevertheless concluded that SBA lacked the authority to
sell direct disaster loans (15 U.S.C. § 636(b)) to the Federal
Financing Bank on a guaranteed basis. Although SBA does have authority
to guarantee disaster loans made to eligible borrowers by
participating lending institutions, it is not authorized, in the
absence of specific statutory authority or a clear expression of
congressional intent, to sell and guarantee disaster loans that it had
originally made directly. Since there was at the time no statutory
ceiling on the type of loans in question, the proposal would enable
SBA to "replenish its disaster loan revolving fund so as to enable it
to make new disaster loans and repeat the process indefinitely,"
potentially resulting in an unlimited contingent liability against the
United States with no congressional restraint. 58 Comp. Gen. at 146.
In addition, the proposal contemplated a 100 percent guarantee which
would have violated the statutory 90 percent maximum guarantee of
disaster loans.
Another case involving the Federal Financing Bank as "guaranteed
lender" is B-162373-0.M., July 31, 1979, finding that an agreement
between the Department of Agriculture, acting through the then Rural
Electrification Administration,[Footnote 30 and the Bank by which the
Bank made loans to borrowers that the Department guaranteed under the
authority of section 306 of the Rural Electrification Act of 1936 (7
U.S.C. § 936), was within the statutory authority of both agencies.
The legality of the arrangement was considered from the perspectives
both of the Department's authority to guarantee loans made by a
nonprivate entity such as the Bank and of the Bank's authority to act
as the initial lender, making loans directly to a private
nongovernmental borrower with the Department's guarantee. Since the
Department has authority to guarantee loans made by "any legally
organized lending agency," it could guarantee loans made by the
Federal Financing Bank. At the same time, the Bank was acting within
its statutory authority to purchase obligations guaranteed by a
federal agency, since the transaction was in the form of its
purchasing the borrower's note from the borrower with payment being
guaranteed by the Department. Although the arrangement was legal, GAO
was critical because it did not involve the private credit sector in
the REA program as contemplated by the Rural Electrification Act. See
GAO, Financing Rural Electric Generating Facilities: A Large and
Growing Activity, CED-81-14 (Nov. 28, 1980), at 16-17.
Congress subsequently confirmed the above arrangement by amending
7 U.S.C. § 936 to provide that the loans, upon request of the
borrower, "shall be made by the Federal Financing Bank" Under the
statute, loan servicing is the responsibility of the lender. Thus, the
Department's funds are available to perform the loan servicing
function as the Bank's agent only on a reimbursable basis. 62 Comp.
Gen. 309 (1983).
Two 1987 opinions discussed the Federal Financing Bank's role in the
foreign military sales program. As described in these opinions, the
Bank finances credit sales under the Arms Export Control Act, 22 U.S.C.
§§ 2751-2799aa-2, with the loans being guaranteed by the Defense
Security Assistance Agency (DSAA). If the debtor nation defaults, DSAA
pays the Bank. One opinion concluded that the Bank is not authorized
to deliberately delay making demand on DSAA for payment upon default.
B-226718.2, Aug. 19, 1987. The second advised that two refinancing
options under consideration, one involving prepayment without penalty
and one involving the partial capitalization of interest, would result
in a financial loss to the United States or the substantial risk of
one and should not be implemented without clear evidence of
congressional approval. 66 Comp. Gen. 577 (1987). Congress
subsequently approved a prepayment option. See GAO, Security
Assistance: Foreign Military Sales Debt Refinancing, GAO/NSIAD-89-175
(Washington, D.C.: Aug. 16, 1989); Federal Financing Bank: The
Government Incurred a Cost of $2 Billion on Loan Prepayments, GAO/AFMD-
89-59 (Washington, D.C.: Aug. 22, 1989).
In two later opinions, GAO held that the Federal Financing Bank was an
appropriate source of financing for the Federal Triangle International
Cultural and Trade Center-Federal Office Building (now known as the
Reagan Building) since this was fundamentally a project being
constructed by the federal government. B-248647, Dec. 28, 1992, aff'd,
B-248647.2, Apr. 24, 1995.
A 1985 transaction illustrates a very different role for the Bank. In
October 1985, the Treasury Department had reached its statutory public
debt ceiling and was in danger of defaulting on its obligations
pending congressional action to raise the ceiling. The Bank
effectively borrowed $5 billion from the Civil Service Retirement and
Disability Fund by issuing securities to the Fund and accepting
Treasury obligations in payment. The Bank then used these securities
to prepay part of its outstanding debt to Treasury. This in turn
reduced Treasury's outstanding debt, enabling it to borrow an
additional $5 billion from the public to meet its obligations. Based
on the Bank's statutory authority and the conclusion that its
obligations do not count against the public debt limit set by 31
U.S.C. § 3101(b), the Comptroller General found the transaction
legally unobjectionable. B-138524, Oct. 30, 1985.
The Justice Department's Office of Legal Counsel cited the above 1985
GAO opinion in affirming the legality of similar transactions by the
Bank that were designed to free up room under the debt limit.
Memorandum for the General Counsel, Department of the Treasury,
Transactions Between the Federal Financing Bank and the Department of
the Treasury, OLC Opinion, Feb. 13, 1996. Among the transactions this
opinion approved was the Bank's sale of loan assets evidencing debts
by the Postal Service and the Tennessee Valley Authority to the Civil
Service Retirement and Disability Fund in exchange for United States
debt obligations. For further information on these transactions, see
GAO, Debt Ceiling: Analysis of Actions During the 1995-1996 Crisis,
GAO/AIMD-96-130 (Washington, D.C.: Aug. 30, 1996). For a description
of more recent transactions along these lines, see GAO, Debt Ceiling:
Analysis of Actions Taken during the 2003 Debt Issuance Suspension
Period, GAO-04-526 (Washington, D.C.: May 20, 2004), at 25-30.
When the Federal Financing Bank was first created, its transactions
were entirely off-budget. 12 U.S.C. § 2290(c) ("receipts and
disbursements of the Bank ... shall not be included in the totals of
the budget of the United States Government"). With the budget reforms
of the Congressional Budget Act and subsequent legislation, this
treatment came under increasing criticism and GAO, among others,
recommended that Bank transactions involving other government entities
be reflected in the budget. E.g., 58 Comp. Gen. 138, 142-44 (1978);
GAO, Government Agency Transactions With the Federal Financing Bank
Should Be Included on the Budget, PAD-77-70 (Aug. 3, 1977). See also B-
178726, Sept. 16, 1976 (pointing out that purchase by the Bank of a
loan guaranteed by another agency amounts to a direct loan).
While not amending the Federal Financing Bank Act itself, Congress in
1985 added 2 U.S.C. § 655(b) to the Congressional Budget Act:
"All receipts and disbursements of the Federal Financing Bank with
respect to any obligations which are issued, sold, or guaranteed by a
Federal agency shall be treated as a means of financing such agency
for purposes of section 1105 of title 31, United States Code
[submission of President's budget] and for purposes of [the
Congressional Budget] Act."
Under this provision, direct loans of the Bank are accounted for as
loans of the guaranteeing agency. See B-226718.2, Aug. 19, 1987.
2. Coverage of Borrowers:
a. Eligibility of Borrowers:
Loan guarantee program legislation may or may not establish criteria for
lender eligibility; it will almost invariably address borrower
eligibility. This is because the primary purpose of a guarantee
program is to enhance credit availability to a particular class of
borrowers (farmers, veterans, small businesses, etc.). The
significance of any such eligibility requirements is that an agency is
not authorized to issue a guarantee or reimburse a lender on behalf of
an ineligible borrower.
For example, one portion of the National Housing Act, 12 U.S.C. §
1703, authorizes the insurance of loans made to finance repairs or
improvements to real property by owners or lessees. Under this
statute, it is the lending institution's responsibility to determine
borrower eligibility. Thus, a lending institution making a loan to
someone who is neither the owner nor the lessee of the property
involved is not entitled to be reimbursed for losses resulting from
borrower default. B-180015, Nov. 28, 1973; B-174739, Jan. 19, 1972.
While most eligibility requirements are found in the program statute
itself, they may appear in other legislation. For example, the
Military Selective Service Act provides that any person who is
required to register for the draft and knowingly and willfully fails
to do so shall be ineligible for guaranteed student loan assistance.
50 U.S.C. App. § 462(f). The Department of Education is authorized to
issue implementing regulations, discussed in B-210733, Feb. 25, 1983.
b. Substitution of Borrowers:
Generally, the substitution of borrowers within the same fiscal year
will not present problems. However, as with contracts and grants, the
substitution may or may not be proper when made in a subsequent fiscal
year. Loan guarantee authority—whether it is an advance appropriation
of budget authority under the Federal Credit Reform Act or a program
level ceiling in a situation not governed by the Credit Reform Act—is
granted on an annual, multiple year, or no-year basis. It thus has a
period of availability analogous to a regular appropriation. Where the
period of availability is a fixed time period, the authority ceases to
be available when that period expires.
The issue in B-164031.5, June 25, 1976, was the transferability of a
loan guarantee and interest subsidy originally approved under a
program of federal assistance for the construction and modernization
of hospitals. The question was whether the guarantee could be
transferred from one hospital to another in the following fiscal year,
when the original hospital became unable to take advantage of the
guarantee due to apparent financial difficulties. The Comptroller
General found that, since the period of availability of the guarantee
authority had expired, the transfer would be authorized only if it
could be viewed as a "replacement." Since the second hospital did not
serve the same community as the first, the transfer of the loan
guarantee to the new "borrower" was not merely a "replacement" and
therefore could not be approved.
A few years later, the then Farmers Home Administration asked whether
it could continue to charge a guarantee to the annual ceiling for the
fiscal year in which it was originally approved when a new borrower
was substituted in a later fiscal year. As a general rule, the answer
is no, and the substitution would have to be treated as a new
undertaking. This is different from the substitution of lenders
discussed previously in this chapter because the approval of a
guaranteed loan to a particular borrower requires a specific
eligibility determination. Thus, while the identity of the particular
lender may be of relatively little consequence, the identity and
eligibility of the borrower are essential to the transaction. However,
the substitution may be treated as a continuation of the original
guarantee where the substituted borrower bears a "close and genuine
relationship" to the originally approved borrower (for example, a
corporation and partnership controlled by the same individuals),
provided of course that the loan purpose remains substantially
unchanged. 60 Comp. Gen. 700, 707 (1981).[Footnote 31]
The authority to make a loan guarantee commitment depends not only on
the eligibility of the particular borrower, but also on whether the
purpose for which the guaranteed loan is to be made is consistent with
the applicable program statute and regulations. The analysis is
essentially an application of the "necessary expense" doctrine used in
other purpose availability contexts.
A number of illustrative cases have arisen under section 301 of the
Defense Production Act of 1950, 50 U.S.C. App. § 2091, which
authorizes loan guarantees to finance the performance of contracts
where deemed "necessary to expedite or expand production and
deliveries or services under Government contracts for the procurement
of industrial resources or critical technology items essential to the
national defense. ..." Id. § 2091(a)(1). For example, B-115791-0.M.,
Sept. 3, 1953, concluded that section 301, ordinarily used to provide
short-term working capital, could also be used to guarantee loans for
the expansion of plant facilities if determined necessary to expedite
production and deliveries or services under defense contracts.
Contracts to purchase equipment for civil defense stockpiling purposes
may be regarded as contracts for the national defense and therefore
eligible for loan guarantees under section 301. 37 Comp. Gen. 417
(1957). The issue in that case was whether a 1953 amendment to the
act, which narrowed the definition of "national defense," had the
effect of excluding civil defense which clearly would have been
covered before the amendment. GAO found no evidence of congressional
intent to exclude civil defense, and concluded therefore that the
loans could be guaranteed.
While section 301 was intended primarily to assist small and medium-
size defense contractors, its language is not so limited and is
sufficiently broad to permit guarantees to large-size defense
contractors as well. B-170109, July 21,1970 (large railroad carrier).
GAO considered a different loan guarantee program in 38 Comp. Gen. 640
(1959). The question in that case was whether the then Civil
Aeronautics Board, under a statute authorizing the guarantee of
aircraft purchase loans, could guarantee the indebtedness of an air
carrier for the conversion of an existing aircraft. The case involved
the conversion of piston engine aircraft to turbo-powered aircraft.
GAO found that the conversion was such an extensive modification as to
amount to a new type of aircraft for all practical purposes. Also, it
was clear that if the manufacturer had performed the conversion and
then sold the converted aircraft to the carrier, the purchase would
have been eligible for the guarantee. The conversion was therefore
within the statutory purpose and the guarantee was authorized.
An analogous situation occurred in 34 Comp. Gen. 392 (1955), involving
the Maritime Administration's ship mortgage insurance authority under
the Merchant Marine Act of 1936, as amended, 46 U.S.C. App. §§ 1271-
1275. Noting that purchase plus reconstruction was the equivalent of
new construction for purposes of the program, the Comptroller General
held that the insurance could extend to the purchase money mortgage
and reconstruction costs for a vessel acquired by purchase (in this
case from the government) instead of under a construction contract.
This decision was amplified in 35 Comp. Gen. 18 (1955), which held
that the Maritime Administration could insure a second-lien
reconstruction mortgage to a private lending institution where the
first-lien (purchase money) mortgage was held by the United States.
There was nothing in the statute limiting the insurance authority to
first-lien mortgages.
The Department of Agriculture's rural electrification financial
assistance programs have generated a number of purpose-related cases.
Generally, the Department may make direct loans and loan guarantees to
finance rural electrification facilities for persons not already
receiving central station service. See 7 U.S.C. §§ 901-950bb.[Footnote
32]
Several cases have established the proposition that the Department can
include elements in a project that are arguably beyond a literal
reading of the statutory language, where those elements are merely
incidental to accomplishing the statutory purpose. Thus, early cases
on the Department's direct loan program held that the Department
cannot make a loan where the only persons to be benefited are already
receiving central service, but it can finance the acquisition of
existing facilities which are to be incorporated into a larger system,
where the acquisition is necessary for the effective operation of the
overall system. B-48590, Apr. 3, 1945; B-32920, Mar. 12, 1943; B-
29463, Dec. 1, 1942. This principle applies whether the acquisition is
by direct purchase or the purchase of securities to be exchanged for
the physical property. B-42486, July 25, 1944.
Rural electrification loans are not intended to parallel existing
facilities. Thus, where Plant A and Plant B are located less than 200
feet apart, and Plant A is receiving central service from a power
supplier who has offered to provide adequate service to Plant B, Plant
B cannot properly be considered a person not receiving central service
for purposes of qualifying for financial assistance. B-134138, Oct.
15, 1958.
In B-195437, Feb. 15, 1980, GAO applied the principles of the above
direct loan cases to the rural electrification loan guarantee program.
The issue was the Department of Agriculture's authority to approve a
loan guarantee to finance certain expenditures associated with the
construction of a coal-fired electric generating plant, including
cancellation charges if two contracts for components of the plant were
terminated. The decision held that, since the contractors would not
begin to build the components without a commitment that the
cancellation costs would be paid, approval of a loan guarantee to
assure funding to pay such charges was consistent with the basic
statutory purpose of providing electricity to persons in rural areas
and therefore authorized.
Finally, loans and loan guarantees to provide housing for the elderly
may include the purchase of related necessary equipment such as
refrigerators and laundry equipment. 42 Comp. Gen. 528 (1963).
d. Change in Loan Purpose:
A decision previously cited in the section C.1.b discussion of changes
in lenders and borrowers, 60 Comp. Gen. 700 (1981), also addressed
changes in loan purpose under the Farmers Home Administration rural
development loan guarantee program. Again, the issue was when changes
could be deemed a continuation of the original transaction, so that
the guarantee would remain chargeable to the annual ceiling for the
fiscal year in which it was originally approved.
Similar questions had arisen frequently in the grant context, and the
Comptroller General applied the grant principles to loan guarantees,
stating:
"Applying these grant decisions to the area of loan guarantees, when a
major change to the 'character' of the project supported by the
guarantee is made, the revised loan guarantee must be charged against
the ceiling in effect when the revision is made. We believe that just
as a significant change in the terms and conditions under which a
grant was made would be viewed as creating a new grant, a significant
change in the terms and conditions under which a loan guarantee was
approved would create a new loan."
Id. at 707. Thus, major changes will result in the treatment of the
transaction as a new guarantee. However, less substantial changes
where the purpose and scope of the revised agreement are consistent
with the purpose and scope of the original agreement may be treated as
a continuation as long as the need for the project continues to exist.
This test must be applied on a case-by-case basis.
3. Terms and Conditions of Guarantees:
a. Introduction:
Just as with any other contractual obligation, a loan guarantee has
terms and conditions which the parties must follow. If a valid
guarantee has been created, the borrower defaults, and the lender has
complied with all applicable terms and conditions, the government is
obligated to pay on the guarantee. Conversely, if the lender does not
comply with applicable requirements, it may find that it has lost the
benefit of the guarantee. The applicable terms and conditions are
found in the program statute, agency regulations, and the guarantee
agreement.
This section will discuss the effect of noncompliance, especially by
the lender. The cases fall into two broad categories. In one group,
the loan may not have been eligible for the guarantee from its
inception based on a failure to satisfy applicable requirements such
as a statutory limitation on the maximum amount or maturity of the
loan. The result will usually be that the guarantee itself was never
valid. In the second group, the loan to be guaranteed complies with
all pertinent statutory or regulatory requirements, but the guarantee
never takes effect or is nullified as a result of the lender's failure
to comply with one or more of the terms and conditions upon which the
government's guarantee is contingent.
To illustrate these concepts, we have selected two areas—property
insurance programs under the National Housing Act and loan guarantee
programs of the Small Business Administration. The specific
requirements discussed are the more common ones and apply of course
only to the particular program. Nevertheless, our selection is
intended to illustrate types of issues, approaches to problem-solving,
and the crucial role of agency regulations, and from this perspective
is of more general relevance. Also, program details such as maximum
loan amount, whether prescribed by statute or regulation, are subject
to change from time to time. Accordingly, individual cases do not
necessarily reflect current program requirements, but are intended to
illustrate or support propositions of continuing validity with respect
to requirements of that type.
b. Property Insurance Programs under the National Housing Act:
Title I of the National Housing Act, Pub. L. No. 73-479, 48 Stat. 1246
(June 27, 1934), as amended and codified at 12 U.S.C. §§ 1701-1706d,
authorizes a number of housing assistance programs. Several of the
programs were formerly administered by the Federal Housing
Administration (FHA) and were transferred to the Department of Housing
and Urban Development (HUD) upon its creation in 1965. The programs
are still popularly known as "FHA programs." GAO has issued numerous
reports on these programs, some of the most recent being: Single-
Family Housing: Progress Made, but Opportunities Exist to Improve
HUD's Oversight of FHA Lenders, GAO-05-13 (Washington, D.C.: Nov. 12,
2004); Multifamily Housing: Improvements Needed in HUD's Oversight of
Lenders That Underwrite FHA-Insured Loans, GAO-02-680 (Washington,
D.C.: July 19, 2002); Mortgage Financing: Changes in the Performance
of FHA-Insured Loans, GAO-02-773 (Washington, D.C.: July 10, 2002).
(1) Maximum amount of loan:
Under 12 U.S.C. § 1703, the Secretary of HUD is authorized to insure
lenders against losses sustained in extending loans to borrowers for
various purposes, including home construction, repair, and
improvement, and the purchase of manufactured (mobile) homes. The
statute establishes the maximum amount of loans that may be insured
for the various authorized purposes, for example, $25,000 for repairs
and improvements to an existing single-family structure. Id. §
1703(b)(1)(A)(i). While the specific dollar amounts have changed over
the years, the Congress has imposed maximum loan limits in one form or
another since the program was established in 1934.
Where a single loan is involved, its face amount cannot exceed the
statutory limitation. If a loan which is reported by the lender to HUD
for insurance exceeds the statutory limitation in effect when the loan
was made, the lender cannot be reimbursed for any of its losses since
the loan was ineligible for insurance from its inception. E.g., B-
127167, July 15, 1970; B-127243, May 21, 1956.
In applying this limitation where more than one loan is involved, the
approach of HUD's program regulations is to consider whether the total
amount of all outstanding insured loans made to a borrower under Title
I of the Housing Act with respect to the same property or structure
exceeds the maximum permissible amount. In this situation, for
example, the ceiling for property improvement loans applies to the
outstanding aggregate loan balance rather than the sum of the face
amounts. 24 C.F.R. § 201.10(a)(2) (2005). Thus, for a second loan, the
ceiling is compared with the face amount of the second loan (which
represents the outstanding balance of that loan at the time the
determination is made) plus the outstanding balance of the first loan.
B-148894, June 29, 1962; B-137493, Nov. 20, 1958. The method used to
compute the outstanding balance is within HUD's discretion. In
considering claims, GAO will apply the method prescribed in the
regulations. The fact that other reasonable methods may exist is
irrelevant. B-162961, Jan. 19, 1968.
The ceiling applies only to loans for the same property. In B-148804,
June 7, 1962, the Comptroller General advised that a lender could be
reimbursed for a loss it suffered when the borrower defaulted, even
though the original loan of $4,000 exceeded the then-existing $3,500
limitation. Although only one application for a $4,000 loan had been
made, the record revealed that two separate properties were involved,
with $3,000 of the loan funds intended for the improvement of one
property, and $1,000 for the other. Therefore, the limitation which
applied only to loans for the same property was not violated.
This decision points out another important provision of 12 U.S.C. §
1703. The Secretary of HUD is authorized to waive a requirement in the
regulations if in the Secretary's judgment enforcement would impose an
injustice on an insured lender, provided that the lender has
substantially complied with the regulations in good faith and waiver
would not increase the government's obligation beyond what it would
have been under full compliance. Id. § 1703(e). Thus, in B-148804, the
regulations required separate applications for separate properties,
but GAO advised that the Federal Housing Administration could waive
the requirement. Prior to enactment of the waiver authority, GAO had
applied the general rule that agencies have no authority to waive
statutory regulations. 15 Comp. Gen. 869 (1936). The waiver provision
was enacted 3 weeks after the decision. The authority has been applied
in a variety of contexts. E.g., B-127026, Mar. 27, 1956 (bank
disbursed loan after a change in regulations under which loan would
have been ineligible, but had approved loan in good faith before
receiving notice of the change). The Secretary of HUD may delegate the
waiver authority to a "substantial compliance committee." B-127167,
Dec. 17, 1968.
Several decisions have emphasized that the waiver authority applies
only to regulations. It does not apply to a requirement imposed by
statute, such as the maximum loan amount. A purported waiver of a
statutory requirement is ineffective. E.g., B-127243, May 21, 1956. A
waiver inconsistent with the statutory authority, for example, lack of
good faith by the lender, is also unauthorized. B-127167, Dec. 5, 1957.
Exercise of the waiver authority is up to HUD, not GAO. While GAO may
find a waiver invalid if it violates one of the above principles, GAO
cannot positively exercise the authority where HUD has chosen not to
do so. As in B-148804, June 7, 1962, GAO can only advise HUD that in
its opinion waiver is authorized.
(2) Maximum loan maturity:
The Housing Act also prescribes, by category, the maximum maturity
term of loans which may be insured under 12 U.S.C. § 1703. For
example, the maturity of a loan for repairs and improvements to an
existing single-family structure may not exceed 20 years and 32 days.
Id. § 1703(b)(3)(A)(i). As with the maximum loan amount, maturity
limitations have existed since the program's inception.
The maturity date is computed based on the payment due date indicated
on the note. If the period exceeds the statutory maximum, the loan is
not insurable. It is the responsibility of the lender rather than the
government to make certain that notes do not have maturities in excess
of the statutory maximum. 55 Comp. Gen. 126 (1975); B-172121, Apr. 12,
1971. Thus, in 55 Comp. Gen. 126, a bank's claim for reimbursement was
denied where a note submitted and accepted for insurance had a
projected maturity date 17 days in excess of the maximum in effect
when the loan was made.
The decision at 55 Comp. Gen. 126 also held that, since the statutory
limitation applies to the maturity of the obligation or note
underlying the loan, the date on the note is controlling and not the
date on which the note was assigned or the funds disbursed. However,
this is not an absolute and there are certain circumstances in which
the date on the note has been found not controlling. For example, in B-
162542, Oct. 24, 1967, GAO approved a lender's claim even though the
note stated a final payment due date after the existing statutory
limitation. The holding was based on a letter from the lender to the
borrower which agreed to move up the date of the first payment and, by
implication, all of the others as well, including the final payment.
As a result, the maturity date fell within the statutory period.
Somewhat similarly, B-166521, Apr. 25, 1969, involved a 60-month note
which, as written, would have exceeded the statutory maximum. The note
was dated June 20, 1963, but provided that the first payment was not
due until July 1, 1968. Based on the borrower's actual payment record,
it was obvious that the maturity date had been inadvertently entered
on the note as the first payment due date. Thus, the maturity date was
within the then-existing statutory maximum and the lender could be
paid.
Again in B-191660, Mar. 5, 1979, GAO upheld a bank's claim where the
note had a projected maturity date 2 days in excess of the then-
existing statutory limitation. The borrower's payment record and other
evidence supported the bank's allegation that, due to inadvertence,
the note as written did not reflect the intention of the parties at
the time the loan was made. The decision emphasized that, where
extraneous evidence is to be used to correct an alleged error on a
note, merely changing the due date after default and after HUD has
refused insurance is legally irrelevant. The extraneous evidence must
establish that the allegedly correct due date is what the parties
intended at the time the note was executed.
Problems may also arise when the term of the initial insured loan is
within the statutory maximum but a subsequent extension agreement
results in exceeding the maximum maturity period. For example, in B-
131963, July 17, 1957, the Federal Housing Administration could not
reimburse a bank for a loss suffered on a defaulted loan where the
bank had agreed in writing to extend the maturity date of the note
beyond the statutory maximum.
In that decision, GAO held that while 12 U.S.C. § 1703(b)(6) permits a
loan to be refinanced, this authority does not include a mere
extension of payment. Thus, a lender may extend the time for paying a
note beyond the maximum time limitation and still retain insurability
only by actually refinancing the loan, that is, by executing a new
note. Short of an actual refinancing, a mere extension of payment
beyond the maximum will result in the loss of insurability. See also B-
164118, Nov. 19, 1969; B-149800, Sept. 28, 1962; B-148816, May 21,
1962. Several cases have rejected arguments by the lender either that
it had not intended to extend the final maturity date beyond the
permissible maximum or that it should have been allowed to
subsequently rescind or reform the extension agreement to conform to
the statutory limitation. E.g., B-188240, Aug. 10, 1977; B-164118,
Dec. 30, 1969; B-164118, Aug. 14, 1968.
Insurability may be retained if the extension is merely a temporary
deferral of certain payments, with the deferred payments to be made up
prior to the original maturity date. However, if this is the case, it
must be spelled out in the extension agreement. B-164118, Dec. 30,
1969.
In 51 Comp. Gen. 222 (1971), the extension agreement was not merely an
extension of time but also changed other terms such as the period of
payment and the amount of the monthly installment. In these
circumstances, the Comptroller General found that the terms of the
extension agreement differed so substantially from those of the
original note that it was "tantamount to a new note" and could be
considered as a refinancing. Although the "refinancing" had not been
accomplished in accordance with applicable regulations, GAO advised
HUD that it could consider waiving those particular regulatory
requirements under 12 U.S.C. § 1703(e).
(3) Owner/lessee requirement:
Another requirement of the Housing Act is that property improvement
loans can be made only to borrowers who are owners of the property or
who are lessees under a lease expiring not less than 6 months after
the maturity of the loan or other advance of credit. 12 U.S.C. §
1703(a). A loan made to a borrower who is neither the owner nor the
lessee of the property involved is not insurable. For example, where
the property was owned by a corporation and the loan application and
note were signed by two individuals who were officers of the
corporation, but with no indication that they were signing as
representatives of the corporation, the loan was not made to the owner
of the property and was ineligible for insurance. B-180015, Nov. 28,
1973. Similarly, where the same person was president of two different
corporations and signed the note as president of corporation "A" but
had signed the lease on the property involved as president of
corporation "B," the loan was not made to the lessee and was not
insurable. B-174739, Jan. 19, 1972.
The lease must expire "not less than six months after the maturity of
the loan." 12 U.S.C. § 1703(a). A loan to a lessee is not insurable
where the lease expires before the maturity date (B-194145, Dec. 12,
1980) or on the maturity date (B-172965, July 16, 1971). Time "after"
an event is traditionally computed by excluding the date of the
happening. Thus, a loan with a maturity date of July 1, 1956, to a
lessee whose lease was due to expire on December 31, 1956, was not
insurable. "Not less than six months after" the maturity date would
have been on or after January 1, 1957. B-129898, Dec. 28, 1956.
In B-194145, Dec. 12, 1980, a loan was refinanced after the borrower,
under a lease with option to purchase, had exercised the option. The
bank argued that the loan should be insurable since the refinancing
note had been executed to the owner. However, the Comptroller General
held that a refinancing loan is insurable only where the prior loan
being refinanced was itself validly insured. Since the original loans
in that case were ineligible, the refinancing loan was equally
ineligible. Also, the refinancing loan could not be considered an
entirely new loan for purposes of insurability, since the statute
authorizes insurance to finance improvements, not to repay outstanding
uninsured loans.
In B-124410, July 25, 1955, GAO allowed a bank's claim on a loan to a
borrower who was not the owner of the property. The decision was based
on Federal Housing Administration (FHA) regulations which provided
that a lender, acting in good faith, may in the absence of any
information to the contrary rely on statements of fact in a credit
application, and the credit application in that case had been
misleading. Compare, however, 17 Comp. Gen. 604 (1938), in which a
claim was denied for a loss suffered when a lender advanced funds to
an individual other than the borrower upon a forged authorization,
where a simple comparison with the signature on the note would have
disclosed the forgery.
While a bank is generally entitled to rely on statements of fact in a
credit application, it is nevertheless required to exercise good
credit judgment. Thus, payment was denied in A-88143, Aug. 21, 1937,
where the borrower had previously defaulted on a different loan with
the same bank. The result applies equally to a bank with several
branches where the contract of insurance is with the home office. 19
Comp. Gen. 92 (1939). An apparent exception occurred in B-124438, July
26, 1955, where a borrower listed on his credit application a prior
loan with a branch of the same bank located 110 miles away, but failed
to note that it was in default. The bank checked several local credit
references and received favorable reports, but did not check with its
branch. Since the bank had diligently checked the local references,
the borrower cured the default on the prior loan, and the FHA waived
the bank's violation of regulations which prohibited accepting a loan
when a prior loan was in default, GAO concluded that the bank could be
reimbursed for its losses on the second note.[Footnote 33] For cases
on the requirement to approve the credit statement, see 16 Comp. Gen.
958 (1937) and A-71945, June 16, 1937.
(4) Execution of the note:
Another requirement, found in the regulations implementing the Housing
Act, is that the note evidencing the indebtedness bear the genuine
signature of the borrower, be valid and enforceable against the
borrower, and be complete and regular on its face. 24 C.F.R. § 201.12
(2005). In a number of cases where either signatures were forged or
terms of the note were altered—potentially making the note ineligible
for insurance under the regulations—GAO has allowed claims by a lender
for reimbursement based on the lender's apparent good faith and the
previously discussed authority to waive regulatory requirements. B-
127167, Dec. 17, 1968 (forged signature); B-127167, Dec. 5, 1957
(false representation as to age); B-130955, May 2, 1957 (alteration of
amount); B-127167, Apr. 10, 1956 (forged signature). Where HUD
declines to exercise its waiver authority, it may treat the note as
ineligible for insurance. United States v. deVallet, 152 F. Supp. 313
(D. Mass. 1957). "The government had the right to make such
limitations on its insurance undertaking as it saw fit." Id. at 315.
One court has held that the validity/regularity requirement applies
"not at the point at which a bank submits its claim, but at the point
at which the loan itself is being arranged." Guardian Federal Savings
and Loan Association v. Harris, 441 E Supp. 789, 791 (D.D.C. 1977).
While this seems clear enough with respect to items such as the
validity of the signature and the "regularity" of the note, subsequent
events may affect the enforceability of a note, a situation implicitly
recognized in the Harris case. In B-127483, Apr. 26, 1956, it was held
that the enforceability requirement was not affected by a mistrial in
a suit brought by the lender resulting in a dismissal without
prejudice. In 37 Comp. Gen. 857 (1958), GAO held that a lender could
be reimbursed where the note had become unenforceable due to the
passage of time notwithstanding the lender's diligent collection
efforts. The result would at least arguably be different if a note
became unenforceable through the fault or neglect of the lender.
(5) Reporting requirement:
The four requirements discussed thus far relate to the eligibility of
a loan for insurance from its inception. This one is different because
the loan itself is eligible but the lender's failure to comply may
result in the loss of insurability. Program regulations require
lenders to report loans to the Department of Housing and Urban
Development (HUD) on a prescribed form within 31 days from the date of
the note or the date the note was purchased. 24 C.F.R. § 201.30(a)
(2005). HUD then accepts the loan for insurance or rejects it. The
reporting requirement also applies to refinancing loans. Id.
Under present regulations, HUD has discretion to accept a late report
as long as the loan is not in default. Id. § 201.30(b). Once the loan
has gone into default, that discretion no longer exists and it is too
late to establish coverage. An illustrative case is B-194822, Sept.
24, 1980. A bank inadvertently failed to report a property improvement
loan to HUD. More than a year later, after the loan was in default,
the bank submitted its report along with its claim for
indemnification. Concluding that the loan was never insured, HUD
denied the claim, and GAO agreed. The fact that HUD had inadvertently
billed the bank for the required premiums, which the bank paid, was
not enough to establish coverage. Of course, refund of the premiums
was appropriate.
Prior to 1968, the regulations did not limit HUD's discretion, and a
late report could be accepted even after default. Cases addressing the
exercise of discretion under this version of the regulations are B-
165239, Oct. 4, 1968, and B-153971, June 17, 1964.
(6) Payment of premiums:
The statute requires that HUD charge the financial institution a
premium for the insurance. 12 U.S.C. § 1703(f). The premium is a
prerequisite to insurability. Id. § 1703(b)(5). This is closely
related to the reporting requirement discussed above in that it is the
report that triggers HUD's billing of the bank. The sequence is: (1)
bank reports loan to HUD on manifest form; (2) HUD includes the loan
on its monthly statement to the bank; (3) upon receipt of monthly
statement, bank pays premium to HUD; (4) when HUD receives the
premium, loan achieves insured status.
Subsection 1703(f) further requires that the premium charge "shall be
payable in advance by the financial institution." Thus, advance
payment of the premium is necessary for the loan to be eligible for
insurance, at least where nonpayment is solely the fault of the bank.
B-172965, July 16, 1971 (loan not covered where bank failed to report
the loan and was thus never billed by HUD). See also B-194822, Sept.
24, 1980 (no authority to accept premiums after default). For loans
with a maturity in excess of 25 months, the insurance charge is
payable in annual installments. 24 C.F.R. § 201.31(b)(2) (2005).
In 55 Comp. Gen. 891 (1976), the bank claimed that it had reported the
loan to HUD. HUD, however, had no record of the report and
consequently had neither requested nor received any premium payments
from the bank prior to default. Apart from the fact that the advance
payment requirement appears in a federal statute, the bank had actual
notice that a loan is not insured until it appears on the monthly
statement and the premium is paid. Adequate review of the monthly
statements would have revealed that the particular loan was not listed
and that therefore either HUD never received the report or failed to
acknowledge it. Since it is the bank's responsibility to assure
payment of premiums in advance, its claim was denied. The decision
once again reiterated that HUD's waiver authority does not apply to
statutory requirements.
A related case, 55 Comp. Gen. 658 (1976), reaffirmed the proposition
that timely payment of the insurance premiums is a prerequisite to
continued insurance coverage. The decision also held that claims by a
lending institution which is currently delinquent in its premium
payments may be allowed if the borrower's default occurred prior to
the delinquency. However, if the lending institution was delinquent
before the default occurred or became imminent, its claim may not be
allowed.
The decision in 55 Comp. Gen. 658 was expanded (and modified with
respect to matters not relevant here) in 56 Comp. Gen. 279 (1977),
holding that timely payment of insurance premiums under 12 U.S.C. §
1703 is a continuing obligation of the lender and cannot be
voluntarily terminated by the lender before the end of the term of the
underlying loan. Unpaid insurance premiums constitute a debt presently
due and payable by the lender to the United States. Therefore, HUD may
offset delinquent premiums against insurance claims otherwise payable
to the lender. However, estimated future premiums may not be offset
against currently payable claims because they are not certain in
amount. (Under the program regulations, the premium may be abated
after an insurance claim has been filed or if the loan is paid in full
prior to maturity. 24 C.F.R. § 201.31(e).)
c. Small Business Administration Business Loan Program:
(1) Payment of guarantee fee:
Like the National Housing Act insurance programs, a loan guarantee
under section 7(a) of the Small Business Act is not free to the
lender. The Small Business Administration is required to charge a
guarantee fee, based on a percentage of the amount guaranteed, on most
loans guaranteed under 15 U.S.C. § 636(a). Id. § 636(a)(18). The fee
is payable by the participating lending institution, but may be passed
through to the borrower. Id. SBA's implementing regulations are found
at 13 C.F.R. part 120 (2005).
For many years prior to the enactment of 15 U.S.C. § 636(a)(18) in
1986[Footnote 34] SBA charged a guarantee fee under the authority of
its program regulations and guarantee agreement. Thus, pre-1986 GAO
decisions dealing with section 7(a) fees must be regarded as modified
to the extent they were addressing a nonstatutory requirement. They,
however, along with elements of the program regulations which pre-date
the 1986 legislation, establish the proposition that an agency may
charge a guarantee fee without specific statutory authority as long as
it is not prohibited and outline the general parameters of a
nonstatutory fee requirement.
As with the Housing Act fees, a fundamental issue is the effect of
nonpayment or late payment. Unlike the Housing Act, the SBA provision
does not require that the fees be paid in advance. Thus, by itself, 15
U.S.C. § 636(a)(18) neither makes payment of the fee an essential
condition of guarantee eligibility, nor does it prohibit such
treatment. Under SBA's regulations, the fee is payable when the lender
applies for a guarantee for loans with maturities of 12 months or
less, and within 90 days after SBA's approval for loans with
maturities greater than 12 months. 13 C.F.R. § 120.220(b). Absent
statutory direction one way or the other, the effect of missing these
deadlines is a matter within SBA's discretion to establish by
regulation or terms of the guarantee agreement.
At one time, SBA's guarantee agreement expressly provided that a loan
is not guaranteed until the fee has been paid. Under this provision,
payment of the fee was a condition precedent to coverage. SBA had the
discretion to accept late payment provided the loan was not in
default, but the loan was not protected by the guarantee until the fee
was paid. B-181432, Nov. 12, 1975; B-181432, Mar. 13, 1975. In cases
where the fee remained unpaid at the time the borrower defaulted,
claims by lenders were consistently denied in the face of arguments
such as estoppel (B-181432, May 21, 1979, and B-181432, Oct. 20,
1978), "constructive payment" (B-181432, July 7, 1978), or
inexperience on the part of bank personnel (B-181432, Aug. 15, 1977).
Since the requirement was explicitly stated in the guarantee
agreement, virtually all of these cases reiterated the proposition
that no government official may give away the government's contractual
rights without either statutory authority or adequate legal
consideration. The courts reached the same result. See Union National
Bank of Chicago v. Weaver, 604 F.2d 543 (7th Cir. 1979); Union State
Bank v. Weaver, 526 E Supp. 29 (S.D.N.Y. 1981).
SBA's current regulations provide that the agency may terminate the
guarantee if the fee is not paid. 13 C.F.R. § 120.220 (introductory
language and subsection (e)). Implicit in this language is the premise
that the guarantee will be regarded as in effect until SBA terminates
it.
A 1983 decision considered similar issues under a different SBA
program, the Surety Bond Guarantee Program established by 15 U.S.C. §§
694a-694c. Since nothing in the legislation or implementing
regulations made payment of the guarantee fee a condition precedent to
the existence of the guarantee, and since the surety bond guarantee
agreement contained no provision comparable to the provision then
being used in the business loan guarantee agreement, the decision
concluded that nonpayment of the fee prior to default would not void
SBA's obligation to honor the guarantee, although SBA should deduct
the unpaid fee from the surety's claim. B-206893, Mar. 18, 1983.
A 1979 case considered the effect of another provision in the
guarantee agreement. A bank, conceding that it had not paid the
guarantee fee prior to default on the loan as originally written,
argued that it had effectively modified the agreement by granting the
borrower additional time to begin repayment. However, the guarantee
agreement explicitly required SBA's prior written approval of any
change in the terms of the loan, which the bank had neither requested
nor received. The modification was therefore not legally effective as
against SBA. B-193134, July 27, 1979.
The issue in 58 Comp. Gen. 693 (1979) was the effect of a refinancing
loan. In view of SBA's discretion to accept refinancing, GAO concluded
that the effect of a bank's failure to timely pay the fee on the
original loan was terminated when the original loan was repaid by the
refinancing loan. Thus, the fact that the guarantee on the original
loan may have been extinguished will not necessarily defeat an
otherwise valid guarantee on a subsequent refinancing loan.
Cases involving late payment or nonpayment of the guarantee fee may be
useful in analyzing the treatment and consequences of other terms and
conditions of the guarantee agreement, but should not be blindly
applied. For example, the court in Eastern Illinois Trust & Savings
Bank v. Sanders, 826 F.2d 615 (7th Cir. 1987), drew a distinction
between provisions expressly declared to be conditions precedent to
SBA's obligation, such as the fee provision, and those which are not
so declared. If a lender violates a provision in the latter category,
the issue becomes "whether the violation was a material breach of the
agreement, or rather whether [the lender] substantially complied with
the agreement." Id. at 616. The lender's violation in the cited case,
making "side loans" to a borrower, was found not to constitute a
material breach and therefore did not justify repudiation of SBA's
guarantee. By way of contrast, a lender who violates a provision in
the "condition precedent" category cannot enforce the guarantee, and
you never get to the material breach versus substantial compliance
analysis. See, e.g., First National Bank of Louisa, Kentucky v. United
States, 6 Cl. Ct. 241 (1984).
(2) Notice of default:
Another type of provision an agency may include in its program
regulations is a requirement that the lender notify the agency in
writing within a specified time period after a default occurs. The
Small Business Administration's (SBA) regulations included such a
requirement for many years. See, e.g., 13 C.F.R. § 122.10(a) (1980).
The provision was dropped in a 1985 revision of the regulations. Under
current regulations, SBA's obligation under a guarantee is
extinguished if the lender fails to demand purchase of the unpaid
guaranteed portion within 120 days after maturity of the note. 13
C.F.R. § 120.524(a)(8) (2005).
Pre-1985 decisions on the notice requirement are no longer applicable
to SBA under the current regulations. Nevertheless, we briefly note a
few of them because they illustrate the scope of an agency's authority
to implement a guarantee program by regulation and may have relevance
by analogy to similar requirements in other programs. Since the
requirement itself is a creature of agency regulations, the agency has
discretion to determine the consequences of noncompliance, ranging
from an interest penalty (B-181432, Sept. 4, 1979) to termination of
the guarantee commitment (B-201388, Sept. 23, 1981). The agency may
also make the consequences contingent upon the extent to which
noncompliance prejudices the interests of the government. See B-
187945, Mar. 22, 1977. While the basic requirement may not be waived
except to the extent permissible under the regulations (see B-181432,
Feb. 19, 1976), the particular form of notice, a matter of procedure,
is subject to waiver. B-188741, Jan. 25, 1978 (oral notice accepted
and acknowledged by agency held to be substantial compliance). See
also B-181432-0.M., Feb. 19, 1976 (agency may waive requirement in
guarantee agreement that lender provide it with a copy of the executed
note and settlement sheet).[Footnote 35]
D. Rights and Obligations of Government upon Default:
1. Nature of the Government's Obligation:
When a government agency guarantees a loan, it is promising to
indemnify someone in case of default. The "someone" includes both the
lending institution that originated the loan and subsequent purchasers
of the guaranteed portion of the loan. The default results from the
borrower's failure to make payment when due or other breach of a
material covenant of the loan. In the simple situation, a borrower
borrows money from a lender. The government guarantees the loan, with
the commitments of the lender and the government usually reduced to
writing in the form of a guarantee agreement. If the borrower defaults
on his or her payments, the lender looks to the government to pay on
the guarantee.
In some instances, Congress has explicitly provided in the program
legislation that the guarantee will be backed by the "full faith and
credit" of the United States. Examples are 12 U.S.C. § 635k
(guarantees and insurance issued by the Export-Import Bank), 15 U.S.C.
§ 683(b) (guarantees of debentures or securities issued by small
business investment companies), and 20 U.S.C. § 1075(b)(4) (federally
insured student loans).[Footnote 36]36 Language of this type has been
held to be "the highest assurance the Government can give, its
plighted faith." Perry v. United States, 294 U.S. 330, 351 (1935).
There is a long line of opinions of the Attorney General addressing
the effect of statutory language pledging the "faith" or "credit" of
the United States, or the absence of such language. While the opinions
are not limited to loan guarantee commitments, almost all of the cases
arose under loan guarantee programs. This is understandable because
(1) lenders are being asked to extend credit to a somewhat riskier
universe of borrowers which they most likely would not accommodate
without the guarantee; and (2) at least prior to the Federal Credit
Reform Act, the government's commitment was not backed by enacted
budget authority. To encourage lender participation in a variety of
programs, the Attorney General was asked, in effect, "Does the
government really mean it?"
Perhaps the leading case is 41 Op. Att'y Gen. 363 (1958), dealing with
ship mortgage and loan insurance under provisions of the Merchant
Marine Act of 1936, subsequently amended and now codified at 46 U.S.C.
App. §§ 12711275. The opinion makes several important points. First,
what does the language mean? It means that the government's obligation
is to be considered on the same footing as the interest-bearing
obligations of the United States such as Treasury bills, notes, and
bonds. 41 Op. Att'y Gen. at 366 (citing 41 Op. Att'y Gen. 138 (1953)).
Second and more important, what is the language's practical
significance? None, answered the Attorney General. Although
recognizing that Congress can establish such distinctions, the
Attorney General stated that, in the absence of such congressional
action, there is no "order of solemnity of valid general obligations
of the United States," nor does an obligation with the statutory faith
and/or credit language have any legal priority over a valid general
obligation of the United States without the language.
41 Op. Att'y Gen. at 369.
Finally, the Attorney General addressed the lack of advance budget
authority:
"If ... the existence of an appropriation is not a condition of or
limitation on the authority of an officer to contract on behalf of the
United States, the need for appropriations to meet an obligation
incurred under the contract does not affect the existence or validity
of the obligation."
Id. at 370. The opinion noted that Congress expressly authorized the
incurrence of obligations under the program in advance of
appropriations. Id. The following year, the Attorney General made the
same points with respect to Interstate Commerce Commission loan
guarantees to rail carriers. 41 Op. Att'y Gen. 403 (1959). After
emphasizing that the validity of the guarantee "is not affected by the
absence from the act of any language expressly pledging the faith or
credit of the United States," the opinion states that "It is enough to
create an obligation of the United States if an agency or officer is
validly authorized to incur such an obligation on its behalf and
validly exercises that power." Id. at 405.[Footnote 37]
Thus, reading all of the opinions together, we may state that a loan
guarantee is a valid obligation of the United States the same as any
other valid obligation, regardless of the presence or absence of full
faith and credit language and regardless of the presence or absence of
advance budget authority, provided (1) the program statute is
constitutional; (2) Congress has not disclaimed liability at the time
or before the commitment is made; (3) the guarantee is made by a
federal agency or official with the legal authority to do so; and (4)
the guarantee complies with applicable statutory and regulatory
requirements.
In an opinion concerning guarantees issued by the former Federal
Savings and Loan Insurance Corporation incident to its resolution of
failed or failing savings and loan institutions, the Comptroller
General expressly adopted the criteria and analysis of the Attorney
General opinions. 68 Comp. Gen. 14 (1988).
2. Scope of the Government’s Guarantee:
As noted earlier, a loan guarantee statute will typically specify the
permissible purpose(s) of the loans to be guaranteed, establish
eligibility requirements, and give the administering agency
considerable discretion to determine the terms and conditions of the
guarantee. Subject to the terms of the program legislation, there is
also an element of discretion in determining the permissible scope of
a guarantee, that is, the types and degree of risk to which the agency
may expose itself. This section presents a few issues GAO has
considered regarding the limits of that discretion.
As with any other payment situation, the government is not expected to
close its eyes to indications of fraud or misrepresentation. For
example, an agency should not make payment to a lender where it has
knowledge of the possibility of fraud, negligence, or
misrepresentation on the part of the lender. Making payment in the
face of such knowledge exposes the certifying officer to potential
liability. 51 Comp. Gen. 474 (1972); B-174861, Feb. 23, 1972. In these
two cases, however, GAO advised that the Small Business Administration
(SBA) could, upon default of the borrower, purchase the guaranteed
portion of the loan from an innocent holder who had purchased it in
the secondary market and who had no knowledge of the possible
misconduct by the originating lender. Payment to the innocent holder
in these circumstances would not waive any of SBA's rights against the
original lender, and, as a practical matter, would avoid a result
adverse to the holder that could seriously jeopardize the secondary
market. Thus, paying the innocent holder is an acceptable level of
risk whereas paying the suspected wrongdoer is not.
It follows that there is no objection to honoring the claim of an
innocent lender who is the victim of fraud by the borrower. B-167329,
Oct. 6, 1969.
Similarly, GAO held in 17 Comp. Gen. 604 (1938) that the Federal
Housing Administration was not liable to reimburse a lender bank for a
loss sustained as a result of a payment made, on the basis of a forged
authorization, to an individual other than a bona fide borrower. This
situation was distinguished from a case where a lender bank, in the
exercise of due care, suffered a loss as a result of a forged note. A-
94717-0.M., Aug. 12, 1938. The bank in 17 Comp. Gen. 604 already
possessed a validly signed note but suffered the loss by accepting a
forged authorization for payment. Comparison of the authorization with
the note would have disclosed the forgery.
A 1974 decision expanded somewhat on 51 Comp. Gen. 474. GAO determined
in B-140673, Dec. 3, 1974, that the SBA has sufficiently broad
statutory authority to repurchase the guaranteed portion of a loan
from an innocent secondary-market holder where the borrower is not in
default but the primary lender negligently or unlawfully withholds
payments. (Under the arrangement in question, the primary lender was
to continue servicing the loan and remit payments, minus a servicing
fee, to the holder.) This decision clearly enlarged the scope of SBA's
guarantee since the "triggering event" could be something other than a
default by the borrower in repaying the loan. However, the holding in
that case was for the relatively limited purpose of allowing SBA to
avoid the security registration requirements of the Securities Act of
1933, subsequently amended and now codified at
15 U.S.C. §§ 77a-77aa. The Securities and Exchange Commission had
determined that these requirements would apply to SBA-guaranteed loans
that were resold in the secondary market, unless SBA's guarantee was
absolute and fully protected the purchaser of the guaranteed portion
in all circumstances, including instances where the lender did not
forward all payments received from the borrower.
A few years later, B-181432, Aug. 11, 1978, explored what are perhaps
the outer limits of the "risk discretion" recognized in B-140673. SBA
proposed to contract with a private entity to serve as the centralized
fiscal agent in the secondary market for SBA guaranteed loans. The
fiscal agent would have responsibility for receiving payments from
borrowers, remitting these payments to the holders, and certifying the
amount of the outstanding balance each time a guaranteed loan was
transferred. SBA further proposed to unconditionally guarantee all
such actions and representations of the fiscal agent to the holder of
the guaranteed portion of a loan. GAO agreed that SBA could contract
with a fiscal agent and, consistent with B-140673, guarantee a holder
against the agent's failure to properly forward the borrower's loan
payments. However, to unconditionally guarantee holders against
certification errors by the fiscal agent would significantly enlarge
SBA's existing guarantee responsibility, would subject SBA to
substantially new risks, and would therefore require additional
legislative authority. The increased risk would include new types of
events that could trigger SBA's obligation to purchase a guaranteed
loan, as well as the maximum amount of SBA's liability (should the
fiscal agent erroneously certify the outstanding balance of a loan to
be larger than it actually was).
3. Amount of Government’s Liability:
A program statute may or may not provide guidance on determining the
amount the government is obligated to pay under a guarantee or the
manner in which a loss is to be computed. If it does not, the agency's
discretion again comes into play. As long as they are consistent with
whatever statutory guidance does exist, the agency's regulations will
generally be controlling.
For example, the computation of claims under Title I of the National
Housing Act is prescribed by regulation. See 24 C.F.R. § 201.55
(2005). In very simplified form, the claim is a specified percentage
of the sum of several elements: the unpaid amount of the loan (subject
to certain reductions), plus accrued interest, plus uncollected court
costs, plus attorney's fees actually paid, plus certain recording
expenses. Claims by lenders using unauthorized computations have been
disallowed. E.g., B-133924, Dec. 4, 1957.
In another case involving the National Housing Act loan program, a
lender claimed an amount representing partial reimbursement of
attorney's fees incurred in collecting on a defaulted note. Although
the borrower's obligation on the note was discharged and the note did
not contain a stipulation for attorney's fees in the event of default
(which would have been ineffective under state law), payment of the
claim was proper since it was specifically provided for in the
regulations. B-163029, Feb. 16, 1968.
Validly issued program regulations are controlling even though
applying them in a particular case may produce an anomalous result to
the lender's advantage, at least where the lender has fully complied.
For example, regulations governing defaulted mobile home loans provide
that reimbursement is computed by deducting from the unpaid amount of
the loan either the actual sales price upon repossession or the
appraised value of the mobile home, whichever is greater. GAO has
found this formula to be within the Department of Housing and Urban
Development's (HUD) statutory authority. 71 Comp. Gen. 449 (1992). At
one time, the regulations also prohibited the filing of a claim until
after default, repossession, and sale of the mobile home. These
regulations occasionally produced a situation in which a particular
model could not be found in current rating publications (such as the
so-called "blue book") and the mobile home was no longer available for
appraisal by HUD because, in compliance with the regulations, it had
already been sold. Since the impossibility of appraisal was due to the
regulations and was through no fault of the lender, the Comptroller
General held that the actual sales price could be used in computing
the reimbursement, as long as it was administratively determined to be
reasonable. 55 Comp. Gen. 151 (1975); B-184016, Sept. 16, 1975. The
solution, of course, was to amend the regulations.
Several early decisions involved the language in 12 U.S.C. § 1703(a)
which authorizes HUD to insure lending institutions against "losses
which they may sustain" in making home improvement loans or other
advances of credit. If the loan does not either provide for the
automatic acceleration of maturity upon default or give the lender the
option to accelerate which the lender in fact exercises, the
government cannot pay the lender the full unpaid balance of an
unmatured loan because payments not yet due do not represent a loss
actually sustained by the lending institution. A-74701, May 22, 1936.
While this result was consistent with the statutory language, it was
not practical from an administrative standpoint. It meant that HUD was
limited to paying the lender the monthly installments as they became
due. Two later decisions effectively modified A-74701 and established
that, if there is no acceleration provision (an event which would be
unlikely today), or if exercising an acceleration option would be
undesirable because of state law, HUD can nevertheless reimburse a
lending institution for the entire unpaid balance of the loan if it is
clear that the entire unpaid balance will be a claim of the lending
institution against the government and if the lender assigns the note
or other evidence of indebtedness to the government. 16 Comp. Gen. 723
(1937); 16 Comp. Gen. 336 (1936).
4. Liability of the Borrower:
When the government guarantees a loan and the borrower defaults, the
lender is not required to make special efforts toward collection.
Rather, the lender may fall back on the government's guarantee and
leave the entire responsibility for collection to the government. See,
e.g., 16 Comp. Gen. 336 (1936); B-134628, Jan. 15, 1958. Naturally, it
is invariably to the lender's advantage to do just that. Payment by
the government, however, does not mean that the borrower is off the
hook. Unless the program legislation provides otherwise, the
government becomes subrogated to the rights of the lender, and the
borrower is indebted to the government for the amount it has paid out.
The government is not required to collect more than the amount it has
actually paid out to the lender, plus interest and collection costs to
the extent authorized. See 15 Comp. Gen. 256 (1935). A variety of
issues relating to borrower liability can be illustrated by an
examination of the Veterans' Home Loan Guarantee Program.
a. Veterans’ Home Loan Guarantee Program:
Title III of the Servicemen's Readjustment Act of 1944, as amended and
codified at 38 U.S.C. §§ 3701-3751, authorizes the Department of
Veterans Affairs (VA) to guarantee loans to enable veterans to
purchase or construct homes and for other specified purposes. This is
the well-known "G.I. loan." The guarantee is an entitlement in the
sense that a loan meeting the statutory requirements and made for one
of the statutory purposes is "automatically guaranteed." Id. §
3710(a). For certain loans closed after December 31, 1989, the
liability of the veteran-borrower to the government was considerably
restricted by the Veterans Home Loan Indemnity and Restructuring Act
of 1989.[Footnote 38] A description of the "old" rules is nevertheless
useful to understand what has and has not been changed, and because
loans under the old and new programs will exist side-by-side for many
years into the future.[Footnote 39]
(1) Loans closed prior to 1990:
Upon proper payment of a guarantee, the Department of Veterans Affairs
(VA) acquires both the right of subrogation and an independent right
of indemnity against the defaulting veteran. United States v. Shimer,
367 U.S. 374 (1961); Vail v. Derwinski, 946 F.2d 589 (8th Cir. 1991);
McKnight v. United States, 259 F.2d 540 (9th Cir. 1958). As the
Supreme Court noted in Shimer, a contrary result would convert the
guarantee into a grant. 367 U.S. at 387. The right of indemnity is
reinforced by the guarantee agreement and by a regulation in effect
since the early days of the program which provides that any amount
paid out by the VA under a guarantee by reason of default "shall
constitute a debt owing to the United States by such veteran." 38
C.F.R. § 36.4323(e) (2005).
In the simple situation, the veteran defaults, the bank forecloses,
the VA pays the bank under the guarantee and then proceeds to attempt
recovery from the defaulting veteran. E.g., McKnight, 259 F.2d 540.
Sale of the property by the veteran does not automatically exonerate
the veteran from liability. Where a veteran who bought a home under a
VA-guaranteed loan sells the property to a purchaser who assumes the
mortgage and subsequently defaults, the veteran may still be liable to
the government for the amount VA is required to pay under the
guarantee. B-155317, Oct. 21, 1964; B-131120, July 26, 1957; B-131210,
Apr. 9, 1957. This result applies unless the transaction amounts to a
novation, that is, unless the mortgagee releases the original
mortgagor and extinguishes the old debt. B-108528, Dec. 3, 1952.
Breach by the lender of an agreement to notify the veteran (original
borrower) if the subsequent purchaser defaults does not affect the
veteran's liability to the United States. B-154496, July 9, 1964.
The potential harshness of the result in many of these cases is
largely mitigated through statutory release and waiver provisions.
When a veteran disposes of residential property securing a guaranteed
loan, the veteran may be released at the time of the sale from all
further liability to the VA resulting from the loan, including default
by the transferee or subsequent purchaser, if (1) the loan is current,
(2) the purchaser is obligated by contract to assume the full
liability and responsibility of the veteran under the loan, and (3)
the purchaser qualifies from a credit standpoint, that is, if the
purchaser would qualify for a guarantee if he or she were an eligible
veteran. 38 U.S.C. § 3714(a)(1). Issuance of the release is mandatory
if the statutory conditions are met. Upon receipt of written
notification by the veteran and a determination that the conditions in
38 U.S.C. § 3714(a) are met, the release is issued by the holder of
the loan. In some cases, the VA is considered the loan holder. Id. §
3714(a)(2). The veteran has a right to appeal an adverse determination
to the VA. Id. § 3714(a)(4). Even if the specified conditions are not
met, the assumption may be approved in certain circumstances. Id. §
3714(a)(4)(B)(ii). Sale of the property without notifying the holder
may result in acceleration of the loan. Id. § 3714(b).
In addition, the VA is required to waive a veteran's indebtedness
arising from a loan upon determining that collection would be against
equity and good conscience, and that there is no indication of fraud,
misrepresentation, or bad faith on the part of any interested person.
38 U.S.C. § 5302(b). Waiver must be requested within 1 year from
receipt of the notification of indebtedness. Id. This is a "mandatory"
waiver statute, imposing upon the VA a duty to actually exercise its
discretion once waiver has been requested. See Beauchesne v. Nimmo,
562 F. Supp. 250 (D. Conn. 1983) (discussing mandatory nature of 38
U.S.C. § 5302 dealing with waiver of benefit overpayments).
As with many waiver statutes, 38 U.S.C. § 5302 eliminates the
potential liability of certifying and disbursing officers with respect
to any amounts waived. Id. § 5302(d). "Certifying officer" in this
context means the authorized certifying officer of the VA who
certified the payment in question, and has no reference to any
official of any private institution involved in the transaction.
Colorado v. Veterans Administration, 430 F. Supp. 551, 561 (D. Colo.
1977), affd, 602 F.2d 926 (10th Cir. 1979), cert. denied, 444 U.S.
1014 (1980).
Adverse waiver determinations may be appealed to the Board of Veterans
Appeals established by 38 U.S.C. § 7101. See 38 C.F.R. §§ 20.101(18)-
(19) (2005); see also 38 C.F.R. § 1.958. Waiver determinations and the
Board's review of them are subject to further judicial review by the
United States Court of Veterans Appeals under an "arbitrary and
capricious" standard. E.g., Kaplan v. Brown, 9 Vet. App. 116, 119
(1996) and cases cited. If waiver is granted, amounts previously paid
may be refunded. 38 C.F.R. § 1.967. GAO reviewed these regulations
when they were first issued and agreed that they were within the VA's
authority. B-158337, Mar. 11, 1966.
Absent either release or waiver, the VA may pursue recovery against
the veteran. See, e.g., Davis v. National Homes Acceptance Corp., 523
F. Supp. 477 (N.D. Ala. 1981); B-188814, Mar. 8, 1978; B-172672, June
22, 1971. In B-188814, for example, the veteran had failed to obtain a
release, would not have been eligible for it anyway, and VA refused to
waive the indebtedness. Therefore, the veteran was held liable even
though the purchaser who subsequently defaulted had assured him that
he would no longer be liable to VA.
Most of the cases cited thus far concern the liability of the original
borrower where a subsequent purchaser defaults. The purchaser of
property for which VA has guaranteed a loan, whether or not the
purchaser is a veteran, may also become liable to VA for amounts VA is
required to pay out upon default. For example, in B-141888, July 21,
1960, a veteran purchased a home, obtained a VA guarantee, and later
sold the home to a nonveteran who assumed the mortgage. The nonveteran
purchaser defaulted. The lender foreclosed and obtained a deficiency
judgment against both the veteran and the nonveteran, which VA paid.
VA waived the veteran's indebtedness, but was still entitled to
collect from the defaulting purchaser. See also B-155932, Feb. 23,
1971; B-155932, Oct. 13, 1970 (same case).
Issues have arisen under the loan program concerning the availability
of state law as a defense to a VA claim. For example, it is not
uncommon for states to prohibit, or impose various restrictions on,
lenders' obtaining deficiency judgments against defaulting purchasers
after a foreclosure sale. Since VA's rights under subrogation are
limited to the rights of lenders, these statutes would limit VA's
right to obtain deficiency judgments under a subrogation theory.
However, VA's regulations have been held to "create a uniform system"
for administering the guarantee program, a system which displaces
state law. Shimer, 367 U.S. at 377. These regulations, as noted
earlier, include a provision giving the VA an independent right of
indemnity. Thus, to avoid the possibility of being hampered by state
law, VA has generally proceeded under its independent right of
indemnity rather than under a subrogation theory. E.g., B-126500, Feb.
3, 1956; B-124724, Dec. 21, 1955.
Consistent with Shimer, the courts generally hold that the VA's right
of indemnity prevails over state laws which flatly prohibit VA from
obtaining deficiency judgments through subrogation. Jones v. Turrtage,
699 E Supp. 795 (N.D. Cal. 1988), aff'd mem., 914 F.2d 1496 (9th Cir.
1990), cert. denied, 499 U.S. 920 (1991); United States v. Rossi, 342
F.2d 505 (9th Cir. 1965); B-174343, Nov. 17, 1971; B-143844, Nov. 15,
1960; B-124724, Oct. 3, 1955. Other cases applied the same approach to
dismiss other aspects of state deficiency laws. E.g., B-173007, June
29, 1971; B-162193, Sept. 1, 1967; B-122929, June 24, 1955.
At one time, some courts viewed VA's right of indemnity as secondary
to its subrogation rights, and, therefore, held that VA could not
invoke indemnification as a means of avoiding state law restrictions
that would limit its recovery rights under a theory of subrogation.
See, e.g., Whitehead v. Derwinski, 904 F.2d 1362 (9th Cir. 1990).
However, this view has been abandoned. In its en bane decision in
Carter v. Derwinski, 987 F.2d 611 (9th Cir. 1992), cert. denied sub
nom., 510 U.S. 821 (1993), the Ninth Circuit explicitly overruled
Whitehead. The court held in Carter that the two remedies were equally
available to VA:
"... The regulation at issue plainly says the VA has a right of both
subrogation and indemnity. There is no occasion for us to resolve any
conflict between the exercise of these two rights, because both can be
fully enforced. Indeed, not only are the rights of subrogation and
indemnity not in conflict, they are complementary and mutually
reinforcing. Demoting the right of indemnity to second-class status
amounts to a judicial rewriting of the regulation."
987 F.2d at 615. See also United States v. Davis, 961 F.2d 603 (7th
Cir. 1992); Vail v. Derwinski, 946 F.2d 589 (8th Cir. 1991); Boley v.
Principi, 144 F.R.D. 305 (E.D.N.C. 1992), affd, 10 F.3d 218 (4th Cir.
1993); In re Silveous, 174 B.R. 479 (Bankr. N.D. Ohio 1994).
The defense of minority has also been raised on occasion. State law
generally provides that a contract entered into by a minor is voidable
at the minor's option. Several states have statutes which expressly
make the defense of infancy inapplicable to contracts under the
Servicemen's Readjustment Act, and the few cases GAO has considered
have involved statutes of this type. See B-126500, Feb. 3, 1956; B-
124750, Oct. 3, 1955; B-105429, Dec. 11, 1951. In addition, the United
States has sovereign immunity from defenses arising under state
statutes of limitations unless expressly waived. E.g., United States
v. Summerlin, 310 U.S. 414 (1940) (claim under National Housing Act);
Bresson v. Commissioner of Internal Revenue, 213 F.3d 1173 (9th Cir.
2000) (federal tax assessment); B-134523, Mar. 19, 1958 (Summerlin
applied to VA claim). See also, United States v. California, 507 U.S.
746, 757-58 (1993) (reaffirming the rule in Summerlin where the
government is proceeding in its sovereign capacity, but distinguishing
Summerlin on the facts of that case).
Another provision of the program legislation makes the "financial
transactions" of the VA "incident to, or arising out or the guarantee
program "final and conclusive upon all officers of the Government."
38 U.S.C. § 3720(c). Thus, GAO will not review the amount of
indebtedness determined by the VA. B-105551, Sept. 25, 1951.
Similarly, apart from advising persons that the options exist, GAO
will not review the VA's exercise of its waiver and release
authorities. B-108528, Oct. 6, 1952; B-216270, Sept. 25, 1984
(nondecision letter).
(2) Loans closed after December 31, 1989:
Under 38 U.S.C. § 3729, the Department of Veterans Affairs will charge
the veteran a loan fee based on a percentage of the loan amount. The
fee may be included in the loan and paid from its proceeds. Payment of
the loan fee is a prerequisite to the guarantee. Disabled veterans
receiving compensation or their surviving spouses are exempt.
Subsequent transferees assuming a loan are also charged a loan fee.
A veteran who pays the loan fee or is exempt from paying it:
"shall have no liability to the Secretary with respect to the loan for
any loss resulting from any default of such individual except in the
case of fraud, misrepresentation, or bad faith by such individual in
obtaining the loan or in connection with the loan default."
Id. § 3703(e)(1). This provision was added by section 304(a) of the
Veterans Home Loan Indemnity and Restructuring Act of 1989.[Footnote
40] An explanatory statement on the final House-Senate compromise
(there was no conference report) emphasizes that "bad faith" is
intended to include abandonment of a mortgage by one with the
financial ability to make the payments. 135 Cong. Rec. 30292 (1989).
The limited liability of 38 U.S.C. § 3703(e)(1) does not apply to
persons assuming a loan or to veterans who receive mobile home loans.
Id. § 3703(e)(2). Apart from the limited liability of 38 U.S.C. §
3703(e), the VA's right of subrogation is preserved. Id. § 3732(a)(1).
b. Debt Collection Procedures:
Debt collection is governed by the Federal Claims Collection Act of
1966,[Footnote 41] the Debt Collection Act of 1982,[Footnote 42] and
the Debt Collection Improvement Act of 1996,[Footnote 43] as well as
the Federal Claims Collection Standards, 31 C.F.R. parts 900-904
(2005). Authorities available to federal agencies in varying degrees
include assessment of interest and penalties, offset, collection in
installments, compromise, use of commercial collection agencies, and,
if none of this works, referral to the Department of Justice for suit.
Federal debt collection practices are explored in detail in Chapter 13
of volume III of the second edition of Principles of Federal
Appropriations Law and, as a general proposition, are the same for a
debt arising from a loan guarantee as for any other debt. The Office
of Management and Budget set out general requirements for agencies to
follow in managing receivables and collecting debts arising from
federal credit activities, including guaranteed and insured loans in
OMB Circular No. A-129, Policies for Federal Credit Programs and Non-
Tax Receivables, Appendix A, §§ IV and V (November 2000). Among other
things, these requirements deal with asset sales. In this regard, two
recent GAO reports address the asset sales program at the Small
Business Administration: Small Business Administration: Accounting
Anomalies and Limited Operational Data Make Results of Loan Sales
Uncertain, GAO-03-87 (Washington, D.C.: Jan. 3, 2003), and a follow-up
report, SBA Disaster Loan Program: Accounting Anomalies Resolved but
Additional Steps Would Improve Long-Term Reliability of Cost
Estimates, GAO-05-409 (Washington, D.C.: Apr. 14, 2005).
The governmentwide authorities described above do not apply to the
extent an agency has its own debt collection authority, either agency-
specific or program-specific. This may be in the form of positive
authority or restrictions. We turn again to the Department of Veterans
Affairs (VA) for several illustrations.
The VA has the authority to compromise any claim arising from its
guarantee or insurance programs, "notwithstanding the provisions of
any other law," and, therefore, independent of the governmentwide
compromise authority under the Federal Claims Collection Act and
related statutes. See 38 U.S.C. §§ 3720(a)(3) and(4). Exercise of this
authority is entirely up to the VA. See B-153726, May 4, 1964. See
generally 71 Comp. Gen. 449 (1992); 67 Comp. Gen. 271 (1988).
Subject to its own implementing regulations and certain exceptions and
procedures specified in the statute, the VA is required to offset
debts arising from veterans' benefit programs (for which recovery has
not been waived) against future payments under any law administered by
the VA. 38 U.S.C. § 5314(a). However, offset against a veteran or his
or her surviving spouse by any other agency to collect a debt owed to
the VA under a guarantee program is prohibited except with the written
consent of the debtor or under a judicial determination. Id. § 3726.
Under this legislation, for example, the Defense Department may not
deduct the amount of indebtedness to VA from the pay of active duty or
retired military personnel absent either consent or a court
determination. (The statutory definition of veteran includes certain
active duty personnel.) B-167880, Jan. 28, 1970. This protection
against setoff applies only where the veteran (debtor) has incurred
the debt through use of his or her VA loan entitlement. Thus, setoff
is not prohibited where a veteran, upon purchasing a home, assumes a
VA loan in the ordinary course of the real estate transaction without
involving his or her own loan entitlement. B-167880, Dec. 2, 1969.
The VA also has independent statutory authority (and a general
obligation) to assess interest and reasonable administrative costs on
debts arising from its benefit programs, including debts arising from
guarantee programs to the extent not precluded by the terms of the
loan instrument. 38 U.S.C. § 5315. For debts within the scope of the
statute, 38 U.S.C. § 5315, rather than 31 U.S.C. § 3717 (Federal
Claims Collection Act), is the controlling provision. 66 Comp. Gen.
512 (1987).
If reasonable administrative collection efforts fail, the VA may use
its own attorneys to sue the debtor, subject to the direction and
supervision of the Attorney General. 38 U.S.C. § 5316.
The VA legislation cited above deals with specific debt collection
tools. An example of more general authority is 7 U.S.C. § 1981(b)(4),
which authorizes the Farmers Home Administration to "compromise,
adjust, reduce, or charge-off debts or claims," and, within certain
limits, to release debtors, other than Housing Act debtors, "from
personal liability with or without payment of any consideration at the
time of the compromise, adjustment, reduction, or charge-off." Under
this law, for example, the Farmers Home Administration is authorized
to terminate the accrual of interest on the guaranteed portion of
defaulted loans. 67 Comp. Gen. 471 (1988) (noting, however, that the
agency had restricted its statutory discretion by its own regulations).
5. Collateral Protection:
In administering a loan guarantee program, it may become desirable for
an agency to make expenditures other than merely paying out on the
guarantee. From a program or even economical standpoint, it may be
desirable, for example, to make expenditures to protect and preserve
the government's interest in the collateral, such as custodial care,
insurance costs, or the purchase of prior liens. For purposes of this
discussion, we use the term "collateral protection" to cover two types
of expenditure—preservation of the collateral itself and protection of
the government's interest in the collateral.
Whether or not such expenditures are proper is essentially a question
of "purpose availability." The first step is to analyze the terms and
intent of the agency's program authority to determine whether the
agency's funds are available for the contemplated expenditure either
expressly or by necessary implication. If this does not provide the
answer, the next step is to apply the "necessary expense" doctrine.
[Footnote 44]
An example of specific authority is 38 U.S.C. § 3727, which authorizes
the Department of Veterans Affairs (VA) to make expenditures to
correct structural defects in certain homes encumbered by a VA-
guaranteed mortgage. The Department of Housing and Urban Development
(HUD) has similar authority to use funds available under Title I of
the National Housing Act to correct structural defects in housing
insured by the Federal Housing Administration (FHA). 12 U.S.C. §
1735b; B-114860-0.M., Jan. 15, 1974. An example of somewhat less
specific authority is another provision of the Housing Act, 12 U.S.C.
§ 1713(k), which authorizes HUD "to take such action and advance such
sums as may be necessary to preserve or protect the lien of such
mortgage." In 54 Comp. Gen. 1061 (1975), GAO agreed that this
provision authorizes HUD to advance money from its insurance fund to
make repairs to multifamily projects covered by insured mortgages
assigned to HUD upon default, until either the default is cured or HUD
acquires title to the property.
Absent specific authority, collateral protection expenditures may
still be permissible under a "necessary expense" theory. As a general
proposition, the authority to require collateral implies the authority
to make reasonable expenditures to care for and preserve the
collateral where administratively determined to be necessary. 54 Comp.
Gen. 1093 (1975).
The limits of the necessary expense approach are illustrated by B-
170971, Jan. 22, 1976, a case involving the now-defunct New Community
Development Program. The Department of Housing and Urban Development
(HUD) questioned whether it could use the revolving fund established
by the Urban Growth and New Community Development Act of 1970 to make
two types of collateral protection expenditures: (1) expenditures to
repair, maintain, and operate the security and (2) payments to senior
lienholders. The expenditures were intended to advance program
objectives by preventing deterioration of the security pending
possible acquisition by HUD, or perhaps in some cases enable a
developer to regain financial health and successfully continue with
the project.
The Comptroller General reviewed the program legislation and
legislative history and concluded that the proposed expenditures would
constitute a new and major type of financial assistance entirely
beyond the intended scope of the statute, and were not authorized
except in cases where HUD had made a bona fide determination to
acquire the security. A later decision, B-170971, July 9, 1976,
discussed HUD's specific authority under the program legislation to
make collateral protection expenditures after it had acquired the
security.
Where an agency acquires property through a loan or loan guarantee
program it administers, it may not transfer the management and
disposition of that property to another federal agency without
specific statutory authority nor may it effect such a transfer under
the Economy Act, 31 U.S.C. § 1535. B-156010, Mar. 16, 1965 (concluding
that VA could not transfer the management and disposition of acquired
property to HUD without specific authority).
A similar type of payment is one designed to protect the government's
interest in the transaction as opposed to maintaining the particular
piece of property. Again, the question is one of purpose availability
in light of the agency's statutory authority. Thus, where FHA had
acquired a second mortgage on real property through payment of a loss
to an insured financial institution under Title I of the National
Housing Act, it could use Title I funds to redeem the property to
protect its junior lien, under a right of redemption conferred by
state law, if it determined that redemption was in the best interests
of the government and necessary to carry out the provisions of Title
I. 36 Comp. Gen. 697 (1957). See also 34 Comp. Gen. 47 (1954).
Collateral protection may take forms other than direct expenditures.
For example, the Small Business Administration could subordinate a
senior lien to enable a borrower to obtain necessary surety bonds upon
an administrative determination that the action would be consistent
with the statutory purposes and would improve the prospects for
repayment of the loan. 42 Comp. Gen. 451 (1963). (Under the governing
legislation, SBA had the discretion not to require security at all on
loans sufficiently sound as to reasonably assure repayment.) Another
1963 case held that a statute authorizing the Maritime Administration
to take necessary steps to protect or preserve collateral securing
indebtedness authorized it to agree to reschedule payments under an
insured ship mortgage to avert impending default. 43 Comp. Gen. 98
(1963).
In 63 Comp. Gen. 465 (1984), a borrower defaulted on a loan guaranteed
by the SBA. SBA purchased the guaranteed portion of the loan from the
lending bank and proceeded to place the loan in liquidation. However,
a prior lienholder scheduled a foreclosure sale. SBA was unable to get
a Treasury check in time to submit a protective bid, and asked the
lending bank to advance funds to purchase the property at the
foreclosure sale, promising to reimburse the bank with interest.
Obviously, a government agency does not normally have the authority to
borrow money from a commercial bank to carry out its programs. Under
the particular circumstances involved, however, GAO found that the
transaction, including the commitment to pay interest, could be
justified under SBA's broad authority[Footnote 45] in 15 U.S.C. §
634(b)(7) to "take any and all actions" deemed necessary in
liquidating or otherwise dealing with authorized loans or guarantees.
The decision emphasized that it was nothing more than an
interpretation of SBA's legal authority under the "unique
circumstances of this case," and should not be regarded as
establishing a "broad legal precedent." 63 Comp. Gen. at 469.
Chapter 11 Footnotes:
[1] Similar definitions are found in GAO, A Glossary of Terms Used in
the Federal Budget Process, GAO-05-734SP (Washington, D.C.: September
2005), at 53, and in OMB Circular No. A-11, Preparation, Submission,
and Execution of the Budget, part V, "Federal Credit," § 185.3(m)
(June 21, 2005). Summary information on individual programs may be
found in the Catalog of Federal Domestic Assistance, prepared annually
by the General Services Administration and Office of Management and
Budget and available in electronic form at www.cfda.gov (last visited
September 15, 2005).
[2] For a detailed discussion of some of these and similar credit
assistance programs, see the following GAO reports: Rural Utilities
Service: Opportunities to Better Target Assistance to Rural Areas and
Avoid Unnecessary Financial Risk, GAO-04-647 (Washington, D.C.: June
18, 2004); Rural Development: Rural Business-Cooperative Service
Business Loan Losses, GAO/RCED-99-249 (Washington, D.C.: Aug. 25,
1999); and Rural Development: Rural Business-Cooperative Service's
Lending and the Financial Condition of Its Loan Portfolio, GAO/RCED-99-
10 (Washington, D.C.: Jan. 12, 1999).
[3] Subcommittee on Economic Stabilization, House Committee on
Banking, Finance and Urban Affairs, Catalog of Federal Loan Guarantee
Programs, 95th Cong., 1st sess. (Comm. Print 1977), at page x.
[4] We do not address GSEs further in this publication. Readers
needing more may consult several GAO products such as Government-
Sponsored Enterprises: A Framework for Strengthening GSE Governance
and Oversight, GAO-04-269T (Washington, D.C.: Feb. 10, 2004); GSEs:
Recent Trends and Policy, T-OCFJGGD-97-76 (Washington, D.C.: July 16,
1997); Government-Sponsored Enterprises: A Framework for Limiting the
Government's Exposure to Risks, GAO/GGD-91-90 (Washington, D.C.: May
22, 1991); and Budget Issues: Profiles of Government-Sponsored
Enterprises, GAO/AFMD-91-17 (Washington, D.C.: Feb. 1, 1991).
[5] See generally Analytical Perspectives, Budget of the United States
Government for Fiscal Year 2006, chapter 7, “Credit and Insurance”
(Feb. 7, 2005), at 85–122, available at
www.whitehouse.gov/omb/budget/fy2006/ (last visited September 15,
2005).
[6] Id. at 85.
[7] Id. at 108.
[8] Id. at 90, 97.
[9] Pub. L. No. 96-185, 93 Stat. 1324 (Jan. 7, 1980).
[10] Pub. L. No. 107-42, 115 Stat. 230 (Sept. 22, 2001).
[11] The amendment was enacted by section 1902 of the Omnibus Budget
Reconciliation Act of 1981, Pub. L. No. 97-35, 95 Stat. 357, 767 (Aug.
13, 1981).
[12] The primary difference between a loan guarantee program and a
deferred participation loan program is that the lending institution
can demand that SBA pay the outstanding balance of a deferred
participation loan at any time, but can demand SBA's purchase of the
outstanding balance of a guaranteed loan only under the conditions
prescribed in the regulations—generally only upon default of the
borrower.
[13] Pub. L. No. 97-35, § 1911.
[14] Pub. L. No. 85-699, 72 Stat. 689 (Aug. 21, 1958).
[15] Pub. L. No. 93-344, § 3(a)(2), 88 Stat. 297, 299 (July 12, 1974).
[16] An "unusual" case where exceeding a ceiling was not illegal,
because of rather explicit legislative history, is 53 Comp. Gen. 560
(1974).
[17] Standing alone, 2 U.S.C. § 651(a) is not a statutory requirement
for advance appropriation authority. A point of order may not be
raised or may be defeated, in which event the validity of any ensuing
legislation is not affected. As in the situation discussed in B-
230951, many program statutes independently impose the requirement.
[18] These documents are available at www.fasab.gov/codifica.html
(last visited September 15, 2005).
[19] As its title suggests, this omnibus act incorporated the fiscal
year 2005 appropriations acts for many federal departments and
agencies.
[20] A very general definition of "administrative expenses" may be
found in B-24341, Mar. 12, 1942, at 5. For FCRA purposes, see also OMB
Cir. No. A-11, § 185.3(a); GAO-01-197, at 60.
[21] Pub. L. No. 108-447, 118 Stat. 2809, 3286 (Dec. 8, 2004)
(Veterans Housing Benefit Program Fund). The fiscal year 2005
appropriation language does include a cap on gross obligations for
certain direct loans.
[22] Pub. L. No. 91-609, title VII, 84 Stat. 1770, 1791 (Dec. 31,
1970).
[23] The Department of Agriculture's Farm Service Agency now has
administrative responsibility for the programs formerly carried out by
the Farmers Home Administration. See 7 U.S.C. §§ 6932(a) and (b)(3).
[24] As discussed later in this section, the continued viability of
these cases is questionable in light of subsequent judicial decisions—
particularly Office of Personnel Management v. Richmond, 496 U.S. 414
(1990).
[25] Estoppel claims arise in many contexts and are discussed further
in Chapter 12 in volume III of the second edition of Principles of
Federal Appropriations Law.
[26] The court noted that, pursuant to a statutory authorization, SBA
had delegated certain creditworthiness determinations to lenders in
its "Preferred Lenders Program"; however, the lender in this case was
not in that program. The Preferred Lenders Program is discussed in
GAO, Small Business Administration: Progress Made but Improvements
Needed in Lender Oversight, GAO-03-90 (Washington, D.C.: Dec. 9,
2002), and in B-300248, Jan. 15, 2004.
[27] The Biomass Energy and Alcohol Fuels Act of 1980, Pub. L. No. 96-
294, title II, 94 Stat. 611, 683 (June 30, 1980).
[28] Pub. L. No. 93-224, 87 Stat. 937 (Dec. 29, 1973), codified at 12
U.S.C. §§ 2281-2296.
[29] SBA now has such borrowing authority in 15 U.S.C. § 633(c)(5).
[30] The Department's Rural Utilities Service now performs the
functions formerly carried out by the Rural Electrification
Administration. See 7 U .S.0 . § 6942.
[31] Both 60 Comp. Gen. 700 and B-164031(5) applied the basic
principles of decisions on the substitution of grantees discussed in
Chapter 10.
[32] The Department of Agriculture used to conduct these programs
through the now defunct Rural Electrification Administration; thus,
the decisions discussed here refer to that entity. The Department's
Rural Utility Service now administers these programs. For recent
background on the programs, see GAO, Rural Utilities Service:
Opportunities to Better Target Assistance to Rural Areas and Avoid
Unnecessary Financial Risk, GAO-04-647 (Washington, D.C.: June 18,
2004).
[33] The same facts in today's computerized environment could well
produce a different result.
[34] Pub. L. No. 99-272, § 18007, 100 Stat. 82, 366 (Apr. 7, 1986).
[35] For a detailed discussion of waiver of agency regulations in the
context of Commodity Credit Corporation export assistance guarantees,
see B-208610, Sept. 1, 1983.
[36] This and similar language has, and is intended to have,
connotations of constitutional significance, although the words "full
faith and credit" appear in the U.S. Constitution only once, in the
requirement that each state recognize the laws, records, and judicial
proceedings of other states (art. IV, § 1). In addition, the U.S.
Constitution empowers the Congress to borrow money "on the credit of
the United States" (art. I, § 8, cl. 2).
[37] Other opinions in this family are 42 Op. Att'y Gen. 327 (1966);
42 Op. Att'y Gen. 323 (1966); 42 Op. Att'y Gen. 21 (1961); 41 Op.
Att'y Gen. 424 (1959); and 6 Op. Off. Legal Counsel 262 (1982). Since
the opinions all said basically the same thing and seemed to arise
under every program in sight, the Attorney General stopped issuing
formal opinions on routine full faith and credit questions in this
context in 1973. 6 Op. Off. Legal Counsel 262, at n.2.
[38] Pub. L. No. 101-237, title III, 103 Stat. 2062, 2069 (Dec. 18,
1989).
[39] For a comprehensive discussion of the program, see Bernard P.
Ingold, The Department of Veterans Affairs Home Loan Guaranty Program:
Friend or Foe?, 132 Mil. L. Rev. 231 (1991).
[40] Pub. L. No. 101-237, title III, 103 Stat. 2069, 2073 (Dec. 18,
1989).
[41] Pub. L. No. 89-508, 80 Stat. 308 (July 19, 1966).
[42] Pub. L. No. 97-365, 96 Stat. 1749 (Oct. 25, 1982).
[43] Pub. L. 104-134, 110 Stat. 1321, 1321-358 (Apr. 26, 1996).
[44] See section B of Chapter 4 for a discussion of the necessary
expense doctrine.
[45] The Supreme Court has noted in another context that Congress has
given the SBA "extraordinarily broad powers" to accomplish the
objectives of the Small Business Act. Small Business Administration v.
McClellan, 364 U.S. 446, 447 (1960).
[End of Chapter 11]
GAO's Mission:
The Government Accountability Office, the investigative arm of
Congress, exists to support Congress in meeting its constitutional
responsibilities and to help improve the performance and accountability
of the federal government for the American people. GAO examines the use
of public funds; evaluates federal programs and policies; and provides
analyses, recommendations, and other assistance to help Congress make
informed oversight, policy, and funding decisions. GAO's commitment to
good government is reflected in its core values of accountability,
integrity, and reliability.
Obtaining Copies of GAO Reports and Testimony:
The fastest and easiest way to obtain copies of GAO documents at no
cost is through the Internet. GAO's Web site ( www.gao.gov ) contains
abstracts and full-text files of current reports and testimony and an
expanding archive of older products. The Web site features a search
engine to help you locate documents using key words and phrases. You
can print these documents in their entirety, including charts and other
graphics.
Each day, GAO issues a list of newly released reports, testimony, and
correspondence. GAO posts this list, known as "Today's Reports," on its
Web site daily. The list contains links to the full-text document
files. To have GAO e-mail this list to you every afternoon, go to
www.gao.gov and select "Subscribe to e-mail alerts" under the "Order
GAO Products" heading.
Order by Mail or Phone:
The first copy of each printed report is free. Additional copies are $2
each. A check or money order should be made out to the Superintendent
of Documents. GAO also accepts VISA and Mastercard. Orders for 100 or
more copies mailed to a single address are discounted 25 percent.
Orders should be sent to:
U.S. Government Accountability Office
441 G Street NW, Room LM
Washington, D.C. 20548:
To order by Phone:
Voice: (202) 512-6000:
TDD: (202) 512-2537:
Fax: (202) 512-6061:
To Report Fraud, Waste, and Abuse in Federal Programs:
Contact:
Web site: www.gao.gov/fraudnet/fraudnet.htm
E-mail: fraudnet@gao.gov
Automated answering system: (800) 424-5454 or (202) 512-7470:
Congressional Relations:
Gloria Jarmon, Managing Director:
JarmonG@gao.gov:
(202) 512-4400:
U.S. Government Accountability Office:
441 G Street NW, Room 7125:
Washington, D.C. 20548:
Public Affairs:
Paul Anderson, Managing Director:
AndersonP1@gao.gov:
(202) 512-4800:
U.S. Government Accountability Office:
441 G Street NW, Room 7149:
Washington, D.C. 20548:
[End of Principles of Federal Appropriations Law: Third Edition:
Volume II]