This is the accessible text file for GAO report number GAO-06-1046 
entitled 'Grants Management: Enhancing Performance Accountability 
Provisions Could Lead to Better Results' which was released on 
September 29, 2006. 

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Report to the Chairman, Subcommittee on Government Management, Finance 
and Accountability, Committee on Government Reform, House of 
Representatives: 

United States Government Accountability Office: 

GAO: 

September 2006: 

Grants Management: 

Enhancing Performance Accountability Provisions Could Lead to Better 
Results: 

Grants Management: 

GAO-06-1046: 

GAO Highlights: 

Highlights of GAO-06-1046, a report to the Chairman, Subcommittee on 
Government Management, Finance and Accountability, Committee on 
Government Reform, House of Representatives 

Why GAO Did This Study: 

Maximizing the extent to which grants achieve their long-term 
performance goals is critical to successfully addressing the challenges 
of the 21st century. While performance accountability mechanisms are 
fairly new to federal grants, they have been used in contracts for some 
time and lessons learned have begun to inform federal grant design. 
Given this, GAO was asked to examine (1) challenges to performance 
accountability in federal grants, (2) mechanisms being used to improve 
grant performance, and (3) strategies the federal government can use to 
encourage the use of these mechanisms. GAO performed a content analysis 
of relevant literature and interviewed experts. To illustrate the 
mechanisms and strategies found in the literature, GAO used examples 
from the literature and selected additional case illustrations—two 
federal grant programs (vocational education and child support 
enforcement) and two nonfederal contracts—for further study. 

What GAO Found: 

Accountability provisions in federal grants can vary widely. They can 
be financial (e.g., bonus payments) or nonfinancial (e.g., altered 
oversight or flexibility), and can be employed by various actors at 
different stages in the grant life cycle (see figure below). Mechanisms 
need to be tailored to specific situations since there is no “one-size-
fits-all” solution. Collectively, five key strategies appear to 
facilitate the effective design and implementation of performance 
accountability mechanisms. They are as follows: 1. ensure mechanisms 
are of sufficient value to motivate desired behaviors, 2. periodically 
renegotiate and revise mechanisms and measures, 3. ensure appropriate 
measurement selection, 4. ensure grantor and grantee technical 
capacity, and 5. allow for phased implementation. 
In addition to these strategies, collaboration, oversight, and feedback 
also appear critical to the success of performance accountability 
mechanisms. 

Opportunities exist to improve the design and implementation of federal 
grants. A results-focused design can enable and facilitate the use of 
accountability provisions. National program evaluation studies and 
demonstration grants can provide valuable information to support 
oversight of and knowledge about accountability mechanisms. Finally, 
the Office of Management and Budget (OMB), agencies, and grantees can 
benefit from sharing good practices and lessons learned regarding 
performance accountability provisions. OMB recognized the value in 
sharing information on performance accountability mechanisms, but has 
not yet focused on this issue. 

Figure: Accountability Provisions Can Be Used by Various Actors 
throughout the Grant Life Cycle: 

[See PDF for Image] 

Source: GAO. 

[End of Figure] 

What GAO Recommends: 

GAO recommends that the Director of OMB work with agencies and Congress 
to encourage the use of performance accountability mechanisms in grant 
design and implementation by promoting the practices in this report and 
encouraging knowledge transfer among agencies and grantees. OMB 
generally agreed with our findings and recommendation. 

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-06-1046]. 

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Bernice Steinhardt at 
(202) 512-6543 or steinhardtb@gao.gov. 

[End of Section] 

Contents: 

Letter1: 

Results in Brief: 

Background: 

Trade-offs and Challenges Exist in Ensuring Performance Accountability 
in Federal Grants: 

Accountability Mechanisms Can Improve Performance and Performance 
Accountability: 

Strategies Support Successful Selection, Design, and Implementation of 
Performance Accountability Mechanisms: 

Various Opportunities Exist at the Federal Level to Enhance Performance 
Accountability in Grants: 

Conclusions: 

Recommendation for Executive Action: 

Agency Comments: 

Appendix I: Objectives, Scope, and Methodology: 

Appendix II: GAO Contact and Staff Acknowledgments: 

Bibliography: 

Tables: 

Table 1: Examples of Accountability Provisions: 

Table 2: Sources and Types of Authorization and Guidance for 
Performance Accountability Mechanisms: 

Table 3: Examples of Ways to Tailor Performance Measures and 
Mechanisms: 

Figure: 

Figure 1: Accountability Provisions Can Be Used at Different Points in 
the Grant Life Cycle by Various Users: 

United States Government Accountability Office: 
Washington, DC 20548: 

September 29, 2006: 

The Honorable Todd Platts: 
Chairman, Subcommittee on Government Management, Finance and 
Accountability: 
Committee on Government Reform: 
House of Representatives: 

Dear Mr. Chairman: 

The federal government faces an array of challenges and opportunities 
to enhance performance, ensure accountability, and position the nation 
for the future. A number of overarching trends--including the nation's 
long-term fiscal imbalance--drive the need to reexamine what the 
federal government does, how it does it, who does it, and how it gets 
financed. Because grants to state and local governments constituted 
nearly 20 percent of total federal outlays in fiscal year 2005, 
maximizing the extent to which grants achieve their long-term 
performance goals and objectives is critical to successfully addressing 
the challenges of the 21st century. 

In recent years, interest in federal grant performance accountability 
has grown. For the purposes of this report, performance accountability 
is defined as the mechanisms by which individuals or organizations are 
held accountable for meeting specified performance-related 
expectations. Consistent with the decade-long trend toward an increased 
results orientation and expectation for performance accountability as 
evidenced by the Government Performance and Results Act of 1993 
(GPRA),[Footnote 1] performance accountability mechanisms in federal 
grants have become more common. For example, performance assessment 
mechanisms are present in grants authorized by both the Job Training 
Partnership Act and its successor program, the Workforce Investment Act 
of 1988 (WIA) and the No Child Left Behind Act.[Footnote 2] More 
recently, the Office of Management and Budget (OMB) developed the 
Program Assessment Rating Tool (PART), which, among other things, holds 
federal programs and their partners accountable for performance. Simply 
monitoring and reporting performance can also encourage performance 
accountability and performance improvements. In this report, we have 
focused on specific mechanisms that are meant to encourage performance 
incentives--such as rewards given or penalties imposed--when 
performance exceeds or fails to meet specified levels. 

While performance accountability mechanisms are fairly new to some 
federal grants, they have been used in contracts and loans for some 
time. Moreover, lessons learned from performance-based contracting have 
begun to inform federal grant design, for example, in the case of WIA 
grants requirements. In addition, some states award their federal pass- 
through grants to subgrantees as contracts with performance 
accountability requirements.[Footnote 3] 

Given this growing body of experience, you asked us to examine ways to 
infuse effective performance accountability mechanisms and practices 
into the federal grant process. Specifically, our objectives were to 
identify (1) What kinds of challenges to performance accountability 
exist in federal grants? (2) What kinds of mechanisms are being used to 
improve grant performance, and how? and (3) Given the findings of 
questions 1 and 2, what strategies can the federal government use to 
encourage the use of these mechanisms, as appropriate? For the purposes 
of this report, we were interested specifically in the mechanisms by 
which individuals or organizations are held accountable for meeting 
specified performance-related expectations that are directly tied to a 
grant. 

To address our objectives, we conducted a literature review that 
included our prior reports, and interviewed experts in the area of 
federal grant and contract performance accountability to identify the: 
(1) challenges to performance accountability that exist in federal 
grants, (2) types of performance accountability mechanisms--defined as 
rewards and penalties--used, and (3) key strategies that appear to 
encourage the successful implementation of performance accountability 
mechanisms. Our identification of types of mechanisms and strategies 
was developed by conducting a content analysis of selected literature 
from our review that met our criteria for addressing the issue of 
accountability. Recognizing that grants have increasingly assumed 
features traditionally associated with contracts, we drew on 
experiences from both performance-based contracting and grants to help 
identify valuable lessons learned that could inform efforts to improve 
performance accountability in federal grants. To illustrate these 
mechanisms and strategies, and to supplement our findings and the many 
case examples identified by our content analysis, we use relevant case 
examples found in the literature. We also selected four additional 
cases for further in-depth illustrations. These four cases were 
selected based on our literature review, interviews with experts, and 
reviews of prior GAO work because they are good examples of where (1) a 
performance mechanism was present and (2) there is reason to believe 
that performance improved. We selected two federal grant programs and 
two nonfederal contracts: (1) the federal vocational education grants 
authorized by the Carl D. Perkins Vocational and Technical Education 
Act of 1998 (Perkins III), which are passed through states to secondary 
and postsecondary schools for career and technical education; (2) the 
federal Child Support Enforcement (CSE) program, authorized by the 
Social Security Act, Title IV, part D, which ensures that children are 
financially supported by both parents; (3) the real property management 
contract between the Ontario Provincial Government's Ontario Realty 
Corporation (ORC) and SNC-Lavalin ProFac, Inc. (ProFac), a private 
property management company; and (4) the contract between the 
Massachusetts Division of Medical Assistance (DMA) and the 
Massachusetts Behavioral Health Partnership (MBHP) for the provision of 
mental health and substance abuse services for residents covered by the 
MassHealth Medicaid program. 

To develop the federal grant case illustrations and obtain perspectives 
on the strategies we identified, we interviewed federal headquarters 
and regional program and finance officials from the federal agencies 
that administer the grant programs--the Departments of Education and 
Health and Human Services. In addition, we visited selected grantees 
and subgrantees from among these programs that federal and state 
officials identified as being particularly successful--or as facing 
particular challenges--with performance accountability. To develop the 
contracting case illustrations, we interviewed, conducted site visits, 
or both with both contractors and contracting agencies. For both the 
grant and contract cases, we reviewed the authorizing legislation or 
contract, guidance, documentation, and prior studies, and interviewed 
relevant officials to obtain perspectives on the strategies we 
identified. 

See appendix I for a more detailed discussion of our scope and 
methodology. 

We conducted our work from December 2005 through August 2006 in offices 
in Washington, D.C; Harrisburg, Lancaster, Norristown, and 
Philadelphia, Pennsylvania; Eloy, Glendale, and Phoenix, Arizona; and 
Boston, Massachusetts, in accordance with generally accepted government 
auditing standards. 

Results in Brief: 

Although there are various ways to design grants to encourage 
performance accountability, in general, there are three factors that 
particularly affect the degree of performance accountability that can 
be achieved, including whether a grant (1) includes performance- 
oriented objectives in addition to fiscally oriented objectives, (2) 
operates as a distinct program or as a funding stream, and (3) supports 
a limited or diverse array of objectives. Because design features that 
encourage performance accountability can limit state and local grantee 
flexibility, achieving these twin goals can be a delicate balancing 
act, and has implications for the accountability relationship between 
levels of government and the information needed to support 
accountability. Even in federal grants with designs that favor 
performance accountability, grant implementation challenges related to 
developing performance goals and measures as well as collecting and 
reporting performance data can influence the extent of performance 
accountability achieved. 

Accountability mechanisms available for use in grants vary widely and 
can be financial or nonfinancial in nature. A financial mechanism could 
reward performance with increased funding or a onetime bonus payment; 
nonfinancial mechanisms include such things as altered oversight or 
flexibility. Financial mechanisms also vary the degree of risk sharing 
between the grantor and the grantee. Many mechanisms can be employed by 
Congress, agencies, or grant recipients at different points throughout 
the grant life cycle. Mechanisms are flexible and need to be tailored 
to specific situations since not all mechanisms are appropriate to all 
situations, and there is no "one-size-fits-all" or "magic bullet" 
solution to performance accountability. 

Collectively, five key strategies appear to facilitate the effective 
design and implementation of performance accountability mechanisms. 
They are as follows: 

* Ensure mechanisms are of sufficient value. The value of the rewards 
and penalties--whether financial or nonfinancial--and the cost of 
improved performance are adequate to motivate desired behaviors and 
provide a meaningful return to both the grantor and the grantee. 

* Periodically renegotiate and revise mechanisms and measures. Provide 
for and use the flexibility to reevaluate performance accountability 
mechanisms and associated performance measures at regular, scheduled 
intervals and allow time to learn from each cycle to improve 
performance. 

* Ensure appropriate measurement selection. Measures should represent 
performance that is within the grantee's sphere of influence, and can 
reasonably be achieved and evaluated within the specified time frame, 
and should be tested over time to minimize the potential for unintended 
consequences and perverse incentives. 

* Ensure grantor and grantee technical capacity. Grantors and grantees 
should have the necessary knowledge about performance accountability 
mechanisms and the ability to effectively implement them. 

* Ensure phased implementation. Allow time to design, test, and revise 
measurement systems before linking them to accountability mechanisms. 

In addition to these strategies, we noted extensive use of partnerships 
and collaborations and regular and effective oversight and feedback, 
which appeared critical to the success of accountability provisions in 
a third-party environment. We have previously reported that these 
practices are often associated with both high-performing 
organizations[Footnote 4] and organizations that effectively used 
performance information to manage.[Footnote 5] 

The experiences with and strategies related to federal grant 
accountability provisions described in this report suggest a number of 
opportunities for Congress and the executive branch to improve the 
design and implementation of performance accountability mechanisms. 
First, a results-focused design can help encourage performance 
accountability in general and specifically provide for--or at least not 
prohibit--the use of accountability mechanisms to encourage desired 
behavior. In addition, the use of national program evaluation studies 
and research and demonstration grants can provide valuable information 
to assist in agency and congressional oversight of and knowledge about 
accountability mechanisms. Because credible performance information and 
performance measures form the basis for well-functioning accountability 
provisions, it remains critical for Congress and the executive branch 
to continue to encourage the development and use of such measures. 
Finally, OMB and agencies--as well as grantees--can benefit from 
sharing good practices and lessons learned about experiences with 
performance accountability provisions in federal grants, as this is an 
efficient and effective way to increase grantor and grantee knowledge, 
understanding, and use of these provisions. 

OMB, as the focal point for overall management in the executive branch, 
plays a key role in improving the performance of federal programs. It 
uses a number of vehicles, such as Web sites with information about 
performance measures and grants targeted to federal agencies and 
informal workshops and seminars, to encourage general performance 
improvement in federal programs. OMB staff told us that focusing 
specifically on performance accountability provisions in grants is 
necessary and useful, but that to date, they have focused their efforts 
on encouraging and enhancing agency capacity to develop high-quality, 
results-based program performance measures since improving the quality 
of measures and data necessarily precedes tying them to accountability 
provisions. 

We are therefore recommending that the Director of OMB encourage and 
assist federal agencies in working with the Congress to expand the 
effective use of performance accountability mechanisms, focusing on the 
practices in this report, when federal grant programs are being created 
or reauthorized. We further recommend that OMB offer opportunities for 
knowledge transfer among federal agencies and encourage agencies to 
share leading practices and lessons learned in implementing grant 
accountability mechanisms. Possible vehicles for the collection and 
dissemination of this information include good practices guides and 
workshops and Web sites such as results.gov, grants.gov, and 
expectmore.gov. 

On August 22, 2006, we provided a draft of this report to the Director 
of OMB and the Secretaries of Education and Health and Human Services. 
We also provided relevant sections of a draft of this report to the 
grantees and contractors highlighted in this report. We received 
technical comments from all three agencies, which were incorporated as 
appropriate. In addition, OMB agreed with our recommendation but 
suggested we broaden it to address the role of federal agencies and 
Congress in the grant redesign and reauthorization process. We agree, 
and have amended our recommendation accordingly. 

Background: 

Grants, along with contracts and cooperative agreements, are tools used 
by the federal government to achieve national priorities via nonfederal 
parties, including state and local governments, educational 
institutions, and nonprofit organizations. Diverse in structure and 
purpose, grants can be generally classified as either categorical or 
block, with categorical grants allowing less recipient discretion than 
block grants. For example, the Community Services Block Grant provides 
funds to states and is sometimes passed to local agencies to support a 
variety of efforts that reduce poverty, revitalize low-income 
communities, and lead to self-sufficiency among low-income families and 
individuals, while giving the agencies broad discretion in how the 
funds can be spent. In practice, the "categorical" and "block" grant 
labels represent the ends of a continuum and overlap considerably in 
its middle range. 

Grant funds may also be grouped by their method of allocating funds. 
Formula grants allocate funds based on distribution formulas prescribed 
by legislation or administrative regulation and often narrowly define 
the eligible recipients as state agencies. On the other hand, 
categorical grants are generally awarded on a competitive basis to 
applicants meeting broader eligibility requirements. 

Despite substantial variation among grants, grants generally follow a 
similar life cycle and include announcement, application, award, 
postaward, and closeout phases. Once established through legislation, 
which may specify particular objectives and eligibility and other 
requirements, a grant program may be further defined by grantor agency 
requirements. For competitive grant programs, the public is notified of 
the grant opportunity announcement, and potential grantees must submit 
their applications for agency review. In the awards stage, the agency 
identifies successful applicants or legislatively defined grant 
recipients and awards funding. The postaward stage includes payment 
processing, agency monitoring, and grantee reporting, which may include 
financial and performance information. The closeout phase includes 
preparation of final reports, financial reconciliation, and any 
required accounting for property. 

Traditionally, grant accountability has referred to legal or financial 
compliance. The Single Audit Act,[Footnote 6] for example, requires 
grantees to conduct an overall financial compliance audit to promote 
accountability. As such, at a minimum all grantees are held accountable 
for sound financial management and use of federal funds to support 
allowable activities. Beyond that, however, accountability for 
performance varies from grant to grant. As discussed earlier, this 
historical focus on financial accountability has expanded in response 
to increasing expectations of demonstrable performance and performance 
accountability for all government programs. For example, the 
Comptroller General's Domestic Working Group issued its Guide to 
Opportunities for Improving Grant Accountability, highlighting 
innovative approaches and promising practices in grants management-- 
focused both on ensuring grant funds are spent properly as well as 
achieving their desired results.[Footnote 7] 

While performance accountability in grants is a relatively new pursuit, 
it has been used in contracts for a number of years. To illustrate 
performance accountability mechanisms and the strategies that 
contribute to their successful design and implementation, we examined 
four cases: (1) the federal CSE program, (2) the federal Perkins III 
Career and Technical Education Program, (3) a performance-based 
contract between the Massachusetts DMA and MBHP, and (4) a performance- 
based contract between the Canadian Ontario Realty Corporation (ORC) 
and ProFac. 

Child Support Enforcement: 

The CSE program was established in 1975 by Title IV-D of the Social 
Security Act (Pub. L. No. 93-647). CSE functions in all states and 
territories through state or local social services departments, 
attorneys general offices, or departments of revenue in order to ensure 
that children are financially supported by both of their parents. State 
programs work toward establishing paternity, locating parents, 
establishing and enforcing support orders, and collecting and 
distributing child support payments. The federal Office of Child 
Support Enforcement (OCSE), an office of the Department of Health and 
Human Services' Administration for Children and Families, oversees the 
development, management, and operation of state CSE programs and 
provides financial support (66 percent of total operating costs) to 
states. In fiscal year 2005 federal expenditures on CSE were $3.5 
billion, with states spending $1.8 billion. Total collections in fiscal 
year 2005 were more than $23 billion. The total legally owed support 
for fiscal year 2005 was $29 billion, with $17.4 billion of that 
collected. Total arrears (past due payments) for all previous years 
combined was $107 billion. Over $7 billion of those past due payments 
were collected and distributed in fiscal year 2005. 

The Child Support Performance and Incentive Act of 1998 (Pub. L. No. 
105-200) linked incentive payments to performance, and in fiscal year 
2005, OCSE made over $450 million in incentive payments to states. This 
act changed the original CSE incentive program from awarding incentives 
based solely on cost-effectiveness to awards based on meeting specific 
performance targets in five outcome areas: paternity establishment, 
order establishment, current collections, past due collections, and 
cost-effectiveness. The performance measures and targets are defined in 
the text of the act, which also provides a formula for determining the 
amount of each incentive payment. Additionally, the act established an 
alternative penalty system for those states not yet in compliance with 
the statewide automated data processing system required by Title IV-D 
Sec. 454(A) of the Social Security Act. The new incentive program was 
phased in from 2000 through 2002. 

Carl D. Perkins Career and Technical Education: 

Effective July 1, 1999, the Carl D. Perkins Vocational and Technical 
Education Act of 1998 (Perkins III, Pub. L. No. 105-332) amends earlier 
legislation to evaluate and improve vocational and technical 
education.[Footnote 8] Each year under Perkins III, Congress has 
appropriated more than $1.1 billion in grants to states for career and 
technical education. The Office of Vocational and Adult Education 
(OVAE), an office of the Department of Education, administers the 
grants established in Perkins III, a pass-through grant to states, 
which administer the distribution of the funds to local school 
districts. 

Perkins III defines major roles for OVAE and states in establishing 
performance accountability systems for vocational and technical 
education. States are given the responsibility for developing 
performance measures and data collection systems related to four 
required core performance indicators: academic and technical skill 
attainment, completion, placement and retention, and nontraditional 
participation and completion. OVAE negotiates these performance 
measures with states to ensure that they are sufficiently rigorous. 
States not meeting their performance levels for 1 year are required to 
complete a program improvement plan. States not meeting their 
performance levels for 2 years are subject to financial sanctions, 
although no state has failed to meet its overall levels for 2 
consecutive years. States have also been eligible to receive incentive 
funds if they exceeded performance goals for the Perkins III grant as 
well as targets established by Title I and Title II of WIA. Title I of 
WIA supports workforce investment programs. Title II, also known as the 
Adult Education and Family Literacy Act, provides adult education funds 
to states. Governors have the authority to allocate the incentive funds 
for use in any of the three program areas. 

Massachusetts Division of Medical Assistance Contract with the 
Massachusetts Behavioral Health Partnership: 

Beginning in 1996, the Massachusetts DMA entered into a 5-year 
contract, which was renewed in 2001, with MBHP to manage mental health 
and substance abuse services for roughly 300,000 people covered by the 
MassHealth Primary Care Clinician Plan--part of the Massachusetts 
Medicaid program. Of the individuals covered by the plan, more than 
half are children 18 or younger, including 20,000 children in the 
custody of the commonwealth's Departments of Social Services and Youth 
Services. 

The structure of the contract between DMA and MBHP involves a base 
contract, which governs requirements related to administrative and 
medical operations. These requirements continue through the life of the 
contract, or until they are modified through amendments. In addition to 
the base contract, there are performance incentive projects that focus 
on research and development projects. The majority of earnings 
available to MBHP come from the organization's successful completion of 
these contractually defined incentive projects, which are renegotiated 
annually. Earnings are achieved only after the successful completion of 
specified goals and objectives, as documented and reviewed by the 
state. 

Ontario Realty Corporation's Contract with ProFac: 

ProFac, a facilities management company, was awarded a 5-year contract 
in 1999 (since renewed) by ORC to provide facilities management 
services for approximately 30 million square feet of space in 2,100 
building sites owned by the Ontario government. About 280 ProFac 
managers, engineers, technicians, and support staff provide these 
services. 

The contract between ORC and ProFac links performance to a 10 percent 
quarterly management fee holdback: on a monthly basis, ORC only 
reimburses ProFac for 90 percent of its administrative costs, retaining 
the other 10 percent, a "holdback," which ORC returns to ProFac on a 
quarterly basis only if ProFac obtains a sufficient level of 
performance. This contract also links performance to an annual share- 
in-savings arrangement: ORC sets a budget each year based on prior 
years' actual expenditures and budget projections; if ProFac spends 
less than the budget, it is able to share the difference, a share in 
savings, only if it reaches a sufficient operational level. ProFac's 
performance on 30 key performance indicators (KPI) determines its 
operational level. These KPIs are accumulated to determine a score in 
four performance objectives: management performance, financial 
performance, asset integrity, and customer service. The performance 
objectives are scored and then weighted according to ORC's priorities 
to determine a total performance rating. 

Trade-offs and Challenges Exist in Ensuring Performance Accountability 
in Federal Grants: 

The trade-offs and challenges associated with performance 
accountability in federal grants largely depend on several key aspects 
of grant design and implementation. As we have previously reported, 
performance accountability tends to be greater (and grantee flexibility 
lower) in programs with certain types of design features. Because 
design features that encourage performance accountability can limit 
state and local grantee flexibility, achieving these twin goals can be 
a delicate balancing act and has implications for the accountability 
relationship between levels of government and the information needed to 
support accountability. Even in federal grants with designs that favor 
performance accountability, grant implementation challenges related to 
developing performance goals and measures as well as collecting and 
reporting performance data can influence the extent of performance 
accountability achieved. 

Grant Design Features Affect the Balance between Accountability and 
Flexibility: 

Although there are various ways to design grants to encourage 
performance accountability, in general, there are three factors that 
particularly affect the degree of performance accountability that can 
be achieved, including whether a grant (1) includes performance- 
oriented objectives in addition to fiscally oriented objectives, (2) 
operates as a distinct program or as a funding stream, and (3) supports 
a limited or diverse array of objectives. 

As we discussed previously, federal grants have traditionally focused 
on fiscal or legal accountability, such as holding states accountable 
for using federal grant funds to supplement rather than to supplant 
their own spending on a particular activity. However, federal grants 
that also include performance-oriented objectives--as well as the 
provisions that implement them--provide the basis for performance 
measurement and accountability for results, and signal a federal role 
in managing performance over the grant. Ideally, both types of 
objectives would be present in federal grants. Performance-related 
objectives focus on service or production activities and their results. 
For example, the central objective of the grants for Special Programs 
for the Aging--Nutrition Services, is to provide nutritious meals to 
needy older Americans to improve nutrition and reduce social isolation. 
In contrast, fiscal or financial assistance objectives focus on 
providing dollars to support or expand activities. Typical fiscal 
objectives include increasing support for meritorious goods or 
underfunded services and targeting grant funding to needy 
jurisdictions. For example, the objective of Title VI Innovative 
Education grants is to provide funds to support local education reform 
efforts. When objectives are purely fiscal, accountability to the 
federal agency tends to focus on fiscal matters, such as holding states 
accountable for using federal grant funds to supplement rather than to 
supplant their own spending on a particular activity. 

Even when performance-oriented objectives are present, whether federal 
grants operate as distinct programs or as part of a larger funding 
stream directly affects who can be held accountable and for 
what.[Footnote 9] A grant that operates as a program has performance 
requirements and objectives and carries out specific programwide 
functions through a distinct delivery system, such that grant-funded 
activities, clients, and products are clearly identifiable. This type 
of grant gives the federal agency a role in managing performance and 
makes it easier to obtain uniform information about performance 
attributable to the grant funds. It is possible to identify which 
activities were supported; the amount of federal funds allocated to 
each; and to various extents, the results grantees achieved with 
federal funds. 

In contrast, funds from grants that operate as part of a funding stream 
are merged with funds from state or local sources (and sometimes from 
other federal sources) to support state or local activities allowable 
under the flexible grant. These programs are managed at the state or 
local level, with the federal role limited accordingly. When grants are 
part of a funding stream, it is possible to identify which activities 
federal funds supported and the amount allocated to each, but once the 
grant funds are combined with the overall budget for a state or local 
activity, federal dollars lose their identification and their specific 
results cannot be separated out. This is particularly the case when the 
federal share is small, with most funding coming from other sources. 
The program outcome measures available in such programs are likely to 
be for outcomes of the state or local service delivery program, not the 
federal program from which the funding originated. Thus, grantees would 
generally be held accountable for overall outcomes, regardless of the 
funding source. For example, projects such as Oregon Option and the 
National Performance Review were designed to promote accountability for 
federal and/or national priorities, regardless of the funding source. 
They encourage grantors and grantees to work toward collaboratively 
developed outcomes. These intergovernmental partnerships can be 
particularly useful when funds come from a combination of federal, 
state, local, and private sources, or when the federal funding share is 
small. 

Federal grants vary along a continuum, at one end supporting a single 
major activity common to all grantees (such as categorical grants), and 
at the other end, allowing unrestricted choice by the recipient among a 
wide variety of allowable activities, (such as block grants). 
Flexibility is narrowest, but accountability to the federal level 
clearest, in programs that focus on a single major activity. 
Flexibility is broadest in programs designed to support diverse state 
or local activities, but finding a common performance metric can be 
extremely challenging since these activities can vary considerably from 
state to state. That said, we have previously reported on options for 
building accountability provisions into block grants that help balance 
states' flexibility to select a mix of activities and services that 
will best allow them to achieve a particular national outcome with 
accountability for achieving that outcome. These options include (1) 
relying on state processes both to manage block grant funds and to 
monitor and assess compliance and (2) emphasizing results-based 
evaluation rather than examining specific program or administrative 
activities. 

Implementation Issues Present Further Performance Accountability 
Challenges: 

In addition to these design features, we have previously reported on a 
number of performance accountability challenges encountered in many 
grant programs during the grant implementation phase. 

Lack of consensus on goals and performance measures: The priorities of 
states, tribes, local communities, and the federal government are not 
always the same. To ensure that grantees work toward national 
priorities, they need to be involved in the development of performance 
goals and measures. Lack of agreement on goals and measures-- 
particularly when the federal funding is a small portion of the funding 
stream--could lead to grantees making choices that do not necessarily 
support the achievement of national goals. 

Reliance on performance data from state and local partners and other 
third parties: Even if grantees collect data on similar activities, 
outcomes, and services, absent common data definitions Congress and 
program managers will lack comparable information, limiting the ability 
to compare state efforts or draw meaningful conclusions about the 
relative effectiveness of different strategies. We have previously 
reported that agencies relying on third parties for performance data 
also have difficulty ascertaining the accuracy and quality of the data. 
Further, programs often rely on state administrative systems for 
performance information. For some programs--such as many of the 
Administration for Children and Families' programs---since final 
reports are not due until 90 to 120 days after the end of the federal 
fiscal year, there is a delay in available data. 

Onerous and inconsistent grant administration processes and 
requirements[Footnote 10]: Multiple grants maybe available for the same 
or similar purposes, meaning that federal grant recipients must 
navigate through a myriad of federal grant programs in order to find 
the appropriate source of funds to finance projects that meet local 
needs and address local issues. Sometimes programs meant to address 
common problems have potentially conflicting requirements. Variations 
in performance accountability requirements among these grants can limit 
the degree of performance accountability achieved. We have recently 
reported that while this situation is improving because of OMB's 
efforts to streamline the grants application process, problems still 
exist.[Footnote 11] 

Prohibition of performance information collection[Footnote 12]: Because 
states are principally responsible for implementing block grants at the 
state level, the block grant statutory prohibitions and requirements, 
and federal regulations and guidance are generally kept to a minimum. 
Sometimes federal agencies are prohibited from imposing reporting 
requirements because they are seen as burdensome. Clearly, this limits 
the extent to which federal agencies can oversee grantee performance. 

Nevertheless, even with these trade-offs and challenges, agencies have 
been able to shift toward increased performance accountability in 
federal grants and the use of accountability provisions to ensure that 
grantees achieve real results through the programs, activities, and 
services financed with federal funds. The accountability provisions 
described in this report, along with strategies for their effective 
use, can help address the challenges noted above. 

Accountability Mechanisms Can Improve Performance and Performance 
Accountability: 

We found a number of accountability provisions, specific actions that 
can be taken--that is, rewards given or penalties imposed when 
performance exceeds or fails to meet specified performance levels--that 
Congress, granting agencies, and grantees can use at different points 
in the grant life cycle to improve both grant performance and 
performance accountability. These examples demonstrate that 
accountability provisions can result in significant performance 
improvement and are flexible enough to accommodate a variety of 
situations. 

A Variety of Accountability Mechanisms Exist: 

We found that a wide variety of accountability provisions are being 
used in both grant and contracting situations. A selection of these 
provisions is shown in table 1. This list is not intended to be 
exhaustive; rather, it is meant to illustrate the variety of mechanisms 
available. Some mechanisms may be more appropriate in certain 
situations than others, but all of these mechanisms can be used to 
either encourage improved performance or discourage poor performance. 
For example, public recognition and increased funding are two different 
mechanisms that can both be used to encourage and reward good 
performance. Similarly, mechanisms such as reduced funding or increased 
oversight can be used to discourage or penalize poor performance. 

Table 1: Examples of Accountability Provisions: 

Rewards; 
Accountability mechanism: Praise; 
Definition: Public recognition of good performance, for example, 
through the press, Web sites, intranets, newsletters, hearings, 
testimony, and award ceremonies. 

Rewards; 
Accountability mechanism: Bonus; 
Definition: Onetime cash payment. 

Rewards or penalties; 
Accountability mechanism: Increase/decrease flexibility; 
Definition: Increase or decrease in grantee's flexibility by issuing 
administrative, programmatic, or financial waivers from requirements 
and restrictions or by adding award conditions. 

Rewards or penalties; 
Accountability mechanism: Increase/decrease workload; 
Definition: Manipulate the workload (e.g., case load). 

Rewards or penalties; 
Accountability mechanism: Increase/decrease award term; 
Definition: Increase or decrease in the length or term of the grant. 

Rewards or penalties; 
Accountability mechanism: Increase/decrease oversight; 
Definition: Increase or decrease in the degree of oversight. 

Rewards or penalties; 
Accountability mechanism: Increase/decrease funding rate; 
Definition: Increase or decrease in the per-unit reimbursement rate 
(e.g., case rate). Either partial or full funding can be based on a 
unit rate. 

Rewards or penalties; 
Accountability mechanism: Increase/decrease funding level; 
Definition: Increase or decrease in funding. Either the entire award 
can be tied to performance or a portion of funding above an established 
baseline (i.e., an incentive portion). Examples include share in 
savings (grantee keeps a portion of dollars saved) and milestones 
(payments linked to a predefined chronological series of performance 
levels typically combining process, output, and outcome measures). 

Rewards or penalties; 
Accountability mechanism: Use of past performance; 
Definition: Use past performance of grantee to inform selection of 
future recipients. 

Penalties; 
Accountability mechanism: Reproof; 
Definition: Public reprimand for poor performance, for example, through 
the press, Web sites, intranets, newsletters, hearings, and testimony. 

Penalties; 
Accountability mechanism: Reperformance; 
Definition: Grantee must reperform the service at its own cost to meet 
performance agreements. 

Penalties; 
Accountability mechanism: Impose financial penalty or sanction; 
Definition: Includes a onetime reduction in the value of an award. 
Sanctions may also be in one area to influence actions in another area 
(crossover sanctions). Also includes suspending or withholding a 
payment (temporarily halting grant payments and/or work), suspending or 
terminating the award (canceling the current grant or temporarily 
excluding grantee from future awards), or finally, debarment 
(permanently exclude grantee from future grant awards). 

Source: GAO. 

[End of table] 

In addition, mechanisms can be either financial or nonfinancial in 
nature. A financial mechanism would be an increase in funding or a 
bonus. For example, the CSE program employs a financial incentive in 
the form of a bonus to encourage states to work toward the program's 
five performance goals: states are eligible for a bonus every year 
based on performance. Nonfinancial mechanisms would include altered 
oversight or flexibility. For example, as part of the National 
Environmental Performance Partnership System, the Environmental 
Protection Agency affords states with high environmental performance 
levels greater flexibility in spending their grant funds. 

Financial mechanisms also vary by their degree of risk or risk sharing 
between the grantor and the grantee. Grantee risk increases as the 
amount of money tied to performance increases. For example, bonuses-- 
money awarded over and above the base grant amount--represent the least 
risk, while an outcome-based milestone payment plan where the entire 
grant award is based on performance represents much higher financial 
risk to the grantee. Nonfinancial actions, such as altering flexibility 
or oversight, would be relatively risk neutral. 

Accountability Provisions Can Be Employed at Different Phases of the 
Grant Life Cycle: 

Accountability mechanisms can be used in different phases of the grant 
life cycle by different actors, including Congress, granting agencies, 
and grantees themselves, and the lessons learned from one grant cycle 
can be used to improve a performance accountability mechanism in the 
next (see fig. 1). For example, when reauthorizing the CSE program, 
Congress revised the original CSE incentive payments, which were solely 
based on cost efficiency, to create an incentive program tied to 
performance measures that reflect CSE's five key goals: (1) paternity 
establishment, (2) order establishment, (3) current collections, (4) 
collection of payments in arrears, and (5) cost-effectiveness (design/ 
redesign phase). 

Figure 1: Accountability Provisions Can Be Used at Different Points in 
the Grant Life Cycle by Various Users: 

[See PDF for image] 

Source: GAO. 

[End of figure] 

In contrast, performance measures and targets for Perkins III are 
created during the implementation phase. Specifically, each state is 
required by law to create its own performance measures linked to four 
core indicators: (1) student attainment of challenging state- 
established academic and vocational technical skill proficiencies; (2) 
student attainment of secondary diploma or postsecondary degree or 
credential; (3) student placement in employment, pursuit of further 
education, or both; and (4) student participation in and completion of 
vocational technical education programs that lead to nontraditional 
training and employment. The Department of Education periodically 
negotiates the performance targets for each state measure (postaward 
phase). 

The use of past performance can inform and improve the recipient 
selection process (application phase). Specifically, the Florida 
Department of Children and Families has reported considerable success 
using past performance in recipient selection--contractors that do not 
meet their performance measures and standards are ineligible to be 
awarded future contracts. 

Other mechanisms, such as altered flexibility or oversight, can be used 
by the granting agency--or even the grantee--to encourage improved 
performance during the term of the award (postaward phase). For 
example, according to the literature we reviewed, Minnesota's 
Department of Human Services Refugee Services Section increases its 
oversight of local agencies if their performance drops below 80 percent 
on their key performance measures, including job placement rates, which 
nearly doubled over 5 fiscal years. 

Importantly, grantees can also use these provisions to extend 
accountability to subgrantees and contractors. This is significant 
because many federal grants are ultimately passed through states to 
subgrantees. Some accountability provisions, such as public award and 
recognition, can even be employed by stakeholders or interested 
parties. For example, the National Association for State Directors of 
Career and Technical Education Consortium annually recognizes high- 
performing career and technical administrators and teachers and 
provides opportunities to share lessons learned and best practices. 

Even when performance accountability provisions are absent from or 
limited by a grant's legislation, agencies and grantees may still be 
able to include these types of provisions in the terms and conditions 
of the grants or subgrants or in contracts as long as the authorizing 
legislation does not specifically prohibit their use. OMB Circular A- 
110 provides that for grants awarded to nonprofits, a number of 
accountability mechanisms may be used--including withholding payments, 
termination of award, and "other remedies that may be legally 
available"--if the grantee materially fails to comply with the terms 
and conditions of the award. These terms and conditions can be 
specified in federal statute, regulation, assurance, applications, or 
the notice of award. For grants to state and local governments, 
however, OMB Circular A-102 contains no detailed accountability 
provisions and defers to the requirements specified in the authorizing 
legislation. 

Various authorities govern the use of accountability provisions (see 
table 2). Provisions set by Congress, such as increased flexibility in 
the form of waivers from statutory restrictions, are generally laid out 
in authorization or appropriations legislation. As stated earlier, 
granting agencies can include accountability provisions in regulations, 
grant announcements, the request for proposal, and the notice of award. 
Grantees (and subgrantees) can use accountability provisions, such as 
formal recognition, to improve their performance internally. For 
example, the CSE program in Montgomery County, Pennsylvania, recognizes 
performance-improving suggestions from individual employees by publicly 
praising and inducting them into the office's "all-star team." These 
employees also receive a T-shirt with a picture of a stork--the 
program's mascot--with the program's motto Striving Toward Optimizing 
our Resources for Kids. 

Table 2: Sources and Types of Authorization and Guidance for 
Performance Accountability Mechanisms: 

Authorizing body: Congress; 
Authorizing/implementing vehicles: Authorization, appropriations, other 
legislation. 

Authorizing body: Grantor; 
Authorizing/implementing vehicles: Regulations, announcements, the 
request for proposal in the Federal Register, notice of award. 

Authorizing body: Grantee; 
Authorizing/implementing vehicles: Internal personnel policies and 
practices, use with subgrantees and contractors. 

Source: GAO. 

[End of table] 

Accountability Mechanisms Can Be Tailored to Specific Situations: 

Selecting appropriate performance measures and linking them to 
performance accountability mechanisms is not a one-size-fits-all 
process; rather, accountability provisions are tailored to reflect the 
program's characteristics. In addition to the range of accountability 
mechanisms available, we found a number of ways mechanisms were 
tailored and combined to reflect a variety of circumstances. Table 3 
describes how measures and mechanisms can be designed and triggered to 
either reward or penalize performance. 

Table 3: Examples of Ways to Tailor Performance Measures and 
Mechanisms: 

Tailored measure and mechanism: Stretch goals; 
Description: An action is taken based on reaching a secondary, higher 
goal. For example, a grantor awards the grantee when performance 
exceeds one performance target and reaches a secondary, higher target. 

Tailored measure and mechanism: Hurdles/triggers; 
Description: Specific conditions or performance levels that must be met 
before actions can be taken. For example, once a recipient meets a 
minimum performance level or requirement, it becomes eligible for an 
award based on performance. 

Tailored measure and mechanism: Dead bands; 
Description: Ranges of performance are established for which the 
mechanism does not provide an award or penalty. For example, 
performance achieved within a certain range is not eligible for an 
award or penalty, but performance above or below that range is subject 
to them. 

Tailored measure and mechanism: Step up/step down; 
Description: Actions are taken based on a number of preset performance 
levels. Step up is similar to a series of stretch goals. For example, a 
recipient receives a reward in which the value is determined by which 
performance interval it reached. Conversely, each time a recipient's 
performance drops, it is subject to increasing penalties or deductions. 

Tailored measure and mechanism: Formula; 
Description: Payments are made based on a formula--a mathematical 
weighting of a number of factors. For example, a recipient's entire 
award or an incentive portion may be based on a formula containing a 
performance component. 

Tailored measure and mechanism: Share in savings/share in revenue; 
Description: Payments represent a share of a specific source of funds. 
Share in revenue is used to refer to situations where performance is 
defined by revenue generation and payments are based on some 
formulation of revenue generated, typically a percentage. For example, 
a recipient responsible for increasing financial collections is 
eligible to receive a portion of the additional funds collected; Share 
in savings is used to refer to situations where performance is defined 
by cost savings and payments are based on some formulation of cost 
savings, typically a percentage. For example, a recipient that 
identifies efficiencies that result in administrative cost savings is 
eligible to receive a portion of the savings. 

Tailored measure and mechanism: Milestones; 
Description: Payments are linked to a predefined chronological series 
of performance levels representing processes, outputs, and outcomes. 
For example, a recipient is paid 33 percent of the performance-based 
portion of award as each of three milestones is completed successfully. 

Tailored measure and mechanism: Floating measures; 
Description: Used to refer to situations where one or sets of 
performance measures can be changed during the term of an agreement. 
These measures are selected from a larger set of predefined performance 
measures. For example, a grantor assesses grantee performance on 25 
performance measures, but at any given time provides awards or 
penalties based on the performance of a subset of the measures. The 
subset the grantor provides the award or penalty for can change during 
the course of the agreement, with notification. 

Tailored measure and mechanism: Indexes; 
Description: Used to refer to a situation where individual performance 
measures are weighted to create a single index. For example, a number 
of measures are weighted according to priority, and then the combined 
weight is used as a single performance measure. 

Tailored measure and mechanism: Variable target; 
Description: Situation where performance is defined by a variable or 
relative measure, such as performance of a third party in the same 
issue area. This method is used, for example, in situations where 
performance can be directly affected by external factors, such as the 
economy. For example, grantors assess the performance of a single grant 
recipient by comparing its performance to other recipients of the same 
grant. 

Source: GAO, based on literature review. 

[End of table] 

For example, to encourage its contractor, ProFac, to cut costs while 
maintaining a high-level of performance, ORC modified a basic financial 
incentive to include a share-in-savings feature. ProFac is eligible to 
share a portion of the savings if it spends less than its yearly 
budget--often referred to as share in savings. To ensure that ProFac 
does not cut costs to the detriment of high performance, ORC also 
requires that ProFac achieve a performance rating of 80 percent or 
higher to share in these cost savings. 

The CSE performance measures are an example of a "step up" provision-- 
for each increasing performance percentage interval there is a 
corresponding increase in the incentive percentage paid. Each time a 
state moves to the next highest interval, it receives a higher 
percentage of the incentive for that measure. Conversely, the 
alternative penalty procedure for failure to implement a statewide 
child support data processing system acts as a "step down" mechanism. 
For each year the state fails to implement such a system, but shows a 
good faith effort to attempt to do so, the state will be penalized at 
increasing intervals--during the first year of noncompliance, the state 
will receive a 4 percent penalty, the second year an 8 percent penalty, 
the third year a 16 percent penalty, and so on. 

Strategies Support Successful Selection, Design, and Implementation of 
Performance Accountability Mechanisms: 

Collectively, five key strategies appear to facilitate the effective 
selection, design, and implementation of performance accountability 
mechanisms.[Footnote 13] These strategies are: 

* ensure mechanisms are of sufficient value, 

* periodically renegotiate and revise mechanisms, 

* ensure appropriate measurement selection and usage, 

* ensure grantor and grantee technical capacity, and: 

* implement system in stages. 

In addition to these strategies, we noted extensive use of partnerships 
and collaborations and regular and effective oversight and feedback, 
which appeared critical to the success of accountability provisions in 
a third-party environment. We have previously reported that these 
practices are often associated with high-performing organizations and 
organizations that effectively used performance information to 
manage.[Footnote 14] 

Ensure Mechanisms Are of Sufficient Value: 

There are a number of factors to consider when designing accountability 
mechanisms that help to ensure the mechanisms are of sufficient value 
and motivate performance improvement. Ensuring sufficient value 
requires that: 

* both the grantor and grantee are able to determine the value of the 
rewards and penalties and the cost of improved performance--be they 
financial or nonfinancial--and provide a meaningful return to both the 
grantor and the grantee and: 

* rewards or penalties should be consistently applied to maintain the 
value of the mechanisms to both the grantor and grantee. 

Understand the Value of Performance: 

According to the literature we reviewed, both the grantor and grantee 
should understand what a particular level of performance is worth to 
them and what it will cost them to achieve that level of performance. 
When the value of performance is not properly identified, funds could 
be wasted and grantees may not respond to the mechanism. For example, 
we found one case where the contracting agency offered and ultimately 
paid a $250,000 bonus to a contractor for completing a pipeline 2-1/2 
months earlier than scheduled. However, because the contracting agency 
did not actually need the pipeline to be completed for several years 
after the original contractual deadline, the contractor paid $250,000 
for a level of performance it did not need. Although the recipient 
responded to the incentive, the contracting agency did not properly 
calculate the value of the performance improvement to the agency, 
resulting in wasted funds. 

For a grantor, considering how accountability provisions support its 
strategic priorities can assist in determining the value of 
performance. The size of the associated rewards and penalties should be 
commensurate with the priority. For example, successful pay-for- 
performance programs reserve large rewards for achieving an 
organization's most important priorities, or those that lead to large 
benefits, and provide smaller incentives for achieving goals that reap 
smaller benefits or are of lesser importance. For example, in the 
health care field, for certain conditions such as heart attack or 
stroke, delays in administering appropriate therapy greatly increase 
the risk of mortality and disability. Therefore, the incentives to 
treat these conditions quickly and appropriately should be larger than 
the incentives for other practices that should be encouraged yet 
produce fewer direct effects on mortality and illness, such as avoiding 
the use of ineffective antibiotics to treat the common cold. 

Based on our literature review, it appears that insufficiently valued 
incentives are one of the main reasons that accountability provisions 
fail. When an incentive is of sufficient value, the expected return 
outweighs the expected risk, and recipients are motivated to pursue the 
performance improvement. From 1975 through 1997 the CSE program 
included an incentive program that focused on cost-effectiveness. 
States were guaranteed an "incentive payment" from 6 to 10 percent of 
their total collections. In practice, the 4 percentage point difference 
between the minimum and maximum payment was reportedly not large enough 
to motivate states to increase collections enough to earn the 10 
percent bonus. The new incentive system, established by the Child 
Support Performance and Incentive Act of 1998[Footnote 15] only 
provides incentive payments to states that meet one or more of the 
act's five outcome-based performance goals and associated 
targets,[Footnote 16] and penalizes states that fall below threshold 
levels in certain areas. A review of the new incentive system in a 
sample of nine states found that the median score on each of the five 
performance measures increased from fiscal years 2000 to 2002, the time 
period that the incentive system was implemented.[Footnote 17] 

Motivating grantees to work toward federal outcomes is particularly 
challenging in grants where the federal investment is relatively small. 
Officials at Arizona's Department of Adult Education, Career and 
Technical Education Division, told us that state funds in joint 
technological education districts outweighed federal funds for career 
and technical education (CTE) programs by more than four to one, and 
some districts did not want to accept federal CTE funds because, in 
their view, complying with the federal performance requirements was not 
worth the amount of funds they would receive. In order to ensure that 
the financial value of the Perkins III grants was large enough to 
motivate districts to meet the Perkins III reporting and performance 
requirements, the Arizona Career and Technical Division requires 
districts be in Perkins III compliance in order to receive CTE-related 
state funds, thereby creating a large incentive for local school 
districts to comply with the Perkins III requirements. Indeed, one 
district we spoke with lost Perkins III funding, but it was not until 
the state linked Perkins III compliance to state funding, and the 
district lost the rest of its CTE funding from the state, that the 
district started to make significant improvement toward meeting Perkins 
III requirements. 

In addition, the grantor and grantee should understand the trade-off 
between the financial risk--the possibility performance will not 
improve sufficiently despite the resource investment--and the potential 
return--what will be gained if performance goals are met or exceeded-- 
in order to determine whether to pursue any particular performance 
improvement. Accountability provisions that contain financial 
incentives and sanctions can shift risk between the grantor and 
grantee. That is, the more the grant award depends on performance, the 
greater the financial risk to the grantees: if they invest but do not 
perform sufficiently, they do not get paid. Conversely, in grants with 
limited or no performance accountability provisions, the grantor bears 
the bulk of the financial risk, since the grantee would receive the 
grant funds regardless of the results achieved. 

Ensure Effective Distribution: 

The ability of a performance accountability mechanism to influence 
performance also depends on the effective distribution of 
organizational rewards and penalties to individuals within the 
organization who are directly responsible for the desired 
performance.[Footnote 18] For example, Glendale Union School District 
officials provide significant financial incentives to every school 
employee with whom a student has contact, including teachers, 
administrative staff, and other support staff--including the 
maintenance staff and bus drivers. The district's philosophy is that 
all employees influence the school's atmosphere and academic 
achievement and therefore contribute to any success it enjoys. 
Incentive funds are distributed based on a school's performance on 13 
academic, involvement, and satisfaction-related measures. According to 
a district official, the program, started 5 years ago, has increased 
camaraderie and collaboration among school employees, which the 
official said has contributed to academic improvement. 

In Pennsylvania, the state passes along a portion of the state-earned 
federal incentive payments to the counties, according to each county's 
proportionate share of the aggregate state CSE expenditures and to 
reflect its relative score for each performance measure, following the 
performance targets defined in legislation. Pennsylvania codifies the 
performance expectations and incentive payment procedures through 
cooperative agreements with each county. 

Execute Mechanisms Consistently: 

The grantor must execute the mechanisms consistently and as designed to 
preserve the value of the mechanisms and to avoid introducing 
unnecessary risk. For example, if rewards are not paid as promised the 
grantee could learn that its additional efforts are not worth the cost-
-or risk--and may not make the additional effort to improve 
performance. Similarly, if rewards are paid indiscriminately or if 
penalties are not levied as expected, the grantee could learn that no 
additional effort or investment is required in order to benefit. In 
both cases, the system breaks down and the intended value of the 
accountability provision is lost. 

We have reported on an agency with the authority to levy penalties for 
poor performance that resisted doing so. For example, the Federal 
Transit Administration (FTA) has several enforcement tools to deal with 
grantees' noncompliance, including warning letters, suspension of 
funds, and grant termination. However, traditionally, FTA had been 
reluctant to use these tools to enforce compliance, opting instead to 
work with grantees in an effort to continually promote transit 
development. Reviews also showed that FTA's oversight was superficial 
and inconsistent and that FTA seldom used its enforcement authority to 
compel grantees to correct weaknesses, even those that were long- 
standing. Consequently, federal dollars had been placed at risk. 
However, in response to our 1992 report, FTA established a new 
enforcement policy, developed detailed guidance on carrying out 
enforcement actions, and has since demonstrated a greater willingness 
to use these actions against grantees that do not comply with federal 
transit requirements. The Department of Defense (DOD), on the other 
hand, has paid billions in incentive and award fees for only 
"acceptable, average, expected, good, or satisfactory" performance. 
Despite paying billions in fees, DOD has little evidence to support its 
belief that these fees improve contractor performance and acquisition 
outcomes. The department has not compiled data, conducted analyses, or 
developed performance measures to evaluate the effectiveness of award 
and incentive fees. Using accountability mechanisms in this manner 
undermines their effectiveness as a motivational tool and marginalizes 
their use in holding grantees and contractors accountable for outcome- 
based results.[Footnote 19] 

Periodically Renegotiate and Revise Mechanisms and Measures: 

Organizations need to allow for and use the flexibility to revise, 
update, or improve performance accountability mechanisms in order to 
respond to changing needs. In the literature we reviewed, we found a 
number of reasons for why accountability provisions may need to be 
revised. For example, unintended consequences associated with 
performance measures may be discovered only after full implementation. 
Organizational priorities may change. Technology may be introduced that 
substantially alters performance expectations. In addition, 
expectations that were previously considered stretch goals can become 
the norm over time--for example, as productivity gains are realized 
rewarding such performance may no longer make sense. Finally, efforts 
to reevaluate and revise should consider whether established 
accountability provisions are still effective at motivating performance 
improvements. 

For example, the DMA/MBHP contract demonstrates a situation in which 
the entire accountability system experienced a revision to adjust to 
contract progression. Incentives in this contract were initially 
designed to motivate operational performance, such as processing time 
for billing, and performance targets were revised upward each year as 
performance improved. This upward revision helped ensure that 
performance continued to improve. Once MBHP's performance reached the 
highest levels of industry performance in these areas, further 
improvements were no longer a priority. 

As a result, DMA and MBHP used the annual review to revise the 
incentive system from motivating operational improvement to completing 
projects designed to improve performance in areas that would add value 
to the services MBHP provides, such as a project on providing 
behavioral health assistance to the homeless. 

There are a number of ways to accommodate the need for periodic 
revision. For example, congressional amendments to or reauthorizations 
of grant programs allow policymakers the opportunity to revisit and 
modify existing provisions and to add flexibility for agencies that can 
lead to improved effectiveness. Agencies can include renegotiation and 
revision policies in regulations, guidance, and the terms and 
conditions of a grant award. Providing for periodic revision may be 
particularly important where performance measures are specified in 
legislation, because agency flexibility to respond to changing needs is 
significantly reduced. For example, as we have discussed, the Child 
Support Performance and Incentive Act of 1998 specifies the five 
performance measures, the performance targets, and the percentage of 
incentive payments that states can earn for performance. Initially, 
states made changes and saw improvement in these areas. Recently, both 
state and federal program officials have expressed concern about the 
long-term sustainability of such aggressive targets. For example, 
program officials said that even states that have in the past met the 
90 percent performance target for the paternity measure are concerned 
because more recent annual rates have dropped back down closer to 80 
percent. According to officials, states initially conducted an 
extensive caseload cleanup to improve performance on the five incentive 
measures when the incentive program was enacted in 1998, and much of 
the backlog of cases that could be addressed relatively easily has 
been. However, since the measures and performance targets are 
legislatively defined and the CSE program is permanently authorized, 
the agency does not currently have the flexibility to revise the 
measures or performance targets. 

In contrast, state agencies, in negotiation with the Department of 
Education, can periodically revise their Perkins III CTE performance 
measures and targets during annual negotiations of their state plans. 
At program introduction, program targets are set through the 
negotiation process between states and OVAE. From this process, 
performance targets negotiated initially reflect a realistic level of 
what states can actually produce. Next, through annual application 
updates, the legislation allows renegotiation of performance levels 
with states. Among other factors, OVAE officials attributed the 
program's success to this ongoing ability to renegotiate and revise the 
program's measures. Although the Perkins III legislation is similar to 
the Child Support Performance and Incentive Act of 1998, in that 
Perkins defines the four core indicators tied to the performance 
measures used in the incentive program, it provides flexibility that 
the Child Support Performance and Incentive Act of 1998 lacks. The 
flexibility to revise or update the performance measures is built into 
the Perkins III legislation. 

Accountability systems by their very nature assume that performance can 
be improved. However, performance improvements depend on adequate time 
for and ability of participants to learn from prior actions and use 
what they have learned to improve performance from one period to the 
next.[Footnote 20] Depending upon the complexity of the task, this 
process can take many cycles. Therefore, accountability systems should 
not be abandoned prematurely; rather, they should be assessed, revised, 
and improved. 

Ensure Appropriate Measurement Selection and Usage: 

Selecting and using appropriate types of performance measures is 
important to the effective use of accountability mechanisms. We have 
previously reported on general attributes of good performance measures, 
noting that measures should be linked to agency goals and missions; be 
clearly stated; include measurable targets; and be objective, reliable, 
and balanced.[Footnote 21] Specifically, we found four of these 
characteristics that highlight key features of performance measures 
that can help ensure the successful linking of performance measures and 
rewards and penalties: 

* the performance being measured should be within the recipient's 
sphere of influence, 

* the performance measures should be suitable to the mechanism 
evaluation cycle, and: 

* the performance measures and performance data should be tested. 

Performance Should Be within Recipient's Ability and Influence: 

Performance measures tied to rewards and penalties should represent 
performance that can be sufficiently influenced by the grant 
recipient's actions. Absent this linkage, the grantee may have little 
motivation to change behavior to improve performance, and the granting 
agency risks wasting funds by either rewarding efforts that cannot 
reasonably be tied to grantee behavior or penalizing a grantee for 
outcomes that even its best efforts may not have prevented. For 
example, the Temporary Assistance to Needy Families (TANF) bonus 
payments[Footnote 22] rewarded states for reducing out-of-wedlock 
births. Several studies report, however, that there does not appear to 
be a link between the existence of these programs, or increases in 
efforts to deliver program services, and the TANF bonus payment. Many 
state officials perceive the outcome measure as inappropriate, 
relatively difficult to influence, or both, and discourage attempts to 
do so. According to one study, several states reported that they did 
not compete or did not continue to compete for the bonus funds because, 
among other reasons, their actions would not sufficiently affect the 
out-of-wedlock birth rate; therefore they directed their efforts to 
activities that were more directly under their influence. 

In another example, the Perkins III CTE program has a financial 
incentive system that assesses state performance through performance 
measures that support its four core indicators--one of which encourages 
participation in and completion of programs leading to nontraditional 
employment.[Footnote 23] State and local officials in Arizona said 
their ability to affect performance for this indicator is very limited. 
They told us that although they have tried to address the barriers to 
nontraditional employment, they found that cultural and demographic 
influences have limited their ability to improve performance every 
year. Because performance has not improved as a result of their 
efforts, they focus most of their energy on efforts to improve 
performance in the other three core indicator areas, which reflect 
performance that is more directly under their control.[Footnote 24] 

Measures Should Be Suitable to the Mechanism Cycle: 

Measures should assess performance that can be observed, achieved, and 
reported frequently enough to inform the use of awards and penalties on 
a timely basis. For example, an annual reward or penalty should be tied 
to a measure that is also assessed annually. 

ORC uses performance measures that can be assessed in a relatively 
short period of time and that support program outcomes. ORC holds back 
10 percent of ProFac's management fee each month. Each quarter, ProFac 
has an opportunity to earn the holdback on the basis of its performance 
during the prior quarter on 30 KPIs. For example, 1 of the quarterly 
indicators tied to its overall customer service objective is the 
"overall customer satisfaction rate with project delivery." The 
quarterly assessment is based on performance information gathered 
through customer satisfaction surveys of local managers and facility 
management contacts for all alteration projects, capital repairs, or 
both completed in the previous quarter. Both ORC and ProFac officials 
credit the frequency of evaluation for motivating ProFac to maintain 
high performance throughout the year. 

OVAE uses the timing of its grant funding distribution cycle to its 
advantage in order to motivate states to meet federal performance 
accountability requirements. OVAE disburses grant funds in two pieces: 
a small portion in July and the remainder in October. States that did 
not provide complete, timely performance data, or missed their 
performance targets in the prior year, may have "conditions" put on the 
July portion of the funding; if conditions are not met during that 
quarter, the October funding is withheld. 

Measures and Data Should Be Tested: 

Performance measures that trigger accountability mechanisms should be 
well functioning and time tested before they are linked to rewards and 
penalties to minimize the potential for unintended consequences. 
Although our literature review did not specify how long this could 
take, one study in our review noted that many leading companies use and 
test their measurement systems for years before linking them to 
accountability provisions. 

Performance data should also be tested to make sure they are credible, 
reliable, and valid. Absent these attributes, organizations lack the 
basis for sound decisions about rewards and penalties. Data quality is 
so critical to performance accountability and oversight of grants that 
several organizations use it as the principal performance measure for 
performance-based funding. Pinellas County, Florida, alters the case 
funding rates paid to its ambulatory service contractor based on data 
quality. This "altered funding rate" provision links case reimbursement 
rates directly to data quality. For example, data that are incomplete, 
illegible, inaccurate, altered, or lacking evidence of medical 
necessity--and limit the county's ability to claim for payment or use 
its data processing procedures--result in reduced reimbursements to the 
ambulatory service contractor for the affected cases. Pinellas County 
reports that as a result, ongoing data quality issues are minimal. In 
another example, the Child Support Performance and Incentive Act of 
1998 prohibits the payment of financial incentives to states for 
performance in program areas where state data have failed an annual 
data reliability test. This requirement ensures that incentive payments 
are based on reliable and complete performance information. 

Ensure Grantor and Grantee Technical Capacity: 

Grantor and grantee capacity--specifically, the knowledge about 
performance accountability mechanisms and the ability to effectively 
implement them--is critical to the effectiveness of performance 
accountability systems. For example, when the Air Force implemented its 
performance-based contracting program, it found that employee training 
focusing on how the performance-based aspects of the contracts should 
work were most critical. Specifically, practices such as providing a 
step-by-step approach to the process that outlined who should be 
involved at each step, how much of their time and effort would be 
required at each step, and what their specific roles and 
responsibilities would be were critical to employees understanding what 
was needed to create mechanisms to improve performance. 

In addition, federal CSE staff in Region III provide a "Child Support 
Enforcement Incentives 101" presentation to state and county CSE staff 
throughout the region to explain how the performance measures and 
incentive payments work. This training presentation is tailored to the 
experience of CSE staff and the demographics of the county, state, or 
both (large urban, rural, large interstate caseloads, etc.) but strives 
to provide a clear and consistent message: the everyday activities of 
CSE staff directly affect the amount of child support available to 
children and their families, and drive the amount of incentive payments 
the county specifically, and the state in general, earns. The 
presentation includes interactive exercises to show how each employee's 
casework feeds into outcome-based program results. 

Implement System in Stages: 

Organizations go through a number of stages designing, testing, and 
revising measurement systems before linking them to accountability 
mechanisms. This longer, phased implementation allows organizations to 
ensure the system is effectively designed before tying it to rewards 
and penalties. During these stages, organizations can conduct pilot 
tests, create financial models, and conduct behavioral modeling to 
understand and modify a system prior to full implementation. For 
example, according to one expert, the Tennessee Valley Authority 
completes a "readiness test," an assessment of measurement 
effectiveness and suitability, before allowing pay for performance or 
similar financial incentive systems to be pinned to that measure. This 
helps avoid unintended consequences associated with poorly designed 
measures. Phased implementation also allows organizations to adjust to 
new demands on their time and resources; set up or modify data 
collection systems; and ensure the credibility, validity, and 
reliability of the data before they are used to measure performance. 

For example, the CSE incentive program was implemented in three stages 
to allow states to learn about the new incentives and performance 
measures. The five performance areas attached to incentives were 
developed and legislatively defined in 1998. In 1999, the new data 
measures were used by the states and audited for data reliability for 
the first time. In year one, one-third of the total incentive funds 
were allocated based on the new formula and the remaining funds were 
allocated based on the old system. In year two, two-thirds of the 
funding was allocated using the new system, and the remaining funds 
were allocated based on the old system. In year three, all incentive 
funding was allocated according to the new formula. 

Collaboration and Oversight Also Key to Success: 

In addition to these strategies described above, we saw extensive use 
of partnerships and collaborations and regular and effective oversight 
and feedback. We have previously reported that these practices are 
often associated with high-performing organizations[Footnote 25] and 
organizations that effectively used performance information to manage. 

Designing and implementing accountability provisions in a collaborative 
environment can help develop and encourage buy-in and support and lead 
to improvements. For example, Arizona state and local CTE officials 
said the state's focus has shifted from a compliance-focused "audit," 
ensuring performance data were properly collected and reported, to a 
true partnership in which state and local officials work together to 
identify and replicate successes, find solutions to challenges, and 
thereby improve performance. State CTE staff spend several days each 
year meeting with local CTE officials and providing regular assistance 
through on-site technical assistance teams, phone calls, and e-mails. 

Oversight and feedback are critical to creating and sustaining 
effective performance accountability provisions. We have previously 
reported on oversight practices, noting specifically the value of 
feedback provided through performance monitoring plans and tools such 
as site visits, document reviews, and evaluations. For example, OVAE 
employs a number of tools to provide feedback and assistance to states 
implementing the Perkins III vocational education program. Among these 
tools are: 

* establishing state guidance that outlines how to meet the Perkins III 
performance requirements, 

* developing a peer-to-peer mentorship program among states and with 
OVAE to share experiences and good practices, 

* conducting monthly conference calls with state directors and data 
specialists to discuss challenges and solutions to data collection and 
quality, 

* offering data quality "institutes" and conferences to share 
performance measurement and data quality and collection practices, and: 

* providing technical assistance to states. 

An OVAE official said providing these types of oversight and feedback 
activities generated ideas and discussion to help states improve their 
performance; the state CTE officials with whom we spoke agreed. 

Various Opportunities Exist at the Federal Level to Enhance Performance 
Accountability in Grants: 

The experiences with and strategies related to federal grant 
accountability provisions described in this report suggest a number of 
opportunities for Congress and the executive branch to improve the 
design and implementation of performance accountability mechanisms. 
First, a results-focused design can help encourage performance 
accountability in general and specifically provide for--or at least not 
prohibit--the use of accountability mechanisms to encourage desired 
behavior. In addition, the use of national program evaluation studies 
and research and demonstration grants can provide valuable information 
to assist in agency and congressional oversight of and knowledge about 
accountability mechanisms. Because credible performance information and 
performance measures form the basis for well-functioning accountability 
provisions, it remains critical for Congress and the executive branch 
to continue to encourage their development and use. Finally, OMB and 
agencies can commit to sharing good practices and lessons learned from 
experiences with performance accountability provisions in federal 
grants--an efficient and effective way to increase grantor and grantee 
knowledge, understanding, and use of these provisions. 

A Results-Focused Design Encourages Performance Accountability: 

Considering grant design features and their implications for grantee 
flexibility and accountability can help policymakers provide for 
appropriate accountability provisions, whatever type of grant design is 
selected. We have previously reported that policy options reflected in 
grant design collectively establish (1) the degree of flexibility 
afforded to states or localities; (2) the relevance of performance 
objectives for grantee accountability; (3) whether accountability for 
performance rests at the federal, state, or local level; and (4) 
prospects for measuring performance through grantee reporting and 
oversight.[Footnote 26] Under a results-oriented approach, federal 
policymakers would specify national goals and objectives in statute, 
enact a process for establishing them, or adopt some combination of the 
two. As a result, when designing or reauthorizing grants, it is 
important to consider questions like the following: 

* Is there a need for national performance objectives in this policy 
area? If so, grantees may be required to use uniform performance 
measures--as in the CSE program--to gauge progress. This allows for 
comparisons across grantees, and the supporting performance data 
collected from grantees have the advantage of being program specific. 
However, uniform activities, objectives, and measures may not exist or 
may not be desirable, especially under flexible grant program designs. 
In these cases, Congress may instead decide to allow grantees to 
establish their own program objectives. For example, the Child Care and 
Development Block Grant requires states to certify that they have 
requirements in effect to protect the health and safety of children 
whose child care is subsidized by the block grant. These requirements 
must cover the areas of preventing and controlling for infectious 
diseases, physical premise safety, and health and safety training. 
However, the specificity and stringency of these requirements and the 
manner in which they are enforced is left to the states. The Perkins 
III legislation outlines several performance areas and requires states 
to determine the measures they will use to measures progress in these 
statutorily defined areas. Performance targets for these measures are 
negotiated with OVAE. In these cases, the federal role in monitoring 
the grants is generally limited to collecting information on state and 
local program efforts and accomplishments as well as evaluating and 
disseminating information on best practices. Another option is to grant 
temporary exemptions (waivers) from certain federal program 
requirements to grantees that demonstrate that the flexibility granted 
can lead to performance improvements. For example, Oregon Option is an 
intergovernmental partnership that seeks to improve performance on 
benchmarks for a broad variety of initiatives, including childhood 
immunization, employment for the disabled, wild salmon recovery, 
juvenile justice, welfare reform, and child nutrition, by waiving 
administrative rules or seeking statutory change. 

* In all cases, what accountability provisions are needed to support 
attainment of national performance objectives? These might include 
constraints on activities and funds distribution or operational 
objectives, standards, and criteria for performance. These can be set 
for the program as a whole or delegated to the level of government 
responsible for program management. Additional considerations are as 
follows: What data are needed for grantee accountability, and is it 
feasible to collect these data from providers? Is it possible to 
collect data at the project level? Will the contribution of federal 
funds be distinguishable from state, local, and private funds? If the 
answer to several of these questions is no, is additional information 
needed for program oversight? If so, how will such information be 
gathered and reported? The answers to questions such as these provide 
the basis for setting grantee reporting requirements. 

Careful Use of National Program Evaluation Studies and Research and 
Demonstration Grants Can Help Assess Mechanism Performance: 

Congress has a number of opportunities to conduct oversight, such as 
when it establishes or reauthorizes a new program, during the annual 
appropriations process, and during hearings focused on program and 
agency operations. Providing for--or at a minimum, not prohibiting-- 
performance accountability mechanisms can provide timely, targeted 
performance information and help policymakers ensure that federal 
grants focus on their goals, providing another basis for congressional 
oversight. 

National program evaluations have the potential to answer questions 
about both overall program performance as well as the effectiveness of 
performance accountability mechanisms, in terms of their 
implementation, outcomes, impacts, and cost-effectiveness. However, 
national programwide evaluations are expensive in terms of dollars and 
time and frequently require capacities and resources beyond those 
provided for program management. Also, while evaluations of multiple 
sites provide valuable information, programwide evaluation data are 
typically periodic and often cover too few sites to support national 
estimates of performance. In these cases, research and demonstration 
projects often can provide better information on the effectiveness of 
various service delivery methods and approaches. Knowledge to support 
effective practice is well established in some subject areas and can be 
incorporated into program provisions (such as service standards) or in 
companion technical assistance or knowledge dissemination programs. 

Encourage Development and Use of Credible Performance Information and 
Performance Measures: 

As we discussed earlier, performance accountability provisions rely on 
a supply of credible, reliable, and valid data and high-quality 
performance measures. We found organizations that recognizing the 
importance of data quality, tied incentives to increasing the supply of 
this type of information. Unfortunately, as our work on PART[Footnote 
27] and GPRA implementation shows, the credibility of performance data 
has been a long-standing weakness. OMB, through its development and use 
of PART, has provided agencies with a powerful incentive for improving 
data quality and availability. However, improving the supply of 
performance information is in and of itself insufficient to sustain 
performance management and achieve real improvements in management and 
program results. Rather, it needs to be accompanied by a demand for and 
use of that information by decision makers and managers alike. Key 
stakeholder outreach and involvement is critical to building demand 
and, therefore, success. Lack of consensus by a community of interested 
parties on goals and measures and the way that they are presented can 
detract from the credibility of performance information and, 
subsequently, its use. While congressional buy-in is critical to 
sustain any major management initiative, it is especially important for 
performance accountability given Congress's constitutional role in 
setting national priorities and allocating the resources to achieve 
them. Recognizing this, policymakers could use incentives to encourage 
program partners to agree on performance measures and targets against 
which performance will be judged. 

Share Good Practices and Lessons Learned: 

We and others have frequently reported on the benefits of sharing 
promising practices and lessons learned to promote performance 
accountability in general in federal programs and program partners. We 
believe sharing good practices related to the effective design and 
implementation of performance accountability mechanisms carries similar 
benefits. As noted earlier, some state and local agencies' programs 
have used this type of information sharing among themselves and their 
grantees and contractors as a means of performance improvement. 

OMB, as the focal point for overall management in the executive branch, 
plays a key role in promoting performance improvement in federal 
programs and has developed or contributed to a number of tools to share 
information and encourage improvements to federal grants and program 
performance. For example, www.grants.gov includes information on grant 
opportunities, resources to assist in writing grant proposals, and a 
newsletter highlighting recent grant success stories, and 
www.results.gov has information on best practices related to the 
President's Management Agenda initiatives--one of which is Budget and 
Performance Integration (BPI). Successful implementation of BPI depends 
significantly on federal agencies' ability to ensure federal program 
partners work toward program goals and are held accountable for 
results. Expectmore.gov provides information on PART assessments and 
improvement plans; these assessments consider, among other things, 
whether the agency regularly collects timely and credible performance 
information to manage its programs, and whether the performance 
measurements are used to increase accountability. OMB's own Web site 
also contains information on and examples of what it considers to be 
high-quality PART performance measures; discussion papers on 
measurement topics, such as how to effectively measure what you are 
trying to prevent; and strategies to address some of the challenges of 
measuring research and development programs. 

OMB hosts a number of standing work groups and committees--comprising 
agency and OMB staff--to address important grant-related issues, all of 
which could accommodate a more specific focus on grants accountability 
provisions. For example, OMB's Chief Financial Officer's Council has a 
standing grants policy committee that focuses on grant application and 
reporting streamlining. Agency BPI leads meet monthly and recently 
developed a subgroup to share lessons learned related to efficiency 
measures that balance effectiveness, quality, and cost. They also 
discuss strategies to address the challenges of efficiency measures in 
the grant context and to develop additional guidance for agencies in 
this area. 

In addition, OMB hosted a Block and Formula Grant workshop in October 
2005 for federal officials aimed at identifying and sharing best 
practices in grants management and performance measurement. OMB staff 
agreed that the workshop was a valuable, efficient, and effective way 
to share information and lessons learned and that collectively the 
participants increased their knowledge and understanding of ways to 
enhance grant performance. They also noted that the real difficulty 
comes in "what to do next," in other words, implementing the strategies 
gleaned from these sessions. 

OMB staff told us that focusing specifically on performance 
accountability provisions in grants is necessary and useful, but that 
to date, they have focused their governmentwide efforts primarily on 
encouraging and enhancing agency capacity to develop high-quality, 
results-based program performance measures since improving the quality 
of measures and data necessarily precedes tying them to accountability 
provisions. The Block and Formula Grant workshop addressed issues of 
measurement and accountability, and several block grant programs have 
been working to strengthen grantee accountability. 

Conclusions: 

As the challenges of the 21st century grow, it will become increasingly 
important for Congress, OMB, and executive agencies to consider how the 
federal government can maximize performance and results. This will be 
particularly important for federal grant program managers, given the 
significant amount of federal resources invested in these tools. 
Because many national objectives can only be achieved through state, 
local, and nongovernmental organizations, enhancing performance 
accountability below the federal level is equally important. In this 
report, we identify a variety of accountability mechanisms as well as 
key strategies to enhance their use. Collectively, these can help 
enhance and sustain performance accountability in grants at all levels 
of government. 

As the cases we described illustrate, rewards and penalties are 
fundamental tools to help drive and motivate desired behaviors, but 
performance accountability mechanisms are not one size fits all; there 
is no universal transferable mechanism applicable to all programs. The 
specific mechanisms used by agencies and programs and highlighted 
throughout this report may not be universally adopted by other federal 
agencies and programs seeking to improve their own programs. 
Nevertheless, many can be tailored to specific grant programs, and the 
key strategies can be adapted to address the specific accountability 
challenges each agency faces. 

Like all successful change initiatives, the progress currently under 
way to move from traditional fiscal accountability in grants to greater 
accountability for performance will take time; accountability 
provisions--and the performance measures associated with them--can take 
many years to mature. Although some federal programs are well on their 
way to collecting and reporting on reliable, credible, and valid data 
that support high-quality outcome goals agreed to by all program 
partners, many others are still struggling with how to define 
appropriate outcome measures. It will be critical to proceed 
thoughtfully and implement performance accountability in phases, 
building in enough opportunities to learn from mistakes and revise 
measures and mechanisms to reap the benefits of performance management 
while minimizing perverse incentives and unintended consequences. 

As with all challenges, starting with small steps is often the best way 
forward. Accountability provisions can be used to bring program 
partners together to identify common ground. For example, programs that 
struggle with defining appropriate outcome goals, measures, and targets 
may wish to tie incentives to reaching agreement on them. Those that 
struggle with poor data quality and data definitions could reward 
grantees for progress in this area. Performance accountability-- 
especially in the early stages--must be constructive, not punitive. 
Even if penalties are employed to promote performance accountability, 
there should be a constructive, collaborative approach to performance 
improvement that precedes them. Tying performance to lower risk, 
nonfinancial mechanisms may at first be more acceptable until 
performance measures have been time tested and revised as needed and 
grantees have had time to collect the necessary data to support the 
measures. Above all, a collaborative process that includes Congress, 
the executive branch, and grantees will be critical to developing 
successful performance accountability systems. 

Accountability provisions assume that performance can be improved--but 
this requires information sharing and feedback. OMB has a central role 
in overseeing the performance and accountability in the federal 
government, and has used its role to promote general results-oriented 
performance measurement and management practices in federal grants 
through Web sites, guidance, work groups, and workshops. Each of these 
tools and strategies could be expanded on to specifically promote and 
encourage performance accountability in federal grants, both among 
related federal grant programs--programs that have a common purpose-- 
and federal grant types--such as categorical grants, block grants, and 
funding streams. Sharing good practices and lessons learned and 
providing feedback on performance are valuable practices that can 
leverage resources to enhance knowledge and further performance 
accountability. Leading practices can be shared within and among 
agencies, grant programs, grantees, and even grant types. OMB 
recognized the value in sharing information on performance 
accountability mechanisms, but has not yet focused on this issue. 

Recommendation for Executive Action: 

We are therefore recommending that the Director of OMB encourage and 
assist federal agencies in working with the Congress to expand the 
effective use of performance accountability mechanisms, focusing on the 
practices in this report, when federal grant programs are being created 
or reauthorized. We further recommend that OMB offer opportunities for 
knowledge transfer among federal agencies and encourage agencies to 
share leading practices and lessons learned in implementing grant 
accountability mechanisms. Possible vehicles for the collection and 
dissemination of this information include good practices guides and 
workshops and Web sites such as results.gov, grants.gov, and 
expectmore.gov. 

Agency Comments: 

On August 22, 2006, we provided a draft of this report to the Director 
of OMB and the Secretaries of Education and Health and Human Services. 
We also provided relevant sections of a draft of this report to the 
grantees and contractors highlighted in this report. We received 
technical comments from all three agencies, which were incorporated as 
appropriate. In addition, OMB agreed with our recommendation but 
suggested we broaden it to address the role of federal agencies and 
Congress in the grant design and reauthorization process. We agree, and 
have amended our recommendation accordingly. 

We are sending copies of this report to the Director of the Office of 
Management and Budget, the Secretaries of Education and Health and 
Human Services, and other interested parties. We will also make copies 
available to others upon request. In addition, the report is available 
at no charge on GAO's Web site at [Hyperlink, http://www.gao.gov]. 

Please contact me on (202) 512-6543 or steinhardtb@gao.gov if you or 
your staff have any questions about this report. Contact points for our 
Offices of Congressional Relations and Public Affairs may be found on 
the last page of this report. Key contributors to this report are 
acknowledged in appendix II. 

Sincerely yours, 

Signed by: 

Bernice Steinhardt: 
Director, Strategic Issues: 

[End of section] 

Appendix I: Objectives, Scope, and Methodology: 

The objectives of this report were to identify (1) the challenges to 
performance accountability in grants; (2) the kinds of mechanisms that 
are being used to improve grant performance and how; and (3) given the 
findings of questions 1 and 2, what strategies the federal government 
can use to encourage the use of these mechanisms, as appropriate. 

To meet the first and second objectives, we interviewed experts in 
grants and performance management, including individuals from the 
following organizations: the School of Public Policy at the University 
of Maryland, the University of Central Florida, the John F. Kennedy 
School of Government at Harvard University, the John C. Stennis 
Institute of Government at Mississippi State University, the Public and 
International Affairs Department at George Mason University, the 
Political Science Department at the University of New Hampshire, 
Measurement International, and the American Productivity and Quality 
Center. 

Based on our literature review, we developed a coding scheme for 
identifying (1) types of performance accountability mechanisms and (2) 
strategies used to successfully design and implement these mechanisms. 
We used these codes in a content analysis we conducted on a subset of 
the documents we reviewed. We chose the documents for content analysis 
based on the following criteria: 

* discussed accountability systems, mechanisms, or both, discussed 
general practices that facilitated to the effective use of 
accountability mechanisms, or provided case examples; 

* published in 1993 or later; 

* found in major electronic databases; and: 

* published in the United States. 

The content analysis was conducted by two analysts, with the second 
analyst conducting a dependent review. Discrepancies in coding were 
discussed and agreement reached between the two analysts. Our analysis 
produced an inventory of performance accountability mechanism types and 
five strategies used to facilitate the effective design and 
implementation of performance accountability mechanisms. See the 
bibliography for documents included in our review. 

To illustrate the mechanisms and strategies identified through our 
content analysis, we used relevant case examples found in the 
literature. To further illustrate the mechanisms and design and 
implementation strategies, we also selected four additional case 
illustrations--two federal grant programs and two nonfederal contract 
cases. These four cases were selected based on our literature review, 
interviews with experts, and reviews of prior GAO work because they are 
good examples of where (1) a performance mechanism was present and (2) 
there is reason to believe that performance improved at least in part 
because of the mechanism. 

To screen and develop the grant case illustrations, we interviewed 
regional and headquarters federal agency officials and officials at 
county/local offices. We also reviewed grant legislation, program 
guidance, and prior studies. To develop contract case illustrations, we 
interviewed officials both from the contracting agencies and the 
contractors and reviewed the contract. 

To address our third objective, we synthesized prior GAO work, and we 
interviewed officials at the Office of Management and Budget. 

We conducted our work from December 2005 through August 2006 in 
accordance with generally accepted government auditing standards. 

[End of section] 

Appendix II: GAO Contact and Staff Acknowledgments: 

GAO Contact: 

Bernice Steinhardt (202) 512-6543 or steinhardtb@gao.gov: 

Acknowledgments: 

Jackie Nowicki (Assistant Director) and Chelsa Gurkin (Senior Analyst- 
in-Charge) managed this assignment. David Bobruff, Katie Hamer, and 
Anne Marie Morillon made significant contributions to all aspects of 
the work. Kate France significantly contributed to the initial research 
and design of the assignment. In addition, Tom Beall and Jay Smale 
provided methodological assistance, Amy Rosewarne provided key 
assistance with message development, and Donna Miller developed the 
report's graphics. 

[End of section] 

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FOOTNOTES 

[1] Pub. L. No. 103-62, 107 Stat. 285 (1993). 

[2] Pub. L. No. 105-220, Pub. L. No. 107-110. 

[3] Pass-through grants are federal grants given to state governments 
that are subsequently distributed to county, municipal, or township 
governments. 

[4] The other attributes of high-performing organizations are a clear, 
well-articulated, and compelling mission; a focus on the needs of the 
clients and customers; and the strategic management of people. 

[5] GAO, Comptroller General's Forum: High-Performing Organizations: 
Metrics, Means, and Mechanisms for Achieving High Performance in the 
21st Century Public Management Environment, GAO-04-343SP (Washington, 
D.C.: Feb. 13, 2004), and Managing for Results: Enhancing Agency Use of 
Performance Information for Management Decision Making, GAO-05-927 
(Washington, D.C.: Sept. 9, 2005). 

[6] Pub. L. No. 98-502. 

[7] Domestic Working Group, Grant Accountability Project, Guide to 
Opportunities for Improving Grant Accountability. October 2005. This 
guide states that it is designed to provide government executives at 
the federal, state and local levels with ideas for better managing 
grants. The guide focuses on specific steps taken by various agencies. 
The intent is to share useful and innovative approaches taken, so that 
others can consider using them. 

[8] On August 12, 2006, the Carl D. Perkins Career and Technical 
Education Improvement Act of 2006 (Perkins IV) became Pub. L. No. 109- 
270. Perkins IV includes some revisions to the performance and 
accountability provisions. 

[9] GAO, Grant Programs: Design Features Shape Flexibility, 
Accountability, and Performance Information, GAO/GGD-98-137 
(Washington, D.C.: June 22, 1998). 

[10] GAO, Federal Assistance: Grant System Continues to Be Highly 
Fragmented, GAO-03-718T (Washington, D.C.: Apr. 29, 2003). 

[11] Pub. L. No. 106-107, the Federal Financial Assistance Management 
Improvement Act of 1999 requires OMB to coordinate agency efforts to 
streamline the administrative requirements of federal grants and engage 
and involve grantees in developing and implementing their reform goals 
and implementation plans. The act also requires GAO to evaluate the 
reform efforts. See GAO, Grants Management: Grantees' Concerns with 
Efforts to Streamline and simplify Processes. GAO-06-566 (Washington, 
D.C.: July 28, 2006). 

[12] GAO, Block Grants: Issues in Designing Accountability Provisions. 
GAO/AIMD-95-226 (Washington, D.C.: Sept. 1, 1995). 

[13] We identified these strategies through our literature review, and 
illustrate them with examples from the literature and from our 
additional four case illustrations. 

[14] GAO-04-343SP, GAO-05-927. 

[15] Pub. L. No. 105-200. 

[16] The five performance goals are (1) paternity establishment, (2) 
child support order establishment, (3) collections on current support 
due, (4) collections on arrears, and (5) cost-effectiveness. 

[17] The Lewin Group, Study of the Implementation of the Performance- 
Based Incentive System, October 2003. 

[18] GAO, Results-Oriented Cultures: Creating a Clear Linkage between 
Individual Performance and Organizational Success, GAO-03-488 
(Washington, D.C.: Mar. 14, 2003). 

[19] GAO, Defense Acquisitions: DOD Has Paid Billions in Award and 
Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66 
(Washington, D.C.: Dec. 19, 2005). 

[20] GAO, Tax Administration: IRS Needs to Further Refine Its Tax 
Filing Season Performance Measures, GAO-03-143 (Washington, D.C.: Nov. 
22, 2002). 

[21] GAO-03-143. 

[22] The Personal Responsibility and Work Opportunity Reconciliation 
Act of 1996 authorized the Bonus to Reward Decrease in Illegitimacy 
Ratio, a provision intended to motivate states to pursue nonmarital 
birth prevention programs. This provision awarded up to $25 million in 
each of fiscal years 1999 through 2002 to as many as five states 
showing the largest reduction in nonmarital births. 

[23] Nontraditional employment relates to the participation of students 
in fields in which their gender constitutes less than 25 percent of the 
individuals employed in that field (e.g., female students participating 
in automotive repair programs). 

[24] However, as discussed earlier, states can periodically revise 
their Perkins III CTE performance measures and targets during annual 
negotiations of their state plan. 

[25] The other attributes of high-performing organizations are a clear, 
well-articulated, and compelling mission; a focus on the needs of the 
clients and customers; and the strategic management of people. 

[26] GAO/GGD-98-137. 

[27] OMB developed PART as a diagnostic tool meant to provide a 
consistent approach to assessing federal programs during the executive 
budget formulation process. PART covers four broad topics for all 
programs selected for review: (1) program purpose and design, (2) 
strategic planning, (3) program management, and (4) program results. We 
have previously reported on PART in GAO, Performance Budgeting: PART 
Focuses Attention on Program Performance, but More Can Be Done to 
Engage Congress, GAO-06-28 (Washington, D.C.: Oct. 28, 2005). 

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