[Department of Labor Request for Opinion Concerning Interest on Recovered Grant Funds]

Pursuant to an agency request, GAO investigated a subgrantee's treatment of interest earned on grant funds held under the Comprehensive Employment and Training Act (CETA). From 1974 through 1977, the Department of Labor made CETA grants to the State of Arkansas, which in turn made subgrants to a firm. The firm used a portion of the grant funds to pay Federal Insurance Contributions Act (FICA) taxes to the Internal Revenue Service (IRS). Subsequently, the subgrantee obtained a waiver from IRS of the requirement that it pay FICA taxes. In 1978, the subgrantee received a refund of all of the FICA taxes it had paid during the 4-year period in question, and it invested the money in certificates of deposit. After an audit by the grantee in 1980, the subgrantee returned most of the principal to Labor. However, the subgrantee retained accrued interest, as well as a portion of the principal that was still owed to employees that the subgrantee had not been able to locate. The subgrantee contended that it could retain the interest on the IRS refund because of a Comptroller General decision that stated that nongovernmental subgrantees are entitled to keep interest earned on grant funds advanced to them by States pending their disbursement for grant purposes under the Intergovernmental Cooperation Act. GAO ruled that: (1) the funds in question were recoveries of funds previously expended for grant purposes, so they were not advances as defined by relevant regulations; (2) the interest earned on the funds was an applicable credit under the grant agreement and grant cost principles and, as such, was owed by the subgrantee to the grantee and by the grantee to Labor; and (3) the recovered funds were not held pending disbursement since they were invested for several years. Accordingly, GAO concurred with Labor that the subgrantee could not retain the interest earned on the grant funds.