B-198255, JUN 20, 1980

B-198255: Jun 20, 1980

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BULGER: YOU HAVE REQUESTED OUR ADVICE CONCERNING THE PROPER APPLICATION OF SECTION 203 OF THE INTERGOVERNMENTAL COOPERATION ACT OF 1968. SUCH AS WHERE IT IS EARNED ON UNEXPENDED FUNDS FROM A COMPLETED GRANT PROGRAM OR ON COSTS DISALLOWED AS THE RESULT OF AN AUDIT. ARE SET FORTH BELOW. A MORE DETAILED ANALYSIS IS ATTACHED. QUESTION 1: IS THERE A REASONABLE BASIS TO RECOMMEND THAT CONGRESS AMEND THE ACT TO REQUIRE STATES TO RETURN INTEREST INCOME IF IT CAN BE SHOWN THAT STATES ARE NOT BURDENED IN ACCOUNTING FOR THE INTEREST AND ARE EARNING SIGNIFICANT SUMS OF INTEREST ON FEDERAL FUNDS? WE BELIEVE THAT THERE IS A REASONABLE BASIS FOR SUCH A RECOMMENDATION UNDER THE DESCRIBED CIRCUMSTANCES IF IT CAN BE SHOWN THAT INTEREST EARNINGS CANNOT BE ADEQUATELY REDUCED BY IMPROVED AGENCY SCHEDULING AND MONITORING OF THE FLOW OF ADVANCES.

B-198255, JUN 20, 1980

INTEREST INCOME EARNED BY GRANTEES ON FEDERAL FUNDS (FILE B-198255)

TEAM LEADER, NYRO - GARY A. BULGER:

YOU HAVE REQUESTED OUR ADVICE CONCERNING THE PROPER APPLICATION OF SECTION 203 OF THE INTERGOVERNMENTAL COOPERATION ACT OF 1968, 42 U.S.C. SEC. 4213 (1976), TO INTEREST INCOME EARNED BY GRANTEES ON FEDERAL FUNDS. THAT PROVISION REQUIRES THAT FEDERAL DEPARTMENTS AND AGENCIES SCHEDULE THE TRANSFER OF GRANT-IN-AID FUNDS SO AS TO MINIMIZE THE TIME ELAPSING BETWEEN THE TRANSFER OF THE FUNDS FROM THE TREASURY AND THEIR DISBURSEMENT BY THE STATE. IT FURTHER PROVIDES THAT STATES SHALL NOT BE HELD ACCOUNTABLE FOR INTEREST EARNED ON SUCH FUNDS, PENDING THEIR DISBURSEMENT FOR PROGRAM PURPOSES.

YOUR FIRST THREE QUESTIONS RELATE TO INTEREST EARNED BY GRANTEES ON ADVANCES OF FEDERAL FUNDS, PRIOR TO THEIR DISBURSEMENT. YOUR LAST TWO QUESTIONS PRIMARILY RELATE TO OTHER SITUATIONS INVOLVING INTEREST INCOME EARNED BY GRANTEES ON FEDERAL FUNDS, SUCH AS WHERE IT IS EARNED ON UNEXPENDED FUNDS FROM A COMPLETED GRANT PROGRAM OR ON COSTS DISALLOWED AS THE RESULT OF AN AUDIT. THE QUESTIONS, ALONG WITH BRIEF RESPONSES, ARE SET FORTH BELOW. A MORE DETAILED ANALYSIS IS ATTACHED.

QUESTION 1: IS THERE A REASONABLE BASIS TO RECOMMEND THAT CONGRESS AMEND THE ACT TO REQUIRE STATES TO RETURN INTEREST INCOME IF IT CAN BE SHOWN THAT STATES ARE NOT BURDENED IN ACCOUNTING FOR THE INTEREST AND ARE EARNING SIGNIFICANT SUMS OF INTEREST ON FEDERAL FUNDS?

ANSWER: CONDITIONALLY, YES. WE BELIEVE THAT THERE IS A REASONABLE BASIS FOR SUCH A RECOMMENDATION UNDER THE DESCRIBED CIRCUMSTANCES IF IT CAN BE SHOWN THAT INTEREST EARNINGS CANNOT BE ADEQUATELY REDUCED BY IMPROVED AGENCY SCHEDULING AND MONITORING OF THE FLOW OF ADVANCES, INCLUDING THE TERMINATION OF THE ADVANCE FINANCING TECHNIQUE WHERE IT IS ABUSED BY A STATE AND THE USE OF MODIFIED LETTER-OF-CREDIT TECHNIQUES SUCH AS THE CHECKS PAID AND DELAY OF DRAWNDOWN METHODS.

QUESTION 2: CAN FEDERAL AGENCIES DRAW A DISTINCTION BETWEEN EARNING INTEREST ON FEDERAL FUNDS IN EXCESS OF IMMEDIATE NEEDS AND EARNING INTEREST ON FUNDS NOT IN EXCESS, AND HENCE, REQUIRE STATES TO RETURN INTEREST INCOME EARNED ON FUNDS IN EXCESS OF THREE DAYS' SUPPLY?

ANSWER: NO. SECTION 203, BY ITS TERMS, ABSOLUTELY RELIEVES STATES OF THE LEGAL OBLIGATION TO ACCOUNT FOR INTEREST EARNED ON GRANT-IN-AID FUNDS PENDING THEIR DISBURSEMENT.

QUESTION 3: CAN FEDERAL AGENCIES REQUIRE STATES TO REDUCE EXCESS CASH BALANCES TO THREE DAYS' SUPPLY?

ANSWER: CONDITIONALLY, YES. WHEN IT CAN BE SHOWN THAT A STATE NEEDS NO MORE THAN THREE DAYS' SUPPLY OF FEDERAL FUNDS TO MEET ITS MINIMUM DISBURSEMENT NEEDS, FEDERAL AGENCIES CAN REQUIRE THE STATE TO REDUCE ITS CASH BALANCES TO THREE DAYS' SUPPLY OF FEDERAL FUNDS.

QUESTION 4: CAN CLEAR DISTINCTIONS BE MADE CONCERNING THE CIRCUMSTANCES UNDER WHICH STATES ARE REQUIRED TO RETURN INTEREST INCOME EARNED ON FEDERAL MONEY?

ANSWER: YES. ONLY INTEREST EARNED ON ADVANCES OF FEDERAL FUNDS FALLING WITHIN THE DEFINITION OF "GRANT-IN-AID" FUNDS SUPPLIED BY THE ACT IS SUBJECT TO THE SECTION 203 INTEREST ACCOUNTABILITY EXEMPTION. ADDITION, SECTION 203 ONLY EXEMPTS STATES FROM ACCOUNTING FOR INTEREST EARNED ON GRANT-IN-AID FUND ADVANCES "PENDING THEIR DISBURSEMENT" FOR PROGRAM PURPOSES.

QUESTION 5: SPECIFICALLY, MUST A STATE RETURN THE INTEREST INCOME EARNED ON FEDERAL FUNDS IN THE FOLLOWING SITUATIONS?

(A) A STATE COLLECTS FEDERAL MONEY FROM SUBGRANTEES RESULTING FROM AUDITS WHICH DISALLOWED CERTAIN COSTS PAID FOR OUT OF FEDERAL FUNDS. THE STATE RETAINS THESE DISALLOWED COST FUNDS FOR A PERIOD OF TIME AND EARNS INTEREST BEFORE RETURNING THE FUNDS TO THE FEDERAL AGENCY.

(B) A STATE EARNS INTEREST ON FEDERAL FUNDS THAT ARE COMPRISED OF UNEXPENDED FUNDS FROM COMPLETED GRANT PROGRAMS.

ANSWER:

(A) YES.

(B) YES, ASSUMING THAT THE STATE IS REQUIRED TO RETURN THE UNEXPENDED FUNDS TO THE FEDERAL GOVERNMENT UPON COMPLETION OF THE GRANT PROGRAMS.

GRANT-IN-AID FUNDS HELD BY THE STATE UNDER THE CIRCUMSTANCES DESCRIBED, IN OUR OPINION, ARE NOT "PENDING DISBURSEMENT" FOR PROGRAM PURPOSES.

ATTACHMENT

DIGESTS:

1. BASIS FOR RECOMMENDING AMENDMENT OF SEC. 203 OF INTERGOVERNMENTAL COOPERATION ACT EXISTS IF IT CAN BE SHOWN THAT INTEREST EARNINGS BY STATES ON ADVANCES OF GRANT-IN-AID FUNDS CANNOT BE ADEQUATELY REDUCED BY IMPROVED AGENCY SCHEDULING AND MONITORING OF FLOW OF ADVANCES.

2. SECTION 203 OF INTERGOVERNMENTAL COOPERATION ACT ABSOLUTELY RELIEVES STATES OF LEGAL OBLIGATION TO ACCOUNT FOR INTEREST EARNED ON GRANT-IN-AID FUNDS PENDING THEIR DISBURSEMENT.

3. FEDERAL AGENCIES CAN REQUIRE STATE TO REDUCE CASH BALANCES TO THREE DAYS' SUPPLY OF FEDERAL FUNDS WHEN IT CAN BE SHOWN THAT NO MORE THAN THREE DAYS' SUPPLY OF FUNDS IS NEEDED TO MEET STATE'S MINIMUM DISBURSEMENT NEEDS.

4. ONLY INTEREST EARNED ON ADVANCES OF FEDERAL FUNDS WITHIN DEFINITION OF "GRANT-IN-AID" SUPPLIED BY INTERGOVERNMENTAL COOPERATION ACT IS SUBJECT TO ACT'S INTEREST ACCOUNTABILITY EXEMPTION.

5. SECTION 203 OF INTERGOVERNMENTAL COOPERATION ACT ONLY EXEMPTS STATES FROM ACCOUNTING FOR INTEREST EARNED ON GRANT-IN-AID FUND ADVANCES "PENDING THEIR DISBURSEMENT" FOR PROGRAM PURPOSES.

BACKGROUND

SECTION 203 OF THE INTERGOVERNMENTAL COOPERATION ACT OF 1968, 42 U.S.C. SEC. 4213 (1976), PROVIDES:

SEC. 4213. SCHEDULING OF FEDERAL TRANSFERS TO STATES

"HEADS OF FEDERAL DEPARTMENTS AND AGENCIES RESPONSIBLE FOR ADMINISTERING GRANT-IN-AID PROGRAMS SHALL SCHEDULE THE TRANSFER OF GRANT-IN-AID FUNDS CONSISTENT WITH PROGRAM PURPOSES AND APPLICABLE TREASURY REGULATIONS, SO AS TO MINIMIZE THE TIME ELAPSING BETWEEN THE TRANSFER OF SUCH FUNDS FROM THE UNITED STATES TREASURY AND THE DISBURSEMENT THEREOF BY A STATE, WHETHER SUCH DISBURSEMENT OCCURS PRIOR TO OR SUBSEQUENT TO SUCH TRANSFER OF FUNDS, ***. STATES SHALL NOT BE HELD ACCOUNTABLE FOR INTEREST EARNED ON GRANT-IN-AID FUNDS, PENDING THEIR DISBURSEMENT FOR PROGRAM PURPOSES."

THE PURPOSES OF AND RATIONALE FOR SECTION 203 HAVE BEEN EXPLAINED AS FOLLOWS:

"THIS SECTION ESTABLISHES A PROCEDURE TO DISCOURAGE THE ADVANCEMENT OF FEDERAL FUNDS FOR LONGER PERIODS OF TIME THAN NECESSARY. THE DEPARTMENT OF THE TREASURY HAS ALREADY MOVED ADMINISTRATIVELY TO ACHIEVE THIS OBJECTIVE IN ITS DEPARTMENTAL CIRCULAR NO. 1075, ISSUED MAY 28, 1964. UNDER THIS CIRCULAR, A LETTER OF CREDIT PROCEDURE HAS BEEN ESTABLISHED WHICH MAINTAINS FUNDS IN THE TREASURY UNTIL NEEDED BY RECIPIENTS. ADVANCES ARE LIMITED TO THE MINIMUM ALLOWANCES THAT ARE NEEDED AND ARE TIMED TO COINCIDE WITH ACTUAL COST AND PROGRAM REQUIREMENTS. THIS SECTION IS DESIGNED TO PLACE THIS ADMINISTRATIVE PRACTICE ON A LEGISLATIVE BASIS AND TO EXTEND IT TO COVER DISBURSEMENTS WHICH OCCUR BOTH PRIOR AND SUBSEQUENT TO THE TRANSFER OF FUNDS. IT IS FURTHER INTENDED THAT STATES WILL NOT DRAW GRANT FUNDS IN ADVANCE OF PROGRAM NEEDS.

"DECISIONS OF THE COMPTROLLER GENERAL OF THE UNITED STATES HAVE IN THE PAST REQUIRED THAT RECIPIENTS OF FEDERAL GRANTS RETURN TO THE TREASURY ANY INTEREST EARNED ON SUCH GRANTS PRIOR TO THEIR USE, UNLESS CONGRESS HAS SPECIFICALLY PRECLUDED SUCH A REQUIREMENT. THE NEW TECHNIQUES, SUCH AS THE LETTER OF CREDIT AND SIGHT DRAFT PROCEDURES NOW USED BY THE TREASURY, SHOULD MINIMIZE THE AMOUNT OF GRANTS ADVANCED, AND THUS, IT SHOULD NOT BE NECESSARY TO CONTINUE TO HOLD STATES ACCOUNTABLE FOR INTEREST OR OTHER INCOME EARNED PRIOR TO DISBURSEMENT." S. REP. NO. 1456, 90TH CONG., 2D SESS. 15 (1968).

YOU POINT OUT THAT IN A LETTER REPORT TO THE ATTORNEY GENERAL (B-171019, OCTOBER 16, 1973), WE STATED THAT THE CONGRESS APPARENTLY ADDED THE LAST SENTENCE OF SECTION 203 IN ANTICIPATION THAT BY MINIMIZING THE LAG TIME BETWEEN TRANSFER AND DISBURSEMENT, THE INTEREST EARNED WOULD BE MINIMAL AND THERE WOULD BE NO NEED TO REQUIRE THE STATES TO MAINTAIN BURDENSOME ACCOUNTING PROCEDURES TO ACCOUNT FOR ANY INTEREST EARNED. YOU STATE THAT IF THIS IS SO, THEN CONGRESS' INTENT IS NOW OUT-DATED.

YOUR SURVEY WORK IN NEW YORK AND CALIFORNIA SHOWS THAT THESE STATES WOULD NOT BE BURDENED BY ACCOUNTING FOR THE INTEREST INCOME EARNED ON FEDERAL GRANT-IN-AID FUNDS. THESE STATES, AS WELL AS OTHERS, HAVE DEVELOPED VERY SOPHISTICATED CASH MANAGEMENT AND INVESTMENT PROGRAMS. THESE PROGRAMS INCLUDE SHORT-TERM INVESTMENTS, WITH SOME AS SHORT AS OVERNIGHT.

IN ADDITION, YOU FOUND THAT A LARGE AMOUNT OF INTEREST IS EARNED ON FEDERAL FUNDS THAT ARE IN EXCESS OF IMMEDIATE NEEDS. YOU STATE THAT ORGANIZATIONS USUALLY NEED NO MORE THAN THREE BUSINESS DAYS' SUPPLY OF FEDERAL CASH BUT THAT ALMOST ALL PROGRAMS SURVEYED IN CALIFORNIA AND NEW YORK MAINTAIN MORE THAN THREE DAYS' SUPPLY OF CASH.

YOU FURTHER NOTE THAT WHILE SECTION 203 OF THE ACT HOLDS HEADS OF FEDERAL AGENCIES PRIMARILY RESPONSIBLE FOR SCHEDULING THE TRANSFER OF FUNDS SO AS TO MINIMIZE THE TIME LAG BETWEEN TRANSFER AND DISBURSEMENT, STATES ALSO HAVE A RESPONSIBILITY NOT TO DRAW FUNDS IN ADVANCE OF PROGRAM NEEDS. YOU FEEL THAT RATHER THAN FULFILLING THIS OBLIGATION, STATES ARE USING THE LAST SENTENCE OF SECTION 203 AS A "LOOPHOLE" TO EARN AND RETAIN SIGNIFICANT SUMS OF INTEREST INCOME.

THUS, YOU BELIEVE THAT THE LAST SENTENCE OF SECTION 203 HAS CREATED A "BONANZA" FOR THE STATES AT A GREAT COST TO THE FEDERAL GOVERNMENT, WHICH MUST BORROW FUNDS IT WOULD NOT OTHERWISE NEED, AND AT HIGH RATES OF INTEREST. YOU BELIEVE THAT THE LEGISLATIVE HISTORY OF THE PROVISION DOES NOT JUSTIFY SUCH "PROFITEERING" AT THE EXPENSE OF THE FEDERAL TAXPAYER.

THE ABOVE STATED FACTS AND OPINIONS FORM THE BASIS OF YOUR FIRST THREE QUESTIONS. YOUR LAST TWO QUESTIONS ARE BASED, IN PART, ON THE FOLLOWING ADDITIONAL FACTS AND CIRCUMSTANCES.

YOU STATE THAT YOU ARE CONFUSED BY THE FACT THAT UNDER CERTAIN CIRCUMSTANCES, INTEREST INCOME EARNED BY FEDERAL GRANTEES IS RETURNED TO THE FEDERAL GOVERNMENT. SPECIFICALLY, YOU CITE THREE EXAMPLES INVOLVING GRANT PROGRAMS ADMINISTERED BY THE DEPARTMENT OF HEALTH AND HUMAN SERVICES (HHS) (FORMERLY THE DEPARTMENT OF HEALTH, EDUCATION AND WELFARE).

THE FIRST EXAMPLE CONCERNS THE COLLECTION FROM THE STATE OF MASSACHUSETTS OF INTEREST INCOME EARNED ON FEDERAL FUNDS ADVANCED FOR THE DISABILITY DETERMINATION PROGRAM. YOU POINT OUT THAT THE AGENCY AUDIT REPORT ON THIS MATTER EMPHASIZES A DISTINCTION BASED ON THE TERM "GRANT-IN-AID" AS USED IN SECTION 203 IN THAT THE TERM DOES NOT INCLUDE PAYMENTS TO STATES FOR COSTS INCURRED IN THE ADMINISTRATION OF THE PROGRAM.

THE SECOND AND THIRD EXAMPLES INVOLVE THE RECOVERY OF MEDICAID OVERPAYMENTS AND THE RETURN OF UNCASHED WELFARE CHECKS, RESPECTIVELY. THE FIRST INSTANCE, INTEREST INCOME EARNED ON MEDICAID OVERPAYMENTS RECOVERED BY NEW YORK STATE WAS COLLECTED. IN THE SECOND INSTANCE, HOWEVER, NO INTEREST WAS COLLECTED FROM THE STATE OF MASSACHUSETTS WHEN IT RETURNED $1.4 MILLION IN FUNDS FROM UNCASHED WELFARE CHECKS, DESPITE THE KNOWLEDGE THAT THE STATE EARNED INTEREST ON THE FUNDS.

FINALLY, YOU ADD THAT ALTHOUGH THE TERM "STATE" IS USED THROUGHOUT YOUR REQUEST, YOUR QUESTIONS APPLY TO BOTH GOVERNMENTAL AND NON GOVERNMENTAL SUBGRANTEES OF THE STATE AS WELL. PAST GAO DECISIONS HAVE HELD THAT SECTION 203 ALSO EXEMPTS STATE SUBGRANTEES FROM ACCOUNTING FOR INTEREST EARNED ON GRANT-IN-AID ADVANCES. B-196794, JANUARY 17, 1980; B-171019, OCTOBER 16, 1973.

ANALYSIS:

QUESTION 1: IS THERE A REASONABLE BASIS TO RECOMMEND THAT CONGRESS AMEND THE ACT TO REQUIRE STATES TO RETURN INTEREST INCOME IF IT CAN BE SHOWN THAT STATES WOULD NOT BE BURDENED IN ACCOUNTING FOR THE INTEREST AND ARE EARNING SIGNIFICANT SUMS OF INTEREST ON FEDERAL FUNDS?

ANSWER: AT THE TIME CONGRESS ENACTED SECTION 203 OF THE INTERGOVERNMENTAL COOPERATION ACT, IT APPARENTLY ANTICIPATED THAT MINIMIZING THE LAG TIME BETWEEN THE TRANSFER OF GRANT-IN-AID FUNDS FROM THE TREASURY AND THEIR DISBURSEMENT BY THE STATE WOULD ALSO MINIMIZE THE AMOUNT OF INTEREST EARNED BY THE STATE ON SUCH FUNDS. THIS WOULD MAKE IT UNNECESSARY FOR THE STATE TO ACCOUNT FOR ANY INTEREST EARNED ON SUCH FUNDS, THUS ENABLING THE STATE TO ELIMINATE BURDENSOME ACCOUNTING PROCEDURES MAINTAINED FOR THIS PURPOSE. B-171019, OCTOBER 16, 1973; S. REP. NO. 1456, 90TH CONG., 2D SESS. 15 (1968).

CONGRESS APPARENTLY DID NOT CONTEMPLATE OR INTEND THAT SIGNIFICANT AMOUNTS OF INTEREST WOULD BE EARNED BY STATES ON ADVANCES OF GRANT-IN AID FUNDS. BECAUSE THIS NEVERTHELESS APPEARS TO BE OCCURRING, WE BELIEVE THAT THERE MAY BE SUFFICIENT BASIS FOR RECOMMENDING THAT CONGRESS CONSIDER AMENDING THE ACT TO REQUIRE INTEREST ACCOUNTABILITY ON THE PART OF THE STATES, UNDER THE DESCRIBED CIRCUMSTANCES.

THIS RESPONSE MUST BE QUALIFIED, HOWEVER, SINCE IT APPEARS THAT THE ACCUMULATION OF LARGE AMOUNTS OF INTEREST BY THE STATES IS DUE, AT LEAST IN PART, TO THE FAILURE OF GRANTOR AGENCIES TO PROPERLY SCHEDULE THE TRANSFER OF GRANT-IN-AID FUNDS SO AS TO MINIMIZE THE LAG TIME BETWEEN TRANSFER AND DISBURSEMENT AS REQUIRED BY THE ACT. WHERE THIS IS THE REASON FOR LARGE INTEREST EARNINGS, RATHER THAN AMENDING THE ACT, THE PROPER SOLUTION TO THE PROBLEM IS BETTER AGENCY SCHEDULING AND MONITORING OF ADVANCES OF GRANT-IN-AID FUNDS TO THE STATES. INTEREST EARNED ON FEDERAL FUNDS THAT ARE IN EXCESS OF IMMEDIATE NEEDS IS A CLEAR EXAMPLE OF INTEREST EARNINGS WHICH RESULT FROM POOR AGENCY SCHEDULING AND MONITORING PRACTICES. WHILE IT IS TRUE THAT STATES ALSO HAVE A RESPONSIBILITY NOT TO DRAW FUNDS IN ADVANCE OF PROGRAM NEEDS, THE PRIMARY RESPONSIBILITY FOR TIMING TRANSFERS RESTS WITH THE HEAD OF THE FEDERAL DEPARTMENT OR AGENCY CONCERNED. B-171019, SUPRA. TREASURY DEPARTMENT CIRCULAR 1075, 31 C.F.R. SEC. 205 ET SEQ., (1979), AND DEPARTMENT OF TREASURY FISCAL REQUIREMENTS MANUAL, VOLUME I, PART 6, CHAPTER 2000, PROVIDE GUIDANCE TO AGENCIES IN MEETING THIS RESPONSIBILITY. WHERE AGENCY MONITORING REVEALS THAT A STATE IS NOT FULFILLING ITS PART OF THE OBLIGATION FOR PROPER SCHEDULING OF ADVANCE TRANSFERS OF GRANT-IN-AID FUNDS, TREASURY DEPARTMENT CIRCULAR 1075 PROVIDES A SOLUTION. SPECIFICALLY, 31 C.F.R. SEC. 205.7 PROVIDES:

"205.7 TERMINATION OF ADVANCE METHODS OF FINANCING GRANT PROGRAMS

"WHEN A RECIPIENT ORGANIZATION RECEIVING CASH ADVANCES BY A LETTER OF CREDIT OR BY DIRECT TREASURY CHECK METHOD HAS DEMONSTRATED TO A FEDERAL PROGRAM AGENCY AN UNWILLINGNESS OR INABILITY TO ESTABLISH PROCEDURES THAT WILL MINIMIZE THE TIME ELAPSING BETWEEN CASH ADVANCES AND THE DISBURSEMENT THEREOF, THE FEDERAL PROGRAM AGENCY, UNLESS PROHIBITED BY THE STATUTES GOVERNING THE PROGRAMS IN QUESTION, SHALL TERMINATE ADVANCE FINANCING AND SHALL REQUIRE THE RECIPIENT ORGANIZATION TO FINANCE ITS OPERATIONS WITH ITS OWN WORKING CAPITAL ***."

THUS, IN CASES WHERE STATES MAY BE SAID TO BE USING SECTION 203 AS A "LOOPHOLE" TO EARN AND RETAIN SIGNIFICANT SUMS OF INTEREST INCOME, TREASURY CIRCULAR 1075 WOULD APPEAR TO PROVIDE AN EFFECTIVE REMEDY. AGENCY TERMINATION OF ADVANCE FINANCING WHEN IT IS ABUSED BY THE STATE (EXCEPT WHERE PROHIBITED BY THE STATUTES GOVERNING THE PROGRAM) WOULD SEEM TO BE AN ADEQUATE SOLUTION TO THIS PROBLEM WITHOUT NECESSITATING AMENDMENT OF THE ACT.

IF, HOWEVER, YOUR RESEARCH AND ANALYSIS INDICATE THAT EVEN THE BEST AGENCY SCHEDULING AND MONITORING PROCEDURES, INCLUDING THE TERMINATION OF THE ADVANCE FINANCING TECHNIQUE WHERE APPROPRIATE, STILL PERMIT STATES TO EARN SIGNIFICANT AMOUNTS OF INTEREST ON GRANT-IN-AID ADVANCES, THEN WE BELIEVE THAT THERE WOULD BE A REASONABLE BASIS FOR RECOMMENDING THAT THE ACT BE AMENDED TO REQUIRE RETURN OF INTEREST INCOME BY THE STATES. (FN1) AS EXPLAINED ABOVE, THE LEGISLATIVE HISTORY OF SECTION 203 INDICATES THAT CONGRESS EXEMPTED STATES FROM THE EXISTING INTEREST ACCOUNTABILITY REQUIREMENT IN THE BELIEF THAT THE LAG TIME BETWEEN TRANSFER OF GRANT-IN- AID FUNDS FROM THE TREASURY AND THEIR DISBURSEMENT BY THE STATES COULD AND SHOULD BE MINIMIZED. THIS, IN TURN, WOULD MINIMIZE INTEREST EARNED BY THE STATES ON SUCH ADVANCES. IF MINIMIZING THE LAG TIME TO THE GREATEST POSSIBLE EXTENT DOES NOT, IN FACT, ELIMINATE SIGNIFICANT INTEREST EARNINGS, THEN THERE IS A REASONABLE BASIS FOR RECOMMENDING THAT CONGRESS CONSIDER AMENDING THE ACT.

YOU INDICATE TWO POSSIBLE REASONS WHY EVEN THE BEST SCHEDULING OF GRANT- IN-AID FUND ADVANCES MAY NOT ADEQUATELY MINIMIZE STATE INTEREST EARNINGS. THE FIRST OF THESE REASONS IS THAT SOME STATES HAVE DEVELOPED SOPHISTICATED CASH MANAGEMENT TECHNIQUES WHICH ENABLE THEM TO MAKE GOOD SHORT-TERM INVESTMENTS, SOME AS SHORT AS OVERNIGHT. SINCE STATES GENERALLY NEED AT LEAST THREE DAYS' SUPPLY OF FUNDS ON HAND, THEY MAY BE ABLE TO ACCUMULATE SIGNIFICANT AMOUNTS OF INTEREST THROUGH SHORT-TERM INVESTMENT OF THESE FUNDS. AN ADDITIONAL REASON THAT SIGNIFICANT INTEREST EARNINGS MAY OCCUR IS THAT THE SHEER SIZE OF GRANT IN-AID PROGRAMS HAS GROWN MEASURABLY SINCE 1968 WHEN THE INTERGOVERNMENTAL COOPERATION ACT WAS PASSED. THUS STATES MAY BE RECEIVING MEASURABLY LARGER CASH ADVANCES ENABLING THEM TO EARN CORRESPONDINGLY LARGER AMOUNTS OF INTEREST.

YOU SHOULD NOTE, HOWEVER, THAT EVEN THESE AVENUES FOR INTEREST EARNINGS CAN PERHAPS BE CLOSED BY EXISTING CASH MANAGEMENT TECHNIQUES. TREASURY CIRCULAR 1075 PROVIDES THAT THE CHECKS PAID AND DELAY OF DRAWDOWN TECHNIQUES FOR WITHDRAWING FUNDS UNDER THE LETTER-OF-CREDIT METHOD SHALL BE EMPLOYED WHEREVER FEASIBLE. 31 C.F.R. SEC. 205.4(D) (1979). UNDER THESE TECHNIQUES, THE LETTER-OF-CREDIT IS NOT DRAWN ON UNTIL CHECKS ISSUED BY THE RECIPIENT ORGANIZATION ARE PRESENTED TO THE BANK FOR PAYMENT (CHECKS PAID) OR UNTIL AFTER CHECKS FOR PROGRAM PURPOSES HAVE BEEN ISSUED TO THE PAYEES (DELAY OF DRAWDOWN). WE DO UNDERSTAND, HOWEVER, THAT THE WIDESPREAD USE OF THESE TECHNIQUES MAY NOT BE FEASIBLE.

QUESTION 2: CAN FEDERAL AGENCIES DRAW A DISTINCTION BETWEEN EARNING INTEREST ON FEDERAL FUNDS IN EXCESS OF IMMEDIATE NEEDS AND EARNING INTEREST ON FUNDS NOT IN EXCESS AND, HENCE, REQUIRE STATES TO RETURN INTEREST INCOME EARNED ON FUNDS IN EXCESS OF THREE DAYS' SUPPLY?

ANSWER: SECTION 203, BY ITS TERMS, ABSOLUTELY RELIEVES THE STATES OF THE LEGAL OBLIGATION TO ACCOUNT FOR INTEREST EARNED ON GRANT-IN-AID FUNDS PENDING THEIR DISBURSEMENT. B-146285-O.M., DECEMBER 8, 1975. THEREFORE, FEDERAL AGENCIES CANNOT REQUIRE STATES TO RETURN INTEREST INCOME EARNED ON GRANT-IN-AID FUNDS IN EXCESS OF IMMEDIATE NEEDS (WHETHER THOSE NEEDS ARE FOR THREE DAYS' SUPPLY OF FUNDS, OR MORE OR LESS THAN THAT). THIS IS TRUE EVEN THOUGH IT CAN RESULT IN A "BONANZA" FOR THE STATES.

WE NOTE THAT TREASURY FISCAL REQUIREMENTS MANUAL, VOLUME I, PART 6, CHAPTER 2000 AT SECTION 2080.30 PROVIDES THAT IF FEDERAL FUNDS ARE ERRONEOUSLY DRAWN IN EXCESS OF IMMEDIATE NEEDS, THEY SHOULD BE PROMPTLY REFUNDED TO THE FEDERAL PROGRAM AGENCY AND REDRAWN WHEN NEEDED. ADHERENCE TO THIS RULE WOULD HELP MINIMIZE INTEREST EARNINGS ON EXCESS FUNDS ALTHOUGH IT WOULD NOT ELIMINATE THEM SINCE IT CONTAINS TWO EXCEPTIONS; PROMPT REFUNDING IS NOT REQUIRED WHERE THE FUNDS INVOLVED WILL BE DISBURSED BY THE RECIPIENT ORGANIZATION WITHIN 7 CALENDAR DAYS OR ARE LESS THAN $10,000 AND WILL BE DISBURSED WITHIN 30 CALENDAR DAYS.

THE BEST WAY TO AVOID STATE INTEREST EARNINGS ON GRANT-IN-AID FUNDS IN EXCESS OF IMMEDIATE NEEDS IS TO CONTROL THE FLOW OF FUNDS THROUGH PROPER AGENCY SCHEDULING AND MONITORING TECHNIQUES SO AS TO LIMIT ADVANCES TO THE MINIMUM AMOUNTS NEEDED BY THE STATE. WHERE, HOWEVER, THIS APPROACH FAILS AND THE STATE NEVERTHELESS EARNS INTEREST ON GRANT IN-AID FUNDS WHICH ARE IN EXCESS OF IMMEDIATE NEEDS, UNDER THE LAW AS PRESENTLY WRITTEN, THE STATE IS ENTITLED TO KEEP THE INTEREST EARNED.

QUESTION 3: CAN FEDERAL AGENCIES REQUIRE STATES TO REDUCE EXCESS CASH BALANCES TO THREE DAYS' SUPPLY?

ANSWER: SECTION 203 REQUIRES AGENCIES TO SCHEDULE TRANSFERS OF GRANT-IN- AID FUNDS CONSISTENT WITH PROGRAM PURPOSES AND APPLICABLE TREASURY REGULATIONS SO AS TO MINIMIZE THE TIME ELAPSING BETWEEN THE TRANSFER OF SUCH FUNDS FROM THE TREASURY AND THEIR DISBURSEMENT BY THE STATE. TREASURY CIRCULAR 1075 REQUIRES THAT CASH ADVANCES BE LIMITED TO THE MINIMUM AMOUNTS NEEDED AND BE TIMED IN ACCORDANCE ONLY WITH ACTUAL, IMMEDIATE CASH REQUIREMENTS FOR CARRYING OUT THE PURPOSES OF THE APPROVED PROGRAM OR PROJECT. 31 C.F.R. SEC. 205.4(A) (1979). THEREFORE, WHEN IT CAN BE SHOWN THAT A STATE ACTUALLY NEEDS NO MORE THAN THREE BUSINESS DAYS' SUPPLY OF GRANT-IN-AID FUNDS, FEDERAL AGENCIES CAN REQUIRE THE STATE TO REDUCE CASH BALANCES TO THREE BUSINESS DAYS' SUPPLY OF SUCH FUNDS.

WE DO NOT BELIEVE, HOWEVER, THAT IT WOULD BE EITHER PRACTICAL OR WISE TO ESTABLISH A RIGID RULE THAT STATES MAY HAVE ONLY THREE DAYS' SUPPLY OF FUNDS ON HAND AT ANY ONE TIME. IT SEEMS EVIDENT THAT CIRCUMSTANCES WILL SOMETIMES ARISE WHEN MORE OR LESS THAN THREE DAYS' SUPPLY OF FUNDS WILL BE NECESSARY TO MEET A STATE'S MINIMUM NEEDS.

WE ALSO NOTE THAT, AS YOU POINT OUT, OMB CIRCULAR A-102, ATTACHMENT H (FINANCIAL REPORTING REQUIREMENTS) PROVIDES FOR FEDERAL AGENCIES TO REQUIRE THE SUBMISSION OF A FEDERAL CASH TRANSACTIONS REPORT BY GRANTEES WHO RECEIVE ADVANCES THROUGH LETTERS OF CREDIT OR DIRECT TREASURY CHECKS. THE INSTRUCTIONS ACCOMPANYING THIS REPORT REQUIRE THE GRANTEE TO PROVIDE AN EXPLANATION FOR HAVING MORE THAN THREE DAYS' CASH REQUIREMENTS ON HAND. THUS, IT APPEARS THAT OMB HAS ALREADY ESTABLISHED A POLICY THAT MORE THAN THREE DAYS' SUPPLY OF FUNDS IS GENERALLY UNNECESSARY AND PROVIDED A MEANS FOR ALTERING AGENCIES TO SITUATIONS WHERE THIS AMOUNT IS EXCEEDED. WE RECOGNIZE, HOWEVER, THAT THE EXPLANATION REQUIREMENT IS INAPPLICABLE TO PRESCHEDULED OR AUTOMATIC ADVANCES.

WITH REGARD TO SUBGRANTEES WHO RECEIVE FEDERAL FUNDS THROUGH THE STATE, THE APPROPRIATE MEANS FOR CONTROLLING CASH ADVANCES AND REDUCING CASH BALANCES IS THROUGH THE STATE. TREASURY CIRCULAR 1075, FOR EXAMPLE, REQUIRES THAT USE OF LETTERS OF CREDIT SHALL BE COVERED BY A CLAUSE IN THE GRANT AGREEMENT IN WHICH THE RECIPIENT ORGANIZATION (IN THIS CASE THE STATE) COMMITS ITSELF TO: (1) INITIATING CASH DRAWDOWNS ONLY WHEN ACTUALLY NEEDED; (2) TIMELY REPORTING OF CASH DISBURSEMENTS AND BALANCES AS THE PROGRAM AGENCY REQUIRES; AND (3) THE IMPOSITION OF THE SAME STANDARDS OF TIMING AND AMOUNT ON ANY SECONDARY RECIPIENT ORGANIZATION, INCLUDING THE FURNISHING OF CASH DISBURSEMENT AND BALANCE REPORTS. 31 C.F.R. SEC. 205.6 (1979).

QUESTION 4:CAN CLEAR DISTINCTIONS BE MADE CONCERNING THE CIRCUMSTANCES UNDER WHICH STATES ARE REQUIRED TO RETURN INTEREST INCOME EARNED ON FEDERAL MONEY?

QUESTION 5: SPECIFICALLY, MUST A STATE RETURN THE INTEREST INCOME EARNED ON FEDERAL FUNDS IN THE FOLLOWING SITUATIONS?

(A) A STATE COLLECTS FEDERAL MONEY FROM SUBGRANTEES RESULTING FROM AUDITS WHICH DISALLOWED CERTAIN COSTS PAID FOR OUT OF FEDERAL FUNDS. THE STATE RETAINS THESE DISALLOWED COST FUNDS FOR A PERIOD OF TIME AND EARNS INTEREST BEFORE RETURNING THE FUNDS TO THE FEDERAL AGENCY.

(B) A STATE EARNS INTEREST ON FEDERAL FUNDS THAT ARE COMPRISED OF UNEXPENDED FUNDS FROM COMPLETED GRANT PROGRAMS.

ANSWER: SECTION 203 SPECIFICALLY PROVIDES THAT "STATES SHALL NOT BE HELD ACCOUNTABLE FOR INTEREST EARNED ON GRANT-IN-AID FUNDS, PENDING THEIR DISBURSEMENT FOR PROGRAM PURPOSES. 42 U.S.C. SEC. 4213 (1976). SECTION 106 OF THE ACT, 42 U.S.C. SEC. 4201(6) (1976), DEFINES THE TERM "GRANT-IN- AID" AS FOLLOWS:

"(6) THE TERM *** 'GRANT-IN-AID' MEANS MONEY, OR PROPERTY PROVIDED IN LIEU OF MONEY, PAID OR FURNISHED BY THE UNITED STATES UNDER A FIXED ANNUAL OR AGGREGATE AUTHORIZATION -

"IF SUCH AUTHORIZATION EITHER (I) REQUIRES THE STATES OR POLITICAL SUBDIVISIONS TO EXPEND NON-FEDERAL FUNDS AS A CONDITION FOR THE RECEIPT OF MONEY OR PROPERTY FROM THE UNITED STATES; OR (II) SPECIFIES DIRECTLY, OR ESTABLISHES BY MEANS OF A FORMULA, THE AMOUNTS WHICH MAY BE PAID OR FURNISHED TO STATES OR POLITICAL SUBDIVISIONS, OR THE AMOUNTS TO BE ALLOTTED FOR USE IN EACH OF THE STATES BY THE STATES, POLITICAL SUBDIVISIONS, OR OTHER BENEFICIARIES. THE TERM ALSO INCLUDES MONEY, OR PROPERTY PROVIDED IN LIEU OF MONEY, PAID AND FURNISHED BY THE UNITED STATES TO ANY COMMUNITY ACTION AGENCY UNDER THE ECONOMIC OPPORTUNITY ACT OF 1964, AS AMENDED. THE TERM DOES NOT INCLUDE (1) SHARED REVENUES; (2) PAYMENTS OF TAXES; (3) PAYMENTS IN LIEU OF TAXES; (4) LOANS OR REPAYABLE ADVANCES; (5) SURPLUS PROPERTY OR SURPLUS AGRICULTURAL COMMODITIES FURNISHED AS SUCH; (6) PAYMENTS UNDER RESEARCH AND DEVELOPMENT CONTRACTS OR GRANTS WHICH ARE AWARDED DIRECTLY AND ON SIMILAR TERMS TO ALL QUALIFYING ORGANIZATIONS, WHETHER PUBLIC OR PRIVATE; OR (7) PAYMENTS TO STATES OR POLITICAL SUBDIVISIONS AS FULL REIMBURSEMENT FOR THE COSTS INCURRED IN PAYING BENEFITS OR FURNISHING SERVICES TO PERSONS ENTITLED THERETO UNDER FEDERAL LAWS."

THUS ONE CLEAR DISTINCTION WHICH CAN BE DRAWN CONCERNING THE CIRCUMSTANCES UNDER WHICH STATES ARE REQUIRED TO RETURN INTEREST INCOME EARNED ON FEDERAL MONEY IS BASED ON WHETHER THE FUNDS IN QUESTION FALL WITHIN THE DEFINITION OF "GRANT-IN-AID" AS SUPPLIED BY THE ACT. ONLY INTEREST EARNINGS ON "GRANT-IN-AID" FUNDS ARE SUBJECT TO THE SECTION 203 INTEREST ACCOUNTABILITY EXEMPTION.

THIS DISTINCTION PROVIDES AN EXPLANATION FOR THE EXAMPLE YOU CITE IN WHICH HHS COLLECTED INTEREST INCOME ON FUNDS ADVANCED TO THE STATE OF MASSACHUSETTS FOR THE SOCIAL SECURITY DISABILITY DETERMINATION PROGRAM. HHS RELIED ON AN OPINION OF THEIR OFFICE OF GENERAL COUNSEL THAT "THE TERM 'GRANT-IN-AID' DOES NOT INCLUDE PAYMENTS TO STATES TO COVER COSTS INCURRED IN CONNECTION WITH THE ADMINISTRATION OF THE SOCIAL SECURITY DISABILITY PROGRAM." THIS OPINION APPARENTLY RELIED ON 42 U.S.C. SEC. 4201(6)(7) WHICH PROVIDES THAT THE TERM "GRANT-IN-AID" DOES NOT INCLUDE

"*** PAYMENTS TO STATES *** AS FULL REIMBURSEMENT FOR THE COSTS INCURRED IN PAYING BENEFITS OR FURNISHING SERVICES TO PERSONS ENTITLED THERETO UNDER FEDERAL LAWS."

WE BELIEVE A DISTINCTION CAN ALSO BE DRAWN CONCERNING THE CIRCUMSTANCES UNDER WHICH STATES ARE REQUIRED TO RETURN INTEREST INCOME EARNED ON GRANT- IN-AID ADVANCES BASED UPON WHETHER OR NOT THE INTEREST IS EARNED WHILE THOSE FUNDS ARE "PENDING DISBURSEMENT" FOR PROGRAM PURPOSES. THE PLAIN LANGUAGE OF THE STATUTE PROVIDES ONLY THAT STATES ARE NOT TO BE HELD ACCOUNTABLE FOR INTEREST EARNED ON GRANT-IN-AID FUND ADVANCES "PENDING THEIR DISBURSEMENT" FOR PROGRAM PURPOSES.

THE COMMITTEE REPORTS AND FLOOR DEBATES RELATED TO THE INTERGOVERNMENTAL COOPERATION ACT SHED LITTLE LIGHT ON CONGRESSIONAL INTENT CONCERNING INTEREST EARNED BY STATES ON FEDERAL GRANT-IN-AID FUNDS WHICH CAN NO LONGER BE SAID TO BE "PENDING DISBURSEMENT" FOR PROGRAM PURPOSES. WE DO NOT, HOWEVER, FIND ANY CONTRADICTION IN THE LEGISLATIVE HISTORY TO THE PLAIN LANGUAGE OF THE STATUTE.

THEREFORE WHERE GRANT-IN-AID FUNDS HELD BY A STATE CAN NO LONGER BE SAID TO BE "PENDING DISBURSEMENT" FOR PROGRAM PURPOSES, WE BELIEVE THAT THE INTEREST ACCOUNTABILITY EXEMPTION IS INAPPLICABLE, AND INTEREST EARNED ON SUCH FUNDS MUST BE RETURNED TO THE FEDERAL GOVERNMENT. THIS OFFICE HAS CONSISTENTLY HELD THAT, EXCEPT AS OTHERWISE PROVIDED BY LAW, INTEREST EARNED BY A GRANTEE ON FUNDS GRANTED BY THE UNITED STATES BELONGS TO THE UNITED STATES AND NOT THE GRANTEE. B-149441, JULY 13, 1976; 42 COMP.GEN. 289 (1962). IN ADDITION, WE NOTE THAT HOLDING STATES ACCOUNTABLE FOR INTEREST EARNED ON FEDERAL FUNDS WHICH THEY ARE REQUIRED TO REPAY OR CREDIT TO THE FEDERAL GOVERNMENT REMOVES THE INCENTIVE WHICH WOULD OTHERWISE EXIST FOR THE STATES TO RETAIN SUCH FUNDS AS LONG AS POSSIBLE IN ORDER TO MAXIMIZE THEIR INTEREST EARNINGS. THE EXISTENCE OF SUCH AN INCENTIVE IS PARTICULARLY UNDESIRABLE BECAUSE THE FEDERAL GOVERNMENT NOT ONLY WOULD LOSE THE INTEREST ON THE FUNDS, BUT ALSO WOULD FREQUENTLY BE REQUIRED TO BORROW, AND PAY INTEREST ON, FUNDS IT WOULD NOT OTHERWISE HAVE TO BORROW.

THEREFORE IN THE SITUATION PRESENTED IN YOUR FIFTH QUESTION, WHERE A STATE EARNS INTEREST ON FUNDS RECOVERED AS THE RESULT OF AUDIT COST DISALLOWANCES BEFORE RETURNING THEM TO THE FEDERAL GOVERNMENT, WE BELIEVE THAT INTEREST EARNED ON THE FEDERAL SHARE OF SUCH FUNDS MUST BE RETURNED TO THE FEDERAL GOVERNMENT. WE DO NOT BELIEVE THAT RECOVERED FUNDS HELD BY THE STATE, WHICH IT IS REQUIRED TO REPAY OR CREDIT TO THE FEDERAL GOVERNMENT, CAN PROPERLY BE DESCRIBED AS "PENDING DISBURSEMENT" FOR PROGRAM PURPOSES.

WE NOTE THAT THE EXAMPLE YOU CITE IN WHICH HHS COLLECTED INTEREST EARNED BY THE STATE OF NEW YORK ON RECOVERED MEDICAID OVERPAYMENTS IS CONSISTENT WITH THIS APPROACH. WE ALSO NOTE THAT THIS RECOVERY WAS THE RESULT OF A GAO RECOMMENDATION IN A LETTER REPORT ISSUED ON OCTOBER 27, 1978, BY THE HUMAN RESOURCES DIVISION.

WE NOW TURN TO THAT ASPECT OF YOUR FIFTH QUESTION CONCERNING INTEREST EARNED ON FEDERAL GRANT-IN-AID FUNDS WHICH ARE UNEXPENDED AFTER COMPLETION OF A GRANT PROGRAM. ASSUMING THAT THE STATE IS REQUIRED TO RETURN THE UNEXPENDED FUNDS TO THE FEDERAL GOVERNMENT UPON COMPLETION OF THE GRANT PROGRAM, WE BELIEVE THAT ANY INTEREST EARNED BY THE STATE AFTER ACTUAL COMPLETION OF THE GRANT PROGRAM MUST ALSO BE RETURNED TO THE FEDERAL GOVERNMENT. GRANT-IN-AID FUNDS HELD BY THE STATE UNDER THE DESCRIBED CIRCUMSTANCES, IN OUR OPINION, ARE NOT "PENDING DISBURSEMENT" FOR PROGRAM PURPOSES.

FINALLY, WE WOULD LIKE TO COMMENT ON YOUR EXAMPLE CONCERNING THE FAILURE OF HHS TO COLLECT INTEREST FROM THE STATE OF MASSACHUSETTS WHEN IT RETURNED FUNDS INVOLVING UNCASHED WELFARE CHECKS, DESPITE THE KNOWLEDGE THAT INTEREST WAS EARNED ON THESE FUNDS.

WHILE WE HAVE BEEN UNABLE TO FULLY ASCERTAIN THE REASONS FOR HHS' FAILURE TO RECOVER THE INTEREST EARNED IN THIS CASE, WE CAN PROVIDE THE FOLLOWING THOUGHTS ON THE SUBJECT.

THE CHECKS INVOLVED WERE ACTUALLY ISSUED TO AID TO FAMILIES WITH DEPENDENT CHILDREN (AFDC) RECIPIENTS. A LARGE PART OF THE CHECKS IN QUESTION WERE CANCELLED BY THE STATE OF MASSACHUSETTS, AND TRANSFERRED TO THE STATE'S GENERAL FUND. A STILL LARGER PORTION SHOULD HAVE BEEN, BUT WAS NOT, CANCELLED. THE AFDC PROGRAM IS A GRANT-IN-AID PROGRAM WITHIN THE DEFINITION OF THE INTERGOVERNMENTAL COOPERATION ACT. SEE 42 U.S.C. SEC. 603 (1976 AND 1980 U.S.C.A. SUPP.); B-146285-O.M., DECEMBER 8, 1975. THEREFORE, IT WOULD APPEAR THAT HHS SHOULD HAVE REQUIRED THE STATE TO RETURN THE INTEREST EARNED ON THE FEDERAL PORTION OF THE AFDC CHECKS WHICH WERE ACTUALLY CANCELLED. WITH REGARD TO THOSE CHECKS WHICH WERE NOT CANCELLED, NO INTEREST SHOULD HAVE BEEN COLLECTED SINCE THE CHECKS APPARENTLY WERE STILL NEGOTIABLE. WE BELIEVE THAT THE GRANT IN-AID FUNDS RELATED TO THESE UNCANCELLED CHECKS COULD PROPERLY BE SAID TO STILL BE PENDING DISBURSEMENT FOR PROGRAM PURPOSES.

WE ALSO NOTE THAT IN OUR AUDIT REPORT ON THIS MATTER, B-164031 (4), APRIL 5, 1979 (HRD-79-68), WE EMPHASIZED THAT HHS HAD ESTABLISHED NO POLICY CONCERNING CREDITING THE FEDERAL PORTION OF UNCASHED AFDC CHECKS, AND RECOMMENDED THAT HHS ESTABLISH UNIFORM REQUIREMENTS FOR THIS PURPOSE. THUS APPEARS THAT THE FAILURE TO COLLECT INTEREST EARNED ON THE FEDERAL PORTION OF THE CANCELLED CHECKS MAY SIMPLY HAVE BEEN DUE TO THE LACK OF SUCH POLICY AND REQUIREMENTS.