Block Grants: Issues in Designing Accountability Provisions (Letter
Report, 09/01/95, GAO/AIMD-95-226).
Congress has shown strong interest in consolidating narrowly defined
categorical grant programs into broader purpose block grants. A total of
15 block grant programs with funding of $35 billion were in effect in
fiscal year 1994, constituting a small portion of the total federal aid
to states. If Medicare and Aid to Families With Dependent Children are
added, however, block grant spending could rise substantially--to as
much as $138 billion or about 58 percent of total federal aid to states.
This report summarizes information on how accountability for financial
management program performance can be designed to fit a block grant
approach, and the potential consequences flowing from such provisions.
To provide an overview and summary of GAO's evaluations of past block
grant programs, GAO reviewed nearly two decades of reports, testimony,
and other GAO correspondence on accountability issues related to
intergovernmental programs. GAO also consulted with experts on block
grants, performance budgeting, and financial accountability.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: AIMD-95-226
TITLE: Block Grants: Issues in Designing Accountability Provisions
DATE: 09/01/95
SUBJECT: Block grants
Accountability
Entitlement programs
Federal funds
Grants-in-aid
Intergovernmental fiscal relations
Financial management
Federal/state relations
Internal controls
IDENTIFIER: Aid to Families with Dependent Children Program
AFDC
Medicaid Program
Community Services Block Grant
Alcohol, Drug Abuse, and Mental Health Block Grant
General Revenue Sharing Program
Education Block Grant
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Cover
================================================================ COVER
Report to the Chairman, Committee on Finance, U.S. Senate
September 1995
BLOCK GRANTS - ISSUES IN DESIGNING
ACCOUNTABILITY PROVISIONS
GAO/AIMD-95-226
Block Grants
(935186)
Abbreviations
=============================================================== ABBREV
ADMS - Alcohol, Drug Abuse, and Mental Health Services Block Grant
AFDC - Aid to Families with Dependent Children
CFO - Chief Financial Officers
CSBG - Community Services Block Grant
GPRA - Government Performance and Results Act
GRS - General Revenue Sharing
HUD - Department of Housing and Urban Development
OBRA - Omnibus Budget Reconciliation Act
Letter
=============================================================== LETTER
B-265754
September 1, 1995
The Honorable Bob Packwood
Chairman, Committee on Finance
United States Senate
Dear Mr. Chairman:
The Congress has shown a strong interest in consolidating narrowly
defined categorical grant programs for specific purposes into broader
purpose block grants. The fiscal year 1996 budget resolution
explicitly assumes enactment of a number of such consolidations. The
Congress is also considering proposals to block grant Medicaid, Aid
to Families with Dependent Children (AFDC), and other entitlement
programs in order to both limit federal budgetary exposure and
increase state flexibility. A total of 15 block grant programs with
funding of $35 billion were in effect in fiscal year 1994,
constituting a small portion of the total federal aid to states, $239
billion for about 593 programs. However, if Medicaid and AFDC are
added, block grant spending could rise substantially--to as much as
$138 billion or about 58 percent of total federal aid to states.
As demonstrated in the past, such basic changes in the grant
structure can significantly alter federal and state and local
government relationships. In contrast to categorical programs that
are consolidated, block grants provide significant additional
discretion for states and localities to define and implement federal
programs in light of local needs and conditions. However, unlike
prior block grant initiatives, some of the health and welfare
programs presently under consideration are entitlement programs with
open-ended funding. Accordingly, they would pose much larger
implementation challenges and implications for intergovernmental
relations.
In response to your request that we synthesize our past work on block
grant and accountability issues, this report summarizes information
on how accountability for financial management and program
performance can be designed to fit a block grant approach and the
potential consequences flowing from such provisions. To provide an
overview and summary of our evaluations of past block grant programs,
we reviewed nearly two decades of reports, evaluations, testimony,
and other GAO correspondence on accountability issues related to
intergovernmental programs. In addition, we consulted with experts
on block grants, performance budgeting, and financial accountability.
RESULTS IN BRIEF
------------------------------------------------------------ Letter :1
Building accountability into the newly proposed block grants is an
important, but difficult, task requiring trade-offs between federal
and state control over program finances, activities, and
administration. More prescriptive federal requirements can limit the
states' ability to implement block grants in an integrated and
efficient fashion. But fewer federal financial and programmatic
accountability provisions can limit federal goals and lead to reduced
funding and/or recategorization. Accountability provisions will need
to strike a balance between the potentially conflicting objectives of
increasing state and local flexibility while attaining certain
national objectives--a balance that inevitably involves philosophical
questions about the proper roles and relationships among the levels
of government in our federal system.
Well designed accountability provisions help clarify the financial
and programmatic relationship between the federal government and the
states and could be important in sustaining the block grant approach
as these programs mature. There is general agreement that financial
accountability provisions implemented through single audits can
provide a foundation for assuring that states apply appropriate
financial management and internal controls. There is less consensus
on whether and how to promote accountability for block grant
implementation and results. For those national goals and standards
that are established, however, policymakers have options for building
in adequate, but less burdensome, provisions. These options include
(1) relying on state processes both to manage block grant funds and
to monitor and assess compliance, (2) assessing the nature of
requirements imposed on states, including the applicability of
cross-cutting requirements\1 for national policy for block-granted
programs, and (3) emphasizing results-based evaluation rather than
examining specific program or administrative activities.
Whatever approach to program accountability the Congress chooses, the
need for comparable data across the states is a critical issue.
Comparable data make it possible to assess progress in meeting
national objectives. Also, the lessons learned from state
experiences are transferable only when conclusions can be drawn about
the relative efficiency and effectiveness of different state
strategies. Developing and implementing guidelines for comparable
data will not be easy, especially under a results-oriented approach
where states have discretion about the means they will use to achieve
program objectives. In particular, the broad range of objectives
identified for some block grants--coupled with state discretion--will
complicate the task of developing and implementing suitable
performance measures and assessing state performance. Regarding the
identification of suitable measures and data collection strategies,
it will be important to have a partnership between the states and the
federal government. Moreover, assessments of state progress will
need to recognize that outcomes are often affected by factors beyond
state administrators' control.
Federal policymakers will also need to be aware of existing state
spending and programmatic commitments in areas that are
block-granted. Evaluation studies have shown that the smaller the
share of federal funds in block grant programs--and the broader the
national objectives--the more difficult it is to assess performance
and evaluate the impact of federal resources. Categorical and some
block grants currently include maintenance-of-effort provisions
requiring states to continue their spending for federally aided areas
to prevent this kind of fiscal substitution. Although such
requirements help to ensure that block grant funds are used in the
program area intended, they can also encumber state resources in
federally funded areas and reduce states' fiscal flexibility,
particularly during times of fiscal stress. Similarly, they can
reduce a state's programmatic flexibility to shift money among
programs so that resources are used as effectively as possible.
Maintenance of effort can also penalize states that take the
initiative to start programs before the federal government--they
essentially become locked into this spending even when federal funds
become available. Carefully designed maintenance-of-effort
provisions can help to overcome some of the technical difficulties.
Yet, the decision to require maintenance of effort presents difficult
trade-offs among competing concerns.
--------------------
\1 Cross-cutting requirements are grant conditions that generally
apply to all or most federal assistance programs and recipients.
Unless block grant statutes specify otherwise, these requirements and
their regulatory prescriptions would apply.
BACKGROUND
------------------------------------------------------------ Letter :2
Of the three kinds of grants-in-aid--categorical, block, and
general-purpose fiscal assistance--block grants lie in the grey,
middle area. Categorical programs feature narrowly prescribed,
federally determined program objectives, processes, and
administration. At the opposite end of the spectrum--general-purpose
fiscal assistance--recipients are free to spend grant funds in the
manner they choose with few, if any, federally imposed programmatic
or administrative requirements. Although existing block grants
differ with respect to
specificity of objectives and administrative requirements, most share
the following characteristics:
federal aid is authorized for a wide range of activities within a
broadly defined functional area;
recipients have substantial discretion to identify problems, design
programs, and allocate resources;
administrative, fiscal reporting, planning, and other federally
imposed requirements are limited to those necessary to ensure
that national goals are being accomplished; and
federal aid is distributed on the basis of a statutory formula with
few, if any, matching requirements and, historically, spending
has been capped.
A decision on whether to block grant programs raises important
questions involving the appropriate balance of power and
responsibilities in our federal system. Thus, the question of
whether and what kind of accountability to require is a policy
decision for the Congress to make. In previous reports, we have
stated that states have become more capable of responding to public
service demands and initiating innovations in the past two decades.
At the same time, we have also noted that the new block grant
proposals include programs that are much broader than block grants of
the past and would present a challenge for states to both implement
and finance.\2
Accountability is an important yet elusive concept whose meanings and
characteristics differ depending upon the context. For categorical
grant programs, accountability is promoted through rules and
regulations that hold state and local officials responsible for
federally established programmatic objectives, implementation
strategies, and administrative processes that are largely prescribed
by federal agencies.
Under block grants, the principal locus of accountability shifts from
the federal government to the states, consistent with the fact that
grant purposes are broadened and authority is delegated. Under block
grants, state and local elected officials bear the primary
responsibility for monitoring and overseeing the planning,
management, and implementation of activities that formerly were the
purview of federal agencies. Nonetheless, because federal funds are
involved, some residual accountability for national objectives is
invariably provided, albeit in different doses and through different
means.
--------------------
\2 Block Grant: Characteristics, Experience, and Lessons Learned,
(GAO/HEHS-95-74, February 9, 1995).
ACCOUNTABILITY WILL LIKELY PLAY
A CRITICAL ROLE IN BLOCK GRANT
IMPLEMENTATION
------------------------------------------------------------ Letter :3
For block grants, accountability plays a critical role in balancing
the potentially conflicting objectives of increasing state and local
flexibility while attaining certain national objectives.
Accordingly, the resolution of these issues invariably reflects a
political decision properly decided through the democratic process.
The recent history of block grants suggests that the balance struck
between federal objectives and state discretion has often been
unstable. The failure to reach an acceptable accommodation of these
competing concerns can undermine continued support for block grant
programs. As a result, the balance is often adjusted and
reformulated as implementation proceeds.
In building accountability into block grant programs, problems can
arise from either too many accountability provisions or too few. The
presence of too many requirements and conditions can inhibit states
from realizing the kinds of efficiencies and service delivery
improvements promised by the block grant mechanism. Overly
prescriptive federal requirements can limit states' abilities to
integrate related federal and state programs in new and more
efficient ways. Moreover, they may limit states' interest in taking
ownership and responsibility for program management and results--a
key attribute that the 1981 block grants initially succeeded in
instilling at the state level. Prompted by their newly won
flexibility, state legislators and governors exercised a level of
involvement and oversight for block grant programs typically not
found for categorical programs.
On the other hand, insufficient federal accountability provisions can
create other problems for consolidated programs. Continued
congressional support for block-granted programs has historically
rested on sufficient information and assurances that the funds are
being well managed and used to support national objectives. The
recent history of block grants suggests that the absence of such
provisions can either undermine continued congressional funding or
prompt recategorization and prescriptive regulations to ensure that
national objectives are achieved. For instance, the block grants
enacted as part of the Omnibus Budget Reconciliation Act of 1981
(OBRA), which lacked consistent national program reporting on state
implementation, were subject to more than 50 congressional actions to
tighten program requirements and accountability provisions.\3
A balance will need to be struck to respond to these two conflicting
objectives. It should include safeguards to ensure that states are
applying proper financial controls. Also, the Congress will not only
have to determine the level and extent of national programmatic
objectives for the individual block grants, but also decide the most
appropriate means to monitor and oversee state progress toward these
objectives.
In considering ways to build financial and program accountability
that could be built into the new block grants, the following
observations based on our work may be useful.
--------------------
\3 Block Grants: Increases in Set-Asides and Cost Ceilings Since
1982 (GAO/HRD-92-58FS, July 27, 1992).
ACCOUNTABILITY FOR FINANCIAL
MANAGEMENT
------------------------------------------------------------ Letter :4
The Single Audit Act of 1984 provides an important tool for ensuring
that states are promoting financial accountability for block grant
programs. The act expanded the focus of federal oversight from a
grant-by-grant examination to an overall financial audit of the state
or local government or agency receiving federal funds with a specific
focus on federal programs.
A single audit is expected to address the states' or state agencies'
overall financial statements and compliance with major federal
assistance program requirements. Moreover, as we have said
repeatedly over the years, the single audit is a more efficient and
less burdensome way to use auditing resources in satisfying federal
accountability interests than the prior grant-by-grant auditing
approach.
The Single Audit Act of 1984 helps ensure that state agencies
responsible for block grant funds have sound financial management
systems and internal controls. The act promotes sound financial
management by requiring each state or agency to arrange for an
annual\4 audit of its financial statements. This involves more than
simply preparing schedules of financial data; it involves a
disciplined process that promotes proper recording of financial
transactions and maintaining accurate records of financial flows.
The single audit also involves evaluating the adequacy of the
internal financial and management controls used by the agency to
prevent problems and ensure the integrity of public funds, including
block grant funds.
Finally, the act, and its implementing guidance, requires that single
audits test compliance with federal program requirements for "major
federal assistance programs."\5
Auditors are required to test two types of grant requirements: (1)
general requirements that are national policies prescribed by
statute, executive order, or other authoritative sources that apply
to federal assistance programs of two or more agencies and (2)
specific requirements that apply only to individual programs.
The results of single audits can also contribute toward achievement
of the objectives of the Chief Financial Officers (CFO) Act of 1990.
The act, as amended, requires the 24 CFO executive branch agencies to
prepare financial statements, beginning for fiscal year 1996, and to
have those statements audited. It also requires GAO to conduct an
audit of the annual consolidated financial statements for the entire
executive branch beginning with fiscal year 1997. Since many federal
funds often flow to their ultimate beneficiaries through multiple
state and local entities, and because many of these amounts are
subject to single audit, the results of these audits can provide
information on the successful completion of the required federal
agency and executive branch-wide consolidated financial statement
audits.
The single audit process could be particularly advantageous for block
grant programs. As the purposes of federal aid programs broaden and
the federal financial role diminishes, federal funds become
fungible.\6 This is especially true for block grants because the
programs anticipate the integration of federal and state funding
streams. Accordingly, the management and outcomes of federal
assistance programs depend heavily on the overall controls states use
to manage the combined effort. Thus, the block grant approach
coincides with the act's shift away from individual grant auditing.
It is also likely that most block grants under consideration would
continue to be considered major programs for Single Audit Act
purposes. Accordingly, they are likely to be reviewed for their
compliance features under this process. A single audit is not and
should not be viewed as sufficient for evaluating state performance
relative to block grant programmatic goals and objectives. However,
a single audit is an important oversight tool that can be used to
provide insights into the entity operating federal programs.
Although we believe that the Single Audit Act of 1984 is a suitable
means for promoting financial accountability for the block grants,
several improvements are needed in the single audit process. First,
criteria for determining which assistance programs will be subject to
compliance checks are based solely on dollar amounts. While, this
approach has the advantage of subjecting a high percentage of federal
funds to audit, it does not necessarily focus audit resources on
identified high-risk programs. We have made recommendations\7
to enhance the single audit process and to make it more useful for
program oversight, including oversight of the block grants.
Second, the single audit cannot be viewed as a substitute for
management oversight and program reviews by federal agencies, should
such activities be deemed appropriate for particular block grants.
The single audit assesses the financial integrity and internal
control of the entities receiving block grant funds and implementing
programs. The audit may not select particular programs for
compliance reviews if they are not defined as major programs. But
even when programs are included for compliance checks, the single
audit is not intended to provide in-depth analysis of state
administrative practices or programmatic accomplishments.
--------------------
\4 In some circumstances, biennial audits are allowed, provided they
cover both years of the biennial period.
\5 A program is classified as a major program based upon the amount
of expenditures. Presumably all the large block grants currently
being proposed--notably, Medicaid and AFDC--would be classified as
major.
\6 In the context of federal grants, the term fungibility refers to
the tendency for federal funds to be commingled with state or local
funds to the point where the use of federal funds is difficult to
track.
\7 Single Audit: Refinements Can Improve Usefulness
(GAO/AIMD-94-133, June 21, 1994).
ACCOUNTABILITY FOR PROGRAM
GOALS AND OBJECTIVES
------------------------------------------------------------ Letter :5
As noted earlier, block grants present a dilemma to federal
policymakers for they must balance the objectives of enhancing state
and local flexibility, while also maintaining a degree of federal
control, consistent with the fact that federal dollars as well as
national objectives are involved. There is no easy way to resolve
this tension; rather, a continuum of trade-offs between federal
objectives and state flexibility will be required. First, the
Congress will need to consider which national objectives remain
appropriate for block grant programs. Then, it will need to
determine how these objectives should be defined and implemented.
Among the various kinds of national objectives that could be applied
to block grants are the following:
Program specific requirements: These are standards or goals
pertaining to program services or implementation processes
funded by the grant. In terms of these grant conditions, prior
block grants have included both federal rules involving program
inputs--that is, what grantees do with their funds--and rules
involving program results--that is, what is accomplished with
the funds.
Cross-cutting requirements: These are grant conditions that
generally apply to all or most federal assistance programs and
recipients. OMB had identified nearly 60 such requirements
ranging from the Davis-Bacon wage standards for
federally-assisted construction projects to Hatch Act
prohibitions on funded employees' political activities. Unless
block grant statutes specify otherwise, these requirements and
their regulatory prescriptions would be expected to apply.
Once the new block grant requirements and programmatic concerns are
defined and specified, the Congress may wish to design approaches
that satisfy federal interests in less burdensome ways, in keeping
with the block grant philosophy of enhanced flexibility and reduced
regulation. Our work and other examinations of past block grant
efforts suggest the following two approaches the Congress could
consider.
RELIANCE ON STATE PROCESSES
---------------------------------------------------------- Letter :5.1
Relying on state processes and procedures to govern the
administration and management of block grant funds, as was done under
the OBRA 1981 block grants, is one approach available to the
Congress. For categorical programs, OMB circulars and federal agency
regulations and guidance prescribe procedures governing such issues
as state procurement, recordkeeping, cost allocations, and other
business-type functions. However, this kind of national
administrative prescription is contrary to the block grant premise of
instilling responsibility in the states. In addition, as we found in
the 1980s, moving away from such prescriptions opens up opportunities
for states to more fully integrate the management of the block grants
with broader state administrative practices and procedures.
In 1981, state authority was also promoted by shifting the
responsibility for monitoring and assessing compliance with federal
requirements away from the federal government toward states and
localities. Reviews of state plans and applications were
significantly limited. States, moreover, were principally
responsible for interpreting the block grant statutory prohibitions
and requirements; federal regulations and guidance were kept to a
minimum. Federal agencies were actually prohibited from imposing
"burdensome" reporting requirements, allowing the states to interpret
the compliance provisions in the statute.
In seeking to minimize block grant program requirements, the Congress
will need to decide whether the broad scale delegation to the states
that occurred under the 1981 block grants is appropriate for the
block grants currently being proposed. The federal dollars involved
are far larger than under past block grants; during fiscal year 1993,
approximately 18 percent of total state spending was for Medicaid,
with 11 percent from state-only sources. Moreover, the stakes
involved stand to significantly affect vulnerable populations and
involve a number of entitlement programs that comprise the "social
safety net."
Reexamining some of the more burdensome cross-cutting requirements
also would provide states with additional flexibility. Cross-cutting
requirements--also known as generally applicable requirements--could
become some of the more burdensome federal mandates for new block
grants because administrative guidance and regulations that have
built up over the years to implement them do not discriminate between
categorical and block grant programs. Our work has specifically
identified one such cross-cutting requirement for potential
elimination. We have stated that the Congress could repeal the
Davis-Bacon Act cross-cutting requirement because of the act's
administrative problems and associated increases in federal
construction costs.\8
--------------------
\8 Addressing the Deficit: Budgetary Implications of Selected GAO
Work for Fiscal Year 1996 (GAO/OCG-95-2, March 15, 1995).
EMPHASIS ON RESULTS
---------------------------------------------------------- Letter :5.2
Another approach for balancing competing state and federal interests
would be to promote accountability for results rather than
accountability for implementation and administrative processes.
Applying a results focus to the block grants would free state
officials and program administrators to determine the most
appropriate means for achieving federal block grant program goals and
objectives, while also vesting them with responsibility for their
choices. This approach presumes, of course, that the Congress has
decided that imposing national block grant outcomes on the states is
appropriate. Furthermore, this approach is fraught with technical
problems and could engender conflict between the federal government
and the states.
Under a results-oriented approach, states would be responsible for
reporting on program outputs, outcomes, or other types of performance
oriented measures. While outputs and outcomes are often correlated,
they are not the same. Program output indicators generally involve
measures of activities or services supported by the funds, such as
the number of participants in job training programs or the number of
children vaccinated. In contrast, program outcome indicators measure
progress in terms of the end result intended by the program, such as
increases in employment from job training or reductions in the
incidence of communicable childhood diseases.
The Government Performance and Results Act of 1993 (GPRA) could be
used as a guide for a results-based approach. GPRA seeks to
fundamentally change the focus of federal management and
accountability from a preoccupation with inputs--what grantees do--to
a greater focus on the outcomes--what has been achieved. GPRA
requires federal agencies to develop outcome-oriented goals,
systematically measure their performance, and report on their
progress toward achieving goals.\9 While GPRA's implementation time
frames do not match those for congressional consideration of the
block grants, GPRA principles provide a logical starting point.
Under a results-oriented approach, federal policymakers would specify
national goals and objectives in block grant statutes, enact a
process for establishing them, or adopt some combination of the two.
Ultimately, the decision whether to impose or call for such national
objectives is a political decision that the Congress must make. The
Congress may, in fact, decide to allow states to establish their own
program objectives, thus limiting the federal role in monitoring
block grants to collecting information on state program efforts and
accomplishments as well as, perhaps, evaluating and disseminating
information on "best state practices."
--------------------
\9 For a fuller description of the requirements of GPRA and the
progress agencies are making in implementing the act, see Managing
for Results: Status of the Government Performance and Results Act
(GAO/T-GGD-95-193, June 27, 1995).
OUTCOME-BASED APPROACH
-------------------------------------------------------- Letter :5.2.1
An outcome-based approach to accountability has some advantages for
block grants. Notably, unlike categorical grants, block grants
provide states a broader scope of allowable activities to select from
in attaining national outcomes. For example, if the desired outcome
is to move welfare recipients into work, a categorical program
providing resources for a single strategy forces grantees to select
that nationally determined strategy--irrespective of local conditions
and circumstances. This approach, in effect, suggests that "one size
fits all." In contrast, a block grant gives states flexibility to mix
services and activities best suited to achieving this outcome goal
and to better integrate federal, state, and local efforts.
However, caution will be needed as well. While state efforts will
certainly be closely tied to block grant results, outcomes will just
as certainly be affected by factors outside the control of state
administrators. Because of the role that these variables may play,
evaluation will need to isolate the effect of outside factors on
state programs. For example, the incidence of low birth weight
infants depends not only on the efforts of a particular state and
local agency to fill the gaps in prenatal care, but also on many
other demographic and situational factors, such as regional
employment trends and demographic patterns, that could easily
confound an accurate assessment of state performance.
Just as some features of block grants facilitate a results-oriented
approach, other features add complications. The broad range of
objectives often identified for particular block grants coupled with
broad state discretion in program implementation may make it
difficult for the federal government to specify and select suitable
results-oriented measures. For example, in areas such as community
development that encompass a broad range of activities, it may be
difficult to select a single, or even a small set of, preferred
indicators against which to gauge performance. Alternatively,
broader outcomes covering an entire function could be chosen, such as
education achievement levels as measured through standardized
testing. In either case, the states' flexibility to determine how
best to use block grant funds can be compromised.
PERFORMANCE INCENTIVES
-------------------------------------------------------- Letter :5.2.2
Some have suggested that the federal government incorporate monetary
incentives to the states into the new block grants to achieve
nationally desired results. Under such an approach, the incentives
and penalties states face would act as a lever because they would be
tied to progress on standards set for all states or standards
predicated on individual states' past performance.
This kind of incentive structure is incorporated in the
administration's "performance partnerships" and it is also central to
Oregon's welfare proposal to pilot a reinvented form of
intergovernmental relationships (known as the "Oregon Option"). The
President's fiscal year 1996 budget introduced performance
partnerships for a number of areas. Like block grants, performance
partnerships would consolidate funding streams. However, the
partnerships would provide for specific federal standards and goals
expressed in output or outcome terms, and states or localities would
be given incentives if they met or exceeded some of these federal
objectives. For instance, the President's budget reported that under
the performance partnership concept, the Environmental Protection
Agency proposed to consolidate 12 media-specific grants (including,
air, water, and hazardous waste), enabling states to target resources
toward their most pressing priorities. Performance-based funding
would be included in this program. Similarly, the Department of
Housing and Urban Development's (HUD) proposed grant consolidations
would distribute 10 percent of formula allocations based on
performance.
Although offering the potential to improve states' performance for
federally assisted programs, funding incentives warrant caution in
their design and implementation. Given the difficulties performance
measurement faces in the near term, significant intergovernmental
conflict could arise from the application of outcome-based measures,
particularly if, in evaluating progress, states were inadvertently
held accountable for the impact of factors beyond their control. If
performance-based measures were also tied to future federal funding
in some way, such conflicts could be exacerbated. For example, it
would make little sense to penalize a state that did not meet an
immunization target if the major reason the state did not meet this
target was a significant influx of unimmunized immigrants. Moreover,
linking performance measures to funding could cause states to present
only the most favorable performance information.
DATA COLLECTION AND CAPACITY
ISSUES
------------------------------------------------------------ Letter :6
Whatever emphasis is selected, the Congress should consider carefully
its current and future needs for uniform data and data collection
procedures across the states. The 1981 block grants carried no
uniform federal information and reporting requirements. After the
block grants were enacted, states collected a wide range of program
information, but the collection efforts were designed to meet the
needs of the individual states. The Congress had limited information
on program activities, services delivered, and clients served. As a
result, it was difficult, in many cases, to aggregate state
experiences and speak from a national perspective on the block grant
activities or their effects. Similarly, without uniform information
definitions and collection methodologies, it was difficult to compare
state efforts or draw meaningful conclusions about the relative
effectiveness of different strategies. In our recent report, Block
Grants: Characteristics, Experience, and Lessons Learned
(GAO/HEHS-95-74, February 9, 1995), we noted that problems in
information and reporting under many block grants--including the
Education block grant, the Community Services Block Grant (CSBG), and
the Alcohol, Drug Abuse, and Mental Health Services Block Grant
(ADMS)--have hampered Congress' ability to evaluate block grants.
Some have expressed concern that uniform national data might
encourage the Congress to recentralize or recategorize block grants.
This certainly could be one outcome, particularly if uniform data
showed that states were falling short of national expectations in
critical areas. However, the absence of uniform national data for
the 1981 block grants did not prevent the Congress from adding new
requirements and funding constraints to the block grant programs of
the 1980s. In the absence of uniform information, policymakers are
pressed to change to block grant programs based on examples and
reports that may or may not represent broad-scale problems with
program implementation. In 9 of the 11 block grants in existence
from fiscal year 1983 through fiscal year 1991, the Congress added
new cost ceilings and set-asides or changed existing ones 58 times as
a result of congressional concern that states were not adequately
meeting national needs. Reliable information that is comparable
across states could enable federal policymakers to identify systemic
problems.
Performance measures for block grants will need to be developed in
partnership with the states. This will not be easy. Not only do
federal and state interests differ, but it will take time to develop
data collection systems and reporting capacities once the initial
decisions are made. Even in the case of employment training
programs, for example, in which there has been a congressional focus
on program outcomes, we have found that most state agencies do not
collect information on participant outcomes, nor do they conduct
studies of program effectiveness.\10
Federal agencies will need time to work with the states to establish
reporting requirements, including the types and measurement
methodologies for needed program information, and how and by whom
such information will be collected and analyzed. For example, we
recently testified\11 that HUD may face difficulties implementing its
plans for consolidating housing and community development funds into
larger programs that rely on performance measures to evaluate state
and local efforts. Localities will need time to establish
performance measures and work out program details. Community
development researchers have had difficulty developing suitable
performance measures because communities' needs differ and the
results of some activities may not be quantifiable.
According to work on the early implementation of GPRA, many federal
agencies currently lack the ability to track progress, evaluate
results, and use performance data to improve their agencies'
effectiveness.\12 Like executive branch agencies, states, will need
to make significant investments in people, skills, and systems to
effectively gather and use performance information.
In designing performance measurement systems for block grants, it
will be important to take into account certain lessons from
evaluation research. Most notably, performance measurement efforts
and evaluation studies both involve cause and effect relationships.
In the case of performance measurement, there is an
assumption--perhaps implicit--that any results observed are a
consequence of the programs and activities under scrutiny. However,
as we have reported,\13 good evaluative information about these kinds
of program effects is difficult to obtain. Each of the tasks
involved--measuring outcomes, ensuring the consistency and quality of
data collected, establishing the causal connection between outcomes
and program activities, and separating out the influence of
extraneous factors--raises formidable technical or logistical
problems that are not easily resolved.
--------------------
\10 Multiple Employment Training Programs: Most Federal Agencies Do
Not Know If Their Programs Are Working Effectively (GAO/HEHS-94-88,
March 2, 1994).
\11 Housing and Urban Development: HUD's Reinvention Blueprint
Raises Budget Issues and Opportunities (GAO/T-RCED-95-196, July 13,
1995).
\12 Managing For Results: Steps for Strengthening Federal Management
(GAO/T-GGD/AIMD-95-158, May 9, 1995).
\13 Program Evaluation: Improving the Flow of Information to the
Congress (GAO/PEMD-95-1, January 30, 1995).
IMPLICATIONS OF STATE
INVOLVEMENT AND SPENDING ON
BLOCK GRANT ACCOUNTABILITY
------------------------------------------------------------ Letter :7
Federal officials need to be aware of existing fiscal and
programmatic state and local commitments when designing federal block
grant accountability provisions. Overall, evaluations and studies
suggest that the broader the objectives and range of authorized
activities and the fewer the requirements on grants, the greater the
fungibility of funds. All grant programs potentially are susceptible
to the problems of fungibility, but these issues loom larger in a
block grant context for two reasons. First, under block grants the
commingling of federal and state funds is allowed to help realize
administrative cost savings, promote innovation, and improve service
delivery.\14 Second, the federal government often assumes the role of
a fiscal junior partner under block grants as state and local
expenditures can easily overshadow the federal contribution within
broadened categories of state and local spending.
The fungibility of federal funds will vary by type of block grant.
It is far easier to isolate the impact of federal funds for block
grants where federal funding will comprise a major share of state
spending or where the activities funded are relatively limited in
purpose. The AFDC block grant, for example, may be more easily
accounted for because federal block grant funds will continue to be a
major, if not larger, share of total spending and because funding is
provided for cash payments to eligible low income individuals.
Proposed block grants for education or community and economic
development, on the other hand, would be more difficult to track due
to their broad, diffuse purposes and the relatively minor role played
by federal funds.
--------------------
\14 While there is agreement that administrative cost savings can
follow from consolidations of federal grant programs--including those
involved in block grants--measuring these savings is fraught with
technical difficulties. We have reported on these problems in
numerous reports and testimonies, many of which are summarized in
Program Consolidation: Budgetary Implications and Other Issues
(GAO/T-AIMD-95-45, May 23, 1995).
IMPLICATIONS FOR DATA
REPORTING
---------------------------------------------------------- Letter :7.1
Fungibility clearly has implications for the kinds of information
that can be expected on block grant results. Imposing data reporting
requirements for the federal funds alone would force states to
separately track and report on expenditures and accomplishments
achieved with federal block grant funds. But this could provide only
a bookkeeping perspective, having little or no relation to the actual
impact of the funds.
We found this to be the case for reporting in the General Revenue
Sharing (GRS) program. When we examined how GRS funds were used, we
found that reports filed by grantees did not necessarily provide
accurate information on how funds might have been used. This was
because the flexibility inherent in revenue sharing permitted states
and localities to use the federal funds to finance other programs,
reduce taxes, or a combination. For reporting purposes, it became
somewhat meaningless to earmark one revenue source for a specific set
of expenditures and a second source for another where both revenues
can be used interchangeably because funds can easily be displaced or
substituted.
The problem with interchangeable resources led us to conclude that,
to be meaningful, data in broadly defined grant programs should be
integrated and related to total expenditures for state and/or local
activities by purpose or function. This logic applies to block
grants. Assume, for example, that a community strongly supports the
development of a recreation project and community officials elect to
use block grant funds for this purpose. The community's accounting
records and financial reports would reflect that the funds were used
for the new project. However, the key question in this situation is
what would have happened in the absence of the federal funds. If the
funds for the new project would have been provided in the absence of
the block grant, by reducing funding for other programs, increasing
taxes, or using available surplus, then the net effects of the grant
are not in the area of the project. In this case, the effect of the
block grant would have been to negate the need to reduce other
programs, halt a tax increase, or maintain the existing level of
surpluses. Thus, instead of tracking the accomplishments of federal
funds alone, it might be more realistic to assess the extent to which
the entire federal-state effort promotes accountability for national
goals of interest to the Congress.
IMPLICATIONS FOR FEDERALLY
IMPOSED PROHIBITIONS AND
RESTRICTIONS
---------------------------------------------------------- Letter :7.2
The inherent difficulty of tracking the use of federal funds in a
fungible fiscal environment, raises some basic questions about the
enforceability of federal prohibitions or restrictions that might be
applied to block grants. If state funds significantly outweigh
federal funds, states can simply shift their own money to support a
federally-eligible activity previously financed with state funds.
This shift enables states to conform to the letter of the
requirement, without fulfilling its spirit.
IMPLICATIONS FOR
MAINTENANCE-OF-EFFORT
REQUIREMENTS
---------------------------------------------------------- Letter :7.3
Maintenance-of-effort requirements are often found in categorical
programs and some block grants to prevent states from substituting
federal for state dollars. Maintenance of effort is potentially more
sweeping than a matching requirement. For most close-ended grant
programs, matching is minimal and can be met with existing state or
local resources dedicated to the program. States and localities
frequently provide far more funding to broad-based programs than
federal matching provisions require. Maintenance of effort, on the
other hand, requires states or localities to maintain their own
previous or current level of nonfederal funding for the program.
Deciding whether to include a maintenance-of-effort requirement will
be controversial. The benefits to the federal interest must be
weighed against the encumbrance such requirements place on states'
fiscal flexibility. Because the stakes are significant in either
case, the Congress needs to carefully consider both sides of the
equation.
Maintenance of effort can help ensure that federal block grant
dollars are used for the broad program area intended by the Congress,
whether it be spending on special education or spending for day care.
Without such provisions, federal funds ostensibly provided for these
broad areas could, in effect, be transformed into general fiscal
relief for the states. States could use some or all of their federal
block grants to replace their own money invested in the program area.
To the extent that this occurs, the ultimate impact of these federal
dollars would be to either increase state spending in other programs
or reduce taxes.
Maintenance of effort does not overcome the fungibility dilemmas
discussed above. These provisions would not permit easy tracking of
the contributions of federal versus state dollars in a flexible block
grant funding environment. Yet, they could ensure that federal block
grant funds contribute to the broad program area addressed by the
block grant.
Maintenance-of-effort requirements also have potentially significant
effects on states' fiscal policy-making. They can encumber state
resources in federally funded areas, even though state funds may far
exceed federal block grants in magnitude. States, thus, are limited
in their ability to shift their own funds across programs without
risking the loss of federal dollars. This is particularly
problematic for states facing cuts, as maintenance of effort has
reportedly caused some to make disproportionate cuts in areas not
receiving federal funds. Maintenance of effort can also penalize
states that take the initiative to start programs before the federal
government; they essentially become locked into this spending even
when federal funds become available. States whose programs do not
precede the federal government with their own programs implicitly get
rewarded for their lack of initiative. As a result, the prospect of
such requirements could defer program innovation until federal funds
become available.
We have previously reported that most maintenance-of-effort
requirements have not avoided widespread fiscal substitution by
states or localities.\15 Typically, states were required to maintain
their spending levels from several years before. Inflation alone
gives states sufficient leeway to use federal funds to replace a
significant amount of state funds.
Should the Congress wish to provide for a maintenance of effort,
requiring states to do so based on a rolling average of the past 2
years of spending, for example, would help better protect against
fiscal substitution. Permitting waivers for states experiencing
fiscal stress or for those having innovative programs would be one
way to at least partially address the states' concerns.
We hope this information meets your needs. If you have any
questions, please call me at (202) 512-9573 or Margaret T.
Wrightson, Assistant Director, at (202) 512-3516.
Sincerely yours,
Paul L. Posner
Director, Budget Issues
--------------------
\15 Proposed Changes in Federal Matching and Maintenance of Effort
Requirements (GAO/GGD-81-7, December 23, 1980).
MAJOR CONTRIBUTORS TO THIS REPORT
=========================================================== Appendix I
ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION,
WASHINGTON, D.C.
--------------------------------------------------------- Appendix I:1
Margaret T. Wrightson, Assistant Director
Jerry C. Skelly, Assistant Director
Bill J. Keller, Evaluator-in-Charge
GENERAL GOVERNMENT DIVISION
--------------------------------------------------------- Appendix I:2
J. Christopher Mihm, Assistant Director
*** End of document. ***