TITLE: Corporation for National and Community Service: Amount of Obligations, B-300480.2, June 6, 2003
BNUMBER: B-300480.2
DATE: June 6, 2003
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Corporation for National and Community Service: Amount of Obligations,
B-300480.2, June 6, 2003
B-300480.2
June 6, 2003
The Honorable Christopher Bond
Chairman
The Honorable Barbara Mikulski
Ranking Minority Member
Subcommittee on VA, HUD, and Independent Agencies
Committee on Appropriations
United States Senate
Subject: Corporation for National and Community Service: Amount of
Obligations
This responds to your request of May 20, 2003, that we review the
conclusion of the Office of Management and Budget (OMB) that the
Corporation for National and Community Service (Corporation) may continue
to record obligations based on the Corporation's estimates of *the amount
of funds [it] will actually have to pay for the [national service
educational] awards that are earned and used* rather than recording its
maximum potential liability. See Letter of May 2, 2003 from Phillip
Perry, General Counsel, OMB, to Frank Trinity, General Counsel,
Corporation for National and Community Service. OMB's position is, as you
know, at variance with our prior advice on this matter. B-300480, April
9, 2003. Specifically, you asked whether OMB has offered a legal basis
for the Corporation to deviate from the requirement to record obligations
according to fiscal law requirements upon grant award.
As noted below, we continue to disagree with OMB's legal conclusion that
the Corporation may record its obligations for education benefits on the
basis of estimates of what it will have to pay when education awards are
earned, i.e., its probable accounting liability, rather than according to
fiscal law requirements, i.e., its maximum potential liability. At the
same time, we note that Congress has provided specific statutory
flexibility to address situations where certain probable accounting
liabilities may likely be greater or less than the real economic costs to
the government, for example, the Federal Credit Reform Act of 1990 (Pub.
L. No. 101-508, title XIII, S: 13201(a), i.e., credit reform. Congress
may wish to provide similar flexibility to the Corporation in obligating
national service education awards.
BACKGROUND
As we explained in our April 9 opinion, at the time the Corporation awards
a grant, it enters into a binding agreement authorizing the grantee to
enroll a specified number of new participants in the AmeriCorps program
without any further action by the Corporation. Because the Corporation,
at time of grant award, accepts a legal duty to cover the education
benefits of the new participants, it incurs, and must record, an
obligation at that time. 42 Comp. Gen. 733, 734 (1963). Since the amount
of the government's obligation is under the control of the grantees and
those they enroll, not the Corporation, the Corporation must obligate
funds to cover its maximum potential liability. See, e.g., B-238581, Oct.
31, 1990; B-197274, Sept. 23, 1983. As more information is known, for
example, when an approved participant fails to enroll or a volunteer drops
out of the program, the Corporation may adjust the obligation, i.e.,
deobligate funds or increase the obligational level, as needed. Because
funds in the Trust are available without fiscal year limitation, the
deobligated funds can be reobligated and used for future education
benefits. At the time of grant award, the Corporation's obligation for
the education benefits is equal to the number of approved positions in a
grant award multiplied by the total value of a national service
educational award.
In its May 2 letter, OMB agrees that the Corporation incurs a recordable
obligation at the time of grant award. OMB apparently, however, does not
consider the amount of the recordable obligation for the education
benefits to be defined as the maximum potential liability reflected in the
grant agreement. OMB finds a distinction between obligations based on
*reasonable and conservative estimates that reflect historical experience*
and obligations based on what OMB calls *theoretical maximums.*
OMB argues that the Corporation may use historical experience and modeling
to estimate its obligation for national service educational awards because
the Congress contemplated that the Corporation would record obligations
based on estimates. OMB bases this argument on two provisions of the
National and Community Service Trust Act of 1993, Pub. L. No. 103-82, 107
Stat. 785. The first provision is 42 U.S.C. S: 12581(f), which provides
that
*The Corporation may not approve positions as approved national service
positions under this division for a fiscal year in excess of the number of
such positions for which the Corporation has sufficient available funds in
the National Service Trust for that fiscal year, taking into consideration
funding needs for national service educational awards . . . based on
completed service. If appropriations are insufficient to provide the
maximum allowable national service educational awards . . . for all
eligible participants, the Corporation is authorized to make necessary and
reasonable adjustments to program rules.*
OMB argues that section 12581(f), permitting an adjustment to program
rules, contemplates that the Corporation will obligate based on estimates
because appropriations would be insufficient only if the Corporation
underestimated the amount it would need.
The second provision on which OMB relies is 42 U.S.C. S: 12603, which
prescribes the value of national service educational awards. OMB argues
that because this section does not provide a single *value* of an award,
the Corporation must necessarily estimate its liability. We will discuss
each provision separately below.
DISCUSSION
Obligation of Appropriations
The federal government generally operates on an obligation basis. This
means that an agency first takes some action that creates the legal
liability to pay--that is, the agency *obligates* itself to pay--and the
actual disbursement of money typically follows at some later time. An
agency can incur a legal liability, i.e., a claim that may be legally
enforced against the government, in a variety of ways, such as by signing
a contract, grant or cooperative agreement, or by operation of law.
Collins v. United States, 15 Ct. Cl. 22 (1879). A general definition of
an obligation is *a definite commitment that creates a legal liability of
the government for the payment of goods and services ordered or
received.* B-116795, June 18, 1954[1]. For the concept to be meaningful
for funds control purposes, we have not limited the definition solely to
agency actions that create legally enforceable claims against the
government, but also have extended the definition to include a legal duty
on the part of the United States which could mature into a legally
enforceable claim by virtue of actions on the part of the other party
beyond the control of the United States. 42 Comp. Gen. 733, 734 (1963);
see also McDonnell Douglas Corp. v. United States, 37 Fed. Cl. 295, 301
(1997).
As we explained in our April 9, 2003, opinion, understanding the concept
of an obligation and properly recording obligations are important because
an obligation serves as the basis for the scheme of funds control that
Congress envisioned when it enacted such fiscal laws as the Antideficiency
Act. 31 U.S.C. S: 1341(a); B-237135, Dec. 21, 1989. Under that act, an
agency may not incur an obligation in excess of the amount available to it
in an appropriation unless authorized by law. 31 U.S.C. S: 1341(a).
The Antideficiency Act evolved over a period of time, in response to
various abuses. As late as the post-Civil War period, it was not uncommon
for agencies to incur obligations in excess of or in advance of
appropriations. Some agencies would spend their entire appropriations
during the first few months of the fiscal year, continue to incur
obligations, and then return to Congress for appropriations to fund these
*coercive deficiencies.* Hopkins & Nutt, The Anti-Deficiency Act (Revised
Statutes 3679) and Funding Federal Contracts: An Analysis, 80 Mil. L.
Rev. 51, 56-58 (1978); Louis Fisher, Presidential Spending Power 232
(1975). The congressional response to abuses of this nature was a series
of enactments collectively known as the Antideficiency Act, which
prescribes a set of funds control and financial management procedures
regarding the obligation and expenditure of agency funds.
In addition, an agency is required to properly record its obligations.
The standards for the proper recording of obligations are found in 31
U.S.C. S: 1501(a). Congress enacted this statute because it *did not have
reliable information in the form of accurate obligations on which to
determine an agency's future requirements.* Senate Committee on
Government Operations, Financial Management in the Federal Government, S.
Doc. No. 11, 87th Cong., 1st Sess. 85 (1961).
Today, the revised Antideficiency Act serves as the primary foundation for
the government's administrative control of funds systems. In its current
form, the law prohibits, among other things:
1. Making or authorizing an expenditure from, or creating or
authorizing an obligation under, any appropriation or fund in excess of
the amount available in the appropriation or fund unless authorized by law
(31 U.S.C. S: 1341(a));
2. Involving the government in any contract or other obligation
for the payment of money for any purpose in advance of appropriations made
for such purpose, unless the contract or obligation is authorized by law
(31 U.S.C. S: 3324(a)).
For purposes of identifying the amount of the obligation, an agency must
first identify whether it is the agency or the contractor (or grantee)
that controls the costs. 59 Comp. Gen. 518 (1980); 47 Comp. Gen. 155
(1967). If the amount of payment is under the control of the grantee, not
the government, the government should obligate funds to cover its maximum
potential liability. See, e.g., B-238581, Oct. 31, 1990; B-197274, Sept.
23, 1983. In regard to the national service educational benefits, the
Corporation must obligate the maximum potential liability because the
amount of the Corporation's obligation is under the control of the
grantees and those they enroll. Otherwise, the Corporation may violate
sections 1341(a) or 3324(a). We now address OMB's interpretation.
The Requirements of the National and Community Service Trust Act
In our view, 42 U.S.C. S: 12581 does not support OMB's interpretation that
section 12581(f) contemplates that the Corporation may estimate the
amount to deposit in the Trust. Subsections (a) through (d) of section
12581 provide the Corporation with percentage allocations to distribute
grants and approved national service positions to states, Indian tribes,
federal agencies, and other applicants. The first sentence of subsection
(f) says no more than that the Corporation must have adequate funds in the
Trust to cover education awards for the total number of approved national
service positions allocated by the previous subsections. If, however,
adequate budget authority is not available, the second sentence of
subsection (f) permits the Corporation to adjust *program rules* to ensure
that the Trust will not be overobligated.
There is nothing in the statute or in the related legislative history that
indicates that adjustment to *program rules* refers to adjustments to
long-established fiscal law requirements for recording obligations. The
National and Community Service Trust Act defines the term *program* as
applying to eight specific programs created by the Act. 42 U.S.C. S:
12511(9). This definition includes national service programs. However,
the definition of *program* does not cover or define the amount of funds
deposited into the National Service Trust to be disbursed as education
benefits. 42 S: U.S.C. 12572(a). Congress stated that its purpose in
inserting the second sentence of subsection (f) was *[t]o ensure that the
Act is not considered as an entitlement program.* 139 Cong. Rec. S9282-01
(1993) (Unanimous consent agreement). Section 12581 emphasizes Congress'
direction to the Corporation to fully obligate the funds necessary to
cover the education awards for the total number of approved positions.
In its May 2 letter, OMB provided examples of three statutes that
specifically instruct agencies to use *estimation methodologies to
determine the amount of funds to be obligated,* rather than fiscal law
requirements, namely the Federal Credit Reform Act of 1990 (Pub. L. No.
101-508, title XIII, S: 13201(a), 104 Stat. 1388-609) [2]; the Department
of Defense Education Benefits Fund (10 U.S.C. S: 2006)[3]; and the
multiyear contract authority provided in the Federal Acquisition
Streamlining Act of 1994 (Pub. L. No. 103-355, S: 1072, 108 Stat. 3243,
3270).[4] In each of these statutes, Congress has modified for specific
purposes, to some degree, established fiscal law requirements for
recording obligations. Each is an exception to the general rule for
recording obligations and authorizes agencies to record estimated probable
accounting liabilities as budgetary obligations. Rather than supporting
OMB's argument, these statutes illustrate that when Congress wishes to
give an agency authority to record estimated probable accounting liability
as obligations it does so explicitly. In fact, these statutes illustrate
that Congress has not provided the Corporation with the explicit authority
to estimate its future probable accounting liabilities for purposes of
recording its obligations, as OMB claims.[5]
The second provision on which OMB bases its argument is 42 U.S.C. S:
12603. The National and Community Service Trust Act requires that the
Corporation calculate the value of its obligations for education benefits
based on approved national service positions. Section 12571(c) of title
42, United States Code, requires the Corporation to deposit into the Trust
*an amount equal to the product of * (A) the value of a national service
educational award under section 12603 of this title; and (B) the total
number of approved national service positions to be provided.* Section
12603 provides values for (a) full-time national service, and (b)
part-time national service, and instructs the Corporation to provide a
pro-rated amount for (c) partial completion of service. OMB argues that
because different values apply, in order to determine the *value* for
section 12571(c), *the Corporation must necessarily rely on robust
estimates, based on historical experience, of the extent to which
volunteers complete their service and, when service is not completed, the
extent to which they receive pro-rated awards.*
We disagree. Section 12571(c) begins by stating that the Corporation must
deposit into the Trust the value specified in section 12603 multiplied by
the total number of approved national service positions. At the time of
grant award, the Corporation knows the total number of full- and part-time
national service positions it is approving. Pursuant to 12571(c), the
Corporation is required to multiply the total number of approved positions
by the appropriate categories in section 12603. At the time of grant
award, this will be either the full-time value or 50 percent of the
full-time value. For example, if the Corporation approves 50 part-time
and 50 full-time positions in a grant award, the Corporation is required
to multiply the 50 full-time positions by $4,725, which is the maximum
education benefit a full-time participant can earn, and multiply the 50
part-time positions by $2,362.50. See 45 C.F.R. S: 2527.10. The sum of
these amounts is the Corporation's obligation according to current fiscal
law requirements. Congress' instructions to provide a pro-rated amount
for the partial completion of service allows the Corporation to adjust the
amount of its obligation and deobligate excess funds when a participant
leaves national service without completing his or her term of service.
CONCLUSION
Accordingly, we find no reason to change our opinion with regard to the
amount of funds that must be obligated at the time the Corporation
authorizes a grant recipient to fill positions. Because the Corporation,
at time of grant award, accepts a legal duty to cover the education
benefits of new participants, it incurs, and must record, its maximum
potential liability at that time. As we stated in our April 9 legal
opinion, to ensure compliance with the Antideficiency Act, 31 U.S.C. S:
1341, and other fiscal laws, the Corporation should be recording and
tracking its obligations as the value of an educational award multiplied
by all approved positions. This requirement to record the maximum
potential liability does not undermine, however, the value of the
Corporation's estimating its probable future liability for accounting
purposes, which is intended to represent the best estimate of the
Corporation's probable future liability for financial statement purposes.
We note that the Corporation could seek legislation that would permit it
to use an estimation model for recording its
obligations. (This model could be similar to the process that would be
used to determine the Corporation's accounting liability.) If you have
any questions, please contact Susan A. Poling, Associate General Counsel,
at 202-512-5644.
Anthony H. Gamboa
General Counsel
DIGEST
As we stated in our April 9, 2003, legal opinion, because the Corporation
for National and Community Service, at time of grant award, accepts a
legal duty to cover the education benefits of new participants, it incurs,
and must record, its maximum potential liability at that time. To ensure
compliance with the Antideficiency Act, 31 U.S.C. S: 1341, and other
fiscal laws, the Corporation should be recording and tracking its
obligations as the value of an educational award multiplied by all
approved positions. As more information is known, for example, when an
approved participant fails to enroll or a volunteer drops out of the
program, the Corporation may adjust the obligation, i.e., deobligate funds
or increase the obligational level, as needed. Because funds in the Trust
are available without fiscal year limitation, the deobligated funds can be
reobligated and used for future education benefits. B‑300480, April
9, 2003.
------------------------
[1] When an agency enters into a contract, the agency incurs and must
record an obligation for the value of the goods and services it has
ordered. An accrual accounting system does not recognize the transaction
until it becomes probable that there will be a future expenditure of
funds. Therefore, the recognition of obligations generally occurs earlier
and in some cases will be in amounts greater than what would be recognized
as the probable future accounting liability. FASAB Statement of Federal
Financial Accounting Standards No. 5.
[2] Congress enacted the Federal Credit Reform Act to allow policymakers
to make more informed decisions about credit programs. Prior to the
enactment of credit reform, the real economic costs of direct loan
programs were overstated and the real economic costs for loan guarantee
programs were understated. The Credit Reform Act requires an agency to
estimate the long-term cost to the government associated with a loan or
loan guarantee and record this as an obligation against available budget
authority appropriated to cover these costs in the year the loan or
guarantee is made. 2 U.S.C. S: 661c(b). See, e.g., U.S. General
Accounting Office, Department of Education: Key Aspects of the Federal
Direct Loan Program's Cost Estimates, GAO-01-197 (Washington, D.C.: Jan.
12, 2001).
[3] The Department of Defense Education Benefits Fund is *used for the
accumulation of funds in order to finance armed forces education
liabilities on an actuarially sound basis,* and specifically authorizes
defense agencies to record obligations on the basis of estimates of their
probable accounting liability rather than on the basis of fiscal law
requirements for recording obligations.
[4] The multiyear contracting authority provided through the Federal
Acquisition Streamlining Act permits an agency to enter into a multiyear
contract using fiscal year funds if the agency obligates funds for the
full period of the contract. 41 U.S.C. S: 254c. This statute also
authorizes incremental funding for some contracts by permitting the agency
to obligate the full costs for the first fiscal year plus estimated
termination costs. The requirements to obligate the full amount of the
contract or the full costs for the first year plus estimated termination
costs upfront are designed to protect the government from future claims in
excess of available budget authority.
[5] Congress could, if it deems appropriate, authorize the Corporation to
estimate its probable liability for purposes of recording obligations. It
is important, however, that the agency have the necessary systems and
controls in place to properly estimate, monitor, and control its budgetary
requirements. In its audit of the Corporation for National and Community
Service's Fiscal Year 2002 Financial Statements, KPMG reported that the
Corporation approved more positions in fiscal year 2002 than what was
estimated as supportable by the National Service Trust. Audit Report
03-01 at 23, KPMG, Feb. 4, 2003. The Corporation has stated that it is in
the process of implementing new oversight and enrollment procedures; it is
too soon, however, to evaluate their effectiveness.