TITLE:  Obligational Practices of the Corporation  for National and Community, B-300480, April 9, 2003
BNUMBER:  B-300480
DATE:  April 9, 2003
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Obligational Practices of the Corporation for National and Community, B-300480,
April 9, 2003

    
B-300480
    
    
    
April 9, 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: Obligational Practices of the Corporation for National and
Community
                   Service
    
This responds to your letter dated February 25, 2003.  You requested that
we determine whether the Corporation for National and Community Service
(Corporation) incurs a legal liability for the award of national service
educational benefits of AmeriCorps participants at the time it enters into
a grant agreement authorizing a grantee to enroll a certain number of
AmeriCorps participants, or at the time a participant enrolls in the
AmeriCorps program.  Subsequent to your letter, your staff explained to us
that your question arises in the context of your efforts to ensure that
the Corporation is properly recording obligations of the Corporation for
National and Community Service National Service Trust (Trust).   
    
As we explain in further detail below, the Corporation incurs an
obligation for education benefits when it enters into a grant agreement. 
At the time of grant award, the Corporation approves the grantee's
enrollment of a specified number of new participants in the AmeriCorps
program.  By this action, the Corporation incurs a legal duty that once
fully matured, by action of the grantee and participants outside the
Corporation's control, will require the Corporation to pay education
benefits to qualified participants from the National Service Trust.  As
the Corporation incurs an obligation for the education benefits, it must
record the obligation against the budget authority available in the
Trust. 
    
You also requested that we review the Corporation's request for a
deficiency appropriation for the Trust.  We will provide a subsequent
response addressing this request. 
    
    
BACKGROUND
    
The Corporation for National and Community Service was created to help
community needs in education, the environment, and public safety, to
expand educational opportunity by rewarding individuals who participate in
national service, and to encourage citizens to engage in national
service.  National and Community Service Trust Act of 1993, Pub. L. No.
103-82, 107 Stat. 785, 42 U.S.C. S: 12501.  One of the three national
service programs the Corporation oversees is AmeriCorps.  Participants in
the AmeriCorps program who successfully complete a required term of
service earn a national service educational award of up to $4,725 that can
be used to pay for college, graduate school, an approved school-to-work
program, or qualified student loans.    42 U.S.C. S: 12604(a); 45 C.F.R.
S: 2527.10.  Participants who earn the award have up to 7 years in which
to use it.  42 U.S.C. S: 12602(d)(1).  While the Corporation pays the
education benefits directly from the Trust, 42 U.S.C. S: 12601(c), the
Corporation also is authorized to make grants for the purpose of assisting
grant recipients in carrying out national service programs.  42 U.S.C. S:
12571(a).  The Corporation provides grant funds for program costs,
including a stipend, and health and child care coverage.  In its grants,
the Corporation also approves enrollment of a specified number of new
participants.  See, e.g., AmeriCorps Grant Award to City Year, Inc., Aug.
3, 2000.[1]  Most of the grant funding from the Corporation for AmeriCorps
programs goes to governor-appointed state service commissions, which award
subgrants to nonprofit groups, who then enroll the AmeriCorps
participants.  Corporation for National and Community Service website,
http://www.national service.org.         
    
The AmeriCorps program is funded through the Departments of Veterans
Affairs, Housing and Urban Development, and Independent Agencies
Appropriations Act (VA-HUD Appropriations Act).  Congress appropriates
amounts in the VA-HUD Appropriations Act on a no-year basis to the
National Service Trust.  See, e.g.,         VA-HUD Appropriations Act,
2001, Pub. L. No. 106-377, 114 Stat. 1441 (*not more than $70,000,000, to
remain available without fiscal year limitation, shall be transferred to
the National Service Trust account for educational awards authorized under
subtitle D of title I of the Act*).  The National Service Trust is a
dedicated fund within the Corporation used to pay national service
educational awards to eligible participants.  42 U.S.C. S: 12601(c)
(*[a]mounts in the Trust shall be available, to the extent provided for in
advance by appropriation, for payments of national service educational
awards in accordance with section 12604 of this title*).  The amount
deposited into the Trust is to be equal to the product of the value of a
national service educational award and the total number of approved
national service positions.  41 U.S.C. S: 12571(c).  Of significance is a
provision that prohibits the Corporation from approving positions for a
fiscal year unless sufficient funds are available in the National Service
Trust.  It states that *[t]he Corporation may not approve positions as
approved national service positions * for a fiscal year in excess of the
number of positions for which the Corporation has sufficient available
funds in the National Service Trust for that fiscal year . . . .*  42
U.S.C. S: 12581(f).          
    
Your question arises in the context of the Corporation's decision to
suspend participant enrollment in the fall of 2002 because the Corporation
feared that the Trust would not have sufficient funds to cover education
awards for all approved enrollees.  For fiscal year 2002, the President
did not request and the Congress did not appropriate funds for the Trust,
based apparently on the Administration's determination that sufficient
funds were available to support fiscal year 2002 education benefit
outlays.  Letter from Phillip J. Perry, General Counsel, Office of
Management and Budget, to Susan A. Poling, Associate General Counsel,
General Accounting Office (GAO), Mar. 31, 2003.  According to the
Corporation's General Counsel, in the fall of 2002, internal controls
alerted the Corporation to the fact that grantees were enrolling members
at an unexpectedly high rate, and the Corporation determined that *in all
likelihood the obligations associated with those approved positions would
exceed budgetary resources in the National Service Trust.*  Letter from
Frank R. Trinity, General Counsel, Corporation for National and Community
Service, to Susan A. Poling, Associate General Counsel, GAO, Mar. 21,
2003.  In response, the Corporation amended all AmeriCorps grants to
suspend enrollments as of November 15, 2002, and did not permit any
additional enrollments until Congress appropriated additional funds to the
Trust.  Id.  Notwithstanding these actions, according to the audit of the
Corporation's fiscal year 2002 financial statements, in fiscal year 2002,
the Corporation had approved AmeriCorps national service positions in
excess of the number of positions that the Trust could support and thus
violated  42 U.S.C. S: 12581(f).  Audit of the Corporation for National
and Community Service's Fiscal Year 2002 Financial Statements, Audit
Report 03-01 at 24, KPMG, Feb. 4, 2003. 
    
ANALYSIS
    
The issues presented are (1) when does the Corporation incur an obligation
for education benefits, and (2) in what amount does the Corporation incur
an obligation for these benefits.  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, 31 U.S.C. S: 1341(a); accordingly, proper recording
of obligations permits compliance with the Antideficiency Act by ensuring
that government agencies have adequate budget authority to cover all of
their obligations.  42 Comp. Gen. 272, 275 (1962).    
    

                       Determining the Obligational Event

    
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.  A legal
liability is defined, generally, as any duty, obligation or responsibility
established by a statute, regulation, or court decision, or where the
agency has agreed to assume responsibility in an interagency agreement,
settlement agreement, or similar legally binding document.  See Black's
Law Dictionary 925 (7th ed. 1999).  While we ordinarily consider
obligations as *legal liabilities,* for the concept to be meaningful for
funds control purposes, we have not limited the definition solely to
agency actions that create legal liabilities, but also have extended the
definition to include *[a] legal duty on the part of the United States
which constitutes a legal liability or which could mature into a legal
liability 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).   
    
When 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.  In addition, when the Corporation enters into
grant agreements with state service commissions, it specifies the budget
and project period of the award, the total number of positions approved,
the total amount awarded for related program costs for the approved
positions, and the terms of acceptance.  See, e.g., AmeriCorps Grant Award
to City Year, Inc., Aug. 3, 2000.  The amounts awarded for related program
costs are used by the grantee to pay participants' stipends and health and
child care coverage.  The Corporation incurs an obligation for these
program costs at the time of grant award.[2]  See, e.g., B-289801, Dec.
30, 2002; B-167790, Jan. 15, 1973.  The costs of education benefits for
the new participants are not specified in the grants. 
    
Nevertheless, at the time of grant agreement, the Corporation commits to
fund education benefits for all of the positions approved in the grant if
all of the positions are enrolled before the Corporation modifies the
terms or conditions of the grant.  Letter from Frank R. Trinity, General
Counsel, Corporation for National and Community Service, to Susan A.
Poling, Associate General Counsel, GAO, Mar. 21, 2003.  At the time of
grant award, when the Corporation approves enrollment of a specified
number of new participants, the Corporation has taken an action that can
mature into a legal liability for the education benefits of the new
participants by virtue of actions taken by the grantee and participants,
not the Corporation.  In other words, upon award of the grant, the
Corporation, at a minimum, has accepted *[a] legal duty . . . which could
mature into a legal liability by virtue of actions on the part of the
grantee beyond the control of the United States.*  42 Comp. Gen. 733, 734
(1963).  In our view, therefore, the Corporation incurs a recordable
obligation at grant award for the education benefits of the approved
number of new participants. 
    
We think our view of when the obligational event occurs is entirely
consistent with applicable provisions of the National and Community
Service Trust Act.  As noted above, the Act requires the Trust to have
adequate funds to cover the total number of approved positions.  42 U.S.C.
S: 12581(f).  The language of section 12581(f) focuses on the
Corporation's approval of positions as the obligational event for fund
control purposes:  *[t]he Corporation may not approve positions as
approved national service positions . . . 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 . . .
.*  
    
The General Counsel of the Corporation has concluded, however, that the
obligational event with respect to the education award occurs no earlier
than the enrollment of an individual in the Trust.  Letter from Frank R.
Trinity, General Counsel, Corporation for National and Community Service,
to Susan A. Poling, Associate General Counsel, GAO, Mar. 21, 2003.  In the
past, the Corporation recorded education award obligations on an outlay
basis, i.e., it recorded an obligation at the time of the quarterly
drawdown of education awards from the Trust.  Id.  The General Counsel
explained, however, that the Corporation is in the process of modifying
its procedures for recording obligations and now will record obligations
at the time of enrollment based on estimates of what these enrolled
members will draw down in the future.  Id.        
    
The General Counsel stated that the Corporation does not incur an
obligation for an education award until the time of enrollment because the
Corporation may modify the terms and conditions of a grant, including
suspension of enrollment into the Trust, prior to the enrollment of all
positions initially approved in a grant.  According to the General
Counsel, this permits the Corporation, if necessary, to prevent a
shortfall in the Trust.  The General Counsel also stated that *a binding
agreement between the Government and an AmeriCorps member exists only upon
the member's authorized enrollment in the Trust.*  Id.  While it may well
be true that the Corporation has no binding agreement with a participant
until the participant enrolls, we do not view this as the controlling
consideration for funds control purposes.  In our opinion, this view
overlooks the legal duty the Corporation incurs at time of grant award
when it commits to funding a specified number of participants and ignores
the constraint imposed on the Corporation by section 12581(f).
    
The Corporation, by its own admission, may modify the number of approved
participants only if it amends the grant agreement to reduce the number of
enrolled positions prior to enrollment.  While the Corporation may
unilaterally reduce the number of authorized positions awarded to a
grantee prior to participant enrollment, from the time of grant award
until the Corporation acts to reduce the approved number of positions, the
grantee and its subgrantee, not the Corporation, controls the number of
participants who may enroll, up to the maximum number of participants the
Corporation has approved in the grant agreement.  The fact that the
government may have the power to amend unilaterally a contract or
agreement does not change the nature or scope of the obligation incurred
at time of award.  Were it otherwise, every government contract that
permits the government to terminate the contract for the convenience of
the government (48 C.F.R. S: 49.502), or to modify the terms of the
contract at will (48 C.F.R. S:S: 52.243-1, 243-2, 243-3), would not be an
obligation of the government at time of award.  Long-standing practice and
logic both of the Congress (31 U.S.C. S: 1501, 41 U.S.C. S: 5) and the
accounting officers of the government
(B-234957, July 10, 1989, B-112131, Feb. 1, 1956) have rejected such a
view.  As we explained earlier, at the time of grant award, the
Corporation's approval of a specified number of new participants
establishes a legal duty that can mature into a legal liability for
education benefits by virtue of actions of the grantee that are beyond the
control of the Corporation unless the Corporation takes affirmative action
to modify the grant. 
    

                            Amount of the Obligation

    
For purposes of identifying the amount of the Corporation's obligation at
grant award, it is also significant that the grantee and subgrantee, by
their actions in enrolling participants, ultimately control the amount of
the Corporation's liability.  If the amount of liability of the government
is under the control of the grantee, not the Corporation, the government
should obligate funds to cover the maximum amount of the liability.  See,
e.g., B-238581, Oct. 31, 1990; B-197274, Sept. 23, 1983.  As more
information is known, the Corporation may adjust the obligation, i.e.,
deobligate funds or increase the obligational level, as needed. 
    
The General Counsel stated that at the time a member enrolls and the
Corporation records an obligation for the member's education benefits, the
Corporation will record its *best estimate of the Government's ultimate
liability for education awards provided to members enrolled in the
National Service Trust.*  Letter from Frank R. Trinity, General Counsel,
Corporation for National and Community Service, to Susan A. Poling,
Associate General Counsel, GAO, Mar. 21, 2003.  According to the General
Counsel, the model the Corporation will use to make estimates of what
enrolled members will draw down in the future, i.e., the amount the
Corporation will obligate, uses historical information, such as attrition
rate and actual usage by members who complete a term of service and earn
an education award. 
    
It appears to us that the Corporation is confusing its accounting
liability, projections booked in its proprietary accounting systems for
financial statement purposes, with its legal liability, amounts to be
recorded in its obligational accounting systems and tracked in order to
ensure compliance with fiscal laws.  For proprietary accounting purposes a
liability is a probable and measurable future outflow or other sacrifice
of resources as a result of past transactions or events.  FASAB Statement
of Federal Financial Accounting Standards Number 1.  Some types of
projections of accounting liability consider the same factors, such as
historical trends, that are considered in the Corporation's model.  For
purposes of tracking its obligations, the Corporation should be recording
its unmatured legal liability for the education benefits, which is the
value of an educational award multiplied by all approved positions.  At
the time of grant award, the Corporation should record an obligation
incurred for the education benefits against the National Service Trust and
the obligation incurred for the related program costs awarded for each of
the approved positions against the appropriate account in the VA-HUD
Appropriations Act.  As the grantees' authority under the grant agreement
to enroll participants in the AmeriCorps program expires or if the
Corporation modifies the grantees' authority, under the grant agreement
the Corporation should deobligate previously obligated amounts to reflect
the change in the Corporation and the Trust's legal exposure. 
    
We trust this is responsive to your request.  If you have any questions,
please contact Susan A. Poling, Associate General Counsel, at
202-512-5644.
    
    
    
    
Anthony H. Gamboa
General Counsel
    

   DIGEST
    
The Corporation for National and Community Service incurs an obligation
for education benefits when it enters into a grant agreement.  At the time
of grant award, in approving enrollment of a specified number of new
participants, the Corporation incurs a legal duty that once fully matured,
by action of the grantee and participants outside the Corporation's
control, will require the Corporation to pay education benefits to
qualified participants.  As the Corporation incurs an obligation for the
education benefits, it must record the obligation against the budget
authority available in the National Service Trust.  The Corporation's
liability at time of grant award is equal to the number of approved
positions in a grant award multiplied by the total value of a national
service educational award plus the program costs awarded in the grant for
each of the approved positions.
    

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   [1] The Corporation provided us with a copy of this grant agreement.
[2] We have not examined and accordingly express no opinion on whether the
Corporation is appropriately obligating these costs in the applicable
appropriation account.