Grants Management: Enhancing Performance Accountability 	 
Provisions Could Lead to Better Results (29-SEP-06, GAO-06-1046).
                                                                 
Maximizing the extent to which grants achieve their long-term	 
performance goals is critical to successfully addressing the	 
challenges of the 21st century. While performance accountability 
mechanisms are fairly new to federal grants, they have been used 
in contracts for some time and lessons learned have begun to	 
inform federal grant design. Given this, GAO was asked to examine
(1) challenges to performance accountability in federal grants,  
(2) mechanisms being used to improve grant performance, and (3)  
strategies the federal government can use to encourage the use of
these mechanisms. GAO performed a content analysis of relevant	 
literature and interviewed experts. To illustrate the mechanisms 
and strategies found in the literature, GAO used examples from	 
the literature and selected additional case illustrations--two	 
federal grant programs (vocational education and child support	 
enforcement) and two nonfederal contracts--for further study.	 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-06-1046					        
    ACCNO:   A61606						        
  TITLE:     Grants Management: Enhancing Performance Accountability  
Provisions Could Lead to Better Results 			 
     DATE:   09/29/2006 
  SUBJECT:   Accountability					 
	     Federal funds					 
	     Federal grants					 
	     Funds management					 
	     Grant administration				 
	     Lessons learned					 
	     Performance measures				 
	     Strategic planning 				 
	     Information sharing				 
	     Program implementation				 

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GAO-06-1046

     

     * Results in Brief
     * Background
          * Child Support Enforcement
          * Carl D. Perkins Career and Technical Education
          * Massachusetts Division of Medical Assistance Contract with t
          * Ontario Realty Corporation's Contract with ProFac
     * Trade-offs and Challenges Exist in Ensuring Performance Acco
          * Grant Design Features Affect the Balance between Accountabil
          * Implementation Issues Present Further Performance Accountabi
     * Accountability Mechanisms Can Improve Performance and Perfor
          * A Variety of Accountability Mechanisms Exist
          * Accountability Provisions Can Be Employed at Different Phase
          * Accountability Mechanisms Can Be Tailored to Specific Situat
     * Strategies Support Successful Selection, Design, and Impleme
          * Ensure Mechanisms Are of Sufficient Value
               * Understand the Value of Performance
               * Ensure Effective Distribution
               * Execute Mechanisms Consistently
          * Periodically Renegotiate and Revise Mechanisms and Measures
          * Ensure Appropriate Measurement Selection and Usage
               * Performance Should Be within Recipient's Ability and Influen
               * Measures Should Be Suitable to the Mechanism Cycle
               * Measures and Data Should Be Tested
          * Ensure Grantor and Grantee Technical Capacity
          * Implement System in Stages
          * Collaboration and Oversight Also Key to Success
     * Various Opportunities Exist at the Federal Level to Enhance
          * A Results-Focused Design Encourages Performance Accountabili
          * Careful Use of National Program Evaluation Studies and Resea
          * Encourage Development and Use of Credible Performance Inform
          * Share Good Practices and Lessons Learned
     * Conclusions
     * Recommendation for Executive Action
     * Agency Comments
     * Appendix I: Objectives, Scope, and Methodology
     * Appendix II: GAO Contact and Staff Acknowledgments
          * GAO Contact
          * Acknowledgments
     * Bibliography
          * Order by Mail or Phone

Report to the Chairman, Subcommittee on Government Management, Finance and
Accountability, Committee on Government Reform, House of Representatives

United States Government Accountability Office

GAO

September 2006

GRANTS MANAGEMENT

Enhancing Performance Accountability Provisions Could Lead to Better
Results

GAO-06-1046

Contents

Letter 1

Results in Brief 4
Background 7
Trade-offs and Challenges Exist in Ensuring Performance Accountability in
Federal Grants 11
Accountability Mechanisms Can Improve Performance and Performance
Accountability 15
Strategies Support Successful Selection, Design, and Implementation of
Performance Accountability Mechanisms 22
Various Opportunities Exist at the Federal Level to Enhance Performance
Accountability in Grants 34
Conclusions 39
Recommendation for Executive Action 41
Agency Comments 41
Appendix I Objectives, Scope, and Methodology 42
Appendix II GAO Contact and Staff Acknowledgments 44
Bibliography 45

Tables

Table 1: Examples of Accountability Provisions 16
Table 2: Sources and Types of Authorization and Guidance for Performance
Accountability Mechanisms 20
Table 3: Examples of Ways to Tailor Performance Measures and Mechanisms 21

Figure

Figure 1: Accountability Provisions Can Be Used at Different Points in the
Grant Life Cycle by Various Users 18

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separately.

United States Government Accountability Office

Washington, DC 20548

September 29, 2006

The Honorable Todd Platts Chairman, Subcommittee on Government Management,
Finance and Accountability Committee on Government Reform House of
Representatives

Dear Mr. Chairman:

The federal government faces an array of challenges and opportunities to
enhance performance, ensure accountability, and position the nation for
the future. A number of overarching trends-including the nation's
long-term fiscal imbalance-drive the need to reexamine what the federal
government does, how it does it, who does it, and how it gets financed.
Because grants to state and local governments constituted nearly 20
percent of total federal outlays in fiscal year 2005, maximizing the
extent to which grants achieve their long-term performance goals and
objectives is critical to successfully addressing the challenges of the
21st century.

In recent years, interest in federal grant performance accountability has
grown. For the purposes of this report, performance accountability is
defined as the mechanisms by which individuals or organizations are held
accountable for meeting specified performance-related expectations.
Consistent with the decade-long trend toward an increased results
orientation and expectation for performance accountability as evidenced by
the Government Performance and Results Act of 1993 (GPRA),1 performance
accountability mechanisms in federal grants have become more common. For
example, performance assessment mechanisms are present in grants
authorized by both the Job Training Partnership Act and its successor
program, the Workforce Investment Act of 1988 (WIA) and the No Child Left
Behind Act.2 More recently, the Office of Management and Budget (OMB)
developed the Program Assessment Rating Tool (PART), which, among other
things, holds federal programs and their partners accountable for
performance. Simply monitoring and reporting performance can also
encourage performance accountability and performance improvements. In this
report, we have focused on specific mechanisms that are meant to encourage
performance incentives-such as rewards given or penalties imposed-when
performance exceeds or fails to meet specified levels.

1Pub. L. No. 103-62, 107 Stat. 285 (1993).

2Pub. L. No. 105-220, Pub. L. No. 107-110.

While performance accountability mechanisms are fairly new to some federal
grants, they have been used in contracts and loans for some time.
Moreover, lessons learned from performance-based contracting have begun to
inform federal grant design, for example, in the case of WIA grants
requirements. In addition, some states award their federal pass-through
grants to subgrantees as contracts with performance accountability
requirements.3

Given this growing body of experience, you asked us to examine ways to
infuse effective performance accountability mechanisms and practices into
the federal grant process. Specifically, our objectives were to identify
(1) What kinds of challenges to performance accountability exist in
federal grants? (2) What kinds of mechanisms are being used to improve
grant performance, and how? and (3) Given the findings of questions 1 and
2, what strategies can the federal government use to encourage the use of
these mechanisms, as appropriate? For the purposes of this report, we were
interested specifically in the mechanisms by which individuals or
organizations are held accountable for meeting specified
performance-related expectations that are directly tied to a grant.

To address our objectives, we conducted a literature review that included
our prior reports, and interviewed experts in the area of federal grant
and contract performance accountability to identify the: (1) challenges to
performance accountability that exist in federal grants, (2) types of
performance accountability mechanisms-defined as rewards and
penalties-used, and (3) key strategies that appear to encourage the
successful implementation of performance accountability mechanisms. Our
identification of types of mechanisms and strategies was developed by
conducting a content analysis of selected literature from our review that
met our criteria for addressing the issue of accountability. Recognizing
that grants have increasingly assumed features traditionally associated
with contracts, we drew on experiences from both performance-based
contracting and grants to help identify valuable lessons learned that
could inform efforts to improve performance accountability in federal
grants. To illustrate these mechanisms and strategies, and to supplement
our findings and the many case examples identified by our content
analysis, we use relevant case examples found in the literature. We also
selected four additional cases for further in-depth illustrations. These
four cases were selected based on our literature review, interviews with
experts, and reviews of prior GAO work because they are good examples of
where (1) a performance mechanism was present and (2) there is reason to
believe that performance improved. We selected two federal grant programs
and two nonfederal contracts: (1) the federal vocational education grants
authorized by the Carl D. Perkins Vocational and Technical Education Act
of 1998 (Perkins III), which are passed through states to secondary and
postsecondary schools for career and technical education; (2) the federal
Child Support Enforcement (CSE) program, authorized by the Social Security
Act, Title IV, part D, which ensures that children are financially
supported by both parents; (3) the real property management contract
between the Ontario Provincial Government's Ontario Realty Corporation
(ORC) and SNC-Lavalin ProFac, Inc. (ProFac), a private property management
company; and (4) the contract between the Massachusetts Division of
Medical Assistance (DMA) and the Massachusetts Behavioral Health
Partnership (MBHP) for the provision of mental health and substance abuse
services for residents covered by the MassHealth Medicaid program.

3Pass-through grants are federal grants given to state governments that
are subsequently distributed to county, municipal, or township
governments.

To develop the federal grant case illustrations and obtain perspectives on
the strategies we identified, we interviewed federal headquarters and
regional program and finance officials from the federal agencies that
administer the grant programs-the Departments of Education and Health and
Human Services. In addition, we visited selected grantees and subgrantees
from among these programs that federal and state officials identified as
being particularly successful-or as facing particular challenges-with
performance accountability. To develop the contracting case illustrations,
we interviewed, conducted site visits, or both with both contractors and
contracting agencies. For both the grant and contract cases, we reviewed
the authorizing legislation or contract, guidance, documentation, and
prior studies, and interviewed relevant officials to obtain perspectives
on the strategies we identified.

See appendix I for a more detailed discussion of our scope and
methodology.

We conducted our work from December 2005 through August 2006 in offices in
Washington, D.C.; Harrisburg, Lancaster, Norristown, and Philadelphia,
Pennsylvania; Eloy, Glendale, and Phoenix, Arizona; and Boston,
Massachusetts, in accordance with generally accepted government auditing
standards.

                                Results in Brief

Although there are various ways to design grants to encourage performance
accountability, in general, there are three factors that particularly
affect the degree of performance accountability that can be achieved,
including whether a grant (1) includes performance-oriented objectives in
addition to fiscally oriented objectives, (2) operates as a distinct
program or as a funding stream, and (3) supports a limited or diverse
array of objectives. Because design features that encourage performance
accountability can limit state and local grantee flexibility, achieving
these twin goals can be a delicate balancing act, and has implications for
the accountability relationship between levels of government and the
information needed to support accountability. Even in federal grants with
designs that favor performance accountability, grant implementation
challenges related to developing performance goals and measures as well as
collecting and reporting performance data can influence the extent of
performance accountability achieved.

Accountability mechanisms available for use in grants vary widely and can
be financial or nonfinancial in nature. A financial mechanism could reward
performance with increased funding or a onetime bonus payment;
nonfinancial mechanisms include such things as altered oversight or
flexibility. Financial mechanisms also vary the degree of risk sharing
between the grantor and the grantee. Many mechanisms can be employed by
Congress, agencies, or grant recipients at different points throughout the
grant life cycle. Mechanisms are flexible and need to be tailored to
specific situations since not all mechanisms are appropriate to all
situations, and there is no "one-size-fits-all" or "magic bullet" solution
to performance accountability.

Collectively, five key strategies appear to facilitate the effective
design and implementation of performance accountability mechanisms. They
are as follows:

           o  Ensure mechanisms are of sufficient value. The value of the
           rewards and penalties-whether financial or nonfinancial-and the
           cost of improved performance are adequate to motivate desired
           behaviors and provide a meaningful return to both the grantor and
           the grantee.
           o  Periodically renegotiate and revise mechanisms and measures.
           Provide for and use the flexibility to reevaluate performance
           accountability mechanisms and associated performance measures at
           regular, scheduled intervals and allow time to learn from each
           cycle to improve performance.
           o  Ensure appropriate measurement selection. Measures should
           represent performance that is within the grantee's sphere of
           influence, and can reasonably be achieved and evaluated within the
           specified time frame, and should be tested over time to minimize
           the potential for unintended consequences and perverse incentives.
           o  Ensure grantor and grantee technical capacity. Grantors and
           grantees should have the necessary knowledge about performance
           accountability mechanisms and the ability to effectively implement
           them.
           o  Ensure phased implementation. Allow time to design, test, and
           revise measurement systems before linking them to accountability
           mechanisms.

           In addition to these strategies, we noted extensive use of
           partnerships and collaborations and regular and effective
           oversight and feedback, which appeared critical to the success of
           accountability provisions in a third-party environment. We have
           previously reported that these practices are often associated with
           both high- performing organizations4 and organizations that
           effectively used performance information to manage.5

           The experiences with and strategies related to federal grant
           accountability provisions described in this report suggest a
           number of opportunities for Congress and the executive branch to
           improve the design and implementation of performance
           accountability mechanisms. First, a results-focused design can
           help encourage performance accountability in general and
           specifically provide for-or at least not prohibit-the use of
           accountability mechanisms to encourage desired behavior. In
           addition, the use of national program evaluation studies and
           research and demonstration grants can provide valuable information
           to assist in agency and congressional oversight of and knowledge
           about accountability mechanisms. Because credible performance
           information and performance measures form the basis for
           well-functioning accountability provisions, it remains critical
           for Congress and the executive branch to continue to encourage the
           development and use of such measures. Finally, OMB and agencies-as
           well as grantees-can benefit from sharing good practices and
           lessons learned about experiences with performance accountability
           provisions in federal grants, as this is an efficient and
           effective way to increase grantor and grantee knowledge,
           understanding, and use of these provisions.

           OMB, as the focal point for overall management in the executive
           branch, plays a key role in improving the performance of federal
           programs. It uses a number of vehicles, such as Web sites with
           information about performance measures and grants targeted to
           federal agencies and informal workshops and seminars, to encourage
           general performance improvement in federal programs. OMB staff
           told us that focusing specifically on performance accountability
           provisions in grants is necessary and useful, but that to date,
           they have focused their efforts on encouraging and enhancing
           agency capacity to develop high-quality, results-based program
           performance measures since improving the quality of measures and
           data necessarily precedes tying them to accountability provisions.

           We are therefore recommending that the Director of OMB encourage
           and assist federal agencies in working with the Congress to expand
           the effective use of performance accountability mechanisms,
           focusing on the practices in this report, when federal grant
           programs are being created or reauthorized. We further recommend
           that OMB offer opportunities for knowledge transfer among federal
           agencies and encourage agencies to share leading practices and
           lessons learned in implementing grant accountability mechanisms.
           Possible vehicles for the collection and dissemination of this
           information include good practices guides and workshops and Web
           sites such as results.gov, grants.gov, and expectmore.gov.

           On August 22, 2006, we provided a draft of this report to the
           Director of OMB and the Secretaries of Education and Health and
           Human Services. We also provided relevant sections of a draft of
           this report to the grantees and contractors highlighted in this
           report. We received technical comments from all three agencies,
           which were incorporated as appropriate. In addition, OMB agreed
           with our recommendation but suggested we broaden it to address the
           role of federal agencies and Congress in the grant redesign and
           reauthorization process. We agree, and have amended our
           recommendation accordingly.

           Background
			  
			  Grants, along with contracts and cooperative agreements, are tools
           used by the federal government to achieve national priorities via
           nonfederal parties, including state and local governments,
           educational institutions, and nonprofit organizations. Diverse in
           structure and purpose, grants can be generally classified as
           either categorical or block, with categorical grants allowing less
           recipient discretion than block grants. For example, the Community
           Services Block Grant provides funds to states and is sometimes
           passed to local agencies to support a variety of efforts that
           reduce poverty, revitalize low-income communities, and lead to
           self-sufficiency among low-income families and individuals, while
           giving the agencies broad discretion in how the funds can be
           spent. In practice, the "categorical" and "block" grant labels
           represent the ends of a continuum and overlap considerably in its
           middle range.

           Grant funds may also be grouped by their method of allocating
           funds. Formula grants allocate funds based on distribution
           formulas prescribed by legislation or administrative regulation
           and often narrowly define the eligible recipients as state
           agencies. On the other hand, categorical grants are generally
           awarded on a competitive basis to applicants meeting broader
           eligibility requirements.

           Despite substantial variation among grants, grants generally
           follow a similar life cycle and include announcement, application,
           award, postaward, and closeout phases. Once established through
           legislation, which may specify particular objectives and
           eligibility and other requirements, a grant program may be further
           defined by grantor agency requirements. For competitive grant
           programs, the public is notified of the grant opportunity
           announcement, and potential grantees must submit their
           applications for agency review. In the awards stage, the agency
           identifies successful applicants or legislatively defined grant
           recipients and awards funding. The postaward stage includes
           payment processing, agency monitoring, and grantee reporting,
           which may include financial and performance information. The
           closeout phase includes preparation of final reports, financial
           reconciliation, and any required accounting for property.

           Traditionally, grant accountability has referred to legal or
           financial compliance. The Single Audit Act,6 for example, requires
           grantees to conduct an overall financial compliance audit to
           promote accountability. As such, at a minimum all grantees are
           held accountable for sound financial management and use of federal
           funds to support allowable activities. Beyond that, however,
           accountability for performance varies from grant to grant. As
           discussed earlier, this historical focus on financial
           accountability has expanded in response to increasing expectations
           of demonstrable performance and performance accountability for all
           government programs. For example, the Comptroller General's
           Domestic Working Group issued its Guide to Opportunities for
           Improving Grant Accountability, highlighting innovative approaches
           and promising practices in grants management-focused both on
           ensuring grant funds are spent properly as well as achieving their
           desired results.7

           While performance accountability in grants is a relatively new
           pursuit, it has been used in contracts for a number of years. To
           illustrate performance accountability mechanisms and the
           strategies that contribute to their successful design and
           implementation, we examined four cases: (1) the federal CSE
           program, (2) the federal Perkins III Career and Technical
           Education Program, (3) a performance-based contract between the
           Massachusetts DMA and MBHP, and (4) a performance-based contract
           between the Canadian Ontario Realty Corporation (ORC) and ProFac.

           Child Support Enforcement
			  
			  The CSE program was established in 1975 by Title IV-D of the
           Social Security Act (Pub. L. No. 93-647). CSE functions in all
           states and territories through state or local social services
           departments, attorneys general offices, or departments of revenue
           in order to ensure that children are financially supported by both
           of their parents. State programs work toward establishing
           paternity, locating parents, establishing and enforcing support
           orders, and collecting and distributing child support payments.
           The federal Office of Child Support Enforcement (OCSE), an office
           of the Department of Health and Human Services' Administration for
           Children and Families, oversees the development, management, and
           operation of state CSE programs and provides financial support (66
           percent of total operating costs) to states. In fiscal year 2005
           federal expenditures on CSE were $3.5 billion, with states
           spending $1.8 billion. Total collections in fiscal year 2005 were
           more than $23 billion. The total legally owed support for fiscal
           year 2005 was $29 billion, with $17.4 billion of that collected.
           Total arrears (past due payments) for all previous years combined
           was $107 billion. Over $7 billion of those past due payments were
           collected and distributed in fiscal year 2005.

           The Child Support Performance and Incentive Act of 1998 (Pub. L.
           No. 105-200) linked incentive payments to performance, and in
           fiscal year 2005, OCSE made over $450 million in incentive
           payments to states. This act changed the original CSE incentive
           program from awarding incentives based solely on
           cost-effectiveness to awards based on meeting specific performance
           targets in five outcome areas: paternity establishment, order
           establishment, current collections, past due collections, and
           cost-effectiveness. The performance measures and targets are
           defined in the text of the act, which also provides a formula for
           determining the amount of each incentive payment. Additionally,
           the act established an alternative penalty system for those states
           not yet in compliance with the statewide automated data processing
           system required by Title IV-D Sec. 454(A) of the Social Security
           Act. The new incentive program was phased in from 2000 through
           2002.

           Carl D. Perkins Career and Technical Education


           Effective July 1, 1999, the Carl D. Perkins Vocational and
           Technical Education Act of 1998 (Perkins III, Pub. L. No. 105-332)
           amends earlier legislation to evaluate and improve vocational and
           technical education.8 Each year under Perkins III, Congress has
           appropriated more than $1.1 billion in grants to states for career
           and technical education. The Office of Vocational and Adult
           Education (OVAE), an office of the Department of Education,
           administers the grants established in Perkins III, a pass-through
           grant to states, which administer the distribution of the funds to
           local school districts.

           Perkins III defines major roles for OVAE and states in
           establishing performance accountability systems for vocational and
           technical education. States are given the responsibility for
           developing performance measures and data collection systems
           related to four required core performance indicators: academic and
           technical skill attainment, completion, placement and retention,
           and nontraditional participation and completion. OVAE negotiates
           these performance measures with states to ensure that they are
           sufficiently rigorous. States not meeting their performance levels
           for 1 year are required to complete a program improvement plan.
           States not meeting their performance levels for 2 years are
           subject to financial sanctions, although no state has failed to
           meet its overall levels for 2 consecutive years. States have also
           been eligible to receive incentive funds if they exceeded
           performance goals for the Perkins III grant as well as targets
           established by Title I and Title II of WIA. Title I of WIA
           supports workforce investment programs. Title II, also known as
           the Adult Education and Family Literacy Act, provides adult
           education funds to states. Governors have the authority to
           allocate the incentive funds for use in any of the three program
           areas.

           Massachusetts Division of Medical Assistance Contract with the
			  Massachusetts Behavioral Health Partnership
			  
			  Beginning in 1996, the Massachusetts DMA entered into a 5-year
           contract, which was renewed in 2001, with MBHP to manage mental
           health and substance abuse services for roughly 300,000 people
           covered by the MassHealth Primary Care Clinician Plan-part of the
           Massachusetts Medicaid program. Of the individuals covered by the
           plan, more than half are children 18 or younger, including 20,000
           children in the custody of the commonwealth's Departments of
           Social Services and Youth Services.

           The structure of the contract between DMA and MBHP involves a base
           contract, which governs requirements related to administrative and
           medical operations. These requirements continue through the life
           of the contract, or until they are modified through amendments. In
           addition to the base contract, there are performance incentive
           projects that focus on research and development projects. The
           majority of earnings available to MBHP come from the
           organization's successful completion of these contractually
           defined incentive projects, which are renegotiated annually.
           Earnings are achieved only after the successful completion of
           specified goals and objectives, as documented and reviewed by the
           state.

           Ontario Realty Corporationï¿½s Contract with ProFac
			  
			  ProFac, a facilities management company, was awarded a 5-year
           contract in 1999 (since renewed) by ORC to provide facilities
           management services for approximately 30 million square feet of
           space in 2,100 building sites owned by the Ontario government.
           About 280 ProFac managers, engineers, technicians, and support
           staff provide these services.

           The contract between ORC and ProFac links performance to a 10
           percent quarterly management fee holdback: on a monthly basis, ORC
           only reimburses ProFac for 90 percent of its administrative costs,
           retaining the other 10 percent, a "holdback," which ORC returns to
           ProFac on a quarterly basis only if ProFac obtains a sufficient
           level of performance. This contract also links performance to an
           annual share-in-savings arrangement: ORC sets a budget each year
           based on prior years' actual expenditures and budget projections;
           if ProFac spends less than the budget, it is able to share the
           difference, a share in savings, only if it reaches a sufficient
           operational level. ProFac's performance on 30 key performance
           indicators (KPI) determines its operational level. These KPIs are
           accumulated to determine a score in four performance objectives:
           management performance, financial performance, asset integrity,
           and customer service. The performance objectives are scored and
           then weighted according to ORC's priorities to determine a total
           performance rating.

           Trade-offs and Challenges Exist in Ensuring Performance
			  Accountability in Federal Grants
			  
			  The trade-offs and challenges associated with performance
           accountability in federal grants largely depend on several key
           aspects of grant design and implementation. As we have previously
           reported, performance accountability tends to be greater (and
           grantee flexibility lower) in programs with certain types of
           design features. Because design features that encourage
           performance accountability can limit state and local grantee
           flexibility, achieving these twin goals can be a delicate
           balancing act and has implications for the accountability
           relationship between levels of government and the information
           needed to support accountability. Even in federal grants with
           designs that favor performance accountability, grant
           implementation challenges related to developing performance goals
           and measures as well as collecting and reporting performance data
           can influence the extent of performance accountability achieved.

           Grant Design Features Affect the Balance between Accountability
			  and Flexibility
			  
			  Although there are various ways to design grants to encourage
           performance accountability, in general, there are three factors
           that particularly affect the degree of performance accountability
           that can be achieved, including whether a grant (1) includes
           performance-oriented objectives in addition to fiscally oriented
           objectives, (2) operates as a distinct program or as a funding
           stream, and (3) supports a limited or diverse array of objectives.

           As we discussed previously, federal grants have traditionally
           focused on fiscal or legal accountability, such as holding states
           accountable for using federal grant funds to supplement rather
           than to supplant their own spending on a particular activity.
           However, federal grants that also include performance-oriented
           objectives-as well as the provisions that implement them-provide
           the basis for performance measurement and accountability for
           results, and signal a federal role in managing performance over
           the grant. Ideally, both types of objectives would be present in
           federal grants. Performance-related objectives focus on service or
           production activities and their results. For example, the central
           objective of the grants for Special Programs for the
           Aging-Nutrition Services, is to provide nutritious meals to needy
           older Americans to improve nutrition and reduce social isolation.
           In contrast, fiscal or financial assistance objectives focus on
           providing dollars to support or expand activities. Typical fiscal
           objectives include increasing support for meritorious goods or
           underfunded services and targeting grant funding to needy
           jurisdictions. For example, the objective of Title VI Innovative
           Education grants is to provide funds to support local education
           reform efforts. When objectives are purely fiscal, accountability
           to the federal agency tends to focus on fiscal matters, such as
           holding states accountable for using federal grant funds to
           supplement rather than to supplant their own spending on a
           particular activity.

           Even when performance-oriented objectives are present, whether
           federal grants operate as distinct programs or as part of a larger
           funding stream directly affects who can be held accountable and
           for what.9 A grant that operates as a program has performance
           requirements and objectives and carries out specific programwide
           functions through a distinct delivery system, such that
           grant-funded activities, clients, and products are clearly
           identifiable. This type of grant gives the federal agency a role
           in managing performance and makes it easier to obtain uniform
           information about performance attributable to the grant funds. It
           is possible to identify which activities were supported; the
           amount of federal funds allocated to each; and to various extents,
           the results grantees achieved with federal funds.

           In contrast, funds from grants that operate as part of a funding
           stream are merged with funds from state or local sources (and
           sometimes from other federal sources) to support state or local
           activities allowable under the flexible grant. These programs are
           managed at the state or local level, with the federal role limited
           accordingly. When grants are part of a funding stream, it is
           possible to identify which activities federal funds supported and
           the amount allocated to each, but once the grant funds are
           combined with the overall budget for a state or local activity,
           federal dollars lose their identification and their specific
           results cannot be separated out. This is particularly the case
           when the federal share is small, with most funding coming from
           other sources. The program outcome measures available in such
           programs are likely to be for outcomes of the state or local
           service delivery program, not the federal program from which the
           funding originated. Thus, grantees would generally be held
           accountable for overall outcomes, regardless of the funding
           source. For example, projects such as Oregon Option and the
           National Performance Review were designed to promote
           accountability for federal and/or national priorities, regardless
           of the funding source. They encourage grantors and grantees to
           work toward collaboratively developed outcomes. These
           intergovernmental partnerships can be particularly useful when
           funds come from a combination of federal, state, local, and
           private sources, or when the federal funding share is small.

           Federal grants vary along a continuum, at one end supporting a
           single major activity common to all grantees (such as categorical
           grants), and at the other end, allowing unrestricted choice by the
           recipient among a wide variety of allowable activities, (such as
           block grants). Flexibility is narrowest, but accountability to the
           federal level clearest, in programs that focus on a single major
           activity. Flexibility is broadest in programs designed to support
           diverse state or local activities, but finding a common
           performance metric can be extremely challenging since these
           activities can vary considerably from state to state. That said,
           we have previously reported on options for building accountability
           provisions into block grants that help balance states' flexibility
           to select a mix of activities and services that will best allow
           them to achieve a particular national outcome with accountability
           for achieving that outcome. These options include (1) relying on
           state processes both to manage block grant funds and to monitor
           and assess compliance and (2) emphasizing results-based evaluation
           rather than examining specific program or administrative
           activities.

           Implementation Issues Present Further Performance Accountability
			  Challenges
			  
			  In addition to these design features, we have previously reported
           on a number of performance accountability challenges encountered
           in many grant programs during the grant implementation phase.

           Lack of consensus on goals and performance measures: The
           priorities of states, tribes, local communities, and the federal
           government are not always the same. To ensure that grantees work
           toward national priorities, they need to be involved in the
           development of performance goals and measures. Lack of agreement
           on goals and measures-particularly when the federal funding is a
           small portion of the funding stream-could lead to grantees making
           choices that do not necessarily support the achievement of
           national goals.

           Reliance on performance data from state and local partners and
           other third parties: Even if grantees collect data on similar
           activities, outcomes, and services, absent common data definitions
           Congress and program managers will lack comparable information,
           limiting the ability to compare state efforts or draw meaningful
           conclusions about the relative effectiveness of different
           strategies. We have previously reported that agencies relying on
           third parties for performance data also have difficulty
           ascertaining the accuracy and quality of the data. Further,
           programs often rely on state administrative systems for
           performance information. For some programs-such as many of the
           Administration for Children and Families' programs--since final
           reports are not due until 90 to 120 days after the end of the
           federal fiscal year, there is a delay in available data.

           Onerous and inconsistent grant administration processes and
           requirements10: Multiple grants maybe available for the same or
           similar purposes, meaning that federal grant recipients must
           navigate through a myriad of federal grant programs in order to
           find the appropriate source of funds to finance projects that meet
           local needs and address local issues. Sometimes programs meant to
           address common problems have potentially conflicting requirements.
           Variations in performance accountability requirements among these
           grants can limit the degree of performance accountability
           achieved. We have recently reported that while this situation is
           improving because of OMB's efforts to streamline the grants
           application process, problems still exist.11

           Prohibition of performance information collection12: Because
           states are principally responsible for implementing block grants
           at the state level, the block grant statutory prohibitions and
           requirements, and federal regulations and guidance are generally
           kept to a minimum. Sometimes federal agencies are prohibited from
           imposing reporting requirements because they are seen as
           burdensome. Clearly, this limits the extent to which federal
           agencies can oversee grantee performance.

           Nevertheless, even with these trade-offs and challenges, agencies
           have been able to shift toward increased performance
           accountability in federal grants and the use of accountability
           provisions to ensure that grantees achieve real results through
           the programs, activities, and services financed with federal
           funds. The accountability provisions described in this report,
           along with strategies for their effective use, can help address
           the challenges noted above.

           Accountability Mechanisms Can Improve Performance and Performance
			  Accountability
			  
			  We found a number of accountability provisions, specific actions
           that can be taken-that is, rewards given or penalties imposed when
           performance exceeds or fails to meet specified performance
           levels-that Congress, granting agencies, and grantees can use at
           different points in the grant life cycle to improve both grant
           performance and performance accountability. These examples
           demonstrate that accountability provisions can result in
           significant performance improvement and are flexible enough to
           accommodate a variety of situations.

           A Variety of Accountability Mechanisms Exist
			  
			  We found that a wide variety of accountability provisions are
           being used in both grant and contracting situations. A selection
           of these provisions is shown in table 1. This list is not intended
           to be exhaustive; rather, it is meant to illustrate the variety of
           mechanisms available. Some mechanisms may be more appropriate in
           certain situations than others, but all of these mechanisms can be
           used to either encourage improved performance or discourage poor
           performance. For example, public recognition and increased funding
           are two different mechanisms that can both be used to encourage
           and reward good performance. Similarly, mechanisms such as reduced
           funding or increased oversight can be used to discourage or
           penalize poor performance.

4The other attributes of high-performing organizations are a clear,
well-articulated, and compelling mission; a focus on the needs of the
clients and customers; and the strategic management of people.

5GAO, Comptroller General's Forum: High-Performing Organizations: Metrics,
Means, and Mechanisms for Achieving High Performance in the 21st Century
Public Management Environment, GAO-04-343SP (Washington, D.C.: Feb. 13,
2004), and Managing for Results: Enhancing Agency Use of Performance
Information for Management Decision Making, GAO-05-927 (Washington, D.C.:
Sept. 9, 2005).

6Pub. L. No. 98-502.

7Domestic Working Group, Grant Accountability Project, Guide to
Opportunities for Improving Grant Accountability. October 2005. This guide
states that it is designed to provide government executives at the
federal, state and local levels with ideas for better managing grants. The
guide focuses on specific steps taken by various agencies. The intent is
to share useful and innovative approaches taken, so that others can
consider using them.

8On August 12, 2006, the Carl D. Perkins Career and Technical Education
Improvement Act of 2006 (Perkins IV) became Pub. L. No. 109-270. Perkins
IV includes some revisions to the performance and accountability
provisions.

9GAO, Grant Programs: Design Features Shape Flexibility, Accountability,
and Performance Information, GAO/GGD-98-137 (Washington, D.C.: June 22,
1998).

10GAO, Federal Assistance: Grant System Continues to Be Highly Fragmented,
GAO-03-718T (Washington, D.C.: Apr. 29, 2003).

11Pub. L. No. 106-107, the Federal Financial Assistance Management
Improvement Act of 1999 requires OMB to coordinate agency efforts to
streamline the administrative requirements of federal grants and engage
and involve grantees in developing and implementing their reform goals and
implementation plans. The act also requires GAO to evaluate the reform
efforts. See GAO, Grants Management: Grantees' Concerns with Efforts to
Streamline and simplify Processes. GAO-06-566 (Washington, D.C.: July 28,
2006).

12GAO, Block Grants: Issues in Designing Accountability Provisions.
GAO/AIMD-95-226 (Washington, D.C.: Sept. 1, 1995).

Table 1: Examples of Accountability Provisions

              Accountability mechanism  Definition                        
Rewards    Praise                    Public recognition of good        
                                        performance, for example, through 
                                        the press, Web sites, intranets,  
                                        newsletters, hearings, testimony, 
                                        and award ceremonies.             
              Bonus                     Onetime cash payment.             
Rewards or Increase/decrease         Increase or decrease in grantee's 
penalties  flexibility               flexibility by issuing            
                                        administrative, programmatic, or  
                                        financial waivers from            
                                        requirements and restrictions or  
                                        by adding award conditions.       
              Increase/decrease         Manipulate the workload (e.g., case
              workload                  load).                            
              Increase/decrease award   Increase or decrease in the length or
              term                      term of the grant.                
              Increase/decrease         Increase or decrease in the degree of
              oversight                 oversight.                        
              Increase/decrease funding Increase or decrease in the per-unit
              rate                      reimbursement rate (e.g., case rate).
                                        Either partial or full funding can be
                                        based on a unit rate.             
              Increase/decrease funding Increase or decrease in funding.  
              level                     Either the entire award can be tied
                                        to performance or a portion of    
                                        funding above an established baseline
                                        (i.e., an incentive portion).     
                                        Examples include share in savings 
                                        (grantee keeps a portion of dollars
                                        saved) and milestones (payments   
                                        linked to a predefined chronological
                                        series of performance levels      
                                        typically combining process, output,
                                        and outcome measures).            
              Use of past performance   Use past performance of grantee to
                                        inform selection of future        
                                        recipients.                       
Penalties  Reproof                   Public reprimand for poor         
                                        performance, for example, through 
                                        the press, Web sites, intranets,  
                                        newsletters, hearings, and        
                                        testimony.                        
              Reperformance             Grantee must reperform the service at
                                        its own cost to meet performance  
                                        agreements.                       
              Impose financial penalty  Includes a onetime reduction in the
              or sanction               value of an award. Sanctions may also
                                        be in one area to influence actions
                                        in another area (crossover        
                                        sanctions). Also includes suspending
                                        or withholding a payment (temporarily
                                        halting grant payments and/or work),
                                        suspending or terminating the award
                                        (canceling the current grant or   
                                        temporarily excluding grantee from
                                        future awards), or finally, debarment
                                        (permanently exclude grantee from 
                                        future grant awards).             

Source: GAO.

In addition, mechanisms can be either financial or nonfinancial in nature.
A financial mechanism would be an increase in funding or a bonus. For
example, the CSE program employs a financial incentive in the form of a
bonus to encourage states to work toward the program's five performance
goals: states are eligible for a bonus every year based on performance.
Nonfinancial mechanisms would include altered oversight or flexibility.
For example, as part of the National Environmental Performance Partnership
System, the Environmental Protection Agency affords states with high
environmental performance levels greater flexibility in spending their
grant funds.

Financial mechanisms also vary by their degree of risk or risk sharing
between the grantor and the grantee. Grantee risk increases as the amount
of money tied to performance increases. For example, bonuses-money awarded
over and above the base grant amount-represent the least risk, while an
outcome-based milestone payment plan where the entire grant award is based
on performance represents much higher financial risk to the grantee.
Nonfinancial actions, such as altering flexibility or oversight, would be
relatively risk neutral.

Accountability Provisions Can Be Employed at Different Phases of the Grant Life
Cycle

Accountability mechanisms can be used in different phases of the grant
life cycle by different actors, including Congress, granting agencies, and
grantees themselves, and the lessons learned from one grant cycle can be
used to improve a performance accountability mechanism in the next (see
fig. 1). For example, when reauthorizing the CSE program, Congress revised
the original CSE incentive payments, which were solely based on cost
efficiency, to create an incentive program tied to performance measures
that reflect CSE's five key goals: (1) paternity establishment, (2) order
establishment, (3) current collections, (4) collection of payments in
arrears, and (5) cost-effectiveness (design/redesign phase).

Figure 1: Accountability Provisions Can Be Used at Different Points in the
Grant Life Cycle by Various Users

In contrast, performance measures and targets for Perkins III are created
during the implementation phase. Specifically, each state is required by
law to create its own performance measures linked to four core indicators:
(1) student attainment of challenging state-established academic and
vocational technical skill proficiencies; (2) student attainment of
secondary diploma or postsecondary degree or credential; (3) student
placement in employment, pursuit of further education, or both; and (4)
student participation in and completion of vocational technical education
programs that lead to nontraditional training and employment. The
Department of Education periodically negotiates the performance targets
for each state measure (postaward phase).

The use of past performance can inform and improve the recipient selection
process (application phase). Specifically, the Florida Department of
Children and Families has reported considerable success using past
performance in recipient selection-contractors that do not meet their
performance measures and standards are ineligible to be awarded future
contracts.

Other mechanisms, such as altered flexibility or oversight, can be used by
the granting agency-or even the grantee-to encourage improved performance
during the term of the award (postaward phase). For example, according to
the literature we reviewed, Minnesota's Department of Human Services
Refugee Services Section increases its oversight of local agencies if
their performance drops below 80 percent on their key performance
measures, including job placement rates, which nearly doubled over 5
fiscal years.

Importantly, grantees can also use these provisions to extend
accountability to subgrantees and contractors. This is significant because
many federal grants are ultimately passed through states to subgrantees.
Some accountability provisions, such as public award and recognition, can
even be employed by stakeholders or interested parties. For example, the
National Association for State Directors of Career and Technical Education
Consortium annually recognizes high-performing career and technical
administrators and teachers and provides opportunities to share lessons
learned and best practices.

Even when performance accountability provisions are absent from or limited
by a grant's legislation, agencies and grantees may still be able to
include these types of provisions in the terms and conditions of the
grants or subgrants or in contracts as long as the authorizing legislation
does not specifically prohibit their use. OMB Circular A-110 provides that
for grants awarded to nonprofits, a number of accountability mechanisms
may be used-including withholding payments, termination of award, and
"other remedies that may be legally available"-if the grantee materially
fails to comply with the terms and conditions of the award. These terms
and conditions can be specified in federal statute, regulation, assurance,
applications, or the notice of award. For grants to state and local
governments, however, OMB Circular A-102 contains no detailed
accountability provisions and defers to the requirements specified in the
authorizing legislation.

Various authorities govern the use of accountability provisions (see table
2). Provisions set by Congress, such as increased flexibility in the form
of waivers from statutory restrictions, are generally laid out in
authorization or appropriations legislation. As stated earlier, granting
agencies can include accountability provisions in regulations, grant
announcements, the request for proposal, and the notice of award. Grantees
(and subgrantees) can use accountability provisions, such as formal
recognition, to improve their performance internally. For example, the CSE
program in Montgomery County, Pennsylvania, recognizes
performance-improving suggestions from individual employees by publicly
praising and inducting them into the office's "all-star team." These
employees also receive a T-shirt with a picture of a stork-the program's
mascot-with the program's motto Striving Toward Optimizing our Resources
for Kids.

Table 2: Sources and Types of Authorization and Guidance for Performance
Accountability Mechanisms

Authorizing body Authorizing/implementing vehicles                         
Congress         Authorization, appropriations, other legislation          
Grantor          Regulations, announcements, the request for proposal in   
                    the Federal Register, notice of award                     
Grantee          Internal personnel policies and practices, use with       
                    subgrantees and contractors                               

Source: GAO.

Accountability Mechanisms Can Be Tailored to Specific Situations

Selecting appropriate performance measures and linking them to performance
accountability mechanisms is not a one-size-fits-all process; rather,
accountability provisions are tailored to reflect the program's
characteristics. In addition to the range of accountability mechanisms
available, we found a number of ways mechanisms were tailored and combined
to reflect a variety of circumstances. Table 3 describes how measures and
mechanisms can be designed and triggered to either reward or penalize
performance.

Table 3: Examples of Ways to Tailor Performance Measures and Mechanisms

Tailored measure and                                                       
mechanism                 Description
Stretch goals             An action is taken based on reaching a           
                             secondary, higher goal. For example, a grantor   
                             awards the grantee when performance exceeds one  
                             performance target and reaches a secondary,      
                             higher target.                                   
Hurdles/triggers          Specific conditions or performance levels that   
                             must be met before actions can be taken. For     
                             example, once a recipient meets a minimum        
                             performance level or requirement, it becomes     
                             eligible for an award based on performance.      
Dead bands                Ranges of performance are established for which  
                             the mechanism does not provide an award or       
                             penalty. For example, performance achieved       
                             within a certain range is not eligible for an    
                             award or penalty, but performance above or below 
                             that range is subject to them.                   
Step up/step down         Actions are taken based on a number of preset    
                             performance levels. Step up is similar to a      
                             series of stretch goals. For example, a          
                             recipient receives a reward in which the value   
                             is determined by which performance interval it   
                             reached. Conversely, each time a recipient's     
                             performance drops, it is subject to increasing   
                             penalties or deductions.                         
Formula                   Payments are made based on a formula-a           
                             mathematical weighting of a number of factors.   
                             For example, a recipient's entire award or an    
                             incentive portion may be based on a formula      
                             containing a performance component.              
Share in savings/share in Payments represent a share of a specific source  
revenue                   of funds. Share in revenue is used to refer to   
                             situations where performance is defined by       
                             revenue generation and payments are based on     
                             some formulation of revenue generated, typically 
                             a percentage. For example, a recipient           
                             responsible for increasing financial collections 
                             is eligible to receive a portion of the          
                             additional funds collected.                      
                                                                              
                             Share in savings is used to refer to situations  
                             where performance is defined by cost savings and 
                             payments are based on some formulation of cost   
                             savings, typically a percentage. For example, a  
                             recipient that identifies efficiencies that      
                             result in administrative cost savings is         
                             eligible to receive a portion of the savings.    
Milestones                Payments are linked to a predefined              
                             chronological series of performance levels       
                             representing processes, outputs, and outcomes.   
                             For example, a recipient is paid 33 percent of   
                             the performance-based portion of award as each   
                             of three milestones is completed successfully.   
Floating measures         Used to refer to situations where one or sets of 
                             performance measures can be changed during the   
                             term of an agreement. These measures are         
                             selected from a larger set of predefined         
                             performance measures. For example, a grantor     
                             assesses grantee performance on 25 performance   
                             measures, but at any given time provides awards  
                             or penalties based on the performance of a       
                             subset of the measures. The subset the grantor   
                             provides the award or penalty for can change     
                             during the course of the agreement, with         
                             notification.                                    
Indexes                   Used to refer to a situation where individual    
                             performance measures are weighted to create a    
                             single index. For example, a number of measures  
                             are weighted according to priority, and then the 
                             combined weight is used as a single performance  
                             measure.                                         
Variable target           Situation where performance is defined by a      
                             variable or relative measure, such as            
                             performance of a third party in the same issue   
                             area. This method is used, for example, in       
                             situations where performance can be directly     
                             affected by external factors, such as the        
                             economy. For example, grantors assess the        
                             performance of a single grant recipient by       
                             comparing its performance to other recipients of 
                             the same grant.                                  

Source: GAO, based on literature review.

For example, to encourage its contractor, ProFac, to cut costs while
maintaining a high-level of performance, ORC modified a basic financial
incentive to include a share-in-savings feature. ProFac is eligible to
share a portion of the savings if it spends less than its yearly
budget-often referred to as share in savings. To ensure that ProFac does
not cut costs to the detriment of high performance, ORC also requires that
ProFac achieve a performance rating of 80 percent or higher to share in
these cost savings.

The CSE performance measures are an example of a "step up" provision-for
each increasing performance percentage interval there is a corresponding
increase in the incentive percentage paid. Each time a state moves to the
next highest interval, it receives a higher percentage of the incentive
for that measure. Conversely, the alternative penalty procedure for
failure to implement a statewide child support data processing system acts
as a "step down" mechanism. For each year the state fails to implement
such a system, but shows a good faith effort to attempt to do so, the
state will be penalized at increasing intervals-during the first year of
noncompliance, the state will receive a 4 percent penalty, the second year
an 8 percent penalty, the third year a 16 percent penalty, and so on.

     Strategies Support Successful Selection, Design, and Implementation of
                     Performance Accountability Mechanisms

Collectively, five key strategies appear to facilitate the effective
selection, design, and implementation of performance accountability
mechanisms.13 These strategies are

           o  ensure mechanisms are of sufficient value,
           o  periodically renegotiate and revise mechanisms,
           o  ensure appropriate measurement selection and usage,
           o  ensure grantor and grantee technical capacity, and
           o  implement system in stages.

           In addition to these strategies, we noted extensive use of
           partnerships and collaborations and regular and effective
           oversight and feedback, which appeared critical to the success of
           accountability provisions in a third-party environment. We have
           previously reported that these practices are often associated with
           high-performing organizations and organizations that effectively
           used performance information to manage.14

           Ensure Mechanisms Are of Sufficient Value
			  
			  There are a number of factors to consider when designing
           accountability mechanisms that help to ensure the mechanisms are
           of sufficient value and motivate performance improvement. Ensuring
           sufficient value requires that

           o  both the grantor and grantee are able to determine the value of
           the rewards and penalties and the cost of improved performance-be
           they financial or nonfinancial-and provide a meaningful return to
           both the grantor and the grantee and
           o  rewards or penalties should be consistently applied to maintain
           the value of the mechanisms to both the grantor and grantee.

           Understand the Value of Performance
			  
			  According to the literature we reviewed, both the grantor and
           grantee should understand what a particular level of performance
           is worth to them and what it will cost them to achieve that level
           of performance. When the value of performance is not properly
           identified, funds could be wasted and grantees may not respond to
           the mechanism. For example, we found one case where the
           contracting agency offered and ultimately paid a $250,000 bonus to
           a contractor for completing a pipeline 2-1/2 months earlier than
           scheduled. However, because the contracting agency did not
           actually need the pipeline to be completed for several years after
           the original contractual deadline, the contractor paid $250,000
           for a level of performance it did not need. Although the recipient
           responded to the incentive, the contracting agency did not
           properly calculate the value of the performance improvement to the
           agency, resulting in wasted funds.

           For a grantor, considering how accountability provisions support
           its strategic priorities can assist in determining the value of
           performance. The size of the associated rewards and penalties
           should be commensurate with the priority. For example, successful
           pay-for-performance programs reserve large rewards for achieving
           an organization's most important priorities, or those that lead to
           large benefits, and provide smaller incentives for achieving goals
           that reap smaller benefits or are of lesser importance. For
           example, in the health care field, for certain conditions such as
           heart attack or stroke, delays in administering appropriate
           therapy greatly increase the risk of mortality and disability.
           Therefore, the incentives to treat these conditions quickly and
           appropriately should be larger than the incentives for other
           practices that should be encouraged yet produce fewer direct
           effects on mortality and illness, such as avoiding the use of
           ineffective antibiotics to treat the common cold.

           Based on our literature review, it appears that insufficiently
           valued incentives are one of the main reasons that accountability
           provisions fail. When an incentive is of sufficient value, the
           expected return outweighs the expected risk, and recipients are
           motivated to pursue the performance improvement. From 1975 through
           1997 the CSE program included an incentive program that focused on
           cost-effectiveness. States were guaranteed an "incentive payment"
           from 6 to 10 percent of their total collections. In practice, the
           4 percentage point difference between the minimum and maximum
           payment was reportedly not large enough to motivate states to
           increase collections enough to earn the 10 percent bonus. The new
           incentive system, established by the Child Support Performance and
           Incentive Act of 199815 only provides incentive payments to states
           that meet one or more of the act's five outcome-based performance
           goals and associated targets,16 and penalizes states that fall
           below threshold levels in certain areas. A review of the new
           incentive system in a sample of nine states found that the median
           score on each of the five performance measures increased from
           fiscal years 2000 to 2002, the time period that the incentive
           system was implemented.17

           Motivating grantees to work toward federal outcomes is
           particularly challenging in grants where the federal investment is
           relatively small. Officials at Arizona's Department of Adult
           Education, Career and Technical Education Division, told us that
           state funds in joint technological education districts outweighed
           federal funds for career and technical education (CTE) programs by
           more than four to one, and some districts did not want to accept
           federal CTE funds because, in their view, complying with the
           federal performance requirements was not worth the amount of funds
           they would receive. In order to ensure that the financial value of
           the Perkins III grants was large enough to motivate districts to
           meet the Perkins III reporting and performance requirements, the
           Arizona Career and Technical Division requires districts be in
           Perkins III compliance in order to receive CTE-related state
           funds, thereby creating a large incentive for local school
           districts to comply with the Perkins III requirements. Indeed, one
           district we spoke with lost Perkins III funding, but it was not
           until the state linked Perkins III compliance to state funding,
           and the district lost the rest of its CTE funding from the state,
           that the district started to make significant improvement toward
           meeting Perkins III requirements.

           In addition, the grantor and grantee should understand the
           trade-off between the financial risk-the possibility performance
           will not improve sufficiently despite the resource investment-and
           the potential return-what will be gained if performance goals are
           met or exceeded-in order to determine whether to pursue any
           particular performance improvement. Accountability provisions that
           contain financial incentives and sanctions can shift risk between
           the grantor and grantee. That is, the more the grant award depends
           on performance, the greater the financial risk to the grantees: if
           they invest but do not perform sufficiently, they do not get paid.
           Conversely, in grants with limited or no performance
           accountability provisions, the grantor bears the bulk of the
           financial risk, since the grantee would receive the grant funds
           regardless of the results achieved.

           Ensure Effective Distribution
			  
			  The ability of a performance accountability mechanism to influence
           performance also depends on the effective distribution of
           organizational rewards and penalties to individuals within the
           organization who are directly responsible for the desired
           performance.18 For example, Glendale Union School District
           officials provide significant financial incentives to every school
           employee with whom a student has contact, including teachers,
           administrative staff, and other support staff-including the
           maintenance staff and bus drivers. The district's philosophy is
           that all employees influence the school's atmosphere and academic
           achievement and therefore contribute to any success it enjoys.
           Incentive funds are distributed based on a school's performance on
           13 academic, involvement, and satisfaction-related measures.
           According to a district official, the program, started 5 years
           ago, has increased camaraderie and collaboration among school
           employees, which the official said has contributed to academic
           improvement.

           In Pennsylvania, the state passes along a portion of the
           state-earned federal incentive payments to the counties, according
           to each county's proportionate share of the aggregate state CSE
           expenditures and to reflect its relative score for each
           performance measure, following the performance targets defined in
           legislation. Pennsylvania codifies the performance expectations
           and incentive payment procedures through cooperative agreements
           with each county.

           Execute Mechanisms Consistently
			  
			  The grantor must execute the mechanisms consistently and as
           designed to preserve the value of the mechanisms and to avoid
           introducing unnecessary risk. For example, if rewards are not paid
           as promised the grantee could learn that its additional efforts
           are not worth the cost-or risk-and may not make the additional
           effort to improve performance. Similarly, if rewards are paid
           indiscriminately or if penalties are not levied as expected, the
           grantee could learn that no additional effort or investment is
           required in order to benefit. In both cases, the system breaks
           down and the intended value of the accountability provision is
           lost.

           We have reported on an agency with the authority to levy penalties
           for poor performance that resisted doing so. For example, the
           Federal Transit Administration (FTA) has several enforcement tools
           to deal with grantees' noncompliance, including warning letters,
           suspension of funds, and grant termination. However,
           traditionally, FTA had been reluctant to use these tools to
           enforce compliance, opting instead to work with grantees in an
           effort to continually promote transit development. Reviews also
           showed that FTA's oversight was superficial and inconsistent and
           that FTA seldom used its enforcement authority to compel grantees
           to correct weaknesses, even those that were long-standing.
           Consequently, federal dollars had been placed at risk. However, in
           response to our 1992 report, FTA established a new enforcement
           policy, developed detailed guidance on carrying out enforcement
           actions, and has since demonstrated a greater willingness to use
           these actions against grantees that do not comply with federal
           transit requirements. The Department of Defense (DOD), on the
           other hand, has paid billions in incentive and award fees for only
           "acceptable, average, expected, good, or satisfactory"
           performance. Despite paying billions in fees, DOD has little
           evidence to support its belief that these fees improve contractor
           performance and acquisition outcomes. The department has not
           compiled data, conducted analyses, or developed performance
           measures to evaluate the effectiveness of award and incentive
           fees. Using accountability mechanisms in this manner undermines
           their effectiveness as a motivational tool and marginalizes their
           use in holding grantees and contractors accountable for
           outcome-based results.19

           Periodically Renegotiate and Revise Mechanisms and Measures
			  
			  Organizations need to allow for and use the flexibility to revise,
           update, or improve performance accountability mechanisms in order
           to respond to changing needs. In the literature we reviewed, we
           found a number of reasons for why accountability provisions may
           need to be revised. For example, unintended consequences
           associated with performance measures may be discovered only after
           full implementation. Organizational priorities may change.
           Technology may be introduced that substantially alters performance
           expectations. In addition, expectations that were previously
           considered stretch goals can become the norm over time-for
           example, as productivity gains are realized rewarding such
           performance may no longer make sense. Finally, efforts to
           reevaluate and revise should consider whether established
           accountability provisions are still effective at motivating
           performance improvements.

           For example, the DMA/MBHP contract demonstrates a situation in
           which the entire accountability system experienced a revision to
           adjust to contract progression. Incentives in this contract were
           initially designed to motivate operational performance, such as
           processing time for billing, and performance targets were revised
           upward each year as performance improved. This upward revision
           helped ensure that performance continued to improve. Once MBHP's
           performance reached the highest levels of industry performance in
           these areas, further improvements were no longer a priority.

           As a result, DMA and MBHP used the annual review to revise the
           incentive system from motivating operational improvement to
           completing projects designed to improve performance in areas that
           would add value to the services MBHP provides, such as a project
           on providing behavioral health assistance to the homeless.

           There are a number of ways to accommodate the need for periodic
           revision. For example, congressional amendments to or
           reauthorizations of grant programs allow policymakers the
           opportunity to revisit and modify existing provisions and to add
           flexibility for agencies that can lead to improved effectiveness.
           Agencies can include renegotiation and revision policies in
           regulations, guidance, and the terms and conditions of a grant
           award. Providing for periodic revision may be particularly
           important where performance measures are specified in legislation,
           because agency flexibility to respond to changing needs is
           significantly reduced. For example, as we have discussed, the
           Child Support Performance and Incentive Act of 1998 specifies the
           five performance measures, the performance targets, and the
           percentage of incentive payments that states can earn for
           performance. Initially, states made changes and saw improvement in
           these areas. Recently, both state and federal program officials
           have expressed concern about the long-term sustainability of such
           aggressive targets. For example, program officials said that even
           states that have in the past met the 90 percent performance target
           for the paternity measure are concerned because more recent annual
           rates have dropped back down closer to 80 percent. According to
           officials, states initially conducted an extensive caseload
           cleanup to improve performance on the five incentive measures when
           the incentive program was enacted in 1998, and much of the backlog
           of cases that could be addressed relatively easily has been.
           However, since the measures and performance targets are
           legislatively defined and the CSE program is permanently
           authorized, the agency does not currently have the flexibility to
           revise the measures or performance targets.

           In contrast, state agencies, in negotiation with the Department of
           Education, can periodically revise their Perkins III CTE
           performance measures and targets during annual negotiations of
           their state plans. At program introduction, program targets are
           set through the negotiation process between states and OVAE. From
           this process, performance targets negotiated initially reflect a
           realistic level of what states can actually produce. Next, through
           annual application updates, the legislation allows renegotiation
           of performance levels with states. Among other factors, OVAE
           officials attributed the program's success to this ongoing ability
           to renegotiate and revise the program's measures. Although the
           Perkins III legislation is similar to the Child Support
           Performance and Incentive Act of 1998, in that Perkins defines the
           four core indicators tied to the performance measures used in the
           incentive program, it provides flexibility that the Child Support
           Performance and Incentive Act of 1998 lacks. The flexibility to
           revise or update the performance measures is built into the
           Perkins III legislation.

           Accountability systems by their very nature assume that
           performance can be improved. However, performance improvements
           depend on adequate time for and ability of participants to learn
           from prior actions and use what they have learned to improve
           performance from one period to the next.20 Depending upon the
           complexity of the task, this process can take many cycles.
           Therefore, accountability systems should not be abandoned
           prematurely; rather, they should be assessed, revised, and
           improved.

           Ensure Appropriate Measurement Selection and Usage
			  
			  Selecting and using appropriate types of performance measures is
           important to the effective use of accountability mechanisms. We
           have previously reported on general attributes of good performance
           measures, noting that measures should be linked to agency goals
           and missions; be clearly stated; include measurable targets; and
           be objective, reliable, and balanced.21 Specifically, we found
           four of these characteristics that highlight key features of
           performance measures that can help ensure the successful linking
           of performance measures and rewards and penalties:

           o  the performance being measured should be within the recipient's
           sphere of influence,
           o  the performance measures should be suitable to the mechanism
           evaluation cycle, and
           o  the performance measures and performance data should be tested.

           Performance Should Be within Recipientï¿½s Ability and Influence
			  
			  Performance measures tied to rewards and penalties should
           represent performance that can be sufficiently influenced by the
           grant recipient's actions. Absent this linkage, the grantee may
           have little motivation to change behavior to improve performance,
           and the granting agency risks wasting funds by either rewarding
           efforts that cannot reasonably be tied to grantee behavior or
           penalizing a grantee for outcomes that even its best efforts may
           not have prevented. For example, the Temporary Assistance to Needy
           Families (TANF) bonus payments22 rewarded states for reducing
           out-of-wedlock births. Several studies report, however, that there
           does not appear to be a link between the existence of these
           programs, or increases in efforts to deliver program services, and
           the TANF bonus payment. Many state officials perceive the outcome
           measure as inappropriate, relatively difficult to influence, or
           both, and discourage attempts to do so. According to one study,
           several states reported that they did not compete or did not
           continue to compete for the bonus funds because, among other
           reasons, their actions would not sufficiently affect the
           out-of-wedlock birth rate; therefore they directed their efforts
           to activities that were more directly under their influence.

           In another example, the Perkins III CTE program has a financial
           incentive system that assesses state performance through
           performance measures that support its four core indicators-one of
           which encourages participation in and completion of programs
           leading to nontraditional employment.23 State and local officials
           in Arizona said their ability to affect performance for this
           indicator is very limited. They told us that although they have
           tried to address the barriers to nontraditional employment, they
           found that cultural and demographic influences have limited their
           ability to improve performance every year. Because performance has
           not improved as a result of their efforts, they focus most of
           their energy on efforts to improve performance in the other three
           core indicator areas, which reflect performance that is more
           directly under their control.24

           Measures Should Be Suitable to the Mechanism Cycle
			  
			  Measures should assess performance that can be observed, achieved,
           and reported frequently enough to inform the use of awards and
           penalties on a timely basis. For example, an annual reward or
           penalty should be tied to a measure that is also assessed
           annually.

           ORC uses performance measures that can be assessed in a relatively
           short period of time and that support program outcomes. ORC holds
           back 10 percent of ProFac's management fee each month. Each
           quarter, ProFac has an opportunity to earn the holdback on the
           basis of its performance during the prior quarter on 30 KPIs. For
           example, 1 of the quarterly indicators tied to its overall
           customer service objective is the "overall customer satisfaction
           rate with project delivery." The quarterly assessment is based on
           performance information gathered through customer satisfaction
           surveys of local managers and facility management contacts for all
           alteration projects, capital repairs, or both completed in the
           previous quarter. Both ORC and ProFac officials credit the
           frequency of evaluation for motivating ProFac to maintain high
           performance throughout the year.

           OVAE uses the timing of its grant funding distribution cycle to
           its advantage in order to motivate states to meet federal
           performance accountability requirements. OVAE disburses grant
           funds in two pieces: a small portion in July and the remainder in
           October. States that did not provide complete, timely performance
           data, or missed their performance targets in the prior year, may
           have "conditions" put on the July portion of the funding; if
           conditions are not met during that quarter, the October funding is
           withheld.

           Measures and Data Should Be Tested
			  
			  Performance measures that trigger accountability mechanisms should
           be well functioning and time tested before they are linked to
           rewards and penalties to minimize the potential for unintended
           consequences. Although our literature review did not specify how
           long this could take, one study in our review noted that many
           leading companies use and test their measurement systems for years
           before linking them to accountability provisions.

           Performance data should also be tested to make sure they are
           credible, reliable, and valid. Absent these attributes,
           organizations lack the basis for sound decisions about rewards and
           penalties. Data quality is so critical to performance
           accountability and oversight of grants that several organizations
           use it as the principal performance measure for performance-based
           funding. Pinellas County, Florida, alters the case funding rates
           paid to its ambulatory service contractor based on data quality.
           This "altered funding rate" provision links case reimbursement
           rates directly to data quality. For example, data that are
           incomplete, illegible, inaccurate, altered, or lacking evidence of
           medical necessity-and limit the county's ability to claim for
           payment or use its data processing procedures-result in reduced
           reimbursements to the ambulatory service contractor for the
           affected cases. Pinellas County reports that as a result, ongoing
           data quality issues are minimal. In another example, the Child
           Support Performance and Incentive Act of 1998 prohibits the
           payment of financial incentives to states for performance in
           program areas where state data have failed an annual data
           reliability test. This requirement ensures that incentive payments
           are based on reliable and complete performance information.

           Ensure Grantor and Grantee Technical Capacity
			  
			  Grantor and grantee capacity-specifically, the knowledge about
           performance accountability mechanisms and the ability to
           effectively implement them-is critical to the effectiveness of
           performance accountability systems. For example, when the Air
           Force implemented its performance-based contracting program, it
           found that employee training focusing on how the performance-based
           aspects of the contracts should work were most critical.
           Specifically, practices such as providing a step-by-step approach
           to the process that outlined who should be involved at each step,
           how much of their time and effort would be required at each step,
           and what their specific roles and responsibilities would be were
           critical to employees understanding what was needed to create
           mechanisms to improve performance.

           In addition, federal CSE staff in Region III provide a "Child
           Support Enforcement Incentives 101" presentation to state and
           county CSE staff throughout the region to explain how the
           performance measures and incentive payments work. This training
           presentation is tailored to the experience of CSE staff and the
           demographics of the county, state, or both (large urban, rural,
           large interstate caseloads, etc.) but strives to provide a clear
           and consistent message: the everyday activities of CSE staff
           directly affect the amount of child support available to children
           and their families, and drive the amount of incentive payments the
           county specifically, and the state in general, earns. The
           presentation includes interactive exercises to show how each
           employee's casework feeds into outcome-based program results.

           Implement System in Stages
			  
			  Organizations go through a number of stages designing, testing,
           and revising measurement systems before linking them to
           accountability mechanisms. This longer, phased implementation
           allows organizations to ensure the system is effectively designed
           before tying it to rewards and penalties. During these stages,
           organizations can conduct pilot tests, create financial models,
           and conduct behavioral modeling to understand and modify a system
           prior to full implementation. For example, according to one
           expert, the Tennessee Valley Authority completes a "readiness
           test," an assessment of measurement effectiveness and suitability,
           before allowing pay for performance or similar financial incentive
           systems to be pinned to that measure. This helps avoid unintended
           consequences associated with poorly designed measures. Phased
           implementation also allows organizations to adjust to new demands
           on their time and resources; set up or modify data collection
           systems; and ensure the credibility, validity, and reliability of
           the data before they are used to measure performance.

           For example, the CSE incentive program was implemented in three
           stages to allow states to learn about the new incentives and
           performance measures. The five performance areas attached to
           incentives were developed and legislatively defined in 1998. In
           1999, the new data measures were used by the states and audited
           for data reliability for the first time. In year one, one-third of
           the total incentive funds were allocated based on the new formula
           and the remaining funds were allocated based on the old system. In
           year two, two-thirds of the funding was allocated using the new
           system, and the remaining funds were allocated based on the old
           system. In year three, all incentive funding was allocated
           according to the new formula.

           Collaboration and Oversight Also Key to Success
			  
			  In addition to these strategies described above, we saw extensive
           use of partnerships and collaborations and regular and effective
           oversight and feedback. We have previously reported that these
           practices are often associated with high-performing
           organizations25 and organizations that effectively used
           performance information to manage.

           Designing and implementing accountability provisions in a
           collaborative environment can help develop and encourage buy-in
           and support and lead to improvements. For example, Arizona state
           and local CTE officials said the state's focus has shifted from a
           compliance-focused "audit," ensuring performance data were
           properly collected and reported, to a true partnership in which
           state and local officials work together to identify and replicate
           successes, find solutions to challenges, and thereby improve
           performance. State CTE staff spend several days each year meeting
           with local CTE officials and providing regular assistance through
           on-site technical assistance teams, phone calls, and e-mails.

           Oversight and feedback are critical to creating and sustaining
           effective performance accountability provisions. We have
           previously reported on oversight practices, noting specifically
           the value of feedback provided through performance monitoring
           plans and tools such as site visits, document reviews, and
           evaluations. For example, OVAE employs a number of tools to
           provide feedback and assistance to states implementing the Perkins
           III vocational education program. Among these tools are

           o  establishing state guidance that outlines how to meet the
           Perkins III performance requirements,
           o  developing a peer-to-peer mentorship program among states and
           with OVAE to share experiences and good practices,
           o  conducting monthly conference calls with state directors and
           data specialists to discuss challenges and solutions to data
           collection and quality,
           o  offering data quality "institutes" and conferences to share
           performance measurement and data quality and collection practices,
           and
           o  providing technical assistance to states.

           An OVAE official said providing these types of oversight and
           feedback activities generated ideas and discussion to help states
           improve their performance; the state CTE officials with whom we
           spoke agreed.

           Various Opportunities Exist at the Federal Level to Enhance
			  Performance Accountability in Grants
			  
			  The experiences with and strategies related to federal grant
           accountability provisions described in this report suggest a
           number of opportunities for Congress and the executive branch to
           improve the design and implementation of performance
           accountability mechanisms. First, a results-focused design can
           help encourage performance accountability in general and
           specifically provide for-or at least not prohibit-the use of
           accountability mechanisms to encourage desired behavior. In
           addition, the use of national program evaluation studies and
           research and demonstration grants can provide valuable information
           to assist in agency and congressional oversight of and knowledge
           about accountability mechanisms. Because credible performance
           information and performance measures form the basis for
           well-functioning accountability provisions, it remains critical
           for Congress and the executive branch to continue to encourage
           their development and use. Finally, OMB and agencies can commit to
           sharing good practices and lessons learned from experiences with
           performance accountability provisions in federal grants-an
           efficient and effective way to increase grantor and grantee
           knowledge, understanding, and use of these provisions.

           A Results-Focused Design Encourages Performance Accountability
			  
			  Considering grant design features and their implications for
           grantee flexibility and accountability can help policymakers
           provide for appropriate accountability provisions, whatever type
           of grant design is selected. We have previously reported that
           policy options reflected in grant design collectively establish
           (1) the degree of flexibility afforded to states or localities;
           (2) the relevance of performance objectives for grantee
           accountability; (3) whether accountability for performance rests
           at the federal, state, or local level; and (4) prospects for
           measuring performance through grantee reporting and oversight.26
           Under a results-oriented approach, federal policymakers would
           specify national goals and objectives in statute, enact a process
           for establishing them, or adopt some combination of the two. As a
           result, when designing or reauthorizing grants, it is important to
           consider questions like the following:

           o  Is there a need for national performance objectives in this
           policy area? If so, grantees may be required to use uniform
           performance measures-as in the CSE program-to gauge progress. This
           allows for comparisons across grantees, and the supporting
           performance data collected from grantees have the advantage of
           being program specific. However, uniform activities, objectives,
           and measures may not exist or may not be desirable, especially
           under flexible grant program designs. In these cases, Congress may
           instead decide to allow grantees to establish their own program
           objectives. For example, the Child Care and Development Block
           Grant requires states to certify that they have requirements in
           effect to protect the health and safety of children whose child
           care is subsidized by the block grant. These requirements must
           cover the areas of preventing and controlling for infectious
           diseases, physical premise safety, and health and safety training.
           However, the specificity and stringency of these requirements and
           the manner in which they are enforced is left to the states. The
           Perkins III legislation outlines several performance areas and
           requires states to determine the measures they will use to
           measures progress in these statutorily defined areas. Performance
           targets for these measures are negotiated with OVAE. In these
           cases, the federal role in monitoring the grants is generally
           limited to collecting information on state and local program
           efforts and accomplishments as well as evaluating and
           disseminating information on best practices. Another option is to
           grant temporary exemptions (waivers) from certain federal program
           requirements to grantees that demonstrate that the flexibility
           granted can lead to performance improvements. For example, Oregon
           Option is an intergovernmental partnership that seeks to improve
           performance on benchmarks for a broad variety of initiatives,
           including childhood immunization, employment for the disabled,
           wild salmon recovery, juvenile justice, welfare reform, and child
           nutrition, by waiving administrative rules or seeking statutory
           change.
           o  In all cases, what accountability provisions are needed to
           support attainment of national performance objectives? These might
           include constraints on activities and funds distribution or
           operational objectives, standards, and criteria for performance.
           These can be set for the program as a whole or delegated to the
           level of government responsible for program management. Additional
           considerations are as follows: What data are needed for grantee
           accountability, and is it feasible to collect these data from
           providers? Is it possible to collect data at the project level?
           Will the contribution of federal funds be distinguishable from
           state, local, and private funds? If the answer to several of these
           questions is no, is additional information needed for program
           oversight? If so, how will such information be gathered and
           reported? The answers to questions such as these provide the basis
           for setting grantee reporting requirements.

           Careful Use of National Program Evaluation Studies and Research
			  and Demonstration Grants Can Help Assess Mechanism Performance
			  
			  Congress has a number of opportunities to conduct oversight, such
           as when it establishes or reauthorizes a new program, during the
           annual appropriations process, and during hearings focused on
           program and agency operations. Providing for-or at a minimum, not
           prohibiting-performance accountability mechanisms can provide
           timely, targeted performance information and help policymakers
           ensure that federal grants focus on their goals, providing another
           basis for congressional oversight.

           National program evaluations have the potential to answer
           questions about both overall program performance as well as the
           effectiveness of performance accountability mechanisms, in terms
           of their implementation, outcomes, impacts, and
           cost-effectiveness. However, national programwide evaluations are
           expensive in terms of dollars and time and frequently require
           capacities and resources beyond those provided for program
           management. Also, while evaluations of multiple sites provide
           valuable information, programwide evaluation data are typically
           periodic and often cover too few sites to support national
           estimates of performance. In these cases, research and
           demonstration projects often can provide better information on the
           effectiveness of various service delivery methods and approaches.
           Knowledge to support effective practice is well established in
           some subject areas and can be incorporated into program provisions
           (such as service standards) or in companion technical assistance
           or knowledge dissemination programs.

           Encourage Development and Use of Credible Performance Information
			  and Performance Measures
			  
			  As we discussed earlier, performance accountability provisions
           rely on a supply of credible, reliable, and valid data and
           high-quality performance measures. We found organizations that
           recognizing the importance of data quality, tied incentives to
           increasing the supply of this type of information. Unfortunately,
           as our work on PART27 and GPRA implementation shows, the
           credibility of performance data has been a long-standing weakness.
           OMB, through its development and use of PART, has provided
           agencies with a powerful incentive for improving data quality and
           availability. However, improving the supply of performance
           information is in and of itself insufficient to sustain
           performance management and achieve real improvements in management
           and program results. Rather, it needs to be accompanied by a
           demand for and use of that information by decision makers and
           managers alike. Key stakeholder outreach and involvement is
           critical to building demand and, therefore, success. Lack of
           consensus by a community of interested parties on goals and
           measures and the way that they are presented can detract from the
           credibility of performance information and, subsequently, its use.
           While congressional buy-in is critical to sustain any major
           management initiative, it is especially important for performance
           accountability given Congress's constitutional role in setting
           national priorities and allocating the resources to achieve them.
           Recognizing this, policymakers could use incentives to encourage
           program partners to agree on performance measures and targets
           against which performance will be judged.

           Share Good Practices and Lessons Learned
			  
			  We and others have frequently reported on the benefits of sharing
           promising practices and lessons learned to promote performance
           accountability in general in federal programs and program
           partners. We believe sharing good practices related to the
           effective design and implementation of performance accountability
           mechanisms carries similar benefits. As noted earlier, some state
           and local agencies' programs have used this type of information
           sharing among themselves and their grantees and contractors as a
           means of performance improvement.

           OMB, as the focal point for overall management in the executive
           branch, plays a key role in promoting performance improvement in
           federal programs and has developed or contributed to a number of
           tools to share information and encourage improvements to federal
           grants and program performance. For example, www.grants.gov
           includes information on grant opportunities, resources to assist
           in writing grant proposals, and a newsletter highlighting recent
           grant success stories, and www.results.gov has information on best
           practices related to the President's Management Agenda
           initiatives-one of which is Budget and Performance Integration
           (BPI). Successful implementation of BPI depends significantly on
           federal agencies' ability to ensure federal program partners work
           toward program goals and are held accountable for results.
           Expectmore.gov provides information on PART assessments and
           improvement plans; these assessments consider, among other things,
           whether the agency regularly collects timely and credible
           performance information to manage its programs, and whether the
           performance measurements are used to increase accountability.
           OMB's own Web site also contains information on and examples of
           what it considers to be high-quality PART performance measures;
           discussion papers on measurement topics, such as how to
           effectively measure what you are trying to prevent; and strategies
           to address some of the challenges of measuring research and
           development programs.

           OMB hosts a number of standing work groups and
           committees-comprising agency and OMB staff-to address important
           grant-related issues, all of which could accommodate a more
           specific focus on grants accountability provisions. For example,
           OMB's Chief Financial Officer's Council has a standing grants
           policy committee that focuses on grant application and reporting
           streamlining. Agency BPI leads meet monthly and recently developed
           a subgroup to share lessons learned related to efficiency measures
           that balance effectiveness, quality, and cost. They also discuss
           strategies to address the challenges of efficiency measures in the
           grant context and to develop additional guidance for agencies in
           this area.

           In addition, OMB hosted a Block and Formula Grant workshop in
           October 2005 for federal officials aimed at identifying and
           sharing best practices in grants management and performance
           measurement. OMB staff agreed that the workshop was a valuable,
           efficient, and effective way to share information and lessons
           learned and that collectively the participants increased their
           knowledge and understanding of ways to enhance grant performance.
           They also noted that the real difficulty comes in "what to do
           next," in other words, implementing the strategies gleaned from
           these sessions.

           OMB staff told us that focusing specifically on performance
           accountability provisions in grants is necessary and useful, but
           that to date, they have focused their governmentwide efforts
           primarily on encouraging and enhancing agency capacity to develop
           high-quality, results-based program performance measures since
           improving the quality of measures and data necessarily precedes
           tying them to accountability provisions. The Block and Formula
           Grant workshop addressed issues of measurement and accountability,
           and several block grant programs have been working to strengthen
           grantee accountability.

           Conclusions
			  
			  As the challenges of the 21st century grow, it will become
           increasingly important for Congress, OMB, and executive agencies
           to consider how the federal government can maximize performance
           and results. This will be particularly important for federal grant
           program managers, given the significant amount of federal
           resources invested in these tools. Because many national
           objectives can only be achieved through state, local, and
           nongovernmental organizations, enhancing performance
           accountability below the federal level is equally important. In
           this report, we identify a variety of accountability mechanisms as
           well as key strategies to enhance their use. Collectively, these
           can help enhance and sustain performance accountability in grants
           at all levels of government.

           As the cases we described illustrate, rewards and penalties are
           fundamental tools to help drive and motivate desired behaviors,
           but performance accountability mechanisms are not one size fits
           all; there is no universal transferable mechanism applicable to
           all programs. The specific mechanisms used by agencies and
           programs and highlighted throughout this report may not be
           universally adopted by other federal agencies and programs seeking
           to improve their own programs. Nevertheless, many can be tailored
           to specific grant programs, and the key strategies can be adapted
           to address the specific accountability challenges each agency
           faces.

           Like all successful change initiatives, the progress currently
           under way to move from traditional fiscal accountability in grants
           to greater accountability for performance will take time;
           accountability provisions-and the performance measures associated
           with them-can take many years to mature. Although some federal
           programs are well on their way to collecting and reporting on
           reliable, credible, and valid data that support high-quality
           outcome goals agreed to by all program partners, many others are
           still struggling with how to define appropriate outcome measures.
           It will be critical to proceed thoughtfully and implement
           performance accountability in phases, building in enough
           opportunities to learn from mistakes and revise measures and
           mechanisms to reap the benefits of performance management while
           minimizing perverse incentives and unintended consequences.

           As with all challenges, starting with small steps is often the
           best way forward. Accountability provisions can be used to bring
           program partners together to identify common ground. For example,
           programs that struggle with defining appropriate outcome goals,
           measures, and targets may wish to tie incentives to reaching
           agreement on them. Those that struggle with poor data quality and
           data definitions could reward grantees for progress in this area.
           Performance accountability-especially in the early stages-must be
           constructive, not punitive. Even if penalties are employed to
           promote performance accountability, there should be a
           constructive, collaborative approach to performance improvement
           that precedes them. Tying performance to lower risk, nonfinancial
           mechanisms may at first be more acceptable until performance
           measures have been time tested and revised as needed and grantees
           have had time to collect the necessary data to support the
           measures. Above all, a collaborative process that includes
           Congress, the executive branch, and grantees will be critical to
           developing successful performance accountability systems.

           Accountability provisions assume that performance can be
           improved-but this requires information sharing and feedback. OMB
           has a central role in overseeing the performance and
           accountability in the federal government, and has used its role to
           promote general results-oriented performance measurement and
           management practices in federal grants through Web sites,
           guidance, work groups, and workshops. Each of these tools and
           strategies could be expanded on to specifically promote and
           encourage performance accountability in federal grants, both among
           related federal grant programs-programs that have a common
           purpose-and federal grant types-such as categorical grants, block
           grants, and funding streams. Sharing good practices and lessons
           learned and providing feedback on performance are valuable
           practices that can leverage resources to enhance knowledge and
           further performance accountability. Leading practices can be
           shared within and among agencies, grant programs, grantees, and
           even grant types. OMB recognized the value in sharing information
           on performance accountability mechanisms, but has not yet focused
           on this issue.

           Recommendation for Executive Action
			  
			  We are therefore recommending that the Director of OMB encourage
           and assist federal agencies in working with the Congress to expand
           the effective use of performance accountability mechanisms,
           focusing on the practices in this report, when federal grant
           programs are being created or reauthorized. We further recommend
           that OMB offer opportunities for knowledge transfer among federal
           agencies and encourage agencies to share leading practices and
           lessons learned in implementing grant accountability mechanisms.
           Possible vehicles for the collection and dissemination of this
           information include good practices guides and workshops and Web
           sites such as results.gov, grants.gov, and expectmore.gov.

           Agency Comments
			  
			  On August 22, 2006, we provided a draft of this report to the
           Director of OMB and the Secretaries of Education and Health and
           Human Services. We also provided relevant sections of a draft of
           this report to the grantees and contractors highlighted in this
           report. We received technical comments from all three agencies,
           which were incorporated as appropriate. In addition, OMB agreed
           with our recommendation but suggested we broaden it to address the
           role of federal agencies and Congress in the grant design and
           reauthorization process. We agree, and have amended our
           recommendation accordingly.

           We are sending copies of this report to the Director of the Office
           of Management and Budget, the Secretaries of Education and Health
           and Human Services, and other interested parties. We will also
           make copies available to others upon request. In addition, the
           report is available at no charge on GAO's Web site at
           http://www.gao.gov .

           Please contact me on (202) 512-6543 or [email protected] if you
           or your staff have any questions about this report. Contact points
           for our Offices of Congressional Relations and Public Affairs may
           be found on the last page of this report. Key contributors to this
           report are acknowledged in appendix II.

           Sincerely yours,

           Bernice Steinhardt Director, Strategic Issues

           Appendix I: Objectives, Scope, and Methodology
			  
			  The objectives of this report were to identify (1) the challenges
           to performance accountability in grants; (2) the kinds of
           mechanisms that are being used to improve grant performance and
           how; and (3) given the findings of questions 1 and 2, what
           strategies the federal government can use to encourage the use of
           these mechanisms, as appropriate.

           To meet the first and second objectives, we interviewed experts in
           grants and performance management, including individuals from the
           following organizations: the School of Public Policy at the
           University of Maryland, the University of Central Florida, the
           John F. Kennedy School of Government at Harvard University, the
           John C. Stennis Institute of Government at Mississippi State
           University, the Public and International Affairs Department at
           George Mason University, the Political Science Department at the
           University of New Hampshire, Measurement International, and the
           American Productivity and Quality Center.

           Based on our literature review, we developed a coding scheme for
           identifying (1) types of performance accountability mechanisms and
           (2) strategies used to successfully design and implement these
           mechanisms. We used these codes in a content analysis we conducted
           on a subset of the documents we reviewed. We chose the documents
           for content analysis based on the following criteria:

           o  discussed accountability systems, mechanisms, or both,
           discussed general practices that facilitated to the effective use
           of accountability mechanisms, or provided case examples;
           o  published in 1993 or later;
           o  found in major electronic databases; and
           o  published in the United States.

           The content analysis was conducted by two analysts, with the
           second analyst conducting a dependent review. Discrepancies in
           coding were discussed and agreement reached between the two
           analysts. Our analysis produced an inventory of performance
           accountability mechanism types and five strategies used to
           facilitate the effective design and implementation of performance
           accountability mechanisms. See the bibliography for documents
           included in our review.

           To illustrate the mechanisms and strategies identified through our
           content analysis, we used relevant case examples found in the
           literature. To further illustrate the mechanisms and design and
           implementation strategies, we also selected four additional case
           illustrations-two federal grant programs and two nonfederal
           contract cases. These four cases were selected based on our
           literature review, interviews with experts, and reviews of prior
           GAO work because they are good examples of where (1) a performance
           mechanism was present and (2) there is reason to believe that
           performance improved at least in part because of the mechanism.

           To screen and develop the grant case illustrations, we interviewed
           regional and headquarters federal agency officials and officials
           at county/local offices. We also reviewed grant legislation,
           program guidance, and prior studies. To develop contract case
           illustrations, we interviewed officials both from the contracting
           agencies and the contractors and reviewed the contract.

           To address our third objective, we synthesized prior GAO work, and
           we interviewed officials at the Office of Management and Budget.

           We conducted our work from December 2005 through August 2006 in
           accordance with generally accepted government auditing standards.

           Appendix II: GAO Contact and Staff Acknowledgments
			  
			  GAO Contact
			  
			  Bernice Steinhardt (202) 512-6543 or [email protected]

           Acknowledgments
			  
			  Jackie Nowicki (Assistant Director) and Chelsa Gurkin (Senior
           Analyst-in-Charge) managed this assignment. David Bobruff, Katie
           Hamer, and Anne Marie Morillon made significant contributions to
           all aspects of the work. Kate France significantly contributed to
           the initial research and design of the assignment. In addition,
           Tom Beall and Jay Smale provided methodological assistance, Amy
           Rosewarne provided key assistance with message development, and
           Donna Miller developed the report's graphics.

           Bibliography

           American Productivity & Quality Center. Achieving Organizational
           Excellence Through the Performance Measurement System. Houston:
           1999.

           American Productivity & Quality Center. Measure What Matters:
           Aligning Performance Measures with Business Strategy. Houston:
           1999.

           Ashworth, Karl, and others. "When Welfare-to-Work Programs Seem to
           Work Well: Explaining Why Riverside and Portland Shine So
           Brightly." Industrial & Labor Relations Review, vol. 59, iss. 1
           (2005).

           Ausink, John, and others. Implementing Performance-Based Services
           Acquisition (PBSA): Perspectives from an Air Logistics Center and
           a Product Center. A Documented Briefing prepared by the RAND
           Corporation for the U.S. Air Force. 2002.

           Ausink, John, Frank Camm, and Charles Cannon. Performance-Based
           Contracting in the Air Force: A Report on Experiences in the
           Field. A Documented Briefing prepared by the RAND Corporation for
           the U.S. Air Force. 2001.

           Baker, George. "Distortion and Risk in Optimal Incentive
           Contracts." The Journal of Human Resources, vol. 37, no. 4 (2002).

           Banta, Trudy W., and others. "Performance Finding Comes of Age in
           Tennessee." The Journal of Higher Education, vol. 67, no. 1
           (1996).

           Conlon, Timothy. "Grants Management in the 21stCentury: Three
           Innovative Policy Responses." IBM Center for the Business of
           Government: Financial Management Series. Washington, D.C.: October
           2005.

           Courty, Pascal, and Gerald Marschke. "Measuring Government
           Performance: Lessons from a Federal Job-Training Program." The
           American Economic Review, vol. 82, no. 2 (1997).

           Dodds, Dan R. "Performance Incentives Can Spark Greater
           Productivity." School Administrator, vol. 55, iss. 3 (1998).

           Domestic Working Group: Grant Accountability Project. Guide to
           Opportunities for Improving Grant Accountability. Washington,
           D.C.: October 2005.

           Dye, Jane Lawler, and Harriet B. Presser. "The State Bonus to
           Reward a Decrease in `Illegitimacy': Flawed Methods and
           Questionable Effects." Family Planning Perspectives, vol. 31, no.
           3 (1999).

           Eberts, Randall, Kevin Hollenbeck, and Joe Stone. "Teacher
           Performance Incentives and Student Outcomes." The Journal of Human
           Resources, vol. 37, no. 4 (2002).

           Garber, Alan M. "Evidence-Based Guidelines as a Foundation for
           Performance Incentives." Health Affairs, vol. 24, no. 1 (2005).

           Gordon, Stephen B. "Performance Incentive Contracting: Using the
           Purchasing Process to Find Money Rather Than Spend It." Government
           Finance Review, August (1998).

           Hatry, Harry P., and others. How Federal Programs Use Outcome
           Information: Opportunities for Federal Managers. Washington, D.C.:
           IBM Center for the Business of Government, May 2003.

           Hildebrandt, Gregory G. "The Use of Performance Incentives in DOD
           Contracting." Acquisition Review Quarterly, Spring (1998).

           Johnston, Jocelyn M., and Barbara S. Romzek. "State Social
           Services Contracting: Exploring the Determinants of Effective
           Contract Accountability." Public Administration Review, vol. 65,
           iss. 4 (2005).

           Kathuria, Sandeep. "An Overview of Share-in Savings Contracting."
           Contract Management, vol. 45, no. 11 (2005).

           King, Donald C., and Paul D. Tolchinsky. "Do Goals Mediate the
           Effects of Incentives on Performance?" Academy of Management
           Review, vol. 5, no. 3 (1980).

           Lane, Nancy E. "Performance Incentives in The Massachusetts
           Behavioral Health Program." Administration and Policy in Mental
           Health, vol. 32, no. 4 (2005).

           Marcus, Alfred A., Barry M. Mitnick, and Kiran Verma. "Making
           Incentive Systems Work: Incentive Regulation in the Nuclear Power
           Industry." Journal of Public Administration Research and Theory:
           J-PART, vol. 9, no. 3 (1999).

           Martin, Lawrence L. "Making Performance-Based Contracting Perform:
           What the Federal Government Can Learn from State and Local
           Governments." IBM Endowment for the Business of Government: New
           Ways to Manage Series. Washington, D.C.: 2002.

           Martin, Lawrence L. Performance-Based Contracting (PBC) for Human
           Services: A Review of the Literature. Orlando: Center for
           Community Partnerships, University of Central Florida, 2003.

           Metzenbaum, Shelley H. "Performance Accountability: The Five
           Building Blocks and Six Essential Practices." IBM Center for the
           Business of Government: Managing for Performance and Results
           Series. Washington, D.C.: 2006.

           Rand Corporation. Organizational Improvement and Accountability:
           Lessons for Education from Other Sectors. 1st ed. Santa Monica,
           Calif.: 2004.

           Sammer, Joanne. "Making Incentive$ Pay." Industry Week: Leadership
           in Manufacturing. (Cleveland: Penton Media Inc., August 2002).
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           Tsimbinos, John M. "Are You Willing to Pay for Success?"
           Bottomline, vol. 7, no. 6 (1990).

           U.S. Department of Defense, Deputy Under Secretary of Defense for
           Acquisition Reform. Incentive Strategies for Defense Acquisitions.
           Washington, D.C.: 2001.

           U.S. Department of Energy, Office of Inspector General. Inspection
           of Selected Aspects of the Office of River Protection
           Performance-Based Incentive Program. Washington, D.C.: 2001.

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13We identified these strategies through our literature review, and
illustrate them with examples from the literature and from our additional
four case illustrations.

14 GAO-04-343SP , GAO-05-927 .

15Pub. L. No. 105-200.

16The five performance goals are (1) paternity establishment, (2) child
support order establishment, (3) collections on current support due, (4)
collections on arrears, and (5) cost-effectiveness.

17The Lewin Group, Study of the Implementation of the Performance-Based
Incentive System, October 2003.

18GAO, Results-Oriented Cultures: Creating a Clear Linkage between
Individual Performance and Organizational Success, GAO-03-488 (Washington,
D.C.: Mar. 14, 2003).

19GAO, Defense Acquisitions: DOD Has Paid Billions in Award and Incentive
Fees Regardless of Acquisition Outcomes, GAO-06-66 (Washington, D.C.: Dec.
19, 2005).

20GAO, Tax Administration: IRS Needs to Further Refine Its Tax Filing
Season Performance Measures, GAO-03-143 (Washington, D.C.: Nov. 22, 2002).

21 GAO-03-143 .

22The Personal Responsibility and Work Opportunity Reconciliation Act of
1996 authorized the Bonus to Reward Decrease in Illegitimacy Ratio, a
provision intended to motivate states to pursue nonmarital birth
prevention programs. This provision awarded up to $25 million in each of
fiscal years 1999 through 2002 to as many as five states showing the
largest reduction in nonmarital births.

23Nontraditional employment relates to the participation of students in
fields in which their gender constitutes less than 25 percent of the
individuals employed in that field (e.g., female students participating in
automotive repair programs).

24However, as discussed earlier, states can periodically revise their
Perkins III CTE performance measures and targets during annual
negotiations of their state plan.

25The other attributes of high-performing organizations are a clear,
well-articulated, and compelling mission; a focus on the needs of the
clients and customers; and the strategic management of people.

26 GAO/GGD-98-137 .

27OMB developed PART as a diagnostic tool meant to provide a consistent
approach to assessing federal programs during the executive budget
formulation process. PART covers four broad topics for all programs
selected for review: (1) program purpose and design, (2) strategic
planning, (3) program management, and (4) program results. We have
previously reported on PART in GAO, Performance Budgeting: PART Focuses
Attention on Program Performance, but More Can Be Done to Engage Congress,
GAO-06-28 (Washington, D.C.: Oct. 28, 2005).

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