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GG07 - Maximize Federal Grant Funds

Summary

California does not receive its fair share of federal grant funds. To increase federal grant funds, all of the state's grant activities related to determining eligibility for or receiving federal grants should be consolidated in a single entity.

Background

The federal government distributed more than $362 billion in various formula-driven and special grant funds to state and local entities in Fiscal Year 2001-2002. California's share of total federal grants awarded was 11.8 percent, or $42.7 billion. Ninety-five percent of California's share of grants is received for such programs as Medicaid, highways, welfare, education assistance and nutrition programs. These grants generally use congressionally developed formulas, often based on some combination of population, income, poverty, or similar data. [1] California is simultaneously poor, wealthy, young, urban and immigrant. [2] California's unique population makeup results in formula calculations that do not represent the state's population characteristics. Some formula grants distribute funding based on population data and the choice of the year for which population is analyzed can significantly influence grant amounts. For example, a recent audit conducted by the California Bureau of State Audits found that federal grants received by California in FY 2001-2002 were $5.3 billion less than an allocation based on population share alone. [3] If current population data had been used to compute federal formula grants, California would have received more than $48 billion in federal funds rather than $42.7 billion actually received.

Funding formulas that do not allocate funds based on accurate population data result in lower grant funding for large states like California. For example, the federal Workforce Investment Act provides federal funds to administer the state's job training and workforce preparation system. The funding formula for this program requires that 1999 census data be used to compute California's share of grant funds. If more current available census data were used, California would have received an additional $30 million in FY 2003-2004. [4]

In federal FY 2001-2002, California sent $58 billion more to Washington in federal taxes than the state received back in federal spending. [5] This equates to California receiving 77 cents in federal payments and services for every dollar sent to Washington. [6]

California does not have an established process to analyze and revise the impact that formula grants have on its economy and services provided until after the state's fiscal year ends. [7] This directly impacts various populations served and the level of services provided to them. The federal Homeland Security grant illustrates the point. On March 1, 2003, the federal Department of Homeland Security was created as a new federal agency. [8] It allocates federal grants to help state and local governments and other eligible entities support the activities of the nation's first responders, such as police and fire fighters.

The Department of Homeland Security was directed to award monies to states based on a calculation spelled out in the USA Patriot Act. [9] The formula provides that nearly half of its more than $2 billion be divided equally among the states and other recipients, regardless of size. The remaining funds are distributed based on population. As a result, California received $5 per person to distribute to first responders in the state, while Wyoming received more than $35 per person in FY 2003-2004. [10] California would have seen this coming and perhaps avoided it, had there been an established process to analyze the impact to California and a mechanism for petitioning Congress for equitable allocations. [11]

The Governor's Office of Planning and Research operates a clearinghouse which is supposed to be the single point of contact for review of federal grants or loans. The clearinghouse does not audit the federal grants received by the state for completeness, timeliness or accuracy. It performs a reporting function that amounts to little more than gathering cover pages for selected federal grant opportunities and then reports the information in a bi-monthly electronic newsletter. [12]

In California, each agency independently lobbies for federal grant funding for its own programs. There is no single point of contact for federal grants. [13] A consolidated process dedicated to grant planning and evaluation would allow California to compete successfully with other states for these funds. This process would focus on securing California's fair share of federal grant funds. In addition, California does not have an established process to verify whether all available federal funds are identified, tracked and received.

Indirect cost rate

The federal government pays the direct costs and the indirect costs for federal grants to state agencies and departments. Generally, a direct cost is one that is incurred for one activity. Indirect costs benefit several activities, such as auditing and accounting functions necessary to oversee grants. These costs are reimbursed based on federal regulations and cost accounting principles. Each state department that receives federal funds must prepare an Indirect Cost Rate Plan (ICRP) that is sent annually to DOF. The ICRP is used to seek reimbursement from the federal government for indirect costs. Federal grant award rules provide that if an ICRP is not prepared or available it will impact future awards. The preparation of the ICRP is a complex process that requires fundamental knowledge of allowable federal indirect costs. Incomplete or inaccurate data will compromise the state's ability to fully recover indirect costs.

DOF is responsible for ensuring that the ICRP is accurate and submitted timely, but the one position assigned to oversee the ICRP process is vacant. State law does not authorize DOF to impose penalties on departments that do not submit their ICRP timely or accurately. In addition, in FY 2002-2003 the state only recovered 8 percent of the amount recoverable from the federal government. That translates to a loss of more than $700,000 per year to the state. [14]

Other states-Texas

In federal FY 2002-2003, Texas received 92 cents in federal payments and services for every dollar sent to Washington. [15] Federal funds are the second largest segment of the Texas state budget, accounting for $39.2 billion, or more than one-third of FY 2004-2005 appropriations. This appropriation was an increase of $2.17 billion from the previous fiscal year. [16]

Texas' Office of State-Federal Relations is charged with increasing federal revenue to Texas by monitoring federal activity in Washington and attempting to modify federal decisions in the state's favor. To achieve these goals, the office works with the state's congressional delegation, the governor, the legislature and state agencies. [17]

Texas hired Maximus® to perform its indirect cost rate calculations for federal grants. Denise Francis, Director of State Grants, says the contract has resulted in millions of additional dollars in federal revenue to Texas. [18]

Other states-New York

In federal FY 2002-2003, New York received 85 cents in federal payments and services for every dollar sent to Washington. [19] New York, like Texas, has been increasing its monitoring of the federal dollars it receives. New York's Management and Governmental Relations Unit coordinates the state's fiscal policies and actions affecting federal and local governments, with particular emphasis on shaping the state's response to fiscally distressed communities and federal program initiatives.

Each New York state department is responsible for computing its own indirect cost rate, similar to California's process.

Recommendations

  1. The Governor should consolidate all monitoring activities related to determining eligibility for and receipt of, federal grant money in a special unit within the Governor's Office of Planning and Research.
  2. This unit should monitor federal grant programs and alert the Governor when grant funding opportunities arise or when grant funding inequities may occur. It should also become the single point of contact to communicate with all state departments and agencies on grant-related issues.

  3. The federal grant unit should develop aggressive grant funding policies to ensure that it receives a fair share of the federal grant resources available.
  4. This may include revising current spending to comply with federal regulations, thus allowing California to qualify for more federal dollars.

  5. The Governor should direct all state agencies to utilize the Department of General Services' Revenue Maximization Master Services Agreement to hire professional vendors to obtain a greater number of federal grants whenever applicable.

Fiscal Impact

Increased revenue from the indirect cost rate

DOF collects information from all state agencies and departments to calculate the indirect cost rate. This information is not audited or verified for accuracy. However, DOF projects each year the amount that should be collected from the indirect cost rate. For the past eight years California has collected about 8 percent of the amounts identified as indirect costs. This leaves more than $700,000 per year of uncollected indirect costs. For example, DOF recovered about $60,000 in FY 2002-2003 of the $760,000 projected to be available to reimburse indirect costs. [20] If the indirect costs are not recovered from the federal government or other sources, then General Fund dollars are used to pay for the costs.

Significant potential revenue from federal advocacy

California's share of federal grant monies has declined every year for the past eight years. Each decline results in billions of dollars of federal revenue from California going to other states. California receives 77 cents in federal payments and services for every dollar sent to Washington. [21] Texas receives 92 cents of every tax dollar sent to the federal government. [22] Each percent translates to more than $2 billion dollars in federal payments. [23] If California prioritized federal grant funding similar to Texas, California would garner additional federal grant dollars.

If federal grants were distributed to the states based on population share alone, an additional $5.3 billion would be received by the state. [24] Texas increased the amount of federal funds it received by 6 percent in FY 2004-2005.25 If California achieved the same level of increase that Texas has achieved, it would result in an additional $2.6 billion in federal funds once full implementation has occurred.

Federal Revenue
(dollars in thousands)
Fiscal Year Revenues Cost Net Savings Change in PYs
2004-05 $0 $0 $0 0
2005-06 $1,300,000 $0 $1,300,000 0
2006-07 $1,950,000 $0 $1,950,000 0
2007-08 $2,350,000 $0 $2,350,000 0
2008-09 $2,600,000 $0 $2,600,000 0
Note: The dollars and PYs for each year in the above chart reflect the total change for that year from 2003-2004 expenditures, revenues and PYs.

Endnotes

[1] California State Auditor, Bureau of State Audits, "Federal Funds: The State of California Takes Advantage of Available Federal Grants, but Budget Constraints and Other Issues Keep It From Maximizing This Resource," Report Number 2002-123.2 (Sacramento, California, August 2003), p. 1.
[2] Public Policy Institute of California, "Factors Determining California's Share of Federal Formula Grants, Second Edition," by Tim Ransdell (San Francisco, California, February 2004), p. 40.
[3] California State Auditor, Bureau of State Audits, "Federal Funds: The State of California Takes Advantage of Available Federal Grants, but Budget Constraints and Other Issues Keep It From Maximizing This Resource," p. 1.
[4] E-mail from Greg Riggs, assistant secretary Labor and Workforce Development Agency (May 6, 2004). Provided copies of Internal White-Paper-Federal Funding Information and Trends Impacting California, February 2004.
[5] The California Institute for Federal Policy Research, "California Institute Special Report: California's Balance of Payments with the Federal Treasury, Fiscal Years 1981-2002," (Washington, D.C.), p. 1.
[6] The California Institute for Federal Policy Research, "California Institute Special Report: California's Balance of Payments with the Federal Treasury, Fiscal Years 1981-2002," p. 2.
[7] U.S. Senator Dianne Feinstein, "Citing Lack of Funding for California, Senator Feinstein Seeks Changes in Homeland Security Funding," Washington, D.C., July 25, 2003. (Press release.) Funding for the Homeland Security grant was done in March of 2003.
[8] Public Law 107-296, "Homeland Security Act of 2002," November 25, 2002.
[9] Public Law 107-56, "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA Patriot) Act of 2001," October 26, 2001.
[10] Public Policy Institute of California, "Federal Formula Grants and California, Homeland Security," by Tim Ransdell (San Francisco, California, January 2004), p. 2.
[11] Interview with Tim Ransdell, author, California Public Policy Institute (April 8, 2004). Mr. Ransdell stated that the Homeland Security grant caught California off guard because the impact was not analyzed until after the appropriation.
[12] Interview with Terry Roberts, director, State Clearinghouse, Governor's Office of Planning and Research, Sacramento, California (March 5, 2004); and Department of General Services, "State Administrative Manual," Section 0911, Sacramento, California (March 27, 2003).
[13] The Governor appointed Stacy Carlson as his top Washington lobbyist on January of 2004. However, California does not have one central location for all federal and grant funding activities related to determining eligibility for and receipt of federal funds.
[14] Interview with Wanda Kelly, senior administrative analyst, Fiscal Systems and Consulting Unit, Department of Finance, Sacramento, California (March 17, 2004). Ms. Kelly provided documentation to support amount collected. Information provided is un-audited. Based on interview with Wanda Kelly the information may contain inaccurate amounts.
[15] Tax Foundation, "Federal Taxing and Spending Benefit Some States, Leave Others Footing the Bill" (Washington, D.C., August 2003), p. 3.
[16] Texas Office of State-Federal Relations, "Texas Federal Priorities 108th Congress, 2nd Session" (Washington, D.C., March 2004) p. 1.
[17] Interview with Tony Gilman, director, Office of State-Federal Relations, Austin, Texas (May 27, 2004).
[18] Interview with Denise Francis, director of State Grants, State of Texas, Austin, Texas (March 22, 2004). She did not provide an exact dollar amount collected by Texas for their indirect costs.
[19] Tax Foundation, "Federal Taxing and Spending Benefit Some States, Leave Others Footing the Bill," p. 3.
[20] Department of Finance, "Internal Spreadsheet," Sacramento, California, March 17, 2004 (computer printout).
[21] The California Institute for Federal Policy Research, "California Institute Special Report: California's Balance of Payments with the Federal Treasury, Fiscal Years 1981-2002," p. 2.
[22] Tax Foundation, "Federal Taxing and Spending Benefit Some States, Leave Others Footing the Bill," p. 3.
[23] 77 cents (CA share of federal dollars) - $1 = 23 cents under recovered federal dollars. The 23 cents divided by $58 billion (not given back from the federal government) = $2.5 billion per cent increase. Assumption: each penny increase equates to more than $2 billion dollars.
[24] California State Auditor, Bureau of State Audits, "Federal Funds: The State of California Takes Advantage of Available Federal Grants, but Budget Constraints and Other Issues Keep It From Maximizing This Resource," p. 1. Audited numbers obtained from the audit work papers. The $5.3 billion is based on audit work papers C4.1-2.4/1.
[25] Texas Office of State-Federal Relations, "Texas Federal Priorities 108th Congress, 2nd Session," p. 1. Assumption: Texas increased their federal dollars by 6% in Fiscal Year 2004-2005. The 6% is an increase of total federal dollars allocated to Texas. They went from $37.03 billion in FY 2002-2003 to $39.2 billion in FY 2004-2005. This is an increase of $2.17 billion.