                   Recovery of Interest on Advance Payments
                      to State Grantees and Subgrantees

Section 203 of the Intergovernm ental Cooperation Act exem pts both the states and their subgrantees
   from accountability for interest earned on federal grant funds pending their disbursem ent, and
   such interest may thus not be recovered by the federal governm ent.

                                                                                          February 5, 1982

 M EM ORANDUM OPINION FOR THE COUNSEL TO THE DIRECTOR,
           OFFICE OF MANAGEMENT AND BUDGET

   This memorandum responds to your request that this Office advise you
whether the federal government may recover interest actually accrued by state
grantees and subgrantees on advance payments of grant funds. Section 203 o f the
Intergovernmental Cooperation Act of 1968,42 U .S.C . § 4213 (1976), provides
that “ [s]tates shall not be held accountable for interest earned on grant-in-aid
funds, pending their disbursement for program purposes.” On the basis of this
provision, prior opinions of the Office of Legal Counsel, and three recent
decisions of the Com ptroller General interpreting that provision, we conclude
that the federal government may not recover interest earned by state grantees and
subgrantees on advances of federal grant-in-aid funds.

                                                        I.

   Section 203 of the Intergovernmental Cooperation Act of 1968, 42 U .S .C .
§ 4213, which directs the scheduling of transfers of federal grant-in-aid funds to
states, provides that transfers of grant funds be made as near as possible to the
time of disbursem ent by the states, and exempts states1 from accountability for
interest earned on these funds pending their disbursement. Section 203 provides:

           Scheduling of Federal transfers to the States
           Heads of Federal departments and agencies responsible for ad­
           ministering grant-in-aid programs shall schedule the transfer of
           grant-in-aid funds consistent with program purposes and applica-


   1 D ecisions of the C om ptroller G eneral have in the past required recipients o f federal g rants to return to the
Treasury any interest earned on such grants prior to their use, unless C ongress has specifically precluded su ch a
requirem ent. See 42 Com p. G en 289 (1962) and cases cited therein.


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           ble Treasury regulations, so as to m inim ize the time elapsing
           between the transfer of such funds from the United States Treas­
           ury and the disbursement thereof by a State, whether such dis­
           bursem ent occurs prior to or subsequent to such transfer of funds.
           . . . States shall not be held accountable for interest earned on
           g ra n t-in -a id funds, p en din g their disbursem ent fo r program
           purposes.

42 U .S .C . § 4213 (emphasis added).
   You have questioned the applicability of the exemption contained in § 203 to
interest actually earned by state grantees in view of the A ct’s mandate that federal
grant-in-aid funds not be transferred from the Treasury until such funds are ready
for use by the state grantees, the effect of which would minimize the amount of
interest accrued by the states. In addition, it is your position that even if § 203
does provide an exemption for interest earned by state grantees, the exemption
does not extend to local governmental units which are secondary recipients of
federal grant funds funnelled through the states.
   N otw ithstanding the Act’s purpose to discourage the transfer of federal grant
funds to states in advance of the grantees’ program needs, we cannot ignore the
clear language o f the A ct which exempts states from accountability for interest in
the event that interest is earned prior to states’ disbursement of funds. Dec.
Comp. G en. B - l 96794 (Feb. 2 4 ,1 9 8 1 ); 5 9 Comp. Gen. 218 (1980); Dec. Comp.
Gen. B -171019 (Oct. 16, 1973); Rehnquist, Office of Legal Counsel, “ Recov­
ery o f Interest on Excessive C ash Balances of LEAA Funds Held by States and
Cities” (Nov. 15, 1971 ).2 Moreover, while the question can be raised whether

  2 In his 1971 o p in io n , then Assistant A ttorney G eneral R ehnquist gave a clear and concise account o f the
exem ption provision co n tain ed in § 203 o f th e Act:

           O u r reading o f the legislative h isto ry concerning § 203 and the bro ad er objectives o f the
       Intergovernm ental Cooperation Act o f 1968 as w ell, leads us to [conclude] that Congress exem pted
       th e States from the burden o f accounting for interest on g rant funds to facilitate the new authorities for
       co m m ingling F ederal funds in the g en e ra l accounts of th e States and the new Treasury techniques
       such as the letter o f cred it and sight d ra ft procedures w h ich im plem ented the A ct. We do not read
       these, however, as support for the view that Congress intended to impose penalties on those States
       which accum ulated interest on deposited or invested funds and to require a forfeiture o f that interest
       O n the contrary, the [S enate and H ouse] reports em phasize the expectation that very little interest
       accum ulation is expected. It is clear to u s that this is because an im portant objective o f the legislation
       is to require the Federal G overnm ent to im pose such oversight controls as w ill result in a scheduling
       o f funds to the S tates and so prevent a n y long periods o f d isu se of funds w ith resulting buildups and
       accum ulation o f w indfalls.
           An overall legislative objective is clearly assistance to the States from the Federal Government. In
       its very title the A ct is described as a m easure to “ achieve the fullest cooperation * * * to im prove the
       adm inistration o f grants-in-aid to the States ” For these purposes, am ong others, the States were
       relieved o f a n u m b e r o f the duties w hich theretofore had b u rden ed the adm inistration o f the grant-in-
       aid pro g ram s, such as the requirem ents for m aintaining funds in separate banks and the requirem ent
       o f accounting for any interest earned o n deposits or investm ents
           We w ould agree . . . that Congress never intended to p erm it a State “ to abuse agency and Treasury
       regulations by draw ing excessive am o u n ts o f cash for investm ent p ending disbursem ent and still be
       relieved o f having to account for th e interest earned on th e in v estm en t.'’ T he legislative history
       indicates that C ongress d id not intend that to happen because the Federal G overnm ent was expected
       to prevent it from happening by sp acin g the disbursem ent funds on the basis o f need.
         Perhaps the most persuasive argument against a plan to hold a State accountable fo r interest
       earned is the categorical provision in § 203 stating “States shall not be held accountable fo r interest
       earned on grant-in-aid funds, pending their disbursement fo r program purposes .” We do not fin d a
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this exemption applies to local governmental units which are subgrantees of the
states, both this Office and the Com ptroller General have examined this issue,
and neither has read § 203 to permit the federal government to recover interest
earned by local governmental units receiving federal funds as subgrants from the
states. See Dec. Comp. G en. B-196794 (Feb. 24, 1981); 59 Comp. Gen. 218
(1980); Dec. Comp. Gen. B—171019 (Oct. 16, 1973); Ulman, Office of Legal
Counsel, “ Issue Raised by Conflicting Opinions Concerning Interest Earned on
Grant Funds by Local Governments” (Mar. 12, 1974); Office of Legal Counsel,
Internal Action M emorandum (Feb. 19, 1974). But see Rehnquist, Office of
Legal Counsel (Nov. 15, 1971), supra.

                                                          II.

   This Office first considered the applicability of the § 203 exemption to
subgrantees of states receiving federal grant-in-aid funds in a 1971 opinion
issued by Assistant Attorney General Rehnquist to the Administrator of the Law
Enforcement Assistance Administration (LEAA). See Rehnquist, Office of Legal
Counsel (Nov. 15, 1971), supra. In that opinion Assistant Attorney General
Rehnquist noted that § 203 of the Act speaks only of relief to “ States,” a term
which is defined in Section 102 of the Act as

           any of the several States of the United States, the District of
           Colum bia, Puerto Rico, any territory or possession of the United
           States, or any agency or instrumentality of a State, but does not
           include the governments of the political subdivisions c f the State.

42 U .S.C . § 4201(2) (emphasis added). Because local governmental units are
not encom passed by this definition, he concluded that local governmental units
receiving federal funds as subgrantees of the states were not exempt from the
general requirement that interest earned on federal funds be returned to the
United States Treasury:

           [D]espite the Congressional intention to discontinue “ future ap­
           plication” of the interest accountability “ principle” (H. Rept.
           No. 1845, 90th C ong., Aug. 2, 1968) the specific mention of the
           States in § 203 without any express legislative relief to the cities
           and other local units leaves unchanged the general rule calling for
           continued accountability by the latter, whether funds are received
           directly or by subgrant from a State. Although we are not aware of
           any reason for the distinction in § 203 between “ States” and
           “ political subdivisions,” it nevertheless exists, and accordingly

        contradiction to that clear statement in the Act nor in its legislative history
R ehnquist opinion at 5 - 6 (em phasis added) Because this Office has continued to m aintain the view s expressed in
A ssistant A ttorney G eneral R ehnquist's 1971 opin io n , w hich are also consistent w ith subsequent decisions b y the
C o m p troller G eneral, we do not find it necessary to re-analyze in this opinion the applicability o f § 203 to state
grantees


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             we thin k that as a m atter of law the distinction must be
             m aintained.
 Rehnquist opinion at 7.
    In strictly construing the term “ State” in the Act without reference to the A ct’s
 legislative history, the Rehnquist opinion failed to distinguish local governmental
 units which receive grant-in-aid funds directly from the federal government from
those which are secondary recipients of federal grant funds, receiving federal
funds as subgrantees of the states. In view o f the A ct’s purpose to assist the states
by facilitating the transfers o f federal grant funds, as well as by relieving the
states of various administrative and accounting duties, we believe that this
distinction is critical to the A ct’s implementation. As subsequent decisions of this
Office3 and the Comptroller G eneral have m ade clear, a requirement that local
governm ental units receiving federal grant funds as subgrantees of the states be
held accountable for interest earned on these funds would necessarily require
state grantees, in contravention of § 203, to be responsible for ascertaining and
securing the interest earned by their local subgrantees. In the case of direct
federal grants to local governmental units, however, state grant administrative
m achinery is in no way implicated— in these cases, o f course, local grantees are
directly accountable to the federal government for interest earned on federal
grant funds prior to their use. S ee Dec. Comp. Gen. B-196794 (Feb. 24, 1981);
59 Comp. G en. 218 (Jan. 17, 1980); U lm an, Office of Legal Counsel, “ Issue
R aised by Conflicting Opinions Concerning Interest Earned on Grant Funds by
Local G overnm ents” (Mar. 12, 1974); Dec. Comp. Gen. B -171019 (Oct. 16,
1973).
   In 1973, the Com ptroller G eneral considered the issue of interest accountabil­
ity by subgrantees o f the states and concluded that “ political subdivisions
receiving Federal grants-in-aid through State governments are entitled to retain
moneys received as interest earned on such Federal funds.” Dec. Comp. Gen.
B -1 7 1 0 1 9 at 1 (O ct. 16, 1973). In reaching this conclusion, the Comptroller
G eneral noted that neither the language nor the legislative history of § 203 of the
Intergovernm ental Cooperation A ct differentiates between grants which the
states will disburse themselves and grants involving funds which the states will
subgrant to local governm ents.4 The Com ptroller General stated:
    1    See U lm a n , O ffice of Legal Counsel, “ Is su e Raised by C onflicting O p inions C oncerning Interest E arned on
G ran t R inds by L ocal G o v ern m en ts’' (Mar 12, 1974) O n Mar. 12, 1974, A cting A ssistant A ttorney G eneral U lm an
responded to a request by LEA A to resolve th e differences betw een the 1971 R ehnquist opinion an d a 1973 decision
by th e C o m p tro lle r G eneral w hich concluded that local governm ental u nits receiving federal grant funds as
sub g ran ts from th e states w ere perm itted to re ta in the interest ea rn e d on those funds. In his letter, U lman deferred to
the ju d g m e n t o f th e C o m p tro lle r G eneral reg ard in g the proper interpretation o f § 203, noting that " th e m atter .
involve[d] th e disp o sitio n o f funds in the settlem ent o f a public accoun t, a m atter w ithin [the C o m ptroller G en eral’s]
official ju risd ic tio n .      ” U lm a n , Office of L e g al C ounsel, supra at 3 See also Office o f Legal C o unsel. Internal
A ction M em o ra n d u m (F eb 19. 1974) (discussing issues to be addressed in the Mar. 12, 1974, letter to LE A A )
   4 T h e C o m p tro lle r G eneral referred to a F eb . 19, 1969, m em orandum from the A ssistant G eneral C ounsel for
E d ucation, D ep artm en t o f H ealth , Education a n d W elfare (H E W ) to the A ssistant C om m issioner for A dm inistra­
tio n . H EW , w hich also co n c lu d ed that the interpretation of § 203 that is m ost co n sisten t w ith the Intergovernm ental
C o o p era tio n A c t’s p urposes and legislative h isto ry requires that all federal g rant funds transferred to states be
ex em p t from in terest accountability, without reg ard to w hether the funds are further subgranted by the states:

           (T he la nguage o f § 203] quite literally instructs us not to hold a S tate agency accountable for
        interest earn ed on g ran t funds pending their disbursement. T h ere is n o exception to this instruction
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           Thus, it seems clear to us that States are not to be held accountable
           for interest earned on any grant-in-aid funds pending their dis­
           bursem ent, whether or not the States intend, or are required by the
           terms of the grant, to subgrant these funds. To hold otherwise
           would, of course, require the States to assume the burden of
           accounting for the presumably relatively small amounts of inter­
           est which would be earned on these funds in contravention of the
           legislative intent behind the last sentence in section 203.
Id. at 8.
   This analysis of § 203 was reaffirmed by the Comptroller General in 1980,
with respect to /ton-governmental subgrantees of state recipients of federal
grants. See 59 Comp. Gen. 218 (Jan. 17, 1980). The Com ptroller General
concluded that “ the same rationale that justifies exempting governmental sub­
grantees from rem itting to the Federal grantor agency interest earned on Federal
grant funds received from the States, applies equally to non-governmental sub­
grantees.” Id.
   Again in 1981, the Comptroller General reiterated his interpretation of § 203
as permitting subgrantees of federal grants to retain the interest earned on funds
received by them through the states. See Dec. Comp. Gen. B -196794 (Feb. 24,
1981). The Com ptroller G eneral’s 1981 decision was prompted by a request from
the Office of M anagement and Budget (OMB) to reconsider the current reading
of § 203 in light of the difficulties that it poses for sound cash management by the
various federal grantor agencies. OMB was, and continues to be, concerned that
§ 203 provides an incentive to states and their subgrantees to draw on their grant
funds prematurely to accrue “ free” interest, and thereby frustrate the mandate of
Treasury C ircular 10755 against excessive cash withdrawals. While the Com p­
       for funds that ea rn interest pending their disbursem ent by a local educational agency, o r any o ther
       agency
          To depart from this plain reading o f § 203 w ould require som e clear indication o f a d ifferent
       legislative intent in its enactm ent. N o such indication is apparent. O n the contrary, as th e floor
       m anager o f the H ouse bill, M r R euss, pointed out—
             T he first substantive title— title II— calls for im proved adm inistration o f grants-in-aid to
             the States * * * In addition it w ould relieve the States from u nnecessary and outm oded
             accounting procedures now in effect and the m aintenance o f separate bank accounts w hile
             protecting the n g h t of the executive branch and the C om ptroller G eneral to audit those
             accounts
          R elief from “ unnecessary * * * accounting procedures” is consistent w ith suspension o f the rule
       requiring the S tates to account for interest earned on grant funds, regardless o f w hat agency o f the
       State may be in possession of those funds at the tim e that such interest accrues. The effect c f excluding
       political subdivisions from the term 'State' must be understood merely to withhold interest fo r -
        giveness in programs in which a local educational agency is directly accountable to the Federal
        Government.
D ec C om p G en B -1 7 1 0 1 9 (O ct. 16, 1973) (em phasis added)
   5 Treasury C ircular 1075 requires th a t1
        Cash advances to a recipient organization shall be lim ited to the m inim um am ounts needed and shall
        be tim ed to be in accord only w ith the actual, im m ediate cash requirem ents o f the recipient
        organization in carry in g out the purpose of the approved program or project T h e tim ing an d am ount
        o f cash advances shall be as close as is adm inistratively feasible to the actual disbursem ents by the
        recipient organization for direct program costs and the proportionate share o f any allow able indirect
        costs

3 1 C .F R § 205 4 ( 1 9 7 8 ) See also S. R ep N o 29, 96th C ong , 2d S ess (1980) o n the S upplem ental A p p ro p n a-
                                                        C o n n n u ed

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troller G eneral was sympathetic to the concerns expressed by OMB and indicated
that § 203 is being reassessed in light of administrative changes that have taken
place since the legislation was passed in 1968, he nevertheless concluded that

             [a]s long as section 203 rem ains in e f f e c t. . . we see no basis for
             changing our ruling even if this is an obstacle to better cash
             m anagem ent. However, we should point out that our decision
             does not preclude agencies from com plying with the three steps
             m entioned by the Senate Com m ittee on Appropriations, includ­
             ing “ [in itiatin g immediate recovery action whenever recipients
             are found to have drawn excess cash, in violation of Treasury
             C ircular 1075.” S. Rep. No. 9 6 -8 2 9 , 96th C ong., 2d Sess. 14
             (1980). T hus, the agencies should monitor their grantees draw of
             cash and recover any excess.

Id. at 2.
   O ur own reading of § 203 of the Intergovernmental Cooperation Act o f 1968,
in light o f its legislative history, supports the foregoing analyses of the Comp­
troller G eneral. W hile we are m indful of the position taken by this Office in the
 1971 Rehnquist opinion, we believe that the A ct’s legislative history, and the
accom panying statem ents of the A ct’s purposes, cannot support the narrow
interpretation of “ State” accorded § 203 by that opinion. To exempt state
grantees from the interest accountability requirement while requiring that they
m onitor and collect interest accrued by their .jwbgrantees would reimpose the
very adm inistrative and accounting burdens of which the Act was intended to
relieve the states.6 Although the Rehnquist opinion did not appear to contemplate
such a result, it nevertheless seem ed com pelled by its narrow reading of “ States”
to distinguish federal grant funds which are disbursed by the states for state
program m ing needs from those funds which are disbursed by the states to their
political subdivisions for local program m ing needs. In view of the A ct’s overall
legislative objective of assisting the states by improving the administration of
grants-in-aid— including the facilitation of grant fund transfers, and relieving
states o f the burdens of maintaining grant funds in separate bank accounts and
accounting for interest earned o n deposits or investments— it would make little
sense to im pose upon states th e far m ore difficult task of accounting for the

tions and R escission B ill, 1980, directing all federal agencies to “ take im m ediate steps to assure com pliance w ith
Treasury C ircu lar 1075“ b y
        (1) Review ing th e p erio d ic reports filed by recipients to ascertain w hether they are draw ing and
        holding cash in ex cess o f their cu rren t needs,
        (2) A uditing a sufficient number of recip ien t accounts to determ ine w h eth er they are filing accurate
        reports on cash m han d ; and
        (3) Initiating immediate recovery action whenever recipients arefo u n d to have drawn excess cash, in
         violation o f Treasury Circular 1075.
S. R ep N o. 829 at 14 (em phasis added).
   6 O f co u rse, th is burden w ould not be im p o se d on the states in cases w h ere federal grant funds are transferred
directly from the federal g ran to r agencies to lo c al governm ental units, w ith o u t being funnelled through the states.
A ll prior o p inions of th e C o m p tro lle r G eneral an d the Office of Legal C o u n sel, including the R ehnquist op in io n , are
in agreem ent that in such ca ses, the local g ra n t recipients are responsible d irectly to the federal grantor agency, and
are not ex em p t from in terest accountability b y operation o f § 203.


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interest earnings of their subgrantees when the states themselves are exempt from
accountability for their own earnings. Thus, we believe that, consistent with the
purposes of the Act, § 203 is properly interpreted to exempt interest accountabil­
ity on all federal grant-in-aid funds that are transferred to the states, regardless of
whether such funds are disbursed by the states for their own programming needs
or subgranted to local governmental units.
   While we are sympathetic to the cash management concerns expressed by
OMB, we believe that the Act clearly places the responsibility for implementing
sound fiscal policies with respect to federal grant funds with the federal grantor
agencies. Section 203 requires the heads of federal departments and agencies
who are responsible for administering grant-in-aid funds to schedule the fund
transfers in a m anner that is “ consistent with program purposes and applicable
Treasury regulations, so as to minimize the tim e elapsing between the transfer of
such funds from the United States Treasury and the disbursement thereof by a
State. . . .” 42 U .S .C . § 4213.

                                              T h e o d o r e B. O l s o n
                                            Assistant Attorney General
                                             Office of Legal Counsel




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