GAO Reports on Nonprofit Funding through Sub-Award Contracts

By sys_anon

Created 03/10/09

A recent report [1] to the chairman of the House Budget Committee shows that the federal government relies on networks and partnerships to achieve its goals, and many of these involve nonprofit organizations. The Government Accountability Office (GAO), the investigative arm of Congress, produced the report.

Rep. John Spratt (D-SC), the budget committee chairman, asked GAO to assess (1) the mechanisms through which federal dollars flow to nonprofits and (2) what is known about federal dollars flowing through government programs to nonprofit organizations in Fiscal Year 2006. To address these objectives, GAO conducted a literature review of funding; analyzed data from several sources, including the Federal Procurement Data System (FPDS) and the Federal Assistance Awards Data System (FAADS); and analyzed nonprofit organizations’ roles in 19 federal programs.

GAO found that the federal government uses a variety of funding mechanisms to achieve national priorities through partnerships with nonprofit organizations, and the relationships are sometimes complex and multidirectional. Nonprofit organizations receive federal grant and contract funds both directly and through other entities for performing activities or providing services to particular beneficiaries. Federal grants and contracts may also reach nonprofit organizations by passing through intermediary levels of government, particularly grant funds provided to states or cities that then disburse those funds to nonprofit organizations. Federal funds paid to nonprofit organizations as "fee for service" contracts follow a more complex path, as exemplified by federal health insurance programs that reimburse nonprofit organizations for services they provide to individuals.

Federal loans facilitate nonprofit organizations’ access to capital; for example, they finance the construction of systems to improve electric service in rural areas. Other mechanisms, such as loan guarantees, while not directly providing federal funds to nonprofit organizations, increase access to other sources of funds.

For instance, student loans, while provided to individual students, often make funds available that result in revenues to nonprofit colleges and universities. Similarly, some tax policies (known as "tax expenditures") result in benefits to some nonprofit organizations by either reducing their costs or increasing revenues. Some nonprofits may be able to borrow funds at lower interest rates because of access to tax-exempt bond financing or may receive more contributions because the tax code provides an incentive for taxpayers to give.

Each of these mechanisms provides the federal government with differing levels of influence and oversight over nonprofit selection, performance, and accountability. With direct federal grants and contracts, and with some loans and loan guarantees, federal agencies generally select the nonprofit recipient, directly control the amount of funding provided, and generally monitor nonprofit performance. With other mechanisms, such as tax expenditures and fee-for-service programs, the federal government sets criteria for acceptable recipients but does not directly select or monitor nonprofit performance.

GAO’s analysis of the FY 2006 data on federal funding to nonprofit organizations indicates that grants were directly provided to nonprofits under roughly 700 different programs. Types of activities funded through direct grants to nonprofit organizations included social services and research. For example:

The National Institutes of Health provides grants for extramural research to accomplish its mission related to public health needs. About 84 percent of its budget in Fiscal Year 2007 supported extramural research by researchers at various institutions, including nonprofit colleges and universities, research institutes, and hospitals.

The Administration for Children and Families in the Department of Health and Human Services provides Head Start grants to nonprofit, as well as for-profit, entities. Public and private nonprofits can receive direct grants to provide educational, health, nutritional, and other services to low-income children and families.

The Senior Community Service Employment Program, funded by the Department of Labor’s Employment and Training Administration, provides grants to nonprofit organizations to provide subsidized, part-time work-based training to older workers through employment in the community service sector. Under this program, nonprofit organizations can also be beneficiaries of this subsidized labor.

Federal agencies also contract directly with nonprofit organizations to provide goods or services for the direct benefit of the federal government. Contracts are tracked in FPDS, which GAO found to be somewhat unreliable in categorizing entities as nonprofit, although suitable for providing some order of magnitude.

Due to limitations and reliability concerns with tracking systems, the data presently collected provide an incomplete and unreliable picture of the federal government’s funds reaching the nonprofit sector through various mechanisms, although they suggest these funds were significant in FY 2006. Funding data sources identified the following as approximate amounts of federal funds provided to nonprofits in 2006 under different mechanisms (most sources did not reliably classify nonprofit status of recipients):

$135 billion in fee-for-service payments under Medicare
$10 billion in other types of fee-for-service payments
$25 billion in grants paid directly to nonprofits
$10 billion paid directly to nonprofits for contracts
$55 billion in federal funds paid to nonprofits by states from two grant programs, including Medicaid

GAO could not assess other programs.

In addition, approximately $2.5 billion in loan guarantees and $450 million in loans were issued to nonprofits, and approximately $50 billion in federal tax revenues were foregone due to tax expenditures related to nonprofits.

No central source tracks federal funds passed through to an initial recipient, such as a state, and the nonprofit status of recipients was not reliably identified in FPDS or FAADS.

Factors contributing to data limitations include the nonprofit status of recipients being self-reported and no consistent definition of "nonprofit" across data systems. The development of a system to report funding through sub-awards, currently underway, may enable more complete estimates of funding to the sector in the future. However, until the definition of nonprofit status is improved, accurately determining the extent of federal funds reaching the sector is not possible, leaving policymakers without a clear understanding of the extent of funding to, and importance of, key partners in delivering federal programs and services.

To ensure that accurate information on federal funding provided to nonprofit entities is available, GAO recommended that the Office of Management and Budget (OMB), which is responsible for the tracking website USAspending.gov [2], ensure that its funding information is categorized with a consistent definition of nonprofit organizations. OMB commented that while GAO’s recommendation would likely ensure more consistent data, it could be burdensome for states tracking sub-award data. As USAspending.gov is expanded and enhanced, GAO believes this is an opportune time to explore ways to improve the reliability of sub-award data.

OMB also said that using the Central Contractor Registration (a database used to support registration for procurement awards that is now being expanded to include grants and other forms of financial assistance) would likely offer a consistent way to validate IRS tax-exempt status. It noted, however, that this could also increase the resource burden on states.