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The American Reinvestment and Recovery Act, signed on Feb. 17 and intended to stimulate the economy, will quickly provide federal grant funds in unprecedented amounts to a wide array of organizations, including the usual suspects: state, local and tribal governments, colleges and universities, and nonprofits of all kinds. But recipients will also include many for-profit companies that do not typically receive federal grants. With many of those private sector companies unfamiliar with the grants process, they should be especially vigilant to the strings attached to federal money. Although traditional projects that either directly or indirectly benefit the public are included in the Recovery Act — such as research, education and health care services to the uninsured — the act also provides substantial funding for which for-profit companies are eligible, such as the development of green technologies. While even the traditional grant recipients will struggle to keep up with the numerous new requirements placed on Recovery Act funds, new entrants into the world of federal grant funding ought to be careful to understand that though the money from the government may be technically free, it comes with plenty of baggage. TREAD CAREFULLY Consider these three things if your organization is about to compete for and receive Recovery Act funds: • Watch the optics. As the folks at American International Group, General Motors, Chrysler, and a host of others are painfully learning, federal assistance comes with a level of public scrutiny unheard of in the private sector. Not only can information about an impending audit of a local organization make its way to the press, when audit reports by the offices of inspector general are completed, they are promptly posted on the Internet, enhancing the negative publicity. In the case of the Recovery Act, audits and other federal scrutiny are inevitable. The act provides for huge increases in appropriations to offices of inspector general and establishes OIG “reviews,” which occur in addition to OIG audits and investigations. The act also establishes a Recovery Act Transparency Board made up of agency inspector generals that possess very broad powers; provides for a Web site to receive citizen complaints involving Recovery Act expenditures; and creates broad whistle-blower protections. Given the recent publicity about the failures of the Securities and Exchange Commission to follow up on complaints about Bernie Madoff, one can expect that even the most far-fetched of complaints will be followed up on by the appropriate OIG or the RATB. Grantees should always keep in mind that what they are doing can easily end up on the front page of their local newspaper. If a particular situation strikes you as the in-house counsel as problematic, investigate further into the use of grant funds and act accordingly. • Remember, grants are not contracts. Recently, we heard a high-ranking federal acquisition official comment that grants are just an outgrowth of the federal procurement system, only a few decades behind in terms of uniformity. Although we certainly agree that uniformity in federal grants administration remains elusive, we can’t agree that grants are simply a variation on the federal contract system. More than 30 years ago, Congress passed the Grants and Cooperative Agreements Act expressly to distinguish between the two. That distinction starts with the purpose of a grant, which is to perform functions for the greater good. The purpose of a contract, on the other hand, is to buy the tools, so to speak, that the government or a grantee needs to perform its public purposes. By way of example, the Navy buys an aircraft carrier to give it one of the tools it needs to provide for the national defense. Similarly, a Head Start grantee buys school supplies, but to help it provide child development services to children living in poverty. The public purposes, defense and healthy child development, are the ultimate aims of Congress, not the purchasing of ships and supplies. This need for a public purpose leads to a second and equally important distinction between grants and contracts. Every federal grant program is based upon a specific statutory authorization that provides that public purpose. There is nothing comparable in the federal contract world. Moreover, appropriations for a grant program can be applied only to the purposes found in those authorizing statutes and must be spent by grantees on costs that are “allowable” for that program under the cost principles issued by the Office of Management and Budget. Even seemingly sacred spending can be questioned. For example in 2005, the comptroller general of the Government Accountability Office reviewed $44 million in post-9/11 grants to New York City. The comptroller found that no matter how worthy the cause, the funds were not expended by New York for the statutory purposes and sought recovery of the $44 million unless Congress duly ratified the use of the funds. It did not matter that the grantor agency allocated the money to New York. Lesson learned: The grantor agency has no authority to approve, and the grantee has no authority to spend, financial assistance funds if those expenditures are not in strict accordance with the statutory purposes. The question of what requirements apply takes on heightened importance in the case of Recovery Act funds. That act is a one-time appropriation of funds with all sorts of additional strings attached. This means that recipients and their attorneys must understand not only the requirements of the authorizing statute that created the grant program, but they must also understand how the additional strings interact with the authorizing statute. For example, one of the strings attached to Recovery Act funds is a new requirement to report quarterly on how the use of those funds created or preserved jobs and aided in the economic recovery. This type of reporting is completely different from the well-established reporting requirements for federal grant programs and is in addition to, not in lieu of, those requirements. These reporting requirements will require grantees to track not only the expenditure of the federal funds but also difficult to quantify matters such as job creation (raising such interesting questions as: What is a job? An individual hired? A position created? What if one person leaves and another takes his or her job? Is that two jobs or one? And so on). Another nuance that exists not in the act itself but in the OMB guidance to agencies on implementation of the act requires federal agencies to include a far-reaching self-disclosure provision in all Recovery Act grants. This imposition of substantive requirements through agency guidance is far too common in the grants world, but is not typical in the contracts world. In this case, the required provision mandates reporting to the appropriate office of inspector general instances where a grantee or sub-grantee has “credible evidence” of fraud or “a criminal or civil violation of laws pertaining to fraud, conflict of interest, bribery, gratuity, or similar misconduct involving those funds.” Recipients of Recovery Act funds would be well advised to have at least a basic understanding of the statute, regulations, and agency guidance that applies to their new-found source of funding. (Note: the Notice of Grant Award will provide the necessary citations to get started.) They should ensure all expenditures further those statutory purposes and the activities identified in the winning proposal. • Create an audit trail. At the most basic level, every grantee must be able to show how it used its federal funds in furtherance of the relevant public purposes. Moreover, federal grants are cost-reimbursement agreements whereby the federal government reimburses the grantee its cost, with no profit or fee in most cases, of conducting the funded program. The rules on what is and is not reimbursable under a federal grant can be rather arcane, and the requirements for documenting the use of grant funds is too. At the heart of the matter is this question: Can our organization show through documentation — not oral explanation — how we used federal grant funds and how those funds furthered the purpose for which they were provided? Grantees must always keep in mind the need for an “audit trail” demonstrating the proper use of federal dollars. In this regard, reviewing the high-risk areas identified by the Health and Human Services OIG in its draft compliance guidance for research grants is a great way to see how other grantees get into trouble. (The information can be found at 70 Fed. Reg. 71312 (Nov. 28, 2005).) Although the draft guidance was written for recipients of grants from the National Institutes of Health, two of the risk areas identified (time and effort reporting and cost allocation) are common problems, in our experience, in many grant programs. Time and effort reporting, i.e. time sheets, are the primary way in which staff costs are reimbursed by a federal grant. Yet many grantees either don’t have their employees do them or, more likely, set up systems for collecting time and effort reports that they fail to monitor and enforce, leaving substantial gaps in their records. Cost allocation systems are systems that ensure that the federal government is paying its fair share and only its fair share of joint or shared costs. One of the most frequent problems in this area is “chasing the dollars.” In other words, accounting practices change to charge costs to whichever program has funds left in it. To be clear, the rules require that costs are charged based on which program received the “benefit” of the expenditure of the funds, not which program has the most money. In sum, organizations should aggressively seek out Recovery Act funds but only if they understand that, as the old adage goes, “you don’t get something for nothing.” Private sector companies must educate themselves on the strings attached to the grant money that they covet, or compliance trouble will likely ensue. Edward T. Waters is the co-managing partner of Feldesman Tucker Leifer Fidell in Washington, D.C., and heads the firm’s grants law practice group. Stacia Le Blanc is a partner at the firm. They may be contacted at [email protected] and [email protected].

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