Shared Pool of Knowledge

How does the US government distribute funds?

The Constitution gives the Legislative Branch the “power of the purse.” Article I, section 8: “The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States.”

How do the federal agencies get the money they give out? Congress, every year, passes a series of appropriation bills, to provide funding to federal agencies. The bills specify the amount going to HUD, for example. It specifies the amount available for salaries and benefits. It specifies the amounts available for each HUD program. The appropriation bills typically include Congressional guidance on where to focus the funds. For example, HUD might say 20% of the funds for the HOME Investments Partnerships Program must go to rural service areas. There is a deadline for expenditure, and often, a deadline for commitment.

Then the federal agency obligates the funds. That is, certain amounts are designated to go to specific recipients, either through a formula or a competition for grants. When the agency (or a local government recipient) signs a legally binding contract with an organization to conduct activities, that money is deemed “committed.”

This brief summary explains how the authorization to use federal funds goes from Congress to your local nonprofit. What follows is a brief description of all the different ways these funds are distributed.

Procurement: a contract for goods or services. These are straightforward purchases, either by federal agencies, or by recipients of federal funds. There are laws, policies, and standards for procurement with federal funds. There is a requirement for open competition in the awarding of these contracts. The federal regulations on procurement are found at 2CFR200. There are three basic methods, described in 2CFR200.320: “informal procurement methods (for micro-purchases and simplified acquisitions); formal procurement methods (through sealed bids or proposals); and noncompetitive procurement methods.”

Grants: Grants are awards of funds with no expectation of return, unless the funds are improperly used. There are two main types of grants.

            Formula grants: These grants go to lesser governmental jurisdictions: cities, counties, states, and federally recognized Native American nations. The language in HUD definitions is: “a State or unit of general local government.” [2CFR92.2]

In simple terms, Congress mandates the formula and, each year, appropriates a certain amount of your tax dollars to a specific program. The relevant federal agency then calculates what portion it should send to each eligible jurisdiction.

What’s in the formula? In general, formulas are based on data relevant to the problem the program is addressing. Let’s look at the HOME Investments Partnerships Program, commonly knows as the HOME program. The purpose of this program is to foster the development of affordable housing. The formula for the HOME Program has six factors: number of rental units occupied by persons with low income, number of occupied rental units that have serious problems, number of rental units built before 1950, number of families at or below poverty level.

The civil servants at HUD collect this data for every city above a certain size in the US. Then run that data through the formula to arrive at the percentage of the total HOME allocation that goes to each city.

Some formula grants are called block grants. This means, basically, that the state, or city, is given a block of money to spend on several specified activities, and the local jurisdiction decides how to divide those funds among the eligible activities.

Competitive grants: Some grants are awarded on a competitive basis. These usually are directly between the agency and the nonprofit organizations implementing the programs on the ground. These grants are awarded after an open and informed competition. As with the formula grants, Congress specifies the grants will be awarded competitively, identifies the eligible applicants, the permissible activities, and, often, some parameters for the competition.

The Agency then promulgates the regulations that control the competition, following the requirements from Congress. The announcement of the competition is made through posting in the Federal Register. The notice explains in detail what an application should address, and the weighted factors that will be used in evaluating the applications. For example, it might say up to 20 points for previous experience, up to 10 points for having matching funding, up to 20 points for programs that meet certain standards, etc. The notice also states the deadline for applications.

After the deadline, all applications will be evaluated according to the grading rubric. This is never done by one individual. I think different agencies may have slightly different procedures, but in all of them, every application is reviewed by more than one person, and the awarding of points is never totally up to one person. Grants are awarded, based on that score. For example, if the Agency has a set number of grants, say 5000, then the 5000 top-scoring applications will receive a grant.

Loans and guarantees

            Conventional government loans: I think some government programs distribute funds with loans that are very similar to loans one would get in the private banking world. I am not aware of any of these programs, though I did see on the Small Business Administration website: SBA only makes direct loans in the case of businesses and homeowners recovering from a declared disaster.

            Forgivable loans: These loans are just what the name implies. Under certain circumstances, or, after certain performance requirements are met, all remaining debt is forgiven. In the HOME Program, most of the funds are given out in the form of forgivable loans, to fund the development of affordable rental housing. Some loans are interest-free, some have interest rates close to market rate. (Cities and states have some secretion in the design details of their HOME programs) Most of them are forgivable after 25 (sometimes 40) years, if the developer maintains the units as affordable rentals for the entire time period. Designating the funds as forgivable loans instead of grants makes it easier to recover funds in the recipient does not follow program regulations. It is easier to foreclose on a loan than it is to try to claw back grant funds.

            Loan guarantees: This method is very common, and rarely results in the actual outlay of federal dollars. The loans come from the private sector banks and credit unions. As with all the other methods discussed above, Congress generally specifies the use of loan guarantees for a specific program. The agency writes the regulations and the qualifications required of eligible applicants, in accordance with Congress’s direction. Banks must also qualify to participate as lenders. The government guarantees the loan – that is, tells the bank that they can feel secure in making this loan because, if something goes wrong, the government will make sure the loan is paid in full.

This seldom results in government dollars being paid out. The agency generally has a state or city that actually administers the loan, and possibly, a non-profit agency below them, more directly involved. All loan agreements give the federal agency the authority to collect the funds from the state, which has authority to collect the funds from the city, which has the authority to collect the funds from the NGO, which has authority to collect the funds from the individual or business that took out the loan. If somebody has to pay back a loan, it’s not likely to be the feds.

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This is the first article of the series I plan to write, explaining what I know about how the federal government works, specifically, Executive Branch Agencies. I am interested in your feedback. Is this common knowledge everyone knows? Is this article helpful in understanding how our government works? Did you learn something new? Was it too detailed or too simple? Thanks for any feedback. I’ll apply it to future articles. which will include explanation of all the different levels of oversight and fraud prevention built into the federal government, and an explanation of how federal regulations are written.