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The Bona Fide Needs Rule

B. 10.  Grants and Cooperative Agreements

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Page 5-49

The bona fide needs rule applies to all federal government activities carried out with appropriated funds, not just contracts, including grants and cooperative agreements. B-289801, Dec. 30, 2002; 73 Comp. Gen. 77, 78–79 (1994). Because of the fundamentally different purposes of contracts and grants, a bona fide needs analysis in the context of grants and cooperative agreements is different from an analysis in a contract context. The purpose of a contract is to acquire goods or services; the purpose of a grant is to provide financial assistance. It is for that reason that we do not import into a grant analysis the contract concepts of supplies and services, particularly severable and nonseverable services. In the world of contracts, the analysis focuses, necessarily, on the agency’s need for the goods or services for which it has contracted. In that context, these concepts have particular relevance. The agency’s “need” in the grant context, however, is to make a grant in furtherance of the goals Congress hoped to achieve when it enacted the grant-making authority. In this context, the agency’s “need” is to make a grant, and the grantee’s use of grant funds has no relevance in the assessment of agency needs.

For that reason, a bona fide needs analysis in the grant context focuses on whether the grant was made during the period of availability of the appropriation charged and furthers the authorized purpose of program legislation. B-289801, Dec. 30, 2002. Thus, where a statute authorizes grants to be made for up to 5 years to support childhood education, an award of a 5-year grant fulfills a bona fide need in the year that the grant is awarded even though the 5-year grant is funded with a fiscal year appropriation. Id. However, where the “School Improvement Programs” appropriation for fiscal year 2002 authorizes grants only for “academic year 2002–2003,” only grants providing funding for the 2002–03 academic year are a bona fide need of the fiscal year 2002 appropriation, notwithstanding that the program statute authorizes grants for up to 4 years. Id.

The application of contract concepts to grants has not been without doubt. Prior to our 2002 decision, the application of the severability concept to grants and cooperative agreements had evolved over the years. In cases where agencies did not have explicit multiyear award authority, GAO used to treat grants and cooperative agreements in much the same way that it treated service contracts with regard to severability. In 64 Comp. Gen. 359 (1985), GAO held that since the National Institutes of Health (NIH) grant program did not contemplate a required outcome or product but, instead, sought to stimulate research that would be needed year after year, NIH was required to use appropriations available in the year that services were rendered to fund the grants.

However, GAO significantly departed from that reasoning in a 1988 decision involving Small Business Administration (SBA) grants. In that decision, GAO stated that when reviewing grants or cooperative agreements in the context of the bona fide needs rule, the principle of severability is irrelevant. B-229873, Nov. 29, 1988. GAO held that SBA did not violate the bona fide needs rule when it used its current appropriation on September 30, the last day of the fiscal year, to award cooperative agreements to Small Business Development Centers that would use the money in the next fiscal year. GAO concluded that, unlike a contract, a cooperative agreement satisfies the bona fide need of the agency—to financially assist the awardee—at the time SBA makes the award to the Small Business Development Centers. Id. Thus, the dates on which the Centers actually used the financial assistance are irrelevant for purposes of assessing SBA’s bona fide need. Id.

Building on the SBA decision, GAO held that the Department of Education could use 1-year appropriations to award multiyear grants where the legislation creating the grant program explicitly stated that the grants could last multiple years and even in instances where the legislation did not address the duration of the grants. B-289801, Dec. 30, 2002. The determining factor is that the grants, at the time of award, further the objective of the grant legislation. Thus, GAO held that Education could use its fiscal year appropriations to fund a 4-year grant when the statute directed the agency to award grants “for periods of not more than 4 years.” See 20 U.S.C. § 6651(e)(2)(B)(i). Furthermore, GAO determined that Education could use its fiscal year appropriation to provide 5- and 2-year grants even though the statutes creating the grants were silent with regard to grant duration. See 20 U.S.C. §§ 1070a-21 et seq. and Pub. L. No. 106-554, app. A, 114 Stat. 2763A-33–34 (Dec. 21, 2000). GAO reasoned that, in addition to authorizing awards, the grant statutes conferred broad discretion on Education to help ensure the accomplishment of grant objectives; and it was within that discretion for Education to determine whether the grant objectives would best be accomplished through the use of multiyear grant awards. B-289801, Dec. 30, 2002.  


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