The Trouble with the "Pass-the-Hat" Funding Model for Government Technology Projects

Federal information technology (IT) spending is approaching $80 billion per year, and debate is swirling about who will pay for new government technology projects and how they will do so. The Government Accountability Office (GAO) recently examined one of the ways new projects are paid for: the “pass-the-hat” model, in which federal agencies contribute some of their funds to help support projects.

Rather than using funding expressly designated by Congress, a project under a pass-the-hat model is funded by contributions from other purpose accounts of multiple agencies, frequently prorated based on agency size or use. This model is different from “fee for service,” which also involves agency payments but is usually in return for specific services, such as payroll.

Many current transparency tools, such as USAspending.gov and Data.gov, do not utilize a pass-the-hat model, but instead are funded from one central fund, the Electronic Government Fund (E-Gov fund), which is annually appropriated by Congress to pay for transparency and technology projects. With Congress having cut the E-Gov fund by some 75 percent in the last fiscal year, pass-the-hat models may become a more attractive way to fund transparency initiatives in the future. But as GAO found, these models are inherently troubled and lack the accountability inherent in appropriated funding sources, making them less than ideal funding vehicles.

In its recent analysis, GAO focused on Grants.gov and highlighted a number of serious funding and governance challenges the site faces. Grants.gov is a large federal website, and as the GAO report notes, it serves as the portal for more than 1,000 federal grant programs from 26 federal agencies and processes some 250,000 grants each year. Grants.gov is intended to be a one-stop shop for federal grants: the site announces new grant opportunities from participating agencies, collects applications from potential grantees, and delivers them to the agencies for review. The only thing the site doesn’t do is distribute funds directly to grantees.

However, Grants.gov is not performing well on the backend, and its pass-the-hat model is costing the government time and money, according to GAO.

Additionally, according to the GAO, the current funding system for Grants.gov is not equitable. The site, which is managed by the Department of Health and Human Services (HHS), uses a complicated formula for charging participating agencies. Essentially, Grants.gov contributions are based on agency size (as determined by the dollar amount of grants), percent of all grants posted to the site, and percent of applications submitted. However, the factors are not equally weighted, and as a result, the GAO found that large agencies are often penalized under the current model. For instance, the National Endowment for the Humanities (NEH) and the Department of Housing and Urban Development (HUD) have similar usage, with about the same number of grants available and grant submissions. But, since HUD is much larger than NEH, it is charged about $259,000 more than NEH, almost three times as much ($414,422 vs. $155,159).

At the same time, some agencies get more help from the Grants.gov office than others. For instance, some agencies frequently ask for updated application forms, while others only update their forms every once in a while. This help is not accounted for in the Grants.gov funding model and thus is provided without charge.

In other words, Grants.gov is not charging agencies based on use or costs incurred.

A second problem with Grants.gov’s pass-the-hat model is that it is difficult to enforce. Since Grants.gov relies on the agencies for its funding, it is susceptible to the agencies’ whims. As a result, it takes months for the funding to come through, with most of it coming late in the fiscal year. As of Sept. 16, 2010, Grants.gov was short some $370,000 in agency contributions for fiscal year (FY) 2010.

This is not an unusual situation for pass-the-hat projects, according to GAO, but the funding delay causes significant problems. “Until it receives its contributions,” the report notes, “Grants.gov is generally not permitted to expend funds for system maintenance, upgrades, or any other activities or purchases.” Instead, HHS must provide Grants.gov with basic funds to pay staff salaries and maintain office space until Grants.gov receives its member contributions.

Grants.gov’s erratic funding stream has real consequences. Contracted work must be pushed to the end of fiscal years, when funds are most likely to be available for the site, regardless of when the work is needed. Managing and enforcing the contribution agreements are costly and time-consuming endeavors, since the Grants.gov model still requires congressional involvement, as the contributing agencies need Congress to sign off on their Grants.gov contributions. Managers of other pass-the-hat projects, such as Benefits.gov and the Disaster Assistance Improvement Program, agree that the funding uncertainty inherent in the model is one of their greatest management challenges.

Despite these problems, the Obama administration might be considering such a model for funding transparency projects in the future. Congress is intent on cutting, not growing, budgets, with the E-Gov fund just one victim of many. Instead of fighting Congress for a relatively meager amount of money ($34 million was the FY 2011 request from the administration), the White House may simply decide to skip the fight and pass the hat among the agencies, charging them for sites the E-Gov fund used to pay for.

However, congressional appropriations for specific transparency projects will ensure that important transparency websites remain online, rather than having their existence dependent upon the ability and desire of the administration in power to pass the hat to various agencies, seeking funding. If transparency projects, such as the IT Dashboard, are not funded adequately because an administration chooses not to go to bat for them, there is little accountability to the public. There are no hearings, no recorded votes, and too many potential reasons why the project wasn’t funded.

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