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How Cities Lose Millions in Federal Funds

A new report examines the ways in which struggling cities mismanage federal grants and offers ideas for fixing it.

The skyline of Detroit.
(David Kidd)
When a municipality struggles with money, it doesn’t just hurt local revenues. A new report from the U.S. Government Accountability Office (GAO) shows that mismanagement and a lack of resources also led to millions in lost federal grant funds for beleaguered governments.

Looking at the experiences of Camden, N.J.; Detroit; Flint, Mich.; and Stockton, Calif., between 2009 and 2013, the report’s authors found that these cities struggled to manage their federal grants for two main reasons. First, layoffs reduced the staff on hand to handle grants and left fewer people who actually had the skills and knowledge to manage them effectively. Second, these cities were making spending cuts across the board, so that often meant they didn’t have the means to match federal funds for grants that required a local spending match. Such losses caused cities to either accidentally spend their grant money in a way that violates the agreement -- meaning the city would have to return the misspent funds -- or not spend their grants at all.

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For example, Flint last year owed the U.S. Department of Housing and Urban Development $1.1 million because federal officials found the city had misspent grant funds. In 2011 and 2012, two audits of Detroit's grant management found more than $45 million in questionable costs. In some cases, Detroit had to return some or all of these costs or had funds withheld. "Knowledge management had been a longstanding challenge for the city of Detroit," according to the GAO report, noting that the city had few written policies when it came to handling grants. "This resulted in ad hoc procedures, passed on from one employee to the next. When an employee who was knowledgeable in one area of grants management retired, his or her knowledge also left."

For the benefit of other struggling cities, the report recommends that the Obama administration use its findings to develop a formal strategy and policy for assisting municipalities in distress. Governments all across the country are dealing with lower staffing levels and a loss of institutional knowledge thanks to slow public-sector job growth. And state and local spending has also not recovered from the recession (after accounting for inflation), meaning that investment in things like IT and infrastructure is lagging far behind.

Stockton is an extreme example of this lack of investment. The GAO report noted that the city’s accounting system was two decades old and did not generate automatic reports that more modern systems produce. It was extremely labor intensive to manually produce the reports. That led to late reporting and outdated numbers, making it difficult -- and sometimes impossible -- for the city’s officials to make informed financial decisions.

The report also offers up some other potential solutions for cities struggling to keep track of their federal grants. It notes that Detroit, Flint and Camden all reported success in collaborating with nonprofits to better manage their grants. Flint and Stockton, recognizing that their governance problems were a barrier to their long-term fiscal health, established advisory committees to their city councils that made recommendations on things like administrative issues and fiscal policies.


One of the many blocks in Camden that's lined with vacant houses. (David Kidd)

On the federal side, the White House Working Group on Detroit and a handful of federal agencies worked directly with the city during its bankruptcy. To help with Detroit’s blight, for example, the working group identified unused money from the “Hardest Hit Fund” that had been given to Michigan to distribute to families throughout the state in response to the Great Recession. The group was able to redirect $100 million from the fund to Detroit and other Michigan cities to help pay for demolition of blighted properties. (A survey in 2013 identified 40,000 structures in Detroit that needed to be torn down immediately.)

The working group assembled to help Detroit, however, did not document its methods to be used by future federal/local collaborators. Officials from other distressed municipalities are interested in learning more about the working group's ideas, but there are no plans to share best practices. The report recommends that the agencies involved in that working group document their methods so other agencies can use them for future cities in distress. “If federal officials do not assign formal responsibility for documenting lessons from Detroit’s experience in a timely manner,” the report concluded, “opportunities to leverage that knowledge may be lost.”

Liz Farmer is a former GOVERNING fiscal policy writer.
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