On October 29, 2012, Super Storm Sandy slammed into the northeastern United States and resulted in billions of dollars of damage, damaging approximately 346,000 homes, and killing 72 people. Years later, as families attempted to rebuild their homes and recover from the devastation, many were dealt a second blow: a bill seeking clawback for grant funds not deemed to have been properly utilized and/or administered. According to the New Jersey Organizing Project, on average, homeowners were expected to repay $30,643; however, 90% of those homeowners reported not being able to pay this amount back.
With all the upheaval that Covid has brought us, why bring this up now? What are clawbacks anyway? As the federal government nears ever closer to a deal on an infrastructure bill, it is important for local government agencies of all sizes to remember that federal grants are not just free money to do with as we please, but, rather, these can be complicated agreements with several strings attached to those grant funds. This is where clawbacks come into play: clawbacks, or clawback provisions, are provisions that require money that has already been paid out by the grantor to be returned by the grantee due to the failure to meet some sort of metric tied to that money. Typically, clawbacks involve a penalty, which makes them different from simple repayments or refunds. Such metrics that can trigger a claw back provision include: milestones, timely completion(s), notifications, reporting requirements, local sourcing of materials, etc., and the failure to meet any one of those provisions can result in a required repayment.
So how can you avoid clawbacks?
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As with any contract, it is important to understand all the provisions, especially those that are tied to penalties. If a provision appears unclear, seek clarification prior to executing that agreement, and/or, if the agreement has already been finalized, request clarification as soon as possible.
- Secondly, assign a responsible party to oversee compliance with these provisions, whether that is available internal staff, a team of outside expert advisors, or somewhere in between, ensure that someone is looking at these requirements, updating the progress, and regularly confirming compliance with the funding agency/agencies.
Even when we have the best of intentions and/or feel confident in our adherence with the provisions of a grant, it is important to obtain written confirmation from the grantor(s). Take, for example, the City of Baltimore: according to an article from the Baltimore Sun, in 2014 the city was ordered to repay $3.7 million in of a $9.5 million grant issued by Housing and Urban Development (HUD) for the prevention and intervention of homelessness in the City 1. Though the City allocated those funds to such organizations as the United Way, the Associated Catholic Charities, and the Prisoners Aid Association of Maryland, the City and its contractors could not properly prove that the money was spent properly according to a HUD audit. In response to that audit, Kate Briddell, director of Baltimore’s homeless services program, at that time, wrote a letter noting, “Guidance was negligible, best.” Though Ms. Briddell may have been accurate in her claims, it would have been more prudent for the city to have clarified such requirements prior to allocating funds to avoid having to go back and provide documentation years after the fact.
The ARP calls for States to begin immediately distributing funds, and there is a deadline to spend those allocations. While the discretion given for compliance is broad, documentation must still be submitted and the rules around it are highly likely to change over time.
While considering whether expert advice may warrant the cost, consider the alternative: “what if we, as an agency, start a project, then lose our grant funding due to a failure to meet a provision, and get stuck with the bill of an incomplete project?”
[1] Broadwater, Luke; Wenger, Yvonne. “City Ordered to Repay $3.7 Million Federal Homeless Grant”. Baltimore Sun. February 25, 2014.