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The most notable event this month for nonprofit federal grant recipients was the release of the Trump administration's proposed "skinny" budget for the federal government's fiscal year 2018. While far from final, the budget is a roadmap of the administration's priorities, including significant program reductions. As a result, we devote this month's newsletter to breaking down the first draft of this budget and a close examination of actions nonprofits can take to recover costs and continue the program through other means of revenue generation.

The Trump Administration's Budget

First, the released budget is limited in scope—it addresses only the $1.2 trillion of discretionary spending. A larger budget, with more specific details based on input from the federal agencies, and covering federal tax issues and mandatory spending ($2.4 trillion), will be released in May. There is pressure to work out an actual budget this year (note that none of President Obama's budgets were approved by Congress), because without an agreed-upon appropriations bill by October 1, 2017, automatic reductions under the federal Budget Control Act could be imposed.

Not surprisingly, the Trump administration's budget proposed to Congress looks to increase funding within the U.S. Department of Defense, the U.S. Department of Veterans Affairs, and the U.S. Department of Homeland Security. Correspondingly, the administration proposes deep cuts to many of the civilian agencies' budgets, the largest of which are being borne by the U.S. Environmental Protection Agency (EPA) (-31%) and the U.S. Department of State (-29%). Of note, these cuts include the following:
  • Cuts nearly $11 billion from the U.S. Department of State, eliminating global climate change-prevention programs, reducing most cultural-exchange programs, and requiring the U.S. Department of State and the U.S. Agency for International Development to reorganize and consolidate;
  • Eliminates more than 50 programs and 3,200 jobs at the EPA, and cuts funds for a number of programs across the agency;
  • Makes deep cuts to climate-change and ocean research at the U.S. National Oceanic and Atmospheric Administration, including cuts of $250 million from coast research programs and $73 million from the Sea Grant program, which operates in conjunction with universities in 33 states;
  • Eliminates $3.7 billion in grants for teacher training, after-school and summer programs, and aid programs to first-generation and low-income students;
  • Imposes an 18% cut (almost $6 billion) on the National Institutes of Health, which doles out these funds to researchers around the world.
  • Eliminates funding for the 49 National Heritage Areas;
  • Eliminates the Senior Community Service Employment Program, which helped low-income seniors find work;
  • Cuts grants that assisted nonprofits in paying for safety and health training;
  • Cuts nearly $500 milling from the TIGER grant program, which has funded dozens of road, transit, and other transportation-related projects; and
  • Eliminates all funds for the National Endowment for the Arts, the National Endowment for the Humanities, the Institute of Museum and Library Services, and the Corporation for Public Broadcasting.

As noted above, this proposed budget is just that—a proposal. By late spring, congressional hearings will start that will focus on the federal agencies' submitted budgets and Congress's own spending priorities. Typically, Cabinet secretaries will appear before Congress and talk about agency priorities. There already has been some modest pushback from Cabinet heads, such as Dr. Carson of the U.S. Department of Housing and Urban Development, who are critical of some of the proposed agency cuts. Congress ultimately determines funding levels. Generally, presidential budgets are a symbolic undertaking that articulate priorities.

Nonprofits should be mindful that the current appropriation bill expires on April 28, 2017 and will govern spending through the end of the fiscal year. In the coming days, Congress will need to pass a supplemental bill to keep the federal government running through October 1, 2017. There are some early indications that the administration will be seeking some discretionary spending reductions through this method, as a marker for future cuts; however, any final decisions about the rest of this fiscal year's spending will be decided by Congress.

Program Termination: Addressing Unfortunate Realities in the Best Way Possible

Given the inevitability of funding cuts for many federal agencies, nonprofits may be forced to address the very real prospect of the termination of some or even all of their federal funding. Cuts in budgets are always a risk, whether explicitly stated or not. What this means is that at any time, the federal government can simply decide to stop funding a certain activity, regardless of the awardee's performance, progress, or investment. The rights associated with the federal government's right to terminate, however, can be vitally important to federal awardees facing defunding. These rights are informed by what is called a termination for convenience, which occurs when the federal government terminates without cause. The termination has nothing to do with the conduct or actions of the awardee and, therefore, would not be a termination for failing to meet grant requirements (i.e., a default). However, the awardee is not without recourse.

First, the federal government recognizes that the termination of an agreement may, unto itself, result in additional cost to the grantee. As such, the Uniform Guidance permits the reimbursement of certain reasonable termination costs. This can include the loss of the useful value of certain equipment, rental costs that cannot be reasonably mitigated, and claims under subawards. Furthermore, administrative costs as a result of the termination itself are allowable, such as legal and/or accounting fees. Thus, upon receiving a termination notice, nonprofit grant recipients can propose to the federal agency a termination settlement that factors in many more costs arising from the termination than just the level of effort expended up to the termination date.

In addition to maximizing termination cost recovery, nonprofits should take stock of their intellectual property and determine what rights they have under their funding agreement. The federal government will typically obtain certain rights when it expends funds for the development of intellectual property, but it does not typically seek to own such property upon termination. A nonprofit may well have the right to use such intellectual property commercially once its relationship with the federal government is severed.

Finally, nonprofits should consider whether the program has generated program income. Will any of that income continue to be generated post-grant? These are critical questions to consider because program income, which is usually required to be returned to the federal agency, ceases to be program income following the expiration (or termination) of a grant. Thus, if income generation continues beyond the life of the grant, it is possible that such income could be the property of the nonprofit grantee, free and clear of federal government entanglement. A federal grantee should consider addressing this issue as part of its termination settlement with its federal agency.