Why Grant Compliance and Tracking Federal and State Funding Remain Major Challenges for City Governments
City governments often rely on federal and state funding to support infrastructure, public safety, transportation, utilities, community development, and a wide range of public services. These grants can be essential to completing projects that a city could not otherwise afford. However, one of the biggest challenges cities face is not simply obtaining the funding, but properly identifying, tracking, and complying with all requirements tied to it.
A common misconception is that once money is received, the hard part is over. In reality, receiving grant money often marks the beginning of a complex compliance process. Cities must understand where the money came from, what rules apply to it, what costs are allowable, how it should be tracked in the accounting records, and what reporting or audit requirements follow. If these steps are not handled correctly, the city may face questioned costs, repayment obligations, audit findings, or delays in reimbursement.
One of the first struggles cities face is determining whether the funding they received is federal or state money. This issue is more important than it may seem. Many cities receive grant funds directly from a state department or agency and assume the funding is therefore state assistance. But in many cases, the state is only acting as a pass-through entity for a federal award. That means the funding may still be subject to federal compliance requirements, federal program rules, and possible inclusion on the Schedule of Expenditures of Federal Awards for Single Audit purposes.
This distinction matters because the compliance burden can be very different depending on the source of the funding. If the money is federal, the city may need to identify the federal assistance listing number (ALN), comply with Uniform Guidance requirements where applicable, follow stricter procurement standards, retain specific documentation, and monitor whether total federal expenditures trigger a Single Audit. If the money is truly state funding, different rules may apply, and the reporting expectations may be less extensive. A city that misidentifies the source of funding may unknowingly apply the wrong compliance standards.
Because of this risk, cities should never rely solely on the fact that payment was received from a state agency. They should review the grant agreement, award notice, contract documents, reimbursement materials, and any related correspondence to determine the true source of the funding. Important questions include whether the agreement references federal statutes or regulations, whether a federal program name or assistance listing number is included, whether the award identifies a pass-through entity, and whether federal compliance requirements are specifically incorporated into the terms of the grant. If those indicators are not clear, cities should request clarification from the granting agency before assuming the funds are state-only.
Even after the source of funding is identified, cities often struggle with the complexity of grant requirements. Each grant program may have different eligibility rules, reimbursement procedures, deadlines, matching requirements, reporting obligations, and restrictions on the use of funds. Managing one grant can be difficult enough. Managing multiple grants from different federal and state sources at the same time can quickly become overwhelming, especially when different departments are involved in administration, purchasing, and accounting.
Tracking expenditures properly is another major challenge. Cities need accounting systems that can separately identify each award, funding source, project, and allowable cost category. Without that structure, grant expenditures can become mixed with normal operating activity, making it difficult to support reimbursement requests or prepare accurate year-end reporting. The problem becomes even greater when cities are managing both federal and state grants simultaneously, because each source may require separate reporting and different compliance treatment.
Allowable costs are another frequent issue. Cities may believe that if an expenditure benefits the public or supports the project generally, it should qualify for reimbursement. But grant agreements often define allowable costs very specifically. Expenditures may be disallowed if they occur outside the grant period, lack adequate documentation, fail to meet procurement standards, or cannot be directly tied to the approved program. When a city has not clearly determined whether funding is federal or state, it may also fail to apply the correct standards in deciding whether a cost is eligible.
Procurement is one of the most common areas where grant problems arise. A city may follow its normal local purchasing policy and still fall short of grant requirements if the award is federally sourced and subject to stricter procurement rules. In those cases, the issue is often not intentional noncompliance but a failure to identify the nature of the funding early enough in the process. Once a purchase is made incorrectly, the city may have limited ability to fix the problem afte rthe fact. Payroll and personnel costs also create difficulty, particularly when employees work on multiple programs or divide time between grant-funded and non-grant-funded activities. Cities need support for how salaries and benefits were allocated, and they need to ensure that personnel costs charged to each award are consistent with the underlying grant terms. Again, knowing whether the funding is federal or state is critical because documentation expectations and compliance risk may differ significantly.
Coordination between departments is often where cities encounter the greatest operational problems. The program department may understand the purpose of the grant, the finance office may record the revenues and expenditures, purchasing may handle vendor selection, and payroll may process employee compensation. If no one is clearly responsible for confirming the source of funding and communicating the compliance requirements to everyone involved, mistakes can occur early and carry through the life of the grant.
Staffing limitations make these issues even more difficult. Smaller cities may not have a dedicated grants manager or compliance officer. Finance staff are often balancing budget preparation, daily accounting, utility billing, debt service, and annual financial reporting in addition to grant administration. When grant requirements are layered on top of those normal duties, important details can be missed. Staff turnover only increases the risk, especially if grant files do not clearly document whether awards were federal, state, or a mix of both.
Single Audit implications are another major concern. Cities that do not properly identify federal pass-through awards may omit them from the Schedule of Expenditures of Federal Awards or fail to monitor whether they have crossed the federal expenditure threshold for a Single Audit. That can create significant problem sat year-end, including incomplete SEFA reporting, audit adjustments, and compliance findings. Even when the city has spent the money correctly, failure to classify the funding properly can still result in reporting errors.
To reduce these risks, cities should build stronger grant intake and monitoring procedures. When a new award is received, the city should document the source of the funding, determine whether it is direct federal assistance, federal pass-through funding, or state assistance, identify the applicable compliance requirements, and assign responsibility for ongoing monitoring. Grant files should include the award agreement, funding source determination, assistance listing number if applicable, deadlines, reimbursement requirements, and key compliance provisions. Separate general ledger tracking should be established at the outset so the city can distinguish between different awards and funding types.
Cities also benefit from using a grant checklist at the time an award is accepted. That checklist can help confirm whether the city has identified the source of funds, reviewed the agreement for compliance terms, established proper accounting codes, communicated requirements to purchasing and program staff, and evaluated whether the award may affect SEFA reporting or Single Audit status. These steps are much easier to complete at the beginning of the grant than to reconstruct after expenditures have already occurred.
Ultimately, grant compliance is not just about spending money on approved projects. It is about understanding the source of the funding, applying the correct rules, maintaining proper documentation, and ensuring that the accounting records support the city’s reporting and audit responsibilities. For city governments, one of the most important early questions is also one of the simplest: Is this money federal, state, or state-administered federal funding? Getting that answer right can make the difference between a well-managed grant and a costly compliance problem.