Let’s make primitive match requirements smarter in federal grant programs
This was published first on LinkedIn in collaboration with Tim Wigington of The Freshwater Trust
Across dozens of federal grant programs, the requirements for applicants to ‘match’ the funding from the federal government with money from someone else are ubiquitous. The phrase "matching requirement"[1]appears 15 times in the recent Infrastructure Investment and Jobs Act (IIJA) passed by Congress, requiring funding applicants to provide non-federal match at 15% - 50% of the government request.[2] Matching funds are also referenced in over 100 other pieces of legislation in just this Congress.
Match requirements have become an unconscious default policy, applied in a reflexive and binary way without consideration of the relevance, accuracy, or precision of intended effects. This might not matter if match requirements didn’t have so many negative outcomes. We believe that many match requirements make it difficult for the federal government to catalyze solutions to big, fast-moving 21st Century environmental problems without creating the benefits that supporters imagine. In the face of climate change, equity concerns, intensifying drought and water quality issues, burning forests, and more frequent “once-in-a-millennia” flood events, the status quo approach to federal fund matching is a bigger problem than ever.
Match requirements should be significantly reformed and only added to federal funding programs after more judicious and careful consideration of how to use them effectively without unintended consequences. We offer recommendation on how to do that below.
But first, why does Congress care if state or local governments, nonprofits, or businesses match federal money for a project? And why does the percentage vary so much? Here are the common arguments made in defense of match requirements:
Skin in the game. The main argument for match is that it proves that an applicant has enough of a commitment to a project that they are willing to put their own money on the table to back it. The higher the percentage of applicant funding, presumably the more important it is to them and the more likely they are to believe that the project will be successful.
Long-term sustainability: A related theory underlying match is that securing it requires community engagement and buy-in, which will make the investment more successful in the long-term once the grant or subsidy is no longer available.
Leveraging. Agencies believe that if they withhold part of a project’s funds and make an applicant use other sources, that they are pulling money into a project that would not happen but for the partial federal contribution.
Diversification. There is an assumption that partially funding many projects across the landscape will make more political constituents (i.e., voters) happy than providing full funding to fewer projects.
However, there are major weaknesses in most of these rationales and in many of the current government practices around match:
Following not leading. Standard practice is to require a grant applicant to already have funds in hand before the federal government will help. This means federal agencies will always be following others’ priorities rather than leading. If you’ve already had to prove you have the other sources of capital in hand, it’s the federal agency getting leveraged, not the other way around. Given the massively asymmetrical resource advantage of the federal government and the ability to print its own money, federal dollars should be the catalyst of change, not the entity asking smaller, lesser-resourced, local government and non-profit entities to prove their buy-in first.
Match is an admission of failure on application screening, and fails to take advantage of technology. Requiring a party to have a match as a way of proving a project’s worthiness basically means that Congress does not believe an agency can be trusted to evaluate applications on their own. Rather, it needs proof that someone else also thinks the project is a good idea. But that is a blind leap of faith by Congress because there is no quality control over those sources of match and whether they did any vetting of the project themselves. Prior to the technological revolution, it was difficult to assess projects, and so extensive technocratic criteria and processes were necessary to ensure that applicants were serious and to protect agencies against allegations of fraud, waste, and abuse. But with objective project quantification technology now widely available, government agencies can objectively define their desired outcomes (e.g., lbs of nutrients removed, water volume saved), and then just fund the good projects that deliver public benefits most cost effectively. This quantified conservation approach means that agencies would no longer need validation from others proven through a large financial match commitment.
Match requirements dramatically slow down “public good” projects, which is the opposite of what is needed to build landscape-level resiliency in the face of climate change: Funding for projects is slow and uncertain, with high transaction costs. Projects often must be exhaustively developed piecemeal over months or years via fundraising, competitive grants, and cost-share programs. This means that completing a single small conservation project often requires under-resourced groups to navigate multiple programs with uncertainty as to whether each funding stream will be awarded. This approach to funding projects is incapable of driving the quantity of projects needed to secure resilient ecosystems and communities in the face of climate change.
Slow grant contracting makes it hard to keep project and funding coalitions together before federal paperwork is complete. Federal agencies want multiple partners to commit funds as part of an application. Even once awarded, these same agencies can take six months, two years – or more – to negotiate contracts. Due to these long and uncertain timelines, partners often must move on to other projects, which can scuttle previous match commitments, and leave the primary applicant scrambling to build new match sources. Because of the sunk costs of moving a federal proposal this far through the process, the applicant organization will often choose to take the federal funds and figure it out—a risk that can result in the organization having to use its own scarce operational funds as match if new partners cannot be secured.
Current loopholes undermine stated match purposes. Sometimes Congress or agencies allow in-kind labor and similar work to count as match, allow their own funds to count as non-federal match, or allow donated real estate values of extremely wealthy landowners to count as match.[3] These outlets, which appear on an ad hoc basis in a seemingly random set of programs, contribute little to any of the goals for having match identified above.
Current match approaches lead to inequitable flow of funds to bigger interests and projects. Match requirements reward larger organizations and projects that already have high capital inflows over smaller organizations and startups. They also reward organizations that have sophisticated and creative experience in defining and applying match as liberally as possible at the expense of local government and private organizations that do not. All else being equal, this means that federal funding is going to be skewed toward older and larger organizations, bigger local governments, and bigger centralized projects, leaving a less effective funding plan for the many smaller-scale, hard-to-fund, but critical projects scattered across the landscape.[4]
At the end of the day, we believe match requirements for many (but not all) programs make federal programs weaker, less effective, and less equitable. With these constraints in mind, we offer the following recommendations for smarter matching requirements in federal programs:
If disadvantaged or overburdened communities are a sought-after beneficiary of a program, eliminate match requirements fully for those communities or create a standardized exemption form and review process across all programs. Given how much time, capacity, and fundraising expertise is currently needed to secure non-federal match funds, why not have a consistent approach that waives non-federal match requirements in a common set of circumstances and struggling communities? Surely if USDA, for example, can frequently allow wealthy individuals to access funding by getting exemptions from various conservation program restrictions that would otherwise prevent them from getting funding (e.g., an AGI waiver[5]), other departments and programs could have a simple match waiver process for communities and organizations at the other end of the spectrum. Under the IIJA, EPA’s State Revolving Fund works like this in some situations, with 100% federal funding (i.e. grants without a match requirement) for toxic lead water pipe replacement in disadvantaged communities.[6] This approach would be consistent with the Biden’s administration Justice40 Initiative.[7]
If innovation, results, speed, or scale are at a goal of a program, Congress shouldn't require match at all, and should instead require results. Statutory changes like those suggested in the recently introduced Watershed Results Act and 21st Century Climate Conservation Corps Act take this approach.[8] One of the military’s creative programs – DARPA – does this and has a record of producing home run technologies that have had broad benefits for the country. Conservation needs an “Advanced Projects Agency” too, without match getting in the way of innovation.
If Congress wants agencies to work together, allow federal-to-federal match for more programs or even explicitly require federal-to-federal match as an incentive for agencies to work together on a coordinated funding plan that concentrates their currently siloed investments into high-priority places at a meaningful enough level to secure results. The federal government is the largest environmental spender in America, but those funds are fragmented into silos that dilute—instead of leverage—the enormous purchasing power that could come from multiple agencies and levels of government driving toward common outcomes. Under such a leverage approach, each funding stream would generate co-benefits for the other federal agency, with the combined funding sources directed to the highest priority projects for multiple agencies. This approach has already been implemented. For example, various Department of Defense conservation programs that help protect military bases from encircling development that would halt or constrain training are allowed to count as non-federal match for USDA and Department of Interior conservation programs.[9] This is an intentional effort to pull conservation resources toward a worthwhile military goal. Congress could, for example, require FEMA disaster risk mitigation or Department of Interior land protection funds to be used together to maximize co-benefits being delivered by otherwise siloed bureaucracies. Similarly, EPA, USDA and Interior programs that target the same or reinforcing types of projects on the irrigated landscape could be leveraged together effectively.
If Congress wants non-federal match leverage, it should allow borrowing to count as match, or use its programs to reduce overall project cost. Concentrated federal resources are often far and away the best source for conservation project funds. However, even when awarded in big amounts, most federal project funds are disbursed in chunks pursuant to annual Congressional appropriation cycles or grant reimbursement practices. Given this mismatch, instead of requiring non-federal project fund match, Congress could instead allow federal or non-federal project finance as the match. Just like securing a home mortgage, private financing could provide the upfront cash necessary to complete projects much faster, with payback coming from reliable sources of future income from the borrower. In addition to allowing borrowing to count as match, agencies could also use negative interest loans as a creative way to effectively lower match requirements for an infrastructure investment over a 20-30 year period.
If agencies must maintain match requirements, assess match secured at the end of a project. Congress should explicitly allow agencies to count match at the end of the project rather than the beginning, with accountability like consequences for future eligibility or prioritization in grant-making, but no consequences on secured funding if the recipient fails to secure it. In this way, federal agencies could help seed new initiatives rather than always following in someone else's footsteps. The same approach also helps deliver real leveraging where the first-in federal money truly pulls more private money after it. The concern that applicants (states, local government, and non-profits) would fraudulently claim match and never deliver it misunderstands their long-term interests. These applicants will continue to rely heavily on federal programs to undertake otherwise under-funded social initiatives. Simply put, none of these entities are going to default on their match commitment if doing so risks future funding eligibility.
If agencies must maintain match requirements, add in other economic multipliers in proving match. Most conservation funding programs were created to addressed public good challenges. Despite this intent, much of the focus on grants often ends up being on the dollars and cents spent, as opposed to the results created. Understanding that these projects produce many other social, economic, and community values, the cost-share value could be added together with economic values derived in these contexts as part of the match proof.
Require agencies to track match across programs not projects. If agencies used a ranking system to score worthy applications by both the economic and equity circumstances of the recipient and the magnitude of benefits the project delivered that are priorities for the program, agencies could offer individual applicants both a match percentage and a funding offer. This would allow agencies to try to hit a target match amount across a program instead of worrying about individual projects.
At minimum, we encourage Congress to think carefully about match requirements incorporated into conservation and climate programs and really ask whether they serve the public interest. We believe match requirements mostly fail to do so and instead leave critical programs to operate at a smaller, slower, and less innovative scale that their potential.
Tim Wigington is Vice President for Finance and Policy at The Freshwater Trust, an organization that protects and restores freshwater ecosystems. Timothy Male is Executive Director of the Environmental Policy Innovation Center, an organization that builds policies that deliver spectacular improvement in the speed and scale of environmental progress.
Footnotes
[1] Federal “match” requirements obligate a project proponent seeking federal funding to secure state, local, or private funds to unlock the federal funds. See 2 CFR 200.306. Matching requirements first started to appear in the early 20th Century.
[2] This range is consistent with what is seen in other federal environmental programs. For example, NRCS EQIP funds require 50% non-federal match for standard projects. FEMA BRIC generally requires 25% non-federal match. 42 U.S.C. §5193(a). CWA section 319 funds require a 40% non-federal match. 33 U.S.C. § 1329(h)(3).
[3] 10 U.S.C. § 2684a.
[4] For example, as of 2011, As an example of this skew, of the $139.7 billion in Clean Water State Revolving Fund (SRF) investments made from 1988 to 2020, only $5 billion, or 3.5% was directed to nonpoint source projects. EPA, Clean Water SRF Program Summary, National Summary, at 24, 28 (2021), https://www.epa.gov/sites/default/files/2021-02/documents/us20.pdf. And yet approximately 75% of America’s waterbodies with Total Maximum Daily Loads were primarily impaired by nonpoint source discharges. EPA, National Evaluation of the CWA Section 319 Program (2011), www.epa.gov/sites/production/files/2015-09/documents/319evaluation.pdf.
[5] “A person or legal entity that exceeds the Adjusted Gross Income (AGI) requirements of the 2008 Farm Bill will not be eligible to receive payments in Farm Bill programs” unless they receive a waiver. AGI Limitation Waiver Request Worksheet, https://www.nrcs.usda.gov/Internet/FSE_DOCUMENTS/nrcs144p2_033693.pdf.
[6] For example, the IIJA contains “$15 billion in dedicated funding through the Drinking Water State Revolving Fund for lead service line identification and replacement. This funding is being provided to states with no match requirement.” EPA, BIL SRF Memo Fact Sheet (March 2022), https://www.epa.gov/system/files/documents/2022-03/bil-srf-memo-fact-sheet-final.pdf.
[7] The stated goal is to “deliver at least 40 percent of the overall benefits from Federal investments in climate and clean energy to disadvantaged communities.” The Path to Achieving Justice 40 (July 20, 2021), https://www.whitehouse.gov/omb/briefing-room/2021/07/20/the-path-to-achieving-justice40/.
[8] These two bills waive match requirements because the focus is on results. Watershed Results Act, S. 2807, § 4(d), https://www.congress.gov/bill/117th-congress/senate-bill/2807/text. 21st Century Climate Conservation Corps Act, S. 487, § 2(e), https://www.congress.gov/bill/117th-congress/senate-bill/487/text.
[9] “10 U.S.C. § 2684a(h) allows the recipient of REPI funds to use such funds as the match or cost-sharing requirement for any conservation or resilience program of any federal agency.” DOD, Using REPI Program Funding as Match for Federal Conservation or Resilience Programs (March 2022), https://www.repi.mil/Portals/44/Documents/Resources/REPI_FactSheet_FundsAsMatch.pdf.