Pass-through funding 101: Everything you need to know

The federal government allocates around $1 trillion to tribal, local, and state entities yearly to fund different programs, including education, social services, public safety, and development projects.

For instance, in 2021, the government transferred $988 billion to state governments and $133 billion to local governments. The same year, states transferred $621 billion to local governments, including indirect funds from the federal government known as pass-through grants.

What are pass-through grants? They’re funds that the federal government distributes to local governments and organizations through an intermediary, such as state governments, government agencies, and nonprofit organizations. The funds pay for varied programs, including community development, low-income schools, and affordable housing.

Below, learn more about pass-through funding, how it works, its key benefits, and compliance essentials.

What is pass-through funding?

It’s a method of funding where funds are allocated to one organization, which then distributes them to sub-recipients to run a program or execute a project. The organization receiving the initial funding is called a “pass-through entity” (PTE). This funding strategy effectively allocates and manages funds for initiatives where the grantor has no direct presence, expertise, or support.

For instance, the Department of Housing and Urban Development (HUD) transfers pass-through funds to state and local governments, which then distribute the funds to local organizations like housing developers, who use the funds to build or maintain affordable housing units.

How does pass-through funding work?

Non-federal pass-through entities (PTEs) and other intermediaries receive funds from a federal agency or program for pass-through funding. The entity then distributes the funds to sub-recipients based on eligibility criteria, formulas, or other program funding models. 

The entities involved bear something akin to a fiduciary responsibility, in which pass-through funding recipients must operate trustfully and pursue the best outcomes for relevant parties.

This approach is effective in two scenarios:

1. Localized expertise: Pass-through entities generally have deeper insights into the specific needs of communities at the state or local level. This means they can effectively manage and distribute funds in areas where the federal government or agency lacks a direct presence.
2. Specialized administration: When pass-through entities lack the capacity, expertise, or resources to administer programs directly, they delegate these responsibilities to cities, school districts, and other organizations. In this case, they allocate the funds to these entities and track their spending to ensure compliance.

For example, under Title I of the Elementary and Secondary Education Act (ESEA), state education agencies act as intermediaries regarding education funding dedicated to local school districts. The state agencies monitor the spending to ensure compliance and report to the Department of Education, ensuring alignment with the funding’s objectives.

Sometimes, nonprofits can also help facilitate related programs through fiscal sponsorship, passing through received funds to smaller initiatives that don’t have 501c3 recognition as nonprofits.

Examples of pass-through funding

Consider the list of different pass-through grants below. These examples illustrate how federal awards provide restricted funding via PTEs to states, local governments, and nonprofit organizations for community benefit and other public purposes. Successfully applying for them (and simplifying their management) would help expand the reach and impact of any government entity, PTE, or other organization.

Disaster relief

The federal government usually funds state and local governments during disasters to support their response and recovery. This is done through the Federal Emergency Management Agency (FEMA). FEMA transfers funds to states and distributes them to various state agencies, local governments, and nonprofits like the Red Cross.

Community development

Local governments rely on federal transfers to fund community projects like housing facilities, water systems, road rehabilitation, and dam construction. For example, the Department of Housing and Urban Development (HUD) provides the Community Development Block Grant (CDBG) to cities and counties through state governments.

Environmental conservation

Every year, the U.S. Environmental Protection Agency (EPA) awards over $4 billion in conservation and sustainability efforts funding. The common fund is the Climate Pollution Reduction Grant (CPRG) that the EPA awards to states, which must then distribute the federal funds responsibly to tribes, territories, and local governments.

Healthcare

About 50-60% of federal funding to state and local governments supports healthcare programs like the Children’s Health Insurance Program (CHIP) and Medicaid. The government also offers formula or block grants to local entities through a state agency to run specific healthcare programs. 

An example is the Preventive Health and Health Services Block Grant (PHHS), which funds states, tribes, and territories to address public health needs.

Benefits of pass-through funding

Pass-through funding offers multiple benefits to the federal government and grant recipients, including the following.

More efficient and flexible

The method channels resources quickly to recipients without direct involvement of the federal government or agencies. PTEs can leverage local expertise, experience, and relationships to allocate funds based on existing needs and priorities. They can also distribute the funds locally as they wish, provided they adhere to the general rules.

Increased impact

The funding allows the federal government and agencies to reach individuals and organizations without direct funding or limited access to financial resources. For instance, Title I offers pass-through funding to low-income students.

The grants can also reach more people and communities than direct funding, as the federal government and agencies can tap into the PTEs’ on-the-ground experience and local knowledge to ensure effective and impactful distribution.

Risk mitigation

Public initiatives like school construction or student funding programs require local knowledge for effective execution. Pass-through funding allows federal agencies to avoid the complexities and risks of executing such projects. They can partner with intermediary organizations that have local experience to produce better outcomes and reduce risk.

Challenges of pass-through funding

Despite the benefits, intermediary funding poses several challenges to prepare for and monitor.

Administrative complexity

Pass-through grant cycles impose a substantial administrative burden on intermediaries. They have to coordinate with federal agencies and sub-recipients to ensure effective distribution of the funds, monitor compliance, and oversee their efficient use. This becomes incredibly complex, especially when managing different types of government funding.

Compliance and regulation hurdles

Intermediaries and sub-recipients must adhere to stringent federal regulations to ensure compliance. PTEs must verify that sub-recipients are not disqualified from receiving federal funds by checking SAM.gov. All parties must also comply with the federal Uniform Guidance (2 CFR Part 200) to ensure efficient use of the funds.

Monitoring and reporting issues

With pass-through funding, PTEs are responsible for grant stewardship, ensuring compliance, and reporting. This decentralization means the funding agency lacks direct visibility into the use of funds, making monitoring difficult. They have to rely on PTEs for oversight, complicated by all the disconnected processes involved.

Best practices for managing pass-through funding

Managing pass-through grants quickly becomes complicated without the right solution to help you manage all stakeholders, program stages, compliance responsibilities, and more. But you can minimize that burden with these best practices.

Set clear expectations

Each federal grant must meet unique funding reporting requirements and serve a specific purpose. It’s essential to set clear expectations and define agreements upfront regarding all terms, conditions, and expectations to ensure all parties understand the objectives and timelines related to the funding. Sub-recipients must know the eligibility criteria and allowable expenses to ensure funding compliance.

Ensure accountability and transparency

Outlining the grantor and grantee roles is crucial to ensuring effective fund disbursement, reporting, and compliance monitoring. Implement systems for transparent fund tracking and reporting. For instance, grant management software can streamline the process, provide visibility into allocations, and create a robust audit trail to ensure accountability.

Establish collaboration between stakeholders

Intermediaries must foster relationships with sub-recipients and federal agencies to ensure effective collaborations. Regular meetings, workshops, or webinars can help to address challenges, provide support, and monitor compliance. It’s also important to train sub-recipients to help them comply with federal regulations and achieve the funding’s objectives.

Leverage grant management software

Investing in grant management software can simplify the process and offer a unified platform for administering government grant programs. It provides a consolidated view of all funds, allocations, and budgets for seamless tracking and reporting. The software also supports automated workflows to reduce grant administration burden and flag potential compliance issues.

Manage your pass-through funding effectively

Every fiscal year, the federal government transfers billions of dollars to states, local governments, tribes, and territories to support community programs and projects, often via pass-through funding. Transparency, accountability, and proper management are critical to ensure the effective distribution and use of the funds to benefit intended populations.

This is particularly important for pass-through funding and grantmaking processes, in which the federal agencies have no direct involvement at the state or local level. Instead, they rely on nonprofits and state agencies to manage fund distribution, enforce compliance, and provide reporting.

Manual, paper-based management workflows complicate the process, increasing administrative burden and compliance issues. Alternatively, implementing SmartSimple provides an end-to-end solution for managing pass-through grants, streamlining processes, and reducing inefficiencies.

It allows sub-recipients to register and apply for new funding or submit spending plans for seamless allocations. Agencies can view proposed budgets, make funding recommendations, generate agreements, process reimbursement requests, and collect progress reports—all possible within a centralized, cloud-based platform.

Discover how we can help you streamline pass-through funding management.