An intergovernmental agreement, often shortened to IGA, is a binding contract between two or more government entities that spells out how they will work together on a shared objective. The term is broad on purpose. It covers a deal between two neighboring cities to share a fire station just as comfortably as it covers a treaty-like arrangement between the United States and a foreign country to exchange bank account data. Whatever the scale, an IGA creates enforceable obligations, allocates costs, and defines what each party must do and when.
The Two Places You’ll See the Term
Most searches for “intergovernmental agreement” land in one of two very different contexts, and it helps to know which one you’re in.
The first is domestic. State governments, counties, cities, townships, and special-purpose districts such as water authorities or school boards routinely sign IGAs with each other. The problems they solve are practical and don’t respect political boundaries: two counties sharing a 911 dispatch center, neighboring cities pooling a joint law enforcement unit, or several municipalities splitting the cost of a bridge or transit system. The common thread is efficiency. If three adjacent towns can share one water treatment plant through an IGA instead of each building their own, everyone’s taxpayers save money.
The second is international, and it almost always means FATCA. The Foreign Account Tax Compliance Act, enacted by Congress in 2010, requires foreign financial institutions to identify and report accounts held by U.S. persons, with a 30 percent withholding tax on U.S.-source income as the penalty for noncompliance.1Office of the Law Revision Counsel. 26 U.S. Code 1471 – Withholdable Payments to Foreign Financial Institutions Because many countries have domestic privacy laws that would block their banks from handing account data straight to a foreign tax authority, the Treasury Department published model IGAs that partner governments can sign. More than 100 jurisdictions now have a FATCA IGA in effect or treated as in effect with the United States.2U.S. Department of the Treasury. Foreign Account Tax Compliance Act (FATCA)
What Every IGA Contains
The specific paperwork varies with the subject, but certain building blocks appear in almost every IGA. Each party has to identify the statute, charter provision, or constitutional authority that lets it enter the agreement in the first place. The document itself needs a clear statement of purpose, the duration of the partnership, financial terms covering how costs are split and when payments are due, performance standards each party must meet, and a dispute resolution process.
Liability is where these agreements get complicated fast. When two government entities share a service and something goes wrong, who pays? Most well-drafted IGAs include mutual indemnification clauses under which each party covers losses caused by its own employees or operations. Government parties bring a wrinkle private contractors don’t have: sovereign immunity. A city or state generally cannot be sued unless it has waived that immunity, and any indemnification clause has to account for that reality. When the federal government is a party, the Anti-Deficiency Act adds another layer, because the federal government generally cannot commit to unlimited future liability beyond what Congress has appropriated.
Who Has the Authority to Sign
Not every organization can sign one of these agreements. Each party must have legal authority to enter binding contracts on behalf of its constituents. For a city or county, that authority comes from its charter or from state enabling legislation. For a federal agency, it comes from the statute that created the agency or from broader grants of contracting power. For a sovereign nation entering a FATCA IGA, the authority flows from executive power over foreign affairs or from specific legislative authorization.
When federal grant money is involved in a domestic IGA, additional rules apply. The Uniform Administrative Requirements at 2 CFR Part 200 encourage state and local governments to use intergovernmental agreements for procurement of shared goods and services, and a properly documented IGA satisfies the federal competition requirements that would otherwise attach to the procurement.3eCFR. Part 200 Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards
State-to-State Deals and the Compact Clause
Interstate IGAs run into a constitutional constraint that trips people up. Article I, Section 10 of the U.S. Constitution says no state can enter into an agreement or compact with another state without the consent of Congress. Read literally, that would mean even a routine handshake deal between two state parks departments needs a congressional vote. Courts have not read it that literally.
The Supreme Court uses a functional test: congressional consent is only required when an interstate agreement would increase the political power of the participating states in a way that encroaches on federal authority.4Legal Information Institute (LII) / Cornell Law School. Requirement of Congressional Consent to Compacts The Court looks at several indicators to decide whether an arrangement is a true compact requiring consent: whether it creates a joint governing body, whether one state’s action is conditioned on another’s, whether states give up the ability to change their own laws unilaterally, and whether all parties are bound by reciprocal constraints.5Legal Information Institute (LII) / Cornell Law School. Overview of the Compact Clause
A shared-services IGA between two cities in the same state almost never triggers those concerns. A multi-state compact that creates a new regulatory authority with power over an industry almost certainly does. When Congress does approve an interstate compact, that approval turns the agreement into federal law.
How FATCA IGAs Are Structured
Treasury offers two structural models, and the difference is who the foreign bank reports to.
- Under a Model 1 IGA, foreign financial institutions report account data to their own country’s tax authority, which then passes the information to the IRS. Model 1 comes in two versions. Model 1A is reciprocal, meaning the U.S. also shares information about the partner country’s residents back to that country. Model 1B is one-directional.
- Under a Model 2 IGA, foreign financial institutions report directly to the IRS. The partner country consents to the arrangement and agrees to remove any legal barriers to compliance, but its own tax authority is not the intermediary.
Under either model, banks covered by an IGA do not need to enter into individual agreements with the IRS, though they still have to register on the IRS FATCA Registration Portal.2U.S. Department of the Treasury. Foreign Account Tax Compliance Act (FATCA)
The data exchange is account-specific. For each U.S. reportable account, the reporting institution collects and transmits the account holder’s name, address, and U.S. taxpayer identification number, along with the account number, year-end balance, and gross income credited to the account during the year, including interest, dividends, and proceeds from asset sales.6U.S. Department of the Treasury. Model 1A IGA Reciprocal, Preexisting TIEA or DTC
How an IGA Gets Adopted
Domestic IGAs typically run through each participating entity’s governing board. A city council, county commission, or school board holds a formal vote, usually a majority, to authorize the executive to sign. Skipping whatever approval process the entity’s charter requires can render the agreement void if it’s later challenged.
Once all parties sign, the executed document is filed with the appropriate records office and becomes a public record. Many jurisdictions require public notice as well, such as a summary posted on the entity’s official website or published in a local newspaper. The specifics vary by state and locality.
FATCA IGAs follow a different path. They are negotiated between the U.S. Treasury Department and the partner country’s finance ministry or equivalent, then executed as executive agreements. Once signed, Treasury publishes the agreement and adds the jurisdiction to the public list of countries with IGAs in effect.
Audit Obligations When Federal Money Flows Through
Any non-federal entity that spends $1,000,000 or more in federal awards during a fiscal year must undergo either a single audit or a program-specific audit.7eCFR. 2 CFR 200.501 – Audit Requirements Entities that receive awards under more than one federal program must have a single audit covering their entire operations. Audits happen annually, are performed by an independent auditor, and must follow generally accepted government auditing standards.8U.S. Government Publishing Office. Single Audit Act Amendments of 1996
The auditor examines whether financial statements are presented fairly, whether the schedule of federal expenditures is accurate, and whether the entity has actually complied with the laws and grant terms governing each major program. A pass-through entity that channels federal funds to a subrecipient through an IGA also has to monitor how the subrecipient uses those funds, including reviewing the subrecipient’s audit results and verifying that corrective action is taken on any findings.8U.S. Government Publishing Office. Single Audit Act Amendments of 1996
The completed audit report is submitted to a federal clearinghouse within the earlier of 30 days after the entity receives the auditor’s report or nine months after the end of the fiscal year audited. Entities spending less than $1,000,000 in federal awards are exempt from these audit requirements, but their records must stay available for review by the awarding agency or the Government Accountability Office.7eCFR. 2 CFR 200.501 – Audit Requirements
Termination and Exit
Every IGA should spell out how a party leaves and what happens when it does. FATCA IGAs generally use a standard termination clause: either country can withdraw by written notice, with termination taking effect on the first day of the month after a 12-month notice period. That lead time allows financial institutions and tax authorities to wind down their reporting obligations in an orderly way.
Domestic IGAs treat exit according to the subject matter. A shared emergency dispatch agreement needs a longer wind-down than a joint purchasing arrangement for office supplies, because a departing city’s residents still need 911 coverage while alternative arrangements are made. Well-drafted agreements also address what happens to shared assets on termination: who keeps jointly purchased equipment, how shared facilities are valued, and whether the departing party owes a buyout.
Dispute resolution clauses usually require the parties to attempt mediation or negotiation before litigation, and some IGAs include binding arbitration. Because government entities are the parties, any lawsuit proceeds through the courts with jurisdiction over government contracts, and sovereign immunity defenses may limit the remedies actually available.