Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
SUBJECT: Michigan Department of Mental Health
DATE: January 13, 1992
Docket No. 91-116
Audit No. A-05-91-05083
Decision No. 1291
The Michigan Department of Mental Health (State, DMH) appealed
determination by the Division of Audit Resolution (DAR) of the
Department of Health and Human Services (HHS), disallowing $31,684 in
payroll and associated indirect costs charged to a grant awarded under
the Child Abuse and Prevention Act, 42 U.S.C. . 5101 et seq. The
disallowance was based on an audit by the Michigan State Auditor for the
period October 1, 1985 through September 30, 1987, covering fiscal years
(FYs) 1986 and 1987, which found that the State had failed to maintain
time distribution records to support the allocation of staff time
between federal and State cost objectives. The State argued that these
costs should not be disallowed since the State's auditor found that,
while the State had not maintained the required time distribution
records, the amounts claimed were not excessive. The State offered
position descriptions and memoranda from staff members to support its
After review of the arguments and documentation offered by the State,
find that the distribution of staff time to federal cost objectives was
not adequately documented. Therefore, we uphold the disallowance in
During the period audited, the State allocated payroll costs to
federal grants by determining a percentage of time spent based on
information from staff and supervisors. 1/ Notice of Appeal at 1. The
audit stated that time "distribution percentages were fixed in the
department's cost distribution system and were not adjusted to reflect
actual time spent on the federal program." DAR Exhibit (Ex.) A at 6.
Therefore, the audit questioned all payroll costs allocated to the
federal grants, because the allocation was not supported by
documentation of actual time distribution. 2/
The State conceded that "time distribution records were not
during the relevant time. State Brief (Br.) at 2. However, the State
suggested that DAR "misinterpreted" the auditor's intent by issuing a
disallowance, since the audit did not "find the payroll charges to be
excessive" or "disagree with the amount of time charged to these
grants." Id. at 1. The State argued that disallowance of all the
questioned payroll costs is inequitable since "actual staff time
consistent with payroll charges was spent on these grants," so the costs
were "legitimately incurred." Id. at 2. The State contended that time
distribution records were not kept, because no standard system for
documenting staff time by project existed. Id. Finally, the State
offered additional supporting documentation for its allocation of staff
time. State Attachments (Atts.) B, C, and D. 3/
Office of Budget and Management Circular A-87 (OMB A-87),
(Att.) B, B.10.b, provides the following requirements for documenting
distribution of staff time:
Payrolls must be supported by time and attendance or
records for individual employees. Salaries and wages of employees
chargeable to more than one grant program or other cost objective will
be supported by appropriate time distribution records. The method used
should produce an equitable distribution of time and effort.
1. The State undeniably failed to meet its obligation to support
costs under the grant with time distribution records.
The State submitted a letter from the State Auditor General in support
of its contention that the disallowance was based on a misinterpretation
of the audit. State Att. A. That letter concluded that "although DMH
could not document the payroll charges made to these grants, DMH staff
performed services on these federal assistance programs, and that the
amount of payroll charges to these grants appeared to be reasonable and
was not excessive." Id. at 1. The Auditor General explained that while
the entire amount charged to the federal programs was not supported by
time distribution records, the audit fieldwork had included procedures,
such as staff interviews, which supported their overall conclusion that
the amounts charged were reasonable and not excessive.
The audit nevertheless questioned the entire amount of payroll costs
stated that potentially "all or a portion" of the payroll charges for
which no time distribution records were kept "could be disallowed
because of the lack of documentation." DAR Ex. A at 6. Consequently,
DAR's determination to disallow all the questioned costs associated with
the HHS program, after the State failed to provide any additional
documentation to resolve the audit finding in its favor, clearly was
within the range of corrective actions contemplated in the audit report.
OMB A-87, including the requirement for "appropriate time
records" for employees working on more than one cost objective, has been
in place throughout the grant period, and was made applicable by federal
regulations at 45 C.F.R. . 74.171. (All cites from the Code of Federal
Regulations were accurate at all relevant times.) Costs charged to
federal grants must not only be reasonable in amount, but must also be
"necessary" to the administration of a grant and "allocable thereto."
OMB A-87, Att. B, B.10.a, and Att. A, C.1.a. Costs are only "allocable
to a particular cost objective to the extent of benefits received by
such objective." Id. at Att. A, C.2.a.
Without source documentation, the extent to which an employee's
activities benefitted the grant cannot be substantiated. Accounting
records which "identify adequately the source and application of funds
for grant . . . supported activities" are required by 45 C.F.R. .
74.61(b). The records must be supported by source documentation "such
as cancelled checks, paid bills, payrolls, contract and subgrant award
documents, etc." 45 C.F.R. . 74.61(g). Section 74.61(f) further
requires that "[p]rocedures shall be established for determining the
reasonableness, allowability, and allocability of costs in accordance
with the applicable cost principles . . . ." We have repeatedly held
that the federal recordkeeping requirements and cost principles place
the burden on grantees to document their costs. See, e.g., Pennsylvania
Dept. of Public Welfare, DAB No. 1089 at 7 (1989). It is therefore
reasonable for DAR to disallow costs which may in fact have been
incurred when the grantee is unable to document that the costs are
properly charged to the grant.
The State nevertheless argued that its failure to maintain the
records resulted from the absence of any standard mechanism at the State
or federal level. The absence of a State mechanism certainly does not
excuse the State from compliance with federal requirements. Nor is the
Federal government responsible for prescribing the mechanism by which
the grantee should prepare and maintain required records. OMB A-87
provides that grantees have "primary responsibility for employing
whatever form of organization and management techniques may be necessary
to assure proper and efficient administration." OMB A-87, Att. A,
A.2.c. Thus, the State had the primary responsibility to employ
whatever mechanism was necessary to comply with requirements for
documenting time distribution. Since the State admittedly failed to
maintain any time distribution records, the costs could only be charged
to the grant if the State were able to provide adequate alternative
documentation to meet federal requirements.
2. The documents offered by the State do not satisfy
requirements and so do not adequately support allocation of staff time
to the federal grant.
We turn now to the documents submitted by the State to support
allocation of staff time. None of the documents even purports to
represent contemporaneous records of actual time distribution. Rather,
the documents amount to either "retrospective estimates of what the
employee actually did" or "forecasts of what the employee would do."
DAR Br. at 9. The specific documents are described below:
-- A letter from the principal investigator on this
Carol T. Mowbray) stating that the project director (Ms. V. Sue
Johnson), whom Ms. Mowbray supervised, had been "assigned . . . to work
on the grant for 25% of her time, in FY 86 and FY 87." She further
states that she "can attest to the fact that during FY 86 and FY 87, Ms.
Johnson spent at least 25% of her time" on specific activities relating
to the grant. State Att. B, Mowbray letter (Aug. 8, 1991).
-- A memorandum from Ms. Johnson stating that her
work on the grant
"constituted an average of 25%" of her time. State Att. B, Johnson
memorandum (July 31, 1991).
-- A memorandum described as coming from the chief
stating that Ms. Johnson's time was charged to the federal grant at
50% in FY 86 and 25% in FY 87. State Br. at 2. The memorandum refers
to four attached, contemporaneous staff memoranda. State Att. D,
Lalwani memorandum (July 19, 1991).
-- The first attached memorandum is from Ms. Johnson
that her salary should be assigned to the grant at 50%. State Att.
D, Johnson memo (Jan. 8, 1986). The second memorandum provides more
detail about accounting and gives the same percentage to be used as of
January 1, 1986. State Att. D, Johnson memo (Feb. 27, 1986). The
third memorandum, from the chief accountant, states that Ms. Johnson's
salary will be charged to the federal grant at 50% as of January 1, 1986
(Mar. 3, 1986). Finally, the fourth memorandum, from Ms. Mowbray,
states that Ms. Johnson's time was still being charged at 50%, but
should have been reduced to 25% at the beginning of FY 87. Ms. Johnson
is described as "devoting a smaller percentage of her time to this
project." State Att. D, Mowbray memo (Apr. 21, 1987).
-- The project director's position description
indicates that she
is to devote 50% of her time to this grant. State Att. C,
Johnson's position description (Oct. 28, 1985).
The memoranda are conflicting as to whether the State is representing
that the project director devoted 25% or 50% of her time to the grant.
The employee herself stated in retrospect that she spent "an average" of
25%, and did not distinguish between the fiscal years. Even if this
were supported by the other documents, an average figure over two years
is too speculative to be reasonably substituted for time distribution
records. Moreover, the memoranda from the period involved show that the
percentage of time charged for the project director dropped from 50% in
FY 86 to 25% in FY 87. Such a reduction is inconsistent with the State's
assertion that its use of a fixed percentage was "appropriate because
the specific staff time . . . was determined to be steady." Notice of
Appeal at 1.
Even if the documents were internally consistent, we are
reluctant to consider non-contemporaneous documents without some
reasonable explanation of the absence of the required records. Second
Street Youth Center, Inc., DAB No. 1270 (1991) (addressing similar
requirements in OMB Circular A-122 for documentation of time
distribution). Most of the memoranda from the relevant period date from
the first three months of the grant, so they cannot represent
contemporaneous records of actual time spent. The State offered no
explanation other than an admission that it did not maintain time
distribution records in the absence of a standard system, but plans to
do so in the future.
Further, these broad percentages do not provide any specificity about
the nature and amount of grant-related work performed on particular
dates. 4/ None of the documents explains the basis for these
percentages, beyond general descriptions of the project director's
duties and a reference to her attendance at certain monthly meetings
(State Atts. B and C). Acadia-Vermillion Community Action Program,
Inc., DAB No. 1201 at 5 (1990) (distribution of time by percentages,
without supporting basis or documentation, is unacceptable). The
documents do not give any detail concerning the relationship between the
predicted percentages and the actual experience of the employee, and
what she actually accomplished on behalf of grant objectives. The "best
guess" of a supervisor or employee is not an acceptable substitute for
proper records. Wisconsin Dept. of Health and Social Services, DAB No.
534 at 5-6 (1984). These documents are essentially conclusory
statements about what percentages should be charged, rather than
evidence as to time spent upon which an allocation of payroll costs
would properly be based. As such, they do not satisfy federal
requirements for documentation.
We conclude that the State did not maintain required time
records and did not offer any adequate substitute documentation. Under
these circumstances, we find no inequity in the DAR determination.
Accordingly, we will uphold as reasonable the disallowance of payroll
costs charged to the grant for the project director.
For the reasons explained above, the disallowance of $31,684 is upheld
_____________________________ Donald F. Garrett
_____________________________ Norval D. (John) Settle
_____________________________ Cecilia Sparks
Presiding Board Member
1. The grant involved was funded for the two fiscal years by
Administration on Children, Youth and Families, now part of the
Administration for Children and Families, for a research project on
"Sexual Abuse in a Day Care Setting."
2. An additional $126,716 in questioned payroll costs was charged to
Department of Education grant and is not involved in this disallowance.
3. The record indicates that the disputed payroll costs were
for the project director on the grant. Payroll costs for other staff
were apparently part of the State's matching share. State Att. D.
4. The State did not contend that it had in place any approved
of allocating the employee's time, such as time studies, to replace the
necessity for detailed records of individual