Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Home Education
Livelihood Program, Inc.
Docket No. A-95-54 and A-95-55
Decision No. 1598
DATE: September 20, 1996
DECISION
The Administration for Children and Families (ACF) of the
Department of Health and Human Services (HHS) notified
Home Education Livelihood Program, Inc. (HELP) by letter
dated December 8, 1994 that ACF was disallowing $642,426
because of alleged improper expenditures of federal funds
for HELP's Migrant Head Start program (Board Docket No.
A-95-55). HELP appealed this disallowance pursuant to 45
C.F.R. Part 16.
ACF also notified HELP, by a separate letter dated
December 8, 1994, that it proposed to terminate HELP's
Migrant Head Start grant (Board Docket No. A-95-54).
This action was taken pursuant to 45 C.F.R. § 1303.14(b)
based on HELP's alleged non-compliance with requirements
of the program, including continuing failure to meet
performance standards, failure to comply with eligibility
requirements and limitations on enrollment, failure to
comply with the Head Start grants administration
requirements, and failure to abide by terms and
conditions of the award and other applicable laws, regu-
lations or requirements. See Termination Letter of
December 8, 1994, submitted with HELP's Notice of Appeal,
attachment 1 (Termination Letter), at 1-6; Respondent's
Statement of Basis for Allegations Concerning Pesticides
and Other Matters (April 17, 1995); 45 C.F.R. Part 1301
and § 1305.7.
These alleged failures were the result of findings made
during an on-site program review conducted at HELP's
facilities on August 22-26, 1994 (1994 on-site review),
including the fiscal findings which led to the
disallowance. Many of the alleged program violations
were also found during an on-site review conducted in
August 1991. The alleged violations on which this
termination was based were listed in the termination and
disallowance letters, as well as in the Departmental
Appeals Board's (DAB's) Rulings of February 2, 1995 (as
modified in the DAB's Summary of April 6, 1995
Teleconference) and Notice of May 17, 1995 issued
pursuant to 45 C.F.R. § 1303.16(g). HELP requested a
hearing on the proposed termination under 45 C.F.R.
§ 1303.14(c)(2).
The DAB held a hearing on both the disallowance and
termination actions in El Paso, Texas from June 5-9, 1995
and in Las Cruces, New Mexico from October 23 to November
1, 1995. The record consists of the transcripts of these
two hearings (Tr. I and Tr. II, respectively), as well as
many volumes of documents submitted by each party (which
we refer to as Appellant's Appeal File (AAF) and
Respondent's Appeal File (RAF)).
SUMMARY OF THE DECISION
ACF contended that its findings that HELP had charged the
grant with $642,426 in unallowable costs and that the
fiscal and administrative practices that led to this
misuse of federal funds, along with the 14 repeat
findings of program deficiencies and two safety-related
incidents that occurred during the 1994 on-site review,
showed that HELP was an unfit grantee and that
termination of the grant was therefore justified. After
fully considering all of the evidence of record and the
parties' arguments, we uphold only $58,965 of the
$642,426 alleged as misspent funds. After considering
all of the evidence and arguments (including the weight
that should be given to the hearing testimony and
documents presented by the parties), we sustain only two
of the fourteen findings of program deficiencies and
neither of the safety-related incidents. In addition,
although ACF alleged that any single finding of non-
compliance was sufficient in and of itself to justify
termination, it failed to provide us with any basis to
conclude that the two remaining findings of non-
compliance were material and therefore would satisfy the
criteria of 45 C.F.R. § 1303.14(b) for termination of
HELP's grant. We therefore conclude that ACF has not
shown that the standards set forth in 45 C.F.R.
§ 1303.14(b) for termination of a Head Start grant had
been satisfied.
The rationale for our decision is organized as follows.
First we review the applicable statute and regulations
(pages 3 to 6).
Next we address each item of the disallowance (pages 7
to 40). We find that ACF properly disallowed $58,965, as
follows:
m $5,200 for rental of the Deming Rainbow Center;
and
m $53,765 for exceeding the administrative cost
limit.
We reverse ACF's finding with regard to the remainder of
the eleven disallowed costs amounting to $581,923 of
federal expenditures.
We then review the findings of repeat deficiencies in
complying with program standards that were reported by
the 1994 OSPRI review team (pages 40 to 95). We conclude
that the record supported only two of the fourteen
alleged deficiencies. We also discuss the two safety-
related incidents in this section, which we find did not
support ACF's decision to terminate HELP's program.
Finally, we consider whether the findings of non-
compliance which are established by the record before us
amount to a material breach of the Head Start
regulations, since 45 C.F.R. § 74.113(a) (applicable to
all HHS grants) requires that termination under 45 C.F.R.
§ 1303.14(b) be based on a material failure to comply
with grant requirements (pages 95 to 100). We conclude
that the findings of non-compliance, either alone or in
combination, do not compromise HELP's ability to provide
quality Head Start services so as to amount to a material
breach. Consequently, the criteria of 45 C.F.R.
§ 1303.14(b) for termination of HELP's Migrant Head Start
program have not been satisfied.
BACKGROUND
I. Overview of Applicable Law and Regulations
The Head Start program is designed to deliver
comprehensive health, educational, nutritional, social
and other services to economically disadvantaged children
and their families. 42 U.S.C. § 9831 and 45 C.F.R.
§ 1304.1-3. Some Head Start funds are set aside for the
purpose of providing these comprehensive services to low-
income children whose families migrate to engage in
agricultural work. Campesinos Unidos, Inc., DAB No. 1518
at 4 (1995). ACF provides funds to grantees to serve as
Head Start agencies within designated communities and
reviews their performance in meeting program and fiscal
requirements. See generally 42 U.S.C. §§ 9836, 9837,
and 9846. The federal share of costs may not exceed 80%
of the program's budget and the grantee must provide a
20% matching share, unless a waiver is granted. Costs
expended for program administration may not exceed 15% of
the grantee's total annual budget. 42 U.S.C. §§ 9835(b)
and 9839(b).
The law requires that in administering a Head Start
grant --
[e]ach Head Start agency shall observe standards of
organization, management, and administration which
will assure, so far as reasonably possible, that all
program activities are conducted in a manner
consistent with the purposes of this subchapter and
the objective of providing assistance effectively,
efficiently and free of any taint of partisan
political bias or personal, or family favoritism.
Each such agency shall establish or adopt rules to
assure full staff accountability in matters governed
by law, regulations, or agency policy . . . . Each
such agency shall adopt for itself rules designed to
. . . assure that only persons capable of
discharging their duties with competence and
integrity are employed . . . .
42 U.S.C. § 9839(a); see also 45 C.F.R. § 1301.30. All
Head Start grantees are required to "keep such records"
as the Secretary of HHS (Secretary) prescribes, including
those which will fully disclose the disposition of
federal funds and will facilitate an effective audit. 42
U.S.C. § 9842(a). The Secretary ". . . shall have access
for the purpose of audit and examination to any books,
documents, papers, and records . . . that are pertinent
to the financial assistance received." 42 U.S.C.
§ 9842(b).
Grantees are subject to requirements related to
eligibility, enrollment and attendance of children
served. 42 U.S.C. § 9836(c)(2)(A). The Head Start
program is unique in that parents are expected to
participate in the management of the program, as well as
in the actual development and implementation of the
program. 42 U.S.C. § 9837. The Secretary is authorized
to prescribe regulations binding on all Head Start
agencies. 42 U.S.C. § 9839(c).
The Secretary has promulgated program performance
standards covering the education, health (including
medical, dental, mental health and nutrition),
disabilities, social services, and parent involvement
areas of Head Start. See 45 C.F.R. Parts 1304 and 1308.
Generally, each grantee is required to develop, with the
advice and concurrence of its Policy Council, a written
plan to implement the performance standards for each
component area and to update each plan at least annually.
45 C.F.R. § 1304.1-4. Under the Head Start Act, HHS is
required to conduct a full review of each Head Start
program at least once during each three-year period in
order to monitor the program's compliance with Head Start
requirements, including performance standards. 42 U.S.C.
§ 9836(c)(2)(A). The Head Start Act states that a
program will not be terminated based solely on one on-
site review finding program performance deficiencies. 42
U.S.C. § 9836(c)(4).
The regulations governing the general administration of
HHS grants contain the provisions applicable to the
financial reporting, procurement, and fiscal management
of Head Start grants. 45 C.F.R. Part 74; 45 C.F.R.
§ 1301.10. The requirements include:
(a) accurate, current and complete financial reporting;
(b) maintenance of accounting records which identify
adequately the source and application of grant
funds;
(c) maintenance of internal controls that effectively
account for all grant funds and other assets and
assure that all such property is safeguarded and
used only for authorized purposes;
(d) comparison of actual and budgeted amounts to
exercise budgetary control;
(e) adoption of procedures to minimize the time elapsing
between the advance of federal funds and their use
by the grantee;
(f) compliance with applicable cost principles to assure
that costs are allowable, reasonable, and properly
allocated;
(g) retention of source documentation, such as paid
bills, checks, or payroll records to support
accounting records; and
(h) systematic resolution of audit findings and
recommendations.
45 C.F.R. § 74.61. Each Head Start grantee must be
audited annually by an independent auditor and the audit
is subject to certain government requirements. 45 C.F.R.
§ 1301.12(a).
In addition to the codified regulations designed
specifically for Head Start, non-profit organizations
which receive Head Start funds are subject to the
requirements of Office of Management and Budget Circular
A-122 (see 45 Fed. Reg. 46022 (July 8, 1980) (OMB A-122),
made applicable to HHS grants by 45 C.F.R. § 74.174
(1993)). OMB A-122 provides a uniform set of cost
principles for determining costs of grants, contracts,
and other agreements and is designed to promote
efficiency and understanding between non-profit grantees
and the federal government. It provides guidance on
allowable direct costs and allocable indirect costs, as
well as guidance on specific cost items.
Finally, Head Start grantees are subject to the
requirements of the Office of Human Development Services
Discretionary Grants Administration Manual (OHDS/DGAM).
This manual provides the policies for management of all
Head Start grants, as well as other grants administered
by ACF. The OHDS/DGAM provides ACF grants policies on
competition and awarding, funding, payment procedures,
reporting and cost limits.
II. Factual Background of this Program
HELP is a non-profit organization, with a home office
located in Albuquerque, New Mexico, which was
incorporated on October 6, 1965. HELP's purpose is to
provide economic and other assistance to low-income
residents and farmworkers in New Mexico, and to foster
community-wide concern for the problems of such
underprivileged persons. AAF (HELP, Inc., Tab A) at
3223. At all times relevant to this proceeding, HELP
received federal funds from HHS through ACF to run a Head
Start program for families of migrant farm workers who
move into or within New Mexico for the purpose of
engaging in agricultural work (Migrant Head Start).
Throughout the relevant time period, HELP likewise
received federal funds from ACF to provide Head Start
services to low-income families who are regular residents
of New Mexico (Regional Head Start). 1/ HELP's two
Head Start programs were jointly administered by a
management team in Las Cruces until fall of 1992, when
ACF required that HELP separate the two programs and
administer them independently from one another (the
"divorce" of the programs). Tr. II at 681-682. HELP
regularly receives federal, state, and private funds to
run other types of assistance programs.
HELP operates on a fiscal year running from October 1
through September 30. 2/ AAF (HELP, Inc., Tab A) at
3220. During the relevant time period, HELP operated
five Migrant Head Start centers in New Mexico, located in
the areas (and referred to) as follows: Las Cruces,
Deming, Anthony, Rincon, and Portales. Each of the
centers, except for Portales, is located less than an
hour's drive from the program's offices in Las Cruces;
Portales is located approximately 250 miles to the east
of Las Cruces. Tr. II at 501. Throughout the relevant
time period (1992-1994), HELP's Migrant Head Start
centers were generally open from June until August, with
some open as late as November. The principal language of
the majority of the families served by HELP's Migrant
Head Start program is Spanish. AAF (HELP Inc., Tab D)
at 3375.
ANALYSIS
I. The Disallowance Proceeding
The disallowed expenditures consisted of the following
eleven items:
1. $155,384 for less-than-arms-length rental costs;
2. $134,251 for overexpenditures of federal funds;
3. $5,200 for the Deming Rainbow Center rental costs;
4. $4,175 for office equipment rental costs;
5. $62,411 for the Social Services and Parent
Involvement Coordinators' salaries;
6. $777 for prior year expenses;
7. $27,300 for La Primera Iglesia Bautista rental
costs;
8. $131,720 for exceeding administrative cost
limitations;
9. $30,633 for staff hired without prior approval;
10. $81,590 for the salary of the Child Development
Director; and
11. $7,447 for literacy programs.
Notice of Disallowance Letter of December 8, 1994,
submitted with HELP's Notice of Appeal, attachment 2
(disallowance letter). 3/
1. Less-Than-Arms-Length Rental Costs
ACF disallowed $155,384 on the grounds that HELP had
engaged in less-than-arms-length negotiations with regard
to leases for three buildings used for its Migrant Head
Start program. 4/ Disallowance Letter at 3-4. The
three buildings were leased from Rural Housing, Inc.
(RHI), and the disallowed amount represented 41 months
(April 1991 through August 1994) of rental payments for
each of the three buildings. ACF alleged that the three
lease arrangements were less-than-arms-length
transactions because the Executive Director of HELP also
functioned as the management agent who signed checks for
RHI and had broad authority over RHI's business
transactions, including the leases at issue. ACF Br. at
4, 5, 6. Moreover, according to ACF, the senior
accountant for RHI had the authority to sign checks
issued by both RHI and HELP. ACF Br. at 4. Finally, ACF
argued that RHI received a substantial loan from HELP and
that the terms of that loan contemplated that it might
become a donation to RHI, an agreement which would not be
consistent with an arms-length transaction. ACF Br. at
5. ACF found that these less-than-arms-length
transactions resulted in an overcharging of the grant in
violation of OMB A-122, att. B, sec. 42.c, which limits
payments for contracts which were not negotiated at arms-
length. 5/ Disallowance Letter at 4.
HELP responded that the concept of a less-than-arms-
length transaction was based on the ability of a person
or party to substantially influence the outcome of the
transaction. HELP Br. at 5. HELP argued that there
could be no substantial influence here due to the sheer
size of both organizations: RHI obtained only 2% of its
annual income from leasing the Migrant Head Start
facilities to HELP, and HELP obtained only 1.5% of its
revenue from (unrelated) management agreements with RHI.
HELP Br. at 6. HELP discussed several criteria
established by the DAB in prior decisions addressing
less-than-arms-length transactions and argued that,
applying these criteria to these transactions, the
transactions were arms-length transactions. See,
generally, HELP Br. at 7-14. In discussing these
criteria, HELP asserted that its Executive Director had
no role in negotiations with RHI on the Migrant Head
Start building leases which were in effect throughout the
relevant time period, and that the leases on which ACF
relied as evidence of a less-than-arms-length transaction
were not applicable to the time period at issue here.
HELP Br. at 12. Moreover, HELP argued, RHI's accountant
did not personally sign checks for HELP during the
relevant time period; her signature remained on a check
signing machine for HELP due to an oversight after she
left HELP's employment. HELP Br. at 15.
We do not find the evidence produced by ACF on this
matter to be convincing. There is no doubt that HELP and
RHI had a working relationship and engaged in business
transactions designed to foster the goals of each
organization. It is clear from the record that their
relationship took two main forms: 1) HELP managed
certain housing properties (unrelated to Migrant Head
Start) as a management agent for RHI; and 2) HELP leased
certain buildings and properties from RHI, three of which
were used for Migrant Head Start. 6/
With regard to the first of these two relationships, the
record provides evidence that HELP's Executive Director,
Ernest Ortega, served as the management agent for the
housing properties which HELP managed for RHI. Tr. II
at 632. With regard to the management agency agreements,
Mr. Ortega was involved in lease negotiations and signing
contracts. Mr. Ortega, as HELP's Executive Director,
represented HELP's interests in these matters and had a
fiduciary responsibility to HELP. Tr. II at 651. ACF
conceded that Mr. Ortega did not personally receive fees
for these services, but the fees went into HELP's bank
accounts. The management agreements involved the work of
RHI in providing housing to low-income persons with
HELP's assistance as a management agent; the agreements
had no impact on the interests of HELP's Migrant Head
Start program. See, generally, Tr. II at 622-633. Thus,
we are not concerned with Mr. Ortega's management agent
relationship with RHI through HELP in determining whether
the three leases for HELP's Migrant Head Start facilities
were the product of less-than-arms-length negotiations.
With regard to the leases for the three buildings used by
Migrant Head Start, we must carefully scrutinize the
relationship of Mr. Ortega to both organizations because
of the potential impact any conflict of interest might
have on the migrant program. We find that, while ACF
argued that Mr. Ortega was involved with lease
negotiations for both organizations, there is no evidence
of such involvement. We conclude that RHI and HELP did
not engage in less-than-arms-length transactions with
regard to these leases.
There are three completed leases in the record pertaining
to the buildings at issue: 1) a lease for the Deming
Center, effective October 1, 1987 through September 30,
1990 (the 1987-1990 Deming lease); 2) a lease for the Las
Cruces office, effective June 1, 1992 through May 30,
1997 (the 1992-1997 Las Cruces lease); and 3) a lease for
the Portales Center (as well as two other buildings
unrelated to the disallowance here), effective October 1,
1993 through September 30, 1998 (the 1993-1998 Portales
lease). RAF Tab 30, at 767-775. The 1987-1990 Deming
lease was signed on October 1, 1987 by Jack M. Harris for
RHI and by Mr. Ortega for HELP. Id. at 770. The 1992-
1997 Las Cruces lease and the 1993-1998 Portales lease
were signed on June 1, 1992 and October 1, 1993,
respectively, by Jack M. Harris for RHI and Henrietta C.
de Baca for HELP. 7/ Id. at 772, 775. Thus, the most
recent lease pertaining to any of the three buildings
used by Migrant Head Start which is signed by Mr. Ortega
is dated October 1, 1987, and is wholly irrelevant to the
time period at issue. 8/ The two leases which cover
the relevant time period, for the Las Cruces and Portales
facilities, were not signed by Mr. Ortega but by Ms. de
Baca. ACF has not argued that Ms. de Baca had any
relationship with RHI.
Mr. Ortega testified that he does not currently sign
leases with RHI for Head Start facilities. Tr. II
at 641. Mr. Ortega stated that he did not take part in
the 1992 and 1993 lease negotiations because, by that
time, HELP had become aware of the possible less-than-
arms-length transaction issue as a result of RHI's
dealings with the Department of Labor, and had made
efforts to correct any potential conflicts of interest.
Tr. II at 634-637. Mr. Ortega stated that the leases
effective throughout the relevant time period for the
three Migrant Head Start buildings were based on leasing
needs identified by HELP's Migrant Head Start Director,
Loui Reyes, and on negotiations between the Boards of
both RHI and HELP. Tr. II at 642. Mr. Ortega testified
that the Boards of the two organizations did not have
common members. Tr. II at 629. Moreover, Mr. Ortega
testified that RHI was discussed at HELP's Board meeting
solely because HELP was managing housing units for RHI
and HELP's Board had a duty to know the results of
actions taken under those contracts. Tr. II at 647.
Based on the above factors, we find no evidence of any
improper influence exerted by either party in the manner
in which the three leases were negotiated.
As asserted by HELP, OMB A-122, att. B, sec. 42.c
provides that a less-than-arms-length transaction is one
under which one party to the lease agreement is able to
control or substantially influence the actions of
another. The section provides examples of such
organizational relationships, such as when the parties
are divisions of the same larger organization, when the
parties have common officers, directors or members, or
where key personnel of one party have a controlling
interest in the other party. The provision states that
less-than-arms-length transactions are not limited to
transactions among parties with these specific
relationships. Enterprise for Progress in the Community,
Inc., DAB No. 1558, at 7 (1996) (EPIC). ACF conceded
that HELP and RHI did not have one of these specific
organizational relationships. ACF Br. at 2.
In EPIC, we stated that --
The Minutes, so far as they reflect the routine
business activities of the [landlord] Foundation,
support a conclusion that the Executive Director
[for the tenant Head Start program] was in a
position to, and often times did, exert substantial
influence over the Foundation's actions. This
factor alone supports a conclusion that the
organizations' relationship was less-than-arms-
length.
Id. 9/ Here, we find that there is no evidence that
Mr. Ortega was in a position to exert substantial
influence over both organizations. While he was the
Executive Director of HELP and thus presumably had
significant influence over the dealings of HELP, his only
proven relationship with RHI is that he was acting as the
management agent for HELP once certain housing properties
of RHI were contracted to HELP for management. However,
his fiduciary and employee relationships were still
exclusively with HELP. See RAF Tab 33, at 914-915
(letter from Mr. Ortega to ACF's William McCarron stating
that Mr. Ortega, as Executive Director for HELP, could
not provide proprietary or other information on RHI
because it was a separate and distinct legal authority);
Tr. II at 648-649, 651.
Moreover, we agree with HELP that the relationship
between RHI and HELP is clearly distinguishable from the
relationships between the organizations discussed in EPIC
and in Salt Lake City Community Action Program, DAB
No. 1261 (1991). In each of those cases, the
organizations providing facilities for lease to the Head
Start programs had no purpose other than to supply
facilities to Head Start. In this case, RHI is an
independent organization providing housing for low-income
persons in New Mexico; its leasing of Head Start
facilities to HELP is a very minimal part of its
business, as are HELP's management agreements with RHI a
minimal part of HELP's business.
ACF also argued that the senior accountant of RHI had
check signing authority for both organizations, and that
this indicated a less-than-arms-length relationship
between the organizations. HELP replied that the
accountant worked exclusively for RHI but her signature
inadvertently remained on a check signing machine for
HELP. Tr. II at 638-639. ACF did not introduce copies
of any checks issued by HELP within the relevant time
period which contained this employee's personal
signature. While we do not endorse the business practice
of having one employee's signature available to two
organizations involved in negotiations, contracts, and
the transfer of money, we find that this practice was the
result of oversight rather than of intentional undue
influence. Thus, we do not find it to be of material
significance on the less-than-arms-length negotiation
issue.
While during the late 1980's it was brought to HELP's
attention that the relationship between RHI and HELP
might be considered less-than-arms-length, HELP has
convinced us that it made a good faith effort to correct
this potential conflict of interest and that a conflict
of interest did not exist during the relevant time
period. There is also evidence that the Department of
Housing and Urban Development (HUD) considers the current
relationship to be arms-length. 10/ Finally, ACF, in
arguing that this was a less-than-arms-length
relationship, relied in part on the fact that HELP had
loaned money to RHI and that the loan's terms
contemplated that such loan might become a donation to
RHI. ACF Br. at 5. However, HELP argued, and ACF did
not rebut, that the loan came from funds raised by HELP
through its management agreements and was unrelated to
Migrant Head Start's funding. HELP Br. at 10; Tr. II at
704-705, citing ACF Hearing Ex. 1. Moreover, HELP stated
(and ACF did not rebut) that the loan always had been
repaid on a regular basis. See also HELP Br. at 10,
citing Tr. II at 1095.
For the above reasons, we reverse the disallowance of
$155,384 for what ACF characterized as less-than-arms-
length lease transactions.
2. Overexpenditure of Federal Funds
ACF disallowed $134,251 for overexpenditures which HELP
allegedly incurred during the 1992-93 program year and
which, according to ACF, HELP carried forward and paid
out of 1993-94 federal grant funds. 11/ ACF argued
that this carry-over of 1992-93 expenditures effectively
reduced the amount available from HELP's 1993-94 grant
award which could be utilized in meeting its program
needs for 1993-94. ACF Br. at 8. ACF disallowed this
amount as a violation of the requirement that expenses be
charged to the proper budget period, citing to OMB A-122,
att. A, sec. A. See Disallowance Letter at 4.
ACF's witness, William McCarron, testified that this
disallowed cost was based on HELP's Balance Sheet of
4/31/94 through 7/31/94 (1994 Balance Sheet) and on a
1993 Migrant Head Start itemized statement for the
program year 4/93 through 3/94 (1993 Statement). Tr. I
at 99-103, citing RAF Tab 30, at 786, 787. The 1994
Balance Sheet, under a category entitled "Capital and
Fund Balance," lists "-$134,250.82" in "prior year
unexpended" funds. The 1993 Statement lists $134,250.82
in unexpended funds. Mr. McCarron asserted that this
represented a 1992-93 overexpenditure that was paid for
from 1993-94 federal grant funds, thus leaving only
$1,031,276 of the $1,165,527 of federal funds HELP
received for 1993-94 available for 1993-94 expenses.
Tr. I at 107. He stated that he based this on the fact
that the records did not indicate that the $134,250.82
deficit was again carried over to 1994-95. Tr. I at 111.
HELP admitted that it kept its Migrant program open
longer than it originally planned in 1992-93 and 1993-94
(due to an extended agricultural season), resulting in
expenditures in excess of its budget for those program
years. Tr. II at 652-653. According to HELP, it carried
those expenditures on its books as "prior year
unexpended" while, at the same time, it sought money from
ACF to cover the overexpenditures. HELP alleged that
when ACF refused additional funding, HELP covered the
expenditures itself out of its unrestricted funds that it
earned from its RHI management contracts. Tr. II at 656.
HELP produced a journal entry form, dated March 31,
1994, reflecting a cash contribution to the Migrant Head
Start from HELP's unrestricted funds in the amount of
$134,250.54. ACF Hearing Ex. 2. HELP contended that Mr.
McCarron's conclusion from the documents that it used 93-
94 funds to cover these costs is contradicted by its
financial status report for the 1993-94 program year, as
well as its income statement, which showed that HELP
spent $130,928.72 more on its Migrant Head Start program
for the 1993-94 year than the amount which ACF claimed
that HELP spent. HELP Br. at 17-18, citing AAF (HELP,
Inc., 5/22/95 Filing, Tab F) at 3391. Moreover, HELP
argued, the on-site team reviewer who reviewed financial
matters testified that she found no payments for out-of-
period costs for the 1993-94 budget year among the
federal expenditures, which would have indicated HELP was
paying previous year's expenses with current year's grant
funds. HELP Br. at 18. HELP argued that it is clear
from the record that HELP had unrestricted funds from
which it could have paid the overexpenditures. HELP Br.
at 18-19.
We reverse this cost item of the disallowance. ACF did
not point to any evidence showing that the
overexpenditures were applied against federal funds
during the 1994 grant year, a year in which HELP actually
had federal funds totalling $188,132 left over. HELP's
submission of 8/4/96, attachment B. The disallowance is
based solely on the 1994 Balance Sheet and the 1993
Statement, which are internal documents of HELP and do
not show on their face that the overexpenditures came
from federal funds. Mr. McCarron stated that he was
given these documents as part of his request for
financial records from HELP, but he admitted he never
inquired as to what these documents were and did not
speak with anyone at HELP regarding this cost item.
Tr. I at 101-102, 113. Mr. McCarron asserted that he did
not believe that the overexpenditures were paid for out
of HELP's unrestricted funds simply because "[i]t is not
a normal practice for a grantee to use unrestricted funds
for situations such as this." Tr. I at 113. Yet ACF's
reviewer for the financial administration portion of the
OSPRI stated that she did not find any charges for a
prior year paid for with 1993-94 federal program funds.
Tr. I at 397. The record substantiates HELP's claim that
it had unrestricted funds available to cover the
overexpenditures in the full amount. HELP Submission of
July 8, 1996, att. 1, at 3.
Based on the above factors, we reverse ACF's findings
with regard to $134,251 for alleged out-of-period costs.
3. Deming Rainbow Center Rental
HELP paid RHI $5,200 to rent classroom space for four
months (June-September 1993) at a location known as the
Deming Rainbow Center. HELP argued that it leased and
renovated this facility to accommodate additional
children who could not be accommodated at its other Head
Start center located in Deming, New Mexico. See
Disallowance Letter at 4-5. The renovation was not
completed until December 1993, and there is no dispute
that the space was never utilized by HELP's Migrant Head
Start program due to an underenrollment of children in
the Deming area throughout the relevant time period. Id.
ACF disallowed the rental costs on the grounds that the
Migrant Head Start program received no benefit from the
rented space and that an expenditure without a comparable
benefit to the program was a violation of OMB A-122, att.
A, sec. A.3.c. 12/ ACF's witness, Mr. McCarron,
testified that this expenditure was a violation because
no children were ever served by the center. Tr. I at 22-
23, 121-122, 124.
In response, HELP argued that section A.3.c. clearly
establishes that whether a cost is reasonably incurred is
determined from the perspective of an individual making
an assessment at the time rather than from hindsight:
Since the cost standard at issue is whether a
grantee has a reasonable belief that it needs the
facility at the time that it signed the lease, Mr.
McCarron's formulation -- i.e., that it could not be
reasonable to lease a facility if the grantee ends
up not using it [citation omitted] -- is simply
wrong.
HELP Br. at 20 (emphasis added). HELP argued that since
it is impossible to know with certainty if a Migrant Head
Start program will reach peak enrollment during any given
year because of numerous factors outside of its control,
the cost incurred here for the Deming Rainbow Center was
reasonable. 13/ HELP Br. at 21-22. Moreover, HELP
argued, evidence in the record indicated that HELP leased
the center because it was under pressure from ACF to
increase its licensed capacity to its funded level. HELP
Br. at 21, citing Tr. II at 1342, 1432.
We conclude that ACF properly disallowed this
expenditure. We agree with HELP that the standard, which
calls for a determination of whether the decision-maker
acted with prudence under the circumstances known to him
at the time, clearly contemplates that a review should be
based on the perspective of the person making the
decision at the time rather than from hindsight.
However, we do not find that the decision to lease the
Deming Rainbow Center was based on a reasonable belief
that leasing this facility was necessary.
At the hearing, Mr. Loui V. Reyes, Director of HELP's
Migrant Head Start program, explained that the purpose of
the Deming Rainbow Center was to serve children in the
event that HELP's Migrant Head Start enrollment in the
Deming area at any given time exceeded the licensed
capacity of its other center in Deming. Mr. Reyes also
stated that the purpose of the center was to ensure that
HELP was licensed to accommodate 404 migrant children in
the event there were that many eligible children enrolled
in its Migrant Head Start program at one time. Tr. II
at 1342. The following colloquy then occurred:
Mr. Waters: In your opinion, was it
necessary to rent that
facility?
Mr. Reyes: No.
Mr. Reyes then explained that HELP rented the Deming
Rainbow Center because ACF asked that HELP's Migrant
program ensure that it had licensed capacity for its
funded enrollment of 404 children in the event that the
program was fully enrolled at any single point in time.
Id. Mr. Reyes also explained that the Las Cruces Public
Schools would accommodate HELP's migrant pre-school
children in the event of overflows and would not charge
rent to the program. Tr. II at 1342-1343. Las Cruces is
located approximately 60 miles east of Deming. Tr. II
at 501.
We find that HELP's actions were not based on a
reasonable belief that rental of the center was
necessary. First, HELP's Migrant Head Start Director,
Mr. Reyes, stated outright that he did not believe that
it was necessary to rent the facility. Mr. Reyes' belief
was apparently based on HELP's history of serving migrant
children in the Deming area and his belief that HELP's
current licensed capacity was adequate for the number of
children ordinarily served in Deming at any single point
in time. This belief is borne out by findings showing
that at least since 1991, HELP's migrant program enrolled
substantially fewer children than the 404 it was funded
to serve and there were no waiting lists at any of its
Head Start centers. RAF Tab 39, at 958; RAF Tab 48,
at 984, 990; Termination Letter at 5-6. ACF's
requirement that HELP have a licensed capacity for 404
was based on the fact that HELP requested and received
funding for 404 children. AAF (Cost Disallowances,
Tab 3) at 1343. HELP could have simply asked for funding
for fewer children if it believed that there would not be
a peak season in which the program was fully enrolled.
Moreover, HELP asserted that it had an agreement with the
Las Cruces Public Schools to take Migrant Head Start
children in the event the need exceeded the licensed
capacity at the Las Cruces center. Oral Argument at 258-
259; Tr. II at 1342-1343. While there was no evidence in
the record as to whether such agreement covered an
unlimited number of children, HELP used this agreement as
its defense to ACF's charge that it could not serve 404
children at once. Thus, it is reasonable to presume that
HELP believed such agreement would allow for serving a
total of at least 404 migrant children during a peak
season. Neither party presented any evidence that the
grant required that a precise number of children had to
be accommodated at a particular center.
Based on the standard asserted by HELP, and the testimony
of its Migrant Head Start Director, we conclude that it
was not reasonable and prudent for HELP to lease and
renovate the Deming Rainbow Center. We therefore uphold
ACF's disallowance of $5,200 for the rental of that
center.
4. Equipment Rental
HELP leased from RHI a Xerox typewriter which RHI
originally purchased for $499. According to ACF, during
the 87 months HELP leased the typewriter (May 1987
through August 1994), HELP's Migrant program paid RHI a
total of $1,465 in monthly payments ranging between $15
and $35. Disallowance Letter at 5. According to ACF,
the typewriter was used approximately 50% of the time by
HELP's Migrant Head Start program and 50% of the time by
HELP's Regional Head Start program. ACF disallowed
$1,215, which represented the total of the monthly
payments ($1,465) minus $250. The $250 which ACF
determined was the allowable cost of the typewriter was
based on Migrant Head Start's 50% usage of the equipment
multiplied by the purchase price of $499 (rounded to the
next dollar). Id.
HELP also leased a photocopying machine from RHI which
RHI purchased for $740. Over the 74 months that HELP
leased the machine, HELP's Migrant program paid RHI a
total of $3,700 in $50 monthly payments. The photocopier
was used exclusively by the Migrant Head Start program.
ACF disallowed $2,960, which represents the total of the
monthly rental payments minus the purchase price of the
photocopier. Id. at 5.
ACF alleged that these lease arrangements violated OMB A-
122, att. B, sec. 42.d, which, according to ACF, provides
that lease costs for office equipment are not allowable
beyond the purchase price of the equipment. ACF also
argued that these costs violated cost principles because
they were not reasonable to the performance of the award
and exceeded costs which would be incurred by a prudent
person. ACF Br. at 12-13. ACF argued that one of HELP's
witnesses, who stated that the typewriter was previously
transferred to the Regional Head Start program solely for
its use and that the photocopier had been disposed of,
could not explain why HELP's records did not reflect
these changes so that the migrant program was no longer
being charged for the equipment. 14/ ACF Br. at 13-
14.
HELP responded that ACF's witness on this matter, Mr.
McCarron, could not explain how he made his determination
on this disallowance item, but only stated that
purchasing this equipment "would have been more prudent."
HELP Br. at 22-23. HELP objected that this involved a
hindsight analysis not proper under the cost principles,
and that ACF generally does not allow funds for the
outright purchase of equipment. HELP Br. at 23.
Moreover, HELP argued, ACF received additional benefits
from the lease arrangements, including maintenance of the
equipment and replacement of both machines at least once
each. HELP Br. at 24.
The provision on which ACF relied in taking this
disallowance, section 42.d of OMB A-122, att. B, provides
that --
[r]ental costs under leases which create a
material equity in the leased property are
allowable only up to the amount that would be
allowed had the organization purchased the
property on the date the lease agreement was
executed; e.g. depreciation or use allowances,
maintenance, taxes, insurance but excluding
interest expense and other allowable costs.
For this purpose, a material equity in the
property exists if the lease is noncancelable
or is cancelable only upon the occurrence of
some remote contingency and has one or more of
[certain characteristics.]
(emphasis added). The equipment leases at issue here
were not introduced into the record, so it is not
possible for the Board to determine if the leases created
a material equity in the property and thus were covered
by the provision. 15/ However, we find it unlikely
that the leases were covered by this provision. HELP's
accountant testified that the equipment was replaced
during the term of the lease, the leases were eventually
terminated, and the equipment was returned. Tr. II at
1099-1100, 1103-1104. These actions would be consistent
only with a term lease arrangement and not with a lease-
purchase contract.
HELP did not show that it requested funds for the
purchase of the office equipment and was denied them.
HELP provided no evidence supporting its assertion that
ACF did not usually approve funding for the outright
purchase of equipment. In fact, instances of ACF giving
advance approval for the purchase of office equipment for
use in Head Start programs have come before the Board in
previous cases. E.g., Urban League of Arkansas, Inc.,
DAB No. 1269 at 3 (1991) (prior approval for purchase of
an electric typewriter was granted); Inter-Tribal Council
of California, DAB No. 1418 at 5, n.4 (1993) (prior
approval for purchase of an office computer was granted).
Nonetheless, we do not find the failure to request funds
from ACF for purchasing office equipment to be
determinative of this matter. Entering into term leases
for the use of office equipment is a common business
practice today, and ACF has not shown that the terms of
the lease were outside that which is normally reasonable.
ACF also did not allege that the equipment was not
needed by HELP for the efficient operation of its
program. ACF's only charge is that leasing rather than
purchasing this equipment was not prudent; however, this
is based on a hindsight analysis of the fact that HELP's
lease costs, over a period of many years, far exceeded
the purchase price of the equipment. ACF has not shown
that equipment term leases are per se prohibited. While
the cost may not seem reasonable in retrospect, it may
have been a reasonable arrangement at the time it was
entered into; HELP may not have known how long it would
need the equipment or whether the equipment would meet
HELP's needs. Moreover, HELP may have contemplated that
the equipment would need servicing and eventual
replacement. ACF has not established sufficient grounds
on which to disallow these expenditures absent some offer
of proof that term lease arrangements for office
equipment are always prohibited or that the terms of
these leases were unfavorable when compared with other
lease arrangements either entered into in the normal
course of business or which HELP could have entered into
in these instances.
For the reasons stated above, we reverse ACF's
disallowance of $4,175 for office equipment leases.
However, ACF may bring a future disallowance with regard
to this amount if either it can show that the lease terms
were not reasonable because they were not similar to
those entered into in the normal course of business or
were not among the best terms available to HELP at the
time.
5. Social Services and Parent Involvement
Coordinators' Salaries
During program year 1992-93, HELP's Migrant Head Start
budget (as approved as part of its grant application)
called for a Social Services Coordinator and a Parent
Involvement Coordinator each to be paid $24,685. 16/
According to ACF, instead of hiring personnel to fill
each of these two positions, HELP hired only one person
to fill both positions. Thus, ACF disallowed $24,685.
Disallowance Letter at 6.
During program year 1993-94, the budget called for a
Social Services Coordinator to be paid $28,881 and for a
Parent Involvement Coordinator to be paid $26,526.
According to ACF, the Social Services Coordinator
position was filled but the Parent Involvement
Coordinator position was not filled. Thus, ACF
disallowed $26,526. Id.
During program year 1994-95, the budget called for the
Social Services Coordinator to be paid $26,859. ACF
determined that this position was not filled (at least)
during the first five months of the program year. Thus,
ACF disallowed $11,200. Id.
Based on these three findings, ACF disallowed a total of
$62,411. ACF stated that its finding with regard to each
of the three hiring failures was based on a lack of
documentation to support the expenditure of funds for
these key positions. ACF stated that there were no
carry-over funds reflected which would indicate that the
money for these positions was never spent; moreover,
filling these positions was a condition of the grant as
approved. ACF Br. at 18.
ACF argued that HELP's Parent Involvement Coordinator,
Rita Morales, testified as to her functions in enrollment
and recruitment, responsibilities which are listed in the
regulations as part of the social services component.
17/ ACF argued that Ms. Morales' testimony indicated
that she performed all of the tasks of a Social Services
Coordinator as well as the tasks of a Parent Involvement
Coordinator except for staff training, stating that she
had to do these tasks in order to supervise two summer
interns. ACF Br. at 19-20. ACF argued that HELP had Ms.
Morales providing most of the social services functions
so that the designated Social Services Coordinator, Nancy
Baptiste, who had been denied separate funding by ACF as
a child development associate (CDA) trainer, could still
be paid by Head Start to provide training to the program
under the guise of being the Social Services
Coordinator. 18/ ACF Br. at 21-22.
In response, HELP submitted personnel action reports
showing annual increases for Social Services Coordinator
Nancy Baptiste and for Parent Involvement Coordinator
Rita Morales for each of the years 1991, 1992, 1993 and
1994. Both were hired in 1987, and each held their
respective positions for each of the years 1991-1994.
AAF (Cost Disallowances, Tab 6) at 1355-1366. HELP did
not dispute that Ms. Baptiste's primary function was to
train staff; however, HELP argued, ACF conceded that the
job duties of coordinator positions are left up to the
grantee and that HELP had the authority to move the
Social Services Coordinator's salary to a new position
under which training would be a primary function. HELP
Br. at 25-26. Moreover, HELP argued, ACF conceded at the
oral argument that providing staff training was an
important part of the Social Services Coordinator's
responsibility as listed in the position description
provided by HELP; thus, at most, ACF should disallow only
the portion of the Social Services Coordinator's position
in excess of the amount of time ACF believes a Social
Services Coordinator should spend on training. HELP Br.
at 199.
There are documents in the record which list Ms. Baptiste
as the Social Services Coordinator throughout the
relevant time period. AAF (Cost Disallowances, Tab 6)
at 1355. There are other documents in the record which
list Ms. Baptiste as the CDA trainer or the Professional
Development Coordinator throughout the relevant time
period and which either do not refer to the existence of
a Social Services Coordinator position or list such
position as being vacant. RAF Tab 30 at 856, 858, 860,
862, and 864. However, the labels applied to a
particular position are not what is relevant in
determining whether a salary cost should be disallowed;
the relevant consideration is the functions which Ms.
Morales and Ms. Baptiste were performing.
Following the in-person hearing, briefing and oral
argument, it is clear from the record that the majority
of Ms. Baptiste's duties were to oversee and perform CDA
and other training for HELP's staff. E.g., Tr. II at
931-932; HELP Br. at 25; Oral Argument Tr. at 200-201.
Ms. Morales was performing all of the remaining usual
functions of a Social Services Coordinator and all of the
usual functions of a Parent Involvement Coordinator.
This is essentially undisputed by both parties. While we
do not agree with ACF that HELP had no left-over funds
from its migrant program for program year 1993-94, it is
undisputed that HELP was paying salaries both to Ms.
Morales and Ms. Baptiste throughout the time period at
issue. The question remains whether HELP had the
flexibility to structure these positions in this manner
under its grant award, and, if not, whether all or only a
portion of Ms. Baptiste's salary should be disallowed.
We reverse this cost item of the disallowance. It is
undisputed that both Ms. Baptiste and Ms. Morales were
working for and being paid by HELP's Migrant Head Start
program. However, both employees were performing
functions required by the Head Start Act and
regulations -- Ms. Morales was performing the usual tasks
of a Parent Involvement Coordinator as well as overseeing
recruitment and enrollment, and Ms. Baptiste was
performing training required by the Head Start Act to
qualify HELP's teaching staff for continued employment.
ACF has not disputed that the program received a benefit
from the services of both employees. While ACF argued
that it had previously denied funding for HELP to hire a
CDA trainer, ACF has not provided any proof or
explanation of that denial. The Board does not know the
basis for such alleged denial or whether that denial was
clearly communicated to HELP. The Board has been
presented with no basis as to why ACF would deny funding
for an employee who was providing services required by
the Head Start Act.
Under the OHDS/DGAM, a grantee has certain flexibility in
structuring positions as it desires and, except for
expenditures requiring prior approval, may make revisions
between and among the object class categories within the
total direct costs of the project, provided that the
funds are used for allowable costs of the project.
OHDS/DGAM at chapter 1, § L.3. Moreover, this case is
clearly distinguishable from Lake County Economic
Opportunity Council, Inc., DAB No. 1580 (1996), where ACF
clearly informed the grantee that ACF considered failure
to fill two coordinator positions inimical to proper
grant administration, and the grantee could not even say
what it had done with the funds it failed to spend. In
this case, HELP clearly hired and paid two full-time
employees to perform tasks required by the grant. ACF
may not base a disallowance simply on HELP's approved
budget items unrelated to any finding that expenses
charged to grant funds were unallowable.
For the reasons stated above, we reverse ACF's
disallowance of $62,411 for the salary of the Social
Services Coordinator.
6. Prior Year Expenses
HELP incurred $777 of costs for tuition payments made to
New Mexico State University for classes taken by HELP's
Migrant Head Start Director, Mr. Reyes, during the 1992-
93 school year. There is no dispute that these tuition
costs were paid for from the 1993-94 program year budget.
ACF disallowed the tuition costs in full as not being
charged to the proper grant period, in violation of OMB
A-122, att. A, sec. A. Disallowance Letter at 7.
In response, HELP submitted the bill for Mr. Reyes'
tuition charges, dated February 28, 1993, and a grade
report summary dated May 19, 1993. HELP also submitted
several pages from its Personnel Rules and Regulations,
effective January 1993, which provide that employees may
be reimbursed up to $1,500 per year for tuition costs for
furthering their education if they maintain a grade of
"C" or better. AAF (Cost Disallowances, Tab 9) at 1377-
1383. These documents were submitted to show that the
cost was charged to the following year's budget because
that was when the grade report was received showing that
the student maintained at least a grade of "C" and was
thus eligible for reimbursement. ACF informed the Board
during the hearing in El Paso that it would withdraw this
portion of the disallowance if HELP established that this
policy was in writing and had been approved by its Policy
Council.
On October 12, 1995, prior to the second week of the
hearing in this matter, HELP submitted a copy of its
Personnel Rules and Regulations, which clearly establish
that it is HELP's policy to reimburse staff tuition costs
up to $1,500 annually if a grade of "C" or better is
obtained. These personnel policies are dated October
1988 and incorporate all revisions made since July 1,
1984. Tab B. Also attached to HELP's October 12, 1995
submission is a copy of the minutes of HELP's Policy
Council meeting of August 30, 1992. Tab C. At that
meeting, the Policy Council adopted the personnel
policies in full.
At the oral argument, ACF argued that the actions of this
Policy Council were irrelevant because the approval was
not made by the Policy Council acting for the applicable
time period -- i.e., the period to which the charges were
made. Oral Argument Tr. at 53-55. We disagree. The
classes were taken in the spring semester of 1993 and the
tuition was billed in February 1993; the spring semester
began and the billing date was within the 1992-93 grant
year. See AAF (Cost Disallowances, Tab 9) at 1383.
HELP's Policy Council approved the personnel policies on
August 30, 1992, which is also within the 1992-1993 grant
year and less than six months prior to the time in which
the tuition costs were incurred. ACF has not pointed to
any provision which holds that personnel rules approved
six months earlier would not still be in effect. The
fact that the Policy Council may not have yet approved
the policies for 1993-94 is not determinative; even
though the costs were paid from the 1993-94 grant, this
transaction was completed when the grade report was
received in May 1993, which was prior to the time the
Policy Council would have been expected to have revisited
the personnel policies in August 1993.
For the above reasons, we reverse ACF's findings with
regard to the $777 in tuition costs.
7. La Primera Iglesia Bautista Rent
HELP paid rent to a local church, La Primera Iglesia
Bautista, where its Las Cruces Migrant Head Start center
was located. The rental rate was $15,600 per year to be
paid in semi-annual installments due in May and November.
Based on this rate, HELP paid $39,000 for rental of the
church space between May 1992 and November 1994. See
Disallowance Letter at 7. According to ACF, the Migrant
Head Start program operated in the church only during the
months of June, July and August in 1992, 1993 and 1994.
ACF disallowed a majority of the cost on the ground that
it was not reasonable to pay rent for space for 12 months
each year when the facility was only being used for three
months each year. ACF Br. at 25. ACF determined that,
based on other lease arrangements its on-site teams had
reviewed, the payment of $5,200 per month ($15,600 per
year divided by the three months allegedly in use) was
not reasonable. Thus, ACF pro-rated the portion of the
rental payments made for these three June-August quarters
at $3,900 per three-month period (($15,600 per year
divided by four quarters) x (three years) = $11,700).
ACF disallowed $27,300, which represents the total rent
paid ($39,000) minus the allowable portion of the rent
paid ($11,700), on the ground that payment of rent when
space is not utilized is a violation of OMB A-122, att.
A, sec. A, which prohibits expenditures which are not
reasonable for the performance of the grant award.
Disallowance Letter at 7.
The record contains copies of HELP's leases, both in
English and in Spanish, for the rental of space in La
Primera Iglesia Bautista from May 20, 1992 through
November 20, 1995. The contract confirms the annual
rental cost of $15,600 made in two semi-annual payments.
The 1992-95 contract does not restrict HELP's use of the
space to limited months out of the year. 19/ AAF
(Cost Disallowances, Tab 8) at 1373-1376. HELP disputed
ACF's implication that space could be found to rent on a
part-year basis which met zoning and state child care
facility requirements and which could be obtained at the
monthly pro-rated amount allowed by ACF. HELP contended
that it was prudent to have annual leases on child care
facilities in New Mexico because there was a shortage of
available child care space and the cost of making
necessary renovations to meet state child care facility
licensing standards was enormous. Oral Argument Tr. at
203. HELP argued that ACF failed to controvert evidence
in the record showing that the lease amount was
reasonable. HELP Br. at 30, citing Tr. II at 662-664.
We reverse this cost item of the disallowance. According
to the applicable cost principles, a cost is reasonable
if it does not exceed that which would be incurred by a
prudent person under the circumstances prevailing at the
time the decision was made to incur the cost. OMB A-122,
att. A, sec. A.3. While ACF asserted that it was a
violation of cost principles for HELP to rent space on an
annual basis when it was only using the center for three
months of each year, ACF offered no evidence to counter
the sound business reasons offered by HELP for year-round
leases. ACF also did not refute the testimony of Mr.
Ortega, who served on Boards and Advisory Councils for
the National Community Investment Coalition, the Federal
Home Loan Bank Board, and the State Housing Authority,
that the lease amount for this particular church was
reasonable. Tr. II at 662-663. ACF's position is
unequivocally based on at least two assumptions which it
did not substantiate. First, ACF assumed that HELP was
not using the space except during the three-month period
when children were present in the center. ACF did not
attempt to show what HELP did (or could do) with its
furniture, supplies, files and equipment during the
months the center was closed, nor did ACF show that it
was feasible to move such property, on an annual basis,
both to and from the center into storage. ACF did not
show that other Migrant programs vacate their properties
during the months when their centers are not open.
Second, ACF implied, but did not show, that other Migrant
programs are generally able to rent space on a less-than-
annual basis at the same pro-rated amount as they could
have if they were renting the space on an annual basis
(or that they have extensive documentation that they have
tried to do so). ACF has not pointed to any instructions
requiring Head Start grantees to present such
documentation. Thus, we have no evidence on which we
could determine that HELP did not act as prudently as
other Migrant Head Start programs. When asked at the
oral argument if it was possible that HELP's annual
payment rate for the facility was based on the lessor's
(and HELP's) assumption that HELP would have children in
the center for only a fraction of the year and would use
the premises for storage or other purposes during the
remainder of the year, ACF's counsel conceded that this
was possible. Oral Argument Tr. at 182-183.
Thus, ACF's determination that HELP should have been able
to arrange part-year leases for the same pro-rated amount
as an annual lease appears to have been based solely on
speculation. Of course, HELP should be required to make
the most favorable lease arrangements possible.
Nonetheless, there is absolutely nothing in the record
which would indicate that HELP's arrangement was
unreasonable or outside of the range of what other
Migrant Head Start programs are doing.
For the above reasons, we reverse ACF's disallowance of
$27,300 for the rental of La Primera Iglesia Bautista.
8. Administrative Cost Limitation
According to the disallowance letter, HELP was authorized
to spend $1,165,527 of federal funds for the 1993-94
program year, of which HELP expended $1,162,205. HELP
was also required by its financial assistance award to
contribute a non-federal matching share to the program of
$291,382, of which HELP was found to have contributed
$84,893. See Disallowance Letter at 8-9. Under
applicable Head Start regulations, a grantee is permitted
to spend no more than 15% of its total approved
expenditures for administrative costs. 45 C.F.R.
§ 1301.32. The disallowance letter calculated HELP's
total approved costs to be $1,247,893 ($1,162,205 +
$84,893), thus resulting in allowable expenditures for
administrative costs of $187,065 ($1,247,893 x 15%).
ACF found that HELP actually spent $318,785 for
administrative costs, thus exceeding the limit on
expenditures for administrative costs by $131,720
($318,785 - $187,065). ACF subsequently reduced this
portion of the disallowance by $480 to $131,240. 20/
ACF stated that HELP did not properly identify or
document which of its costs were administrative; ACF
asserted that it was HELP's responsibility to document
the allocation of its expenditures between administrative
and programmatic costs. ACF Br. at 28, 29. ACF took the
position that absent such documentation, any costs which
had some administrative component should be treated as
wholly administrative costs.
Specifically, ACF found that the salary of the Migrant
Head Start Director should be considered 100%
administrative absent some documentation showing
programmatic work he had done. ACF Br. at 29. According
to the ACF reviewer, the salaries of the Lead Teachers or
Center Directors should also be considered 100%
administrative based on conversations with these
employees during the 1994 on-site visit. ACF stated that
the testimony of lead teacher Nancy Moore, as well as
common sense, indicated that Lead Teachers and Center
Directors were involved in administrative (i.e.,
supervisory) functions at least part of the time,
although HELP designated these salaries in full as
program costs. ACF Br. at 29-30, 32-33. Moreover,
according to ACF, certain office supplies should have
been designated as administrative costs but were not.
ACF Br. at 31.
In response, HELP first disputed ACF's calculation of the
allowable expenditure for administrative costs. Thus,
HELP argued, the limit should have been $218,536 (15% x
($1,165,527 + $291,382)) rather than $187,065 (15% x
($1,165,527 + $84,893)). While ACF calculated the
allowable administrative cost limit using the amount of
non-matching funds actually provided and documented by
HELP, HELP argued that ACF should have applied the limit
using the amount of non-matching funds required by the
financial assistance award. HELP Br. at 32. In
determining the amount HELP actually spent on
administrative costs, HELP argued that ACF used the wrong
figure of $142,452 for indirect costs which were charged
to administrative costs of the program instead of the
correct figure of $134,948. HELP Br. at 33. HELP argued
that a significant percentage of the Migrant Program
Director's salary should be allocated to programmatic
costs because Mr. Reyes was involved in both
administrative and programmatic functions. 21/ HELP
disputed that the salaries of the Lead Teachers or Center
Directors, totalling $39,966, were administrative since
these employees were not involved in fiscal accounting
functions; HELP cited to attachments 2 and 3 to ACF's
brief. HELP Br. at 33-34. HELP argued that the office
supply costs were nearly 100% programmatic because the
paper and printing costs went toward carrying out
programmatic functions. HELP Br. at 35-36. HELP
nonetheless conceded that it exceeded the administrative
cost limit by $29,274 and requested retroactive approval
based on extenuating circumstances. HELP Br. at 37.
Initially, we note that the administrative cost limit is
to be based on 15% of "total approved costs." This term
is defined in the regulations as follows:
Total approved costs mean the sum of all costs of
the Head Start program approved for a given budget
period by the Administration on Children, Youth and
Families as indicated on the Financial Assistance
Award. Total approved costs consist of the Federal
share plus any approved non-Federal share, including
non-Federal share above the statutory minimum.
45 C.F.R. § 1301.2 (1993). We believe that a common
sense interpretation of the plain language of this
regulation supports HELP's calculation here using the
total of the federal financial award plus the amount of
non-federal matching funds indicated in the financial
assistance award. If ACF had intended for grantees to be
limited by the amount of non-federal matching funds
actually credited to each grantee at the close of the
budget period, ACF could have written the regulation to
say that the administrative cost limit would be based on
15% of the approved federal award plus the non-matching
share actually raised (where the amount raised is less
than that required by the financial assistance award).
While there might be strong policy reasons to support
such an approach, such approach would not be consistent
with the plain language of the current regulation and
grantees would not fairly be on notice that they should
limit their administrative costs in such manner. Thus,
we believe that the proper amount of allowable
administrative costs should be $218,536, as calculated by
HELP.
Second, we agree with HELP that ACF applied an
unsupported amount for indirect costs. Apparently, the
figure of $142,452 which ACF applied for indirect costs
came from the 1994 on-site investigation notes of a
member of the 1994 on-site investigation team who did not
testify at the hearing. See RAF 30, at 828; Tr. I at
186-187. Neither Mr. McCarron, any of ACF's witnesses,
nor ACF's counsel explained how this figure was derived.
HELP argued that its indirect costs instead should have
been $134,948, as found in its independent audit for the
applicable time period. Oral Argument Tr. at 204. We
agree with HELP that an indirect cost rate substantiated
by an independent audit is reliable; a page of
handwritten notes by a reviewer who was not a witness and
regarding which no ACF witness testified is not.
However, we find that the indirect costs should be
$135,998 (based on the breakdown of $134,948 and $1,050
listed as indirect costs in HELP's independent audit),
instead of $134,948 as contended by HELP.
With regard to the salary of the Head Start Director, we
agree with ACF that 100% of his salary should be charged
to administrative costs absent any reliable documentation
indicating what portion of his time was spent on
programmatic functions. It is generally anticipated that
a Head Start Director, who is responsible for overseeing
a program and supervising all aspects of the program,
would be performing administrative functions nearly
exclusively, except for occasional tasks to fill in for
others as necessary. See ACF Br., Tab 2 (Information
Memorandum to all Head Start grantees regarding 15% limit
on administrative costs, dated 4/11/83). Mr. Reyes'
position description confirms that it was his duty to
perform tasks which would be considered administrative.
AAF (Cost Disallowances, Tab 10) at 1386-1390. If HELP
intended to allocate part of the director's salary to
programmatic costs for other occasional tasks, it should
have kept accurate documentation of the time spent on
these tasks. Moreover, HELP's line-item budget
attributes 100% of the director's salary to
administrative costs; this indicates what HELP
anticipated the director's work would be at the time it
filed its refunding application. RAF Tab 30, at 829.
Thus, we uphold ACF's allocation of Mr. Reyes' salary in
full to administrative costs.
However, with regard to the salaries of the Lead
Teachers, we do not agree with ACF that their salaries,
totalling $39,966 should be allocated to administrative
costs. First, the line-item budget for HELP lists
teachers as 0% administrative. RAF Tab 30, at 831.
There is no separate category for "Lead Teachers;" thus,
we assume that the Lead Teachers are included among the
20 teachers accounted for in this item and that the
budget assumed that none of their time would be counted
as administrative. While there is a separate line item
for a "Center Director" which contemplates that a Center
Director's time would be 100% administrative, there is no
funding provided for such a position in the budget and no
indication that there was such a position within HELP's
particular Migrant Head Start program during the relevant
time period. RAF Tab 30, at 829.
Mr. Reyes testified that the Lead Teachers were
responsible for the overall implementation of the program
at each center, including observing and mentoring
teachers. They would also be doing home visits, family
needs assessments, referrals for health examinations, and
working with disabled children. Tr. II at 1320-1321.
These activities would make their salaries programmatic
costs. This is consistent with the testimony of Lead
Teacher Nancy Moore, who indicated that most of her time
was spent on programmatic functions with some limited
amount of time spent on supervisory functions. She
testified that she was not responsible for budget
matters, which appear to be the majority of
administrative costs associated with ACF's guidelines.
See ACF Br., Tab 2; Tr. II at 1034, 1049-1050. Moreover,
ACF's finding was based on a conversation by its reviewer
with a single, unnamed Lead Teacher. This is not
persuasive evidence, especially for the conclusion that
100% of the time of all Lead Teachers was administrative.
Thus, we conclude that the Lead Teachers' time should
not be charged to administrative costs.
Finally, with regard to the office supply costs, we find
that -- absent a more specific breakdown of what the
supplies were used for -- these costs should be
considered 100% administrative. This is consistent with
the general guidelines developed by ACF in the
Information Memorandum of 4/11/83, and we see no reason
to depart from them absent better documentation. ACF
Br., Tab 2, at 6 (unnumbered). Moreover, HELP has an
obligation to document its costs. See 45 C.F.R. § 74.21
(formerly 45 C.F.R. §74.62).
For the above reasons, we reduce the disallowance for
exceeding limits on administrative costs to $53,765.
22/ An explanation follows:
$1,165,527 Federal Expenditures
+ 291,382 Non-Federal Share
$1,456,909 Total Approved Costs
$1,456,909 Total Approved Costs
x 15% Allowable Administrative
Percentage
$ 218,536 Allowable Administrative
Expenditures
$ 272,301 Funds Expended for
Administration
- 218,536 Less Allowable Administrative
Costs
$ 53,765 Amount Disallowed
$ 272,301 Funds Expended for
Administration
(a) $135,998 Indirect Costs
$134,948 Indirect Costs
$ 1,050 Indirect Costs H/C
(b) $ 80,095 Personnel 23/
$40,950 H.S. Director
$17,438 Admin. Asst.
$21,707 Accts. Payable Clerk
(c) $ 22,346 Fringe Benefits ($80,095 x
27.9%)
(d) $ 33,862 Other (Office Supplies, etc.)
9. Staff Hired Without Prior Approval
ACF disallowed the cost of a professional staff developer
who was paid a total of $30,633 (including fringe
benefits) from HELP's Migrant Head Start funds for the
period April 1, 1993 through August 30, 1994. ACF
disallowed this amount in full on the grounds that the
position was not approved in advance by the Migrant
Programs Branch of ACF, allegedly in violation of 45
C.F.R. § 74.103(c)(2). 24/ See Disallowance Letter at
9. ACF argued that this employee was hired as a staff
CDA trainer and never functioned as the Social Services
Coordinator as HELP alleged.
The regulation on which ACF relied, which is
substantially the same as OHDS/DGAM, chapter 1,
§ L(4)(b), is inapplicable. The regulatory section
requires prior approval from ACF for a grantee to replace
persons named and expressly identified as "key project
people" in the notice of grant award. The purpose of the
provision, which is more fully developed in the
OHDS/DGAM, is to address situations where a grant may
have been awarded in part based on the qualifications or
participation of a named project director or principal
investigator. The Board has not been provided with any
evidence that the Social Services Coordinator was
expressly identified as one of the key personnel in the
notice of grant award. In fact, the notices of grant
award for the relevant time period list only Mr. Ortega
and Mr. Reyes by name. (Mr. Reyes is listed as the
Principal Investigator or Program Director.) RAF Tab 30,
at 850-855. Thus, we have no basis on which to find that
the Social Services Coordinator position requires prior
approval from ACF.
Thus, we reverse ACF's disallowance of $30,633 based on
an alleged failure to obtain prior approval to hire this
employee.
10. Salary of Child Development Director
ACF calculated the salary for HELP's Migrant Head Start
Director, listed as the Child Development Director, to
total $81,590 for April 1993 through August 1994
(including fringe benefits). ACF disallowed the entire
salary on the grounds that HELP did not have a full-time
Head Start Director as represented in its Migrant Head
Start application. Instead, according to ACF, HELP's
Child Development Director also had overall
responsibility for the nutrition program, the Regional
Head Start program, the before- and after-school child
care program, and the Institute of Children, Youth and
Family Studies, as well as the Migrant Head Start
program. According to the disallowance letter, the Child
Development Director's entire salary was paid by the
Migrant Head Start program. See Disallowance Letter
at 10.
In support of its position, ACF introduced a promotional
brochure developed by HELP which indicated that the Child
Development Director had authority over these five
different programs. ACF Br. at 40, citing RAF 30 at 868.
HELP provided no documentation showing an allocation of
the Director's time between Migrant Head Start and other
programs. ACF alleged that this division of time by the
Migrant Head Start Director was a violation of the grant
award, and thus of applicable cost principles, since a
full-time Migrant Head Start Director was approved in the
budget request. ACF Br. at 41.
HELP responded that, while the Migrant Head Start
Director did have involvement in other programs, he
devoted at least the equivalent of a full-time position
to the migrant program. HELP Br. at 38; 41, n.40. HELP
conceded that, during the seventeen-month period involved
here, the Migrant Head Start Director reported on
Regional Head Start to HELP's Executive Director (Mr.
Ortega) and Board, interacted with ACF's Regional project
manager, oversaw a 1994 on-site visit to Regional Head
Start, provided occasional advice to the Regional
program, and managed the food program for both Migrant
and Regional Head Start. HELP Br. at 38-39. However,
HELP argued, the time which the Migrant Head Start
Director spent on these other programs was insignificant
and was justified by the nature of the other programs or
by his prior relationship with these programs.
Based on testimony presented at the hearing, we find that
HELP sufficiently proved that Mr. Reyes was a full-time
Migrant Head Start Director and that his contact with the
other programs was minimal and appropriate. HELP
provided unrebutted testimony that Mr. Reyes had charge
of the food program, which provides meals for Head Start
children in both Migrant and Regional Head Start, because
the state required one contract and one person to contact
per agency, not per program. Tr. II at 1366. The
testimony indicated that Mr. Ortega was temporarily
assigned responsibility for Regional Head Start following
the "divorce" of the programs, and that Priscilla Mendoza
was appointed to take over as Director of the Regional
Head Start program on September 3, 1992. AAF (Cost
Disallowances, Tab 12) at 1396. Mr. Reyes' contacts with
the Regional program were limited to contacts with Ms.
Mendoza to answer questions, contact with on-site
reviewers to the Regional program who were reviewing a
period inclusive of when Mr. Reyes had run both the
Regional and Migrant programs, and some very limited
presentations to HELP's Board which encompassed both the
Regional and Migrant programs (and were done in order to
limit the number of persons who would have to travel from
Las Cruces to Albuquerque.) See generally Tr. II at
1182-1186. Mr. Reyes stated that he did not have
responsibility for the school-age child care program.
Moreover, Mr. Reyes stated that while he did have
responsibility for the Institute for Children, Youth, and
Family Studies, this program was a training and research
arm of Migrant Head Start and was chargeable to the
Migrant Head Start grant. Tr. II at 1366- 1367.
To the extent that Mr. Reyes had contact with the other
programs, his testimony indicated that his time spent
with such programs was minimal and that he put in many
overtime hours serving HELP's migrant program on a
regular basis. We found Mr. Reyes generally to be a
credible witness, and do not find it determinative that
some of the staff still believed him to be associated
with the regional program, since he had previously
performed both roles. We find it curious that ACF would
urge us to rely on HELP's promotional brochures and
position descriptions rather than on Mr. Reyes' testimony
when, with reference to other disallowed items, ACF
argued that written documents contemplating what an
employee or consultant is expected to do are unreliable
as to what an employee or consultant actually did. Thus,
absent any evidence to the contrary, we conclude that Mr.
Reyes functioned and was properly paid as the Director of
the Migrant Head Start program.
For the above reasons, we reverse ACF's disallowance of
$81,890 for the Migrant Head Start Director's salary.
11. Literacy Program
HELP requested and was awarded $7,447 ($2,447 in 1993 and
$5,000 in 1994) for consulting services to operate a
literacy training program for parents of Migrant Head
Start children. According to ACF, there was no
documentation showing that these funds were spent on a
literacy program, and it was not certain to what use the
funds were put. ACF alleged that this violated the basic
cost principles of OMB A-122, att. A, sec. A. See
Disallowance Letter at 11.
In response, HELP submitted copies of the following three
signed contracts for literacy consulting services:
m a contract entered into with C.V. on June 7, 1993
for a fixed fee of $5,000;
m a contract entered into with S.W. on July 1, 1994
for a fixed fee of $5,000; and
m a contract entered into with V.D. on August 1, 1994
for a fixed fee of $2,500.
AAF (Cost Disallowances, Tab 13) at 1397-1405. Each of
these documents contained an attached list of services to
be provided by the consultants. Two of these contracts
specifically stated that payment will be made upon
receipt of invoices. 25/ Id. at 1397, 1399.
Following the oral argument and at the request of the
Board, HELP provided the Board with a copy of a payment
voucher for program year 1993 covering services provided
by consultant V.D., a copy of an invoice signed by V.D.,
and a copy of a check dated August 31, 1993 made payable
to V.D. The voucher, the invoice, and the check were
each for the amount of $2,500. See HELP submission of
July 8, 1996. In addition, HELP provided the Board with
a July 17, 1996 letter from HELP's independent accountant
stating that the Migrant program paid consultant V.D.
$1,250 and consultant S.W. $2,500 for literacy services
provided during the period July through December 1994.
See HELP submission of July 17, 1996.
A reliable invoice has been produced for the 1993 program
year, along with a payment voucher and a copy of a check
made payable to one of the listed literacy program
consultants. Since HELP was given $2,447 for budget year
1993 and since HELP paid a literacy consultant $2,500 for
services for the 1993 program year, we find that HELP has
met its burden of showing that it spent the money it was
awarded for literacy services in 1993 on such services.
We likewise find that HELP has met its burden of documen-
tation with regard to literacy services provided during
program year 1994. The July 17, 1996 statement signed by
HELP's independent certified public accountant indicates
that a total of $3,750 was paid by HELP's Migrant Head
Start program to two consultants for literacy program
seminars provided during the second half of calendar year
1994. The accountant gave the dates of the checks and
the check numbers. We conclude that HELP spent $3,750 of
the $5,000 it was awarded on literacy services for 1994.
The disallowance letter was unclear as to whether the
funding for literacy services was specifically
appropriated (and therefore mandated) for those services
or whether the funds were simply a line-item in HELP's
budget. 26/ If the funds were not awarded to HELP
with any restrictions, then HELP had some flexibility
under the OHDS/DGAM to reprogram the $1,250 in 1994
literacy program funds which it did not spend on literacy
services to other budget categories or to request
permission to carry over the excess funds to the
following program year. OHDS/DGAM, chapter 1, § L(3).
There is no requirement that a grantee spend the full
amount in its budget for a specific item or service if,
for example, it can obtain the item or service for less
money than it expected when it developed its budget.
With regard to HELP, we note that according to its
financial status report (SF-269) submitted to ACF, it did
not spend the full amount of its financial award in 1994.
See HELP submission of August 14, 1996. Thus, the
$1,250 which HELP did not spend on its literacy services
in 1994 could have been accounted for in its unobligated
balance for that year.
For the above reasons, we reverse ACF's disallowance of
$7,447 for literacy services. However, if ACF determines
that the $5,000 it sought to disallow for literacy
services for 1994 was restricted and could only be used
for literacy services, if that restriction was clearly
communicated to HELP, and if HELP nevertheless spent the
$1,250 for other purposes, then ACF is not barred from
bringing a disallowance limited to the amount of $1,250
for this item.
12. Conclusion on Disallowance
For the above reasons, we uphold $58,965 and reverse
$581,923 of the disallowance.
II. The Termination Proceeding
Pursuant to 42 U.S.C. § 9841 and the Head Start
regulations at 45 C.F.R. §§ 1303.14(c)(2) and 1303.16(a),
a full and fair hearing must be afforded to a Head Start
grantee before its grant is terminated. The Head Start
regulations at 45 C.F.R. § 1303.16 set forth procedures
for the conduct of a hearing. To the extent not
inconsistent with these procedures, the hearing
procedures of the DAB at 45 C.F.R. Part 16 also govern.
See 45 C.F.R. § 1303.14(c)(2).
The regulations list nine grounds for which a Head Start
grantee may be terminated from the program.
Specifically, a grantee may be terminated when the
grantee --
(1) is no longer financially viable;
(2) has lost the requisite legal status or permits;
(3) has failed to comply with the required fiscal or
program reporting requirements;
(4) has failed to meet the performance standards for
operation of Head Start programs;
(5) has violated enrollment or eligibility rules;
(6) has failed to comply with the Head Start grants
administration requirements;
(7) has failed to comply with the requirements of the
Head Start Act;
(8) has been debarred from receiving federal funds; or
(9) has failed to abide by other terms and conditions of
its award of financial assistance, or any other
applicable laws, regulations, or other Federal or
State requirements or policies.
45 C.F.R. §§ 1303.14(b). Regulations which are
applicable to all HHS grant awards, including Head Start
grants, state that an agency of HHS may terminate for
cause when "a grantee has materially failed to comply
with the terms of a grant." 45 C.F.R. §§ 74.4, 74.113;
see also 45 C.F.R. § 74.115. ACF is seeking to terminate
HELP's Head Start program here based on grounds which
fall under above paragraphs 4, 5, 6 and 9 and which ACF
asserts amount to a material breach of Head Start
requirements. HELP Br., att. 1, at 6.
ACF must establish a prima facie case that HELP did not
meet the federal requirements to continue its program for
one or more of the reasons listed at 45 C.F.R. §
1303.14(b). To establish a prima facie case, ACF must
set forth reasons for its decision which are legally
adequate to support the termination. Once ACF
establishes a prima facie case, HELP has the burden of
rebutting that evidence by providing evidence to show
that ACF's position is wrong and that the grantee did
meet Head Start requirements during the relevant period.
Rural Day Care Association of Northeastern North
Carolina, DAB No. 1489 (1994) at 7-8; Meriden Community
Action Agency, DAB No. 1501 (1994) at 6.
For policy reasons, the Head Start Act does not allow
grantees an unlimited amount of time to correct
deficiencies in meeting performance standards; otherwise
families would not receive the full benefits of the Head
Start program and grantees would not have an incentive to
improve their programs until termination or denial of
refunding proceedings were initiated. Meriden at 6.
HELP was notified in a November 1, 1991 report of
deficiencies which were found to exist in its program
during an August 1991 on-site visit; HELP received a
written report on December 27, 1994 identifying
deficiencies found to exist during the August 1994 on-
site visit. See, generally, RAF Tabs 1-28, at 1-758.
Thus, we have determined that the relevant time period
for this matter is the period reviewed in the August 1991
on-site visit through the August 1994 on-site review.
Below we discuss each of the findings of non-compliance
on which the proposed termination is based, along with
our conclusions as to each item. During this appeal
process, HELP produced documents and supporting testimony
which, if credible and reliable, showed that HELP's
compliance with the performance standards was
significantly better than the reviewers found. In
response, ACF argued that nearly all of HELP's witnesses
were not credible. We found HELP's witnesses, as well as
the majority of ACF's, to be sincere and capable people
with a desire to serve children and to provide the best
services available. Notwithstanding ACF's allegations,
we found all of HELP's witnesses to be honest and
credible.
A. Financial Management System
Following the 1994 on-site visit, ACF concluded that HELP
violated the regulatory standard measured by On-Site
Program Review Instrument (OSPRI) Item 218, which
requires that --
[t]here is a financial management system that
ensures budget management, maintains control over
current operations, and provides timely, accurate,
current and complete disclosure of financial
matters.
See also 45 C.F.R. Part 74, Subpart H. 27/ ACF's
financial reviewer, Barbara Ricketts, reached this
conclusion by examining HELP's financial records in its
home offices in Albuquerque and consulting other review
team members, including some who visited HELP's Migrant
Head Start headquarters and facilities in Las Cruces and
other locations. Tr. I at 380, 388-391. Specifically,
she found that accounting records were supported by
source documentation, but that HELP failed to post
accounts payable and indirect costs for the period April
through July 1994. She also found a violation of the
requirement that there be a clear separation of duties
with regard to financial operations in that one person
had the authority to authorize transactions, sign checks,
and reconcile bank accounts. In addition, she concluded
that HELP had not reconciled financial records and
individual cost elements to the cost categories in its
projects budget or used budgetary controls to prevent
overexpenditures in excess of the grant award, the object
classes, or the program account. Finally, she concluded
that HELP failed to ensure that expenses charged to Head
Start were properly allocable to Head Start.
HELP argued that ACF's determination on this matter,
which was based in substantial part on the cost
disallowances discussed above, should be overturned if
the majority of the cost disallowances were overturned.
HELP Br. at 46. We do not agree with HELP that such a
reversal automatically warrants a finding of compliance
with this OSPRI item. However, in reviewing the
testimony of the financial reviewer on this item, we find
that many of her conclusions on HELP's compliance with
financial requirements were indeed based on disallowed
items that we have found unsubstantiated or on reports of
other OSPRI team members that she may have misunderstood.
We find her conclusions on most other items to be
unsupported as well.
In connection with her review of whether transactions
were being posted in the accounting records in a
consistent and timely manner, Ms. Ricketts found during
her August 1994 visit that accounts payable and indirect
costs had not been posted for the period April through
July 1994. HELP attributed this delay to ACF's failure
to approve HELP's funding, which expired March 30, 1994,
until July 13, 1994. HELP Br. at 46-47. Ms. Ricketts
noted that HELP was also behind in posting in 1993, and
HELP responded that refunding that year was also delayed,
until July 8, 1993. Ms. Ricketts stated during cross
examination that HELP was not allowed to draw down funds
to pay its payables until its funding had been approved
and agreed that it also would not be prudent to post its
indirect costs until funding had been received. We
discuss below the parties' ongoing dispute about who was
to blame for HELP's late funding, but, as it applies
here, this would seem to explain the late posting of some
items. Consequently, we find that the late posting does
not support a finding that HELP's financial management
system was materially out of compliance with regulatory
standards.
HELP admitted that it made changes in its separation of
accounting duties as a result of the suggestions of its
independent auditors, although these changes occurred
after the 1994 on-site visit. HELP Br. at 47; Oral
Argument Tr. at 262. Thus, HELP recognized that it did
not have the proper separation of accounting functions
within its structure; however, it argued that this
failing alone did not justify a non-compliance finding on
the entire OSPRI item. HELP Br. at 47. We therefore
conclude that HELP did fail to implement this one
internal control as part of its financial management
system. We discuss below whether this was indeed the
only failing of HELP's system.
With respect to her review of whether financial records
and individual cost elements used were reconciled to the
cost categories in the project's approved budget, Ms.
Ricketts wrote that there were "major variances." ACF
ex. 26, p. 713. When questioned, Ms. Ricketts identified
those major variances as "instances of positions not
being filled causing variances within the salary category
of the general ledger. Also, equipment that had been
purchased had not been prior authorized." Tr. I at 345.
Specifically, she was referring to her understanding
that a Social Services Coordinator position had been
approved but not filled, and that a computer system had
been purchased without prior approval. Id. She could
not recall any other variances. Tr. I at 404. Ms.
Ricketts therefore was apparently basing her opinion on
whether the position was filled on the disallowance item,
which we have overturned, and on the $1,538 computer
system purchased without prior approval, for which HELP
is seeking retroactive approval. HELP conceded that
unforeseen events such as unusually severe weather had
caused it to exceed its budget for some consumables.
(See OHDS/DGAM, ch. 1, § L.3, which allows grantees
certain budget flexibility.) That admission coupled with
Ms. Ricketts' findings on this subitem are not sufficient
support to conclude that HELP had "major variances"
between its budgeted and actual expenditures. Moreover,
ACF did not refute HELP's assertion that it was extremely
hard to have adherence with a Migrant Head Start program
budget and that to expect such adherence was inconsistent
with the budget flexibility discretion accorded to
grantees and ACF's policy of being more lenient with
regard to Migrant program grantees. HELP Br. at 48, n.5.
Consequently, we conclude that these issues were not
significant enough to find HELP's financial management
system unsound.
We find a similar problem with Ms. Ricketts' finding
concerning whether "[b]udgetary controls are in place to
preclude incurring obligations in excess of total funds
available for (1) grant, (2) object class category,
and (3) program account." Ms. Ricketts testified that
her recommendation that this be found out of compliance
was "[b]ased on the fact that there had been significant
deficits incurred in a prior year's grant period. . . . I
believe it was around $130,000." Tr. I at 346. This is
a clear reference to the alleged overexpenditure
disallowance item that we have already found
unsubstantiated. Consequently, we conclude that this
finding cannot serve as a basis for determining that
HELP's financial management system was unsound.
Finally, Ms. Ricketts testified that she based her
finding as to whether budgetary controls were in place to
assure that obligations incurred for the Head Start
program were allocable to the Head Start program on her
understanding that "[t]here were numerous instances of
staff that were performing duties for the regional
program as well as the Migrant Head Start program . . . .
There was also a situation with food costs where USDA-
related expenditures and revenues were not being properly
allocated." Tr. I at 406. Ms. Ricketts based her
assertion that migrant staff were performing duties for
the regional program on her understanding of other OSPRI
team members' interviews, however, and we have determined
above that the disallowance item based on this assertion,
the disallowance of the Migrant Head Start Director's
salary, was not supported by substantial evidence in the
record. As for the assertion concerning the USDA
expenditures, these funds were apparently provided to
HELP from USDA through the state and thus, strictly
speaking, were irrelevant to the subitem under
consideration, since the subitem refers to assuring that
Head Start funds are spent only for the Head Start
program. We note that there was testimony by the Migrant
Head Start Director that USDA required a single contact
for all USDA programs, which would explain the unified
accounting system but not necessarily assuage Ms.
Ricketts' concerns that food costs were being improperly
allocated to the two Head Start programs run by HELP.
Without further information, however, we do not rely on
this assertion as establishing that HELP's financial
management system was materially deficient.
Thus, while we do not find that HELP's fiscal management
practices were perfect in that it failed on one internal
control, we do not find that ACF's substantiated findings
on this item provide a sufficient basis for concluding
that HELP's financial management system did not meet
program standards. We therefore reverse ACF's findings
with regard to OSPRI Item 218.
B. Education Component
The Head Start regulations require that there be --
procedures for ongoing observation, recording, and
evaluation of each child's growth and development
for the purpose of planning activities to suit each
child's individual needs.
45 C.F.R. § 1304.2-2(d); OSPRI Item 16 (1994 and 1991).
At the on-site visit in 1994, ACF found that there was a
lack of individualized education plans for children at
four of the five centers, and that classroom plans did
not reflect activities designed to meet children's needs
individually and in small groups at one of the centers.
See RAF Tab 18, at 130. ACF found that the Denver II
screening tool was being used by HELP as the only
assessment tool, and ACF offered testimony that the
Denver II could properly be used as a screening tool but
was insufficient as an assessment tool. Tr. II at 446-
447; ACF Br. at 55. Thus, according to ACF, HELP did not
meet the requirement of assessing and evaluating each
child. ACF alleged problems with the updating of HELP's
observations of the children's progress. ACF Br. at 53.
ACF disagreed with HELP's position that it properly used
a technique known as portfolio assessment to evaluate the
development of the children, although ACF conceded that
proper use of portfolio assessment by a program would
fulfill the assessment requirement. ACF Br. at 58. ACF
argued that the observations recorded in the children's
files by HELP were insufficient in number and frequency,
there was no assessment of the children's progress from
those observations, and no relating of any assessment to
developmental plans for the children. ACF Br. at 64, 68-
69. ACF stated that the teachers who were interviewed
during the on-site visit, when asked about assessment of
the children, referred only to the Denver II and did not
mention portfolios or observations. 28/ ACF Br. at
58-59, 67-68. In the 1991 OSPRI, ACF found that HELP did
not comply with this standard for similar reasons,
although ACF subsequently found some progress had been
made since 1991. ACF Br. at 53-54.
HELP argued in response that it provided ACF with a copy
of the Denver II in support of future compliance with
this OSPRI item in a quality improvement plan following
the 1991 OSPRI, and that ACF never stated that the Denver
II was inadequate. HELP Br. at 50, n.47, citing RAF at
1064-1067. Moreover, HELP responded, it properly used
portfolio assessment to evaluate the children and
suggested that what was at dispute here is a matter of
opinion as to what constitutes adequate portfolio
assessment. HELP Br. at 50. HELP argued that the new
proposed regulations for Head Start support its position
that ongoing assessment consists of a collection of
observations. Oral Argument Tr. at 212. HELP stated
that the files did not reflect numerous instances of
updating for each child because, at the time of the 1994
on-site visit, the centers had been operating for only a
few weeks and all the children did not begin the program
at the same time. HELP Br. at 54. Finally, HELP argued,
ACF's reviewer did not understand the requirement for
individualization of activities in that she reviewed
files for evidence of work on identified problems rather
than determining if HELP properly observed the children.
HELP argued that the education component reviewer's
approach was proper only for addressing the special needs
of children with disabilities and that there was no
requirement for individualized education plans (IEPs) for
all children. HELP Br. at 55 and n.53.
The record reflects some confusion in the use of the
terms "individualizing" and "individualized education
plan." 29/ ACF's education component reviewer
described "individualizing" as "classroom plans designed
to meet children's needs individually and in small
groups." She then related that concept to her review of
HELP's classroom plans. Tr. I at 448. She stated that
she did not see evidence of individualizing in all of the
children's folders, and stated that the needs of children
who did not have individual goals and plans were not
being met. Tr. I at 449-450. Thus, the reviewer implied
that HELP was to have IEP's (or some similar type of
individualized plans) for all of its children regardless
of whether they had identified disabilities or special
needs. ACF also argued this in its brief, where it
stated that each child's plan (file) should reflect the
individualized activities done with each child. ACF Br.
at 73. However, at no time did ACF present testimony as
to what individualization of classroom plans meant.
We find that IEP's are not necessary for children who do
not have identified disabilities. On April 11, 1995, the
Academy for Educational Development, a Migrant Head Start
task force which provides training and technical
assistance to Migrant Head Start grantees, sent HELP's
Migrant Head Start Education Coordinator some articles
discussing the evaluation of children in Head Start. See
Tr. II at 537, 591. One of those articles, "Screening
and Assessment in Head Start," issued by the Head Start
Bureau in 1993 ("Screening and Assessment" article),
states:
If the multidisciplinary evaluation team determines
that a child meets eligibility criteria for a
disability and needs special education, an
Individualized Education Plan (IEP) must be
developed.
AAF (Education Training Doc., 5/8/95 Filing) at 1538
(emphasis added). Likewise, another of those articles,
"An Introduction to Developmental Screening in the
Education Component," also issued by the Head Start
Bureau in 1993 ("Developmental Screening" article),
states that --
[w]hen screening identifies children who are in need
of further evaluation or diagnostic testing, and the
subsequent results indicate that the child has a
disability, an Individualized Education Plan (IEP)
must be developed for that child.
AAF (Education Training Documentation, 5/8/95 Filing)
at 1540 (emphasis added). Given the above language, we
reverse ACF's conclusion that HELP did not meet program
standards because it did not have IEP's for each of its
enrolled children at four out of five centers.
The "Developmental Screening" article also gives insight
into the meaning of the term "individualizing:"
Although IEP's differ from individualizing
curricula, the underlying spirit is similar to the
principle of individualizing as it applies to each
child in Head Start. In both situations, everyday
activities are designed to strengthen all areas of
development: physical, emotional, social, and
intellectual, and classroom teachers and home
visitors should work at including every child in
day-to-day activities and experiences, as well as
implementing the IEP.
Id. at 1545. It appears from the above-quoted language
that individualizing curricula means simply to have daily
activities which are designed to strengthen each child's
skills and to ensure that all children are able to
participate in each of the classroom experiences as much
as possible. It is not clear from the record on what
basis ACF's reviewer concluded that HELP's classroom
plans did not show individualized plans at one of the
five centers.
The record contains an Activity Plan Guide prepared by
some of HELP's component coordinators consisting of
hundreds of classroom ideas for teachers to use to teach
various skills to infants, toddlers and pre-schoolers in
the areas of education, health and nutrition. AAF
(Education, Tab 1) at 1 et seq. While each of the
proposed classroom plans has an area marked
"Individualized" and a place for a few children's names,
all of these areas are blank on each plan. However, the
fact that there are no specific plans for individuali-
zation on these forms is reasonable given that these are
merely lesson plan ideas, and the Migrant Head Start
coordinators who developed these plans could not predict
which plans each center would use and what
individualizing might have to be done with particular
children at each center. Such individualizing decisions
would have to be made by the teachers who worked with the
particular children at each center, and there are some
activity plans contained in the record which do show that
individual modifications were made in doing group
activities. AAF (Education, Tab 4) at 321-325. Given
that ACF has not shown that HELP failed to have
educational plans designed to strengthen the children's
skills and to ensure that all children could participate
to the best of their ability, we do not find any merit to
ACF's finding with regard to the individualization of
activities.
There also appears to be much confusion within ACF (and
undoubtedly among Head Start grantees) in the use of the
terms "screening" and "assessment." At the hearing,
ACF's education component reviewer stated that a grantee
must comprehensively screen its children and, regardless
of the results of the screening, perform an assessment of
each child. Tr. I at 480-481. However, the Head Start
Bureau makes a distinction between "indepth assessment"
(which is required only for those children whose
screenings indicate specific problems) and "on-going
assessment" (required of all Head Start children). The
"Screening and Assessment" article states that --
[i]f the results from the child's comprehensive
screening indicate some difficulties, the child is
referred for a more indepth evaluation of the
problems or concerns that were flagged in the
screening process . . . . [T]his is labeled as
"indepth assessment."
* * *
If no need for followup is indicated at any step
in the process, the child then is assessed on an
ongoing basis throughout his or her experience at
Head Start. Ongoing assessment provides information
on the progress of the child and the family, how the
program can be planned to meet the individual needs
of the child and the family, and how best to
communicate those needs to the parents.
In conducting the ongoing assessment process,
teachers are strongly encouraged to use a
combination of checklists, teacher observations,
parent reports, and collections of work done by the
child.
AAF (Education Training Doc., 5/8/95 Filing) at 1538-
1539. 30/
Thus, we agree with HELP that the real dispute in this
matter is what constitutes adequate ongoing assessment
and whether HELP was sufficiently conducting such
assessment through the portfolio method or otherwise.
The regulations do not specify how ongoing assessment is
to be conducted and the articles above emphasize that a
grantee is to have considerable flexibility.
HELP provided the Board with a list entitled "Migrant
Classroom Documentation Education Forms," which lists
various forms which Head Start teachers and staff are to
fill out and place in the children's records. The forms
applicable to screening and assessment are to be used on
the following schedule:
m Child's Observations -- one observation per month
per child, as well as when the need arises.
m I.E.P.'s -- only when the need arises, i.e. when
staff can detect a child having difficulty doing
a specific task. 31/
m "Notitas de Orgullo" 32/ -- three of these
notes to parents per program year per child.
m Denver II -- within two weeks after the child
enters the program.
m Report of Contacts -- two educational home visits
per child per program year.
m Infant/Toddler Checklist -- filed in child's
file.
m Child's Activity -- three activities per program
year per child.
AAF (Education Training Doc., 5/8/95 Filing) at 1489.
Samples of each of these documents are scattered
throughout the record and particularly in HELP's exhibit
marked "Sample Files." AAF (Sample Files, 5/8/95 Filing)
at 1553 et seq. The majority of these documents are
dated prior to the 1994 on-site visit. In the sample
files, HELP has included the education files for several
of its children. It is clear from the forms listed
above, as demonstrated in the sample files, that HELP was
using each of the methods discussed in the "Screening and
Assessment" article: checklists, teacher observations,
parent reports (through notes of discussions with parents
during home visits), and collections of the children's
work. While HELP did not introduce the files for each of
its children, it introduced sufficient information
through its sample files to convince the Board that HELP
was doing an adequate job in observing its children. We
do not find it reasonable to ask HELP to reproduce files
for hundreds of children served in 1992-1994 when ACF has
given us no basis on which to believe that the sample
files were not representative or that HELP's witnesses
who testified to this matter were not credible.
Finally, we need not address ACF's contention that Mr.
Reyes is not an expert on screening and assessment
procedures and that ACF was not informed following the
1991 on-site visit that HELP was using "portfolio
assessment" in addition to the Denver II screening
instrument. It is clear that Mr. Reyes , who is pursuing
his Ph.D. in childhood education and who has been with
Head Start for more than 20 years, is at least as
qualified as ACF's education component reviewer, who has
a bachelor's degree and five years with Head Start, to
discuss evaluation methods. Tr. I at 443-444; Tr. II at
1167-68, 1177. Moreover, it does not matter that HELP's
teachers did not specifically mention portfolios or
observations during the on-site visit; it is clear that
they were meeting the OSPRI requirement, and there is
apparently some confusion even among ACF and its
reviewers as to the meaning of terms such as screening,
indepth assessment, and ongoing assessment.
For the above reasons, we reverse ACF's finding that HELP
was out of compliance with the regulatory requirements
measured by OSPRI Item 16.
C. Disabilities Component
The Head Start regulations require that --
at least 10 percent of the total number of
enrollment opportunities in each grantee and
delegate agency during an enrollment year [be] made
available to children with disabilities who meet the
definition of children with disabilities.
42 C.F.R. § 1305.6; OSPRI Item 153 (1994). The
regulations further require that resources to implement
the disabilities services plan be adequate. 45 C.F.R.
§ 1308.4(n-o); OSPRI Item 155 (1994).
The 1994 on-site reviewer found that the program had not
met the ten percent mandate for the two previous program
years (1993 and 1992). See Termination Letter at 3-4.
The reviewer found that only six of the 270 enrolled
slots for the previous year were filled with children
with disabilities, and that this enrollment figure was
indicative, though not conclusive, of whether the program
was making such slots available to disabled children.
ACF Br. at 81, citing Tr. I at 599. ACF found that there
was no evidence of specialized efforts to recruit
disabled children and that there was no specific tracking
of funds set aside to provide services to disabled
children. ACF Br. at 81-82, citing Tr. II at 120-121,
124-125. ACF stated that HELP's position that it would
never turn away a disabled child on account of the
disability was never an issue in this matter, and that
ACF's position was that it was the responsibility of a
Head Start grantee to actively recruit disabled children
rather than simply enrolling them once the families got
in touch with the program. ACF Br. at 82.
Based on staff interviews, the 1994 on-site reviewer
found that the staff at the centers responsible for the
recruitment of children were unfamiliar with the laws and
program requirements relating to serving persons with
disabilities, including the Americans with Disabilities
Act (ADA) and the Individuals with Disabilities Education
Act (IDEA). ACF Br. at 77-78, citing Tr. I at 488. She
found that the local center staff had not received
training concerning specific disabilities occurring among
children in their centers; her conclusion was purportedly
based on a lack of attendance records from any training
and on no specific recollection by the staff that they
attended any training. ACF Br. at 78-79, citing Tr. I at
520. ACF concluded that a lack of an adequately trained
staff regarding services for children with disabilities
meant that HELP did not have adequate resources to serve
disabled children. Moreover, ACF found, the staff
exhibited uncertainty as to what kinds of activities
should be done with disabled children. ACF provided
testimony that the inappropriate placement of one child
in the program reinforced its belief that HELP lacked
sufficient knowledge in the area of disabilities. Tr. I
at 601-604. Finally, ACF found that there was no
documented training of parents regarding disabilities
even among parents whose children were believed to have
disabilities. ACF Br. at 80.
In response, HELP emphasized that the standards do not
require that 10% of enrollment slots actually be filled
with children with disabilities but only that they be
made available to such children, a fact not disputed by
ACF. HELP Br. at 56. HELP argued that the fact HELP had
not, and would not have, turned away disabled children
from enrollment in the program was evidence that at least
10% of its enrollment opportunities were available to
children with disabilities, particularly in the years at
issue when HELP was significantly underenrolled and thus
had plenty of room for additional children with or
without disabilities. HELP Br. at 57, citing Tr. II at
1069. HELP stated that it actively recruited children
with disabilities by "posting posters, placing public
services announcements, and obtaining referrals from
schools and governmental agencies;" HELP noted that ACF's
Migrant Head Start Branch Chief admitted that he saw one
of HELP's disabilities recruitment fliers. HELP Br. at
59, citing Tr. II at 400.
With regard to the adequacy of resources, HELP argued
that its staffing levels met state law requirements, that
it could supplement staff with temporary employees,
volunteers or parents, and that it would not be
reasonable for it to hire staff to handle children with
disabilities if such children were not, in fact,
enrolled. HELP Br. at 61. HELP noted that its
Disabilities Coordinator testified that she conducted
disabilities training sessions for all staff at the pre-
recruitment and pre-service training, and that ACF never
indicated or proved that separate sign-in sheets for such
training were necessary. HELP Br. at 62. HELP stated
that staff were trained in the requirements of the ADA,
the IDEA, and the requirements of state child care
regulations for serving persons with disabilities. HELP
argued that ACF's evidence on a lack of training of
parents on disabilities was weak. HELP Br. at 64. HELP
stated that it provided appropriate treatment to the one
chil