GAB Decision 713
November 12, 1985
New York State Department of Social Services;
Ballard, Judith A.; Teitz, Alexander Garrett, Donald F.
Docket No. 85-95; ACN 02-50253
The New York State Department of Social Services (State) appealed the
decision of the Acting Deputy Assistant Secretary for Management
Analysis and Systems, Office of the Assistant Secretary for Management
and Budget (Agency), to disallow $199,904 in federal financial
participation (FFP) for "nonpersonal services" incurred by Erie County
in the development and implementation of the State's Welfare Management
System (WMS). /1/ The disallowance was based on an audit by the Office
of Inspector General, which found, in part, that the "nonpersonal
service" costs claimed by Erie County duplicated other costs claimed or
were improperly allocated to the WMS program. In addition, the Agency
asserted that Erie County did not follow established federal procurement
regulations in acquiring electronic data processing (EDP) services from
outside contractors for the development and implementation of the(2)
WMS. Erie County, on behalf of the State, argued that the costs of EDP
services provided to the County by outside contractors were allowable.
/2/
For the reasons discussed below, we sustain the disallowance.
Background
New York State Department of Social Services is the single State
agency
authorized to receive federal funds under the Social Security Act
for
such programs as Medicaid, Child Support Enforcement, and
Family
Assistance. The Department of Social Services generally
supervises
these programs, which are administered locally by county social
services
departments and the New York City Department of Social Services.
In order to ensure that public assistance and care are provided
to
recipients at the lowest possible cost, State law authorized the
design
and implementation of the Welfare Management System (WMS), a
mechanized
claims processing system. This system was implemented at the
Department
level as well as at the local level.
The Office of Inspector General of HHS performed a review of the
WMS
implementation and development costs claimed by the State. The
basis of
this review was to determine the amount of implementation
and
development costs incurred by the 57 county social services
departments
for the period of October 1, 1977 through March 31, 1982 and
to
determine the accuracy and allowability of the incurred costs.
The present appeal relates to the auditors' findings concerning costs
for
the purchase of EDP consultant services and the rental of EDP
equipment
incurred by Erie County and claimed for reimbursement by the
State. The
auditors found that the services were duplicate of other
services also
claimed or improperly allocated and that the contracting
procedures used by
Erie County in procuring EDP services were in
violation of federal
regulations.(3)
The disallowance of $199,904 in FFP is comprised of the following costs:
a. $2,346 FFP - represents amounts charged to WMS for
services of a
contractor's employee which should have been charged to other
County
functions;
b. $5,856 FFP - represents a duplicate charge paid to an
outside
contractor for EDP services; and
c. $191,702 - represents disallowed costs resulting from
a
determination that Erie County's procurement of EDP services from
four
outside contractors violated the Federal Procurement
Standards,
Attachment 0 of Office of Management and Budget (OMB) Circular
A-102.
While Erie County presented the appeal in this matter (see footnote
2),
the Agency imposed the disallowance against the State. As the
Agency
noted in its brief, the Agency has no direct relationship with the
Erie
County with respect to WMS. Erie County, for purposes of
the
development of WMS, is a subgrantee of the State.
Analysis
1. Disallowances of $5,856 and $2,346 FFP.
Erie County did not address in its initial brief the disallowance
of
$5,856 in FFP for a duplicate charge to WMS. Moreover, although
the
County was given the opportunity to submit a reply brief, it chose
not
to file a submission. The County indicated in a telephone call to
the
Board on November 12, 1985, that it had no arguments to raise.
Inasmuch
as thr County has not presented any arguments to dispute the
Agency's
findings, we sustain the disallowance of $5,856 FFP.
The only argument raised by the County concerning the disallowance
of
$2,346 relating to work performed by a contractor's employee which
the
Agency alleged was improperly allocated to WMS was that there was
no
conflict of interest involved in the selection of this employee to
work
on the project. The Agency's disallowance, however, was not based
on
any alleged conflict of interest. Rather, the Agency found upon
a
review of the employee's time sheets that, while all the employee's
time
was charged to WMS, the time sheets indicated the employee's spent
some
time on county business unrelated to WMS. The County did not deny
this
occurred. We, therefore, conclude that part of the employee's time
was
improperly allocated to WMS and sustain the disallowance in the
amount
of $2,346 FFP.(4)
2. Disallowance of $191,702 FFP.
Erie County purchased EDP services from four outside contractors
during
the period of May, 1981 through March 1982. The Agency found
that
appellant did not procure EDP services in accordance with
several
requirements of OMB Circular A-102 procurement standards. The
Agency
found a lack of specific selection procedures; no competitive
sealed
bids or competitive negotiation; no records detailing the
history of
the procurement; and contracts lacking in certain required
provisions
such as contract amount, legal remedies, sanctions and
penalties. The
Agency pointed out that the County did not even have any
contracts with
the providers for the first eight months of EDP purchases.
The County did not dispute that the contracts in question were prepared
in
early 1982 and made retroactive to May 1981. The County,
however,
argued that the contracts, although retroactive, were
sufficient
inasmuch as the contracts delineated the obligations and duties of
the
parties as well as provided safeguards to the County. The County
also
contended that due to the nature of the work to be performed,
the
contract language could not have been more specific nor could the
time
frames for the completion of work performed be further delineated.
Erie
County further contended that the contractual agreements
existing
between the County and the contractors contained all the factors
present
in the definition of a "contract" as found in Black's Law
Dictionary,
5th Edition. The County argued that a disallowance premised
on the fact
that there were no written contracts until early 1982 amounts to
an
argument of form over substance. Consequently, Erie County urged
the
Board to interpret the procurement standards liberally, and overturn
the
disallowance based on a finding that the County had
substantially
complied with the federal procurement standards. /3/
(5)
We conclude that the State has not met its burden of demonstrating
through
persuasive evidence that it complied with the procurement
standards.
Under 45 CFR Part 74, Subpart P, procurements by grantees and
subgrantees
of supplies, equipment, and services are subject to the
federal procurement
standards if any part of the cost of the property or
service being procured
is treated as a direct cost under a grant or
subgrant and is either paid by
grant funds or counted toward satisfying
a cost-sharing or matching
requirement of the federal grant. 45 CFR
74.160(a) and (b) (1980 and
1981). Procurements by governmental
recipients, such as states and
local governments, are governed by the
procurement standards contained in
Attachment 0 of OMB Circular A-102.
Neither the County nor the State had
disputed that the EDP services and
equipment in question were treated as
direct costs under the various
grant programs and paid by grant funds.
Moreover, although the County
is the subgrantee of the federal grant funds,
the applicable provisions
of Subpart P apply to subgrantees and Attachment O
of OMB Circular A-102
specifically applies to procurements under no question
that the federal
procurement standards were applicable here.
Having concluded that these procurement standards were applicable, we
must
determine whether the County complied with the standards. While
the
County argued that it "substantially complied" with the
procurement
regulations, the Agency chronicled numerous substantive
deficiencies in
the County's procurement process. Agency Brief, pp.
5-9
For example, section 10.b of the procurement standards requires a
grantee
to have written selection procedures which provide, as a
minimum, certain
requirements for the solicitation of offers, such as a
clear and accurate
description of the technical requirements for the
services which contains the
minimum standards to which the services
offerors must fulfill, as well as all
other factors to be used in
evaluating bids or proposals. The Agency
found that the County had no
written selection procedures. The Agency
also found that the Country
failed to make the procurements at issue
according to the requirements
set forth under section 11 of the procurement
standards. This section
requires procurements by grantees in situations
like the one here to be
made by either competitive sealed bids or competitive
negotiation. The
County also did not maintain records of the history of
the procurement
which detailed the rationale for method of procurement,
selection of
contract type, basis of the contractor selection or rejection,
and the
basis for the cost, as required by section 13 of the
standards.
Finally, the Agency determined that the contracts(6) entered into
by the
County and its outside contractors did not contain, as required
by
section 14 of the procurement standards, provisions or conditions
which
allow for administrative, contractual, or legal remedies and
provisions
for appropriate sanctions and penalties in the event of a breach
of
contract by the contractor.
The only safeguards included in the contracts between the County and
the
outside contractors were that the County was obligated to pay only
for
work actually performed by the contractor, and that the contracts
were
executory only to the extent of money available to the County
for
performance of the terms of the contract. These provisions,
however, do
not provide the County with any remedies or appropriate sanctions
or
penalties in case of breach by the contractors as set forth in
section
14.
The County, therefore, has failed to provide persuasive evidence to
rebut
the Agency's findings of deficiencies in the County's
procurement
process. While the regulations require the County to
demonstrate that
it fully complied, not that it "substantially" complied, the
County's
evidence does not even demonstrate "substantial" compliance.
The Board
has previously upheld a disallowance where it found that the
procurement
regulation set forth clear standards applicable to the contract
between
the grantee and contractor which the Agency alleged were not met
and
where the appellant had not produced evidence that
demonstrated
compliance. Ohio Developmental Disabilities Council,
Decision No. 330,
June 30, 1982. /5/ As in that case, we find that the County
did not
present persuasive evidence to demonstrate that it complied with
the
procurement standards. We, therefore, uphold the disallowance.
(7)
Conclusion
For the reasons stated above, we sustain the full disallowance
of
$199,904. /1/ With its notice of appeal, the State provided copies
of
two disallowance
determinations. The first, by the Acting
Deputy Assistant Secretary for
Management Analysis and Systems,
discussed the disallowance of$199,904 in
"nonpersonal service" claims by
Erie County allocated among three HHS
agencies -- the Health Care
Financing Administration (HCFA), the Office of
Family Assistance (OFA),
and the Office of Child Support Enforcement (OCSE)
-- and the Department
of Agriculture (DOA). The second determination,
by the HCFA Regional
Administrator, duplicated the findings of the Acting
Deputy Secretary,
concerning the HCFA share of the questioned costs.
Our decision here
will be dispositive of both disallowances to the extent
they concerned
costs allocated to HHS programs. Our decision, however,
is not binding
on the disallowance of$19,327 allocated to DOA since we have
no
jurisdiction over the DOA
funds. /2/ At the State's
request
(Notice of Appeal, p. 2), we have allowed Erie County to present
the
appeal under 45 CFR 16.16(a), because the major fiscal impact of
the
disallowance would be on that County. See Board's Acknowledgment
letter
dated June 12, 1985. The State delegated to the County the
authority to
make the State's presentation in full. The State, however,
remains the
appellant in this matter although it is bound by the
County's
presentation. /3/
The County also argued that problems with New
York State resulted in the
delay in the County's implementation of WMS
and was one of the reasons why
the County had to rely on outside
contractors. This argument, however,
is not relevant to the resolution
of the issues in this case. We agree
with the Agency that the
disallowance was based on the allegation that the
federal procurement
standards were not followed. The basis of the
disallowance was not that
there were delays in implementing WMS. Moreover,
the State was the
grantee and remains the appellant in this appeal, and to
the extent that
it was responsible for the delay in the implementation of
WMS, it
through its subgrantee Erie County can not be excused for not
complying
with applicable grant
requirements. /5/ In the Ohio
appeal, the
Agency found that the grantee, in awarding a procurement
contract,
failed to adhere to provisions of the procurement standards
contained in
45 CFR 74.159 (1975). These requirements are similar to
the provisions
found in section 14 of OMB Circular A-102 (1980 and 1981)
which provide
that a procurement contract contain provisions for
administative,
contractual, or legal remedies in case of breach of contract
by the
contractor and provide for appropriate sanctions and penalties, and
that
the conntract contain suitable provision for termination by the
grantee
and the manner in which it may be terminated as well as the basis
for
settlement. In that case, the only evidence presented to the Board
of
an agreement between the contractor and grantee was a letter.
The
letter, however, did not contain the terms and conditions required
by
the procurement standard.
MARCH 28, 1987