SUBJECT: University of Wisconsin-Madison,

DECISION

The University of Wisconsin-Madison (University) appealed the April 5, 2000 determination by the Division of Payment Management (DPM), Department of Health and Human Services (DHHS), that the University owed $584,740 in interest earned on federal cash advances during the period July 1, 1993 through June 30, 1997. This determination was based on an audit of the University's cash management procedures during that period conducted by auditors from the Office of Inspector General, DHHS.

On appeal, the University argued that the amount of interest owed should be reduced because the University was not accountable for interest earned on cash held for three days or less prior to June 1, 1994, when the Cash Management Improvement Act of 1990 (CMIA) was implemented for universities. The University also argued that, under the CMIA, the University was entitled to an offset for interest owed to the University by the federal government. In addition, the University took the position that the figure for federal cash on hand as of July 1, 1993 used by the auditors to calculate the interest owed was incorrect.

As explained in detail below, we conclude that the regulations applicable both before and after implementation of CMIA clearly made the University accountable for any interest it earned on advances of federal funds, without any offset for interest costs of the University, and required the University to remit that interest after deducting an amount for associated administrative expense.

We further conclude that the auditors properly calculated the interest the University earned during the audit period. The federal cash on hand figure that the auditors used as a starting point was certified as accurate by the University, after DPM had made adjustments to the prior quarter's figure and explained those adjustments to the University. The adjustments were also reviewed and verified by the auditors. The University did not provide any documentation showing that those adjustments were invalid, and the University's general attacks on the payment management system have no merit. The figure used by the auditors was more reliable than the figure the University would have us use.

While the University did not challenge on appeal the auditors' calculations (other than the starting figure), we note that the University may have been entitled to claim an amount for administrative expense ($100 for the first year and $250 for each of the subsequent years). Thus, we conclude that the University is liable for interest in the amount determined by the auditors, subject to a reduction of up to $850 if the University provides documentation to DPM showing that the University has not previously claimed from any federal grantor agency the allowable administrative expense for any year of the audit period.⁽¹⁾

Background

The auditors performed a review to determine whether the University's cash management policies and procedures were in accordance with federal requirements. The auditors reviewed requests for cash transfers totaling approximately $664.3 million made by the University for the period July 1, 1993 through June 30, 1997. The auditors determined that the University did not have formal, written control procedures to minimize the time between request and deposit of federal funds and their eventual disbursement, as required. The auditors found that the University frequently requested federal funds earlier than they were needed and, consequently, earned interest on federal funds. This interest was not identified and remitted to the payment management system. University (UW) Ex. 1, at 3. For example, for fiscal year (FY) 1994, the auditors found that excess cash on hand for DHHS programs averaged approximately $5.5 million for each day of the year. Id.

The University responded that it did have written procedures to effectively monitor cash payments, but acknowledged that it needed to modify those procedures. Specifically, the University acknowledged that it had been drawing payroll funds "prior to the time they are accessible by employe[e]s." UW Ex. 1, Attachment (Att.) (Letter of 7/20/99, 2d page). The University also agreed that it should in the future remit any interest earned (although it asserted it would base this calculation on its accounting records). Id. The University disputed the auditors' calculation of interest due for the audit period.

After considering the University's response to the audit report, DPM offered the University an opportunity to provide additional documentation. DPM subsequently notified the University that the auditors had found the additional documentation insufficient. Accordingly, DPM sustained the audit finding that the University should remit $584,740 in interest to DPM. The University then appealed this determination to us.

Analysis

Whether the University was liable for interest earned in FY 1994

On appeal, the University asserted that, prior to the implementation of the Cash Management Improvement Act (CMIA), Public Law No. 101-453, the University did not need to account for interest earned on advances of federal funds. Specifically, the University alleged that no interest is due with respect to the 1994 fiscal year because the University's drawdown procedures complied with the existing standard.

According to the University, prior to the CMIA, "no law or regulation specifically required the payment of interest on draws from letters of credit from the first day of the draw until the day the funds were paid out for program purposes." UW Br. at 10. The University took the position that Office of Management and Budget (OMB) Circular A-110 required only that "the timing and amount of cash advances shall be as close as administratively feasible to the actual disbursements by the recipient organization for direct program or project costs. . . ." The University argued that it met the "administratively feasible" standard (in spite of the fact that the University admittedly was prematurely drawing down federal funds for payroll costs).⁽²⁾ Alternatively, the University argued that, even if it did not meet the "administratively feasible" standard, "it has been recognized throughout the higher education community that, until the advent of the CMIA, OMB A-110 required interest to be charged only on amounts held longer than three days." UW Br. at 11.

These arguments have no merit.

Basic requirements for administration of grants awarded by DHHS are at 45 C.F.R. Part 74. These requirements are based on OMB Circulars, including A-110 (which applies to institutions of higher education). The Circulars are promulgated to ensure that federal agencies have uniform administrative requirements for grants.

As in effect in the University's fiscal year 1994, subpart K of Part 74 contained payment requirements for recipients of grant awards. The basic standard for payment of grant funds to recipients appeared at 45 C.F.R. § 74.92, which provided:

(a) Methods and procedures for making payments to recipients shall minimize the time elapsing between the transfer of funds and the recipient's disbursements.

(b) Except as provided in § 74.47(b), public and private nonprofit institutions of higher education, public and private nonprofit hospitals, and other private nonprofit grantees shall maintain advances of Federal funds in interest bearing accounts. Interest earned on Federal advances deposited in such accounts shall be remitted promptly, but at least quarterly, to the Federal agencies that provided the funds. Interest amounts up to $100 per recipient fiscal year may be retained by the recipient for administrative expense. (The $100 pertains to the total interest earned on all Federal advances.)

(Emphasis added.)

Section 74.47(b) referred to the Intergovernmental Cooperation Act of 1968 (ICA), Public Law No. 90-577. The ICA provided that states, as defined in the ICA, were not accountable for interest or investment income earned if the income was attributable to "grants-in-aid" as defined in the ICA. 42 U.S.C. § 4213. The ICA defined "State" to include any agency or instrumentality of a state. "Grant-in-aid" was defined to exclude "payments under research and development contracts or grants which are awarded directly and on similar terms to all qualifying organizations, whether public or private." 42 U.S.C. § 4201. Unless exempted by the ICA or other statute, recipients were required by section 74.47(a) to "remit to the Federal Government any interest or investment income earned on advances of HHS grant funds." (Emphasis added.)

The University did not argue that any of the funds at issue here were "grants-in-aid" within the meaning of the ICA. The record indicates that the funds were primarily research project grants awarded by HHS Public Health Service agencies such as the National Institutes of Health (designated by R01 document numbers) and that the University office responsible for the these awards was "Research and Sponsored Programs." See, e.g., DPM Ex. 29, at 11-26; DPM Ex. 33. The requirements for remitting interest thus applied to the funds at issue in this case. Under these requirements, the University was obligated to remit any interest earned on federal advances. Nothing in these provisions limited this obligation to interest earned after the funds were held for any particular period.

The key problem with the University's argument is that it assumes that no interest is owed if the University complied with the conditions for receiving advances of federal funds through a letter of credit method and with general requirements for minimizing the time between transfer and disbursement of funds. These requirements are separate from the obligation to account for any interest earned, however. A "letter of credit" is "an instrument certified by an authorized official which authorizes a recipient to draw funds needed for immediate disbursement in accordance with Treasury Circular No. 1075." 45 C.F.R. § 74.91. Section 74.61(e) provided that, when "advances are made by a letter-of-credit method, the recipient shall make drawdowns as close as possible to the time of making disbursements." The "administratively feasible" standard cited by the University then appeared in Treasury regulations as a standard that federal agencies must require of their grantees, but federal agencies were given some discretion in how to interpret the standard. See UW Ex. 15 (preamble to 1973 version of Treasury regulations).

Failure to comply with such requirements would have been a basis for placing the University on a reimbursement rather than advance payment system and/or revocation of its letter of credit. 45 C.F.R. § 74.94(a). Mere compliance with the timing requirements would not, however, absolve the University from its separate obligation to account for interest earned on advances of federal funds.

As early as 1980, this Board (then called the Departmental Grant Appeals Board) upheld a determination requiring a state university to remit interest earned on advances of federal funds for research grants. University of California - Letter of Credit, DAB No. 139 (1980). In 1986, the Board rejected an argument by a different state university that it should be permitted to offset excess advances of federal funds against deficits of federal funds in determining the amount of interest earned. Indiana University, DAB No. 774 (1986). The Board noted that the regulations placed the obligation on the grantee to minimize the time between transfer and disbursement of funds and therefore to keep both surpluses and deficits to a minimum.

Although Part 74 was amended in 1987 to conform to a revision in OMB Circular A-110, the basic requirements for remitting any interest earned remained the same as those discussed in the cited Board decisions. The revision merely required recipients to deposit advances in interest-bearing accounts and permitted them to retain $100 per year of the earned interest to cover administrative expense. The preamble to this revision specifically referred to the ICA exemption for accountability for interest, noting that most DHHS grants to state universities would be subject to the revision since the exemption would not apply. 52 Fed. Reg. 33,239; 33,240 (Sept. 2, 1987). The preamble also referred to the longstanding rule generally requiring recipients "to remit to the Federal Government any interest they earn on advances of Federal grant funds." 52 Fed. Reg. at 33,329. No distinction was made according to when the interest was earned.

The University cited no specific statement in the applicable regulations or elsewhere to support its assertion that the understanding in the higher education community was that no interest was due on advanced funds until after the funds had been held for more than three days. Instead, the University would have us infer such a "grace period" from the instructions for preparing the Federal Cash Transactions Report, stating that grantees should note in the "Remarks" section when funds have been held for more than three days and explain why. UW Br. at 11-12, citing OMB Circular A-110. The University also cited to a statement in proposed regulations implementing CMIA referring to the "existing standard" that grantees provide justification for holding federal cash balances in excess of three days. UW Br. at 12, citing Ex. 17 (57 Fed. Reg. 44,272, 44,274). Contrary to what the University argued, however, the mere fact that the federal government required a justification if funds were held in excess of three days does not "strongly imply" that cash on hand is "excess" only if held more than three days, much less establish that the federal government intended to permit grantees to keep interest earned in that three-day period. In light of the express requirement that recipients remit any interest earned (unless exempt under the ICA), the University's interpretation of these statements as establishing a "grace period" is unreasonable.

Thus, we conclude that the University was accountable to the federal government for any interest earned in FY 1994, even if it was earned on advances of federal funds held less than three days.

Whether the Cash Management Improvement Act applied to the interest earned after FY 1994

The University did not deny that it was accountable for interest for that part of the audit period after the CMIA was implemented, which the University identified as beginning in FY 1995 for universities. The University argued, however, that the CMIA entitled the University to offset (against any interest earned on advances of federal funds) any interest lost when University funds were advanced to cover grant expenditures. The University argued that the CMIA is expressly made applicable to state universities by OMB Circular A-110. The University quoted the following provision from the Treasury regulation at 31 C.F.R. § 205.11(a), implementing the CMIA:

The Federal Government will incur an interest liability to the State if the State pays out its own funds for program purposes with valid obligational authority under Federal law, Federal regulation, or Federal-State agreement. A Federal interest liability will accrue from the day a State pays out its own funds for program purposes to the day Federal funds are credited to a State account.

The University also cited 31 C.F.R. § 205.11(c), arguing that the University was entitled to interest on advances of its funds "even in cases where obligational authority has not been established, such as expenditures in advance of a renewal award, because the lack of obligational authority is not the result of 'limitation, reduction, or termination of the program' and obligational authority (i.e., the renewal award) is subsequently established." UW Br. at 14.

There are two major problems with the University's reliance on the CMIA regulations cited:

• The sections cited are from subpart A of 31 C.F.R. Part 205. As the scope section explains, subpart A applies only to certain programs, generally those that meet the threshold to qualify as a "major Federal assistance program in the State." 31 C.F.R. § 205.4. The University did not allege that the programs at issue here were such programs, and the record indicates instead that they are research programs. The preamble to the CMIA final regulation published in 1992 explained that research and development programs are not covered by either subpart A or subpart B of Part 205. 57 Fed. Reg. 44,272 (Sept. 24, 1992).
  
  
• Although the 1992 rule would have defined "State agency or instrumentality" as used in the CMIA to include any organization or component unit of the state reporting entity as defined by Generally Accepted Accounting Principles (and therefore to include institutions of higher education), this interpretation was later reconsidered and changed. In a revision published June 1, 1994, the definition of "State agency or instrumentality" was changed to specifically exclude institutions of higher education. DPM Ex. 32 (59 Fed. Reg. 28260, amending 31 C.F.R. § 205.3). The preamble explained that states and institutions of higher education had strongly objected to the original definition since such institutions are fiscally (and sometimes legally) independent. The preamble further explained that the CMIA regulations would not apply even if the excluded entity disbursed funds from an account maintained in the state treasury.

These exclusions are consistent with the purpose of the CMIA, which sought to balance federal agencies' concerns about the provisions of the ICA exempting states from accountability for interest earned on federal funds for "grants-in-aid" programs with state concerns about delays in receiving federal funds for those programs. See 57 Fed. Reg. 44,272.

Contrary to what the University argued, OMB Circular A-110 does not make the CMIA regulations on which the University relied expressly applicable to state universities. The University was apparently relying on revisions to OMB Circular A-110 made in November of 1993, prior to the revision to the CMIA regulations discussed above. UW Ex. 13. These revisions include the statement that "State universities and hospitals shall comply with the CMIA, as it pertains to interest." OMB Circular A-110, Subpart C, § ___.22(l); see also 45 C.F.R. § 74.22(l)(1994-1997). In our view, the University could not reasonably have read this statement as applying the cited CMIA regulations, when they do not apply by their own terms. While the University implied that OMB Circular A-110 should have been amended to delete this provision if the CMIA regulations did not apply to universities, the provision merely instructs universities to comply with the CMIA. In order to so comply, the University should have been aware of the revision to the implementing regulations excluding institutions of higher education from the regulatory requirements.

Moreover, the revisions to OMB Circular A-110 and the corresponding revisions to this Department's regulations at 45 C.F.R. Part 74 clearly set out the University's obligation to track interest earned on federal funds and to remit that interest to the extent the interest exceeded the amount specified for associated administrative expense. Examples of such requirements include the following:

• Recipients are required to have financial management systems with records that "contain information pertaining to Federal awards, authorizations, obligations, unobligated balances, assets, outlays, income and interest." 45 C.F.R. § 74.21.
• Recipients are required to "disburse funds available from repayments to and interest earned on a revolving fund, program income, rebates, refunds, contract settlements, audit recoveries and interest earned on such funds before requesting additional cash payments" unless inconsistent with statutory program purposes. 45 C.F.R. § 74.22(g).
• Recipients are required to "maintain advances of Federal funds in interest bearing accounts" unless the amounts of funds advanced are so low that the amounts are minimal or it is not feasible to maintain the required balance in the account. 45 C.F.R. § 74.22(k).
• For "those entities where CMIA and its implementing regulations do not apply (see 31 CFR part 205), interest earned on Federal advances deposited in interest bearing accounts shall be remitted annually to the Department of Health and Human Services, Payment Management System . . . . Interest amounts up to $250 per year may be retained by the recipient for administrative expense. . . ." 45 C.F.R § 74.22(l).
  

In spite of these requirements, the University failed to account for and remit interest it earned on advances of federal funds. There may have been some lapse on DPM's part in not noticing that the University was not filling in the line for interest on the Federal Cash Transactions Reports submitted by the University. Under the regulations, however, the University must account for interest earned and therefore must bear the responsibility to the extent that any problem exists in retroactively determining the amount of interest due for past periods. As we discuss next, the approach the auditors took in calculating the interest was reasonable and, if anything, understated the interest due.

Whether the auditors reasonably used an amount from the University's Federal Cash Transactions Report as the cash on hand on July 1, 1993

Much of the University's argument about how the auditors calculated the interest due centers on the University's attack on the reliability of its Federal Cash Transactions Reports. According to the University, the auditors should not have relied on those reports to determine the cash on hand as of July 1, 1993 (the start of the audit period). Instead, the University said, the auditors should have started with an amount based on the report the University used to determine how much cash it should draw down under its letter of credit. Using this amount as the starting point, the University recalculated the interest due for DHHS funds as $119,722, for a total due of $169,437, rather than the $584,740 that the auditors determined was due. UW Ex. 1, Att. at 2.

As we explain in detail in this section, this argument has no merit, for two primary reasons. First, the auditors reasonably relied on the starting cash balance figure of $3,829,656.03. Second, the University did not establish that its starting point is reliable.

The auditors' starting cash balance was reasonable.

Under 45 C.F.R. Part 74, the University was required to submit certain relevant reports to this Department. The relevant provisions of Part 74 prior to revisions made in August 1994 were as follows:

• Under section 74.73, recipients were required to submit a Financial Status Report, Form 269, to report the status of funds for all nonconstruction grants, using the same accounting basis (i.e., cash or accrued expenditures) used in its accounting system. (The University is on a cash basis of accounting. UW Br. at 11.)



• Under section 74.74(a), for grants paid by letter of credit, recipients were required generally to use Form 272, Federal Cash Transactions Report. This form was described as being used by the DHHS payment office to monitor cash advanced to grantees and to obtain disbursement or outlay information for each grant from grantees. 45 C.F.R. § 74.74(b). The regulation provided that this could be accomplished with the assistance of automatic data processing equipment provided that the information submitted was not changed in substance. Id.
  

Subsequent to the 1994 revisions, the following provisions of Part 74 applied:

• Under section 74.52(a)(1), recipients are required to use the Financial Status Report (either Form SF-269 or Form SF-269A) to report the status of funds for all nonconstruction projects or programs, generally submitting such reports at least annually and at the completion of the agreement.



• Under section 74.52(a)(2), recipients are required to submit the Report of Federal Cash Transactions, Form PMS-272, 15 days following the end of each quarter (unless submission has been waived). The purpose of the report is still described as being "to monitor cash advanced to recipients and to obtain disbursement information for each agreement with the recipients." 45 C.F.R. § 74.52(a)(2)(i).

• Under sections 74.52(a)(3) and (4), the HHS awarding agency is authorized to accept the identical information from the recipient in machine readable format or electronic outputs and to provide computer or electronic outputs to recipients when this would expedite or contribute to the accuracy of the reporting.
  

The University had a system under which DPM would send a tape to the University with document numbers related to the notices of grant award and other documents used to obligate federal funds and authorizing the expenditure of federal funds by the University. This tape would then pick up the corresponding disbursements charged to those accounts by the University's accounting system. DPM would make adjustments (for example, if the disbursements charged to an award exceeded the authorized amount) and then send a hard copy PMS-272 to the University reflecting the cash drawdowns for the quarter and the disbursements, as adjusted. The University official who was responsible for the reports would note adjustments on this form indicating, for example, if the University's records showed that the University had not received the amount of funds shown on the form as received, and would then certify the accuracy of the report. DPM might not accept all of the adjustments made by the University.

The $3,829,656 figure used by the auditors as the cash on hand on July 1, 1993 appears as the figure for cash on hand on the hard copy PMS-272 for the quarter beginning on that date. DPM Ex. 25. As DPM pointed out, the University's responsible official certified to the accuracy of that report. Id. The University tried to undercut the significance of this certification by pointing out that the University had entered a different amount (negative $5,467,837.76) as the cash on hand amount at the end of the prior quarter, on the hard copy report for that quarter. UW Br. at 6; UW Ex. 6. This argument has no merit because it ignores the fact that DPM reached the figure for cash on hand as of July 1, 1993 by making certain adjustments to the University's figure for the end of the prior quarter. DPM explained the adjustments in detail to the University at the time. DPM Ex. 34. The University's subsequent certification of the accuracy of the hard copy report for the quarter beginning July 1, 1993, can be read as the University's contemporaneous agreement with DPM's adjustments. These adjustments were later reviewed by the auditors, who verified them. UW Ex. 1, at 5.

Moreover, the University did not provide any documentation that undercuts the validity of the adjustments made by DPM to the University's figure.

The major difference between the University's and DPM's figures, as indicated on the PMS-272 for the quarter ending June 30, 1993, was that DPM had recorded the amount of cash available as $31,451,565.33, whereas the University crossed this amount off and replaced it with a figure reduced by $7,830,000. A typewritten note by the University stated that the DPM amount "reflected drawdowns not reflected on our records as of 6/30/93." UW Ex. 6. Before us, DPM provided receipt dates showing that drawdowns totalling this amount were all received by the University on or before June 30, 1993. DPM Ex. 27. The University had disputed these receipt dates in a December 15, 1999 letter. UW Ex. 4. Yet, the University's own receipt log shows receipt dates on or before June 30, 1993 with respect to all of the drawdowns comprising the $7,830,000 except one for $256,000 (shown as not received until July 7, 1993). UW Ex. 12.

The University's receipt log is, moreover, less reliable than DPM's electronic records of when funds were transferred out of the federal depository under the University's letter of credit into the designated account. The University did not deny DPM's assertion that the transfer under a letter of credit generally takes place within one day of the request for funds. Nor did the University provide either bank statements from the state account into which the funds were transferrd or any contemporaneous written procedures from its accounting system to show that its receipt log reflected the date the bank credited the non-federal account. Notations on the receipt log indicate with respect to amounts totaling the $7,830,000 that the cash was "drawn but not in University Accting System." Id. The issue is not, however, whether the drawdown had been recorded in the University's accounting system, but whether cash had been transferred out of a federal bank account into the non-federal bank account designated by the University.⁽³⁾

Acknowledging that most of these drawdowns were related to payroll costs, the University also argued that "[r]egardless of whether the $7 million would have been treated as a disbursement in the quarter beginning July 1 or properly could have been treated as a disbursement in the prior quarter, the simple fact is that this money was not held by the University as of July 1, 1993, and should not be used to artificially inflate the University's cash on hand." UW Br. at 9-10. No such artificial inflation occurred, however. Since the University's accounting system treated the payroll amounts as disbursements in the prior quarter (as the University's argument suggests and the audit report indicates), this amount would not have been treated as part of the cash on hand for purposes of the PMS-272 for the quarter beginning July 1, 1993. See UW Ex. 1, at 6. Instead, the payroll amounts would have been offset against the cash drawdowns in the prior quarter to determine the cash on hand (unless they were in excess of authorized amounts). Moreover, the University's argument about the payroll amounts was based on the fact that the payroll checks were negotiable on July 1, 1993. The University provided no information on when it actually disbursed federal cash to cover the payroll checks and it is unlikely that all of the disbursements occurred on the date the checks were negotiable. Since the auditors treated the payroll amounts from the prior quarter as though all of the cash had been disbursed prior to July 1, 1993, the auditors' calculation likely understated the actual beginning cash balance, if anything.

Similarly, the other adjustments made by DPM and verified by the auditors to obtain the beginning cash balance for the audit period appear to be reasonable ones. The two major adjustments were to reduce disbursements shown on the paper report to the extent that they exceeded either disbursements shown on the tape transfer or the authorized amounts. UW Ex. 1, at 5. The University provided no documentation showing that these adjustments were somehow unwarranted or incorrect in amount, even though DPM had provided the University with a line-by-line analysis of the adjustments.

Instead, the University relied on general assertions about problems with the payment management system. These assertions lack merit, for the following reasons:

• The problems appear in large part to have been caused by the University. For example, in the tape to tape transfer of information, the University's accounting system reported as disbursements charged to federal grant awards amounts that were in excess of the amounts authorized as of the quarter in question. This apparently occurred because the University's system was reporting pre-award costs the University incurred in anticipation that it would receive renewal awards in later periods as though they were disbursements chargable to existing awards. The University tried to downplay this problem by asserting that it covered these pre-award costs with its own funds until it had the authorization to charge them to federal funds and that its system for determining how much federal cash to draw down under its letter of credit did not include these pre-award costs as amounts to be drawn down until the authorization was received. Regardless of whether the University was actually drawing down federal funds to cover these pre-award costs at the time incurred, however, the University's accounting system should not have been charging those disbursements to accounts for awards different from the renewal or other awards with respect to which they could properly be charged as pre-award costs. DPM was apparently aware of this problem and was adjusting disbursements downward by the amount they exceeded the authorized amount for any particular grant award. To the extent that DPM's adjustments did not include all of the pre-award costs improperly charged to existing awards, however, the amount of federal cash on hand may have been understated, rather than overstated.⁽⁴⁾



• While the University alleged that DPM never made corresponding upward adjustments in disbursements after the pre-award costs could properly be charged to later awards of funds, the disbursements would have been picked up on later PMS-272 reports, so long as the University's accounting system showed them as disbursements under the later awards. The letter from DPM to the University explaining the adjustments to the PMS-272 for the quarter ending June 30, 1993 specifically stated that, for awards with a future authorization, "disbursements should be reported on the quarter ending 9/30/93 PMS-272 report, but not on the 6/30/93 PMS-272." DPM Ex. 34, at 2. Since the PMS-272's reported cumulative disbursements for each "document number," not just disbursements in any one quarter, it is likely that the disbursements were taken into account in subsequent quarters.



• The documents that the University submitted to show mistakes made by DPM instead show that the University was aware of its obligation to point out any differences between its records and DPM records regarding disbursements under any particular document number. See generally UW Ex. 37. Moreover, most of the adjustments requested by the University were based on Financial Status Reports with respect to grants that had been closed out. If, as the University alleged, DPM did not make all of the adjustments the University requested, there may have been valid reasons for rejecting them - for example, if the University did not meet the requirement in 45 C.F.R. § 74.71 (1995) that unliquidated obligations must be liquidated within 90 days of the expiration of the grant in order to be charged to federal funds.⁽⁵⁾



• The University's attempt to undercut the validity of the PMS-272 report because the tape transfer would generally show disbursements for awards not listed on the hard copy reports fails to recognize that DPM's adjustments included downward adjustments for disbursements related to awards for which authorization was not received until the subsequent quarter.



• The University tried to show that the PMS-272's were unreliable by pointing out that the beginning cash on hand amount is different in two PMS-272's, even though both reports are for periods beginning October 1, 1995. A close examination of those reports provides a ready explanation of the difference, however. The first report covers only one quarter, and the second covers that quarter plus the following quarter. The second report inadvertently includes the "Total Cash Available" amount from the first report as the cash on hand on October 1, 1995. UW Ex. 7. The Cash Available figure in the first report ($28,935,687.48) was obtained by adding receipts during the quarter beginning October 1, 1995 ($31,654,000.00) to the cash on hand at the beginning of that quarter shown on the first report (-$2,718,312.52). If the second report had added the total receipts for both quarters to the $28,935,687.48, this would have resulted in an overstatement of the cash on hand at the end of the two-quarter period (March 31, 1996) because the $31,654,000.00 in receipts during the first of the two quarters would have been added in twice. Instead, the receipts amount on the second report appears to include only receipts from the first quarter of calendar 1996.⁽⁶⁾ In any event, the University provided no evidence of a similar mistake or any other mistake that would have rendered unreliable the specific cash on hand amount used by the auditors -- the figure on the report for the quarter beginning July 1, 1993.

• The University's reliance on its own "Extramural Support Receivable Report" (Receivable Report) as a more reliable basis for determining federal cash on hand than DPM's figures is misplaced, for the reasons explained below. Moreover, the University's attempt in its reply brief to attribute the difference between the $3,829,656 and the amount on its Receivable Report as due to a "succession of minor errors and reconciliation failures, compounded over the last thirty years" ignores the fact that the major difference between the University's figures and DPM's at the time was because the University claimed it had not yet received $7,830,000 in drawdowns that it had in fact received.

Thus, we conclude that the auditors were reasonable in relying on the adjusted, certified, and verified amount of $3,829,656 as the amount of federal cash on hand as of July 1, 1993.

We also reject the University's attempt to undercut DPM's reliance on the PMS-272 amount by pointing out that the figure for cash on hand as of January 1, 1994 in the audit workpapers differed from the amount of cash on hand on the PMS-272 for the quarter beginning on that date. UW Ex. 8. The University said that one would expect the amounts to be the same. As discussed below, however, the auditors calculated the average daily cash balances for FY 1994 using the paydates for the various University payrolls. In contrast, on the PMS-272's, the University was reporting payroll amounts as disbursements on the dates they were calculated.

The audit likely understated the true amounts of federal cash on hand during the audit period since: 1) it is unlikely that the University had in fact disbursed all of the substantial amounts drawn down at the end of the prior quarter to cover payroll checks that were not negotiable until July 1, 1993; and 2) it is unlikely that all of the payroll checks issued during the audit period were in fact cashed by the payees on the paydates.

The University's starting figure for cash on hand is unreliable.

The University asserted that the correct figure for cash on hand at the beginning of the audit period is negative $155,000. The basis for this assertion is that this is the amount on the University's Receivable Report that the University used to calculate its first request for a drawdown of federal funds in the quarter starting July 1, 1993. We find this figure to be wholly unreliable as a basis for determining federal cash on hand, for the following reasons:

• The University described its Receivable Report as containing a receivable total that is a sum of individual line calculations for all active projects determined by subtracting receipts from budget or expenses (whichever is less). UW Ex. 4 (Letter of 12/15/99, at 1). To determine cash drawdown amounts, however, recipients are supposed to take into account more than just receipts and expenses. The Federal Cash Transactions Report instructions published in 1976 refer to offsetting expenses with program income and making other adjustments. UW Ex. 16 (41 Fed. Reg. 32,016, 32,023). The 1994 regulatory provisions specify that, before requesting additional cash payments, recipients must disburse funds available from other sources, such as interest earned, program income, rebates, refunds, contract settlements, and audit recoveries. See 45 C.F.R. § 74.22(g). Moreover, adjustments might have to be made for projects that are no longer active (for example, if an audit showed that a refund or rebate attributable to an expense charged to federal funds had not been properly credited to the federal account for an award that had been closed out).



• The University did not provide any written documentation of how it defined "expenses" for purposes of the Receivable Report used to determine the drawdown amount of $155,000. Expenses are not necessarily the same as disbursements. While the University was supposedly on a cash basis of accounting, it admitted that it was recording payroll amounts as disbursements before the checks were even negotiable. These amounts were apparently included on the Receivable Report when the payrolls were calculated. We have no assurance that other amounts were not also treated prematurely as receivables the University used to justify drawdowns.



• The mere fact that prior audits might not have questioned the University's system for calculating drawdowns does not necessarily indicate approval of that system. Moreover, we do not know whether previous auditors were aware, for example, that the University was recording disbursements for payrolls prematurely.



• Even if the Receivable Report was an accurate way of predicting the amount of drawdown that the University could properly request at any point in time, based on its expected disbursements on or shortly after the expected date of transfer, this would not necessarily mean that the Receivable Report accurately reflected the amount of cash on hand on any particular day. The cash on hand amount should reflect amounts previously drawn down based on other Receivable Reports and not yet disbursed for authorized purposes, as well as any program income and other adjustments to available cash.

Contrary to what the University argued, moreover, it is not necessarily true that if the PMS-272's that showed negative balances in the millions of dollars were correct, the University would have relied on those amounts to determine its next drawdowns, rather than making its requests based on the lower amounts shown on the Receivable Reports. The Receivable Reports took into account drawdowns that had been previously requested, but not received. The negative cash balances on the PMS-272's were determined by offsetting receipts against disbursements, and therefore would not have reflected drawdowns that had been requested, but not received.

Thus, we reject the University's position that we should rely on its Receivable Report system and use negative $155,000 as the cash on hand as of July 1, 1993.

Whether the auditors' calculations were otherwise correct

The audit report noted that the University had provided monthly schedules of expenditures for FYs 1996 and 1997, but was "unable to provide these details for 1994 and 1995 because of the effort that would be required to accumulate the data." UW Ex. 1, at 4. Thus, the auditors "developed average daily expenditures for 1994 and 1995 by using data similar to that the University provided to [the auditors] for 1996 and 1997." Id. For payroll costs, which were 75% of total disbursements, the auditors obtained and used the "paydates for the different employee payrolls during the audit period." Id. The auditors provided a summary of the average daily balance amounts in the audit report and subsequently provided more detailed information to the University on how the interest amounts were calculated.

Although the University responded to the audit report by challenging the average daily expenditure amounts used by the auditors, the University conceded the accuracy of those amounts for purposes of its appeal to us. UW Br. at 2.

We note, however, that the audit report does not indicate that the auditors deducted the allowable administrative expense from the amount of interest to be remitted. The University was entitled to $100 for FY 1994 and to $250 for each of the three subsequent fiscal years in the audit period. 45 C.F.R. § 74.92(b)(1987-93); § 74.22 (1994-97). The annual administrative expense amount is, however, "an overall ceiling on the aggregate amount that a single grantee may retain for a year, even if the grantee earns interest on advances from more than one Federal source -- such as two or more letters of credit from the same or different Federal grantor agencies." 52 Fed. Reg. 33,239, 33,240 (Sept. 2, 1987). Accordingly, the amount due should be reduced by an amount up to $850 for administrative expense if the University can show that it did not claim its allowable administrative expense from any other grantor agency for the years during the audit period.

Conclusion

For the reasons stated above, we uphold DPM's determination that the University is required to remit interest in the amount of $584,740, subject to a reduction of up to $850 if the University provides documentation to DPM that it has not previously claimed from any federal grantor agency the allowable administrative expense for any year of the audit period.

Cecilia Sparks Ford

M. Terry Johnson

Judith A. Ballard
Presiding Board Member

1. The auditors determined that the University had earned $535,025 in interest on DHHS funds and $49,715 on National Science Foundation funds. UW Ex. 1, 8^th page. DPM noted that DHHS was the cognizant agency for the University, and therefore, pursuant to OMB Circular A-133, as codified at 45 C.F.R. Part 74, Appendix I (1993-1997), was responsible for ensuring the resolution of audit findings that affect the programs of more than one agency. DPM Brief (Br.), at 2, n.3.

2. The University admitted that it was drawing down federal funds at the time the payroll was calculated (several days before the checks were even negotiable), but appeared to attribute this system to wording in Treasury regulations prior to 1977 that referred to drawdowns at the time checks were "issued." UW Br. at 11, n. 23. This reliance is misplaced not only because this provision was superseded long before the audit period, but also because the checks clearly were not "issued" until several days after the payroll was calculated. Indeed, the University said it had "to allow time for the checks to be sent to the State Department of Administration for signature, sent back to the University, and then transmitted via bus or courier to the UW System campuses throughout the state." UW Br. at 11.

3. The University asserted that it did not benefit from any interest earned on federal funds because the interest went into the general Wisconsin State treasury. Also, a 1986 letter from a University official refers to "the 'pool' account that our cash gets deposited into initially after drawdown." UW Ex. 38. Under the regulations, the University was required to keep track of and remit any interest earned on federal funds while in such a "pool" account, as well as any interest earned on any account into which the funds were subsequently transferred, regardless of whether the University could use the funds at that point and regardless of who benefited from the interest.

4. For example, assume the University had a $100,000 grant award for a project that ended June 30, 1993 and only $99,000 in allowable disbursements under that award, but charged to the account for that award $2,000 in pre-award costs incurred in applying for an award extending the project, so that cumulative disbursements of $101,000 would show up on the tape for the quarter ending June 30, 1993. DPM would have reduced the disbursements to the authorized amount of $100,000, but this would still overstate by $1,000 the disbursements properly charged to that award (and therefore understate the federal cash on hand by $1,000).

5. An affidavit by the University official responsible for the PMS-272's avers that DPM did not timely make some adjustments requested by the University. The only specific example given, however, is identified to document number 08F2HL07786A. UW Ex. 36 (Hoffman Affidavit, ¶ 5). This document number does not correspond to any of the documentation of requested adjustments submitted by the University in its Exhibit 37, so we are not able to evaluate the merits of the University's requested adjustment (which in any event did not relate to the beginning cash on hand figure for July 1, 1993).

6. The Total Receipts figure on the first report (for the period October 1, 1995 through December 31, 1995) is $31,654,000, whereas the Total Receipts is $30,920,500 on the second report (for the period October 1, 1995 through March 31, 1996). UW Ex. 7. Thirty million is roughly the amount of the receipts for each of the other quarters during the audit period.