Economic Opportunities Atlanta, Inc., DAB No. 313 (1982)

GAB Decision 313

June 24, 1982 Economic Opportunities Atlanta, Inc.; Docket No. 81-66
Garrett, Donald; Settle, Norval Ford, Cecilia


Economic Opportunity Atlanta, Inc. (EOA) appealed the disallowance by
the Office of Human Development Services (Agency) of $58,000 in costs
claimed under a Head Start grant for the calendar year which ended
December 31, 1979.

EOA used Head Start program funds to pay for some of its general and
administrative (G & A) expenses. The Agency considered EOA's action to
be a budget revision as well as a programmatic change, either of which
required prior approval by the Agency. EOA did not have prior approval
but did not dispute that this was necessary; the question before he
Board is whether the Agency later appropriately denied retroactive
approval. During this appeal the Agency considered granting retroactive
approval of EOA's actions, but did not. See, Agency's April 15, 1982
Final Position, p. 3. For the reasons discussed below, we have
determined that the Agency's denial of retroactive approval for EOA's
use of the funds was not a sound exercise of Agency discretion.
Accordingly, the disallowance is reversed.

There are no material issues of fact in dispute. We have, therefore,
determined to proceed to decision based on the written record, including
the Agency's written comments following a telephone conference call
conducted by the Board; EOA elected not to comment.

Background

Over a period of years EOA administered several Head Start programs.
EOA received grants from the Community Services Administration (CSA)
which funded the G & A expenses for both the CSA and the Head Start
programs. For the year which ended December 31, 1979, EOA experienced a
shortage of G & A funds. To cover this shortage, EOA used Head Start
funds to pay for certain G & A expenses. This shifting of funds did not
result in an overexpenditure of EOA's Head Start budget.

(2) The Agency disallowed this expenditure because EOA needed, but
did not obtain, prior written approval to use the Head Start funds for G
& A expenses. /1/ Furthermore, the Agency denied retroactive approval
of the expenditure because of EOA's alleged fiscal management problems.


EOA contended that the allocation of G & A expenses to the Head Start
program was not arbitrary but, on the contrary, was based on economic
need. EOA submitted two methods of allocation to support its
determination that the expenditure was reasonable. See, generally EOA's
April 20, 1982 Brief. EOA concluded that:

additional funds were necessary for the proper administration of both
the CSA and Head Start programs.

Id. at p. 7.

EOA contended that the regulatory time limitations would prevent
recovery of such costs by means of an indirect cost rate. EOA stated
that it attempted to recover the funds through a direct allocation
similar to that provided by CSA's "01" account. /2/ Board's Summary, p.
2. The Agency argued that EOA did not keep any detailed records which
could be used to allocate these funds in a direct manner. Id.
Therefore, a direct allocation would not be possible.


EOA agreed that it did not keep any detailed records of the
expenditures. However, EOA argued that since one-third of EOA's staff
time was spent administering the Head Start program, EOA was justified
in allocating a certain portion of the administrative costs directly to
the Head Start program. EOA compared its projected administrative costs
with the available G & A funds from the CSA and other grants. The
shortage was associated with Head Start, expressed as a percentage, (3)
and applied to the Head Start grant. EOA concluded that they had
treated these additional Head Start funds as direct costs in the same
manner as the CSA G & A funds. Id. n3


Discussion

The issue before the Board is whether the Agency was justified in not
granting retroactive approval of these costs. Chapter 1-105, B. 1. of
the HHS Grants Administration Manual, which covers retroactive approval,
was effective October 30, 1980. /4/ While not in effect during the
grant year in question, neither party has argued that this provision
does not apply to the Agency's consideration of whether or not to grant
retroactive approval. The Manual provides that the Agency may grant
retroactive approval if, inter alia, "the transaction would have been
approved had the organization requested approval in advance." Since the
language of this provision is permissive, i.e. may, it does not preclude
the Agency's consideration of all other relevant factors, such as a
grantee's fiscal management history, in deciding whether or not to
ultimately grant retroactive approval where prior approval was required
but not obtained. In making its determination on a request for
retroactive approval, the Agency has considerable, but not completely
unbounded, discretion. Although the Board will not interfere when the
Agency appropriately exercises its discretion, the Agency must state the
basis for its decision and may not deny retroactive approval based on
unsubstantiated conclusions or on bases so insubstantial that the
decision fairly can be described as capricious. See, e.g., Kent
Community Mental Health Center Services Board, Decision No. 138,
December 1, 1980; Upstate Medical Center of the State University of New
York, Decision No. 279, April 20, 1982.


The Agency contended that EOA had demonstrated fiscal management
problems in years prior to the grant year in question. Agency's April
15, 1982 Final Position, p. 3. In addition, the Agency argued that EOA
continued to experience fiscal management problems in subsequent years.
The Agency stated that according to the Grant Monitoring Statement dated
June 2, (4) 1981 EOA "was having difficulty in keeping its
administrative costs below the fifteen percent maximum." Id. n5 The
other "continuing problems" relied on by the Agency were the
overexpenditure of federal funds and unauthorized interprogram loans.
Id. The Agency stated that these problems were noted in the audit report
and the Agency's April 10, 1981 disallowance letter. Id. The Agency
concluded that:

In light of the fiscal management problems prior and subsequent to
the grant year in question, the denial of retroactive approval is a
sound exercise of discretion.

Agency's May 19, 1982 Response, p. 1.


We do not agree that the Agency has shown that EOA experienced
continuing fiscal management problems which would support the denial of
retroactive approval for the costs in question here. The Agency did not
explain the basis for its conclusion that there were fiscal management
problems, but instead referred generally to the Audit Report and the
April 10, 1981 disallowance letter as containing examples of such
problems.

The audit report shows that $58,484 in costs:

were questioned because they exceeded budgeted revenues by program
account for the year ended December 31, 1977.

Audit Report, p. 4, Note 8.

The questioned costs were resolved by an adjustment in the grant
awards for 1980. Id. Presumably, this means that EOA conceded the issue
and its 1980 grant awards were adjusted downward by $58,484.

(5) Among the documents presented by the Agency, this is the lone
incident of a prior fiscal problem. The incident occurred two years
prior to the grant year in question. The Agency has presented no
evidence showing that this single overexpenditure in 1977 is somehow
related to the exceptions taken by the auditors for the grant year in
question. Without such a showing of related, recurring fiscal problems,
or at least a showing of continual fiscal problems, we can accord little
weight to this isolated incident cited by the Agency.

The Agency also contended that EOA had experienced fiscal management
problems in years subsequent to the year in question. The Agency argued
repeatedly that:

Problems subsequent to the grant year in question indicate that such
problems are of a continuing nature, not isolated events.

Agency's May 19, 1982 Response, p. 2.

The Agency alleged that EOA "has continually experienced shortcomings
in its fiscal management." Agency's April 15, 1982 Final Position, p. 3.
The Agency contended that fiscal management problems identified in the
audit report and diallowance letter were subsequently noted in a Grant
Monitoring Statement prepared for EOA. Id. These problems included
overexpending funds and making unauthorized interprogram loans. Id. The
Agency also stated that according to the Grant Monitoring Statement, EOA
was having problems keeping its administrative costs below the 15
percent maximum. Id. The Agency argued that although "(these) problems
occurred after the year in question, the grantee still had not rectified
its fiscal problems." Id. Therefore, retroactive relief should not be
accorded EOA.

We find unpersuasive the Agency's argument that EOA's continual
fiscal management problems support the denial of retroactive approval.
The findings relied on by the Agency that were first noted in the 1979
audit report were addressed by EOA in a letter dated September 26, 1980.
In this letter, EOA set forth its response to the individual problems
and the methods EOA intended to use to alleviate the problems. The
Agency's April 10, 1981 letter disallowing the costs in question here,
also stated that, subject to EOA's satisfactory implementation of its
new procedures, the problems cited in the audit report were resolved.

The Agency alleged that the Grant Monitoring Statement noted these
same findings. Agency's April 15, 1982 Final Position, p. 3. The
Agency has provided us with no additional information which would
explain the significance of references in a Grant Monitoring Statement
dated (6) June 2, 1981 which notes findings which were determined
resolved by the Agency in its letter of April 10, 1981. The Agency did
not submit the Grant Monitoring Statement into the record of this case.
We are, therefore, at a loss to know to what year the document applies
and what exactly it concludes. We do not know whether the Grant
Monitoring Statement concluded that EOA experienced fiscal management
problems after April 10, 1981 resulting from its failure to implement
its new procedures (which is highly unlikely considering the short
period of time), or if the findings related to a period prior to April
10, 1981 (in which case the findings were determined to be resolved).
The Agency has not alleged that EOA has failed to implement the new
procedures as required by the disallowance letter. There is, therefore,
no basis for us to give any substantial weight to the Agency's summary
of the Grant Monitoring Statement given that alleged comparable problems
were considered resolved by the Agency less than two months earlier.
Therefore, the Agency has not supported its allegation that EOA
experienced continual fiscal management problems.

Contrary to the Agency's assertions of EOA's fiscal management
problems, Schedule 111 of the Audit Report shows that, for the year
1979, EOA had a budget surplus. While this is not necessarily
indicative of good fiscal management, it does show that at least for the
year in question EOA did not overspend its budget.

The Agency has not argued that it would have denied a request for
prior approval for this expenditure. In fact, the Agency approved
virtually the same amount for G & A expenses in 1980 as EOA expended and
claimed in 1979. /6/ It is, therefore, reasonable to infer that had
there in fact been a sound basis for disapproving such an expenditure,
this expenditure would also have been disapproved for 1980. /7/

(7) The Agency contended that it is not inconsistent to disallow the
costs for 1979 while approving the same costs for 1980. The Agency
argued that EOA did not have prior approval for the costs in 1979, while
in 1980 there was no need for prior approval since the costs were
approved in the grant award. See, Board's Summary, p. 4. The Agency's
reasoning is circular, however. The reason the Agency denied these
costs for 1979 was that EOA did not have prior approval to charge them.
Had EOA requested prior approval, the Agency would not have disallowed
the costs and, therefore, would be no need for retroactive consideration
of them. For the Agency to now rely on the same prior approval
requirement as a basis for not granting retroactive approval renders the
consideration of retroactive approval meaningless.

The Board twice requested that the Agency provide an explanation of
its basis for not granting retroactive approval. On the last occasion,
the Board went to great lengths to indicate to the Agency that the Board
required a detailed explanation of the Agency's reasons for denying
retroactive approval, not conclusory statements. See, Board's Summary,
p. 5. The Agency failed to provide the Board with any additional
information in its response. See, generally. Agency's May 19, 1982
Response. The Agency has had numerous opportunities to explain the
reasons for denying EOA retroactive approval of these costs, and has
failed to do so. Based on the foregoing analysis, the Board finds that
the Agency's denial of retroactive approval was not a sound exercise of
its discretion.

Conclusion

For the reasons stated above, we reverse the disallowance of $58,000.
/1/ EOA had originally argued that it had attempted to obtain
prior approval. See, EOA's May 8, 1981 Appeal letter. EOA subsequently
conceded that it could not present any evidence of an attempt to obtain
prior approval from the Agency.Board's May 7, 1982 summary of telephone
conference call (Board's Summary, p. 3. /2/ The "01" account is a
program account designation used in the CSA grants whereby funds are
provided to pay for general administrative costs. /3/ It is not
disputed that at least $58,000 in reasonable and allocable G & A
expenses were incurred by EOA in administering the Head Start program,
even though the funds at issue here are not linked to any particular
expenditures. /4/ The Agency has not argued that the granting of
retroactive approval to EOA for this expenditure was not permitted by
the criteria in the Grants Administration Manual. /5/ The cost
of administering the Head Start program may not exceed 15 percent. 45
CFR 1301.32. The Agency cited this limitation in a footnote and noted
that should the Board "grant some relief to EOA... care should be
taken... not to exceed the fifteen percent limitation." Agency's April
15, 1982 Final Position, p. 3. We have reviewed the various
calculations submitted by the parties. None of the calculations
directly addressed the 15 percent limitation. There is nothing in the
record demonstrating that with the additional $58,000 of G & A funds EOA
would exceed the 15 percent limitation. In addition, we note that this
regulation permits the Agency to approve a higher percentage under
specified circumstances. If the Agency finds that the expenditure does
exceed the 15 percent limitation and approval of a higher percentage is
not possible, it may issue a new disallowance for the excess.
/6/ The record contains EOA's 1980 budget application which included an
additional $57,111 as a direct charge for administrative expenses.
Although the record does not include a copy of EOA's approved 1980
budget, the Agency did not contest in the phone conference or in its
final brief that EOA's final 1980 budget included the $57,111 as set out
in its budget application. See, Board's Summary, p. 4. /7/ The
Agency had previously argued that EOA could not now collect these 1979 G
& A costs because EOA did not negotiate an indirect cost rate for the
Head Start program for the year in question. See, Agency's April 15,
1982 Final Position, p. 2. However, the Agency ultimately noted that it
was the Agency's practice not to grant indirect cost rates for the Head
Start program. Agency's May 19, 1982 Response, p. 2. EOA was not
trying to establish an indirect cost rate, but was attempting to recover
the funds through a direct allocation; the Agency has not argued that
EOA is precluded from making such a direct charge.

SEPTEMBER 22, 1983