City of Dayton, Ohio, DAB No. 325 (1982)

GAB Decision 325

June 30, 1982 City of Dayton, ohio; Docket No. 81-67 Ford, Cecilia;
Settle, Norval Teitz, Alexander


The City of Dayton, Ohio (City) appealed a decision of the Public
Health Service Grant Appeals Board sustaining all but $108 of the
$266,511 determined to be unallowable by the Chief, Grants Management
Branch, Health Services Administration, PHS (Agency). The disallowance
followed recommendations contained in an Office of Inspector General
audit report titled "Audit of Grant No. 05-H-000009-08, Community Health
Center, for the period July 1, 1976 through June 30, 1977," audit
control number 05-01478, dated July 18, 1980.

The City also appealed to the Board two issues which were not
included in the PHS Board's decision. They involve $197,912 of alleged
counterclaims by the City and $68,739 of program income for which the
City claims it should not be held accountable. The Agency contested the
Board's jurisdiction over these two matters. The Board Chair had
tentatively concluded that the Board had jurisdiction over the program
income, but not the counterclaims. Board's March 22, 1982 letter, pp.
2-4. As discussed in detail below, the Board Chair rules that the
earlier tentative conclusion is correct.

During the course of proceedings before the Board, the Agency stated
that it was withdrawing $31,224 of the disallowance (Tr., p. 156), and
the City stated that it was not contesting $55,353 ($58,543 of
unallowable costs less a $3,190 credit for understated claimed costs and
clerical errors) of the disallowance (see, City's June 8, 1982
(Post-hearing) Brief, p. 3), leaving in dispute $179,826. For the
reasons discussed below, we sustain the remaining disallowance in part
and reverse in part. This decision is based on briefings and documents
submitted by the City and Agency, the transcript of a hearing conducted
by the Board in this case, and the parties' post-hearing briefs.

Background

The Agency awarded a grant to the City to implement a Community
Health Center program. The City in turn contracted with the Charles R.
Drew Community Health Center, Inc. (Drew) to operate the program. For
at least the grant year in question, Drew experienced financial
difficulties resulting partly from its inability to collect third party
receivables in (2) a timely manner. Dur to these financial problems,
Drew eventually was unable to continue its operations. Drew
discontinued operations in June, 1977 and on August 26, 1977 filed a
petition for voluntary bankruptcy.

The City filed a final report of expenditures with the Agency on
behalf of Drew for the period July 1, 1976 through June 30, 1977. An
audit was conducted of these expenditures; this dispute fillowed.

Discussion

The discussion of this appeal is separated into three parts: Part 1
discusses our jurisdiction over the City's counterclaims and program
income question; Part 2 discusses the City's claim that it should be
relieved of any responsibility for Drew's financial problems; Part 3
discusses the individual items which make up the disallowance.

1. Whether the Board Has Jurisdiction Over the City's Counterclaims and
the Question of Program Income

The City appealed two issues which were not included in the PHS
Board's decision. They involve $197,912 of counterclaims by the City
and $68,739 of program income for which the City claims it should not be
held accountable.

The Board, on two separate occasions, requested the parties to brief
the question of whether or not the Board has jurisdiction over these two
issues. Board's June 4, 1981 letter, p. 2; Board's February 22, 1982
letter, p. 2. Following the parties' responses, the Board Chair
tentatively concluded that the Board did not have jurisdiction over the
issue of the City's counterclaims, but had jurisdiction over the program
income issue. Board's March 22, 1982 letter, pp. 2-4.

The Board Chair's final decision under 45 CFR 16.7 (1981) on the
Board's jurisdiction over these issues is set out below. The two issues
will be discussed separately.

a. City's Counterclaims

The City contended that it expended $197,912 "to close the Drew
Health Center and otherwise prepare final filings for the grant." City's
Appeal Brief, p. 1. The City claimed these costs of closing Drew in
addition to the costs claimed under the grant in question here. The
City alleged that an HHS official assured the City that "HHS would fund
a reasonable portion" of the City's costs in closing Drew down. Id. at
subsection H. The City submitted an itemized list of the costs it
allegedly incurred in closing Drew. Id.

(3) The City contended that the Board has jurisdiction over these
counterclaims. The City stated that:

it is entitled to a set-off against any amounts the Board may
eventually determine are owing to the government by the appellant.

City's March 3, 1982 Brief, p. 5.

The City did not cite any specific provision in the Board's
regulations under which the Board would have jurisdiction over this
issue.

The Agency asserted that the Board's regulations do not provide for
jurisdiction over these counterclaims. The Agency alleged that the City
admitted that these costs were incurred after the grant period expired.
Agency's March 3, 1982 Brief, p. 10. The Agency argued, therefore, that
these costs cannot be characterized under 45 CFR Part 16, App. A,
C(a)(1) as a denial of "payment of an amount claimed under an award."
Id. The Agency also contended that these costs do not fit within the
language of "(a)... determination... requiring return or set-off of
funds already received." Id. The Agency concluded that:

no matter within the Board's statement of jurisdiction governs this
amount in dispute.

Id.

The Board Chair finds that the Board does not have jurisdiction over
the issue of the City's counterclaims. The Board's regulations provide
for review of disallowances involving direct, discretionary project
grants where the Agency is denying payment of an "amount claimed under
an award" or "requiring return or setoff of funs already received" 45
CFR Part 16, App. A, C(a)(1). The costs of closing Drew were incurred
by the City after the expiration of the City's grant award on June 30,
1977. See, City's Appeal Brief, subsection H. The City neither alleged
that the grant in question provided funds for closing Drew, nor that a
separate grant was issued to pay for these costs. In the absence of
such a showing, the Board Chair finds that the dispute concerning
whether these costs should be setoff does not arise under a grant award
subject to the Board's jurisdiction. The City, in essence, requested
the award of additional funds, which the Board cannot do.

(4) b. Program Income

The City contended that $68,739 was improperly included by the
auditors in the total grant-related income of Drew. The City argued
that this money went to the trustee in bankruptcy and, therefore, was
not available to pay Drew's bills and did not benefit the grant. City's
Appeal Brief, subsection G.

The City contended that the Board has jurisdiction over this issue.
The City stated a number of reasons in support of its contention, all of
which related to the fundamental fairness of receiving a full and
complete determination of this entire dispute before the Board. The
City did not cite any specific provision in the Board's regulations
under which the Board would have jurisdiction over this issue.

The Agency noted that, under section G of Appendix A of the Board's
regulations, the Board is bound by the Agency's opinion on the Board's
jurisdiction over this issue unless the Agency's opinion is "clearly
erroneous." Agency's March 3, 1982 Brief, p. 9.

The Agency contended that the only section of the Board's
jurisdiction that the issue of program income could possibly come under
is section C(a)(1). This section provides for Board review over:

A disallowance or other determination denying payment of an amount
claimed under an award, or requiring return or set-off of funds already
received....

45 CFR Part 16, App. A., C(a)(1).

The Agency argued that, with regard to the program income, there has
been no disallowance or determination of an amount claimed requiring the
return or set-off of funds already received. Agency's March 3, 1982
Brief, p. 8. The Agency contended that the City's request that the
Board review this issue is an attempt to:

use that claim as a set-off against other funds it must repay to PHS.

Id.

The Board Chair finds that the Board has jurisdiction over this issue
of program income. Unlike the counterclaims discussed above, which
arose from activities unrelated to the grant involved here, the program
income arose from activities under the grant. The issue of how much
program income of Drew the City must account for is central to this (5)
case. The auditors were unable to conduct an audit of Drew until the
City reconstructed Drew's records. Questions of duplicate payments,
charges to the grant where no actual payments were made, lack of
documentation, and overpayments have arisen throughout this appeal. The
central issue in this appeal has become one of accountability - which
necessarily requires an accounting for both the income and expenses of
Drew. The program income issue is inextricably intertwined with the
other issues before us in this appeal (see discussion below at pp.
19-20).

The Agency argued that there has been no disallowance of an amount
claimed for these costs for the Board to review. However, as stated
above, the determination of how much program income the City must
account for has a direct bearing on the amount of the disallowance
presently before us. If the program income was improperly included, the
size of the disallowance would rise by a corresponding amount.
Therefore, the Board Chair finds that it is proper for the Board to
review the amount of the program income in determining the overall
correctness of this disallowance.

Under section G of Appendix A, the Board Chair finds that the
Agency's opinion on the Board's jurisdiction over this matter was
"clearly erroneous" and that the Board has jurisdiction over this issue
under section C(a)(1).

2. Whether the Agency Interfered with the City's Ability to Supervise
Drew's Performance

The City has argued repeatedly throughout this appeal that the Agency
dealt with Drew in such a manner as to effectively prevent the City from
exercising supervisory control over Drew. Therefore, the City
contended, it should be relieved of its legal responsibilities as the
grantee.

The City contended that the Agency carried on a continuous working
dialogue with Drew from which the City was excluded. The City contended
decisions regarding Drew's programmatic and fiscal operations were made
without the knowledge and approval of the City. City's Post-hearing
Brief, p. 8. The City cited, for example, the fact that although the
City was the grantee, Drew prepared the grant applications and, for at
least the grant year in question, "approval of the award was
communicated to Drew." Id. The City concluded that:

despite the language of the agreement, all of the parties recognized
that, in fact, HEW had assumed (6) the responsibility of suervising Drew
and the City was little more than a conduit through which the money
passed. Id. at pp. 8-9.

To support its contention, the City cited the testimony of the former
Drew director. The City alleged that the director testimony showed that
the Agency:

reserved the right to approve key appointments to the Drew staff
(Tr., pp. 178-179, 252), approve budget changes and, on at least one
occasion, directed a reformation of the Drew Board (Tr., p. 186).

Id. at p. 9.

Another example cited by the City of the Agency's working directly
with Drew to the exclusion of the City was the preparation of a
questionnaire prepared by the federal auditor to be completed by Drew
officials. Id. The City alleged that this questionnaire which resulted
in conclusions critical of Drew was not presented to the City, nor was
the City informed of it. Id.

The City stated that it did not want to suggest that the Agency's
monitoring and assistance to Drew was anything but well-intentioned.
However, the City concluded that:

The Agency developed the custom and practice, however well
intentioned, of usurping the City's purported right of supervision over
Drew, and cannot now hold the City accountable for failing to exercise
such right.

Id.

The Agency contended that the City has failed to show that as a
matter of law the City is absolved of its obligation as the grantee.
Agency's June 9, 1982 (Post-hearing) Brief, p. 10. The Agency stated,
however, that even assuming the validity of the City's legal position:

the City... failed to produce significant evidence that the Federal
government has interfered (with) the City's ability to exercise its
responsibilities as grantee.

Id.

(7) We agree with the Agency that the record does not support the
City's contention that the Agency meaningfully interfered with the
City's ability to supervise Drew. /1/


The City produced a great deal of testimony showing the close
relationship between the Agency and Drew to the exclusion of the City.
However, the testimony showed a lack of diligence by the City in keeping
apprised of Drew's activities which resulted in a breakdown in the
City's supervision of Drew.

The City did not argue that the Agency's close working relationship
with Drew was anything but well-intentioned. See, City's Post-hearing
Brief, p. 8. The main thrust of the City's argument was, however, that
this close relationship spawned a line of communication that excluded
the City, thereby preventing the City from exercising effective
supervisory control. It is clear from the record, however, that it was
the City's failure to enforce the terms of its contract with Drew, not
any Agency interference, that resulted in the City's lack of supervisory
control of Drew.

The City's contract with Drew (Joint Ex. 2) provided the City with
the necessary means of control over Drew's activities. For example, a
daily report of cash receipts and disposition was required (Id. at p.
2), Drew's records were open to City inspection at any time (Id.),
budgets were to be submitted to the City Office of Management and Budget
for review and approval (Id. at p. 3), and the City could require "such
information and reports as the City may demand at such time." Id. at p.
4. While the City had the means of supervision at its disposal, it
chose not to exercise the control. The City's Director of Finance
acknowledged that, while the contract stated that the City would
exercise such control, the City for whatever reason did not exercise it.
Tr., p. 379.

The City alleged that the Agency's actions in dealing directly with
Drew effectively usurped the City's ability to supervise Drew. There is
simply no evidence in the record to support this contention. Both the
director of Drew and the City's Superintendent, who had oversight
responsibilities for Drew, testified that they could not cite any
specific examples of interference by the Agency with regard to the
City's carrying out its responsibilities as grantee. see, Tr., (8) pp.
243-244, 303. Since the record contains no other evidence of Agency
interference in the City's supervision of Drew, we find that the City
has simply failed to support this allegation.

We also find unpersuasive the City's argument that decisions were
made regarding Drew's operations without the City's knowledge because of
alleged Agency interference. City's Post-hearing Brief, p. 8.The City
stated for example that:

Grant Applications were prepared by Drew, and in at least the last
year of the program, the approval of the award was communicated to Drew.

Id.

The City also submitted as examples ten letters (Grantee's Ex. 1)
which the City alleged represented communications between the Agency and
Drew of which the City had no knowledge.

There is no evidence in the record to indicate that the examples
cited by the City are anything but a breakdown in communications between
the City and Drew. There is no evidence that Agency actions
precipitated this communication problem. The City did not allege what
role the Agency played in the grant applications being prepared by Drew.
Drew's director testified that although the grant applications should
normally be sent through the City before going to the Agency:

Frequently what would happen is we would be so close to the deadline
date for submission that we would often send it up without it having
gone through the City first.

Tr., p. 191.

It is clear that the problem here was not Agency interference, but
ineffective managerial controls over the grant application preparation
process.

We also find unpersuasive the City's contention that letters
(grantee's Ex. 1) submitted by the City somehow are evidence of Agency
interference. /2/ The letters for the most part represent the
transmission of general (9) performance related data from the Agency to
Drew. The City did not allege any specific problems resulting from
being excluded from the receipt of such general data. In fact, the
City's Sueprintendent testified on cross-examination that he could not
cite any examples of problems resulting from a lack of communication
between the City and the Agency. Tr., p. 300. We note that the City's
contract with Drew provided the City with the right of inspection of any
information and records of Drew. Joint Ex. 2, p. 2. Had the City
exercised its rights under the contract, these alleged communication
problems could have been circumvented.


We also note that Drew's director's testimony conflicts with the
City's position that it lacked knowledge of decisions being made
regarding Drew's fiscal operations. The director testified on
cross-examination that to his knowledge all financial matters did go
through the City. Tr., p. 240. In addition, the director testified
that, in an attempt to facilitate the flow of information between the
three parties, he sent copies to the City of correspondence that was
sent to the Agency and the City did likewise. Id. at pp. 241-242.

In summary, the parties recognized that the three-way relationship
between the City, the Agency, and Drew created certain managerial
problems. However, the contract between the City and Drew was obviously
tightly drafted to allow the City to maintain the proper control over
Drew to ensure that the federal grant funds were properly expended. The
City has failed to show that the Agency interfered in any meaningful way
with its efforts to supervise Drew. Instead, it is clear that the City
did not make an effort to enforce its supervisory rights contained in
its contract with Drew. Although this failure may not have given rise
to the financial collapse of Drew, it is clear that it was the City's
failure to monitor the contract, not alleged Agency interference, that
excluded the City from its supervisory role of Drew.

3. Individual Items Disallowed by the Agency

a. Accrued Liabilities for Federal, State, and City Withheld Taxes

The Agency disallowed $158,912 which represented the withholding
portion of Drew employees' federal, state, and city taxes. The federal
auditor testified that, although these taxes were claimed as a project
cost of Drew, they were not paid to the respective taxing authorities
during the grant year in question. Tr., p. 392. Therefore, the City
claimed as project costs amounts that were not paid. Id.

(10) The City did not dispute the auditors' determination that the
taxes were withheld but not paid. The City contended, however, that
events subsequent to the audit report rendered the auditors'
determination incorrect. The City stated, and the Agency did not
contest, that the federal taxes have now been paid. City's Post-hearing
Brief, p. 4. The City asserted that the federal taxes were paid with
the proceeds from the sale of assets once belonging to Drew. Id. The
City argued that since the taxes have now been paid, the disallowance
should be adjusted.

With regard to the state tax liability, the City presented
essentially the same argument. The City contended that the state tax
has now been paid and, therefore, the City should not be held further
accountable for these costs. City's Post-hearing Brief, p. 5. The City
was not able to say how the state taxes had been paid. The City's
Finance Director stated that:

We... checked... with the State of Ohio to see whether they had an
outstanding claim, and they indicated that they did not have an
outstanding claim and refused to provide any additional information on
this.

Tr., p. 347.

With regard to the city tax liability, the City stated that as part
of the bankruptcy agreement, the City waived its claim to the unpaid
taxes. City's Post-hearing Brief, p. 5.The City argued, therefore, the
taxes have in effect been paid and, as the federal and state taxes, the
City should no longer be held accountable for them. Id.

The Agency contended that the City was seeking reimbursement for
project costs:

Which either were not paid from project funds or, in the case of
Drew's liabilities for State and City taxes, were not paid at all.

Agency's Post-hearing Brief, p. 3.

The Agency contended that payment of the taxes from proceeds of the
sale of Drew's assets represents a duplicate claim. Id. at p. 4. The
Agency argued that it did not matter whether the sale represented
project income, since federal reimbursement would represent a double
payment:

(11) once to the Internal Revenue Service from the sale proceeds and
once to the City from grant funds constituting part of gross salaries.

Id.

We find unpersuasive the City's argument that, because the taxes were
paid or waived subsequent to the audit report, the City should be
relieved of its obligation to account for the grant funds originally
provided to the City. It is not disputed that sufficient funds were
available to the City to pay for the gross payroll of Drew. However,
Drew was experiencing serious cash flow problems resulting from its
inability to collect its receivables in a timely fashion. See,
generally, Tr., pp. 262-267. Drew's director testified that in order to
pay the immediate expenses of Drew, the employees were paid their net
salary and the withholding portions were not deposited in their
respective accounts. Id. at pp. 264-265. This was accomplished with
the City's knowledge. The director stated that the practice of paying
the net payroll was approved by the City Commission and that the City
sometimes provided enough funds to cover the gross payroll and at other
times only enough to cover the net payroll. Id. at pp. 266-267.

Grantees are required to meet certain standards for the financial
management of a grant. These standards, 45 CFR 74.61(b), (f), and (g),
require that the grantee make and retain records of expenditures, and
support these records with source documentation. The Board has found
that "(t)hese provisions clearly place the burden of establishing the
allowability of costs on the grantee." Neighborhood Services Department,
Decision No. 110, July 15, 1980, p. 3. In this case, the City was
provided with funds that were represented as used for, among other
things, the withholding taxes of Drew's employees. These withholding
taxes were not paid with the monies provided. The City has made no
attempt to explain or document for what the money was expended. Without
documentation of what these funds were expended for, we must sustain the
disallowance.

We note that even if the City were able to account for the
expenditures of the withholding funds for other allowable expenses, the
City would not necessarily be relieved of its liability to the federal
government.

Federal regulations governing this grant program specifically provide
that:

A community health center supported under this subpart must...

(r) Utilize, to the maximum extent feasible, other (12) Federal,
State, local, and private resources available for support of the
project, prior to use of project funds under this part.

42 CFR 51c.303(r).

As the federal auditor correctly testified on cross-examination (see,
Tr., pp. 413-414), if the City had donated funds to extinguish the tax
liability, those costs would no longer be questioned. However, the
application of the above regulation would require a recomputation of the
amount of federal participation taking into account the increased City
contributions.

In this case, the federal, state, and city tax liabilities were
satisfied other than by payment from federal grant funds for this grant
year. The sale of assets, the waiver of the city tax, and the unknown
satisfaction of the state tax liability gave rise to a source of
additional resources to this grant which, in accordance with 42 CFR
51c.303(r), must be considered in computing the federal share under this
grant. The obvious effect of this new increased non-federal
contribution would be to decrease the federal participation. Therefore,
the City would be required to account to the Agency for any excess
federal contribution the City has received.

b. Prepaid Insurance Extending Beyond the Grant Year

The Agency disallowed $13,454 of insurance premiums attributable to
coverage extending beyond Drew's grant year. The Agency stated that the
cost of insurance is allowable for the length of the project period
only. See, Agency's April 17, 1981 Decision letter, p. 2.

The City presented two arguments relating to the allowability of
these prepaid insurance premiums. The first argument pertains to the
entire amount of disallowed premiums. The second argument relates to
alleged mathematical errors in the computation of the unused portion of
the insurance premiums.

1. Whether the purchase of insurance extending beyond the grant year
was appropriate

The City stated that the malpractice insurance for Drew's physicians
was required by the Agency, and it was purchased with "prior knowledge
and approval" of the Agency. City's Post-hearing Brief, p. 6. The City
contended that Drew had difficulty obtaining this insurance and it
became necessary to purchase insurance that did not conform exactly (13)
to the period of the grant. The director testified that the purchase
"was with the knowledge of our project officer." Tr., p. 201. The City
argued that upon the filing of bankruptcy it made attempts to collect
the unused portion of the premiums from the insurance company but they
were nonrefundable. City's Post-hearing Brief, p. 7.

The Agency contended that these costs were unallowable because they
were not allocable to the grant year in question in accordance with the
principles contained in 45 CFR Part 74, Appendix C. Agency's
Post-hearing Brief, p. 7. The Agency further contended that this
restriction was recognized in the contract between the City and Drew
(Joint Ex. 2, p. 2., Art. IV, B.). Id. at p. 8. Since the costs were
not allocable to the grant, the Agency argued that they cannot be
charged to the grant.

The City did not argue that these costs were allocable to the grant
year in question. Federal regulations are clear that for a cost to be
allowable, costs must be allocable to the grant. 45 CFR Part 74,
Appendix C., Part I, C.1.a. The regulations further state that:

A cost is allocable to a particular cost objective to the extent of
benefits received by such objective.

Id. at c.2.a.

The cost of the insurance that extends beyond the end of the grant
does not benefit the grant. Therefore, it is not allocable to the grant
and is properly disallowed.

In finding against the City on this question, we find unpersuasive
the City's argument that Drew had the Agency's approval for purchasing
this insurance. There is no documented evidence of such approval. The
City produced no written confirmation of such approval by the project
officer. Drew's director did testify that the project officer
recommended an insurance carrier. Tr., p. 201.However, that does not
necessarily mean that the project officer knew or approved of the
purchase of insurance that extended beyond the grant year. In the
absence of any documented evidence of Agency approval to purchase
insurance which extended beyond the grant year, we sustain the
disallowance.

We also find unpersuasive the City's contention that the City
attempted to recover the unused portion of the insurance premiums, but
they were non-refundable. Although the City's Finance Director
testified to such an effort (Tr., p. 349), the record contains no
documented evidence to support such a contention. In fact, the City had
previously argued (14) that it had consciously decided that it was more
prudent to continue the insurance on Drew's assets because of the
relatively small potential refund. See, City's Appeal Brief, subsection
C. We therefore find that the City failed to show that it attempted to
collect the unused portion of the insurance premiums.

2. Whether mathematical errors were made in calculating the amount
of the disallowance

The City argued that the computation of the unused portion of the
insurance premiums was incorrect. The City submitted copies of the
insurance policies and contended that the policies show that errors were
made by the auditors in determining the unused portion of the insurance
premiums. See, City's Appeal Brief, subsection C. The City contended
that an adjustment of $5,980 is necessary, reducing the disallowance to
$7,474.

The Agency did not at any point in the appeal address the City's
contention that the amount of the disallowed portion of insurance
premiums was improperly computed.

Although the figures used by the auditors in calculating the
unallowable portion of the insurance premiums are not in the record, we
will accept the City's statement of the auditors' calculation since the
City submitted the statement in its original appeal brief (see, City's
Appeal Brief, subsection C) and the Agency has not questioned it, and
the dates and amounts used in the calculation correspond to figures
already in the record.

The City contended that for one policy the auditors determined that
$8,391 of the $33,573 annual premium was unallowable. The City stated
that the auditors determined that the premium was prepaid for the period
October 1, 1976 to September 30, 1977, which was three months beyond the
end of the grant period. Id. The City submitted a copy of the financing
agreement for the policy (Id. at C. 1.) and stated that, as shown on the
financing agreement, the policy was effective from September 1, 1976 to
September 1, 1977, which is two months beyond the grant period. The
City argued, therefore, that the correct computation of the disallowance
for this policy should be:

2/12 X $33,573 = $5,593

Id.

(15) The federal auditor testified, in response to questions from the
Board with regard to the $33,573 annual premiums, that after looking at
the City's documentation, he determined that to correctly calculate the
unallowable portion of the insurance premiums the auditors should have
used two months as the period extending beyond the grant. Tr., p. 436.
After reviewing the documentation submitted by the City, the Board
agrees. Therefore, the disallowance should be reduced by $2,798
($8,391-$5,593).

The City contended that similar computation errors were made for two
policies purchased for Doctors Barnhill and Mintz. The City alleged
that the auditors determined that the policy periods for the two
physicians were January 28, 1977 through January 28, 1978. Id. The City
stated that since Dr. Barnhill was on Drew's payroll through April 15,
1977, the auditors computed the disallowance as follows:

2.5/12 X $1,440 = $300 allowable; $1,140 disallowed.

Id.

The City stated that Dr. Mintz was on Drew's payroll through June 30,
1977. The City contended that the auditors computed the unallowable
portion of Dr. Mintz's policy as follows:

5/12 X $1,440 = $600 allowable; $840 disallowed.

Id.

The total of the disallowed portion of the two policies was $1,980.

The City submitted copies of the two policy invoices and contended
that the effective dates of the policies were November 23, 1976 through
November 23, 1977. Id. In addition, the City argued that:

one-half of the policy premium for each position ($720) was part of a
"stabilization reserve fund" and was not refundable per letter from Ohio
Medical Professional Liability Underwriting Association.

Id.

The City argued that the correct calculation of the unallowable
portion of these two policies should be as follows:

(16) Dr. Barnhill

5/12 X $720 = $300 + $720 fund = $1,020 allowable; $320 disallowed

Dr. Mintz

7.5/12 X $720 = $450 + $720 fund = $1,170 allowable; $270 disallowed

Id.

We agree with the City's calculations of the unallowable portions of
Dr. Barnhill's and Dr. Mintz's policies. The City's documentation shows
the effective dates of the doctors' policies as November 23, 1976
through November 23, 1977. Since, as the City stated and the Agency did
not dispute, Dr. Barnhill worked for Drew through April 15, 1977, his
insurance policy was in effect for approximately four months and 22
days. For administrative convenience we will round this up to five
months, which is the same as the City calculated.

The City stated, and the Agency did not dispute, that Dr. Mintz
worked for Drew through June 30, 1977. Therefore, Dr. Mintz's insurance
policy was in effect for seven months and seven days. We will for
simplicity round this figure up to seven and one-half months, which is
the same as the City's calculation.

With regard to the stabilization fund included in the insurance
policies, the federal auditor in reviewing the City's documentation
stated that he felt it should be allowable. In the absence of any
contrary evidence presented by the Agency, and after reviewing the
documentation submitted by the City, we find that the $720 stabilization
fund included in Dr. Barnhill's and Dr. Mintz's policies is allowable.

Therefore, in accordance with the City's calculations, the total
disallowance for these two policies should be $590.

The City also contended that the auditors questioned $2,986 of
premiums because four and one-half months of the policy extended beyond
the grant year. Id. The City stated that the auditors computed the
unallowable portion as follows:

4.5/12 X $4,777 = $1,791; the difference of $2,986 disallowed.

Id.

(17) The City argued that the $4,777 was a six month premium and
therefore the computation should be as follows:

4.5/6 X $4,777 = $3,583 with the difference of $1,194 the correct
unallowable portion.

Id.

The City contended that an adjustment of $1,792 ($2,986 - $1,194)
should be made. Id.

The documentation submitted by the City shows the price of an
insurance policy for a Dr. Reginald Daniels as $4,777.50. City's Appeal
Brief, subsection C. There is nothing in the documentation to indicate
that the price shown in a six month premium. Since the City did not
dispute the length of time the policy extended beyond the grant and the
City failed to support its contention that this was a six month premium,
we sustain the amount of the disallowance for this insurance policy.

In summary, this portion of the disallowance is reduced by $4,188 to
$9,266.

4. Dual Compensation

The Agency disallowed $7,460 claimed for salaries of two physicians
working for Drew. The basis for the disallowance was that time cards
indicated that the physicians were reimbursed by Drew and another
grantee organization, Project Cure, for the same hours on the same days.

The City contended that there was no evidence of any
"double-charging." City's Post-hearing Brief, p. 7. The City argued
that, as testified to by Drew's director, the:

physicians do not punch time cards, and that the cards were used
simply as an "administrative convenience".

Id.

The City argued further that the F.B.I. conducted an investigation of
the physicians' billings and, based on the F.B.I.'s report, the U.S.
Attorney General "found no basis for taking any action in the matter."
Id. The City submitted as evidence documents of the F.B.I. findings
obtained through a Freedom of Information Act request. See, City's
Appeal File, subsection F. Although much of the information was
"blacked out" by the F.B.I. prior to its transmission to the City, one
memorandum states that:

(18) Prosecution was declined on the basis that there was no
indication of any Federal violation.

Id.

The Agency argued that the allowability of Drew's payroll costs was
based on Drew's record keeping system. Agency's Post-hearing Brief, p.
9. Since Drew's records indicate a double payment, the disallowance
must be upheld. Id.

Federal regulations require the grantee to maintain accounting
records to support its payroll. 45 CFR 74.61(g). Drew's director
admitted on cross-examination that no records were kept of actual hours
worked and no record keeping system was maintained to determine how may
hours a physician spent on his/her rounds. See, Tr., pp. 207-209. The
City has an obligation to document the actual hours worked by the
grantee's employees. See, Colorado Department of Social Services,
Decision No. 200, July 31, 1981, pp. 7-8. Since the City has conceded
that it had no record keeping system to track its employees working
hours, and has not presented any documentation of such a system, we
sustain the disallowance.

In finding against the City, we cannot agree with its argument that
the disallowance for this item should be reversed because the F.B.I.
and Attorney General found no violation of federal law. As we stated
above, the City had a positive duty to document its payroll costs. It
is irrelevant that there was no criminal double charging. What is
important is that the City could not accurately document actual hours
worked.

5. Program Income

The City contested the auditors' inclusion of $68,739 in "program
income" in the total amount of grant-related funds for which it claimed
it was held accountable. The City claimed that this money was
erroneously included as an element of income in the final project
accounting. City's Appeal Brief, subsection G.

This $68,739 did not appear as a separate item in the Audit Report
itself, nor in the letter of Adverse Determination. There, the only
mention of any program income issue was the auditors' finding that there
was $719 in unreported program income. Agency Ex. E, p. 2; Agency Ex.
C., p. 5.

(19) However, in the City's appeal of February 6, 1981 (see, Agency
Ex. B.), under the informal appeals procedure, the City submitted a
handwritten sheet, which it stated was the "auditor's work papers." Id.
at G.2. The paper itself has a stamped heading of "Charles R. Drew
Health Center," and the handwritten heading "Payments Made to Drew from
ODPW (Ohio Department of Public Welfare) by Fiscal Years." The figures
on this paper state that during FY 77 ODPW paid Drew $211,538 for
medical reimbursements, and since July 1, 1977 "ODPW has paid out
$68,739... went to Trustee." Id.

The City claimed in its appeal to PHS that this amount of $68,739
should not be included in program income:

since no expenditures from the bankruptcy period were included either
in the City's final report of activity or in the auditor's summary of
allowable costs...

Agency Ex. B, subsection G.

The City has since raised the identical argument before this Board.
See, e.g., City's Appeal Brief, subsection G.

PHS's Grant Appeals Committee completely disregarded this contention.
In fact, its only mention of "Program Income" was in upholding the audit
finding that the $462,390 of income in fiscal year 1977 was understated
by $719.

On its face the contention of the City that it should not be
accountable for the $68,739 is very attractive. The City argued that
the money went to the trustee in bankruptcy, who must have used it for
the benefit of the grant in some manner; the City should either not be
charged with the receipt of this money or it should be allowed to charge
off against its receipt the payment over to the trustee.

However, the problem with this approach is that the facts appear to
be otherwise. The City has stated repeatedly that it was contesting the
auditors' inclusion of the $68,739 in Drew's program income. See, e.g.,
City's Appeal Brief, subsection G. However, the City reported Drew's
program income on the November 14, 1977 revised report of expenditures.
See, Agency Ex. L. The auditors determined the amount of Drew's program
income to be the same (except for the $719 of unreported income which
the City did not contest) as that reported by the City. See, Agency Ex.
E., p. 9. The fact is, therefore, that the City itself included the
$68,739 in Drew's program income. It is unreasonable for the City to
now claim that the $68,739 was improperly included (20) in Drew's
program income without some explanation of why it was included by the
City. Since the City offered no explanation, we find that the $68,739
was properly included in Drew's program income.

In addition, we note that in the Expenditure Report for FY 1977 the
City reported total income under the grant of $1,571,671. This
consisted of $300,000 from the City, $461,671 program income, and
$810,000 net federal costs. The amount claimed for total costs incurred
was the same, namely $1,571,671. Of this amount, $266,403 was
disallowed for the various specific items discussed above. Nowhere is
there any indication that the City was not credited with all
disbursements made of the program income, whether it went to Drew or the
trustee in bankruptcy. Since the City reported the full amount of
program income received even after the grant year closed (the accounts
being on an accrual basis), and its report of expenditures balance out
against all its receipts, then the City obviously had claimed all
disbursements by it of funds received. The City is not, therefore,
prejudiced by the inclusion of this $68,739 in Drew's program income.

Conclusion

For the reasons stated above, we find that the Agency did not
interfere with the City's ability to supervise Drew. With regard to the
individual items of the disallowance still in dispute, in summary, we
find as follows:

Accrued Liabilities for Federal, State and City Withheld Taxes:

Agency determination that $158,912 of withholding taxes were claimed
but not paid is upheld.

Prepaid Insurance Extending Beyond the Grant Year:

Agency determination that insurance premiums attributable to periods
extending beyond the grant year are unallowable is upheld. However,
mathematical errors made in calculating the unallowable portion reduce
disallowance by $4,188, from $13,454 to $9,266.

Dual Compensation:

Agency determination that $7,460 was claimed for salaries for the
same hours on the same day at two separate projects is upheld.

(21) Program Income:

Agency inclusion of $68,373 in the total amount of grant-related
income of Drew is upheld. /1/ Because of the way we decide this issue,
it is not necessary for the Board to decide whether, as a matter
of law, the City could be relieved of its responsibilities as grantee.
/2/ In fact, four of the ten letters are addressed to City of Dayton
officials.

SEPTEMBER 22, 1983