GAB Decision 403
Docket No. 82-57-IA-PH
March 30, 1983
Iowa State Department of Health;
Ford, Cecilia; Garrett, Donald Settle, Norval
The Iowa State Department of Public Health (appellant) appealed the
determination of the Public Health Service (PHS or respondent) reducing
an Alcoholism Formula Grant award by $274,828.42. The respondent had
determined that the appellant had not obligated this amount of fiscal
year 1974 funds by the end of fiscal year 1975, as required by 42 U.S.
C. 4572.
The major issue presented is whether a vote by a commission
authorized to award the funds to subrecipients was sufficient to
obligate the funds. For reasons stated below, we conclude that the
appellant did not timely obligate fiscal year 1974 funds and we uphold
the respondent's determination.
I. Background
In June 1974, the respondent awarded the appellant an Alcoholism
Formula Grant in the amount of $620,481.00. In November 1974, the
appellant's Fiscal Director notified the appellant that the funds at
issue had to be obligated by June 30, 1975. The memorandum stated that
"a contract with a center will obligate funds." (appellant's brief,
Tab
B) The word "center" referred to social service centers in the State,
which apparently were responsible for providing community alcoholism
services.
In March 1975, the Iowa Commission on Alcoholism (Commission), which
had the authority to allocate state and federal alcoholism funds,
solicited grant applications for alcoholism funds from service centers.
On June 27, 1975 the Commission held a public meeting and voted to
approve a budget, recommended by Commission staff, allocating funds to
certain service centers. On June 30, 1975, the Des Moines Tribune
published a news story reporting the Commission's awards.
Subsequently, the appellant executed written contracts with the
service centers. The appellant did not dispute that all contracts
except eight were signed on July 1, 1975 or later. The eight
exceptional contracts (2) show no signature date, but the contracts
covered the period July 1, 1975 through June 30, 1976.
On September 30, 1975, the appellant submitted a financial status
report to PHS, showing an "unobligated balance" of $274,828.42. The
appellant later stated that an error had been made and that this amount
had, in fact, been obligated. The appellant stated that when this
mistake was discovered, PHS was notified, at first by telephone and then
by a letter dated October 24, 1975.
In April 1976, the respondent issued a letter informing the appellant
that, based on the opinion of the Regional Attorney, the respondent had
determined that the appellant had not timely obligated the fiscal year
1974 funds. At the same time, the respondent issued a revised grant
award notice, reducing the award amount by $274,828.42.
Apparently, the appellant had already drawn the funds down under its
letter of credit, and did not adjust for the reduction in award. The
respondent discovered this in a site visit early in 1978 but gave the
appellant an opportunity to investigate the "overexpenditure." The
respondent took further action by phone call late in 1978, requesting
the appellant to take corrective action.
In December 1981, the respondent requested that the appellant refund
all unresolved amounts of old grant awards, including the
overexpenditure in the amount at issue, or the appellant's letter of
credit would be jeopardized. On January 19, 1982, the appellant
contacted the respondent, offering further information on the matter and
arguing that the respondent's April 1976 determination was in error.
The respondent replied by letter dated February 24, 1982 that the
additional information had been reviewed and that the original decision
to withdraw the funds must stand.
The appellant filed a notice of appeal, dated March 31, 1982, with
the Board and simultaneously requested review under the PHS informal
appeals process. The appellant's late filing raised a question of the
Board's jurisdiction in this case, and, in accordance with the Board's
regulations, the Board requested the written opinion of the respondent.
45 CFR Part 16, Appendix A, para. G (1981). PHS, by letter dated April
27, 1982, stated that it would not consider the appellant's case under
its informal appeals process, but that it had no objection to the Board
reviewing the matter. Before the Board ruled on jurisdiction, the
parties agreed to mediation services provided by the Board; however,
this matter was not resolved by mediation. The Board held a telephone
conference call on September 24, 1982 to discuss the Board's
jurisdiction. The Board determined that it did not have jurisdiction,
based on the appellant's rights at the time of the original
disallowance, but that it would hear the appeal if requested by PHS to
do so. PHS responded that it would (3) ask the Board to hear the appeal
if the appellant desired to be heard. The appellant, after additional
time to consider the matter, requested the Board to hear the case. /1/
II. The Appellant's Arguments
The appellant's arguments essentially are as follows:
1. The appellant contended that its mistaken financial status report
apparently culminated in the respondent's April 1976 determination.
However, the appellant said that contrary to the respondent's
determination, contracts were not required to timely obligate the funds.
2. Even if contracts arguably were required to obligate the funds,
there existed such contracts between the appellant and the various
service centers by virtue of (a) the Des Moines Tribune article, and (b)
the formal vote of the Commission, which allegedly made a commitment of
funds and created contractual obligations between the appellant and the
service centers.
3. Even if it was determined that contractual obligations did not
occur until July 1, 1975, the one-day difference results in an
unfairness not in keeping with the intent of the statute. The appellant
argued that it made a good faith effort to obligate the funds before the
end of the fiscal year, and the appellant should be granted relief based
on the principles of equity. The appellant argued that the unreasonable
delay by the respondent prejudiced the appellant.
4. Because the grant award number was changed and the award period
was listed as September 1, 1974 through June 30, 1975, the appellant had
an additional year, to September 30, 1976, to obligate the funds.
III. Analysis
Below, we first discuss the requirement for a timely obligation and
the basis for respondent's determination. We then address the
appellant's argument that there was an obligation here, that equity
requires a result for appellant, and that the obligation period was
extended.
(4) a. The requirement for a timely obligation.
The funds at issue were available only until the end of the fiscal
year in question. Section 4572(b) of 42 U.S.C. specifically and
unequivocally provides how long the funds will be available. /2/
For its determination that the funds were not timely obligated here,
the respondent relied on section 74.71 of 45 CFR (1975), which defines
"obligation" as--
... the amounts of orders placed, contracts and grants awarded,
services received, and similar transactions during a given period, which
will require payment during the same or a future period. (emphasis
added) /3/
This regulation is not a matter merely of respondent's bureaucratic
convenience. "The concept of 'obligation' is central to appropriations
law." Principles of Federal Appropriations Law, United States General
Accounting Office, June 1982, p. 6-3. Fundamentally, an obligation is
"a definite commitment which creates a legal liability of the Government
for the payment of appropriated funds for goods and services ordered or
received." Decision of the U.S. Comptroller General, B-116795, June 18,
1954. The issue whether a transaction constitutes an obligation becomes
particularly critical when the obligation would operate to extend the
availability of funds beyond the end of a fiscal year, because statutory
and decisional law make it clear that funds do not remain available in
the absence of a firm commitment made prior to the end of the fiscal
year. See, generally, Principles of Federal Appropriations Law, pp. 4-2
et seq., and cases cited therein.
(5) b. The basis for the respondent's decision.
The appellant argued that the fact that it had submitted an incorrect
financial status report culminated in the respondent's April 1976
decision.
We find nothing in the record to indicate that the sole basis for the
determination was the report submitted by the appellant in September
1975. The question whether the funds were timely obligated was a
question which needed an answer regardless of the appellant's error or
lack of error in the financial status report. The respondent, in its
response to the Board, noted that after appellant's report was submitted
the Regional Grants Management Officer visited the appellant. Based on
information received during the visit, the Regional Office requested an
opinion from the Regional Attorney concerning the obligation of the
funds. Further, the respondent noted that it had questioned appellant's
employees during the visit, and they indicated that they did not think
the funds had been timely obligated. Although the appellant argued, in
its reply, that any statements made by appellant's employees were
hearsay and not relevant, this information serves to show, not the truth
of what the employees may have said, but rather that the respondent did
investigate the matter in question and made its decision based on
relevant factors. Additionally, the requirement of obligation is
clearly laid out in the statute. No matter how appellant or its
employees characterized the transactions involved, the respondent was
justified in questioning the timing of the obligations. /4/
c. There is no substantial evidence of timely obligation.
Although the appellant disagreed in some respects with the
respondent's interpretation of the regulatory definition of obligation
and of relevant Comptroller General decisions, the appellant
acknowledged the need for a definite commitment of funds or other
creation of legal liability. In support of its position that this
requirement was met, the appellant argued that a contract existed
between the Commission and the service centers because of a report of
awards published in a newspaper. We disagree. The record indicates
that the newspaper article constituted a mere reporting of events.
Nothing in the record supports a conclusion (6) that this publication
bound the appellant, in a contractual sense, to pay the funds as
reported. At best, the newspaper article would give rise to a mere
expectancy of funding.
The more substantial argument of appellant was that the Commission
had authority to make contracts which bound the appellant, and that the
Commission's vote to award funds to the centers was a definite
commitment of funds. The appellant argued that, through the authority
of Iowa Code Chapter 125 (1975) and the Iowa Administrative Procedure
Act, the Commission's vote was a formal agency action constituting a
legal commitment subject to challenge in court. Further, the appellant
argued, citing a number of cases in support of its position, that
administrative agencies are only empowered to act with the authority
granted to them, and must perform the duties mandated to them by the
legislative bodies creating them. (appellant's reply brief, pp. 8-10)
The respondent did not substantially rebut appellant's argument that
the Commission had the requisite contracting authority; the problem is
that even if such authority is conceded, there were no timely contract
documents executed. Therefore, the argument boils down to an assertion
that the vote of the Commission to award funds a to the centers was
sufficient in itself to constitute a binding legal liability to pay the
awarded sums to the centers.
Although we agree with the appellant that the actual signing of a
document may not be the only method of obligating funds, we cannot agree
that, in this case, all that was necessary to form a contract was the
vote of the Commission. The appellant has not shown that the vote was
in substance anything more than an authorization and direction to
contract with the centers. While Iowa Code section 125.7 states that
the Commission shall act "as the sole agency to allocate state, federal,
and private funds," nothing in the section indicates that a vote to
"allocate" the funds a particular way binds the appellant to pay the
funds without further action. Indeed, section 125.9 authorizes the
Director of the appellant's Division on Alcoholism (who acted as
Secretary to the Commission) to make contracts with public and private
agencies to pay them for services rendered to substance abusers or
intoxicated persons. This is what happened here. The minutes of the
Commission meeting characterize the vote as approval of the budget
recommended by the Director and his staff, allocating specific amounts
of funds to centers which had applied for them. Following the meeting,
the Director mailed to the centers agreements containing specific terms
and conditions. The agreements were to be signed by center
representatives and the Director. Thus, it is reasonable to conclude
that the Commission (7) did not by its vote commit the funds but,
rather, that the Commission contemplated that the Director would take
the further action of actually contracting with the centers. /5/
The appellant pointed to the language in the definition of
"obligation" at 45 CFR 74.71 using "grants awarded" as an
example of a
transaction requiring payment. According to the appellant, we should
view the Commission's action as awarding grants incorporating the terms
set out in the centers' applications for funding. Replying to
respondent's statement that the terms were not set since the awards were
less than the amounts requested by the centers, the appellant argued
that the focus should be on the Commission's intent and that, in any
event, none of the centers protested the funding recommendations. We
agree with the appellant that the fact that the amounts approved were
less than what was requested is not determinative here. Moreover, in
some circumstances a grant award instrument signed by the awarding party
in response to an application containing award terms might constitute a
valid obligation. However, the difficulty here is that appellant has
not shown that the Commission's process was this type of commitment.
Rather, as discussed above, the process contemplated that two-party
agreements containing funding terms would be entered into by the
Director and the centers. The appellant has not shown that this action
was taken in a timely manner.
In this connection, we note that the Iowa Code does not make a vote
of the Commission irrevocable. Nothing prevented the Commission from
changing its vote. Until the contracts were signed, the Commission
still had the option of changing the amount of funding, changing the
service centers, or, possibly, changing completely the decision to enter
into contracts. That the Commission's vote was formal agency action
under the Iowa Administrative Procedure Act which might be challenged by
an aggrieved party does not mean that it could not be followed by a
later contradictory action within the Commission's authority.
(8) The appellant argued that the burden was on the respondent to
show that the eight contracts with undated signatures were signed after
June 30, 1975. This Board has previously held that generally the burden
is on the grantee to demonstrate that costs charged to a grant meet
grant requirements. See, e.g., Florida Farmworkers Council, Inc.,
Decision No. 202, July 31, 1981. Similarly, in this case, the burden is
on the appellant to show that the obligation of funds occurred during
the required time limit. /6/ It is the appellant who held the funds,
had the power to obligate them, and had the responsibility to act
timely. Further, since June 27th (the date on which the Commission
voted) was a Friday, and the service centers were scattered across the
State, it is unlikely that the contracts were signed prior to July 1st.
The appellant argued that the respondent's interpretation of the
regulation and the Comptroller General's opinions is "over-technical,"
and that the Board should look at the broad purposes of the statute
rather than choosing a "hypertechnical" interpretation. (appellant's
brief, p. 17 and reply brief, p. 12) The appellant also cited a number
of cases in support of this position. (appellant's brief, p. 17)
As explained below, the Board is not taking a "hypertechnical"
approach. Instead, the Board is applying an express statutory
restriction on the availability of funds to the actual facts of this
case. While the appellant's actions may have furthered the broad
purposes of the alcoholism program, this can not overcome the
appellant's failure to meet the statutory requirement of a timely
obligation.
d. The facts do not support the appellant's equitable arguments.
The appellant argued that even if it is determined that a contractual
obligation did not occur until July 1, 1975, the one-day difference
results in an unfairness not in keeping with the intent of the statute.
Further, the appellant argued that the respondent should be barred from
the recovery of funds by the equitable doctrine of laches. The
appellant argued that the respondent should be estopped from reducing
the appellant's letter of credit since the appellant no longer receives
the grant funds and because the respondent remained silent for nine
months knowing the appellant believed that it had obligated the funds.
(9) The Board is bound by applicable law and regulations. The law is
clear on when the funds had to be obligated, and the regulation gives a
clear understanding of the type of action that was necessary to obligate
the funds. The appellant's argument concerning harsh treatment should
be viewed in context: the appellant had quite a long time to use the
funds and chose to wait until the very last moment to attempt to
obligate them. It can be argued that the appellant contributed
substantially to the problem by so delaying its action that it was at
risk in its hasty, last minute obligation efforts.
The appellant argued that the respondent should be barred from
recovery because of its delay in notifying the appellant. As mentioned
earlier, the record shows that the respondent investigated the matter
when a question was raised by the September 1975 financial status
report. In April 1976, the respondent notified the appellant that the
funds in question were not timely obligated and issued a revised notice
of grant award. The respondent could fairly presume that the appellant
would no longer consider the funds appropriately spent. The later
determination resulted from the fact that, in spite of the revised
notice of grant award, the appellant drew down the funds under its
letter of credit. Since the appellant had no authority to do this, the
drawdown constituted an overexpenditure of federal funds. Nothing in
the record indicates that the respondent delayed unreasonably in acting
once it was clear that the overexpenditure resulted from the earlier
reduction of award and that appellant would not voluntarily make an
adjustment. Further, there is no evidence of any misleading action on
the part of the respondent.
In its reply, the appellant asserted that because of various reasons,
including changes in personnel and the fact that the appellant had no
formal appeal rights, it took no formal action to contest the 1976
determination. We note the appellant's apparent inexperience in this
area and its problems in administration of the grant; however, the
appellant had the responsibility to assert its objections to respondent,
even if no formal appeals procedures were available.
Thus, the facts here do not justify application of equitable
principles as a basis for reversing respondent's determination, even if
those principles otherwise would apply.
e. The respondent's action was not a termination.
In its reply brief, the appellant argued that respondent's own
regulations state that negative action (action that is in substance a
termination) against a grantee is only permissible when the grantee has
failed to "materially" comply with the terms or conditions of a grant.
(reply brief, p. 12) The appellant argued that the Board could find
there was no "material" failure here and that the respondent did not
properly (10) terminate the grant under 45 CFR 74.112 (1975). We do not
think that the respondent's action here amounted to a termination of a
grant "before the date of completion" within the meaning of 45 CFR
74.114. Given the lack of a timely obligation of funds, the funds
reverted to the general treasury by operation of law. The respondent's
notice in April 1976 informed the appellant not of an action that the
respondent intended to take but of the result of the failure to timely
obligate the funds, i.e., that the appellant no longer had authority
over the funds.
f. The funds were only available until the end of fiscal year 1975.
In December 1974 the grant number for Iowa's alcoholism formula funds
was changed from 07-X-199500-74-0 to 07-X-199500-74-1 and the award
period was changed from the period July 1, 1973 through June 30, 1974 to
the period September 1, 1974 through June 30, 1975. The appellant
argued that this meant that the relevant award was made in fiscal year
1975 and this entitled the respondent to an additional fiscal year to
obligate the funds.
We do not agree with the appellant's position. The statute only
provides for funds to be available "to a State in a given fiscal year"
but if the funds are not obligated in the fiscal year awarded, the funds
"shall remain available to that State through the next fiscal year."
The
grant award documents show that the specific funds in question were
fiscal year 1974 funds, awarded in 1974 from that year's appropriation.
Regardless of the change of the grant number and award period, the grant
funds were only available to the end of fiscal year 1975.
IV. Conclusion
Based on the foregoing reasons, we sustain the $274,828.42 reduction
of the Alcoholism Formula Grant Award by the Public Health Service. /1/
The Board also held a later telephone conference call to discuss
the appellant's request for an in-person hearing. In that telephone
conference call, all parties agreed that a hearing was unnecessary.
/2/ Section 4572(b) provides that -- Any amount allotted to a state in a
fiscal year... and remaining unobligated at the end of such year shall
remain available to such state... for the next fiscal year (and for such
year only).... The statute provides for the availability of funds, to
the states, for a period not to exceed two fiscal years. Therefore,
these funds are "two-year" funds and must have been obligated within
that period, which in this case ended on June 30, 1975. /3/
Although the appellant did not raise it, we note that this definition is
set out for purposes of Subpart I (Financial Reporting Requirements) of
45 CFR Part 74, and the forms identified by that subpart. Thus, it does
not directly interpret the statute here. However, the definition is
consistent with the Comptroller General decisions on the issue, and,
therefore, it is reasonable to apply it here. /4/ This does not
mean that we agree with the respondent's reasoning in every respect. It
appears that the respondent based its decision in part on the statement
by appellant's fiscal officer that a contract "will obligate funds,"
interpreting that as meaning a contract was required. As the appellant
noted, this does not necessarily mean a contract is the only means of
obligating the funds. /5/ The Iowa Code Annotated, in
"construction and application" notes on section 125.7, cites an Iowa
Attorney General's opinion, stating, in part -- The director is not
obliged to enter into a contract with a facility merely because the
commission has approved the facility and allocated funds to it...
Although we do not rely on this notation for the decision reached here,
this notation supports our view of the nature of the Commission's vote.
/6/ Under 45 CFR 74.61 (1975), a grantee is required to have a
financial management system providing for records which identify the
source and application of funds for grant or subgrant-supported
activities, including information pertaining to obligations.
SEPTEMBER 22, 1983