GAB Decision 428
Docket No. 83-50
May 27, 1983
CAP Services, Inc.;
Ford, Cecilia; Teitz, Alexander Settle, Norval
CAP Services, Inc. (Grantee) appealed a decision by the Office of
Human Development Services (Agency) disallowing $3,398 of costs claimed
under a Head Start grant for the period April 1, 1981 through March 31,
1982.
Grantee subsequently conceded that its request that the Board find
allowable an "overexpenditure," which resulted from Grantee's refund
to
the Agency of $1,806 in interest earned on certificates of deposit, was
inappropriate. See, Transcript of Telephone Conference (Tr.), p. 5.
/1/ The only remaining issue (involving $1,592) is whether mortgage
interest costs were appropriately charged to the Grantee's Head Start
grant.
There are no material issues of fact in dispute. We have, therefore,
determined to proceed to decision based on the written record, including
the transcript of a telephone conference call conducted by the Board.
Discussion
1. Background
Grantee is a non-profit organization which owns at least two
buildings and allocates space in these buildings to the federal grant
programs which Grantee administers, Head Start being one of the
programs. Grantee stated that the rental rate charged to the Head Start
program was substantially less than the appraised fair market value of
the space. Included in the rental charge was a pro rata charge for the
mortgage interest cost of the building. Grantee Brief, Item II, p. 2.
(2) The Agency contended that federal Head Start officials were
unaware that Grantee had purchased buildings and was charging mortagage
interest costs to the respective grants. Agency Brief, p. 10. The
Agency stated that Head Start officials learned of Grantee's purchases
through a supplemental grant request for renovation funds. Id. The
Agency subsequently included a special condition on Grantee's Head Start
grant for the year in question which stated (citing Office of Management
and Budget Circular A-122, B-42c and B-19a) that mortgage interest is an
unallowable cost and that Grantee should instruct its auditors to
disclose the amount of mortgage interest already charged to the Head
Start program. Agency Ex. 3, Special Condition #5. Grantee's auditors
disclosed that $1,592 was charged to the Head Start program. It was
this disclosure that gave rise to the disallowance in question.
2. Analysis
Grantee did not contest that, generally, mortgage interest costs are
an unallowable charge to a grant. Grantee contended, however, that for
the grant year in question it requested and received an extension of
time in which to implement section B-42c of OMB Circular A-122 which
limits rental costs involving less than arms-length leases to actual
costs excluding interest. Grantee received the extension from the
Community Services Administration (CSA) which operated as Grantee's
"cognizant agency." Grantee did not request a similar extension from
Head Start officials. Grantee argued, however, that this extension
granted by its cognizant agency should be recognized by other federal
funding sources, i.e., the Head Start program.
We are not persuaded by Grantee's argument. As the Agency stated in
its brief (Agency Brief, p. 2), the concept of the "cognizant agency"
as
applied to a non-profit grantee is limited to a designated role played
by the major federal funding agency in negotiating indirect cost awards
on behalf of all the grantee's federal funding agencies. See, e.g., OMB
Circular A-122, Attch. A, Para. E-1. There is no mention of, and
Grantee did not provide any evidence to suggest otherwise, a broader
role for the "cognizant agency" vis-a-vis other federal funding
agencies. Indeed Grantee conceded that it may have misinterpreted CSA's
role as Grantee's cognizant agency with regard to Grantee's Head Start
grant. Since CSA's extension of section B-42c did not involve an (3)
indirect cost award and there is no other evidence in the record to
indicate that Head Start officials agreed in any way to be bound by
CSA's extension, we find that CSA's extension of the Implementation
period of OMB Circular A-122, B-42c did not affect Grantee's
implementation of that provision with regard to Grantee's Head Start
grant. /2/
In addition, OMB Circular A-122, B-19 states, in part, that "costs
incurred for interest on borrowed capital..., however represented, are
unallowable."
As previously stated, Grantee did not argue that mortgage interest
expense is an allowable cost. As we found above, Grantee did not have
an extension from OMB Circular A-122, B-42c dealing with interest costs;
nor did it request or receive any deviation from section B-19 cited
above. Therefore, we find that the mortgage interest charged to the
Head Start grant was an unallowable cost under the applicable cost
principles, and we sustain the disallowance.
3. Conclusion
For the reasons stated above, we uphold the disallowance of $3,398.
/1/ The Agency informed the Grantee that its request to allow
the "overexpenditure" should be filed with the Regional Office of
Fiscal
Operations. Tr., p. 5; see also, Agency Brief, p. 1. /2/ Since we
find that CSA's extension did not affect the Head Start grant and,
therefore, section B-42c can be applied to the Head Start grant, it is
unnecessary for us to address the Agency's arguments relating to the
appropriateness of CSA's action in granting the extension.
JULY 07, 1984