GAB Decision 430
Docket No. 83-14
May 31, 1983
Puerto Rico Office for Human Development;
Ford, Cecilia; Teitz, Alexander Settle, Norval
The Puerto Rico Office for Human Development (appellant) asked the
Board to review a decision by the Acting Regional Program Director in
Region II for the Administration for Children, Youth and Families of the
Office of Human Development Services (OHDS), which disallowed $300,700
claimed under appellant's Head Start program. Appellant's claim
represented an expenditure for 620 waste receptacles (one for each Head
Start center in Puerto Rico). OHDS's disallowance was based on a denial
of prior approval for the expenditure and on OHDS' determination that
the money should have been spent for other priority needs. The
appellant defended the purchase of the receptacles as reasonable, and
argued that the OHDS decision was inconsistent with federal regulations
on procedures for prior approval.
As discussed below, we remand this case to OHDS for further
development of the record. The record so far established indicates that
certain premises underlying the disallowance are incorrect, and that
there currently is an insufficient basis for a Board determination on
the remaining issue of the reasonableness of the expenditure.
The history of the purchase.
By letter of November 11, 1981, appellant's administrator asked OHDS
for "authorization" to purchase the trash cans. The letter specified
that the funds would come from "cost of living" grant (2) funds budgeted
for supplies and other costs. /1/ The letter stated, "your approval to
our request will be greatly appreciated." OHDS Exhibit 1.
By letter of December 4, 1981, appellant responded to a request for
further details from OHDS, and again noted the request for "permission"
to purchase the trash cans. The letter stated, "after receiving the
authorization, we will submit this purchase to our Bidding Board, as
requested by laws and regulations." OHDS Exhibit 4.
By letter dated December 17, 1981, appellant sent OHDS literature on
the trash cans, and mentioned the "proposed purchase" of the cans.OHDS
Exhibit 5.
By letter dated January 18, 1982, OHDS disapproved the purchase in a
letter containing the following statement:
After consideration of the Cost-of-Living increase funding guidance,
and the list of needed center repairs, all funds available should be
used toward that effort, therefore, we do not approve your request for
the purchase of waste receptacles for the amount of $300,700.
OHDS Exhibit 6.
During a site visit in June, 1982, an OHDS official discovered that
appellant had purchased the 620 trash cans anyway. OHDS Exhibits 7, 8.
The written record does not specify when the purchase occurred, but a
November, 1982, letter from appellant (3) to the HHS Regional
Administrator clearly says that "after receiving the denial" appellant
"proceeded to acquire" the trash cans because it was "sure that
we did
not have to request prior approval... to acquire equipment which cost
less than $500.00 per unit." OHDS Exhibit 9. During the telephone
conference held in this case, appellant's administrator appeared unclear
about the precise dates of purchase, but did indicate that at least a
portion of the trash cans were bought in April, 1982.
The need for prior approval.
The parties spent considerable effort arguing over whether prior
approval was required for the purchase of the trash cans. As the
discussion below indicates, it appears that prior approval was not
specifically required. However, as we conclude below, the issue is
something of a red herring.
As support for the proposition that it reasonably believed it did not
have to seek prior approval, appellant submitted a letter dated January
13, 1982, from an OHDS official to appellant which referred to a request
"of 11/23/81" for authorization to purchase equipment. Appellant's
Exhibit 1. The letter stated:
We wish to inform you that the Federal definition of Equipment has
been changed to mean:
"... an article of tangible personal property that has a useful life
of more than two years and an acquisition cost of $500 or more."
You, therefore, have local authority to purchase necessary items
costing less than $500 as shown in your letter of 11/23/81. Those items
costing over $500 will be addressed in a separate letter.
OHDS did not address this letter in its brief, but in the subsequent
telephone conference call, noted (with no dispute from appellant) that
the letter was not speaking about the transaction involved here, but was
in response to a separate request about different proposed purchases.
This is corroborated by reference to the request "of 11/23/ 81" in
the
letter, as appellant's request for approval of the trash can purchase
was dated November 11, 1981. Furthermore, as noted above, appellant
proceeded to acquire part or all of the trash cans only after it
received OHDS' specific disapproval of the purchase, dated January 18,
1982--five days after the letter quoted immediately above. Thus, the
quoted letter is no direct impeachment of OHDS' case. However, the
letter does indicate one of the problems with OHDS' position: whether
prior (4) approval was specifically required at all for the trash can
purchase (each trash can cost less than $500) and if not, the effect of
that on the case.
This is how the $500 exemption question arises. Under the
Department's uniform requirements for administration of grants, the
principles for determining allowable costs of the grant involved here,
since the grant was to a governmental agency, were set forth in Federal
Management Circular (FMC) 74-4. See, 45 CFR 74.171 (1980 and 1981).
/2/ 45 CFR 74.176, entitled "costs allowable with approval," sets
forth
procedures governing approval of the kinds of costs for which FMC 74-4
specifies that there must be HHS approval. /3/ (FMC 74-4 also specifies
two other categories of costs: those which are unallowable altogether,
and those which do not require HHS approval). If a cost requires
approval under FMC 74-4, section 74.176 requires that the approval be
given in advance, either by approval of a budget specifying the cost
item or by specific written approval for a cost item not addressed in
the budget.
FMC 74-4, Attachment A, section C.3., states:
Capital expenditures. The cost of facilities, equipment, other
capital assets, and repairs which materially increase the value or
useful life of capital assets is allowable when such procurement is
specifically approved by the Federal grantor agency. (emphasis on
"equipment, other capital assets" added).
Appellant argued that it was not required to seek approval under this
provision for two reasons: first, because the trash cans were not
capital assets but were "materials or supplies," a category of costs
which are allowable without prior approval (see FMC 74-4, Attachment A,
section B.18.); and, second, because even if one calls the trash cans
"equipment," another regulation defines (5) "equipment"
to mean an item
costing $500 or more. As to the first argument, we find that the trash
cans are much more reasonably characterized as equipment than as
materials or supplies. The provision on materials and supplies, when
contrasted with the provision on capital assets, clearly is intended to
cover consumable items such as paper and pencils, not items like the
trash cans, which the record indicates are rugged items likely to last
for many years.
As to the second argument, the appellant apparently is correct. The
regulations contain a subpart dealing with the use and disposition of
equipment and real property (45 CFR Subpart 0) which includes this
definition of "equipment": "... an article of tangible personal
property that has a useful life of more than two years and an
acquisition cost of $500 or more." 45 CFR 74.132 (1981). By its own
terms, Subpart 0 does not deal with acquisition per se, and the
definition of equipment is specifically stated to be "as used in this
subpart" (i.e., Subpart 0), so that one might argue that the regulations
generally require advance approval of all equipment purchases but
require accountability for use and disposition only of items over $500;
however, OHDS does not use that interpretation, and has chosen in its
grants administration manual to specifically interrelate the equipment
provisions of Subpart 0 with the prior approval requirements. See OHD
Grants Administration Manual, pp. 1-1-8 and 1-6-1 (42 Fed. Reg. 21055,
21070 (April 22, 1977)). /4/
Confronted with the foregoing, OHDS argued that the trash cans should
be considered "other capital assets" and not "equipment"
under FMC 74-4,
Attachment A, section C.3. We are not persuaded by this for the
following reasons: the trash cans easily fall within the definition of
equipment (the only issue being whether they have at least a year's
useful life, and we infer from the record, without dispute from OHDS,
that they do; see, e.g., OHDS Brief, p. 11, and OHDS Exhibit 5); a
contrary interpretation would mean that anything which is equipment
could be called an "other capital asset," making the $500 exemption
meaningless; and OHDS (6) raised this distinction only in the
conference after close of briefing, making it appear to be a post-hoc
rationalization. /5/
Apart from the prior approval requirements of 45 CFR 74.171 and
74.176, the only other relevant requirements for prior approval are
found in 45 CFR Subpart L, which deals with programmatic changes and
budget revisions. In nonconstruction grants, the regulations specify
that prior approval is required for budget revisions involving transfer
of funds budgeted for indirect costs and student support, and revisions
which would lead to a need for additional funds; but "other budget
changes... do not require approval." 45 CFR 74.105(c). Otherwise, the
only provision in Subpart L that might be applicable is section 74.103(
b), which requires prior approval "for any change to the scope or
objectives of the approved project." This statement is subject to the
terms of section 74.103(a), which says that the provision does not apply
to departures from approved plans which constitute "budget revisions."
Even if the circumstance here was somehow viewed as other than a budget
revision, we do not clearly see any change in scope (in the sense that
the appellant substantially extended or retracted the approved project),
nor was this argued by OHDS. One might argue that the expenditure for
trash cans was, in effect, a change affecting the objectives of the
project; but, since the narrow objectives of COL funding turned out not
to be involved, and since a concern about trash disposal at Head Start
facilities in the hot Puerto Rican climate seems consistent with the
objectives of Head Start, the Board is not prepared, based on the record
before us, to find that the expenditure changed program objectives.
Furthermore, OHDS did not dispute appellant's claim in the conference
that the funds came from "program savings" (i.e., unobligated funds),
so
that there apparently was not any conversion of funds intended for one
purpose to another.
In sum, the maze of provisions on prior approval appear to leave the
particular expenditure here untouched. There is, in effect, an
elaborate exception. However, appellant is still subject to the
requirement that the expenditure be reasonable.
Whether the expenditure was necessary and reasonable.
OHDS urged strongly that the expenditure was unreasonable. FMC 74-4,
Attachment A, contains an umbrella provision limiting all (7) types of
expenditures, which states that, to be allowable, costs must be
"necessary and reasonable for proper and efficient administration of the
grant program." Section C.1.a.
The problem is that OHDS premised its disapproval, and its argument
on reasonableness here, in substantial part on compliance with COL
guidance, which, as we have already noted, turns out not to be
dispositive. /6/ OHDS argued at one point, "by spending $300,700 on the
receptacles, petitioner used up over 10% of its $2,258,213 Cost of
Living Allowance." OHDS Brief, p. 15. In fact, since appellant did not
use COL funds, it used an amount of its funds which amounted to less
than 2% of its Head Start grant for the one year in question; the
amount appears even smaller when the one-time purchase is viewed in the
context of the ongoing funding relationship which apparently exists
here.
The record does not contain anything substantial to indicate the
price of the trash cans was unreasonable, and, indeed, appellant stated
during the conference that the cans were purchased from the low bidder
in a competed procurement involving five bidders. Regardless of
limitations applicable to COL grants, the basic Head Start grant is
available for "... comprehensive health, nutritional, educational,
social, and other services as will aid the children to obtain their full
potential...." 42 U.S.C. 9833. Appellant argued essentially that health
needs called for these trash cans, and that it was adequately meeting
its other Head Start needs. OHDS acknowledged in the conference that
there was not anything unreasonable per se about charging the Head Start
grant for a trash can at a Head Start center.
Even so, it is true that $300,700 is a lot of money to spend at one
time on trash cans in the face of the fundamental developmental needs
typically faced in Head Start projects, and the appellant has done
little more than make conclusory arguments about the reasonableness of
the purchase. The appellant contributed significantly to the confusion
by describing the purchase at first as coming from COL funds, and
apparently did not expend much effort later (8) to clarify that point.
Furthermore, there is evidence, albeit contested, that there were more
important things appellant could have funded. OHDS Exhibits 4, 8.
Finally, it is clear that once the appellant had actually asked for
prior approval--even though it may technically not have been required to
do so--it had a reasonable obligation, once OHDS communicated its
reservations, to delay a purchase of this magnitude until it resolved
OHDS' doubts. /7/ The circumstances of this case indicate that
appellant deliberately defied OHDS' disapproval, and given the size of
the purchase, that is no small matter.
The Board's disposition of the case.
Two of OHDS' major premises in support of its case have been shown to
be incorrect. OHDS was mistaken about the applicability of prior
approval requirements here, and the record before us shows, without
dispute from OHDS, that COL funds were not involved after all. OHDS'
remaining substantial argument is that the purchase was unreasonable in
the circumstances of the Head Start program generally and appellant's
program in particular. That is an argument that the Board must listen
to, and arises where OHDS' expertise is entitled to some deference from
this Board. However, the record on this issue is poorly developed, in
large part because of the focus of both parties' attention on other
issues.
Appellant has not developed the record adequately to show the
reasonableness of its actions.Appellant has submitted a substantial mass
of material to the Board detailing its activities, but the material is
essentially unexplained. Appellant argued that health needs required
the trash cans, but at this point this is only a conclusory argument.
(9) In short, on the key issue in the case--simply stated, whether
the purchase of 620 trash cans is per se unreasonable under the basic
Head Start grant--the record is inadequately developed, mainly because
of diversion of attention to other issues which are not dispositive.
In the foregoing context, we think that the spirit of cooperative
federalism, and the interests of both parties in a good Head Start
program, call for further communication on the key issue. We therefore
remand this case to OHDS, with the following instructions applicable to
both parties:
1. Appellant should provide OHDS with a detailed statement
supporting the reasonableness of the purchase. The criteria for
reasonableness will be those of the basic Head Start program, not the
special criteria applicable to cost of living grants. In particular,
appellant should (a) explain in more detail, with supporting data as
appropriate from health regulations or other official sources, why oil
drums were inadequate and why trash cans were necessary; and (b) how
programmatic and renovation needs of the program were otherwise
adequately met, so that it was not inappropriate to buy these trash cans
all at once.
In providing the foregoing information, appellant may make reference
to materials already submitted in this appeal (e.g., Appellant's Exhibit
4).
Appellant is cautioned that it has a burden to show the
reasonableness of the purchase. If it fails to do so, OHDS' disallowance
will be upheld.
Appellant should make the foregoing presentation within 30 days after
receiving this decision (or such longer time as OHDS allows).
2. Within a reasonable time after receiving the foregoing (we
suggest no more than 30 days), OHDS should respond, and if OHDS
continues to find the purchase unreasonable, OHDS should specify, by
detailed response to appellant's presentation, in what ways appellant's
presentation is inadequate to show reasonableness of the purchase.
In responding, OHDS should consider the possibility of a reduction in
the amount of the disallowance. We note the suggestion in the record
that it may be the size (10) of the purchase that prompted concern in
the first place, and that the purchase of some lesser number of trash
cans might have been treated as reasonable.
3. If appellant receives a negative response from OHDS, and chooses
to challenge that response, it may return to the Board by sending a
letter referring to this decision within ten days after receiving the
OHDS response.
CONCLUSION.
Based on the foregoing analysis, this case is remanded to OHDS for
the action described above. /1/ Appellant's Head Start budget for the
fiscal year in question was $18,691,814, which either included
or was supplemented by $2,258,213 in "cost of living" (COL) funds.
COL
funds were awarded for a narrower range of Head Start activities than
the basic grant (such things as increases in operating expenses due to
inflation). Appellant first proposed using COL funds for the trash
cans, and the record thereafter (including briefing to this Board)
reflects OHDS' concern for noncompliance with OHDS' COL guidelines. But
appellant argued (and OHDS agreed during a telephone conference held
after briefing) that the funds it actually used were unobligated funds
from a prior program year, not COL funds. OHDS did not state any
objection to the use of unobligated funds per se, and we do not consider
here the propriety of such usage. See, OHDS Brief, pp. 2, 7, 15; OHDS
Exhibits 2 and 3; Appellant's Reply Brief, pp. 2, 5. /2/ OHDS
cited the provisions of OMB Circular A-87, which superseded FMC 74-4.
There is no practical problem, because the provisions of the two
documents are virtually identical (and no provisions relevant here are
different). /3/ OHDS' position seemed to be that section 74.176 itself
required prior approval of costs. OHDS Brief, pp. 6-7, 10. However, on
its face, it is not a self-executing provision. It becomes applicable
only when triggered by a requirement in some cost principle (here, FMC
74-4) that a cost must be approved to be allowable. /4/ This version of
the manual (a new one has been proposed but not finally promulgated)
uses $300 as th cut-off point, rather than $500. This apparently is
because Subpart 0 also used $300 until amended in June, 1981. See 45
CFR 74.132 (1980); 46 FR 30501 (June 9, 1981). Since the manual
implements Subpart 0, the $500 figure presumably must be read into it.
/5/ In fact, in its brief, albeit in a different context, OHDS said,
"waste receptacles would undoubtedly fall under the heading of equipment
in a budget breakdown." OHDS Brief, p. 10. /6/ See footnote 1
above. The OHDS letter disapproving the expenditure said, "after
consideration of the Cost-of-Living increase funding guidance, and the
list of needed center repairs, all funds available should be used
towards that effort...." OHDS Exhibit 6. Other correspondence in the
file, including the final OHDS decision prompting this appeal, built on
the assumption that COL funds were involved. /7/ Appellant argued that
OHDS did not respond timely and properly to its request for
approval under the standards set forth in 45 CFR 74.102, which says
essentially that OHDS has to act within 30 days on such a request. We
agree with OHDS that while there was about two months between the
request and the disapproval, the fact that there were several OHDS
requests for more information, and respones, meant that the actual time
limit did not begin running until December 17, 1981, and the one-day
slippage (even if not otherwise justifiable as OHDS argues) was not a
sufficient basis in the circumstances here for taking action. More
important, appellant admitted that at least a portion of the cans were
not purchased until after it had received the disapproval. We do not
read the provisions of 45 CFR 74.102 as authorizing a grantee to ignore
a disapproval after it has received the disapproval, even though late.
JULY 07, 1984