Georgia Department of Administrative Services, DAB No. 577 (1984)

DAB Decision 577
Docket No. 84-20

October 5, 1984

Georgia Department of Administrative Services;
Garrett, Donald; Teitz, Alexander Settle, Norval


The Georgia Department of Administrative Services (DOAS) appealed a
decision by the Regional Director, Region IV (Agency), disallowing
interest costs associated with the installment purchase of computer
equipment over a five year period dating back to July 1979. /1/ The
Agency based its decision on OMB Circular A-87, Attachment B, Part D,
paragraph 7, which provides:

"Interest on borrowings (however represented), bond discounts, cost
of financing and refinancing operations, and legal and professional fees
paid in connection therewith, are unallowable except when authorized by
federal legislation. . . ."


DOAS challenged the disallowance arguing that the across-the-board
prohibition on the allowability of interest expenses contained in
Circular A-87 is arbitrary and capricious in its application to the
facts of this case.

For the reasons set out below, we uphold the disallowance. /2/


(2) Background and DOAS Argument

DOAS is not itself a recipient of a grant award from the Agency.
DOAS provides services to various State agencies which do receive grants
from the Agency. The costs of those services, where allowable, may be
recouped indirectly from the Agency under an approved cost allocation
plan. DOAS became involved in this dispute as the result of its
preparation of a cost allocation plan utilized in reimbursing DOAS for
computer services provided to State agencies which receive grants from
the Agency. (DOAS Brief, pp. 2-3) DOAS purchases computer equipment and
then provides data processing services to various agencies and
departments within the State, generally billing users commensurate with
their use of data processing services. The billing defrays capital
purchase costs, including interest on the purchase of the
equipment.(DOAS Brief, p. 2)

DOAS did not contest the general applicability of Circular A-87 as
the cost principles applicable to grants and contracts between state and
local governments and the Agency. Rather, DOAS challenged the
Circular's prohibition on the allowability of interest as a charge to a
grant.

DOAS admitted that the costs in question represented interest on the
installment purchase of computer equipment. However, DOAS maintained
that purchasing computer equipment and passing on the interest cost to
the users of its data services resulted in a substantially lower cost to
the users than that which would be incurred under a long-term lease of
the equipment. Thus, DOAS argued, the interest involved here should be
an allowable charge to a grant because the installment purchase of
computer equipment is the most economic method of providing computer
services.

DOAS asserted that since the installment purchase reflects the most
prudent policy, the flat denial of interest as an allowable cost is
arbitrary and capricious. In support of its position, DOAS cited OMB
Circular A-21, which allows interest as a cost in the purchase of
buildings used in carrying out the purposes of agreements with
educational institutions, as proof that the Agency has recognized the
reasonableness of facilitating the purchase of expensive grant program
items by allowing interest costs to be charged to a grant.

Analysis

The Board has previously addressed the allowability of interest
expenses incurred in the purchase of computer equipment. See Alameda
County Cost Plan, Decision No. 281, April 23, 1982; Vermont State-Wide
Cost Allocation Plan, (3) Decision No. 84, February 26, 1980. In
Vermont, we recognized that the grantee had raised valid questions about
the reasonableness of the federal policy of denying federal financial
participation for the interest expense accompanying the purchase of
computer equipment when such a purchase clearly is more economical than
leasing. We noted that there appears to be substantial merit to the
idea that the Agency or OMB should consider changing the regulation to
reflect the advantage of purchasing computer equipment. See Vermont, p.
2. While the same may be said in this appeal, we also held in Vermont
and Alameda County, as we must hold here, that this Board cannot
disregard the cost principle prohibiting federal reimbursement of
interest costs which has been specifically implemented by Agency
regulations. See 45 CFR 74.171. DOAS has not presented any argument
which would cause us to decide differently than we did in either the
Alameda County or Vermont decisions. The Board is bound by applicable
laws and regulations. See 45 CFR 16.14. Thus, based on the fact that
the principles of OMB Circular A-87 are clearly applicable here through
regulation, we are compelled to deny the appeal of DOAS.

Conclusion

For the reasons set out above, we uphold this disallowance. /1/
The precise dollar amount of this disallowance has not been
calculated. (DOAS Brief, p. 3; Agency Brief, p. 1) Accordingly, this
decision addresses only the question in principle of the allowability of
the interest costs involved here. /2/ This decision is based on
briefs and evidence submitted by the parties. Although the Board's
regulations at 45 CFR 16.8(c) allow an appellant (here, DOAS) to file a
reply to the respondent's (Agency) brief, DOAS has not submitted a reply
brief.

MARCH 19, 1985