Economic Opportunity Planning Association of Greater Toledo, Inc., DAB No. 579 (1984)

GAB Decision 579
Docket No. 84-89

October 11, 1984

Economic Opportunity Planning Association of Greater Toledo, Inc.;
Settle, Norval; Teitz, Alexander Ford, Cecilia


The Economic Opportunity Planning Association of Greater Toledo, Inc.
(Grantee) appealed a decision by the Office of Human Development
Services (Agency) requiring the Grantee to restore $33,070 to its Head
Start Program fund balance to reflect decreased expenditures for the
1970 program year. The Grantee's expenditures for 1970 included a debt
to a subgrantee. At the close of the 1977 program year, the Grantee
wrote the debt off against its unfunded agency expenditures for that
year; the Grantee had never actually paid the amount due to the
subgrantee. The Agency determined that the write-off should have been
taken against the Grantee's total expenditures for 1970. This action
would result in a $33,070 fund balance for that year.

The Grantee contested the Agency action on three grounds: (1) The
cost incurred represented an actual expense by the Grantee; (2) The
write-off was similar to the settlement of an account receivable which
is not an allowable cost of a federal program; therefore, the write-off
of a liability is "not accountable" to a federal program; (3) The Agency
should have addressed the write-off at the close of the 1977 program
year, rather than waiting until 1984 to take the disallowance.

This decision is based upon the briefs and documentation submitted by
both parties. For the reasons set out below, we conclude that the
Agency's determination regarding the Grantee's write-off of the
liability was proper.

BACKGROUND

The facts are undisputed. The Grantee received $627,335 in federal
funds for the 1970 program year. The Grantee's expenditures for that
year totaled $662,934. Part of the expenditures included $68,669 for a
claim arising from an account payable to a subgrantee, the Toledo Board
of Education. The cost represented expenses incurred by the Board of
Education while running the Grantee's Head Start program.

(2) At the close of the 1977 program year, the Grantee determined
that the Board of Education would not attempt to collec the debt and
wrote off the account payable against "unpaid agency erxpenditures" for
1977. /1/ Thus, the Grantee never actually paid the debt owed the Board
of Education. The Agency first learned of this during its review of the
audit reports for the 1980 and 1981 Program Years. After examining the
relevant records, the Agency determined that the Grantee should have
written off the account payable ($68,699) against the total expenditures
for the 1970 program year ($662,934). This action would have produced a
net federal expenditure of $594,265. Subtracting the net federal
expenditure from the Grantee's award for 1970 ($627,335), would have
produced a program fund balance of $33,070. (Agency Brief, pp. 1-2)


ANALYSIS

The Agency has not argued that the cost for which the disputed funds
were originally claimed was an inappropriate charge to the Head Start
grant. The disallowance is based on the Agency's allegation that
although the Grantee claimed these funds as an allowable expense, the
Grantee never actually paid the expense. Therefore, the liability,
which was written off in 1977, should be deducted from the Grantee's
total expenditure for the program year in which the liability arose, and
the resultant excess restored to the Grantee's program fund balance.

The Grantee's arguments have not convinced us that the Agency's
position is incorrect.

1. The Funds Claimed Were Never Actually Paid. Therefore The "Cost
Incurred" Did Not Represent An Actual Expense By The Grantee.

The Grantee admits that it wrote off the account payable to the
Toledo Board of Education at the close of the 1977 program year. Thus,
among the federal funds received by the Grantee for the 1970 program
year were funds attributable to a debt which the Grantee never paid.
Therefore, the Grantee received the value of the Board of Education's
services ($68,699) at no actual cost, as well as federal funding to pay
for those services.

An otherwise allowable cost may properly be considered an expenditure
as long as there is an expectation that federal (3) funds will be paid
out for the expenditure. Once the liability is cancelled so that, as a
practical matter, there is no possibility that payment would be made
from the federal funds charged, then the liability cannot properly be
counted as an expenditure. Here the possibility of a subsequent demand
for payment to the Board of Education is too remote to justify continued
consideration of the liability as a legitimate charge to the program.
Thus, the mere fact that a grantee has incurred a cost "on paper" cannot
support the ultimate allowance of the cost if the grantee will never
actually pay the debt.

2. Settlement Of An Account Payable Is Not Similar To The Settlement Of
An Account Receivable.

The Grantee drew an analogy between its write-off of an account
payable and the federal prohibition against charging bad debts to a
grant. /2/ The Grantee contended that since "a bad debt write-off is
not an allowable cost of a federal program; by the same reasoning, the
write-off of a liability would not benefit, or be accountable to, a
federal program." (Grantee's Brief, p. 1)


The Grantee's analogy is invalid. In the situation where a bad debt
is written off, a grantee forgoes the right to receive money owed to it
by another party. Presumably, the grantee has provided something to the
debtor; thus the write-off of the debt is a loss for the grantee in
that it does not receive full value for a cost expended. However, in
the write-off of a liability, it is the grantee who is the debtor and
who is not providing a full return for services received. Here the
Grantee did not pay the Board of Education for the services provided,
thus incurring the benefit of those services at no cost. Federal funds
had been paid to the Grantee in order to enable the Grantee to pay for
the value of that benefit. However, in retrospect, since the Grantee
did not have to pay for the services there was no reason to provide the
Grantee with funds for the services. Therefore, the Grantee could not
properly include in its total expenditures for the 1970 program year a
debt which was ultimately cancelled.

(4) 3. The Agency's Failure To Act At The Close Of The 1977 Program
Year Does Not Preclude The Disallowance.

The Grantee contended that the Agency should have taken this
disallowance at the end of the 1977 program year. Although the Agency
conceded that it did not review the auditor's workpapers for the 1977
program year, which may have provided a more detailed explanation of the
write-offs, the Agency contended the 1977 Audit Report did not identify
the write-off of the account payable to the Board of Education. The
Agency argued that it was not aware of the write-off until it reviewed
the auditor's workpapers accompanying the 1980 and 1981 Audit Reports.
The Agency contended that it acted promptly after it discovered the
write-off and alleged that the delay in discovery of the write-off was
due to improper accounting procedures employed by the Grantee. /3/
(Agency Brief, p. 2, n. 2; Agency Exhibit 5) The Grantee argued that
the Audit Report for 1977 did address the write-off of the account
payable. Additionally, the Grantee took exception to the Agency's
allegation that it used improper accounting procedures. (Grantee's
Reply Brief, p. 2)


The 1977 Audit Report does refer to "the settlement of certain
liabilities." However, the report does not discuss this in detail. We
see nothing in the 1977 Audit Report which could have reasonably alerted
the Agency to any problems relative to 1970 funding. Once the Agency
had reviewed the audits for the 1980 and 1981 program years and
discovered the write-off, it acted promptly to question the application
of the debt written off to unfunded agency exenditures and ultimately to
determine that the Grantee should have instead written-off the liability
against its total expenditures for 1970. /4/ There is simply no basis
for concluding that the Agency's determination is barred because it
could have acted more promptly.


(5) CONCLUSION

For the reasons outlined above, we uphold the Agency determination
requiring the Grantee to restore $33,070 to its Head Start fund balance.
/1/ We deduce from the 1977 Audit Report that unpaid agency
expenditures are, apparently, those expenditures for which Grantee
received no federal funds. (Agency Exhibit 5) /2/ The
regulation at 45 CFR Part 74, Appendix F, Section G. (b) 2, (1977)
provides: "Bad debts . . . are unallowable." Appendix F was replaced by
Office of Management and Budget Circular A-122. See 45 CFR 74.174
(1981). /3/ The Agency did not specify what acts comprised
improper procedures. /4/ The Agency contended that the Grantee's
argument on this issue was effectively one of estoppel, but that the
Grantee had failed to prove at least one element necessary to establish
a case of estoppel against the federal government, i.e., affirmative
misconduct by the government. (Agency Brief, pp. 7-8) The Grantee did
not address this point in its Reply Brief.

MARCH 19, 1985