GAB Decision 620
January 30, 1985
Tri-County Migrant Head Start;
Ballard, Judith A.; Ford, Cecilia Sparks Teitz, Alexander G.
Docket No. 84-97
Tri-County Migrant Head Start (Tri-County) /1/ appealed a decision by
the Office of Human Development Services (Agency) to disallow $16,650
charged by Tri-County to its Head Start grant for the 1982 program year.
The disallowance consisted of $15,998, which the Agency alleged
Tri-County had used to repay a disallowance by the United States
Department of Agriculture (USDA) for the fiscal year ending September
30, 1980; and $652, which the Agency alleged represented interest
charged to the grant for financed insurance premiums. The Agency
disallowed the USDA repayment based on cost principles which preclude
repayment of a disallowance taken under one federal program with funds
from another and which also prohibit prior year costs from being charged
to later grants. The Agency based the interest charge disallowance on
the regulatory prohibition against charging interest to federal funds.
Tri-County denied that it had used Head Start funds to repay the
USDA, arguing instead that poor management practices at the time of the
repayment provided federal auditors with the mistaken impression that
Head Start, rather than USDA, funds had been expended. Tri-County
argued that a prior period adjustment to its 1982 budget would correct
this error. Tri-County defended the use of federal funds to pay
interest charges by arguing that the interest cost was an unavoidable
expense.
This appeal was heard under our expedited process as set out at 45
CFR 16.12. The record for this decision includes briefs and evidence
submitted by both parties as well as the tape of a telephone conference
conducted August 22, 1984. For the reasons set out below, we uphold
this disallowance.
(2) I. Repayment of the USDA Disallowance
Under the National School Lunch Act, 42 USC Sec. 1751 et seq., the
USDA is the primary source of funding for food services in Head Start.
The USDA distributes food service funding through the Child Care Food
Program (CCFP). /2/ The California Department of Education audited
Tri-County's CCFP records for the 1979-1980 program year and determined
that, based on its submission of an inaccurate number of meals claimed
for reimbursement, Tri-County had received excess USDA funding.
Tri-County repaid the USDA during the 1982 program year. The head Start
audit for the 1982 program year found that Tri-County had used Head
Start funds to repay the USDA.
Tri-County denied that it had used Head Start funds to repay the
USDA. Tri-County noted that its predecessor organization had not kept
segregated USDA and Head Start accounts, but instead commingled funds
from both programs in a general account. Thus, the repayment from the
general account had provided the appearance of Head Start funds being
used to pay a USDA debt.
In support of its position, Tri-County submitted two letters from its
CPA (September 18, and December 11, 1984). The CPA had reviewed
Tri-County's Head Start audit reports for the years 1979-1983, as well
as the California Department of Education CCFP audit report for 1980.
In the September submission, the CPA indicated that repayment of the
USDA disallowance was not an allowable charge to the 1982 Head Start
grant. The CPA also concluded that, "it appears that the . . . USDA
disallowed costs would have been allowable expenditures of the 1980"
Head Start grant. The CPA's December submission was virtually identical
to his September letter.
Responding to the CPA's analysis, the Agency noted that the CPA had:
* confirmed that 1982 Head Start funds had been used to repay the
USDA disallowance and that such action was, in fact, improper;
* failed to address Tri-County's claim that repayment had come from
USDA funds commingled with Head Start funds;
(3) * erroneously concluded that the USDA repayment could have
appropriately been charged to 1980 Head Start funding.
Agency Response to Statement by Tri-County's CPA, October 24, 1984.
We believe that both the facts of this case and applicable program
regulations mandate that this disallowance be upheld.
Under applicable federal cost principles, a cost otherwise allowable
under the Head Start program may not be allocated to another program.
See OMB Circular A-122 A.2.f. /3/ Additionally, OMB Circular A-122 A.
4.b. prohibits shifting a cost allocable to a particular grant program
to another grant program to avoid any restrictions imposed by law or
grant principles.
Tri-County's challenge to this disallowance focused on the facts
leading to the disallowance, rather than program regulations. However,
although Tri-County alleged that the Agency had misunderstood the
factual background leading to this disallowance, we do not believe that
Tri-County's evidence demonstrates that the Agency had misinterpreted
those facts.
The CPA did not say that the USDA disallowance was repaid with USDA
funds. As the Agency noted, the CPA's conclusion that repayment of the
USDA disallowance was not an appropriate charge to the 1982 Head Start
grant was an admission as to the accuracy of the Agency's position, more
than an exoneration of Tri-County. The CPA also offered the
unsubstantiated conclusion that the USDA repayment would have been an
appropriate charge to the 1980 Head Start grant. Not only was this
conclusion legally incorrect, for as the Agency correctly argued, grant
funds may only be used for allowable costs of activities for which the
particular grant was awarded and funds from one federal program may not
be used to repay disallowances taken under another federal program, but
the disallowance was taken because Tri-County had received funds for
meals not provided. Thus, regardless of its source, receipt of the
excess funding was improper.
(4) Additionally, the figures displayed in the relevant audit reports
do not support Tri-County's position. For example, at the close of the
1980 program year (the year of excess USDA funding) Tri-County had a
fund balance of $1,476. (Tri-County Exhibit 6) Clearly, even if this
entire balance was attributable to USDA, it falls far short of the
disallowed amount. At the close of the 1981 program year Tri-County
carried a fund balance of $72,166. (Tri-County Exhibit 6) While the
size of this balance might initially provide the impression that
Tri-County had sufficient "general funds" on hand at the start of
1982
to repay the USDA, the facts preclude a finding in Tri-County's favor.
There is no clear cut allocation of the makeup of the funds in this
balance, i.e., USDA or Head Start funds. Consequently, given that there
is no evidence in the record that any amount of Tri-County's fund
balance at the start of 1982 was attributable to excess USDA funds, we
conclude that the fund balance did not contain sufficient USDA funds (if
any) to repay the disallowance. /4/
/1/ Prior to March 1, 1983, Tri-County was known as Hispanic
American Center for Intercultural Affairs, Inc. (HACIA), and operated it
Head Start program under the auspices of its Indian and Migrant Program
Division. In the interest of clarity, we will simply refer to the
appellant as Tri-County. /2/ Tri-County is located in
California, and the CCFP program is administered there by the California
Department of Education. /3/ OMB Circular A-122 sets out the
principles for determining the allowable costs of programs administered
by nonprofit organizations under grants from the contracts with the
Federal Government. OMB Circular A-122 is incorporated by reference
into the federal regulations applicable to this grant by 45 CFR 74.174
(1981). /4/ As set out in Tri-County's Exhibit 6, the December
31, 1981 fund balance ($72,166) consisted of: $1,476Fund Balance as of
January 1, 1981, 6,533Pension Fund Adjustment, 64,658Revenue over
Expenditures for 1981, less $501Prior Period Adjustments E In
spite of the fact that Tri-County may have had problems administering
its Head Start program, recipients of federal funds are responsible for
the proper administration of grant funds. While the circumstances
surrounding this disallowance may have been as Tri-County has described
them, Tri-County has not produced the evidence necessary to refute this
aspect of the disallowance. Thus, we uphold the Agency decision to
disallow $15,998 in Head Start funds used to repay the USDA
disallowance. II. Interest Paid With Head Start Funds Tri-County
admitted that it used federal funds to pay interest costs associated
with financed insurance premiums and conceded that federal regulation
prohibits the use of Head Start funding to pay interest. However,
Tri-County noted that the insurance in question was mandatory and that,
due to the confusion surrounding Tri-County's reorganization, the only
available source of payment for the premiums was Head Start funding.
(5) OMB Circular A-122, Attachment B, section 19, provides that: "Costs
incurred for interest . . . are unallowable." As the Agency pointed out,
we have consistently upheld this cost principle. See CAP Services,
Inc., Decision No. 428, May 27, 1983, and Marshalls Community Action
Agency, Decision No. 328, June 30, 1982, among others.Tri-County has
offered no reason why we should reverse our position on this issue.
Accordingly, we uphold the Agency decision to disallow the $652 which
Tri-County charged to its Head Start grant for the 1982 program year.
Conclusion Based on the above analysis, we uphold the full disallowance
of $16,650.
MARCH 19, 1985