New York City Human Resources Administration, DAB No. 720 (1986)

GAB Decision 720

January 30, 1986

New York City Human Resources Administration; 
Ballard, Judith A.; Teitz, Alexander G.  Garrett;  Donald F.
Docket No. 84-206; Audit Control No. 02-35063


The New York City Human Resources Administration (the City, Grantee)
appealed the disallowance of the Regional Office of the Office of Human
Development Services (OHDS, Agency) of $620,622 under the City's Head
Start grant.  This disallowed amount represented certain "accounts
receivable" held by the City's Head Start program on January 31, 1982.

The Agency characterized the accounts receivable as the excess of cash
advances to delegate agencies over their reported expenditures and took
the disallowance because it found that these accounts receivable
represented federal grant funds exceeded the amount to which the City
was entitled and that were uncollectible from the delegate agencies and
properly characterized as bad debts.

The City appealed the disallowance primarily on the basis that under the
City's financial system the accounts receivable were owed to the City
not the Agency.  For the reasons discussed below, we uphold the
disallowance in full.

Background

The New York City Human Resources Administration is the Head Start
grantee for the City of New York and receives grant funds from the
Federal Government.  For the year in question, the City contracted with
69 delegate agencies that provided Head Start services to elligible
recipients.  Each agency submitted monthly requests for funds to pay its
operating expenses based on its estimated expenditures and was
responsible for spending the funds for Head Start purposes.  When
delegate agencies had cash advances in excess of expenditures for a
grant period, the excess advances became accounts receivable to the
grant program subject to recovery by the City.(2)$% Several audit
reports in the record indicated accounts receivable from the City's
delegate agencies had increased from one year to the next for the period
prior to the disallowance.  The audit for the Head Start program for the
year ended January 31, 1978 showed accounts receivable of $181,023.  The
audits for the years ended January 31, 1979 and 1980 showed that the
accounts receivable had increased to $250,983 and $303,166 respectively.

In conjuction with the process of finalizing the audit report for the
year ended January 31, 1980, the Agency on October 19, 1982 (Agency's
exhibit D) and March 23, 1983 (Agency's exhibit F) requested further
information regarding the status of the accounts receivable and the
progress made towards liquidating them.  Although the City indicated
that it had been intensifying its efforts to close these accounts,
(Agency's exhibit F) there is nothing in the record showing that the
City provided the requested information.  On February 13, 1984, the
Agency informed the City that (1) it was closing the audit for the year
ended January 31, 1980, but the accounts receivable issue remained open,
and (2) it would continue to monitor the City's progress in liquidating
the accounts receivable.  Agency's exhibit H.

The audit report for the year ended January 31, 1981 showed accounts
receivable of $321,693.  Agency's exhibit I.  By letter dated October
27, 1983, the Agency requested that the City advise it of the status of
administrative actions to recoup these accounts receivable.  The City
stated, in a February 8, 1984 letter, that some accounts receivable had
been recouped and that further actions would be taken to recoup the
remainder.  The City's July 3, 1984 letter stated that the accounts
receivable balance was $127,961 as of January 31, 1984.  However, the
City did not provide evidence of any recovery of funds.

On August 1, 1984, the Agency informed the City that it would advise the
City of its decision concerning the remaining uncollected accounts
receivable as part of the Agency's review of the audit for the year
ended January 31, 1982.  City's exhibit 5.  The audit report for that
year showed $620,622 in accounts receivable /1/ and noted that (1) many
receivables had (3) been outstanding for several years, raising serious
doubts as to their collectibility, and (2) delegate agencies were paid
funds due them for a current year, even though they owed funds from a
prior year.  The Agency then took a disallowance of $620, 622 for the
reasons stated below.

 

 

Agency's authority to reclaim unexpended grant funds

In an earlier case involving a different Head Start grantee, the Board
held that the Agency has the authority to require that a grantee account
in cash for "accounts receivable" to the extent that grant funds were
received and not accounted for through allowable costs actually paid.
Economic Opportunity Council of Suffolk, Inc., Decision No. 679, August
12, 1985.  The grants administration regulation relied on in Suffolk
also applies here.  That regulation provides:

   For each grant, the following sums shall constitute a debt or debts
owed by the grantee to the Federal Government, and shall, if not paid on
demand, be recovered from the grantee . . .

   (a) Any grant funds paid to the grantee by the Federal Government in
excess of the amount to which the grantee is finally determined to be
entitled under the terms of the grant;  . . . .

   45 CFR 74.112. /2/


We noted in Suffolk that the principle embodied in the regulation was
fundamental and applied to circumstances beyond grant closeout.  In
particular, we stated:

   . . . grantees are not permitted to retain federal grant funds in
excess of what is authorized for, and actually expended for, program
purposes.  See, e.g., 45 CFR 74.611(c) and (e);  and 45 CFR Part 74,
Subpart I.  While a "debt" requiring a refund of federal funds may arise
at the time of grant closeout, a grantor agency may also require refund
of federal funds in other circumstances.  See 45 CFR 74.112(b)-( e);
see also 47 Fed. Reg. 20028 (May 10, 1982).  (p. 6)

While the accounts receivable in Suffolk involved transfers to agencies
administering programs other than Head Start, we see no reason why the
same principle would not also apply to (4) accounts receivable owed by
Head Start delegate agencies.  As we discuss below, the City is
accountable for funds provided to delegate agencies in the same way the
City is accountable for funds that the City itself expends for grant
purposes.  Indeed, the City did not contest that the Agency may reclaim
unexpended federal grant funds provided to the City under the Head Start
program. Rather the City made two arguments on appeal which we address
below.  The two arguments were that (1) the City is not accountable for
the accounts receivable because they are owed to the City not the
Agency, and (2) the accounts receivable were eliminated by delegate
agency expenditures, payments, and accounts payable.

Do the accounts receivable represent City funds or Agency funds?

The City's first argument was that the disallowance should be reversed
because the moneys advanced to the delegate agencies were City funds not
federal grant funds.  Therefore, the accounts receivable were owed to
the City and not the Agency.

The City explained its position by describing a two track system by
which the Head Start program daily operation is funded.  The City
asserted that because federal grant funds are not available to the
delegate agencies providing the services when the grant period starts,
the City advances City funds to the delegate agencies based on their
anticipated expenses.  The City maintained that this was the first track
of its system for financing Head Start.

The City maintained that, under the second track of the system, the
federal grant funds are initially drawn down under the City's federal
letter of credit and deposited in a special City bank account to keep
them separate from City funds.  The Head Start monies are transferred to
the City treasury only when the delegate agencies submit documentation
of actual expenditures. Thus, the City maintained that it did not
actually receive grant monies until claims were made by the delegate
agencies for grant expenditures.  Consequently, the City took the
position that the acounts receivable had to be owed to the City not the
federal government, because no federal funds were ever advanced to the
delegate agencies and because the City itself did not receive funding
from its special account until actual expenditures had been incurred by
delegate agencies.

In further support of its position, the City asserted that the accounts
receivable had to be owed to the City because all grant years prior to
the year ended January 31, 1980 had been designated "closed" following
audit and excess funds reprogrammed to subsequent years or returned to
the Agency. The City cited letters from the Agency that closed out
grant(5) years ended January 31, 1980 and 1981 without referring to the
existence of accounts receivable.  City's exhibits 4 and 5.  For the
year ended January 31, 1982, the City claimed that the Agency had
acknowledged that all grant funds had been accounted for (although the
City did not indicate how that acknowledgment was manifested).
Therefore, concluded the City, since the financial relationship between
the Agency and the City has been closed for these grant years, the
accounts receivable in existence must represent funds from the City
treasury.

The City, in its reply brief, attempted to illustrate its position using
the example of its year ended January 31, 1981 (program year 15).  The
authorized grant funds for that year were $25,795,504.  Final
expenditures were $22,341,420 leaving a fund balance of grant funds of
$3,454,084.  The City noted that the Agency found that the City had a
balance of accounts receivable owed by delegate agencies, in the amount
of $436,890 for program year 15.

The City stated that if the Agency had requested refund of all unused
federal funds for program year 15, the City would have returned the
entire unobligated balance of $3,454,084.  The City then argued that its
not having collected the $436,890 in program year 15 accounts receivable
would not change the amount that the City had to return to the federal
government.  It is on this basis that the City maintained that the
accounts receivable must be due the City and not the Agency.  The City
stated that, in fact, it was allowed to carry over the unobligated
balance into subsequent years demonstrating that the City was permitted
to retain the unobligated balance.

Analysis

The fundamental difficulty with the City's two track argument is that it
misconstrues the nature of the City's accountability for federal grant
funding. /3/ The Board has held (6) repeatedly that a grantee is
accountable for the proper use and expenditure of grant funds received
by delegate agencies (subgrantees).  See, e.g., Community
Relations-Social Development Commission in Milwaukee County, Decision
No. 134, November 28, 1980;  Sacramento Area Economic Opportunity
Council, Inc., Decision No. 640, April 17, 1985.


The grantee's accountability in effect is the same as if the grantee
itself (rather than the delegate agency) had performed the program
activities.  This accountability begins as soon as federal grant funding
is provided to the delegate agencies through the grantee and extends to
all such funding provided.  In the instant case, although the City
advanced City funds to the delegate agencies for their Head Start
program activities, the City subsequently drew down federal funds to
cover the advances.

And in fact, the draw downs were authorized for this very purpose--to
support the program activities of the delegate agencies, not to support
special accounts retained by the City.  The City, therefore, became
accountable to the Agency for the delegate agencies' use of advanced
funds as soon as the City drew down replacement funding from the Federal
Government even if the City retained part or all of the actual cash in a
special account rather than transferring it to the City treasury.  To
the extent that the City had cash advances to its delegate agencies in
excess of the federal funds drawn down, the City might have been correct
that the accounts receivable represented City funds.  However, the City
does not dispute and the record fully supports the conclusion that the
City drew down funds equal to the advances and thus received an amount
of federal funds sufficient to cover the amount of the accounts
receivable owed by the delegate agencies.  City reply brief, p. 3.

If the City had in fact returned the entire unobligated balance of
$3,454,084 for program year 15 as it suggested in its example, it would
not have to return the additional amount of $436,890 in accounts
receivable.  This is so, however, because the $436,890 in uncollected
accounts receivable would have been part of the $3,454,084 unobligated
balance returned to the Agency, not because the accounts recevable did
not represent federal funds.

Under the City's position in this appeal, the City would be able to
delay indefinitely the accounting for substantial sums of funding
received by the City to cover the advances to the delegate agencies
merely by delaying a paper transaction transferring funds from a special
City account to the City treasury.  Any such delay in accountability,
however, would be inconsistent with the City's fundamental
responsibility to account for all federal funding.  The financial (7)
relationship between the Agency and the City can not be changed
arbitrarily depending on whether the City happens to retain federal
funding in one account or another.

Moreover, we see no reason why the Agency should be any less concerned
about instances involving accounts receivable owed by delegate agencies
than about instances where the delegate agencies have expended funds for
unallowable grant activities.  It is undisputed that these accounts
receivable represent the receipt by the delegate agencies of funding to
be used for allowable program expenditures that in fact can not be
documented as having been expended by the agencies for allowable grant
activities. Indeed, the Agency asserted, and the City does not deny,
that the amount of accounts receivable owed by delegate agencies has
been increasing over a period of several years and that it is reasonable
to assume that a substantial amount, if not all, of the accounts at
issue here would not be readily collectible and would represent bad
debts between the City and the delegate agencies.

We should also point out that the Agency's allowing the City to carry
over an unobligated balance in any given year does not (1) make these
funds Grantee's or (2) permit Grantee to use them for any non-grant
purpose or to hold them indefinately.  These funds must be expended for
grant purposes, be reasonable and necessary for the purposes of the
grant, and comply with all other applicable cost principles or
eventually be returned to the federal government.  There is no basis for
considering funds now represented by accounts receivable owed by
delegate agencies as complying with these requirements. /4/


Finally, the City's assertion that, because the grant years in question
have been closed the accounts receivable must be owed to the City, is
simply incorrect.  For each of the grant years involved herein, the
pertinent Agency correspondence actually stated that although the grant
year was generally(8) considered closed, the Agency left open the
resolution of these longstanding accounts receivable, which troubled the
Agency.  See the Background Section to this decision.  In any event, the
correspondence in no way can be viewed as an acknowledgment that the
accounts receivable represented City funds only.

For the reasons discussed above, we find that these accounts receivable
amounts represent federal grant funds for which the City may be held
accountable.  The effect of our decision is to ensure that accounts
receivable will be owed to the City rather than the grant program, and
that the City does not retain federal cash drawn on the basis of
advances to the delegate agencies of amounts that have not been
accounted for by allowable Head Start costs.

Were the accounts receivable reduced by delegate agency expenditures,
payments, or accounts payable?

The City argued that, if the Board did not accept the assertion that the
accounts receivable represent City funds only and not federal grant
funds, the disallowance should nevertheless be overturned since the
accounts receivable had been eliminated by three circumstances.  The
circumstances cited by the City were:

   * expenditures by delegate agencies that had not been recognized in
the amount of $502,580,

   * payments from delegate agencies against accounts receivable in the
amount of $118,639.88,

   * accounts payable owed delegate agencies in the amount of $786,752.
City's December 10, 1985, brief, pp. 7-8.

The City stated that during the year ended January 31, 1981 the delegate
agencies did not spend all the funds allocated for renovations and that
these unused funds were initially considered accounts receivable.  Id.,
p. 6.  The City alleged that the funds were subsequently spent during
the year ended January 31, 1982 which, the City argued, reduced the
accounts receivable by $502,580.  The City claimed that the auditors
mistakenly failed to report the expenditures during that year.

In addition, the City submitted documentation that it said substantiated
$118,639.88 in payments by delegate agencies against the accounts
receivable involved in this appeal.  See City's October 31, 1985 brief,
exhibit 2.

Finally, the City maintained that the accounts receivable owed by the
delegate agencies were more than accounted for in the accounts payable
owed to the delegate agencies.  City's(9)$% December 10, 1985 brief, p.
8.  It claimed that the accounts payable to the delegate agencies should
be credited against the accounts receivable, leaving no net accounts
receivable.  Thus, the City argued, even if it was accountable for
accounts receivable owed by delegate agencies, the accounts receivable
had been reduced to zero.

For the reasons discussed below, we conclude that the City has not shown
that these accounts receivable were eliminated because of any of the
circumstances alleged.

As argued by the Agency, grant funds must be accounted for on the basis
of audited financial statements produced by independent auditors.  The
documentation submitted by the City to substantiate its claims were
internal memoranda or other statements written by City employees without
any substantiating source documentation.  The documents can not be
accepted until they have been examined and verified by independent
auditors.

Further doubt is cast on the City's documentation by the fact that the
City had not submitted these alternative arguments until more than three
years had passed since the closing of the grant year in question and
more than one year after the start of this appeal.

In addition there was no mention of (1) the $502,580 in renovation costs
the City claimed were mistakenly unreported, or (2) the $118,639.88 in
claimed collections from delegate agencies in any certified audit
reports of Grantee's operation submitted since the apparent discovery of
the unreported renovation costs and the alleged collection of accounts
receivable.  In fact, the audit report for the year ended January 31,
1985 submitted by the City indicates that accounts receivable owed by
contract agencies had actually increased from $620,622 to $1,870,419.
Grantee's assertions, therefore, are contraticted by its own audit
report.

The City's assertion that delegate agencies have accounts payable in
greater amount than accounts receivable is also not availing to it.  As
long as the City allows accounts payable and accounts receivable to
stand on the books at the same time, the City presumably could pay off
the accounts payable while permitting the accounts receivable to remain
unpaid indefinitely.  The Agency's concern from the outset has been the
City's unwillingness to liquidate the accounts receivable by any means
available to it.  Furthermore, there appear to be discrepancies in the
substantiating source documentation for these accounts payable, and the
documents have not been accepted and verified by independent auditors.
We do not know, for example, whether the accounts payable in fact
represent allowable expenditures by delegate agencies (10) that
appropriately could be netted against accounts receivable even if the
City and the delegate agencies were agreeable to such a netting process.

Accordingly, for the reasons discussed above, we find that the city has
not shown that the accounts receivable were eliminated by virtue of any
of the three circumstances identified by the City.

The City's request that certain documents and related arguments not be
considered

During the Board's conference of May 6, 1985, the parties agreed to
exchange information that it was hoped would result in a resolution of
this matter through agreement between the parties.  Specifically, the
City stated that it would ask the auditors then examining the year ended
January 31, 1985 to show in their report, in a manner satisfactory to
the Agency, that the accounts receivable represented City, not federal,
funds.  Transcript, p. 43.

By letter of September 26, 1985 the Agency informed the Board that the
parties had been unable to resolve this appeal between themselves.  The
parties were given two additional opportunities to brief any issues they
considered relevant.

The City objected to the introduction into the record of unspecified
elements of the Agency's submissions made subsequent to settlement
discussions.  Its position was based on its assertion that the Agency's
submissions were the fruit of settlement discussions, were off the
record, outside the scope of the appeal and should not be considered by
the Board.  City's December 10, 1985 brief.

For the reasons discussed below, we find that there is no need to
exclude any document or argument submitted by the Agency.

First, the City was not specific as to which documents and arguments,
submitted by the Agency, it objected to.  Nor did the City cite any
legal authority in support of its objection.  In the face of a blanket
objection to the submission of the Agency, the Board is inclined to
reject the objection on that basis alone.  However, when looking at what
has been submitted since the settlement discussions, we find that
nothing submitted by the Agency should be excluded from the record.

The Agency submitted documents provided by the City during settlement
discussions and documents from the audit report for the year ended
January 31, 1985.  Agency's November 8, 1985 brief, exhibits AA and BB.
The two documents provided(11) during the settlement discussions make
certain assurances about the availability of City funds to cover the
disallowance.  The Agency submitted these documents to demonstrate why
it had not changed its position that the Head Start program still had
not received an infusion of cash equal to the amount of the accounts
receivable.  We fail to see how documents relating the City's ability to
pay the disallowance could in any way prejudice the City's position
regarding the accounts receivable.  If anything, these documents could
have been beneficial to the City's case if in fact they demonstrated an
infusion of cash.  As a consequence, we see no reason to exclude the
documents.

The Agency also submitted three pages of the audit report for the year
ended January 31, 1985 that demonstrated that the balance of accounts
receivable had increased since the year in question in this appeal.
These documents are damaging to the City's position.  The pages of the
report were submitted in response to the City's claim that the accounts
receivable had been eliminated and were clearly appropriate for the
Agency to put in the record for that purpose.  Regardless of whether any
drafts of the reports may have been exchanged as part of the settlement
negotiations, the audit report as a whole was submitted to the Agency on
October 17, 1985 after settlement discussions had ended as part of the
City's obligation to audit its program.  As such, pages of the report
can hardly be viewed as "privileged."

Clearly we do not have an instance where the Agency has attempted to
reveal a privileged negotiation position taken by the City during
settlement discussions.  The documentation exchanged during the
discussions was not prejudicial to the City's position as a whole and
the audit report at issue was submitted by the City in fulfillment of
its audit requirements.  The City cited no legal principle that would
bar consideration of any documents exchanged by the parties once formal
administrative review proceedings had resumed.

For the reasons discussed above, we find that the City has not shown why
any document or argument submitted by the Agency should be stricken from
the record.

Conclusion

For the foregoing reasons, we uphold in full the disallowance of
$620,622 representing the accounts receivable owed by the City's
delegate agencies as of the year ending January 31, 1982.  As we
previously held in Decision No. 679, the Agency has the authority to
require that a grantee account in cash for accounts receivable to the
extent that grant funds were received and not accounted(12) for through
allowable costs actually expended.  In the instant case the accounts
represent federal grant funds that have not been demonstrated to have
been used for allowable program expenditures by the delegate agencies
and that may no longer even be collectible from the delegate agencies.
Furthermore, the City has not demonstrated that the accounts receivable
have been eliminated or reduced by any of three circumstances it
identified.  Accordingly, the City must now account for these funds in
cash as it would in any other instance of disallowed funding.  Although
the Agency indicated in its November 8, 1985 brief (p. 5), that there
may be more than one method by which the City can satisfy its obligation
resulting from the disallowance, the use of any method other than the
return of the disallowed funds in cash would be solely at the discretion
of the Agency.  /1/ The accounts receivable were incurred:  (1) prior to
        the year ended January 31, 1980 $144,982), (2) during the year
ended January 31, 1980 ($38,750), and (3) during the year ended January
31, 1981 ($436, 890).         /2/ Part 74 of 45 CFR establishes
requirements for the administration of HHS grants and principles for
determining costs applicable to activities assisted by HHS grants.  45
CFR 74.1.  45 CFR 1301.10 specifically makes Part 74 applicable to Head
Start grants.         /3/ An equally fatal difficulty with the City's
argument is that the City has never even demonstrated the existence of
its two track system. The City has never demonstrated, for example, by
means of statements of independent auditors, 1) that a special account
existed throughout the entire period during which these accounts
receivable arose, 2) that the special account had been consistently
managed to retain federal grant funds drawn down by the City where the
delegate agencies had been unable to document allowable program
expenditures based on City advances, and 3) that the special account
contained at least an amount equal to the accumulated accounts
receivable for years through the year ending January 31, 1982.  /4/
Thus, even if the City could demonstrate conclusively that a special
account existed and contained all carried forward funds including funds
representing the accounts receivable, the Agency may still require that
an amount equal to the accounts receivable be returned in cash.  These
funds were provided to the City solely to be used for proper grant
expenditures, not to be retained in a special account, and the City has
not demonstrated that such expenditures have occurred for funds
reflected by the accounts receivable.  If, in fact, the funds have been
retained in a special account as the City alleged, the City should not
be under any hardship to return the funds to the Federal Government.