GAB Decision 758
June 13, 1986
Somerset County Head Start Program;
Docket No. 85-169;
ACN 02-55046
Ford, Cecilia S.; Settle, Norval D. Ballard, Judith A.
Somerset County Head Start Program (Grantee) appealed a decision by
the Office of Human Development Services (OHDS, Agency) disallowing
$15,152 charged to its Head Start grant for the program year (PY) ended
August 31, 1984. The disallowance consisted of two apparent debts owed
to Grantee, shown on Grantee's balance sheet as "account receivables" of
$10,129 and $3,799 (due from a Day Care account and from Grantee itself,
respectively), as well as a "fund balance adjustment" of $1,224 shown on
Grantee's statement of revenues and expenditures. For the reasons set
forth below, we uphold all but $197 of the disallowance.
$10,129 Account Receivable
OHDS determined, and Grantee at one point acknowledged, that the
$10,129
was an uncollectible loan made to Grantee's now-defunct Day
Care
program. (Respondent's Ex. N, p. 15) This determination was based
on
the fact that the $10,129 appeared as an account receivable from
Day
Care on Grantee's balance sheet for three successive years. If
this
determination were correct, the $10,129 would clearly be unallowable
as
a bad debt under the applicable cost principles. /1/
(2)
However, Grantee contended on appeal to the Board that the $10,129 was
not
an account receivable but merely a "plug figure" inserted on its
balance
sheet in order to make the fund balance (i.e., the excess of
revenues over
expenses) shown for PY 1984 more closely agree with the
prior year fund
balance. Grantee further maintained that the prior year
fund balance
was overstated by $10,129 because of an erroneous
determination by OHDS that
Grantee had failed to credit the Head Start
grant for PY 1977 with
reimbursement received from the United States
Department of Agriculture
(USDA) for food costs (under its Special Food
Service Cost Reimbursement
Program). If the fund balance was in fact
overstated, then Grantee
should not have to account to OHDS for the
amount by which it was overstated
regardless of how that amount was
represented on its balance sheet. As
explained in detail below, we
conclude that Grantee's fund balance was
overstated, but only by $197,
and not the full $10,129 alleged by
Grantee.
The record shows that in September 1980, the Agency did increase
the
Grantee's fund balance by $10,129 on the ground that funds in
that
amount should have been transferred from Grantee's Day Care account
to
its Head Start account and applied "to reduce nutrition
component
expenditures incurred by the Head Start program." (Grantee's brief
dated
December 19, 1985, Att. B) /2/ An earlier letter to OHDS from
Grantee's
auditor regarding PY 1977 indicated that Grantee received $69,340
from
USDA, of which it applied $18,000 to reduce Head Start food
costs,
leaving $9,932 chargeable to the Head Start grant for that line
item.
The letter further indicated that $51,340 of the USDA funds was
applied
to Grantee's Day Care program, which exceeded by $10,129 the $41,211
of
food costs incurred by that program. (Agency's Ex. L, p. 2) It
thus
appears that $9,932 of the USDA funds was properly transferred to
the
Head Start account from the Day Care account since $9,932 in food
costs
incurred by the Head Start program remained uncovered while USDA
funds
in excess of that amount remained in the Day Care account after the
full
food costs of that program had been covered. OHDS's decision to
require
Grantee to transfer the remaining $197 ($10,129 - $9,932) from the
Day
Care account to the Head Start account does not appear to be
justified
on this basis,(3) however, since the Head Start food costs were
fully
covered by the transfer of $9,932. /3/ Accordingly, we find that
the
Head Start fund balance was overstated by $197.
Grantee asserted, and the Agency agreed, that in accordance with
the
Agency's instructions, Grantee transferred $10,129 into its Head
Start
account in December 1980. This does not affect our finding with
respect
to the fund balance, however, since Grantee did not allege that
the
transferred funds were used to reduce the Head Start food costs
in
question here. (The transferred funds might have been applied to
food
costs for another year, for example.) Moreover, Grantee stated that
the
transferred funds came from its USDA account (recently set up at
OHDS's
request to avoid future accounting problems) and that the Day
Care
account owed $10,129 to the USDA account. Since the Day Care
program
was terminated in 1979, the fact that USDA funds still
remained
available, in the form of the unliquidated Day Care debt, following
the
transfer most likely means that $10,129 in food costs incurred by
Head
Start were reimbursed by USDA but never covered with cash from the
USDA
account.
Grantee also contended, however, that during PY 1977 it made a
separate
payment of $3,847 of USDA funds to the Head Start account in
addition to
the $18,000 previously mentioned, leaving net food costs incurred
by
Head Start of $6,085 rather than $9,932. (Grantee's letter dated
April
17, 1986, enclosure, p. 2) If true, only $6,085 rather than $9,932
was
properly transferred to the Head Start account to reduce food costs,
in
which case the fund balance was overstated by $3,847 in addition to
the
$197 discussed above. However, the documentation submitted by
Grantee
in support of this contention does not clearly establish that the
$3,847
was not a part of the $18,000 paid to the Head Start account.
If, as
indicated by the documentation, the $3,847 was received from USDA
in
October 1976, the application of this amount to the Head Start
account
would have been reflected in the letter to OHDS mentioned above,
written
in 1980, which showed that only $18,000 of USDA funds had been
applied
to reduce Head Start food costs.(4)
Grantee also argued that, notwithstanding its auditor's 1980 letter,
the
full amount of USDA funds was applied to all food costs incurred by
it
before the food costs were allocated to the Day Care program and
the
Head Start program, thus disputing the OHDS determination that
Head
Start food costs had not been covered by USDA funds to the
fullest
extent possible. Grantee provided evidence that this procedure
was
followed for PY 1975. (Grantee's brief dated December 19, 1985,
Att.
C) However, with respect to PY 1977, the record merely specifies
the
basis (a 2:1 ratio) on which certain joint expenses of the Head
Start
program and the Day Care program were allocated, and does not
contain
any indication that USDA reimbursements were deducted from total
food
costs before these costs were allocated to Head Start and Day
Care.
(Grantee's letter dated April 17, 1986, Att. I)
Grantee also appeared to allege that no additional USDA funds (beyond
the
amounts paid before OHDS increased the PY 1977 fund balance) were
allocable
to the Head Start grant because of a difference in the
"contract periods" for
the Head Start grant, the Day Care grant, and the
USDA funding.
(Grantee's letter dated April 17, 1986, enclosure, p. 3)
However, Grantee did
not specifically indicate how these different time
periods affected the costs
in question. Grantee also referred to the
fact that USDA funding was
based on the attendance rates at its various
program sites (Id.), but
similarly failed to explain how this was
relevant. In addition, Grantee
indicated that a relevant consideration
was whether food costs incurred in
excess of the amount reimbursed by
USDA were reasonable and necessary (Id.);
however, since USDA funding
here covered the food costs incurred, this is not
in fact germane.
Finally, Grantee noted that only $4,896 in food costs was
charged to
Head Start for PY 1978. (Id.) Assuming that Grantee's point
is that it
compensated for any excess food costs charged to Head Start in the
prior
year by significantly lower charges in the next year, we fail to see
how
this affects this case.
Grantee also argued in the alternative that the $10,129 should be
offset
against a larger amount due from Head Start to the Day Care
account.
(Grantee's brief dated December 19, 1985, Att. H) If the latter
debt
still existed at the time of the 1980 OHDS decision increasing the
fund
balance for Head Start, perhaps Grantee should have made this offset
as
part of its cash accounting. However, such a transaction would
not
affect the finding that Grantee had improperly charged Head Start
for
food costs which had been reimbursed by USDA.
Although Grantee thus failed to establish that the fund balance for
PY
1977 was overstated by more than $197 of the $10,129 in dispute,
if
Grantee could account for all federal funds received in allowable
costs
incurred and paid or in cash(5) on hand, the necessary implication
would
be that the $10,129 account receivable did not represent federal
funds,
and the disallowance of this amount would not be warranted. On
the
other hand, to the extent that federal funds received cannot
be
accounted for, the disallowance is warranted since the use of
grant
funds for other than the purposes for which awarded (in this case,
Head
Start activities) is prohibited by law. 31 U.S.C. 628. (See
also,
Economic Opportunity Council of Suffolk, Inc., Decision No. 679,
August
12, 1985)
In response to the Board's inquiry, Grantee indicated that its
allowable
costs for PY 1985 /4/ exceeded the amount of grant funds
received.
However, since Grantee reported costs on an accrual rather than a
cash
basis, federal cash presumably reserved for payment of accrued
expenses
identified by Grantee as allowable costs might in fact have been
applied
elsewhere. Thus, the comparison of allowable costs with grant
funds
received does not clearly account for all such funds. Instead, in
view
of Grantee's use of the accrual method of accounting, to establish
that
all grant funds were properly used, Grantee would need to show
that
total cash drawn down under its Head Start grant equalled the total
of
allowable costs incurred and paid for that grant plus any cash on
hand
(or other liquid assets). Absent any such showing, we must uphold
the
disallownce expect for the $197 by which we previously determined
that
the fund balance was overstated. The $197 is allowable
notwithstanding
the fact that Grantee has not established that it can account
for all
grant funds since we have determined that it was never properly
included
in Grantee's Head Start fund balance.
$3,799 Account Receivable
Grantee stated that it could not verify whether this amount in
fact
represented an account receivable. It appeared to suggest that
this
amount, like the $10,129 discussed above, was shown as
account
receivable only to compensate for some problem involving
USDA
reimbursement for food costs. (Grantee's letter dated April 17,
1986,
enclosure, p. 6) Since there is no evidence that the fund balance
was
overstated by more than the $197 indicated above as a result of
such
problems, however, there is no basis for overturning the
Agency's
determination that the $3,799 is unallowable as a bad debt.
Moreover,
as indicated by the discussion above, the(6) funds in question
are
unallowable on the additional ground that Grantee is unable to
account
for them in allowable costs incurred and paid or in cash on hand.
We note that Grantee stated that it "has proposed to the Regional
Office
to liquidate $3,799 with additional in-kind contributions."
(Grantee's
letter dated April 17, 1986, enclosure, p. 6) It appears, however,
that
the Agency has already rejected Grantee's proposal. In its brief
dated
December 20, 1985, OHDS cited the Board's holding in a prior case
that
OHDS correctly refused to accept additional in-kind contributions
in
lieu of repayment in cash of an amount disallowed as a bad
debt.
(Ventura County Commission on Human Concerns and Community
Development,
Decision No. 359, November 30, 1982) OHDS concluded that Grantee
must
therefore reimburse it for the amount in question. Since Grantee
has
not distinguished its case from the one cited by the Agency, we
conclude
that Grantee's request was properly denied here as well.
$1,224 Fund Balance Adjustment
Grantee's Statement of Revenues and Expenses for PY 1984 shows
$1,224
deducted from the fund balance as an "Adjustment." The auditor's
notes
state that "(the) Fund Balance difference of $1,224 represents
prior
auditor adjustments." (OHDS Ex. I, pp. 11, 15) Grantee later
explained
that the purpose of this adjustment was to make the fund balance
more
closely agree with the prior year fund balance. Grantee conceded
that
the $1,224 was unallowable, and advised the Agency, which expressed
no
objection, that it would transfer $1,224 in cash to its Head
Start
account from its non-federal account. Nevertheless, Grantee
indicated
in its last submission to the Board that it had transferred only
$1,000
in cash to offset this adjustment. (Grantee's letter dated April
17,
1986, enclosure, p. 6) Since Grantee did not argue that there was
any
basis for non-payment of the remaining $224, we uphold the
disallowance
to the extent that the matter has not been resolved by payment
of the
entire amount in cash.
Conclusion
For the foregoing reasons, we sustain the disallowance except for $197
by
which we find the fund balance for the Head Start(7) grant was
overstated and
except for any amount which the Agency verifies has
already been paid to
Grantee's Head Start account in non-federal
funds.
/1/ OHDS cited Attachment B
to OMB Circular A-122, which is
applicable to non-profit organizations
pursuant to 45 CFR 74.174(a), and
provides at Paragraph 2: Bad debts,
including losses (whether actual or
estimated) arising from uncollectible
accounts and other claims . . .
are unallowable. It appears that Grantee may
be a local government
subject to OMB Circular A-87 rather than a non-profit
organization as
indicated by OHDS. OMB Circular A-87, Attachment B,
D. 1., is a
comparable provision, however. Moreover, the OHD Grants
Administration
Manual (published at 42 Fed. Reg. 21046, April 22, 1977) also
contains a
similar provision at p.
1-7-5. /2/ Although this action
was
tantamount to a disallowance, OHDS did not advise Grantee of its
appeal
rights. Grantee has had ample opportunity to contest that
disallowance
in the context of the instant proceeding,
however. /3/ Although
there
might conceivably be some other basis for the transfer of the
remaining $197
to the Head Start account, this matter was not
specifically addressed by the
parties. If, for example, the $197 was
reimbursement for food costs
charged in a prior program year, transfer
of this amount to the Head Start
account would have been justified.
/4/ The Board asked for information
pertaining to PY 1985 rather than PY
1984 since $12,407 of unobligated funds
for PY 1984 was reprogrammed for
use in the later year and must be accounted
for. (OHDS Ex. N, p. 16)