GAB Decision 771
July 30, 1986
Cincinnati-Hamilton County Community Action Agency;
Docket No. 86-38; Audit Control No. 05-55437
Stratton, Charles E.; Teitz, Alexander G. Settle, Norval D.
The Cincinnati-Hamilton County Community Action Agency (Grantee)
appealed a determination by the Office of Human Development Services
(Agency/OHDS) disallowing $36,301 in federal funds claimed by the
Grantee under its Head Start grant for the program year November 1, 1983
through October 31, 1984. /1/ Based on an independent audit for that
program year, the Agency found that the Grantee had exceeded its
authorized budget for two program accounts (PA 22 = $35,426 and PA 25 =
$875). The Agency asserted (and the Grantee did not dispute) that prior
approval was necessary before a grantee could incur a cost that would
cause it to exceed its established budget for a program account (in
effect revising its budget), and that the Grantee had not sought
approval for the costs until after completion of the audit. Further,
the Agency asserted that retroactive approval of expenditures is only
justified in certain limited instances and found that the documentation
ultimately submitted by the Grantee as justification for the
expenditures did not provide an adequate basis for retroactive approval
of those expenditures.
The Grantee conceded that it had not obtained prior approval for
these
expenditures, but asserted that the costs were for legitimate
program
expenditures and should be approved. Thus, the question before
us is
whether the Agency should have retroactively approved these
costs. For
the reasons discussed below, we conclude that the Agency did
not abuse
its discretion in refusing to grant retroactive approval.
Background
The Grantee, through five delegate agencies (subgrantees),
administers
Head Start programs in Cincinnati. On October 3, 1983, one
of those
subgrantees, the Cincinnati(8) Board of Education, requested
additional
funding from the Grantee to offset certain personnel expenses it
would
incur during the program year beginning November 1, 1983. Grantee
Reply
Brief, Ex. 1. The Grantee's finance division determined that
the
additional funding would benefit the Cincinnati Head Start program
and
recommended approval of the Board of Education's request. Grantee
Reply
Brief, Ex. 2. Although there is no exact date of its occurrence
in the
record, the Grantee obviously approved the request for
additional
funding. The program year closed on October 31, 1984, and
independent
auditors brought attention to the problem in their April 8, 1985,
report
to OHDS. The Grantee did not request federal funds for the
expenditure
until April 19, 1985. The Grantee's explanation for this
delay was that
it had not realized that it would be over-budget in the
program accounts
until its finance division began preparing workpapers for
the audit.
See Grantee Brief, p. 1; Grantee Reply Brief, p. 2.
The notice of disallowance informed the Grantee that the funds at
issue
were being disallowed because the Grantee had not obtained
prior
approval for their expenditure. In its briefing to the Board,
the
Grantee argued for what amounts to retroactive approval. In its
Brief
before the Board, the Agency maintained that, although it has
the
authority to retroactively approve expenditures, the facts of this
case
did not support retroactive approval.
Analysis
The Agency noted that the applicable program regulation (45 CFR
74.105(
a)(3)) requires a grantee to obtain prior approval for any
budget
revision which will "result in the need for additional funds."
The
Agency has interpreted this provision to apply in instances such as
this
where a grantee exceeds the authorized budget in a particular
program
account. See Agency Brief, pp. 2-3. The Grantee indicated
that, during
the period in issue, it interpreted the term "additional funds"
to refer
to funds exceeding the overall program budget and that prior
approval
was not required in this situation. See Grantee Reply Brief,
p. 3.
Although the Grantee argues that it misinterpreted the
regulatory
requirement, thus explaining its failure to seek prior approval
for
these expenditures, the Grantee does not now argue that the
Agency's
interpretation of the regulation is incorrect. On its face,
the
Agency's interpretation and application of its prior approval rule
to
the program accounts which make up a budget appears to be
reasonable.
Thus, the sole issue here is whether the Agency acted correctly
in
denying retroactive approval of the Grantee's claim.(3)
The Health and Human Services Grants Administration Manual
(Manual)
provides for retroactive approval of costs in certain circumstances.
As
applicable here, the Manual provides --
1. If a transaction requiring prior approval under the provisions of
an
award is questioned because the approval was not requested,
the
transaction may be approved retroactively. Retroactive approvals
may be
granted, however, only where:
a. The transaction would have been approved had the
organization
requested approval in advance;
b. The transaction is approved by an official who has the
authority
to grant such approvals (usually the grants officer or the
contracting
officer); and
c. The organization agrees to institute controls to ensure
that
prior approval requirements are met in the future.
Manual, Chapter 1-105-60, Sec. B.
We have applied the retroactive approval standard in the following
manner
--
Since the language of this provision is permissive, i.e., may,
it
does not preclude the Agency's consideration of all relevant
factors,
such as a grantee's fiscal management history, in deciding whether
or
not to ultimately grant retroactive approval where prior approval
was
required but not obtained. In making its determination on a request
for
retroactive approval, the Agency has considerable, but not
completely
unbounded, discretion. Although the Board will not interfere
when the
Agency appropriately exercises its discretion, the Agency must state
the
basis for its decision and may not deny retroactive approval based
on
unsubstantiated conclusions or on bases so insubstantial that
the
decision fairly can be described as capricious. (Citations
omitted)$%
Wayne County Intermediate School District (Michigan) Decision No.
466,
June 30, 1983, p. 2; Economic Opportunity Atlanta, Inc. Decision
No.
313, June 24, 1982, p. 3.
As we have indicated above, the Agency initially disallowed
the
expenditure based on the Grantee's failure to obtain prior approval
for
these costs. However, in its Brief the(4) Agency indicated that it
had
reviewed the Grantee's submissions to the Board to determine if
there
was a basis for retroactive approval of the costs. The
Agency
determined that the Grantee had not provided an explicit and
reasonable
basis for retroactive approval of the budget revisions. Our
review of
the Record convinces us that the Agency decision on this question
was
reasonable.
In its April 19, 1985 request for a budget revision, more than one
year
after its finance division recommended approval of the expenditure
and
over six months after the end of the budget period, the Grantee
stated
that it had exceeded the established budgets in PA 22 and PA 25,
in
pursuit of the "goals and objectives" set out in its Head
Start
application. See Agency Ex. C. The Grantee provided no
further
explanation of how this expenditure would be used. Before
us,
responding to the Agency's Brief, the Grantee submitted documentation
it
received from the subgrantee outlining its need for additional
funding
in which the subgrantee generally described the impact of a
proposed
funding reduction and noted that it was due to implement a
salary
increase which would require further modification of its
programs. The
Grantee also submitted a document from its finance
division recommending
approval of the subgrantee's request based on the
impending salary
increase the subgrantee was facing. See Grantee Reply
Brief, Exs. 1 and
2. This material is hardly more explicit in detailing
the need for
additional funding than the material initially rejected by the
Agency.
Thus, there is not sufficient evidence in the record that the
Grantee
has ever presented the Agency with more than a general request
for
additional funding based on a conclusory allegation of legitimacy of
the
costs and inadvertence of the overexpenditure. Given our standard
of
review for examining how OHDS applied its retroactive
approval
discretion, we conclude that OHDS was justified in not
granting
retroactive approval of these costs.
The record before us supports the Agency's position that the
Grantee's
stated basis for the additional funding was vague and
conclusory. As we
noted in Wayne County, supra, we will not interfere
with the Agency
discretion to grant retroactive approval where the facts
support a
finding that the Agency exercised that discretion in an
appropriate
manner. Here we conclude that the Agency could have
reasonably expected
the Grantee to provide a more detailed and substantive
explanation of
the need for additional funding. While we make no
specific
determination as to what would pass as adequate justification
for
retroactive approval, OHDS was not arbitrary in finding that there
was
insufficient information to allow OHDS to make an informed
determination
concerning this issue.(5)
Based on the parties' arguments and submissions, it does not appear
that
the Grantee had a prior history of program mismanagement. Rather,
what
appears to have occurred here was that the Grantee attempted to
attain
what may have been a legitimate program objective (and we again
note
that the Grantee has never fully explained the reason for
the
overexpenditure) without following the proper procedures. Failing,
by
its own admission, to get prior approval for the expenditure,
the
Grantee did not then provide sufficient explanation of its action
for
the Agency to justify retroactive approval of these costs. Thus,
we
conclude that the Agency had a rational basis for denying
retroactive
approval of these costs.
Conclusion
Based on the foregoing analysis, we uphold the Agency decision
disallowing
$36,301 claimed by the Grantee during the grant year
November 1, 1983 through
October 31, 1984. /1/ The Agency disallowed
a
total of $48,743 claimed by the
Grantee during this period. The
Grantee accepted the Agency's findings
regarding $12,442 of the
disallowance.