New Mexico State Agency on Aging, DAB No. 790 (1986)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT:  New Mexico State Agency on Aging

Docket No. 86-55
Decision No. 790

DATE:  September 22, 1986

DECISION

The New Mexico State Agency on Aging (State) appealed a determination by
the Office of Human Development Services (OHDS) to disallow $133,970 in
funds awarded to the State for fiscal year (FY) 1984 under Title III of
the Older Americans Act of 1965 as amended, 42 U.S.C. 3001 et seq.  The
basis for the disallowance was the State's failure to obligate these
funds by the end of FY 1984 on September 30, 1984.  For the reasons
discussed below, we uphold the disallowance.

I.  The Obligation Requirement

Regulations applying to the Older Americans Program provide:

     Except as provided in paragraph (b) of this section [concerning the
     "reallotment" of funding], the State agency must obligate any funds
     received under this part during the fiscal year in which they are
     allotted.

45 CFR 1321.197(a).

Obligation has been characterized as "a definite commitment which
creates a legal liability of the Government for the payment of
appropriated funds for goods and services ordered or received." Decision
of the U.S. Comptroller General, B-116795, June 18, 1954.  The
Comptroller Genera! "has generally avoided a universally applicable
legal definition of the term 'obligation,' and has instead analyzed the
nature of the particular transaction at issue to determine whether an
obligation has been incurred." Decision of the U.S.  Comptroller
General, B-192282, April 18, 1979.

The State referred to a general definition of "obligations" found in 45
CFR 74.71, which pertains to financial reporting requirements for
Department grantees.  As such, the regulation does not specifically
implement the program requirement in 45 CFR 1321.197 that funds be
obligated by the end of the fiscal year.  However, the definition is
consistent with the.- 2 -

Comptroller General decisions cited above and may provide some general
guidance to determining whether there has been an obligation:

     "Obligations" are the amounts of orders placed, contracts and
     subgrants awarded, services received, and similar transactions
     during a given period, which will require payment during the same
     or a future period.

45 CFR 74.71.  The Board has previously concluded that the key issue in
determining whether a state timely obligated funds as required by 45 CFR
1321.197 is whether there was, during the fiscal year, a definite
commitment requiring payment.  See Texas Department on Aging, Decision
No. 571, September 12, 1984, pp. 4-5.

II.  The Facts of this Case

The State entered into a contract with the New Mexico District II Area
on Aging, Inc. (District II) to provide services under the Older
Americans Act.  The contract was signed by the State on July 3, 1984 and
by District II on June 29, 1984.  State's Ex. 5a.  The contract
incorporated by reference a Notification of Grant Award (NGA), which had
several sections, including an "approved budget" and a "computation of
grant." State's Ex.  5b. 1/  The parties agreed that the NGA's "approved
budget" of $2,428,983 ($1,205,332 federal share) included $133,970 in
costs to which the funds in dispute were ultimately applied.  The
"computation of grant" on this NGA, however, listed under "[n]ew
obligational authority herein awarded" only $368,353 in federal funds;
the parties agreed that this amount did not include the $133,970 in
dispute here.

The State issued amendments to the original contract to "release
additional federal funds as the funds [became] available." State's
Brief, p. 4.  Amendment No. 2 to the contract, OHDS' Exhibit 2, was
signed by the State on September 28, 1986, only two days prior to the
end of FY 1984.  Amendment No. 3 to the contract "released" the $133,970
in federal funds which are in dispute, according to the State.  State's
Ex. 5c.  Amendment No. 3 was signed by representatives of the State and
of District II on October 30 and October 31,

 

1/   The blanks on the NGA form which were apparently intended to
describe the time period to which the budget applied were not filled
out.  However, two contract amendments, State's Exhibit 5c and OHDS'
Exhibit 2, describe the precisely identical budget as pertaining to the
period July 1, 1984 to June 1, 1985.

        - 3 -

1984, respectively, after the end of FY 1984.  Amendment Nos.  2 and 3
also were each accompanied by a Notification of Grant Award, the same
basic NGA form as that incorporated into the original contract. 2/  The
NGA for Amendment Nos. 2 and 3 repeated the same entries under the
category "approved budget" as that for the NGA to the original contract.
Under the "computation of grant" category, the NGA to Amendment No. 3
listed the $133,970 that is in dispute as the federal share on the line
for "[n]ew obligational authority herein awarded." State's Ex. 5c.

Although Amendment No. 3 was signed on October 30 and 31, the State
maintained that it should be considered effective before the end of the
fiscal year.  State's Exhibit 6, an October 29, 1984 memorandum from the
State Agency on Aging to the State Division of Finance and
Administration (DFA), was signed by the Secretary of DFA next to the
notation "Waiver Approved." The four-sentence memorandum requested a
"waiver on the effective date" of the contract because "[a]llocation of
these funds in this manner had been planned for several months but no
contract was executed." The memorandum further explained: "The effective
date of the contract must be September 30, 1984 in order to avoid the
loss of federal funds in the amount of $134,000."

III.  Analysis

In maintaining that the $133,970 was obligated by the State before the
close of FY 1984, the State presented the following arguments.  First,
the State maintained that the State had "waived" the October date and
retroactively established the amendment date to be September 30, 1984.
Second, the State argued that the NGA incorporated into the original
contract, executed before the close of the fiscal year, obligated the
funds.  The State also argued generally that the disallowance was
inequitable.  We discuss these arguments in turn below.

 

 


2/   Only the original contract stated that the attached NGA was
"incorporated by reference." State's Ex. 5a, p. 2 of the contract.
However, Contract Amendments Nos. 2 and 3 and their attached NGA's
appear in an identical format, indicating that these NGA's were part of
the contract amendments to which they were appended.  OHDS' Ex. 2;
State's Ex. 5c.  Further, the parties in their briefs assumed that the
two later NGA's were also incorporated by reference.

        - 4 -

A.   The State could not retroactively change the date of obligation.

In its notice of appeal, the State argued that the Contract Amendment
No. 3, which released the $133,970 in dispute to District II, should be
considered as "effective" on September 30, 1984 because of a "waiver" by
the State Department of Finance and Administration.  Although the State
did not continue to argue this point in its brief, we respond briefly to
the argument below. 3/

To accept a state's argument that it may "waive" the effective date of a
contract in order to claim that funds were obligated by a certain date
would render meaningless the regulatory requirement that funds be
obligated by the end of the fiscal year in which they were awarded.  The
State's "waiver" does not alter the uncontroverted fact that Amendment
No. 3 to the contract was signed by both parties at the end of October
1984, after the end of the fiscal year.  We therefore conclude that we
cannot accept the "waiver" of the contract's signature date as evidence
that the funds were obligated in a timely manner.

B.  The Notification of Grant Award here did not constitute an
 obligation of funds.

The State alternatively argued that the NGA incorporated into the
original contract obligated the $133,970 in dispute.  The State noted
that the Board has previously recognized that a notification of grant
award may constitute an obligation of

 


3/   The State in its brief emphasized that before March 1986, including
the time when the notice of appeal was filed, the State was not
represented by counsel.  The State observed that the record indicates
the State's apparent admission that the funds in dispute were not
"obligated" during the fiscal year, but explained that this apparent
admission stemmed from a misunderstanding of the technical meaning of
obligation of funds.  The State urged the Board to "look beyond" the
statement that the funds were not "obligated" during the fiscal year.
State's Brief, pp. 8-10.

     We find that we do not need to consider whether the State should be
     bound by its earlier statements since, as explained in the
     decision, we have analyzed the parties' complete arguments and
     appeal files and have concluded on the record that the funds were
     not obligated by the end of FY 1984.

        - 5 -

funds, citing Montana Department of Social and Rehabilitation Services,
Decision No. 549, July 3, 1984.

The State is correct that an NGA may constitute an obligation of funds.
In any particular case, however, the Board would clearly need to analyze
how the NGA in question is worded and the context in which it operates
in evaluating whether the NGA was a definite commitment that constituted
an obligation of funds.

In the present appeal, the State would have a stronger case if the
"approved budget" section of the NGA to the original contract, which
included the $133,970, stood alone as the sole component of the NGA.
Even in such a case, however, the State would need to demonstrate how
approval of a budget constituted a definite commitment of the State to
pay the full budgeted amount out of a specific year's funds.  The State
presented only a conclusory argument, and no evidence, to support a
conclusion that budget approval constituted such a commitment.

In any event, the "approved budget" section of the NGA here obviously
must be considered in conjunction with the remainder of that form,
including the "computation of grant" section which appears directly
below it.  The name and wording of the section itself indicates that
this was the part of the NGA form intended to describe the amount of
funding which was granted to District II.

Line 8 of the "computation of grant" section reads:  "Federal/State
Shares will be Comprised of:" and then lists possible sources of federal
and state shares.  Line 8(b) describes the "carry over" from the
previous period and line 8(c) describes the "new obligational authority
herein awarded," listing both the federal and state shares of the award.
The $133,970 in dispute is clearly listed as the federal share on line
8(c) of the NGA appended to Contract Amendment No. 3, which we have
concluded was not executed prior to the end of FY 1984. 4/ This NGA is
identified as a

 

4/   The "computation of grant" section also includes on line 1
("Estimated total cost") the $2,428,983 which is the total budgeted
amount and on line 6 ("Federal share of net cost") the $1,205,332 which
appears on the budget as the total federal share.  A careful reading of
the "Remarks" section of the NGA indicates, however, that the $2,428,983
is only an "estimated net project cost" and that the $1,205,332 is a
"ceiling" on the federal share and is subject to certain conditions
(i.e., satisfactory progress, adequate justification, and availability
of funds).  State's Ex. 5b.  - 6 -

"Revision of Earlier Grant." Since the only change is on line 8(c), the
logical conclusion is that the $133,970 was not part of the funds
granted by the original NGA.

Our conclusion that line 8 of the NGA's "computation of grant" section
obligated funds, rather than the "approved budget" section, is further
reinforced by the contract into which the NGA was incorporated by
reference.  OHDS argued that the NGA was by nature "ambiguous" and
"could not control the more specific language of the contract." OHDS'
Brief, p. 6.  We do not specifically decide whether the language of the
contract and its amendments superseded the NGA's which they
incorporated, but nonetheless find it highly significant that the amount
of funding authorized by the contract and each of the amendments
corresponded precisely with the sum of money described on line 8(c) in
the "computation of grant" section for each of the NGA's and was only
some part of the funds listed as the "approved budget." The original
contract is a 16-page formal document which includes an extensive
description of the duties of District II, as well as the specific
amounts of funding released by the State under each relevant statutory
provision.  State's Ex. 5a.  Each of the contract amendments also
described the monies released under each statutory provision.  Read in
conjunction with the NGA's, the contracts clearly support the conclusion
that the amount of federal funds obligated was not the total federal
share of the approved budget but was only the amount of federal funds
"awarded" on line 8 of the "computation of grant" section of the NGA.

The State interpreted the relationship between the contract and the NGA
differently, arguing that the NGA to the original contract was itself a
"contract and subgrant awarded," one of the examples of an "obligation"
as defined in 45 CFR 74.71.  The State further argued that by the NGA
the State was "contractually bound to fulfill the entire amount of grant
awarded thereunder," referring to the total sum specified in the
"approved budget" portion of the NGA.  State's Brief, pp. 5-6.

However, the State did not seek to demonstrate how either the contract
or the NGA contractually bound the State to eventually spend the
disputed sum because of its inclusion in the "approved budget" amount.
The contract itself was not silent on the question of what money had to
be spent to satisfy the contract, but instead listed under each
statutory provision the dollar amount which the State "shall pay the
Contractor . . . for the provision of services. . . ." Those dollar
amounts did not reflect the full amount of federal funds described by
the "approved budget" part of the NGA, as we have explained above, but
rather corresponded precisely

        - 7 -

with the smaller amount described by line 8(c) of the "computation of
grant" part of the NGA.

In sum, we conclude that line 8 of the "computation of grant" section of
the NGA described the funding which represented a definite commitment of
the State and thus an obligation, as also reflected in the contracts.
The State was not legally bound to pay all amounts listed on the
approved budget part of the NGA.

The State relied upon two Board decisions in arguing that the NGA
incorporated into the original contract constituted an obligation of the
$133,970.  We find the circumstances of both of those decisions to be
distinguishable from the present appeal.

The State first argued that this case was analogous to that decided in
Montana Department of Social and Rehabilitation Services, Decision No.
549, July 3, 1984.  The Board found in that decision that the language
of the NGA's at issue there "unquestionably binds the State agency to
turn over funds" to the local agency and "the award language does not
appear to be susceptible to any other interpretation." Montana, p. 4
(footnote omitted).  As we have discussed above, the language of the NGA
here is susceptible of another interpretation, i.e., that the State's
commitment extended only to funds listed under line 8 of the
"computation of grant" section, not to the full budgeted amount. 5/

The State also cited Texas Department on Aging, Decision No. 571,
September 12, 1984, for the proposition that a "clear intent" to
obligate funds may exist even in the absence of a signed document to
obligate the funds.  The State argued that such a clear intent existed
in the present case.  State's Brief, pp. 7-8.  The situation considered
in Texas was very different from the present case, however.  In Texas, a
State agency official, authorized to grant funds, had sent a letter to
the subgrantee during the fiscal year approving the use of the funds in
question as a carryover.  The Board found that this constituted an
obligation because preceding events, including approval of a method of
allocating funds and written

 

5/   The Agency in that case did not even dispute that the NGA there
might per se constitute a binding commitment of funding, but instead
objected to the State's practice of awarding the funds by the NGA to a
lead agency, which then would have to redistribute the funds to the
actual entity which would provide the program services.  In the present
case, by contrast, there is no issue of a redistribution of funds by the
contractor.  - 8 -

communications between the State and the subgrantee, eliminated any
ambiguity about whether the approval meant that Texas was legally bound
to pay the funds in question.  While the Board noted that the events
made it clear what that State's intent was with regard to the funds, the
Board also noted that mere intent is insufficient to create an
obligation.

Here, the State said that it had been "planning" to obligate the funds
earlier, but the State's own document indicates that this was merely a
general intent to obligate all federal funds and that the choice to
provide the $133,970 in funds to District II was made subsequent to the
end of the fiscal year (based on the somewhat arbitrary factor that that
district was geographically closest to the State office so the contract
amendment could be processed relatively quickly).  State's Ex.  10.

We therefore conclude that the State's reliance on Montana and Texas is
misplaced.

C.  The disallowance should not be reversed on equitable grounds.

In the last part of its brief, the State argued that for the Board to
uphold the disallowance in this appeal would be "inequitable and
contrary to the goals of administrative law." State's Brief, p. 10.  One
basis for this was the explanation that during 1984 there was a major
reorganization of the State government which streamlined the contracting
process and caused a temporary disruption which delayed the
"formalizing" of Contract Amendment No. 3.  The State also argued that
the disallowance would work a particular hardship on the State's program
in light of declining State revenues and recent budget cuts.  State's
Brief, pp. 10-11.

The Board's power is expressly limited by Department regulations, which
provide that we are "bound by all applicable laws and regulations." 45
CFR 16.14.  The Board has also concluded in previous decisions that it
is not empowered to award grants.  Here, we have found that the State
did not meet the regulatory requirement to obligate the $133,970 during
FY 1984.

We also note that the failure to obligate the funds in a timely manner
appears to have been caused by the State's own delay, as reflected in
the State's admission that "[a]llocation of these funds . . . had been
planned for several months but no contract was executed."  State's Ex.6.
The significance of the state's point that the contracting .
- 9 -

process was disrupted is further weakened by the fact that Contract
Amendment No. 2 was signed on September 28, 1986, just prior to the
close of the fiscal year.  It would appear to have been a simple matter
to have included the $133,970 in that amendment, rather than executing a
separate amendment at a later date.

The State's apparent implication that the obligation requirement is an
overly technical one is not a proposition we can accept.  The purpose
behind the requirement is to enable the federal Commissioner on Aging to
fulfill a statutory duty to timely reallot to other states any amount
which was allotted to a state which that state has not used for the
intended purpose.  Section 304(b) of the Older Americans Act; see 45
Fed. Reg. 21145 (March 31, 1980).  Thus, OHDS was reasonable in holding
the State to the requirement.

Conclusion

For the reasons stated above, we uphold the disallowance.


 ________________________________ Cecilia Sparks Ford

 ________________________________ Norval D.(John) Settle

 ________________________________ Judith A. Ballard Presiding
 Board