Project Bravo, Inc., DAB No. 925 (1987)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT:  Project Bravo, Inc.   

Docket No. 87-148
Audit Control No. A-06-87-07081
Decision No. 925

DATE: December 11, 1987

DECISION

Project Bravo, Inc. (Grantee) appealed a decision by the Office of Human
Development Services (OHDS/Agency) disallowing $18,402 in federal funds
claimed by the Grantee in connection with its Head Start Program.  The
disallowance was based on an audit for the program year ending August
31, 1986, the last year in which the Grantee's Head Start program was
federally funded.  The auditors found that the Grantee, in violation of
applicable cost principles, had used federal funds to pay $1,108 in
penalties owed to the Texas Employment Commission for late payment of
taxes. 1/  Additionally, the audit revealed that the Grantee had an
unobligated fund balance of $13,516.  Since the Grantee's federal
funding was being terminated, this amount constituted a debt to be
refunded to the Government.  The auditors also alleged that the Grantee
did not adequately document $3,778 in cash disbursements.  However,
during the course of this appeal the Agency reviewed and accepted
documentation submitted by the Grantee regarding the cash disbursements,
thereby resolving that issue.  Accordingly, the amount of federal funds
now in dispute is $14,624.  The Grantee did not challenge the facts as
presented by the Agency.  Rather, the Grantee asked that it be allowed
to repay the entire disallowance with in-kind services.

The Grantee effectively presented two related issues for us to consider.
The expressed issue essentially was whether the alleged in-kind services
can be used to repay an acknowledged debt.  The other issue, never
articulated as such by the Grantee, but implied in the argument that it
received free services of employees, was whether the Grantee might now
claim additional funding (as a kind of offset against the debt) for
costs represented by those employees' previously unfunded efforts.

This appeal was heard under the Board's expedited procedures. See 45
C.F.R. 16.12.  The record consists of briefs and evidence submitted by
the parties as well as the taped proceedings of a conference call
conducted on November 23, 1987.  Based on the record and the following
analysis, we find that the disallowance may not be repaid with in-kind
services.

Analysis

I.  In-Kind Contributions Generally

In-kind contributions are part of the overall funding mechanism for Head
Start program costs.  Subject to exceptions not relevant here, a
federally sponsored Head Start program receives 80 percent of its
allowable costs from the Federal Government, while the grantee is
responsible for matching that amount with a 20 percent non-federal share
of costs.  See 45 C.F.R. 1301.20. Generally, the non-federal share can
consist of cash or in-kind contributions -- , the grantee's non-cash
contributions to the costs of the program, and certain contributions
(property or services) from non-federal third parties.  45 C.F.R. 74.51.

Thus, in-kind services provide one method by which a grantee may satisfy
the non-federal matching requirement of a Head Start grant.  In-kind
services in excess of a grantee's matching requirement do not reduce or
increase the amount of federal funds to which a grantee is entitled.
Rather, excess in-kind services would increase the resources available
to the Head Start program.

II.  In-Kind Services as a Repayment Mechanism

The Grantee asked that it be allowed to repay the unobligated balance,
as well as the tax-related part of this disallowance, with in-kind
contributions.  The Grantee maintained that, due to the financial
practices of previous administrations, it did not have unrestricted
funds with which it could repay this debt at the close of the 1986
program year.  The Grantee indicated that although it was now attempting
to raise funding through private donations, it was not optimistic
concerning its chances of repaying the debt in this manner.  The Grantee
noted that during its most recent year of operation as a federal Grantee
its program was run by several employees who acted in more than one
capacity and did not charge the program for their services.  The Grantee
estimated a savings of $61,419 from these actions and asked that the
Board "waive" the disallowance by offsetting this amount against the
$14,624 it undisputedly owes the federal government.  The Agency argued
that applicable law and the circumstances of this case do not permit the
Grantee to repay any aspect of this disallowance with in-kind services.
We agree.

The Office of Human Development, Grants Administration Manual (GAM),
Chapter I (F) specifies three methods for disposing of unobligated fund
balances.  The Agency may treat an unobligated balance as --

            1.  an offset from a continuation award for the current or
                succeeding budget period;

            2.  a carryover for the current budget period if prior
                approval is requested and granted;

            3.  a refund to the federal government if the unobligated
                balance is cash which has already been transferred to
                the grantee.

See OHDS Brief, pp. 1-2; and OHDS Ex. A.

OHDS indicated that since the Grantee's federal funding was terminated
after the 1986 program year, the Agency was precluded from doing
anything other than requesting a refund of the Grantee's unobligated
balance.  Further, grant closeout regulations specifically provide that
--

            The grantee shall immediately refund or otherwise dispose
            of, in accordance with instructions from HHS, any
            unobligated balance of cash advanced to the grantee.

45 C.F.R 74.111(b)(2)

There is no support in the applicable program guidelines or regulations
for the Grantee's request to repay the unobligated fund balance through
the value represented by in-kind services. Under the GAM, since the
Grantee is no longer a recipient of federal funding (so that carry-over
and offset are not possible), its only alternative is to refund the
unobligated fund balance in cash.

The Grantee could avoid this disallowance only by documenting allowable,
allocable costs in the amount disallowed that had not been claimed
previously for federal funding.  The items at issue here--an unobligated
fund balance and a tax-related penalty--are not allowable Head Start
costs.  The expenditure for the tax-related penalty is specified to be
unallowable by the cost principles in OMB Circular A-122, Attachment B,
Paragraph 14. The unobligated fund balance is not a cost at all, but
represents an amount of authorized federal funding which the Grantee had
already received and which remained unobligated at the end of the grant.

The Grantee clearly envisions substituting in-kind services for
allowable, allocable costs.  However, this is inconsistent with the
concept of in-kind contributions--which are used to make up the
Grantee's non-federal share but which, by their nature, are not properly
regarded as obligations chargable to federal funds. Moreover, in-kind
contributions used to make up the non-federal share must be such that if
the grantee had expended federal funds to obtain these services, the
expenditures would have been proper.  Here, there in nothing in the
record to show that these services have the value asserted by the
Grantee or that they even would be acceptable under the regulations as
in-kind contributions for the grant year in question.  See 45 C.F.R.
74.50-57.

Finally, it is well-established that a disallowance based on the
unallowable expenditure of federal funds must result in the reduction of
the amount of federal funds used by a grantee. Where an unallowable
expenditure was financed with federal funds, as was the case here with
the tax-related penalty, a grantee must reimburse the Agency with cash
from non-federal sources.  See Ventura County Commission on Human
Concerns and Community Development, DGAB No. 359 (1982), p. 2.

III.    The In-Kind Services as Representing Previously Unclaimed Costs.

As is clear from the analysis above, both the applicable rules and the
fundamental nature of in-kind contributions would not permit the
Grantee's alleged in-kind contributions to repay the debt involved here.
Thus, the most reasonable translation of the Grantee's position is that
the Grantee is actually claiming costs (i.e., the costs of the
previously unreimbursed employees' extra efforts) which it did not
previously claim, and asking that this claim be offset against the
Grantee's debt.  For the reasons below, we cannot find for the Grantee
on this basis.

Although the Grantee claimed to have saved more than $61,000 through the
extra efforts of certain employees functioning in several administrative
capacities, the Grantee's claim is undocumented.  In essence the Grantee
claims that putative savings from the way it operated its program ought
to be treated as allowable costs.  In order to be allowable, a cost must
be adequately documented.  See OMB Circular A-122, Attachment A,
Paragraph A, 2e.  The Grantee provided no supporting documentation or
budget materials for these alleged costs. Moreover, the record provides
no support for a finding that there is an outstanding debt to the
employees or any other expenditure that ought to be charged to grant
funds arising out of the services in question.  Thus, these alleged
costs would not be eligible for federal reimbursement.

Conclusion

For the reasons discussed above we uphold the disallowance and find that
the disallowance of $14,624 may not be repaid with in-kind
contributions. 2/

 


                            ________________________________ Cecilia
                            Sparks Ford


                            ________________________________ Alexander
                            G. Teitz


                            ________________________________ Norval D.
                            (John) Settle Presiding Board Member

 


1.     See Office of Management and Budget Circular A-122, "Cost
Principles for Nonprofit Organizations" 45 Fed. Reg. 46022, July 8,
1980,  Attachment B, Paragraph 14, which is made applicable to the Head
Start program by 45 C.F.R. 74.174(a).

2.     We note that the Agency may be able to allow the Grantee to repay
this debt over time, or to establish some other repayment plan, under
authority of the Federal Claims Collection Act.  See 31 U.S.C. 951 et
seq.