DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: Virgin Islands Department DATE: June 29, 1989 of Justice
Docket No. 88-244 Audit Control No. A-02-87-087310 Decision
No. 1067
DECISION
The Virgin Islands Department of Justice (Grantee) appealed the
determination of the Office of Child Support Enforcement (OCSE)
disallowing $113,290 in federal financial participation (FFP) claimed
under title IV-D of the Social Security Act for the period October 1,
1983 through June 30, 1986. Grantee later indicated that it disputed
the disallowance of only two of five categories of costs covered by the
disallowance: $68,437 FFP claimed for office renovations and $19,432
FFP claimed for non-competitive procurements.
For the reasons discussed below, we conclude that the office renovation
costs were not unallowable construction or major renovation costs within
the meaning of the cost principles, but rather rearrangement and
alteration costs as to which Grantee failed to obtain the required prior
approval and which may or may not be reasonable charges. Since OCSE has
discretion to grant approval on a retroactive basis, we remand that
portion of the appeal to OCSE to consider whether to grant such approval
based on documentation submitted by Grantee within 30 days of Grantee's
receipt of this decision or such longer period as OCSE may allow. We
further conclude that the non-competitive procurements over $1,000 were
authorized under Virgin Islands law as required by OMB Circular A-87,
and accordingly reverse the disallowance with respect to these costs.
However, we sustain the disallowance with respect to the non-competitive
procurements under $1,000 as unauthorized under Virgin Islands law.
Office Renovations
The expenditures for office renovations were incurred as a result of
relocations of the St. Croix and St. Thomas offices of PCS. During the
period covered by the disallowance, the St. Croix office moved three
times within the same government-owned building, and the St. Thomas
office moved once to a privately-owned building. The offices into which
PCS moved in each instance were renovated to accommodate PCS. The audit
report identified the costs in question as expenditures for "Supplies"
and "Repair and Maintenance." Grantee's appeal file, Exhibit (Ex.)
1,
Appendix.
Whether the costs were unallowable construction or major renovation
costs.
OCSE disallowed the costs based on 45 C.F.R. 304.23(c) (1982), which
provides that FFP is not available under title IV-D for construction and
major renovation. Grantee contended, and OCSE did not dispute, that
the office renovations did not involve construction of wings or
additions or work on exterior walls. (In any event, this contention
seems consistent with how the auditors classified the costs.) OCSE
disagreed with Grantee's position that the work did not constitute
construction or major renovations within the meaning of the regulation
on the sole basis that--
. . . given that the two offices were moved 4 times over a 33
month period and for a cost of almost $100,000, the renovations
can certainly be considered major and therefore the costs for
the renovations are unallowable in accordance with the
regulation. . . .
Grantee's appeal file, Ex. 4, p. 3.
We find this to be an insufficient basis for concluding that the costs
are unallowable as major renovations, and contrary to this Department's
guidance on what constitutes major renovations. Since 45 C.F.R.
304.23(c) provides that "major renovations" are unallowable, it follows
that renovations which can be categorized as "minor" are allowable.
We
are not persuaded by OCSE's argument that the renovations in question
here were major because their total cost was close to $100,000. While
it may be appropriate to apply a dollar standard to determine whether
renovations are minor or major, it is not reasonable to conclude that
the cost of renovating office space in different locations can be
aggregated to make the renovations major.
Moreover, the HHS Grants Administration Manual clearly indicates that
non-structural changes do not constitute major renovations. Chapter
6-180-00A. states the general rule that "[f]or most programs, limited
alterations and renovations (A & R) may be allowed, but new construction
and large scale A & R are unallowable." Chapter 6-180-30 further
provides that--
A. In connection with existing buildings, A & R costs shall
be limited to the costs of work required to:
1) make non-structural changes 2) improve other facilities on the
property or 3) install equipment.
* * *
C. The costs of structural changes to foundations, roofs, floors or
exterior or load-bearing walls . . . are unallowable.
In the absence of any definition of "construction and major renovations"
in the regulation, we find it appropriate to look to these provisions
for guidance. In light of these provisions, OCSE's unsupported
assertion that the costs in question were unallowable as major
renovations is unreasonable.
To say that the costs are not unallowable on this basis is not to say
that the costs are necessarily allowable, however. The fact that
Grantee moved its offices several times raises some question as to the
reasonableness of the costs. To the extent Grantee cannot show that
each move was justified, the office renovation costs associated with
that move would not be "necessary and reasonable for the proper
administration of the grant program" within the meaning of OMB Circular
A-87 (made applicable to title IV-D grants by 45 C.F.R. 301.15(e) (1975)
and 45 C.F.R. 74.171 (1982)). This is a matter which would properly be
considered by OCSE upon remand, as discussed later in this decision.
Whether the costs were unallowable based on the lack of prior
approval.
OCSE contended that even if the costs were not unallowable as major
renovations, they were unallowable because Grantee had failed to comply
with the requirement in OMB Circular A-87, Attachment B, Section C.2.c.,
for specific grantor agency approval prior to the claiming of
expenditures for "rearrangement and alteration of facilities." However,
Grantee noted that 45 C.F.R. 74.177(c) (1982) permits the grantor agency
to waive a requirement for prior approval, and argued that OCSE had done
so by providing funds based on Quarterly Applications for Grant Award
(OCSE-65's) and Quarterly Reports of Expenditures (OCSE-41's) which
"outlined" these costs. Grantee's brief dated 2/24/89, p. 3. Grantee
acknowledged that this did not preclude OCSE from finding the costs
unallowable on other grounds, but asserted that it was "prepared to
defend each individual expenditure when and if challenged on merit."
Grantee's brief dated 2/24/89, p. 5. In response, OCSE did not dispute
that the office renovation costs were identified on the OCSE-65's and
OCSE-41's. It argued, however, that a waiver of the prior approval
requirement "must be specifically articulated for a specific cost, and
formally requested," and that OCSE's "acceptance of various quarterly
expenditure reports" thus did not constitute a waiver. OCSE's brief
dated 4/17/89, p. 5.
We find that OCSE did not waive the requirement for prior approval of
the office renovation costs by making payments based on either the
OCSE-65's or OCSE-41's. As the Board noted in an earlier decision, the
purpose of section 74.177(c) "is to enable an awarding agency to waive
in advance for a particular grantee the general requirement to obtain
prior approval whenever incurring a cost in a category for which such
approval is specified." Economic Opportunity of Suffolk, Inc., DAB No.
714 (1985), p. 2. Thus, waiver of a prior approval requirement
exempts a grantee from the need to seek approval of any expenditures of
a certain type incurred by a grantee in the future. Since such a waiver
has a broader impact than prior approval of a single expenditure, it
follows that a waiver must be requested with at least the same degree of
formality required for a request for prior approval. Section 74.177(b)
provides that a grantee "shall obtain specific prior approval in writing
from the awarding party" except where the awarding party approves a
budget in which the costs are specified. We see nothing in the process
of submitting estimates or requests for payment that could be considered
as complying with this procedure. There was clearly no specific written
waiver by OCSE.
Moreover, although approval of a budget may constitute prior approval,
Grantee did not argue that the provision of FFP based on the OCSE-65's
or OCSE-41's was equivalent to approval of specific line items in a
budget. In any event, such an argument would not be persuasive; the
funding process for a formula or mandatory grant such as title IV-D is
different from the funding process for a discretionary grant, which
requires the grantor agency's approval of a budget as the basis for an
award.
We therefore agree with OCSE that no waiver of the requirement for prior
approval of the costs can be reasonably implied from the circumstances
of this case.
Although there was no waiver of the requirement for prior approval of
"rearrangement and alteration" costs, and Grantee did not receive
prior
approval of the costs in question, the absence of prior approval would
not be dispositive if OCSE were to grant retroactive approval. The
Department of Health and Human Services Grants Administration Manual
provides that a "transaction may be approved retroactively" if, among
other things, "the transaction would have been approved had the
organization requested approval in advance." HHS GAM Chapter 1-105-60
B.1. While OCSE's arguments indicate that it may have some doubts as to
the reasonableness of the costs, the disallowance was based on other
grounds, and Grantee was never afforded the opportunity it requested "to
justify, item by item, the relocations in question and the expenses
incurred thereby." Grantee's reply brief dated 5/18/89, pp. 1-2.
Accordingly, we conclude that it is appropriate to remand the appeal to
OCSE to determine whether it should grant retroactive approval for the
office renovation costs based on documentation submitted by Grantee
within 30 days of its receipt of this decision or such longer period as
allowed by OCSE. If retroactive approval is denied, Grantee may appeal
to the Board on the limited issue of whether OCSE was justified in
denying retroactive approval for these costs.
On remand, OCSE should bear in mind that it "has considerable discretion
in determining whether to grant retroactive approval, but `may not deny
retroactive approval based on unsubstantiated conclusions or on bases so
insubstantial that the decision fairly can be described as capricious.'"
Alabama Dept. of Human Resources, DAB No. 939 (1988), at p. 7, citing
Economic Opportunity Atlanta, Inc., DAB No. 313 (1982). The Board also
reiterated in Alabama its view that "retroactive approval standards are
permissive and do not preclude the grantor agency from considering all
relevant factors, including factors which might not have been considered
if prior approval had been requested, such as the grantee's fiscal
management history." Alabama, p. 7. The Board emphasized, however,
that "the grantor agency must articulate a substantive basis for denying
retroactive approval." Id. Accordingly, if OCSE decides not to grant
retroactive approval, it should provide a written statement of its
reasons to Grantee.
Non-Competitive Procurements
OCSE disallowed as costs of non-competitive procurements $28,278
($19,432 FFP) representing payments to three vendors--Ferst Stationary,
Island Furniture House, and Draughting Shaft. OCSE found that Grantee
had violated the Virgin Island's requirements for competitive
procurement by purchasing from these vendors on an open-market basis.
OCSE therefore disallowed the costs based on OMB Circular A-87,
Attachment A, Section C.1.b., which requires that, in order to be
allowable under a grant program, costs must "[b]e authorized or not
prohibited under State or local laws or regulations." Title 31 Virgin
Islands Code Section 236(a) provides that--
All purchases of, and contracts for, supplies, materials,
equipment, and contractual services, and all sales of personal
property. . . shall be based on competitive bids, except as
provided in section 239 of this title.
Section 239(a) provides, in pertinent part, that "[s]upplies, material
and equipment may be purchased. . . in the open market without observing
the provisions of section 236 . . . " where--
* * *
(3) the aggregate amount involved is not more than $1,000;
* * *
(8) the purchase or contract is for property or services for
which it is impracticable to obtain competition . . . .
OCSE found that Grantee split purchases in order to fall under the
exception for purchases under $1,000. OCSE also found that purchases
over the $1,000 limit were "routinely made under open market conditions,
citing the inability to obtain competition as the sole justification for
the purchases." Grantee's appeal file, Ex. 2, p. 4. Grantee stated,
and OCSE did not dispute, that the Virgin Islands Department of Property
and Procurement approved the purchases pursuant to section 239(a)(8).
(This approval would presumably only have been given for purchases over
$1,000, since a separate exception applied to purchases under $1,000.)
Grantee argued that OCSE "cannot circumvent the authority of the Virgin
Islands' Legislature and of the said Department by prohibiting that
which is authorized by local laws, regulations and departmental
officials." Grantee's reply brief, dated 5/18/89, p. 3. Grantee stated
that it was nevertheless prepared to provide evidence that competitive
procurement was impracticable if the Board were to conclude that this
was required. Grantee did not address the allegation that it split
purchases in some instances.
The question presented here (except with respect to the split purchases,
discussed later) is whether OCSE can reasonably refuse to recognize
these particular determinations by the Virgin Islands' government that
it was impracticable to obtain competition absent evidence that these
determinations were improperly made. We conclude that there is no basis
in the record for doing so. Grantee submitted as an example of approval
by the Department of Property and Procurement a form on which the words
"Approved Under V.I.C. 239(a)(8)" were typed in. Grantee's appeal
file,
Ex. 10. OCSE offered no reason not to accept as valid this
determination that competition was impracticable, other than to note
that open market procurements were made on a "routine" basis.
Accordingly, we see no reason to require Grantee to produce further
evidence in addition to what is on its face a valid determination that
the open market procurements complied with Virgin Islands law.
We conclude that the disallowance with respect to the alleged split
purchases should be sustained, however. Grantee did not dispute OCSE's
finding that it split purchases in order to stay below the $1,000
threshold for competitive procurements. Furthermore, the record shows
that Grantee purchased teak furniture in amounts under $1,000 from
Island Furniture House on 2/28/86 (two purchases), 3/13/86, 8/13/86 and
9/5/86. Grantee's appeal file, Ex. 2, Table III. These facts at least
suggest that the first three purchases and the last two purchases
(which, aggregated as indicated, exceed $1,000) were made pursuant to
single contracts or were otherwise related. Since OCSE's finding to
this effect was undisputed, we conclude that the costs in question were
unallowable on the ground that the purchases were not justified as
non-competitive procurements under one of the other exceptions to V.I.C.
236. (No further opportunity to establish that an exception applied
seems warranted since it is unlikely that Grantee would have
deliberately split the purchases if a non-competitive procurement could
have been justified.)
Conclusion
For the reasons discussed above, we remand the appeal with respect to
the office renovation costs to OCSE to determine whether it should grant
retroactive approval for the costs based on documentation submitted by
Grantee within 30 days of its receipt of this decision or such longer
period as OCSE may allow ($68,437 FFP). We reverse the disallowance of
the federal share of the non-competitive procurements over $1,000 (total
costs of $24,803) on the ground that they were authorized by Virgin
Islands law, but sustain the disallowance of the appropriate federal
share of the non-competitive procurements under $1,000 (total costs of
$3,475) as related to other purchases in the aggregate over $1,000 and
thus unauthorized by Virgin Islands law. We also sustain the
disallowance of the $25,421 FFP not contested by Grantee.
Cecilia Sparks Ford
Norval D. (John) Settle
Judith A. Ballard Presiding Board