Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Licking County Economic
DATE: May 21, 1990
Action Development Study Docket No. 90-27
Audit Report No. A-05-89-05441
Decision No. 1159
DECISION
The Licking County Economic Action Development Study (LEADS/Grantee)
appealed a determination by the Office of Human Development Services
(OHDS/Agency) disallowing $18,448 in federal funds claimed by the
Grantee for its Head Start Program for the program year ending March 31,
1989. OHDS asserted that the disallowed funding represented the federal
share of alleged bonus payments made to Head Start employees which were
unallowable under the applicable cost principles. See Office of
Management and Budget (OMB) Circular A-122, Attachment B, 6. 1/ LEADS
denied that it had paid bonuses to its Head Start employees. Rather, it
characterized the questioned costs as one-time lump sum payments for the
Head Start employees.
This appeal was heard under the Board's expedited procedures. See 45
C.F.R. 16.12. The parties waived their right to present oral argument
on this case. Based on the following analysis, we sustain the
disallowance in its entirety.
Background
The material facts are undisputed. The Agency disallowed these costs as
the result of an audit of the LEADS Head Start Program for the program
year ending March 31, 1989. The Audit Report is set out at OHDS Exhibit
(Ex.) 1. The auditors found --
that LEADS paid their employees a bonus on March 31, 1989. The
bonus appears to have been paid because the grantee had unexpended
program funds. As a result, the amount paid to each employee was
arbitrarily determined without regard to award or incentive for
improved performance.
OHDS Ex. 1, p. 17.
Responding to the audit, LEADS characterized these payments as salary
adjustments or enhancements. LEADS indicated that it made these
payments "to off-set the traditionally low salaries" that it paid
its
employees. The Grantee asserted that it realized, as early as December
1988, that it would have funds available in its personnel budget with
which to make these payments. The Grantee noted that it waited until
the end of the program year (March 31, 1989), in order to maintain
budget flexibility. LEADS indicated that the individual payments ranged
from 3% to 7% of the employees' salaries, based on position and
seniority. LEADS noted that, even after making these payments, its
overall personnel costs for the year came in under budget. Id. Before
the Board, LEADS indicated that its "decision to grant a one time lump
sum payment (not a bonus)" was based on the fact that it did not want to
increase its salary liability for future grants. Leads argued that
since it did not plan or pay a bonus, OMB Circular A-122 is
inapplicable. LEADS then asserted that its actions--
in granting a one time lump sum payment so as not to affect future
budgets is consistent with the rest of OMB Circular A-122 and that
our actions actually resulted in a lower overall cost to the
government . . . .
LEADS Notice of Appeal (January 26, 1990).
The Grantee's response to the audit findings and its Notice of Appeal
constituted the substance of its argument on the merits. The Grantee's
brief, a letter dated April 19, 1990, merely denied that a bonus was
paid, chastised the Agency for not attempting to settle this matter, and
asserted that having to repay the disallowed money would be devastating
to the Grantee and that OHDS could protect its interest by a simple
letter reprimanding the Grantee.
The Agency maintained that the disallowed funding did not meet the
applicable federal standards for bonus payments. The cost principles
provide that incentive compensation is allowable to the extent that it
was --
paid or accrued pursuant to an agreement entered into in good faith
between the organization and the employees before the services were
rendered, or pursuant to an established plan followed by the
organization so consistently as to imply, in effect, an agreement
to make such payment.
OMB Circular A-122, Attachment B., 6.h.
OHDS noted that the Grantee did not follow these guidelines, but made
the payments based on job position and seniority. OHDS generally
asserted that these costs could not be considered reasonable in that
they were not ordinary or necessary costs of operation, nor did the
bonuses fit within the concept of a sound business practice. See OMB
Circular A-122, Attachment A, A.3.a. and b.
OHDS took the position that, in awarding the bonuses, LEADS neglected
the best interests of the children in its Head Start program. OHDS
argued that when the Grantee learned that it would have extra money
available in the program year (December 1988), it should have hired
additional personnel rather than holding the money until March in order
to provide the existing staff with bonuses.
Further, the Agency asserted that allowing this type of bonus would
establish bad precedent for future administration of Head Start
programs. The Agency noted that if these bonuses were not paid, the
Grantee would have had an unobligated balance at the end of its program
year. The Agency indicated this "carry-over balance" was to be
available to OHDS, "not individual grantees to reprogram from the
current . . . to the next fiscal year." OHDS argued that allowing this
payment would encourage grantees to "skimp" on budgeted program costs
and reallocate the leftover funding as they, not OHDS, saw fit. OHDS
concluded that this would effectively usurp the Agency's discretionary
authority to control the distribution of carry-over balances. Finally,
OHDS dismissed the notion that these one-time bonuses would have some
effect on the low salaries paid to teachers. OHDS outlined the action
LEADS could take in hopes of gaining salary increases for Head Start
personnel, but noted that the Grantee had not taken any steps in that
direction. OHDS Br., pp. 7-9.
Analysis
Although the Grantee insisted that the disallowed costs were not for
bonus payments, the Grantee offered no evidence to show how the costs
might be otherwise allowable as a charge to federal funds. There is no
substantive difference between the costs in issue, characterized by the
Grantee as "a one time lump sum payment," and a bonus. Further, the
Grantee pointed to no provision in the cost principles which would apply
to such a one-time lump sum payment other than the provision on
incentive payments.
The Grantee's description of the circumstances surrounding these
payments clearly demonstrates that they were outside the scope of
allowable incentive compensation. The cost principles require that such
compensation be reasonable and paid (or accrued) pursuant to a good
faith agreement entered into before services were rendered or an
established plan followed by the organization so consistently as to
imply an agreement to make such payment. See OMB Circular A-122,
Attachment B., 6.h. Even assuming the reasonableness of the amount of
the compensation (given the Grantee's assertion that the payments were
based on position and length of service), the Grantee, in effect,
acknowledged that the payments were not made pursuant to an agreement
entered into before services were performed, or pursuant to an
established organizational plan. Rather, the Grantee freely admitted
that it simply discovered extra money available in its personnel budget
and decided to make these payments.
The Grantee stated that it had decided to make a one-time payment
because it did not want to increase its future salary liability. Yet in
response to the audit, the Grantee complained that:
As a result of our low salary levels, it is very difficult . . . to
find and retain qualified staff, especially professional staff . .
. .
OHDS Ex. 1, p. 17.
As the Agency noted, a one-time lump sum payment would not have a
practical positive effect on the compensation level of the Grantee's
employees in ensuing years as their salaries would revert to the
pre-lump sum payment levels. See OHDS Br., pp. 8-9.
The Grantee also complained that, in spite of the Board's urging, the
Agency did not attempt to negotiate a settlement of this appeal. In the
Acknowledgment of Appeal, we did not "urge" the parties to negotiate.
Rather, we noted that the Grantee should notify the Board if it had any
supporting documentation which the Agency would need to review. This
would assist us in modifying the briefing schedule accordingly. The
Grantee has submitted no documentation to the Board at any time during
this appeal. The Acknowledgment also noted that while the appeal was
pending, "the parties may negotiate to resolve the dispute . . . ."
This language is generally included in all Board Acknowledgments. How a
party elects to resolve an appeal is a matter of individual choice.
While it is always preferable to see parties resolve their disputes
informally, it takes two parties to negotiate. OHDS chose not to
negotiate a settlement here.
Finally, a grantee's ability to repay a disallowance is immaterial to
the propriety of the disallowance. They are two distinct issues. Here,
the disallowance was clearly correct. That determination ends our
inquiry. The repayment of the disallowance is a matter between the
Grantee and OHDS. OHDS pointed to a persuasive programmatic reason why
it would set a bad precedent to allow such costs. While OHDS might have
some discretion in establishing the manner of repayment by the Grantee,
OHDS was reasonable in disallowing the full amount, given the plain
requirements of the cost principles.
Conclusion
Based on the foregoing analysis, we find that the Grantee's one-time
lump sum payment was effectively a bonus payment that did not satisfy
the cost principle standards for allowable incentive compensation.
Accordingly, we sustain the entire disallowance of $18,448.
_____________________________ Donald F. Garrett
_____________________________ Alexander G. Teitz
_____________________________ Judith A. Ballard
Presiding Board Member
1. OMB Circular A-122 sets out cost principles for nonprofit
organizations such as Head Start programs. The Circular is made
applicable by regulation at 45 C.F.R. 74.174(a) (1987).