Rio Bravo Association, DAB No. 1161 (1990)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: Rio Bravo Association
DATE: May 31, 1990
Docket No. 90-43
Audit Control No. CIN-A-06-89-00051
Decision No. 1161

DECISION

The Rio Bravo Association (RBA) of El Paso, Texas, appealed a decision
by an ad hoc review committee of the Public Health Service (PHS review
committee), issued pursuant to 42 C.F.R. Part 50, Subpart D. That
decision upheld two determinations of the Centers for Disease Control
(CDC) related to RBA's National AIDS Minority Information and Education
project: (1) CDC disallowed $35,891 in costs charged to RBA's grant
award for the first budget period of the project; and (2) CDC denied a
noncompeting continuation award for the second budget period of the
project.

For the reasons stated below, we sustain the PHS decision. We find that
RBA charged its CDC grant for $35,891 in unallowable costs, and that
RBA's failure to comply with the terms of the award regarding
accountability for federal funds was material and justified the denial
of continuation funding. We note that certain allegations of misconduct
on the part of RBA's Executive Director have not been substantiated on
the record here, and we do not base our decision on those allegations.
On the other hand, we find that allegations by RBA of bad faith and bias
on the part of CDC are also unsubstantiated.

I. Factual background

In this section, we set out the undisputed background facts leading to
CDC's determinations. We also resolve a factual dispute RBA raised
about the accuracy of a CDC "trip report." Although this factual
dispute is peripheral to the major issues in this case, much of RBA's
position flowed from its view of CDC's actions based on the report.

CDC administers a National AIDS Minority Information and Education
Program authorized under sections 301(a) and 318 of the Public Health
Service Act, as amended. Section 301(a) is the general grant-making
authority given to PHS; section 318 specifically authorizes grants "to
public and nonprofit private entities for information and education
programs" on AIDS (acquired immunodeficiency syndrome).

RBA applied for such funds in June 1988 in response to a Program
Announcement sent to RBA in April 1988 (later published without
substantial change in the Federal Register), announcing the availability
of funding for AIDs information and education projects run by a
"regional minority nonprofit organization or consortia or group of
organizations." 52 Fed. Reg. 15734 (May 3, 1988). RBA described itself
as a member of the Alianza Rio Bravo Coalition, listing itself as a
coordinating member together with three other organizations from the
Southwest region. Although the committee which reviewed RBA's
application recommended it for approval on the basis that RBA
represented the most active organizations involved with Hispanic
gay/bisexual men, the committee also noted certain weaknesses in the
application.

CDC identified further areas of concern in discussions and
correspondence with RBA, but indicated in November 1988 that it would
probably fund the project. Funding was not actually provided until a
Notice of Grant Award was issued on December 21, 1988. That notice
provided $133,779 in federal funds for the budget period 01/01/89
through 4/30/89 and approved RBA's project for the project period
01/01/89 through 4/30/93.

CDC appointed both a Project Officer and a Grants Management Officer to
work with RBA. As a result of communications between the CDC Project
Officer and RBA's Executive Director, a site visit to RBA's offices in
El Paso by an independent panel of consultants was set up for April 13,
1989. Prior to meeting with RBA's Executive Director, the panel met
with another RBA official (whom we will refer to as RBA's Project
Director since he acted in that capacity for part of the budget period).
The CDC Project Officer's "trip report" of the panel's visit states
that, during that meeting, RBA's Project Director made a number of
serious allegations of misuse of federal funds and other misconduct by
RBA's Executive Director.

RBA denied that the allegations in the trip report were ever made,
citing a letter from its Project Director to its Executive Director
which stated:

Comments attributed to me are simply untrue . . . . I would
suggest that you demand documentation regarding any allegation I or
anyone has purportedly made.

CDC Ex. 3. 1/ In rebuttal, CDC submitted letters from panel members,
stating that the trip report was accurate regarding the allegations made
by the Project Director. CDC Ex. 5. 2/ RBA replied by alleging that one
of the independent panel members was possibly biased against RBA because
he worked for a rival organization, and one had worked for the Texas
Department of Health (with which RBA had had some disagreements).

While the truth of the allegations reported by CDC's Project Officer is
not substantiated on the record here, we find that CDC did substantiate
that the panel understood RBA's Project Director to be making serious
allegations against the Executive Director and that the panel did not
reveal those allegations to the Executive Director because it was
concerned that he might flee. 3/

After the mid-April site visit, CDC requested that the HHS Office of
Inspector General (OIG) perform an audit of RBA. Meanwhile, RBA had
applied for continuation funding of its project for the budget period
beginning May 1, 1989. On April 28, 1989, CDC notified RBA by telephone
that continuation funding would be denied; CDC followed this with a
written notice, dated May 1, 1989. The reason given for the denial was
that RBA had made insufficient progress toward establishing a regional
consortium to provide AIDS education and information to the Hispanic
communities within the four-State area addressed by RBA's grant
agreement.

RBA appealed the denial to this Board. During Board proceedings, CDC
sought to amend its decision to include allegations of fiscal
improprieties. RBA opposed this amendment since RBA sought a speedy
resolution of the consortium issue and the audit was still pending. The
Board agreed to address the consortium issue separately; the Board
informed RBA, however, that a Board decision in RBA's favor on that
issue would not obligate CDC to award continuation funding and that CDC
could issue another determination denying the award if it found that
other allegations were adequately supported. Subsequently, the Board
issued a decision in August 1989 reversing CDC's finding on the
consortium issue. CDC had determined that RBA was required to have
written agreements with other consortium members by April. The Board
found that there was no binding requirement that written agreements be
obtained prior to the May 1989 date set in RBA's workplan (a goal which
RBA met), nor was the execution of such agreements prior to that date
essential to meeting project objectives.

On August 1, 1989, the OIG issued a Management Advisory Report (audit
report), questioning a total of $49,554 in costs RBA charged to federal
funds. RBA NA-Ex. G. After reviewing this report, CDC issued a
determination disallowing $35,891 in costs, based on a detailed analysis
of the audit findings. CDC also issued a determination again denying
continuation funding for the second budget period of CDC's project.

RBA appealed both determinations to the PHS review committee and
subsequently to this Board.

II. The PHS review committee decision and scope of Board review

Under the project period system of funding used by PHS, a project may be
approved for a period of years (usually 3-5 years), but initial funding
is provided only for the first budget period of the project. Approval
of the project simply means the awarding agency has determined that the
project has merit and that the grantee's application for continued
funding need not be subject to the competitive review process used for
initial applications. The 1987 PHS Grants Policy Statement explains
that approval of a project period expresses merely an intention by PHS
to provide continued financial support to the project, and "the
recommended levels of future support within a project period are not
guarantees by PHS that the project will be funded . . . and creates no
legal obligation to provide such future support." P. 20 (emphasis in
original).

The PHS Policy Statement also explains that a decision not to make a
noncompeting continuation award (withholding of support) may occur if --

a grantee has failed to make satisfactory progress in achieving the
objectives of the project, or if adequate Federal funds are not
available . . . or . . . as a means of protecting PHS interests
[or] where the grantee has not complied with the terms of the
award, is delinquent in submitting required reports, or has failed
to provide adequate stewardship of Federal funds to an extent that
indicates that PHS support should not continue beyond the current
budget period, but where the situation is not serious enough to
warrant termination.

P. 59. 4/

Since, generally, pre-award determinations are committed to grantor
agency discretion, the Board's review of pre- award disputes is limited
to "a denial of a noncompeting continuation award under the project
period system of funding where the denial is for failure to comply with
the terms of a previous award." 45 C.F.R. Part 16, App. A, para.
C.(a)(3). The Board also has jurisdiction over a "disallowance or other
determination denying payment of an amount claimed under an award, or
requiring return or setoff of funds already received . . . ." Id.
para. C.(a)(1).

As noted above, the PHS review committee upheld the disallowance of
$35,891 in costs RBA charged to its award for the first budget period of
its project. The review committee's decision noted that CDC had
reviewed the audit report and had presented a detailed description of
the issues surrounding each item disallowed. The review committee
further noted that RBA had not produced any documentation to support its
position or to rebut the CDC determinations.

The first basis cited for the PHS decision to deny continuation funding
was that RBA's management practices had failed to provide adequate
stewardship of federal funds. The PHS review committee noted that RBA
did not deny CDC's factual allegations related to this failure (which
were based on the audit report), but that RBA's rebuttal was primarily
the assertion of mitigating circumstances. The review committee found
that "RBA's accounting system failed to provide adequate documentation
and accountability for funds received and expended under the CDC grant."
RBA NA Ex. A. The review committee also rejected RBA's assertions
regarding mitigating circumstances. Since this basis for the PHS
decision involves allegations of material failure to comply with the
terms of the previous award to RBA, it is clearly within the scope of
Board review.

The second basis cited for the PHS decision to deny continuation funding
was that there were other circumstances or reasons, substantiated by the
record, to support CDC's determination that continued funding of RBA's
project would not be in the best interests of the Federal Government.
As the Board noted in its Preliminary Analysis, some of the findings
supporting this basis related to terms of the previous award. We do not
here need to reach the issue of precisely what is the scope of Board
review of the second basis for the PHS decision, however, since we find
below that the findings supporting the determination of inadequate
stewardship of federal funds are sufficient as a basis for denying
continuation funding for RBA's project. 5/

Since the finding of inadequate stewardship is related to the bases for
disallowing certain costs charged to RBA's grant for the first budget
period, we first discuss the requirements applying to RBA's grant and
how they support the disallowance of individual items of cost. We next
discuss why we consider those findings sufficient also as a basis for
denying continuation funding and why we also reject RBA's arguments
concerning the adequacy of its stewardship of federal funds.

III. The disallowed costs

In this section, we first discuss what the requirements of the award to
RBA were, how they were made applicable, and what they provide generally
about a grantee's accountability for federal funds. We then discuss
each category of disallowed costs, explaining our findings and
conclusions with respect to each of the categories. Some of RBA's
arguments in commenting on specific costs did not go to the allowability
of those costs per se, but to reasons why the fact that RBA charged
these costs to federal funds should not be a basis for discontinuing
RBA's funding. We discuss these arguments in the following section.

A. The applicable requirements

The Notice of Grant Award for the first budget period specifically
states that the following are part of the terms of the award (in
addition to the grant program legislation): the PHS Grants Policy
Statement in effect at the beginning of the budget period, Department
regulations at 45 C.F.R. Part 74, and the PHS Grants Administration
Manual. RBA NA Ex. K. 6/ The PHS review committee noted that RBA had
acknowledged receiving a copy of the regulations and of the PHS Grants
Policy Statement prior to the award. RBA did not challenge this on
appeal, but claimed to have received a copy of Office of Management and
Budget Circular A-122 (on which PHS also relied), only after the end of
the budget period. PHS asserted that it had sent a copy of OMB Circular
A-122 to RBA at the time of the award.

We find it unnecessary to decide whether PHS in fact timely sent a copy
of the Circular to RBA. The regulations in Part 74, which RBA
acknowledged receiving, specifically provide that the cost principles to
be used by nonprofit organizations in determining allowable costs are
contained in OMB Circular A-122. The provision also specifically
informs grantees that a copy of the Circular "may be obtained from the
Division of Cost Allocation in any HHS Regional Office." Id.; see also
PHS Grants Policy Statement, p. 26. Thus, RBA not only had a clear
obligation to obtain a copy of the Circular, but also notice as to the
means of obtaining it.

Part 74, the PHS Policy Statement, and OMB Circular A-122 establish
certain general principles relevant to our discussion below. First,
Part 74 provides that a grantee must maintain accounting records which
adequately identify the source and application of funds for grant
activities, supported by source documentation such as cancelled checks,
paid bills, etc. A grantee also must establish procedures for
determining the reasonableness, allowability, and allocability of costs
in accordance with the applicable cost principles (in this case, those
set out in OMB Circular A-122). 45 C.F.R. 74.60; PHS Grants Policy
Statement, p. 26.

Based on these requirements, this Board has consistently held that a
grantee bears a burden of documenting the allowability of costs charged
to federal funds. See, e.g., New York State Dept. of Social Services,
DAB No. 932 (1988); Ohio Dept. of Human Services, DAB No. 858 (1987).

Second, both the PHS Grants Policy Statement and OMB Circular A-122 set
out the general principle that costs must be reasonable and necessary
for the performance of the award and must be allocable thereto under the
cost principles. A cost is allocable to a particular cost objective,
such as a grant or project, in accordance with the relative benefits
received. A cost may be charged as a direct cost of a particular award
if it can be identified specifically with that award as a final cost
objective. These policies also explain that costs incurred for joint
purposes must be allocated according to the relative benefits received.
The concept underlying the principle of allocability is that federal
funds may be spent only for the purposes for which they were
appropriated.

The Policy Statement and the Circular also set out cost principles used
to determine allowability for selected items of costs, some of which
require prior approval of the grantor agency or specific types of
documentation.

B. Office salaries and fringe benefits

The audit report found: (1) that during the period October 1, 1988
through January 31, 1989, RBA had received a grant from the Texas
Department of Health (TDH), as well as CDC; (2) that both grants
provided for payment of the salaries of an Executive Director and
Community Specialist; and (3) that RBA had charged 100% of the salaries
of the two employees to the CDC grant. The auditors questioned $20,000,
the total amount of these two salaries for the period in question. CDC
allowed 50% of the salaries for the period. CDC disallowed the
remaining $10,000 on the basis that RBA could not document the time
actually spent on each of the grant projects. CDC also disallowed $963
in fringe benefits for these employees, as allocable to time spent on
the TDH grant rather than on the CDC grant.

As a basis for its determination, CDC relied on the PHS Grants Policy
Statement at page 36, which provides that "amounts charged to a
grant-supported project for personal services must be based on an
adequate payroll distribution system" and defines such a system for a
nonprofit organization as requiring--

Monthly after-the-fact activity reports including a signed
certification by the employee or a responsible supervisory official
having firsthand knowledge of the work performed that the
distribution of activity represents a reasonable estimate of the
actual work performed by the employee during the periods covered by
the reports. Each report must account for the total activity for
which the employee is compensated . . . .

CDC also relied on OMB Circular A-122, Attachment B, Section 6.b., which
sets out basically the same requirements for monthly activity reports.

RBA did not dispute the factual findings made by the auditors, nor did
RBA provide any evidence that these two employees in fact spent more
than 50% of their time on CDC grant activities during the period in
question. Indeed, RBA acknowledged that it not only had the TDH funding,
which expired January 31, 1989, but that it also had "unrestricted"
funding from the Levi Strauss Corporation to acquire a home for persons
with AIDS, which expired in July 1989. RBA brief, p. 9. RBA's major
arguments presented to this Board were: (1) that CDC was, in effect,
rescinding the approval it gave to RBA to charge costs retroactive from
the time of the grant award to October 1, 1988; (2) that CDC failed to
provide technical information and assistance to RBA concerning
separation of grant functions; and (3) that RBA's Executive Director and
the Director/Projects Administrator were engaged in work directly
related to CDC objectives and thought of themselves as CDC project
employees.

Normally, to be charged to funds for a particular budget period, costs
must be allocable to that period. At its own risk, a grantee may incur
costs prior to the effective date of an award, but certain provisos
apply, including that "the costs concerned are considered necessary to
the project." PHS Grants Policy Statement, p. 34. The retroactive
approval to which RBA referred was the following statement on a
continuation sheet to the Notice of Grant Award:

The expenses incurred October, November, and December are
retroactively approved. These costs are a part of the approved
funding of $133,779.

RBA would have us read this statement to mean that any expenses incurred
by RBA in this time period were approved by CDC. In the context of the
Notice of Grant Award as a whole and the specific provisions on preaward
costs, however, this statement must be read as limited to retroactive
approval to charge to the awarded funds allowable and necessary costs of
the approved CDC project, in accordance with the grant application and
budget, as amended during negotiations between RBA and CDC. Thus, we do
not view CDC's disallowance of costs not allocable to the CDC project to
be in any way a rescinding of this approval.

RBA's argument on the lack of technical assistance from CDC ignores the
fact that the concept of allocability is clearly defined in the
applicable grant terms. Further, although RBA argued that CDC had an
unclear policy regarding separation of grant functions, RBA's argument
on this point was based on an erroneous assumption that CDC was faulting
RBA for not recording each client contact as a cost of either the CDC or
TDH grant. CDC's determination was, however, based on the lack of
monthly activity reports or other evidence about how these two employees
spent their time. While the grant award was not actually made until
December 1988, RBA did not explain why it could not have prepared at
that time monthly activity reports to support salary costs for the last
three months of 1988 which RBA intended to charge to the CDC grant.

RBA argued that both the TDH and CDC grants involved outreach
activities, that, on learning it could expect CDC funding, RBA hired
more employees to do outreach, and that, from October to December of
1988, the Executive Director and Director/Projects Administrator thought
of themselves as CDC project employees. 7/ RBA also stated that these
employees were engaged in work directly related to activities "well
within the spirit of the CDC grant." RBA brief, p. 10. The specific
description of their activities provided by RBA, however, shows that not
all of these employees' activities were specifically identifiable to the
CDC-approved project of providing AIDs information and education to
Hispanics in the four-State region. RBA described these two employees'
activities during the Fall of 1988 as--

acquiring offices, building a national response to AIDS among
Hispanics, establishing local and regional networks to help the
AIDS efforts, fulfilling CDC objectives, providing technical
assistance and support to embryonic AIDS efforts and facilitating
the death of Persons with AIDS.

RBA brief, p. 10. Given that some of these admitted activities are
clearly not related to the CDC-funded project, RBA could not charge 100%
of these employees' salaries to CDC funds. CDC was clearly reasonable
in allowing only 50% of their salaries, in the absence not only of a
proposed alternative allocation, but of any evidence of how they in fact
spent their time.

Accordingly, we uphold the disallowance of $10,000 for 50% of these
employees' salaries and $963 in related fringe benefits.

C. Purchase and sale of automobile and insurance

The auditors found that RBA had purchased a 1987 Buick Regal for $10,090
on January 13, 1989 and had sold the car on May 8, 1989 to the brother
of the Executive Director for $6,500, a $3,590 loss. The auditors
questioned whether this expenditure, as well as $882 spent for
automobile insurance, was related to the grant.

CDC allowed $400 for the automobile, identifying this amount as the
difference between the blue book values from the date of purchase to the
date of resale (and apparently accepting RBA's argument that it needed
an automobile for grant activities). CDC disallowed the remaining
automobile costs of $3,190, noting that grantees are held to a standard
of prudence, which the sale of the automobile did not meet since it was
not an arms length transaction and represented a 36% loss. CDC also
allowed $294 for automobile insurance, for the time RBA actually
possessed the automobile, but disallowed the remaining $588 as not
allocable to the award.

RBA submitted copies of a check for $6,500 from the Executive Director's
brother and a memorandum dated May 8, 1989, from the Executive Director
to RBA's Board of Trustees, informing that Board that he had sold the
automobile to cover commitments for employee salaries and operational
costs for April. The memorandum states: "We received various offers
but the bid for $6,500 was the highest and is consistent with the real
value of the car as recorded in the 'blue book.'" RBA NA Ex. N.

In its Preliminary Analysis, the Board asked RBA to clarify whether it
was contesting the CDC finding that the difference in blue book values
was only $400 and to provide support for its allegation that it had
accepted the best offer. 8/

RBA then stated that it accepted the finding that the cost of
depreciation may have been less than the loss sustained through the sale
of the automobile, but argued that this was unavoidable in light of
RBA's administra- tive priorities and the timing and way in which RBA
was notified of its defunding. RBA also asserted that the Executive
Director had approached various RBA Board members and community
supporters about the automobile, but had received only one other offer,
which was for $6,000.

OMB Circular A-122, Attachment A., section A. 3. states: "A cost is
reasonable if, in its nature or amount, it does not exceed that which
would be incurred by a prudent person under the circumstances prevailing
at the time the decision was made to incur the cost." The section then
sets out various factors to be considered in determining reasonableness,
including the restraints imposed by generally accepted sound business
practices and arms length bargaining and whether the individuals
concerned acted with prudence, considering their responsibilities to the
organization and to the Federal Government. Here, there is an
undisputed lack of arms length bargaining, given the close relationship
of the purchaser to the Executive Director. RBA submitted no evidence
to support its assertion that only one other offer was made. While the
circumstances certainly dictated that RBA act promptly, sound business
practices would appear to dictate that RBA not sell the automobile for
an amount substantially less than the blue book value without at least
advertising the sale in the newspaper and documenting any offers made.

Accordingly, CDC had a reasonable basis to conclude that costs for the
automobile in excess of the difference in blue book values from the date
of purchase to the date of sale were not reasonable, and we uphold the
disallowance of the $3,190.

RBA presented no arguments about the $588 in automobile insurance CDC
found was not allocable to the time RBA possessed the automobile, and we
also uphold the disallowance of that amount.

D. Construction Costs

The audit report found that RBA had expended $8,153 for asphaltic
concrete paving of its parking lot because of conditions imposed by the
City of El Paso for RBA to receive a special permit. The special permit
was for a "philanthropic designation to provide a hospice/shelter and
offices." RBA NA Ex. G, p. 4. The auditors questioned whether this
expenditure was necessary for an information and education project. The
auditors also noted that, even if necessary to the project, the paving
expenditures should have been recorded as a capital asset and
depreciated (which would have resulted in a grant charge of only $272),
rather than being treated as an expenditure.

RBA responded that it had the authority to reprogram up to $25,000 of
the grant funds from other program areas into "Alterations and
Renovations," notwithstanding the fact that such an expenditure was not
part of the original approved budget. CDC pointed out that costs of
paving a parking lot do not fall within the definition of allowable
"Alterations and Renovations," discussed at length in the PHS Grants
Policy Statement at pages 27 through 29. Specifically, page 28 states:

Alteration and renovation projects in an existing building that are
considered construction, such as . . . development and repairing of
parking lots . . . are unallowable unless authorized by the program
legislation.

The program legislation under which RBA was funded does not authorize
construction expenditures. CDC also noted that page 27 of the Grants
Policy Statement states: "Work necessary to obtain an initial
occupancy permit for the intended use is not an allowable alteration and
renovation cost."

RBA argued that the paving was required to make the facility accessible
to its client population and that its decision to make the facility
accessible was made with prior approval from the CDC Grants Management
Officer and was consistent with the technical information received from
CDC. RBA described a conversation between its Executive Director and
the Grants Management Officer in January 1989 in which RBA requested an
award of indirect costs (which were not included in the original
budget). 9/ RBA alleged that when the Grants Management Officer denied
the request, the following occurred:

RBA explained the need to do some things such as acquiring
furniture and make alterations and repairs and explained that the
approved budget categories seemed very limited. She indicated that
RBA had ample latitude to rebudget. In reference to the rent
category, the officer explained that RBA should bill for rent of
the facility rather than bill for RBA mortgage obligations as
facility acquisition was not permitted.

RBA NA, p. 19. In support of this allegation, RBA submitted a
memorandum from RBA's Executive Director to its Project Director, dated
April 27, 1989, referring to the PHS Grants Policy Statement provision
on postaward budget revisions and to the alleged January conversation.
The memorandum states that when the Executive Director inquired of the
Grants Management Officer about an indirect cost award to meet needs
such as "furniture and minor building maintenance," she responded that
the award amount was set, that this amount was to use for start-up, and
"indicated that we had ample latitude." RBA NA Ex. X.

RBA further argued:

The [Grants Management Officer] agrees that the conversation took
place, that the issues of rent vs. mortgage et al. were addressed,
that issues of rebudgeting were addressed, that the request for
indirect costs was made for the reasons stated and that she
indicated that RBA had ample latitude to rebudget. She only denies
that she gave specific authorization for the decision to make the
facility accessible to the physically impaired.

RBA NA, p. 19. RBA stated that it was provided a copy of Part 145 of
the Grants Administration Manual, identifying items requiring prior
approval of the Grants Management Officer before rebudgeting is
permitted, and that section 145.3 refers to "Transfer of Funds between
Construction and NonConstruction" without indicating that such a
transfer is not permitted.

We reject RBA's arguments for the following reasons:

o The PHS Grants Policy Statement clearly states that costs of paving a
parking lot are unallowable where the relevant legislation does not
authorize construction costs.

o Even RBA's memorandum of the conversation with the Grants Management
Officer (written several months later) does not indicate that she was
informed RBA intended to use CDC funds for paving the parking lot.

o Part 145 (which RBA acknowledged receiving) requires prior approval
of a transfer of funds to construction. See RBA AF Ex. 2. The terms
of the grant clearly provide that prior approval must be in writing.
PHS Grants Policy Statement, pp. 43-45; 45 C.F.R. 74.102. RBA could
not reasonably construe oral approval, even if given, to be
sufficient in light of clear requirements that such approval be in
writing.

o RBA acknowledged that the Grants Management Officer had informed it
that it could claim only rental costs for its use of RBA facilities
for CDC project purposes. Rental costs under less-than-arms-length
leases are allowable only up to the amount of allowable ownership
costs under the applicable cost principles. PHS Grants Policy
Statement, p. 34.

o It appears that the primary reason the special permit was needed was
to gain approval for use of RBA's facility as a hospice/shelter
for persons with AIDS, rather than for purposes of the CDC
information and education project. 10/ Contrary to what RBA implied,
a cost is not allocable to the CDC project simply because it is
related in general to AIDS; RBA failed to show that this cost was
specifically identifiable with the AIDS information and education
project CDC funded.

o While RBA is correct that grantees are given a certain degree of
latitude in revising their budgets, the applicable provisions make it
clear that grantees must obtain prior written approval for certain
revisions and that costs must be allocable to the grant project.

Accordingly, we uphold the disallowance of $8,153 for asphalt concrete
paving.

The auditors also questioned, and CDC disallowed under the category of
construction, $108 for a survey of the grantee's property and $64 for
five small trees. CDC determined that the costs did not directly
benefit the purpose of the grant and therefore could not be charged as a
direct cost of the grant. RBA NA Ex. I, unnumbered p. 8, citing PHS
Grants Policy Statement, p. 26.

RBA argued that the survey was a necessary and incidental cost of paving
the parking lot. RBA said that the trees were not a required incidental
cost of the parking lot (although RBA also described the trees as
complementing the paving), but that the expense was made "in view of the
prior approval and rebudgeting latitude granted RBA." RBA NA, p. 22.

Whether necessary for the parking lot or not, these costs are clearly
costs which RBA failed to show were necessary to the CDC grant project
and specifically identifiable to that project as a cost objective.
Accordingly, we also uphold the disallowance of $108 in survey costs and
$64 for trees.

E. Consultant fees

The audit report questioned $4,256 in consultant fees on the basis that,
during January 1989, RBA had reclassified the expenditure as contract
labor under the TDH grant (without adjusting the charge to CDC funds).
The audit report noted that the auditors could not identify which
consultant fees had been reclassified to the TDH grant. RBA responded
that the consultant fees represented a "coding error," but provided no
documentation of what consultant fees were involved or of how they may
have related to the CDC grant. RBA NA Ex. I, unnumbered p. 11.

In its determination, CDC found that RBA had not adequately documented
the costs. CDC cited to the following requirement at page 30 of the PHS
Grants Policy Statement:

Where the costs of consultants are borne in whole or in part as
direct costs by PHS projects, the consultation must be documented
by an invoice from the consultant and a copy of the consultant's
written report, if any. Any of the following information not shown
on the invoice and/or report must be shown in a memorandum or other
document, including handwritten notations on the invoice, signed by
an organization official and retained in its files: the name of
the consulting firm or individual consultants, the nature of the
services rendered and their relevance to the grant-supported
activities, if not otherwise apparent from the nature of the
services; the period of service; the basis for calculating the fee
paid, e.g., rate per day or hour worked or rate per unit of service
rendered; and the amount paid.

In its notice of appeal, RBA argued that the disputed costs were for
accounting services, for a BPI accounting system (which RBA said is an
IBM compatible computer system), and for consultants to assist in the
development of the Knowledge, Attitude and Behavior Survey described in
the CDC project workplan. The Board's Preliminary Analysis asked RBA to
explain its basis for determining that the $4,256 identified in the
audit report was for these costs and either to provide documentation
meeting the requirements cited in the CDC decision or to explain why
such documentation was not required.

RBA then provided copies of the following documentation:

o A check for $2,314.86 to Computerland, dated January 20, 1989, and an
invoice for $2,316.46 for computer equipment and software for a BPI
accounting system. RBA AF Ex. 3.

o A consultant agreement dated January 6, 1989, between RBA and Sonia
Myrick to "prepare grant applications and personnel policies and
procedures" from January 9 to January 25, 1989, for a fee not to
exceed $1,500; checks to Sonia Myrick for $438 and $1,062 for
consultant fees, each dated January 25, 1989; and a letter dated
January 17, 1989 from Sonia Myrick to RBA's Executive Director
enclosing a contract for consultant fees, as requested. RBA AF Ex.
D.

o A check dated January 24, 1989, for $500 to Reyes Ramos for
"consultant work" and an invoice "for the completion of the SCOPE OF
WORK PLAN . . . for the Rio Bravo Association for the fee of $500"
per agreement with RBA's Executive Director. RBA AF Ex. D.

o A check dated January 16, 1989 to Jane Warach, C.P.A., for $301.80
for "consultant work," and a letter from her to RBA confirming that
she would perform certain accounting activities for RBA on a monthly
basis in 1989 for a charge of between $250 and $300 per month, with a
"one-time set up fee" of $200. RBA AF Ex. F.

o The following checks (totaling $1,957.50) made out to Paul E.
Raudenbush, C.P.A.: one dated February 10, 1989, for $205; one dated
March 8, 1989 for $322.50; and one dated April 7, 1989, for $1,430;
invoices from Paul E. Raudenbush detailing hours and types of
services for various dates from January 6 to March 10, 1989, and the
charges for those services. RBA AF Ex. G.

We find this documentation to be insufficient to respond to the audit
finding and the CDC determination, for the following reasons:

o RBA provided no evidence or explanation to link this documentation to
the $4,256 in consultant fees which the auditors found RBA's books
had reclassified to the TDH grant as contract labor in January 1989,
and we can discern no such relationship from the documentation
itself. 11/

o While the documentation for Mr. Raudenbush is detailed, all except
$205 relates to services rendered after January 1989 (which therefore
could not have been reclassified in January 1989). Moreover, the
audit report allowed $1,958 for Certified Public Accountant services,
under the category of professional services. RBA NA Ex. G, p. 6.

o The costs for the computer equipment and software are not costs of
consultant fees. 12/

o The development of personnel policies by Ms. Wyrick and the type of
accounting services performed by Ms. Warach might have been allocable
in part to the CDC grant, but the services are not documented by
invoices, as required. Moreover, as noted above, we have nothing to
connect these payments specifically with the amount in dispute.

o RBA admitted that the grant applications referred to in the contract
with Ms. Myrick were for "two funding proposals to the City of El
Paso and the Texas Department of Health." RBA brief, p. 20. Thus,
these costs are specifically identifiable with cost objectives other
than the CDC project.

o While RBA had alleged that part of the consultant fees involved
related to developing the Knowledge, Attitudes, and Behavior Survey
for the CDC project, RBA provided no documentation of these fees.
RBA alleged that Dr. Ramos was hired to do the survey, but the
documentation for his services refers only to a workplan. Nothing in
this documentation identifies this workplan as a workplan for the CDC
project.

Accordingly, we uphold the disallowance of $4,256 in consultant fees.

F. Travel costs

The audit report questioned $1,550 in travel costs which the auditors
found lacked supporting documentation. The auditors found that RBA's
procedure for travel was to provide a travel advance to the employee and
to record that advance as a travel expenditure, without reconciling the
advances to actual travel expenditures. CDC disallowed this amount
based on various citations to Part 74 and the applicable cost
principles. RBA NA Ex. I, unnumbered p. 12.

RBA alleged that the expenses were documented by RBA checks and
identified by category in the RBA accounting system, but did not deny
that it did not have source documentation such as hotel receipts or
actual mileage records for the $1,550. RBA blamed this lack on its
former bookkeeper, who RBA said lost receipts and was fired as a result.
13/

Clearly, documentation that RBA paid travel advances and charged them as
travel to CDC funds is not sufficient to document the amount of travel
expenses actually incurred for project-related travel. As discussed
above, accounting entries must be supported by source documentation.
Even if the failure to have such documentation could be excused if
attributable to an incompetent bookkeeper, RBA did not specifically
dispute the audit finding that the problem arose because RBA's procedure
was to pay travel advances without requiring documentation of actual
expenditures. Moreover, RBA did not explain why, if the bookkeeper had
in fact lost receipts, RBA could not have obtained copies from the
employees who incurred the expenses.

Accordingly, we uphold the disallowance of $1,550 in unsupported travel
charges.

G. Rent

The audit report questioned $800 charged as rent to the CDC grant. The
audit report identified the $800 as follows: (1) $500 paid to Rio Bravo
Association/Laredo in April 1989, which RBA identified as start-up costs
(office space, bank account, and miscellaneous expenditures) for a
cooperative outreach program in Laredo, Texas, but which the auditors
questioned on the basis that there was no supporting documentation; and
(2) $300 charged to the CDC grant, which was incurred after the grant
period ended on April 30, 1989 and which was for RBA's Food Bank Center.
CDC noted that RBA had provided no response to these audit findings and
disallowed the $500 as unsupported rental (start-up) expenses and the
$300 as rental charges for a facility whose use and function was beyond
the scope of the grant. CDC cited numerous provisions of the terms of
the grant in support of its determination. RBA NA Ex. I, unnumbered p.
13.

In its notice of appeal, RBA stated that documentation of the $500 rent
charge had been completed later for OIG. The Board noted in its
Preliminary Analysis that it did not appear that this documentation had
been provided to CDC or the PHS review committee. The Board
specifically told RBA that it should submit this documentation to the
Board if it wished the Board to consider it.

RBA then submitted documentation which it said supported the $500 in
rent. The documentation provided, however, is a check for $500 to the
City of El Paso, Texas, dated April 21, 1989, and a lease agreement for
furnished space at 710 East Seventh Avenue in El Paso for 60 days
beginning April 18. RBA AF Ex. C. This documentation bears no
relationship to the questioned cost of $500 paid to RBA/Laredo,
allegedly for start-up costs of a cooperative outreach program. In
fact, the audit report indicates that the auditors did not question the
$500 for rent for 710 East Seventh Avenue. 14/

With respect to the additional $300 in disallowed rent, RBA did not
deny that it was for a Food Bank Center. RBA also argued that the $300
was incurred within the "grant period," citing the Notice of Grant Award
for RBA's view that the grant period ended on April 30, 1993. As the
Board pointed out in its Preliminary Analysis, the award of funds was
only for the budget period ending April 30, 1990. Recommended support
was for the project period ending in 1993, but, as explained above,
there is no guarantee that funds will be awarded for use beyond the
first budget period. Thus, we agree with CDC that this rent cost is
beyond the scope of the CDC award, both in its purpose and in the time
period to which it is allocable.

Accordingly, we uphold the disallowance of $800 in rent charges.

H. Organizational party

The audit report questioned whether an expenditure of $500 for an
organizational party held at the residence of the Executive Director was
grant-related. The auditors found: "The receipts, which totaled only
$432, were for items such as food, decorations, and a band. The $68
difference between the $500 payment and the receipts was not
reconciled." RBA NA Ex. G, p. 6. CDC determined that the costs were
for entertainment, which is unallowable under the applicable cost
principles. See PHS Grants Policy Statement, p. 31; OMB Circular A-122,
Att. B, section 12.

On appeal, RBA argued:

The method of recruitment through social and sports activities have
proven among the most effective in reaching the target populations.
RBA, therefore, considers such activities directly program related.
The activities are highly successful in bringing large groups of
people together and, hence, provide an opportunity to engage in
substantial educational interventions. Moreover, it facilitates
the networking process so important to building channels of
information to the target populations.

RBA NA, p. 20. RBA also argued that its workplans submitted in January
and February 1989 both referred to the use of social activities as part
of the methodology of recruitment of target groups. According to RBA,
the "fact that the workplans were accepted and that no warning was
received that would have permitted RBA to change this methodology of
recruitment constitutes prior approval on the part of CDC." RBA NA, p.
20. RBA also pointed again to the Grants Management Officer's alleged
statement that RBA had wide latitude in rebudgeting, and argued that CDC
failed to give technical assistance to RBA and therefore should bear the
burden of the questioned costs.

We first note that RBA did not specifically allege that the activity in
question here was the type of social activity RBA argued was
grant-related, nor did RBA provide any evidence about who attended the
party or what its purpose was. The audit report and RBA itself
described the activity as an "organizational party," which could mean
that it was a party for RBA as an organization, rather than a social
activity designed to promote the information and education project CDC
funded.

The PHS Grants Policy Statement, which RBA acknowledged receiving,
clearly states that entertainment costs, including the costs of social
activities, are not allowable. P. 31. This distinguishes this type of
cost from costs which are allowable with prior approval. Moreover, any
prior approval must be in writing from the Grants Management Officer or
other authorized official, as discussed above. Thus, RBA had sufficient
notice that these costs were unallowable and could not reasonably rely
on merely including a reference to social activities in a workplan
(which apparently was submitted to the CDC Project Officer) as a basis
for concluding it had approval for incurring the costs.

Moreover, RBA did not show that it in fact relied on CDC silence in
response to the workplans in incurring the costs in question. RBA did
not state when the party occurred and its designation as an
"organizational party" may indicate it occurred before the workplans
were even submitted to CDC. Nor did RBA explain why it would need a
party with decorations and a band in order to do educational
intervention and networking with the target population. The revised
objectives of the grant (as described by RBA in a letter to CDC dated
September 20, 1988) refer to distributing information on AIDS in gay
bars and at sports events sponsored by RBA, but do not specifically
refer to RBA actually conducting the type of social activity at issue
here. CDC Ex. 4-l. The first revised workplan (sent to the CDC Project
Officer no earlier than January 26) refers to developing a model
methodology for outreach which would include: "Sports events and social
functions used to attract network members to local central office."
CDC Ex. 4-2. This could reasonably be interpreted, however, to simply
mean that RBA would distribute information at such events, rather than
that RBA would actually conduct such activities as part of its project.

Finally, we note that RBA did not dispute the audit finding that the
costs were not fully documented.

Accordingly, we uphold the disallowance of $500 for an organizational
party.

I. Supplies

The audit report questioned $2,894 in supplies based on the following
findings: (1) $1,861 in purchases (mainly from discount stores) lacked
supporting documentation, and there was no assurance that the items were
received and were program-related; (2) $234 was for purchases from a
discount store of men's clothes, shoes, and "music records/tapes" not
related to the program; and (3) $799 was for other grants or for RBA
itself, including $723 for the Levi Strauss grant. The auditors also
found that supporting documentation for $490 of the $799 in expenditures
was not available. RBA NA Ex. G, p. 7. CDC noted that RBA had not
responded directly to these questioned expenditures; CDC disallowed the
full $2,894.

With respect to the $1,861 in undocumented purchases, RBA argued that
the costs were documented because all checks issued were accounted for
and were identified by category in the accounting system. As discussed
above, this documentation is insufficient, given the requirement that a
grantee maintain source documentation. Without such source
documentation, it is impossible to determine whether the expenditures
were for CDC grant purposes.

With respect to the $234 for discount-store purchases, RBA argued that
the items were program-related. RBA said that the video and audio
cassettes were part of RBA's policy of sharing video and audio materials
with other agencies. RBA said that the personal items were approved at
the request of the Project Director, who identified a need to present
himself appropriately to conferences. RBA submitted no evidence in
support of these assertions.

In the absence of any evidence regarding these costs, we cannot merely
assume that they are related to the CDC project. First, even if video
and audio cassettes containing information on AIDS might be
project-related, the audit report's characterization of the supplies as
"music records/tapes" calls into question whether these particular
purchases were at all related to disseminating AIDS information as RBA
implied. Moreover, while RBA's reports on project activities refer to
distributing posters and brochures, they do not specifically mention
distributing records or tapes. CDC Ex. 4-3 and 4-4. 15/

The clothes and shoes would be questionable grant expenditures even if
RBA had provided support for its assertion that they were necessary to
enable the Project Director to attend conferences, but here RBA did not
even specifically identify the nature of the conferences or explain how
they were related to the project. Indeed, in one of RBA's earlier
responses on this issue, RBA attributed the fact that these costs were
charged to CDC funds to a mistake by the bookkeeper, who failed to
separate these expenses from "a CDC purchase" made at the same time,
even though the Executive Director had directed that the expenses should
be separated. CDC Ex. 2-1, p. 15. This implies that the Executive
Director did not consider the clothes and shoes to be legitimate CDC
expenses.

RBA did not specifically address the $799 expenditure.

Accordingly, we uphold the disallowance of $2,894 in supplies.

J. Printing

The audit report found that RBA had charged to CDC funds $432 in
expenditures for printing, poster frames, and miscellaneous supplies
that were related to the TDH grant, rather than the CDC grant. CDC
disallowed the $432 on the basis that the costs did not benefit the CDC
grant.

In response, RBA argued that (1) printing was "an approved category of
expenditure without specific or prior approval;" (2) CDC failed to
provide support for its claim that these printing expenditures were not
related to CDC; and (3) the posters, poster frames and miscellaneous
supplies were "directly related to the promotion of the posters printed
for the project." RBA NA, p. 22. RBA provided no evidence about the
nature of these particular costs.

While printing was an approved budget category and the record supports a
conclusion that it was consistent with grant objectives to disseminate
posters, that does not necessarily mean that these particular poster
costs were allowable project costs. The audit report noted a total of
$3,981 in printing costs charged to the CDC grant, questioning only this
$432. The audit report does not detail the specific basis for the
finding that the $432 charge was related to the TDH project, but RBA
acknowledged the TDH grant was for activities similar to those under the
CDC grant. RBA provided no evidence to show that the particular poster
costs at issue here were allocable to the CDC project, rather than to
the TDH project as the auditors found. Unsupported assertions are
wholly insufficient to meet RBA's burden of documenting the allowability
of costs charged to federal funds. See section III. A. above.

Accordingly, we uphold the disallowance of $432 charged as printing
costs.

K. Permit fees

The audit report questioned an expenditure of $450 paid to the City of
El Paso for a special permit fee. The auditors found that the special
permit was for a "philanthropic designation to provide a hospice/shelter
and offices," and that the expenditure had been coded as an expenditure
for the Levi Strauss grant. CDC disallowed the $450, stating that it
agreed with the audit report and quoting the following provision from
OMB Circular A-122:

Expenditures such as incorporation fees, brokers' fees, fees to
promoters, organizers or management consultants, attorneys,
accountants, or investment counselors, whether or not employees of
the organization, in connection with establishment or
reorganization of an organization, are unallowable except with
prior approval of the awarding agency.

OMB Circular A-122, Att. B, section 26. RBA did not specifically address
these costs.

While the applicability of section 26 of Attachment B of the Circular to
these costs is not entirely clear, we agree that the costs are not
allowable as a direct charge to the CDC grant. RBA presented nothing
which would indicate that the costs were incurred for the specific cost
objective of the CDC project. It appears that the cost should have been
a direct charge to the Levi Strauss grant, given the undisputed facts
that RBA itself had coded the expenditure to the Levi Strauss grant and
that the special permit referred to a hospice/shelter (which the record
indicates was related to the purpose of the Levi Strauss grant).

Accordingly, we uphold the disallowance of $450 for the special permit
fee.

L. Other expenses

The audit report also questioned other expenditures totaling $1,943
consisting of: (1) $347 which the auditors found was used to reimburse
RBA's general account and which lacked supporting documentation; (2)
$760 which the auditors found was related to the Levi Strauss grant; and
(3) $836 which the auditors found was related to the Rio Bravo
Association. CDC disallowed the entire amount.

RBA did not specifically address the $347 other than in a general
argument that the expenditures the auditors found lacked supporting
documentation were in fact supported by checks and by accounting
entries. As discussed above, this is simply not adequate documentation.

RBA argued that CDC had provided no documentation to support the claim
that $760 "of alteration and renovation expenses" were related to Levi
Strauss. RBA said:

CDC does not dispute the fact that Alterations and Renovation are a
recognized budget category and did not require prior approval given
the fact that the expense was under $25,000. Moreover, RBA had
only one facility. Therefore, the suggestion that some alteration
and renovation costs are legitimate and others are not evidence a
decision process based on unsupported and arbitrary criteria.

RBA NA, p. 22.

RBA again mistakes which party has the burden here. Given the audit
finding, RBA had the burden to document the allowability of the costs.
Moreover, assuming the costs were for alteration and renovation as RBA
alleged, this does not mean that the costs were not readily identifiable
with the Levi Strauss grant, rather than the CDC grant. The Levi
Strauss grant was for a hospice/shelter; certain types of renovations
might be necessary for this use of RBA's facility, which would not be
necessary simply to use the facility as an office for an information and
education project.

RBA made a similar argument with respect to the $836, arguing that CDC
had not provided any evidence that the costs inured to the benefit of
RBA. RBA further argued that the "stated purpose of the Rio Bravo
Association is AIDS Prevention and Education." RBA NA, p. 23.

The record as a whole indicates that RBA had purposes and activities as
an organization which clearly went beyond the scope of the particular
information and education project which CDC funded. Moreover, the
applicable cost principles recognize that certain costs of a grantee
organization relate to its own existence or mission as an organization
and may not be charged to grant funds. See, e.g., OMB Circular A-122,
Att. B, section 26, quoted above on p. 27.

Absent any documentation or other evidence regarding these costs, we
cannot conclude that they were identifiable with the CDC project, rather
than other activities of RBA as an organization.

Accordingly, we uphold the disallowance of $1,943 in costs in the
"other" category.

M. Summary of findings on disallowed costs

In summary, we uphold the disallowance of $35,891, based on our analysis
of each cost item above. We turn now to the denial of continuation
funding.

IV. The denial of continuation funding

As indicated above, the primary basis on which the PHS review committee
upheld the denial of continuation funding was inadequate stewardship of
federal funds. The review committee stated:

The record demonstrates RBA's accounting system failed to provide
adequate documentation and accountability for funds received and
expended under the CDC grant. Missing and/or incomplete receipts,
incomplete personnel time and attendance records, nonavailability
of records to document correction of posting errors made between
the CDC and the [TDH] grants, and missing or incomplete
documentation to support travel expenses incurred by RBA staff,
serve as examples of this failure.

RBA NA, Ex. A, p. 3.

RBA asserted on appeal that its accounting system provided adequate
accountability for funds received and expended and adequate
documentation. In support of this assertion, RBA explained that it used
the BPI accounting system, which provided a clear audit trail, recording
all adjustments or changes, including posting, coding, and rebudgeting.
RBA also asserted that all checks issued had been accounted for, and
that the costs for which the documentation was incomplete represented
only 2.9% of the total amount recorded in the Financial Status Report.
RBA NA, p. 5. 16/

As discussed above in section III. A., the terms of the grant made it
clear that accounting records must be supported by source documentation.
They also require that a grantee have procedures for determining the
reasonableness, allowability, and allocability of costs in accordance
with the applicable cost principles. The cost disallowances discussed
above amply demonstrate RBA's failures in this regard, which we find to
be material and sufficient by themselves to support the conclusion that
RBA provided inadequate stewardship of federal funds.

For the most part, RBA's arguments about the cost disallowances
presented here do not persuade us that the cost disallowances should be
treated as merely the type of mistakes any inexperienced grantee would
make in initiating a project. Rather, they support a conclusion that
RBA lacked understanding of fundamental concepts essential to
accountability for federal funds, that RBA had failed to obtain a copy
of the OMB Circular (even though RBA had clear notice that it applied),
and that RBA had not carefully read the materials which admittedly were
provided to it as guidance by CDC.

RBA's remaining arguments were mainly directed at avoiding
responsibility for the failures. RBA argued that its bookkeeper had
been malicious and lost receipts, that CDC failed to provide adequate
technical assistance, and that the CDC Project Officer had interfered in
RBA's management in an inappropriate way.

The PHS review committee responded to RBA's arguments about the
incompetence of its own employees as follows:

. . . RBA's management was responsible for ensuring that grant
funds provided under the CDC grant were properly accounted for and
used in accordance with the grant agreement. This responsibility
extended to the supervision of employees and assurance that the
work performed by them met or exceeded prescribed standards. In
the case of a grantee, the standards are those of a public
fiduciary or one in whom special trust has been placed; based on
the record RBA failed in many respects to achieve those standards.

RBA NA Ex. A, p. 3. We agree with this statement. Moreover, as
discussed in section II. F. above, the record raises a substantial
question whether the bookkeeper or RBA's procedures were responsible for
the lack of source documentation, especially with respect to the travel
expenses.

The record also supports a conclusion that CDC did provide some
technical assistance to RBA, such as a conference providing basic
information at which RBA officials met with the Grants Management
Officer. See, e.g., CDC Ex. 10. Moreover, the PHS Grants Policy
Statement informs grantees that if they are uncertain whether a
particular cost is allowable, "the grantee should contact the Grants
Management Officer . . . ." PHS Grants Policy Statement, p. 27. The
only evidence in the record about any specific request from RBA for
fiscal guidance from the Grants Management Officer is the January
conversation about budget flexibility discussed above in section II. D.
Contrary to what RBA argued, there is no evidence that RBA could have
reasonably relied on this conversation in incurring unallowable costs or
that the conversation was misleading.

RBA's allegations about the CDC Project Officer are unsubstantiated and,
for the most part, based on RBA's view of what professional behavior
should have been in the circumstances or on RBA's assumption that the
Project Officer had information which there is no evidence she had. The
main way in which RBA alleged that the Project Officer interfered was
that she proposed having RBA's Project Director take over some functions
from the Executive Director in April 1989. This allegation was
primarily a response to the review committee's finding that, if RBA had
to sell the automobile to pay April salaries, this was evidence of
financial mismanagement since RBA should have set funds aside for such
fixed costs. RBA attributed this failure to the Project Director having
committed funds for other purposes and to his lack of the necessary
skills to perform Executive Director functions.

The contemporaneous written record indicates, however, that the
Executive Director agreed to the proposed change based on programmatic
considerations and that he did not raise any questions about the ability
of the Project Director. CDC Ex. 1. The record also shows that RBA's
Board of Trustees approved the change and that the Project Director had
previously acted as Treasurer for RBA. RBA NA Ex. C-4. In light of
this, we fail to see how any failure on the part of the Project Director
can be attributed to interference by the CDC Project Officer.

We note that, while perhaps the CDC Project Officer could have
documented her conversations with RBA in a more complete manner, we
reject RBA's assertions about her behavior. We agree with the PHS
review committee that she acted appropriately in not divulging to RBA's
Executive Director the serious allegations which the panel understood
RBA's Project Director to be making during the site visit in April.

Finally, we reject RBA's arguments that CDC's interactions with it
evidence bad faith and bias. In our view, the record, read as a whole,
evidences the fact that CDC gave RBA the benefit of the doubt in many
respects, both in awarding the grant initially and in reviewing the
audit findings. The PHS review committee expressed the opinion that, in
spite of a commitment on CDC's part to incorporate community-based
organizations in the National AIDS Minority Information and Education
Program, CDC should not have selected RBA as a grantee, given what CDC
knew about RBA at the time. It is not our role to question CDC's
initial judgment in awarding funds. We find, however, that CDC
reasonably denied continuation funding. The record amply supports a
conclusion that RBA materially failed to comply with the terms of the
award made and that RBA provided inadequate stewardship of federal
funds. CDC has a responsibility to ensure that funds are spent only for
the purposes which Congress intended.

CDC and the PHS review committee addressed other reasons in support of a
conclusion that continuation funding was not in the best interests of
the Federal Government. We do not need to address these reasons, or
RBA's responses, in light of our conclusions above.

Conclusion

For the reasons stated above, we uphold the disallowance of $35,891 in
costs charged to CDC funds. We also uphold the denial of continuation
funding on the basis that RBA materially failed to comply with the terms
of the award, providing inadequate stewardship of federal funds.


_____________________________ Donald F.
Garrett


_____________________________ Norval D. (John)
Settle


_____________________________ Judith A.
Ballard Presiding Board Member

Ballard/bgl/5-31-90, JB's personal Disk 7 (RBA90-43.dec)

1. In this decision, we use the following abbreviations in identifying
the exhibits:

- Exhibits submitted by RBA with its notice of
appeal: RBA NA Ex. .

- Exhibits submitted by RBA with its brief and
appeal file under 45 C.F.R. 16.8(a): RBA AF
Ex. __.

- Exhibits submitted by RBA with its reply
brief under 16.8(c): RBA RB Ex. .

- Exhibits submitted by CDC: CDC Ex. .

Where a party included more than one document as part of a tabbed
exhibit, we indicate the tab number or letter and the number of the
document within that tab. For example, the third document included
under Exhibit E, submitted with RBA's notice of appeal, is RBA NA Ex.
E-3.

2. Two of these letters suggested clarifications of the report in
minor respects. Contrary to what RBA argued, we do not think these
corrections undercut the gist of the letters, which is to affirm the CDC
Project Officer's report that serious allegations were made by the
Project Director concerning the Executive Director's activities.

3. RBA argued to us that the panel's conduct in not revealing the
allegations to the Executive Director was unprofessional and that there
was no basis for the panel's belief that the Executive Director might
flee, given his family connections and status in the community. These
are matters of judgment, and we find nothing to indicate that the
panel's exercise of judgment under the circumstances was unreasonable.
We also reject RBA's insinuations that the CDC Project Officer was
biased against RBA and acting in conspiracy with former RBA employees.
The Project Officer could have documented her communications with RBA
more carefully, but the record does not support the allegations made by
RBA.

4. RBA argued in its notice of appeal that the PHS action here was a
"termination," but abandoned this argument when the Board pointed out in
its Preliminary Analysis that the PHS action did not appear to fit the
applicable definitions of "termination."

5. RBA also sought Board review of CDC's decision not to accept RBA's
application for funding for the third budget period, pending resolution
of funding for the second budget period, and to have the Board award
"restitution" to RBA for losses allegedly caused by CDC. In a
Preliminary Analysis (sent to RBA with the Board's acknowledgment of
RBA's appeal), the Board noted that these matters appeared to be outside
the scope of Board review. RBA presented nothing in response to change
this analysis.

6. The CDC determination cited to provisions of the PHS Grants Policy
Statement dated January 1, 1987, DHHS Publication No. (OASH) 82-50,000
(Rev.). RBA did not deny that this was the version in effect at the
beginning of the budget period.

7. RBA did not specifically allege that the Director/Projects
Administrator was the same as the Community Specialist referred to in
the audit report. For the purposes of our discussion, we assume this to
be so.

8. The Board also noted that the sale appeared questionable in light
of the allegation in the trip report that the Executive Director had
used grant funds to repay a $3,000 loan from his brother. RBA NA Ex. O,
p. 3. RBA asserted that the trip report allegations were
unsubstantiated, and raised several other arguments related to this
question, but never denied that such a loan had been made. We also note
that the Executive Director did not disclose in his memorandum to the
Board of Trustees the fact that the automobile was sold to his brother.
RBA NA Ex. N.

9. RBA explained this request as resulting from its need for an
"unrestricted expenditures category." RBA NA, p. 19. Indirect costs,
however, are simply overhead-type costs which cannot be readily
identified with any particular cost objective, so are allocated to
various objectives using some surrogate measure, pursuant to an indirect
cost rate agreement between a grantee organization and the Federal
Government. Indirect costs are still subject to the applicable cost
principles.

10. A June 29, 1989 letter to a doctor in the Mayor's office of the
City of El Paso from RBA's Executive Director states that the question
of the paving came up in connection with suspension of a contract
between RBA and the City of El Paso for counseling, some time shortly
after September 1988. RBA Reply Ex. 2.

11. We note that the PHS Grants Policy Statement recognizes that
grantees may need to make cost transfers to correct bookkeeping or
clerical errors in original charges. The Policy Statement states,
however, that transfers to or from PHS grants "must be supported by
documentation that contains a full explanation of how the error occurred
and a certification of the correctness of the new charge by a
responsible financial or administrative official of the recipient
organization." P. 42.

12. Also, the audit report indicates that the auditors had allowed
$4,029 for two computers. RBA NA Ex. G, p. 3.

13. RBA alleged that the bookkeeper's activity "had CDC's tacit
support." RBA brief, p. 8. RBA provided nothing that supports this
allegation, however.

14. In this and in many other respects, we find that the auditors and
CDC gave RBA the benefit of the doubt, and accepted RBA's after-the-fact
explanations of how costs related to the CDC project. This is
inconsistent with RBA's stated view that it was a victim of bias. See,
e.g., RBA brief, p. 21.

15. The audit report indicates that RBA spent CDC funds for a musical
recording which RBA alleged provided information on AIDS. The audit
report goes on to say: "The musical recording was to be distributed
nationally, but the master, which is necessary for the reproductions,
was apparently stolen." RBA NA Ex. G, p. 6. RBA did not allege that
the records/tapes at issue here were related to this tape, and it
appears unlikely given that the master was lost and given that RBA said
elsewhere that the musical recording was done in April 1989, the last
month of the budget period. RBA brief, p. 6.

16. This argument was based on RBA's identification of the items
having "unfinished documentation" as: $1,861 in supplies, $1,550 in
travel expenses, $500 in rent, and $347 (which RBA said were petty cash
charges and which was included in the audit category of "other"). As
our discussion above indicates, however, substantial other costs lacked
required documentation. CDC pointed out that the cost disallowances
amounted to over 28% of expenses charged to CDC