New York City Human Resources Administration, DAB No. 1199 (1990)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: New York City Human

DATE: October 4, 1990
Resources Administration Docket No. 87-184
ACN 02-65035
Decision No. 1199

DECISION

The New York City Human Resources Administration (NYC) appealed a
determination by the Office of Human Development Services (OHDS)
disallowing $2,615,538 in Head Start grant funds. OHDS's action was
based on the report of NYC's independent auditor for the year ended
January 31, 1985, NYC's program year (PY) 19. While the appeal was
pending, the parties reached agreement with respect to several areas of
disallowed costs. 1/ The amount remaining in dispute is $2,443,001.
This amount is the total of the "accounts receivable" and "accounts
payable" balances for a number of program years. OHDS determined that
the balances represented excess federal cash drawn down by NYC but not
actually expended for program purposes. Accordingly, OHDS requested
repayment of the amount at issue.

The accounts receivable amount of $901,639 represents federal funds
advanced by NYC to its delegate agencies in excess of their reported
expenditures for the program years from 1977 until 1983 (PYs K, L, M, N,
O, 16, and 17). The accounts payable amount of $1,541,362 represents
expenditures reported by NYC's delegate agencies which exceeded cash
advances from NYC for the program years from 1977 until 1984 (PYs K, L,
M, N, O, 16, 17, and 18). 2/ It is undisputed that NYC drew down
federal cash to cover both the accounts receivable and the accounts
payable.

In arguing that these balances were not unallowable expenditures
properly subject to a disallowance action, NYC relied on a number of
general principles which are not necessarily unsound but which simply do
not address the cash management issues arising out of the long- standing
cash balances involved here. Both the accounts receivable and the
accounts payable balances at issue had been carried on NYC's books for a
number of years. Given the age of the balances, we find that OHDS
reasonably determined both that the receivable amounts were
uncollectible and that the payable amounts do not represent legitimate
program obligations. Moreover, the documentation supplied by NYC was
inadequate to support its assertion that these balances were reduced by
later transactions or by various adjustments to its records.

A fundamental principle of grants law is that federal funds may be
expended only for the purpose for which appropriated, and no other. 31
U.S.C. 628. It is, moreover, a grantee's obligation to document that
federal funds received were actually expended for allowable program
costs. At the heart of this case is what NYC must do to account for
federal funds actually received. As we explain below, we conclude that
sound cash management practices require that the federal funds
represented by these balances be returned in order to safeguard federal
resources and assure their availability for proper program expenditures.
Accordingly, in the absence of persuasive evidence that the amount of
Head Start funds currently unaccounted for is less than the balances
relied on by OHDS, we conclude that NYC must repay now the accounts
receivable and accounts payable amounts, which represent cash NYC has
received but for which it has not accounted by documenting actual, paid,
and allowable grant expenditures.

NYC's Head Start Program and the Program Year 19 Audit

During PY 19, February 1, 1984 to January 31, 1985, NYC operated its
Head Start program by contracting with 67 delegate agencies. NYC was
responsible for programmatic and fiscal oversight of the delegated Head
Start program. Delegate agencies submitted monthly expenditure reports
and requests for disbursements to NYC. NYC Ex. 1-B, p. 3. NYC's
schedules listing receivable and payable amounts by PY, by delegate
agency, included 86 different agencies (some obviously no longer serving
as delegates).

This dispute concerns the accounts receivable and accounts payable
balances shown on the PY 19 audit report. What these balances
represent, the nature of the federal government's interest, and its
authority to require the return of cash now are the central questions
presented here. NYC argued that these balances are not properly subject
to a disallowance action and, in any event, have been reduced
essentially to zero by later transactions or adjustments. To facilitate
consideration of these arguments, we first describe in some detail the
pertinent parts of the audit report.

The financial statements for the PY 19 audit showed accounts receivable
from the delegate agencies of $1,870,419 and accounts payable to
delegate agencies of $2,362,359. NYC Ex. 1-B (Audit report), p. 13.
The notes to the financial statements stated the receivable and payable
balances by PY from PY K through PY 19. The notes described the
accounts receivable as the "excess of cash advances to delegate agencies
over their reported expenditures" reported for each delegate agency on a
program year basis. Audit report, p. 17. The accounts payable were
described as the "excess of delegate agencies' expenditures over cash
amounts received" reported for each delegate agency on a program year
basis. Audit report, p. 20. (It should be noted that unlike other
years' composite audit reports, the PY 19 audit reported the balances
separately for each program year without offsetting for a particular
delegate agency a receivable from one PY against a payable for another
PY.)

The financial statements also showed a fund balance for PY 19 of
$1,144,721. Audit report, p. 13. The notes to the fund balance entry
listed the fund balance amounts for PYs K through 19. Audit report, p.
20. The fund balances were described as the "differences between
authorized funds and actual expenditures" for each PY. The audit noted
that the fund balance amounts cannot be budgeted for any expenditures
unless reprogrammed by OHDS into another program year. The audit also
stated that as of amendment 4 to PY 20's grant, unobligated balances
totaling $1,264,299 from PYs 16 through 19 had been reprogrammed.

In the calculation of the fund balance amount, the receivable amounts
are listed among the assets and the payable amounts are listed among the
liabilities. The fund balance is calculated simply by deducting the
total liabilities from the total assets. Audit report, pp. 13 and 20.

The audit report's analysis of deficiencies in NYC's internal accounting
controls found that $1,651,890 of the accounts receivable had been due
for more than one year. Of that amount, $238,588 had been owed for six
years or more and $1,048,107 had been owed for four years or more. In
addition, $196,717 of the accounts receivable amount was listed as
"unallocated" since it was due from delegate agencies which could not be
identified. Also, $339,522 of the accounts receivable was due from 12
agencies that were no longer participating in NYC's Head Start program.
With regard to the accounts payable, the audit stated that $107,284 was
due to delegate agencies that were no longer in the program. The
auditors recommended prompt collection of amounts due and liquidation of
amounts payable. 3/

OHDS's Disallowance

Based on the PY 19 audit, OHDS determined that the receivable amounts
that had aged over two years were uncollectible. After deducting an
earlier disallowance of $620,622 (part of the accounts receivable
balances for PYs K, L, M, N, and O), OHDS disallowed $901,639, the
remaining amount of the accounts receivable balances for PYs K, L, M, N,
O, 16, and 17. OHDS considered NYC's argument that it had collected
$1,313,344 of the total PY 19 accounts receivable balance of $1,870,419,
but concluded that it must proceed with a disallowance in the absence of
either (1) documentation supporting the alleged collections or (2)
evidence that $901,639 in non-federal cash had been transferred to the
Head Start account.

OHDS's disallowance stated that, as advances of federal funds in excess
of actual expenditures, the amounts represented by the accounts
receivable are not allowable expenditures in accordance with Office of
Management and Budget (OMB) Circular A-87. OHDS also relied on the
administrative regulations at 45 C.F.R. 74.61(b) and (g) and 74.112(a).
These regulations require that a grantee maintain documentation of the
source and application of grant funds and state the fundamental right of
the grantor agency to recover any funds advanced in excess of the amount
to which the grantee is entitled.

With regard to the payables balance, OHDS concluded that --

Carrying these liabilities on the books is an inappropriate
practice because [NYC] charged the Head Start fund balance without
actually using the funds involved to reimburse delegates for
program related expenditures. . . .

OHDS concluded that unpaid liabilities did not represent necessary and
reasonable costs of the grant program and thus were not allowable under
OMB Circular A-87, Section C.1.a. OHDS also relied on 45 C.F.R.
74.61(b), noted above, and 45 C.F.R. 74.92, which requires prompt
liquidation of payables by requiring a grantee to minimize the amount of
time between the draw down of federal funds and their actual
disbursement for program purposes. OHDS disallowed the payables in the
absence of documentation that either the liabilities had been liquidated
or the funds restored to the fund balance.

Below, we analyze first the issues related to the accounts receivable,
and then those related to the accounts payable.

Accounts Receivable

OHDS took the position that this appeal presented the same issues as
arose in New York City Human Resources Administration, DAB No. 720
(1986) (NYC's appeal of the earlier disallowance of $620,622). The
Board there upheld a disallowance representing part of the accounts
receivable owed by NYC's delegate agencies as of the end of PY 16. 4/
The Board found that the "accounts represent federal grant funds that
have not been demonstrated to have been used for allowable program
expenditures by the delegate agencies and that may no longer even be
collectible from the delegate agencies." DAB No. 720, p. 12. The Board
concluded that NYC must "account for these funds in cash as it would in
any other instance of disallowed funding" since NYC had not demonstrated
that the accounts receivable had been reduced or eliminated. Id. OHDS
asserted that the disallowance of the accounts receivable in question
here was required for the same reasons.

NYC argued, however, that there is no federal interest in the
receivables balance authorizing OHDS's action to recover those amounts.
NYC argued that the accounts receivable balance was "recovered" by OHDS
when the unobligated fund balance for PY 19 was carried over
("reprogrammed") to PY 20, so that DAB No. 720 was not controlling here.
NYC argued that it should not have to account to OHDS for the amount in
question in both PY 19 and PY 20: in PY 19 by repayment of the amount
of the accounts receivable, which NYC asserted were now only debts
running from the delegate agencies to itself, and in PY 20 by accounting
for the funds awarded for that program year, which included the
unobligated balance carried over from PY 19. 5/

While the record shows that the amount of the accounts receivable for PY
19 was reflected in NYC's calculation of the fund balance amount, since
the total accounts receivable balance is listed as an asset (Audit
report, p. 13), the unobligated funds carried over to PY 20 do not
consist literally of the accounts receivable balance. See Audit report,
pp. 13 and 30, and Ex. 1-C (Audit report, PY 20), p. 28. In other
words, while NYC's audited fund balance is NYC's statement of unexpended
grant funds as of a certain point in time, OHDS's determination of the
funds available for carryover is not necessarily directly related to
NYC's stated fund balance. The carryover amount can, for example,
include amounts authorized but not yet drawn down or amounts
representing prior years' disallowed expenditures. NYC attempted to
account for cash drawn down in excess of reported expenditures by
reporting the accounts receivable balance as an asset. But the mere
fact NYC did this does not mean that OHDS by reprogramming NYC's funding
authority was writing off its interest in the federal cash represented
by the accounts receivable.

The Board previously considered an argument that the reprogramming of
grant funds in an amount equal to an accounts receivable amount
discharged a grantee's obligation for the funds in Economic Opportunity
Council of Suffolk, Inc., DAB No. 679 (1985). In rejecting that
argument, the Board stated:

We agree with Grantee that the effect of the reprogramming is that
Grantee can ultimately discharge its obligation for the
reprogrammed funds through costs incurred in the program year to
which the funds are reprogrammed. . . . But this does not really
undermine OHDS' position that . . . Grantee had received federal
cash . . . which it had not accounted for either through program
expenditures actually paid or through cash on hand.

DAB No. 679, p. 5. The Board further stated in DAB No. 720, supra,
that --

the Agency's allowing the City to carry over an unobligated balance
in any given year does not . . . permit Grantee to use . . .
[these funds] for any non-grant purpose or to hold them
indefinitely. These funds must be expended for grant purposes, be
reasonable and necessary for the purposes of the grant, and comply
with all other applicable cost principles or eventually be returned
to the federal government.

DAB No. 720, p. 7.

Thus, OHDS did not recover (or NYC in turn account for) any funds simply
by reprogramming. See OHDS's Cordasco affidavit dated April 12, 1989,
paragraph (para.) 7, responding to NYC's Miller affidavit, NYC Ex. 2,
para. 14. Instead, by reprogramming, OHDS merely authorized NYC to
expend in PY 20, in addition to new funds awarded for PY 20, an amount
originally awarded earlier. Reprogramming does not result in recovery of
excess federal cash amounts, it merely authorizes their expenditure
later. Accordingly, regardless of whether the amount in question is
labelled as accounts receivable or as carryover to PY 20, OHDS can
require NYC ultimately to account for it either in cash or in allowable
costs incurred and paid. Unless OHDS can do so, the risk is that the
federal funds advanced to the delegate agencies -- nearly $1,000,000
which may have been spent by the delegate agencies for purposes other
than the Head Start program -- will never be collected and that no funds
will be available to actually pay expenditures properly charged to the
grant. By requiring NYC to repay the accounts receivable amount in
cash, OHDS can ensure that federal cash drawn down in excess of total
allowable costs incurred and paid is not lost forever because of NYC's
practice of advancing excess funds to delegate agencies and not
collecting the funds back in a timely manner.

In an Order to Show Cause issued in this case, however, the Board
questioned whether NYC might have already discharged its obligation to
OHDS for the amount of the accounts receivable, to the extent these
funds were reprogrammed, if it incurred and paid in PY 20 allowable
costs which equalled the amount of the PY 20 grant award of new funds
plus the reprogrammed funds. 6/ To do so, NYC could have used its own
cash in the amount of the reprogrammed funds or taken steps to assure
that the delegate agencies expended their own cash in an amount equal to
the reprogrammed funds for allowable program purposes. In either case,
there would no longer be a federal interest in the cash advanced to the
delegate agencies (represented by the receivables); the accounts
receivable would then be debts owed to NYC only. As the Order made
clear, however, unless NYC could demonstrate that reprogrammed funds had
been paid out for program purposes, NYC would not have met its burden to
account for the excess cash represented by the portion of the
receivables reflected in any year's unobligated balance which was
carried over. In that instance, the cash management issue remains --
NYC is not entitled to retain federal cash, reprogrammed or not, which
exceeds allowable costs incurred and paid. This is especially true here
when NYC cannot show it actually had the cash on hand but instead was
carrying accounts receivable balances as old as the ones at issue here.

In response to the Order, NYC submitted documentation which purported to
establish that, in PY 20, NYC used its own cash in the amount of the
reprogrammed funds. We find this documentation unpersuasive, however.
NYC argued that it only needed to show an infusion of NYC funds into the
Headstart program without demonstrating that such funds were used for
allowable costs incurred and paid. NYC response to Order, p. 4.
Schedule 1 of NYC's response to the Order shows that, as of 1/31/86,
total cash receipts from OHDS for PY 20 were less than NYC's cash
disbursements to its delegate agencies and for Central Administration.
Schedule 1 further shows that this "cash overdraft" (which exceeded the
amount of the accounts receivable) was covered with NYC funds. However,
Schedule 2 of NYC's response shows that, on 2/16/86 and 4/7/86, NYC
received funds from OHDS up to the full amount authorized for PY 20,
which necessarily included funds to cover the disbursements related to
the overdraft. Thus, NYC funds were used only on a temporary basis and
not as a permanent substitute for federal funds.

Accordingly, we conclude that NYC failed to support its argument that
there would be a double recovery of funds by OHDS if it both
reprogrammed unobligated funds and required the return of the accounts
receivable amount.

Following the receipt of responses to the Order, the Board held a
telephone conference in order to give NYC an opportunity to explain how
its documentation supported its position. While no further explanation
was offered, the parties agreed that the balance sheets for the
individual delegate agencies for PY 19 might support NYC's contention
that the accounts receivable had been reduced to $30,828 as of December
31, 1988 and the accounts payable reduced to zero as of the same date.
Proceedings in the case were stayed in order to permit OHDS to review
this documentation. OHDS subsequently determined that the documentation
was unacceptable because most of the balance sheets had no information
about accounts receivable (or accounts payable) prior to PY 19 and NYC
was unable to produce supporting documentation for the years prior to
1981 for even a limited sample of delegate agencies.

NYC contended that it was not required to have documentation for the
earlier years because the three- year records retention period provided
for by the applicable regulations 7/ had expired. NYC took the
position, moreover, that composite audit reports for its Head Start
program, which were available for all the years in question, constituted
adequate documentation, asserting that the auditor confirmed the amount
of the accounts receivable (and accounts payable) for each delegate
agency as a part of each year's audit.

NYC would have OHDS accept at face value the figures shown in its
composite audit reports. In view of OHDS's responsibility for guarding
the federal fisc, however, it was not unreasonable for OHDS to refuse to
accept the composite audits since the questions raised here were not
addressed in those audit reports.

That the records retention period may have expired here is not a
sufficient basis for excusing NYC from producing supporting
documentation, moreover. The Board has held that there is no
presumption that a grantee kept pertinent records and retained them for
the requisite period. See Kentucky Cabinet for Human Resources, DAB No.
957 (1988), and cases cited therein. Here, NYC did not claim that it at
one time possessed supporting documentation which was destroyed in
accordance with an established record-keeping policy rather than lost
due to carelessness, nor did it indicate when such documentation might
have been destroyed. Since NYC did not establish that pertinent
documentation ever existed, its responsibility to document that federal
funds were properly expended is not defeated by the records retention
provisions.

Moreover, NYC's reliance on the absence of documentation for earlier
years amounts to bootstrapping. The problem here arises from a record
which is nearly inscrutable in part because NYC for years carried
bookkeeping entries for receivables and payables without ever
satisfactorily resolving them. Now, in the midst of this muddle, NYC
would have us excuse it from accountability based on the mere assertion
that in some records which NYC no longer has, there may have been
something which might have shed some light. This is entirely too
speculative and tenuous a possibility to relieve NYC of its obligation
to account for the funds involved here.

NYC asserted all along that the receivables balance for the PYs involved
had been reduced. See NYC to OHDS letter of January 8, 1987, OHDS Ex.
R-36 (that letter stated that NYC had collected outstanding receivables
of 1.3 million dollars). In addition to the documents it showed to OHDS
to support this assertion, discussed above, NYC also submitted schedules
to the Board showing adjustments reducing the accounts receivable to
$30,828 by December 31, 1988. NYC response to Order, schedule 3; and
NYC April 30, 1990 submission, schedule 1. A further schedule showed a
reduction to $5,292 by June 3, 1990. NYC August 16, 1990 submission,
updated schedule 1.

OHDS did not accept the schedules and neither do we. The adjustments
shown on the schedules are not persuasive evidence that the cash amounts
were accounted for by legitimate program expenditures. For example, as
reflected in the PY 20 audit (NYC Ex. 1-C), a substantial part of the
reduction is due to the offset of payables and receivables due to and
from the same delegate agency. As we explain in more detail when we
discuss the payables balance, such an offset is not proper here. NYC
did not dispute that federal funds were drawn down to cover both the
payable and the receivable amounts. Here -- where NYC has not
documented that the receivables balance was actually reprogrammed and
paid out for program purposes in a later program year -- the receivables
balance retains its status as federal cash and is not subject to offset.

Moreover, some of the other adjustments simply recharacterize parts of
the accounts receivable balance as amounts restored to the fund balance
-- as such, these amounts should be available in cash to return to OHDS
upon demand. Other of the adjustments were not supported in our record
other than by a summary notation on the schedule itself. We cannot
accept an adjustment without concrete supporting evidence. See DAB No.
720, pp. 8-10.

Accordingly, we find that there is no basis for concluding that the
accounts receivable (or, for that matter, the accounts payable) balance
was reduced as contended by NYC.

In essence, the accounts receivable balance represents federal funds
received by NYC for which it has not provided adequate evidence of
expenditure for program purposes. Since NYC has not shown that the
federal interest in the amount of the accounts receivable was
extinguished, NYC must now pay this amount in cash to OHDS.

Accounts Payable

OHDS took the position that the accounts payable were not necessary and
reasonable costs since they represented debts at least two years old
which were never paid by NYC, although NYC reported them as grant
expenditures. NYC asserted that the amount of the accounts payable
should be presumed to have been expended by the delegate agencies for
allowable costs despite its failure to pay the delegate agencies. NYC
argued that it should not be required to repay OHDS for the federal
funds drawn down to cover these allowable costs when it remained liable
to the delegate agencies. In addition, NYC asserted that the accounts
payable could be liquidated by setting them off against the accounts
receivable and that it had reduced any remaining accounts payable
balances to zero by means of other adjustments.

We conclude that the amount in question was properly disallowed. NYC
cannot reasonably claim that it incurred a reimbursable cost for an
accrued expenditure which had not been paid for two or more years, the
length of time that the accounts payable had remained on its books.
Simply due to the age of the balances, the payables do not represent
legitimate Head Start program obligations. Even if NYC had a letter of
credit which allowed it to draw federal funds from its account in
advance of making expenditures, it was required to have procedures for
making payments which minimized the time elapsing between the draw down
and expenditure of funds. 45 C.F.R. 74.92(a). Since NYC was not
entitled to retain federal funds indefinitely to cover the accounts
payable, the amount in question was due to be returned to OHDS.

Even if there were no requirement for timely liquidation of the accounts
payable, we would conclude that the disallowance of the accounts payable
was justified. NYC did not establish that the accounts payable
represented allowable costs incurred and paid by the delegate agencies.
As indicated above, NYC argued for a presumption that the delegate
agencies incurred allowable expenditures in the amount of the payables,
asserting that it was OHDS's responsibility to identify unallowable
costs. Such a presumption would, however, be contrary to this Board's
consistent holding in numerous cases that the burden to document the
existence and allowability of costs claimed in grant programs rests with
the grantee. See West Central Wisconsin Community Action Agency, Inc.,
DAB No. 861 (1987), and cases cited therein at page 4. Moreover, the
Board has also held that since the legal relationship created by a grant
award is between the awarding agency and the grantee, the grantee and
not delegate agency is responsible for the funds awarded. Sacramento
Area Economic Opportunity Council, Inc., DAB No. 640 (1985). Thus,
there is simply no basis for a presumption that the payables amount
represents actual allowable expenditures incurred and paid by the
delegate agencies. Without some evidence as to the nature of the
underlying expenditures and the reasons these obligations were not
promptly paid by NYC, it is more reasonable to presume that these
reported expenditures may never have been liquidated by the delegate
agencies or that given their age they have been written off by the
delegates (since NYC never paid). 8/

As evidence that the payables balances were actually liquidated by the
delegate agencies, NYC submitted a schedule for nine delegates derived
from its accounting records and the delegate agency audits for PYs 20
and 21. NYC response to Order, schedule 4. The schedule states that for
those nine delegates there were no unliquidated "Trade Accounts Payable"
as of January 1, 1987. Such a summary schedule, derived from later
years' records, simply does not address the payables balances for the
years in question, 1977-1984, or provide any evidence that those
payables in fact represented allowable expenditures incurred and paid by
the delegate agencies.

Since NYC did not establish that the accounts payable represented
allowable costs (or indeed, that the $1.5 million involved was even
spent for the Head Start program), there is also no basis for a setoff
of the accounts payable against the accounts receivable; such a setoff
would be wholly illusory. 9/

As OHDS asserted, federal funds are accounted for on a fiscal year
basis. Consequently, OHDS objected to NYC's combining one year's
surplus with another year's deficit to arrive at an ending balance
without "independent verification that assets were available to carry
over and/or liabilities for another year had been liquidated with
revenue from that grant year." OHDS April 18, 1988 submission, p. 3.
In light of our conclusion that NYC failed to demonstrate either that
federal funds represented by the receivables were actually expended for
program purposes in a later program year or that the payables
represented legitimate Head Start obligations, it is clear that all a
setoff accomplishes is the unwarranted writeoff of substantial amounts
of federal cash.

Moreover, as previously indicated, NYC was unable to adequately support
its claim that the accounts payable balance had been reduced to zero.
The adjustments reflected on the schedules for the accounts payable
suffer from the same infirmities as the schedules for the receivables
discussed above. See NYC response to Order, schedule 3, and NYC
submission of April 30, 1990, schedules 1, 2, and 3.

Conclusion

There is a large and complex record in this case. We have provided NYC
with every opportunity to demonstrate that the amount of federal cash
represented by the accounts receivable and accounts payable balances is
not properly recovered at this time. At best, NYC's largely theoretical
arguments and summary schedules raise only a speculative possibility
that the amount to be repaid is less than that demanded by OHDS. In
light of OHDS' oversight responsibility for federal funds, we find based
on the record presented here that OHDS rightly determined that it could
not adjust the amount due. To the extent this decision may result in
NYC's receiving less federal funds than it is entitled to, NYC must bear
the responsibility for this: NYC's poor cash management practices and
lack of credible documentation resulted in its inability to account for
large blocks of federal cash.

For the reasons discussed above, we conclude that OHDS properly
disallowed the amounts of the accounts receivable and the accounts
payable as of PY 19. Accordingly, we sustain the disallowance totalling
$2,443,001.


_____________________________ Judith A. Ballard


_____________________________ Norval D. (John)
Settle


_____________________________ Cecilia Sparks
Ford Presiding Board Member

1. During these proceedings, the Board granted a number of lengthy
stays to permit the parties to pursue settlement. While the parties
successfully resolved several of the disallowed items, they were
ultimately unable to resolve the questions presented here. The record
is large and complex, containing the parties' responses to our
preliminary analysis in an Order to Show Cause as well as responses
addressing matters which arose during various telephone conferences. In
addition, NYC originally requested and the Board granted a request for
an in-person oral proceeding. Ultimately, NYC withdrew its request.

2. NYC conceded that there were some accounts payable owed to, and
accounts receivable due from, delegate agencies which were defunct. NYC
also conceded that the accounts payable included a small amount of
unallowable costs. Although NYC acknowledged that OHDS was entitled to
recover such amounts in cash, NYC did not withdraw its appeal with
respect to such amounts. See, e.g., NYC Exhibit 7, p. 2.

3. The PY 20 audit report indicates that in response to this audit
recommendation, NYC instituted procedures to offset and net amounts due
to and due from the same delegate agency for different years. NYC also
stated that it was pursuing collection and reduction of outstanding
balances. NYC Ex. 1-C, pp. 61, 77. However, as explained later, the
offset procedure was not acceptable, and there is inadequate evidence
that NYC reduced the amounts due in any other fashion.

4. OHDS agreed to postpone collection of the disallowance upheld in
DAB No. 720 pending a decision by the Board in this appeal.

5. NYC received for its PY 20 a Notice of Financial Assistance Awarded
which showed a total federal approved budget of $37,831,866. Of this
amount, $36,203,957 was identified as "total amount awarded this budget
period." The remaining $1,627,909 was identified as "unobligated balance
from prior budget period." NYC reply brief, Ex. 5-B. NYC took the
position that the $1,627,909 represented a carryover of unobligated
funds, including the amount of the accounts receivable, from PY 19. In
support of its position, it pointed to a statement in the PY 19 audit
report showing a "fund balance" of $1,144,721 as of January 31, 1985,
the close of PY 19. Audit report, p. 15. NYC also submitted an
affidavit from a certified public accountant stating that the fund
balance is an accounting of all unexpended federal grant funds and that
the receivables are a part of the fund balance. NYC Ex. 2, p. 5.

6. The Order also stated that, to the extent that unobligated funds
were carried over from PY 20 to 21 or subsequently, NYC would have to
account for those funds through costs incurred and paid in those program
years in order to completely discharge its obligation for the cash
represented by the accounts receivable.

7. Section 74.21 of 45 C.F.R. provides generally that records shall be
retained for three years from the submission of the grantee's last
expenditure report for the period in question. The time for retention
is extended until the resolution of any litigation, claim, negotiation,
audit or other action involving the records which is started before the
expiration of the three-year period. According to NYC, the audits for
the PYs through 1980 were all closed without any unresolved questions
prior to the onset of this litigation in late 1986. However, the fact
that NYC carried separate accounts receivable and accounts payable on
its books for earlier periods as reported in the PY 19 audit shows that
unresolved questions remained.

8. The Order noted that, according to a composite audit, individual
delegate agency audits for PY 19 identified a total of only $36,830 of
unresolved questioned costs, and tentatively concluded that this implied
that the $1,541,362 of accounts payable less $36,830 represented
allowable costs. However, the Agency pointed out that the disallowance
did not cover PY 19.

9. We note in any event that even if the accounts payable represented
allowable costs, a setoff would not extinguish NYC's liability to OHDS
for the payables since the accounts receivable still represented federal
funds. The Board gave an example to illustrate this point in the Order
to Show Cause. Neither party challenged the example or the assumptions
on which it was based. The example assumes that in Year A NYC received
$100,000 in federal funds and transferred that amount to one delegate
agency, which had grant expenditures of only $90,000. Since $10,000 of
the Year A grant award was not used for grant costs, NYC was liable to
OHDS for this amount. Assume that in Year B NYC again drew down $100,000
in federal funds, transferring $90,000 to the same delegate agency,
which reported grant expenditures of $100,000. Since $10,000 of the Year
B grant award was not actually received by the delegate agency and used
for grant costs, NYC was also liable to OHDS for this amount. By
setting off the $10,000 owed NYC by the delegate agency (accounts
receivable) against the $10,000 which NYC owed the delegate agency
(accounts payable), NYC would have accounted for $10,000, but would
remain liable to OHDS for $10,000. Only if NYC had already extinguished
the federal interest in the accounts receivable by applying its own
funds to cover allowable costs incurred and paid in later years would
the offset of the accounts receivable and the accounts payable (assumed
here to represent allowable expenditures incurred and paid by the
delegate agencies) extinguish NYC's remaining $10,000 liability. Here,
where there is a federal interest in the receivables balance and no
basis for concluding that the payables balance represents a legitimate
program obligation, NYC remains separately accountable to OHDS for the
amount of both