Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Michigan Department of Mental Health
DATE: January 13, 1992
Docket No. 91-116
Audit No. A-05-91-05083
Decision No. 1291
DECISION
The Michigan Department of Mental Health (State, DMH) appealed
a
determination by the Division of Audit Resolution (DAR) of
the
Department of Health and Human Services (HHS), disallowing $31,684
in
payroll and associated indirect costs charged to a grant awarded
under
the Child Abuse and Prevention Act, 42 U.S.C. . 5101 et seq.
The
disallowance was based on an audit by the Michigan State Auditor for
the
period October 1, 1985 through September 30, 1987, covering fiscal
years
(FYs) 1986 and 1987, which found that the State had failed to
maintain
time distribution records to support the allocation of staff
time
between federal and State cost objectives. The State argued that
these
costs should not be disallowed since the State's auditor found
that,
while the State had not maintained the required time
distribution
records, the amounts claimed were not excessive. The State
offered
position descriptions and memoranda from staff members to support
its
claim.
After review of the arguments and documentation offered by the State,
we
find that the distribution of staff time to federal cost objectives
was
not adequately documented. Therefore, we uphold the disallowance
in
full.
Background
During the period audited, the State allocated payroll costs to
certain
federal grants by determining a percentage of time spent based
on
information from staff and supervisors. 1/ Notice of Appeal at
1. The
audit stated that time "distribution percentages were fixed in
the
department's cost distribution system and were not adjusted to
reflect
actual time spent on the federal program." DAR Exhibit (Ex.) A
at 6.
Therefore, the audit questioned all payroll costs allocated to
the
federal grants, because the allocation was not supported
by
documentation of actual time distribution. 2/
The State conceded that "time distribution records were not
maintained"
during the relevant time. State Brief (Br.) at 2.
However, the State
suggested that DAR "misinterpreted" the auditor's intent
by issuing a
disallowance, since the audit did not "find the payroll charges
to be
excessive" or "disagree with the amount of time charged to
these
grants." Id. at 1. The State argued that disallowance of
all the
questioned payroll costs is inequitable since "actual staff
time
consistent with payroll charges was spent on these grants," so the
costs
were "legitimately incurred." Id. at 2. The State contended
that time
distribution records were not kept, because no standard system
for
documenting staff time by project existed. Id. Finally, the
State
offered additional supporting documentation for its allocation of
staff
time. State Attachments (Atts.) B, C, and D. 3/
Office of Budget and Management Circular A-87 (OMB A-87),
Attachment
(Att.) B, B.10.b, provides the following requirements for
documenting
distribution of staff time:
Payrolls must be supported by time and attendance or
equivalent
records for individual employees.
Salaries and wages of employees
chargeable to more than one grant program or
other cost objective will
be supported by appropriate time distribution
records. The method used
should produce an equitable distribution of
time and effort.
Analysis
1. The State undeniably failed to meet its obligation to support
its
costs under the grant with time distribution records.
The State submitted a letter from the State Auditor General in support
of
its contention that the disallowance was based on a misinterpretation
of the
audit. State Att. A. That letter concluded that "although
DMH
could not document the payroll charges made to these grants, DMH
staff
performed services on these federal assistance programs, and that
the
amount of payroll charges to these grants appeared to be reasonable
and
was not excessive." Id. at 1. The Auditor General explained
that while
the entire amount charged to the federal programs was not
supported by
time distribution records, the audit fieldwork had included
procedures,
such as staff interviews, which supported their overall
conclusion that
the amounts charged were reasonable and not excessive.
The audit nevertheless questioned the entire amount of payroll costs
and
stated that potentially "all or a portion" of the payroll charges
for
which no time distribution records were kept "could be
disallowed
because of the lack of documentation." DAR Ex. A at 6.
Consequently,
DAR's determination to disallow all the questioned costs
associated with
the HHS program, after the State failed to provide any
additional
documentation to resolve the audit finding in its favor, clearly
was
within the range of corrective actions contemplated in the audit
report.
OMB A-87, including the requirement for "appropriate time
distribution
records" for employees working on more than one cost objective,
has been
in place throughout the grant period, and was made applicable by
federal
regulations at 45 C.F.R. . 74.171. (All cites from the Code of
Federal
Regulations were accurate at all relevant times.) Costs charged
to
federal grants must not only be reasonable in amount, but must also
be
"necessary" to the administration of a grant and "allocable
thereto."
OMB A-87, Att. B, B.10.a, and Att. A, C.1.a. Costs are
only "allocable
to a particular cost objective to the extent of benefits
received by
such objective." Id. at Att. A, C.2.a.
Without source documentation, the extent to which an employee's
activities
benefitted the grant cannot be substantiated. Accounting
records which
"identify adequately the source and application of funds
for grant . . .
supported activities" are required by 45 C.F.R. .
74.61(b). The records
must be supported by source documentation "such
as cancelled checks, paid
bills, payrolls, contract and subgrant award
documents, etc." 45 C.F.R.
. 74.61(g). Section 74.61(f) further
requires that "[p]rocedures shall
be established for determining the
reasonableness, allowability, and
allocability of costs in accordance
with the applicable cost principles . . .
." We have repeatedly held
that the federal recordkeeping
requirements and cost principles place
the burden on grantees to document
their costs. See, e.g., Pennsylvania
Dept. of Public Welfare, DAB No.
1089 at 7 (1989). It is therefore
reasonable for DAR to disallow costs
which may in fact have been
incurred when the grantee is unable to document
that the costs are
properly charged to the grant.
The State nevertheless argued that its failure to maintain the
required
records resulted from the absence of any standard mechanism at the
State
or federal level. The absence of a State mechanism certainly does
not
excuse the State from compliance with federal requirements. Nor is
the
Federal government responsible for prescribing the mechanism by
which
the grantee should prepare and maintain required records. OMB
A-87
provides that grantees have "primary responsibility for
employing
whatever form of organization and management techniques may be
necessary
to assure proper and efficient administration." OMB A-87,
Att. A,
A.2.c. Thus, the State had the primary responsibility to
employ
whatever mechanism was necessary to comply with requirements
for
documenting time distribution. Since the State admittedly failed
to
maintain any time distribution records, the costs could only be
charged
to the grant if the State were able to provide adequate
alternative
documentation to meet federal requirements.
2. The documents offered by the State do not satisfy
federal
requirements and so do not adequately support allocation of staff
time
to the federal grant.
We turn now to the documents submitted by the State to support
its
allocation of staff time. None of the documents even purports
to
represent contemporaneous records of actual time distribution.
Rather,
the documents amount to either "retrospective estimates of what
the
employee actually did" or "forecasts of what the employee would
do."
DAR Br. at 9. The specific documents are described below:
-- A letter from the principal investigator on this
grant (Ms.
Carol T. Mowbray) stating that the
project director (Ms. V. Sue
Johnson), whom Ms. Mowbray supervised, had been
"assigned . . . to work
on the grant for 25% of her time, in FY 86 and FY
87." She further
states that she "can attest to the fact that during FY 86
and FY 87, Ms.
Johnson spent at least 25% of her time" on specific activities
relating
to the grant. State Att. B, Mowbray letter (Aug. 8, 1991).
-- A memorandum from Ms. Johnson stating that her
work on the grant
"constituted an average of 25%" of her time. State
Att. B, Johnson
memorandum (July 31, 1991).
-- A memorandum described as coming from the chief
accountant
stating that Ms. Johnson's time was
charged to the federal grant at
50% in FY 86 and 25% in FY 87. State
Br. at 2. The memorandum refers
to four attached, contemporaneous staff
memoranda. State Att. D,
Lalwani memorandum (July 19, 1991).
-- The first attached memorandum is from Ms. Johnson
and states
that her salary should be assigned to the
grant at 50%. State Att.
D, Johnson memo (Jan. 8, 1986). The
second memorandum provides more
detail about accounting and gives the same
percentage to be used as of
January 1, 1986. State Att. D, Johnson memo
(Feb. 27, 1986). The
third memorandum, from the chief accountant,
states that Ms. Johnson's
salary will be charged to the federal grant
at 50% as of January 1, 1986
(Mar. 3, 1986). Finally, the fourth
memorandum, from Ms. Mowbray,
states that Ms. Johnson's time was still
being charged at 50%, but
should have been reduced to 25% at the beginning of
FY 87. Ms. Johnson
is described as "devoting a smaller percentage of
her time to this
project." State Att. D, Mowbray memo (Apr. 21,
1987).
-- The project director's position description
indicates that she
is to devote 50% of her time to
this grant. State Att. C,
Johnson's position description (Oct. 28,
1985).
The memoranda are conflicting as to whether the State is representing
that
the project director devoted 25% or 50% of her time to the grant.
The
employee herself stated in retrospect that she spent "an average" of
25%, and
did not distinguish between the fiscal years. Even if this
were
supported by the other documents, an average figure over two years
is too
speculative to be reasonably substituted for time distribution
records.
Moreover, the memoranda from the period involved show that the
percentage of
time charged for the project director dropped from 50% in
FY 86 to 25% in FY
87. Such a reduction is inconsistent with the State's
assertion that its use
of a fixed percentage was "appropriate because
the specific staff time . . .
was determined to be steady." Notice of
Appeal at 1.
Even if the documents were internally consistent, we are
generally
reluctant to consider non-contemporaneous documents without
some
reasonable explanation of the absence of the required records.
Second
Street Youth Center, Inc., DAB No. 1270 (1991) (addressing
similar
requirements in OMB Circular A-122 for documentation of
time
distribution). Most of the memoranda from the relevant period date
from
the first three months of the grant, so they cannot
represent
contemporaneous records of actual time spent. The State
offered no
explanation other than an admission that it did not maintain
time
distribution records in the absence of a standard system, but plans
to
do so in the future.
Further, these broad percentages do not provide any specificity about
the
nature and amount of grant-related work performed on particular
dates.
4/ None of the documents explains the basis for these
percentages,
beyond general descriptions of the project director's
duties and a reference
to her attendance at certain monthly meetings
(State Atts. B and C).
Acadia-Vermillion Community Action Program,
Inc., DAB No. 1201 at 5
(1990) (distribution of time by percentages,
without supporting basis or
documentation, is unacceptable). The
documents do not give any
detail concerning the relationship between the
predicted percentages and the
actual experience of the employee, and
what she actually accomplished on
behalf of grant objectives. The "best
guess" of a supervisor or
employee is not an acceptable substitute for
proper records. Wisconsin Dept.
of Health and Social Services, DAB No.
534 at 5-6 (1984). These
documents are essentially conclusory
statements about what percentages should
be charged, rather than
evidence as to time spent upon which an allocation of
payroll costs
would properly be based. As such, they do not satisfy
federal
requirements for documentation.
We conclude that the State did not maintain required time
distribution
records and did not offer any adequate substitute
documentation. Under
these circumstances, we find no inequity in the
DAR determination.
Accordingly, we will uphold as reasonable the disallowance
of payroll
costs charged to the grant for the project director.
Conclusion
For the reasons explained above, the disallowance of $31,684 is upheld
in
full.
_____________________________ Donald F. Garrett
_____________________________ Norval D. (John) Settle
_____________________________ Cecilia Sparks
Ford
Presiding Board Member
1. The grant involved was funded for the two fiscal years by
the
Administration on Children, Youth and Families, now part of
the
Administration for Children and Families, for a research project
on
"Sexual Abuse in a Day Care Setting."
2. An additional $126,716 in questioned payroll costs was charged to
a
Department of Education grant and is not involved in this disallowance.
3. The record indicates that the disputed payroll costs were
incurred
for the project director on the grant. Payroll costs for other
staff
were apparently part of the State's matching share. State Att.
D.
4. The State did not contend that it had in place any approved
method
of allocating the employee's time, such as time studies, to replace
the
necessity for detailed records of individual