Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: El Grito Head Start Agency
DATE: March 5, 1992
Docket No. 91-120
Decision No. 1309
DECISION
El Grito Head Start Agency (El Grito) appealed a decision by the Office
of
Human Development Services (OHDS) disallowing $6,759 in federal
funding for
El Grito's Head Start program for the program year June 1,
1988 through May
31, 1989. OHDS disallowed this amount on the grounds
that it
constituted overexpenditures in several budget areas of the
grant. The
overexpenditures were found to have been paid out of the
subsequent program
year's federal Head Start funds in violation of
applicable regulations.
We sustain in full the disallowance.
Background
The United States Department of Health and Human Services
(DHHS),
through OHDS, implements the program known as Head Start. The
purpose
of Head Start is to provide comprehensive health,
educational,
nutritional, social and other services to economically
disadvantaged
pre-school children and their families. 42 U.S.C. .
9831. To carry out
the program, OHDS provides federal funding to
qualified public and
private agencies (grantees). 42 U.S.C. .
9833. OHDS generally provides
80% of the budgeted funding for each Head
Start program and requires
that each grantee provide 20% of the funding from
non-federal sources.
42 U.S.C. . 9835(b); 45 C.F.R. . 1301.20.
Each year, Congress appropriates a certain amount of funds for Head
Start
within an authorized limit. In some years, the funds may be
greater
than the previous year and in other years, due to budget
constraints, the
funds.may be less. In either case, there is a finite
amount of money
available for Head Start programs at any given time.
Current Head Start grantees are refunded annually on a
noncompeting
basis. See OHDS Grants Administration Manual (OHDS/GAM)
Ch. 1, ..
(A)(2)(c), (E)(3)(b) and (I)(1). In their initial Head
Start
applications, grantees must obligate themselves to providing
certain
services to a specified number of beneficiaries for a set amount
of
money. If the grantee wishes to change the number of people served,
the
approved activities, or the scope or direction of the project, it
must
obtain prior approval from OHDS. OHDS/GAM Ch. 1, .
(L)(4)(a). Grantees
must also obtain prior approval for any budget
revisions which will
result in the need for additional federal funds;
otherwise, OHDS assumes
no obligation for the excessive expenditures and the
funds may be
disallowed. OHDS/GAM Ch. 1, .. (I)(2), (L)(1) and
(L)(3)(b).
Under the implementing regulations of Head Start, federal funds may
be
used only for certain expenditures. 45 C.F.R. . 1301.10(a); 45
C.F.R. .
74.170. In order to ensure that all expenditures are in
compliance with
applicable regulations and project requirements, each grantee
must be
audited annually by an independent auditor. The independent
auditor
must determine whether the grantee's financial statements are
accurate,
whether the grantee is complying with the terms and conditions of
the
grant, and whether appropriate financial and administrative
procedures
and controls have been installed and are operating
effectively. 45
C.F.R. . 1301.12.
El Grito Head Start agency has been a grantee under the Head Start
program
since the late 1960s. On July 7, 1989 an independent auditor
issued the
required annual independent audit report covering El Grito's
Head Start
program for the year beginning June 1, 1988 and ending May
31, 1989
(PY20). See generally El Grito, Inc. Head Start Program,
Financial
Statements, Year Ended May 31, 1989 (hereinafter cited as
"PY20
audit"). Among other things, the PY20 audit found that El Grito
had a
deficit of $20,118 at the close of the year. Id. at 6.
This
deficit consisted of overexpenditures for PY20 in the areas
of
personnel, travel, equipment, supplies, contractual services, and
other
expenses, as well as of carry-over debts from the previous year.
Id. at
5. 1/
On June 4, 1990, OHDS issued an audit review letter indicating
that
$13,359 of additional funding was being provided by OHDS to cover
part
of the deficit. The letter also notified El Grito that it was to
repay
the remaining $6,759 from non-federal sources. OHDS Ex. B at
3-4. On
June 14, 1990, El Grito responded to the audit review letter,
admitting
to some $9,846.80 of overexpenditures and indicating in which
budget
categories they occurred. El Grito stated that the
overexpenditures
were due to the continued demand for services outstripping
the available
cash resources. OHDS Ex. C at 1. El Grito did not
address from what
funding sources the overexpenditures had been paid.
On June 25, 1991, OHDS issued a final disallowance of the $6,759.
OHDS
Ex. D. The final disallowance stated:
After considering your letter dated June 14, 1990
which further
confirmed that over-expenditures were
committed in several budget
cost categories, and the
fact that the referenced audit report did
not
include a CPA certification that the overexpended funds
had
been repaid to the Head Start account from
non-Federal sources, we
have concluded that these
excess expenditures were paid from the
subsequent
year's Federal Head Start funds.
Id. at 1.
El Grito brought this appeal and submitted its appeal file in
several
stages. In a letter dated July 24, 1991, El Grito noted its
appeal and
responded to both the PY20 disallowance and PY21 questioned
costs
contained in the June 25 disallowance letter. 2/ El Grito
identified
$6,566 of the PY20 expenditures as follows: $3,844 in bus
maintenance
and fuel costs, $175 in electricity costs, $270 in gas heating
costs,
$774 in insurance costs, and $1,503 in building maintenance
costs. On
October 8, 1991, El Grito submitted a substantially identical
letter,
but which dropped the discussion of the PY21 overexpenditures
and
provided monthly ledgers for and explanations of some of the
PY20
overexpenditures. On October 16, 1991, Peter A. Keys, Attorney at
Law,
submitted a letter which further addressed the PY20 overexpenditures.
3/
None of these documents either expressly stated or denied that the
PY20
overexpenditures came from federal funds designated for the
subsequent
year's program. However, the October 16, 1991 letter from
Mr. Keys
stated:
[The disallowances from 1978 and 1979], coupled with
what appear to
me to be arbitrary and unrealistic
expectations about non-federal
funding created a
momentum of carrying obligations into the
succeeding
fiscal year's budget.
The letter then identified overexpenditures from 1984 through 1987
which
were carried forward and concluded:
Whether the foregoing budgeting strategies were
proper or not, they
probably were necessary in order
to keep El Grito open.
OHDS filed its responsive brief dated December 17, 1991 and El
Grito
submitted its reply dated January 16, 1992.
Analysis
I. The disallowance of funding for PY20 was
appropriate because the
overexpenditures came from PY21 funds without a
corresponding benefit to
the PY21 program.
The general regulations governing the operation of Head Start
programs
are codified at 45 C.F.R. . 1301 et seq. Section
1301.10(a)
specifically incorporates the general grants administration
principles
applicable to most DHHS grants into Head Start programs.
These
principles are found at 45 C.F.R. Part 74.
Section 74.170 states the general principle of allowable costs:
Grant funds may be used only for allowable costs of
the activities
for which the grant was awarded.
The principles used in determining allowable costs for
non-profit
organization grantees are contained in OMB Circular A-122.
45 C.F.R. .
74.174. Some examples of allowable costs for grantees under
OHDS
discretionary grants are founds in OHDS/GAM at Ch. 3, . (D).
Office of
Management and Budget (OMB) Circular A-122 provides that to be
allowable
under an award, costs must "be reasonable for the performance of
the
award and be allocable thereto under these principles." Id. at
.
(A)(2). A cost is allocable to a particular grant in accordance
with
the relative benefits received. A cost is allocable to a
Government
award if it is treated consistently with other costs incurred for
the
same purpose in like circumstances and if it is incurred
specifically
for the award. Id. at . (A)(4)(a).
Prior decisions of the Board have addressed the concepts of
allowability
and allocability in the use of federal grant funds awarded for
one year
but used to pay program costs of a previous year. In Community
Action
Agency of Memphis and Shelby County, DAB No. 103 (1980), the Board
held
that a Head Start grantee was precluded from using its
unexpended
program year funds to pay for excess costs incurred in the
previous
program year. As in the present case, the expenditures above
budget
were used to pay for operating expenses such as personnel, travel,
rent
and consumable supplies for the previous year. The Board found
that the
spending of project funds budgeted for one year to pay for cost
overruns
in a previous year was not allowable absent a showing that the
funds
benefitted the year for which they were allocated. Id. at 3.
These cost principles and the cited Board decision clearly indicate that
a
grantee cannot spend funds from a current program year to pay for
cost
overruns from a previous year unless the expenditures benefit
the
current year. In the June 25 disallowance letter, OHDS asserts that
it
is assuming that El Grito paid the cost overruns for PY20 with
the
subsequent year's federal funds. El Grito has not expressly
denied
this. In fact, El Grito seems to concur with this assumption by
stating
that it had "a momentum of carrying obligations into the
succeeding
fiscal year's budget." El Grito has never established, as it
was
required to do, that the cost overruns were paid for with
non-federal
funds. Moreover, El Grito stated in its January 16, 1992
reply that its
appeal "did not question whether the excess expenditures were
properly
disallowed." We therefore find that the cost overruns in El
Grito's
PY20 budget were paid for with federal Head Start grant funds
designated
for the subsequent year. Since El Grito did not argue (much
less
establish) that these funds benefitted the subsequent program year,
4/
the funds are disallowed in full.
II. The disallowance of funding for PY20 was
appropriate because
OHDS has a system for obtaining prior approval of budget
increases but
El Grito did not comply with that system.
We are not unsympathetic to the difficulties caused by unexpected
but
necessary program costs. However, we note, as OHDS did, that the
DHHS
principles for the administration of grants (Part 74) provide
a
mechanism by which a grantee can and must gain prior approval of
any
budget revision which will result in the need for the award
of
additional funds. 45 C.F.R. . 74.105. This provision is also
published
in the OHDS/GAM at chapter 1, paragraph (L)(3)(b). The
OHDS/GAM
provides that all requests for prior approval must be in writing
and
that grantees who do not obtain prior approval when they are required
to
do so act at their own risk in that the costs may be
subsequently
disallowed. OHDS/GAM Ch. 1, . (L)(1). These
provisions give grantees
such as El Grito sufficient notice that the option
to apply for
additional federal funding exists.
El Grito argued that it was unaware of the option to apply for approval
of
budget increases to meet additional program needs. 5/ OHDS argued
that
El Grito cannot gain retroactive approval of excessive expenditures
by means
of filing this appeal. We agree with OHDS since there is no
indication
that El Grito has ever specifically requested retroactive
approval from OHDS
or that OHDS has specifically considered and decided
such request. We
have no authority to retroactively approve budget
increases which were
incurred in a manner which circumvented the DHHS
process for prior approval.
6/ When grantees overspend their budgets
and request that the federal
Head Start program cover the costs without
prior approval, they effectively
overlook the limited nature of the
available funds and the fact that other
Head Start programs are then
deprived of those funds.
Conclusion
For the foregoing reasons, we sustain in full the disallowance.
Judith A. Ballard
Norval D. (John) Settle
Donald F. Garrett Presiding Board Member
1. There seems to be some uncertainty in the record as to what
portion
of the deficit was a result of unexpected costs which exceeded
the
budget in PY20 and what portion was due to debts carried over from
PY19
caused in part by prior program mismanagement. According to
submissions
made by El Grito to the Board dated July 24, October 8, and
October 16,
1991, $13,359 was disallowed in PY19 and was carried
forward. However,
the PY20 audit and June 4, 1990 disallowance letter
from OHDS refer to
part of the deficit totalling $13,728 (as compared to
$13,359) as
"[r]enovation program revenues previously recognized as
earned
erroneously." See PY20 audit at 6; OHDS Ex. B at 3. The
June 4
disallowance letter also refers to $13,359 in additional income
as
"additional funding provided by OHDS to cover the
grantee's
over-expenditure" and not as funding to cover the previous year's
debt.
OHDS Ex. B at 3.
The matter is confused further by the fact that El Grito
alternatively
seeks to justify $6,566 (see July 24 and October 8, 1991
letters) and
$9,846.80 (see OHDS Ex. C) as overexpenditures for PY20.
Neither of
these figures is consistent with the $6,759 in disallowed
funds.
However, since OHDS provided $13,359 in additional funding for PY20,
we
assume for purposes of this decision that the $6,759 disallowed by
OHDS
is the amount attributable to PY20 overexpenditures and that $13,359
is
the amount attributable to PY19 expenditures which was previously
but
erroneously disallowed.
2. The disallowance letter refers to overexpenditures in PY21 (June
1,
1989 through May 31, 1990) of $7,351 in addition to the
overexpenditures
in PY20. However, the PY21 overexpenditures have not
been finally
disallowed pursuant to the requirements of 45 C.F.R. . 74.304
and are
therefore not addressed in this decision.
3. Mr. Keys was asked by El Grito to assist it in responding to
the
disallowance, and his October 16, 1991 letter has therefore
been
incorporated into the record. Mr. Keys is not representing El
Grito in
this matter.
4. We observe that while El Grito did not argue or establish that
the
overexpenditures benefitted multiple years, many of them are of such
a
nature that they could not have benefitted more than the single year
in
which they were incurred. For example, of the costs identified in
El
Grito's appeal letters to the Board, we note that electricity,
gas
heating, and bus fuel costs could only benefit the year in which
they
were incurred. Of the remaining identified overexpenditures
(insurance,
bus maintenance, and building maintenance), El Grito would have
to show
not only that they benefitted more than one year but that payments
for
such items were customarily and consistently split between the
years
they benefitted. See OMB Circular A-122, . (A)(2)(d).
5. El Grito also argued that it should be treated leniently with
regard
to the disallowed funds since they are the result of poor management
by
previous directors and not by current management. It argued that
the
disallowance penalizes the current Head Start beneficiaries and
their
families in that they were not associated with the program when
the
problems began. Nevertheless, the recipient of the funds was El
Grito
Head Start Agency and not the previous manager in his
individual
capacity. Therefore, the grantee agency is ultimately
responsible for
the management of the funds. Moreover, the cost
principles in Part 74
do not allow forgiveness of cost overruns based on poor
management by
prior directors.
6. OHDS also argued that retroactive approval, even if
obtainable,
would be inappropriate in this instance because El Grito has
failed to
demonstrate that the funds in question were spent for program
activities
that were conducted in an effective and efficient manner
consistent with
the purposes of Head Start. See 42 U.S.C. . 9839(a); 45
C.F.R. .
1301.30. OHDS did not specifically identify any expenditures
it found
questionable, and we need not consider this issue for purposes of
this