Rural Day Care Association of Northeastern North Carolina, DAB No. 1384 (1993)

Department of Health and Human Services


Appellate Division

SUBJECT:   Rural Day Care Association of Northeastern North Carolina

DATE:  January 21, 1993
Docket No. A-93-03
Decision No.  1384


Rural Day Care Association of Northeastern North Carolina (Rural Day
Care) appealed a determination by the Administration for Children and
Families (ACF) disallowing $22,608 charged to Rural Day Care's Head
Start program. 1/  Rural Day Care also appealed a requirement by ACF
that it pay its Head Start account $19,895 to account for funds which
ACF had reprogrammed based on overstated balances of unobligated funds.
ACF's determination was based on its financial management review of
Rural Day Care's Head Start accounts.  After the appeal was filed, the
disallowance was reduced to $18,608.  ACF Brief (Br.) at 16.  The
disallowed costs remaining in dispute are renovation costs ($7,000) and
rental payments for four months ($1,600) for one Head Start facility,
and Christmas bonuses ($10,008).  The required payment to account for
overstated balances of unobligated funds also remains in dispute.


As discussed in more detail below, we have made the following

   We reverse the disallowance of $7,000 for
   renovation costs, which was taken by ACF on the
   ground that there was not a signed lease
   covering the renovated property at the time the
   costs were incurred.  However, we do not
   preclude ACF's further review of issues of
   allowability of the costs on other grounds.

   We uphold the disallowance of
   less-than-arms-length rental costs in principle,
   but remand this part of the disallowance to ACF
   for recalculation of the $1,600 amount in
   accordance with applicable depreciation and use
   allowance policies.

   We uphold the disallowance of $10,008 paid for
   Christmas bonuses.

   We find that Rural Day Care is obligated to
   account for $19,895 in overreprogrammed funds,
   but we also remand this matter to ACF to
   determine whether Rural Day Care can account for
   some or all of the funds.

I.      Renovation Costs Incurred and Rental Payments Made on Behalf of
Cozy Center Prior to a Signed Lease

Rural Day Care is a recipient of federal discretionary grant funds under
the Head Start program.  Rural Day Care has operated Head Start centers
in northeastern North Carolina since 1984, and receives funding based on
program years running from November 1 through October 31 of each year.
ACF Br. at 4.  On August 20, 1991, Rural Day Care received an award for
expansion of Head Start services.  The award included $7,000 for
renovation of a Head Start center.

The renovation was begun at the Cozy Day Care Center (Cozy Center) on
November 1, 1991.  Rural Day Care (RDC) Ex. A-2 at 4.  Although a draft
lease on the Cozy Center was presented to Rural Day Care's Board of
Directors in December, 1991, the lease was not signed until February 28,
1992.  Id.  During the four months between the time Rural Day Care began
renovation of the Cozy Center and the time the lease was signed (11/1/91
- 2/28/92), Rural Day Care paid four monthly rental payments for the
facility totalling $1,600.  Id.  The lease, when signed, was effective
retroactive to November 1, 1991 and provided for the same monthly rental
payment which Rural Day Care had been paying.  ACF Ex. 15-2.  ACF
disallowed both the renovation costs and the four monthly rental
payments on the ground that Rural Day Care did not have a signed lease
on the property covering the period when the renovations were made and
the rental costs incurred.  ACF also disallowed the four months of
rental payments on the ground that the lease arrangement was a
less-than-arms-length transaction since the owners of the Cozy Center
property included employees of Rural Day Care.  RDC Ex. A-2 at 4.

 A.      Renovation costs were not properly disallowed.

ACF argued that it was not prudent for Rural Day Care to expend money
for renovation of property to which it had no legal entitlement, and
that Rural Day Care realized this when it confronted the former Head
Start Director as to why the renovations were made prior to execution of
the lease.  ACF Br. at 11.  ACF argued that, by not having a signed
lease prior to the renovations, Rural Day Care "violated the requirement
that a grantee have source documentation to justify expenditure of
Federal funds."  ACF Br. at 12.  ACF noted that the applicable cost
principles provide that in order to be allowable, a cost must be
reasonable, and that a cost is reasonable "if, in its nature or amount,
it does not exceed that which would be incurred by a prudent person . .
. ."  ACF Br. at 10, citing OMB Cir. A-122, Attachment A, . A.3.  ACF
argued that the cost was not reasonable because it was not necessary to
the operation of Rural Day Care's Head Start program, as Rural Day Care
conceded that it could have postponed expansion into the Cozy Center
until it had signed the lease.  ACF Br. at 12; ACF Ex. 14-1.

Rural Day Care argued in response that the funds were not improperly
spent in that they were used for the intended renovation purposes and
that, as a result of the expenditure, 39 additional children were
receiving Head Start services.  RDC Reply at 3.

It is important to note what is not at issue here.  It is undisputed
that ACF's grant contemplated expenditure of $7,000 for renovation
costs.  ACF has not attacked the expenditures per se as unreasonable
(i.e., there is nothing in the record so far to indicate that the
particular goods and services purchased for the $7,000 were questionable
or would have been unallowable if incurred after the lease was signed).
Furthermore, ACF does not dispute the validity of the retroactive lease
agreement itself.

Even if ACF is correct that costs incurred for renovations to a facility
to which a grantee had no legal entitlement would be properly disallowed
as unreasonable costs, this was not the case here.  When Rural Day Care
executed the lease on February 28, 1992, retroactive to November 1,
1991, whatever defect existed in the leasing arrangement at the time the
costs were incurred was cured.  Since ACF has not disputed the validity
of the retroactive lease, we conclude that the renovation costs are not
properly disallowed under applicable regulations and cost principles on
the ground that they were not reasonable.

ACF's argument that Rural Day Care violated source documentation
requirements since the lease was not contemporaneous also is not
persuasive.  The source documentation regulation applicable to
recipients of Department of Health and Human Services grants states:

 Accounting records shall 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).  It is questionable whether a lease on the Cozy
Center is the type of source documentation contemplated by this
regulation since a lease alone would not establish that funds were
actually expended for renovations.  Instead, section 74.61(g) requires
documentation such as bills from contractors and cancelled checks
showing payments for the renovation costs.  ACF did not allege that
Rural Day Care was unable to document its actual renovation costs,
merely that in the absence of a lease its documentation was deficient.
However, there is nothing in the language of section 74.61(g) which
supports ACF's position that the absence of a lease at the time of the
expenditure of funds compels treating otherwise reasonable costs as

Furthermore, there is no merit to ACF's argument that the renovation
expenditures were not necessary costs.  It may not have been "necessary"
for Rural Day Care to incur these costs at the time it did any more than
it is necessary for any potential grantee to seek funds to start
administering or to expand a grant program when it does.  However, this
begs the question.  ACF certainly must have agreed that it was necessary
for Rural Day Care to incur the renovation costs in order to expand its
program at the time it did or ACF would not have included the renovation
funds in Rural Day Care's approved grant budget.  Moreover, as stated,
ACF did not argue that the expenditures for the renovation costs were
excessive or were not otherwise reasonable.  ACF's position effectively
elevates form over substance, and does so in the absence of any showing
of loss to federal interests arising from the tardy leasing arrangement.
Nothing in ACF's regulations requires this result.  Therefore, we find
that the funds were not properly disallowed.

However, nothing in this decision prevents ACF from requiring Rural Day
Care to show the propriety of the renovation costs through proper source
documentation.  Nor does this decision prevent ACF from closely
scrutinizing the less-than-arms-length nature of the leasing arrangement
to determine if the renovation costs were, in fact, reasonable and

 B.      Allowable rental payments should be recalculated in
 accordance with OMB Cir. A-122, Attachment B, Paragraph 9.

ACF also argued that the rental payments for the four months during
which there was no lease should be disallowed.  ACF Br. at 10-12.  In
addition to making arguments regarding the lack of source documentation
and the necessity of the costs similar to those discussed above, ACF
argued that the rental payments should be disallowed based on the
following provision in the cost principles:

     [R]ental costs are allowable to the extent that the rates are
     reasonable in light of such factors as . . . the value of the
     property leased.

ACF Br. at 10, citing Office of Management and Budget Circular (OMB
Cir.) A-122, Attachment B, . 42.a.  ACF argued that this provision
contemplated that there would be a signed lease for the rented property
and that without a lease, the costs were not allowable.

While the use of the word "lease" in the provision quoted above implies
that there would be an agreement between the owners and occupiers of the
property establishing the terms and conditions of the lessor-lessee
relationship, the provision does not per se condition reimbursement for
rental payments made pursuant to that relationship upon the existence of
a document signed at the time of the agreement.  As we stated
previously, whatever defect existed in the relationship between the
owners and occupiers of the property was cured by the signing of the
lease retroactive to the time the property was first occupied by Head
Start.  The lease, when it was signed on February 28, 1992, provided for
the same monthly rental payments that Rural Day Care had been paying
since the beginning of the period which the lease retroactively covered.
Thus, we do not find that the use of the word "lease" in OMB Cir. A-122,
Attachment B, Paragraph 42.a, necessarily prohibits reimbursement of
rental payments under the circumstances of this case.

As for ACF's other arguments, ACF is again misconstruing the source
documentation provision since, as discussed previously, Rural Day Care
had a valid lease covering the period for which the payments were made
and ACF did not allege that Rural Day Care would be unable to provide
basic source documentation such as cancelled checks for the monthly
rental payments.  Furthermore, ACF did not argue that the amount of the
rental payments or other conditions of the agreement between the parties
were not otherwise reasonable; likewise, ACF did not argue that the
payments were not necessarily incurred given the expansion of the

However, although we conclude that the rental costs were not properly
disallowed on other grounds raised by ACF, we further conclude that some
portion of the costs may be unallowable based on the fact that the lease
arrangement was a less-than-arms-length transaction.  ACF implied that
all rental payments should be disallowed on this ground.  ACF Br. at
10-12.  However, the cost principles provide that rental costs under
less-than-arms-length leases are allowable up to the amount that would
be allowed had title to the property vested in the organization.  OMB
Cir. A-122, Attachment B, .42.c.

The cost principles define less-than-arms-length transactions as those
under which "one party to the lease agreement is able to control or
substantially influence the actions of the other," and gives as an
example of such a lease arrangement one between an organization and a
key employee of the organization or his immediate family.  Id.  The
provision does not require that there have been an actual exercise of
influence; the potential for influence is sufficient to constitute a
less-than-arms-length transaction.  Maternal and Family Health Services,
Inc., DAB No. 839 (1987).  The purpose of this provision is to ensure
that there is "no possibility that decisions made in management of a
grant-supported project could be influenced by conflicts of interest not
related to the best interests of that project."  Los Angeles County
Office of Education, DAB No. 901 at 3 (1987).

There was clearly a less-than-arms-length agreement here.  The Cozy
Center facility's owners included persons who were key employees of Head
Start.  RDC Ex. A-2 at 4; ACF Ex. 14-1.  These same owners were also the
Head Start Director's prospective mother-in-law and brother-in-law.  ACF
Ex. 14-1.  In a special meeting of Rural Day Care's Board of Directors
held on March 10, 1992, Rural Day Care's President confronted the Head
Start Director as to whether he saw a conflict in the fact that the
landlords of the property were Head Start employees and his prospective
in-laws.  The Board "expressed concern that these people would be in a
position to demand higher salaries or refuse to renew [Rural Day Care's]
lease."  Id.  The fact that the owners of Cozy Center were willing to
allow Rural Day Care to renovate and occupy the facility four months
prior to signing a lease, which was clearly not a usual business
practice, is further evidence that this was a less-than-arms-length

As a result of the less-than-arms-length nature of the transaction,
rental costs must be limited to the amount that would have been allowed
had title to the property been vested in Rural Day Care.  ACF should
therefore recalculate the disallowance using a depreciation or use
allowance method as provided for in OMB Cir. A-122, Attachment B, . 9.
See Maternal and Family Health at 2, 3 (1987). 2/

II.     Christmas Bonuses

ACF disallowed $10,008 which had been paid by Rural Day Care to Head
Start employees on November 27, 1991 as Christmas bonuses and which had
been charged to funds remaining in the Head Start account at the end of
the year.  RDC Exs. A-1 at 2; A-2 at 5.  ACF argued that the Christmas
bonuses were not reasonable, ordinary, and necessary expenses under the
cost principles of OMB Cir. A-122.  ACF Br. at 14.  ACF argued that
Rural Day Care did not have permission to use Head Start funds for any
type of bonuses other than incentive bonuses provided for under OMB Cir.
A-122, Attachment B, . 6.h. 3/  ACF argued that, even if permission had
been given, there is no estoppel against the government for
misinformation communicated by government personnel.  ACF Br. at 14-15.

Rural Day Care argued that the bonuses should be allowable under the
general cost principles of OMB Cir. A-122.  RDC Br. at 1.  According to
Rural Day Care, the former Head Start Director stated that he had been
given permission by ACF's regional office to award the bonuses.  Rural
Day Care stated that it did not believe that the former Head Start
Director was told that the bonuses had to be part of existing personnel
policies.  Id.

We conclude that the Christmas bonuses are unallowable.  The
Discretionary Grants Administration Manual of the Office of Human
Development Services (OHDS/DGAM), Ch. 3, . D, (made applicable to the
grant by 51 Fed. Reg. 6936 (February 27, 1986) and by the Terms and
Conditions, . 4, attached to the Notices of Grant Award), states that
the following costs are allowable:

 Salaries and wages paid to employees of an organization for
 services provided in connection with a grant or subgrant
 supported activity.  Such compensation must be consistent with
 the salaries and wages policy of the recipient organization
 applied to all activities regardless of the source of funds.
 Amounts charged to projects for salaries and wages must be based
 on organizational payrolls, documented and approved in
 accordance with generally accepted practices.

Rural Day Care has not argued, much less proven, that it had established
policies on paying bonuses to employees.  The bonuses certainly were not
part of the usual payroll or they would have been included in the
established salary levels.  Thus, these payments were properly
disallowed under the plain language of this provision.

Furthermore, the Christmas bonuses at issue were clearly unallowable
under the rationale in the Board's previous decision in Licking County
Economic Action Development Study, DAB No. 1159 (1990).  In that case,
the grantee paid one-time lump sum bonuses to its Head Start employees.
The amount paid to each employee was determined by job seniority without
regard to award or incentive for improved performance.  An audit report
showed that the bonuses apparently were made because the grantee had
unexpended program funds.  Id.  Finding that the bonuses were outside
the incentive bonus provision of OMB Cir. A-122, the Board found that
the grantee had offered no evidence nor cited any provision which would
indicate that the bonuses were allowable charges to federal Head Start
funds.  The Board also held that the disallowance was proper on the
ground that the payments were not made pursuant to an agreement entered
into before services were performed or pursuant to an established
organizational plan.  Id. at 4.

We find Licking County to be factually indistinguishable from this
matter. 4/  Rural Day Care paid one-time lump sum bonuses to its
employees.  The bonuses were not incentive payments based on outstanding
performance but rather were based on position.  They were not issued
pursuant to an established policy.  Rural Day Care has not cited any
regulation which would allow the payment of these types of bonuses, and
we find that they were properly disallowed.

We do not reach the merits of Rural Day Care's argument that the bonuses
should be allowed because it had permission from the regional office to
make the payments.  See RDC Br. at 1; ACF Br. at 13-14.  No current
employees of Rural Day Care participated in the telephone conversation
with the regional office in which the bonuses were discussed; thus, no
one at Rural Day Care can assert with certainty that permission was
given. 5/

III.     Overreprogrammed Funds

Within ninety days after the close of each budget period, a Head Start
grantee is required to file a financial status report (Form SF-269) for
the year which indicates, among other things, the amount of unobligated
funds which it has available. 6/  Based on these financial reports, ACF
may carry over the unobligated balances to a subsequent program year.
If it does so, ACF often reprograms the funds by reducing the amount of
new funds available to be drawn down by the grantee (but not the total
approved budget amount) by the reprogrammed amount.  See OHDS/DGAM Ch.
1, . J.  If the funds are reprogrammed and a final audit shows that the
grantee, had, in fact, fewer unobligated funds than it had reported on
Form SF-269, then the difference between the reported and actual
unobligated balances is referred to as "overreprogrammed" funds.  ACF
demanded that Rural Day Care pay its Head Start account for $19,895 in
overreprogrammed funds which resulted from its overreporting of
unobligated balances on Forms SF-269 for Program Year (PY) 1 (1984-85 --
$1,225), PY 5 (1988-89 -- $15,863), and PY 6 (1989-90 -- $2,807).  RDC
Ex. A-2 at 7. 7/  The overstated balances were reprogrammed to PYs 2, 6,
and 7, respectively.  ACF Exs. 3-4, 5, 6, and 12-1.

 A.      The Board has jurisdiction over matters in which ACF is
 requiring repayment of funds to the Head Start account.

ACF argued that the Board does not have jurisdiction over the matter of
the overreprogrammed funds.  See ACF Br. at 6-7.  In support of its
argument, ACF quoted the Board's jurisdictional regulation as it refers
to discretionary grants:

  (a)  The Board reviews the following types of . . .
  disputes . . .  (1)  a disallowance or other
   determination . . . requiring return or set-off
   of funds already received.  This does not apply
   to determinations of . . . disposition of
   unobligated balances . . . .

ACF Br. at 6, citing 45 C.F.R. Part 16, Appendix A, . (C)(a)(1).  ACF
argued that the decision whether to permit a grantee to carry forward
its unobligated balances to a subsequent year, and whether to offset the
subsequent year's available funds or to increase the grantee's budget by
that amount, is within the discretion of ACF.  For this reason, ACF
argued, the Board does not have jurisdiction over demands by ACF that a
grantee reimburse its program account for overreprogrammed funds.  ACF
Br. at 6-7.

ACF misconstrues the Board's jurisdictional regulation.  The first
sentence quoted above states that the Board has jurisdiction over a
determination requiring a return or set-off of funds already received.
That is clearly what is involved here.  ACF required that Rural Day Care
restore to its Head Start account the amount of its overstated
unobligated balances.  In essence, ACF required the return to the Head
Start account of monies actually applied during PYs 1, 5, and 6 but
which Rural Day Care had represented to ACF as unobligated.  ACF's
determination that, under the terms of its grant awards, Rural Day Care
was responsible for the amount of any overstated balance of unobligated
funds and therefore must repay these reprogrammed amounts to its Head
Start account was a determination that funds already received must be
returned.  It matters not that ACF is requiring that the funds be
returned to the Head Start program account rather than to ACF, as the
regulation is worded broadly enough to cover either situation.

The second sentence, which modifies this broad provision, limits the
Board's jurisdiction over determinations of the disposition of
unobligated funds.  However, the disposition of unobligated funds is not
at issue here.  Rural Day Care did not challenge the disposition of
unobligated funds made by ACF when it reprogrammed Rural Day Care's
unobligated balances for PYs 1, 5, and 6 to the following respective
program years.  Rural Day Care is simply appealing a requirement that it
reimburse its Head Start account by a specific amount; such a
determination is within the Board's jurisdiction.  See Hinds County
Human Resources Agency, Jackson, Mississippi, DAB No. 109 (1980) (Board
had jurisdiction over agency's disallowance of expenditures charged to
Head Start but for which no funds were available since the amount of
available carryover had been overstated in the grant award; however,
Board cannot grant the remedy sought (i.e., supplemental award to cover
overreprogrammed amounts)).

 B.      ACF can require reimbursement of overrepro-grammed funds
 which resulted from Rural Day Care's misstatement of unobligated
 balances on Forms SF-269, but must offset the reimbursement to
 the extent it has already recovered this amount.

On appeal, Rural Day Care questioned the accuracy of the figures on
which ACF based its request for reimbursement.  It also argued that, if
$19,895 in overreprogrammed funds was due, it had been reimbursed
through the use of general monies.  ACF did not comment on the alleged
inaccuracy of its figures, but merely argued that a grantee bears the
risk of overstating unobligated balances on Forms SF-269 in that it must
account for any funds which are overreprogrammed on that basis.

We conclude that ACF properly required Rural Day Care to account for the
overreprogrammed funds.  While Rural Day Care disputed the accuracy of
the figures which resulted in the reimbursement request, it did not
provide any documentation showing in what manner the figures are
inaccurate.  The figures do, in fact, appear to be accurate.  See ACF
Ex. 12.

Moreover, Rural Day Care was clearly on notice that it was responsible
for the overreprogrammed funds.  The Notices of Grant Award for PYs 2
and 7, to which funds were overreprogrammed from PYs 1 and 6,
respectively, stated clearly that no additional federal funds would be
awarded to offset a deficit if the audited actual unobligated balance
was less than the amount reported on Form SF-269.  ACF Ex. 5-1, 2. 8/
In addition, Head Start grantees, including Rural Day Care, were
notified by a letter from ACF entitled "Financial Reports," dated
November 27, 1984, regarding the Form SF-269 that --

 [i]t is imperative that this required report be accurately
 completed and submitted on time to the Regional Office.  No
 additional Federal funds will be awarded to offset a deficit if
 the actual.      unobligated balance later reported in an audit
 report is less than the amount reported on the final SF-269.

ACF Ex. 9-2 (emphasis added); ACF Br at 7, 8.

Nevertheless, Rural Day Care is not required to return the $19,895 to
the extent it has already reimbursed its Head Start account for all or
some of the overrepro-grammed funds. 9/  There is insufficient
information in the record, however, to determine if Rural Day Care has
already reimbursed the Head Start account for these overreprogrammed
funds.  Rural Day Care could reimburse the program by placing
non-federal funds in the amount of the overreprogrammed funds into the
Head Start account.  Rural Day Care could also show that it had
accounted for these funds by documenting that it spent, for allowable
Head Start expenditures, non-federal funds which were over and above its
available federal funds and its non-federal matching share and which
thus offset part or all of the overreprogrammed funds.  ACF's
supervisory financial officer stated that "[t]o date, Rural Day Care has
not repaid the $19,895.00 with non-Federal funds.  Previous audits of
Rural Day Care reveal no general non-Federal funds from which Rural Day
Care could have repaid the money."  ACF Ex. 3-7.  On the other hand,
Rural Day Care asserted, through its accountant, that "[i]f this $19,895
has been expended then [Rural Day Care has] already used general monies
for this."  RDC Attachment V.  The Board has not been provided with
documentation which would resolve the apparent conflict between these
two assertions.  Therefore, we remand this matter to ACF to determine
whether any of the overreprogrammed funds have been recovered through
Head Start costs incurred and paid which exceeded available federal
funds (and non-federal matching requirements) to offset, in full or in
part, the overreprogrammed funds. 10/

IV.     Rural Day Care's Claim of Bias

Rural Day Care argued at length that ACF's actions, in zealously
undertaking this disallowance, may have been based on bias within ACF
which ACF allegedly expressed in certain communications with disgruntled
former Rural Day Care personnel.  See RDC submission captioned "Possible
Bias," attached to RDC Br.  Rural Day Care conceded, however, that it
could not be certain that regional office staff had, in fact, made the
comments which Rural Day Care heard its former Head Start employees
attributing to them and which allegedly indicated bias.  Id. at 3.

Rural Day Care's allegations of bias are unsupported and are based on
hearsay assertions for which Rural Day Care has offered no concrete
proof.  Such assertions are simply too tenuous to be credible.  Even if
Rural Day Care could support its allegations, the Board has previously
held that such claims of bias are not relevant to the question of
whether the disallowance was proper:

 The Board's inquiry is whether the questioned costs were or were
 not allowable charges to the grant under applicable law,
 regulations, and policy, based on the record before us.  The
 reason that the investigation of grant expenses was initiated
 has no bearing on the Federal government's legitimate purposes
 of determining how its funds were spent.  Consequently, it is
 not necessary to resolve the Grantee's charges of bias in order
 to dispose of the disallowance here.

Traylor Products and Services, Inc., DAB No. 1331 (1992).  For identical
reasons, Rural Day Care's claim of bias is irrelevant here.  ACF has a
clear interest in ensuring that its programs are administered correctly,
and Rural Day Care's financial reporting problems have been documented
in several independent accounting reports.  ACF Br. at 20.


For the reasons stated above, the disallowance of $7,000 in renovation
costs is reversed; however, ACF is not precluded from further
considering whether the costs were properly documented and were
otherwise reasonable and necessary.  The disallowance of $1,600 in
rental payments is remanded to ACF to be recalculated in accordance with
the depreciation and use allowance provisions of OMB Cir. A-122,
Attachment B, . 9.  The disallowance of $10,008 paid in 1991 for
Christmas bonuses is upheld.  As for the required $19,895 payment to the
Head Start program account, this matter is remanded to ACF to determine
whether Rural Day Care has offset part or all of the overreprogrammed
funds through Head Start costs incurred and paid which exceeded
available federal funds and the non-federal matching share.  We suggest
that ACF give Rural Day Care 30 days, or some other reasonable amount of
time, to present documentation supporting a downward adjustment in the
disallowance for rental costs and the payment of funds to offset the
overreprogrammed funds (see discussions above).  ACF should review this
documentation and take appropriate action promptly..To the extent that
Rural Day Care disagrees with the recalculation of the rental payments
and/or the required payment to the Head Start account for
overreprogrammed funds, Rural Day Care may return to the Board on these
limited issues by filing with the Board a notice of appeal within 30
days of the date it receives final notice of either or both of these


      Cecilia Sparks Ford


      Donald F. Garrett


      Norval D. (John) Settle
      Presiding Board Member

1.  The disallowance, communicated in a letter from ACF dated September
4, 1992, originally totalled $25,599, of which $2,991 was not appealed.
See Rural Day Care Exhibit (Ex.) A-1.

2.  Though the scope of this decision is limited to the four rental
payments which were disallowed and appealed, ACF is not precluded from
considering a recalculation of allowable charges for subsequent monthly
rental payments which were made pursuant to this less-than-arms-length
lease transaction.

3.  Both parties agreed that the bonuses in question were not incentive
bonuses because they were given to employees based on their position
rather than as an award for meritorious performance.  RDC Br. at 1; ACF
Br. at  13; ACF Ex. 3-7.  Therefore, the incentive bonus provision found
in OMB Cir. A-122 is not applicable.

4.  Rural Day Care argued that, even though the Board held in Licking
County that these types of bonuses were not allowable, the Board could
take a different position in this matter and effectively overrule its
previous decision.  RDC Reply at 3.  However, Rural Day Care has not
shown any legal basis for finding that the decision in Licking County
was erroneous.

5.  However, we note that the estoppel argument set forth in ACF's brief
accurately reflects the current and well-settled law on this matter.
ACF Br. at 14.  Estoppel against the government, if available at all, is
presumably not available absent affirmative misconduct by the federal
government.  Schweiker v. Hansen, 450 U.S. 785 (1981).

6.  Unobligated funds are monies left at the close of the budget period
which are not needed to pay actual costs incurred.  See OHDS/DGAM, Ch.
1, .. I and J.

7.  Rural Day Care questioned the fairness of going back to PY 1
(11/1/84-10/31/85) in calculating the overreprogrammed amounts.
However, we note that there is no statute of limitations or doctrine of
laches which can be applied against the federal government unless
specifically provided for by Congress.  Maryland Department of Human
Resources, DAB No. 519 (1984) (and cases cited therein).

8.  The Notice of Grant Award for PY 6, to which the unobligated balance
for PY 5 was reprogrammed, was not included in the record.  However, ACF
stated that each grant award contained this warning, and Rural Day Care
did not dispute this assertion.  ACF Br. at 8.

9.  ACF can reasonably require Rural Day Care to account now in cash for
prior years' overstated unobligated balances so long as those balances
were not in fact accounted for by expenditures during later program
years where those amounts were reflected in reprogrammed balances.
However, while ACF can reasonably question whether Rural Cay Care has
accounted in cash for the overstated carryover balances, it appears that
to simply require payment to the Head Start account of the overstated
carryover balances from individual program years may overstate what is
currently due.  For example, for program account 20, it appears that
Rural Day Care may have fully accounted for the overstated balance.  ACF
Exhibit 12 shows that there was a reprogrammed shortfall of $1,225 for
PY 1 and that by the end of PY 4 Rural Day Care's expenses had exceeded
awarded funds by $567.  Therefore, it appears based on this exhibit that
expenses during PYs 2, 3, and 4 (to which prior years' unobligated
balances were apparently reprogrammed) fully accounted for all awarded
federal funds as well as the overstated unobligated balance. Also, for
program account 22, it appears that the upper limit that Rural Day Care
would be responsible for in cash is the amount of the current
unobligated balance (plus any unobligated balances which ACF determined
not to carry over to subsequent years) since prior unobligated balances
whether actual or overstated would have been accounted for by actual
expenditures for program purposes in order to calculate the current
amount of unobligated funds.

10.  Since the Board does not have jurisdiction over determinations
concerning the disposition of funds, the Board cannot direct ACF to
allow Rural Day Care to offset the overreprogrammed funds with
unobligated balances from other Head Start accounts or from other
program years, per Rural Day Care's request, even if ACF had the
discretion to allow the offset.  See RDC Reply at 3.  ACF's
reimbursement requests for PYs 5 and 6 were the result of
overreprogramming in program account 22; however, Rural Day Care had
unobligated balances for those years in program account 20 totalling
$6,750.  Furthermore, Rural Day Care had unobligated balances totalling
$53,725 during PY 7, a time period for which there was no alleged
overreprogramming, in program accounts 20, 22 and 26.  Rural Day Care
requested that it be allowed to offset the deficits caused by the
overre-programming at issue in this case with unobligated balances from
the other accounts and year not at issue.  See ACF Ex. 12; RDC Br. at