Action, Inc., DAB No. 1400 (1993)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT:  Action, Inc.  

DATE:  March 25, 1993                    
Docket No. A-92-215
Audit Control No.  A-06-92-17226
Decision No. 1400

DECISION

Action, Inc. (Action) appealed a determination by the Administration for
Children and Families (ACF) to disallow $174,169 based on an audit
report of Action's Head Start grant for the period April 1, 1989 through
March 31, 1990 (program year 20).  For the reasons discussed below, we
uphold the disallowance, subject to adjustment as ACF agreed during
Board proceedings.

Relevant Authority

Section 2928 of 42 U.S.C. describes the purpose of Head Start grants as
follows:

 [T]he planning, conduct, administration, and evaluation of a
 Headstart program focused primarily upon children from
 low-income families who have not reached the age of compulsory
 school attendance which (1) will provide such comprehensive
 health, nutritional, educational, social, and other services as
 will aid the children to attain their full potential, and (2)
 will provide for direct participation of the parents of such
 children in the development, conduct, and overall program
 direction at the local level.

Action is accountable for all of its Head Start program expenditures.
45 C.F.R. .. 1301.1-2.  Grant funds for programs such as Head Start may
be used only for allowable costs of the activities for which the grant
was awarded.  45 C.F.R. . 74.170; Economic Opportunity Council of
Suffolk, Inc., DAB No. 679 (1985).  Section 74.174 of 45 C.F.R. provides
that the principles to be used to determine the allowable costs of
activities conducted by nonprofit organizations, such as Action, are
contained in Office of Management and Budget (OMB) Circular A-122.  OMB
Circular A-122, Att. A, A. 2. states in pertinent part:

 Factors affecting allowability of costs.  To be allowable under
 an award, costs must meet the following general criteria:

 a.  Be reasonable for the performance of the award and be
 allocable thereto under these principles.

Costs that are not specified in the approved budget, in order to be
allowable, must be approved by the granting agency.  45 C.F.R. . 74.177.

Background

In accordance with grant requirements, Action's Head Start program was
audited for the program year 20.  According to the audit report, Action
had made interfund transfers in the amount of $184,623 from the Head
Start general fund and only $10,454 had been later repaid.  ACF notified
Action that $174,169 was being disallowed on the ground that grant funds
were used for costs that were not allocable to the current program year.
1/

Action acknowledged that $125,000 of the disallowed amount represented
expenditures for costs which Action had expended in a prior year, but
which were in excess of the budget for that year and which therefore had
previously been questioned by ACF.  Action explained that the costs were
otherwise allowable since the costs were primarily for food and expenses
of Head Start participants. 2/  Action asserted that the
over-expenditures had been inadvertent, that Action had taken steps to
improve its accounting system, and that it operated a model program.
Action expressed concern that it would not be able to repay the funds,
since it received very little in unrestricted cash contributions.  Thus,
Action maintained that it should be allowed to repay the Head Start
program with in-kind contributions.

Further, Action asserted that $49,169 of the disallowance  represented
"normal" interfund transfers which Action typically repaid to the Head
Start program within a year.  Action did not, however, submit any
documentation showing such repayment.  In a February 25, 1993 telephone
conference call convened by the Board, a representative of the certified
public accounting (CPA) firm which performed the audit for program year
20 stated that while the $49,169 might have been paid back to the Head
Start general fund, Action's previous practice of interfund borrowings
made it impossible to tell if the money had been loaned out again.
Further, the CPA representative stated that the firm was in the process
of completing the audit for 1991 and, until it completes the audit for
1992 (when the interfund borrowings were stopped), it would be
impossible to state that the Head Start fund had been completely repaid.

ACF agreed to work with Action in an attempt to develop a repayment
schedule and stated that it would reconsider Action's request to repay
the over-expenditures through excess in-kind contributions in later
years.  ACF also agreed to adjust the disallowance to the extent that
the 1992 audit report confirmed that any "normal" interfund transfers
had been  repaid to the Head Start program.  Although this appeared to
satisfy Action's concerns, ACF asked that the Board issue a decision
affirming the merits of the disallowance.  Tape recording of Board's
February 25, 1993 Telephone Conference.

Analysis

As previously indicated, Action is accountable for all of its Head Start
program expenditures.  45 C.F.R. .. 1301.1-2.  In this case, Action
failed to properly account for Head Start funds since it used those
funds to pay over-expenditures from a prior year and to cover costs of
other programs, to which the funds were transferred.  Thus, the costs
were not allocable to the project for which the funds were awarded.  45
C.F.R. . 74.170; OMB Circular A-122, Att. A, A. 2; see also Economic
Opportunity Council of Suffolk, Inc., DAB No. 679 at 3 (1985), and El
Grito Head Start Agency, DAB No. 1309 (1992).  In addition, the costs
were not specified in the approved budget of the grant at issue and were
not approved by ACF as required by regulation.  45 C.F.R. .74.177.  ACF
agreed to adjust the disallowance to the extent "normal" interfund
transfers have been repaid (and not replaced by other improper interfund
transfers).  Action did not allege that it had repaid any of the
$125,000 through incurring and paying allowable Head Start expenditures
in later years with its own funds.  Indeed, Action acknowledged that
virtually all of the cash contributions it received were funds
restricted to use for other Action projects.  Therefore, ACF's
disallowance was appropriate in this instance.

Moreover, we do not have authority to grant Action's request that it be
allowed to repay the Head Start program with excess in-kind
contributions.  The discretion to determine Action's repayment method
lies completely with ACF.  The Board has in many decisions stated that
we decide only the merits of the dispute between the parties.  See,
e.g., Guam Dept. of Public Health and Social Services, DAB No. 1050
(1989), and decisions cited therein.

Finally, we note that ACF has agreed to work out a repayment schedule
which will address Action's concern that it be able to maintain its
program.  Conclusion

Based on the foregoing, we uphold ACF's disallowance in full subject to
reduction by ACF, as noted above, when Action's 1992 audit is completed.

 

     Donald F. Garrett

 

     M. Terry Johnson

 

     Judith A. Ballard Presiding
     Board Member

1.  ACF also determined that Action's Head Start program had a net
expenditure in excess of the approved budget in the amount of $28,118
for program account number 26.  In response to a question from the
Board, ACF explained that this amount was not included in the
disallowance because ACF's general practice is to allow a grantee to
repay its Head Start account without disallowing the amount of an excess
expenditure in the current program year.  ACF stated that if the amount
is not repaid by the next audited program year or period, then ACF would
disallow the amount owed.

2.  Initially, Action signed a promissory note to the Department for
repayment of the Head Start over-expenditures.  Thereafter, Action took
out a loan and paid off the note and transferred $125,000 from the grant
at issue to repay the