Bedford Stuyvesant Restoration Corporation, DAB No. 1404 (1993)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT:  Bedford Stuyvesant Restoration Corporation

DATE:  April 16, 1993
Docket Nos. A-92-127 and   A-92-128
Audit Control Nos. CIN-A-02-91-14535 and  CIN-A-02-91-14405
Decision No. 1404

DECISION

The Bedford Stuyvesant Restoration Corporation (BSRC) appealed two
determinations by the Office of Community Services (OCS).  At issue is
$839,638 in federal funds obtained by BSRC under the Community Services
Block Grant Program.  Docket No. A-92-127 concerns a disallowance of
$373,231 in connection with a grant to BSRC for a Homeless Project.  Of
this amount $360,371 represented allegedly excess administrative costs
claimed by BSRC and $12,860 represented expenditures incurred outside
the grant period.  Docket No. A-92-128 concerns $466,407 disallowed in
connection with BSRC's Drugstore Project.  These funds were disallowed
based on BSRC's failure to expend or obligate adequate private or public
matching funds during the grant period. 1/

Although BSRC filed separate appeals, the parties agreed to the Board's
suggestion that the two appeals be considered jointly.  See
Acknowledgment of Notice of Appeal and Notice of Joint Consideration in
Docket Nos. A-92-127 and A-92-128 (May 1, 1992).  The record upon which
this decision is based consists of the parties' briefs and exhibits.
Based on the analysis below, we sustain these disallowances in their
entirety.

We first address separately the issues specific to each disallowance.
In Part I, we consider BSRC's Drugstore Project (the earlier grant).  In
Part II, we examine the Homeless Project.  In Part III, we address
several subsidiary issues raised by BSRC during the course of the
appeal.  Those issues are 1) whether, during this appeal, OCS could
increase the amount of the disallowance relative to the Drugstore
Project, 2) whether, in its reply brief, OCS exceeded the scope of
argument permitted by the Board, 3) whether, in the event it lost the
appeal, BSRC's proposed procedures for disposition of the Drugstore
Project property would satisfy its debt to OCS, 4) whether BSRC's claim
of possible bankruptcy should affect the Board's analysis of these
disallowances, and 5) whether BSRC may respond to OCS's refusal to
participate in mediation after the Board has closed the record in this
case.

I.  THE DRUGSTORE PROJECT (Docket No. A-92-128)

Background

Responding to a January 25, 1985 Federal Register Program Announcement,
BSRC requested $1,200,000 in discretionary grant funds for a one-year
project.  BSRC proposed to develop, own and operate two joint-venture
"super drug stores."  BSRC expected this project to provide 104
permanent jobs at the end of the first year and a total of 130 jobs
within three years.  BSRC targeted 90% of these jobs for low-income
teenagers and female-heads-of-households.  BSRC envisioned the project
generating approximately $320,000 by the end of its third year.  This
money would be partially allocated for expansion and reinvestment into
youth programs, housing and community-related programs.  BSRC's
timetable anticipated completion of the project within twelve months and
substantial completion of construction within nine months.  BSRC
indicated that the project would require $3,110,000 for completion ($1.2
million in grant funds and $1,910,000 in matching funds).  OCS Exhibit
(Ex.) D-1.

Based on BSRC's proposal, OCS awarded BSRC a $500,000 grant for the
period September 30, 1985 through September 29, 1986.  The grant award
specified that BSRC's matching requirement "ranges from $500,000 private
to $1,000,000 public funds."  BSRC Ex. J.  This meant that BSRC would be
required to obtain a commitment of one private sector dollar or two
public sector dollars to each dollar of OCS funds awarded.  Program
Announcement OCS-85-1, 50 Fed. Reg. 3670, 3674 (January 25, 1985) (BSRC
Ex. K).

BSRC submitted a progress report dated December 2, 1986, for the quarter
ending September 30, 1986.  There, BSRC indicated that the drugstore
project was not yet complete.  However, BSRC stated that it intended to
split the grant between the following two projects.  In conjunction with
an independent operator who owned two other supermarkets in the "C-Town
chain," BSRC would build a "small supermarket-drugstore" on one site
(Myrtle and Sumner Avenues) as "mentioned in the original proposal."
The site was an abandoned building owned by BSRC.  Additionally, BSRC
would lease a second site (Washington Avenue) for a drugstore.  BSRC
projected that construction for the second store would begin in August
(presumably 1987, although a specific year was not identified), all
financing would be in place by September and the store would open by
October.  OCS Ex. D-3.

On April 6, 1987 BSRC requested a no-cost extension through September
29, 1987.  OCS granted that extension on July 15, 1987.  OCS Br. at 7;
OCS Ex. D-2.  Thereafter, on a date which OCS concedes is unknown, the
grant was extended for another year through September 30, 1988.  OCS Br.
at 7.

BSRC and OCS officials were scheduled to meet January 11, 1990 to
discuss the Drugstore and Homeless Project grants and one other. 2/  In
a letter preceding that meeting (January 8th), BSRC indicated that it
had purchased and renovated a store site at 1583 Fulton Street.  BSRC
also noted that while more than $500,000 had been spent on this project,
BSRC had not yet finalized a joint venture agreement, although it was
still negotiating with two potential partners.  BSRC sought another
one-year no cost extension for the grant.  OCS Ex. D-4.

Following the meeting, OCS informed BSRC that it was "appalled" by the
status of all three grants.  OCS alleged that BSRC had "violated the
terms and conditions of these grants by utilizing grant funds at its
discretion" and that BSRC had "failed to implement the approved
projects."  OCS indicated that before it approved any further no-cost
extensions or alternate use of grant funding, BSRC was to have the
grants audited.  OCS also requested final narrative and financial
reports on the grants setting out their accomplishments and detailing
the use of the OCS and matching funds.  BSRC Ex. A.

In the Final Narrative Report for the Drugstore Project (September 21,
1990) BSRC conceded that "this joint venture never materialized."  BSRC
offered several reasons for the grant's status:

 o  Management changes within BSRC from 1985 to 1989 resulted in
 inconsistency and personnel shortages;

 o  The original site selected was unacceptable to the original
 prospective joint venture partner (Pathmark) due to size and
 location;

 o  Pathmark was involved in a leveraged buyout in 1986 and
 sharply curtailed new ventures in order to conserve cash;

 o  A 1987 fire in the building caused further delays;

 o  BSRC indicated that it had discussions with another potential
 joint venture partner which were unsuccessful and terminated in
 1989; and

 o  BSRC did not timely seek additional extensions or discuss
 possible alternatives with OCS.

However, BSRC asserted that the project was "not dead."  BSRC proposed
that the project definition be changed and an extension be provided
through September 1991.  This would permit an "acceptable job intensive
venture," other than a drugstore, to be started.  In conclusion, BSRC
acknowledged that the Fulton Street site "appears to be unacceptable as
a drug store site."  OCS Ex. D-5.

The independent audit report on the Drugstore Project was issued August
3, 1990.  The auditors determined that BSRC incurred total project
expenditures of $630,230, made up of $500,000 in OCS funds and $130,230
in unrestricted (non-grant) funds during the period September 30, 1985
through May 31, 1990.  The auditors questioned certain costs ($96,637)
incurred outside the approved project period, i.e., after September 30,
1988.  During the approved project period BSRC applied $33,593 in
unrestricted funds and $500,000 in OCS funds.  BSRC Ex. I at 6.  Based
on this analysis, the auditors concluded that BSRC had failed to meet
its matching requirement for the grant.  The auditors blamed BSRC's
failure to meet the matching requirement on the absence of a joint
venture agreement.  The auditors determined that the most recent joint
venture negotiations had been terminated subsequent to August 24, 1989
and there were still no firm plans to complete the project and open the
drugstore.  However, they noted that BSRC was still seeking a joint
venture partner.  BSRC Ex. I.

On January 28, 1991, OCS sought additional information from BSRC
regarding ownership of the building and the potential placement there of
a venture other than the drugstore.  See OCS Ex. D-6.  In its March 26,
1991 response, BSRC stated that it had paid off the mortgage in January
1990 and, in May 1990, had entered into discussions with "the President
of Store 24."  This person had expressed interest in putting a franchise
at the site and had submitted a tentative proposal in June 1990. 3/
BSRC noted that although this prospective partner was still interested
in the site, it was looking for an "appropriate franchise
owner/manager."  BSRC indicated that, in the interim, it had taken steps
to defer various building-related costs.  Specifically, in September
1990 it had leased the site for 18 months to the construction company
renovating Fulton Street.  BSRC also noted that Fulton Street had been
converted to a one-way street for the duration of the renovation, making
"it difficult to establish a store at this site until the construction
is completed."  OCS Ex. D-7.

Rather than granting a further no-cost extension, on March 23, 1992, OCS
disallowed $369,770 charged to grant funds.  The disallowance was based
on BSRC's failure to expend or obligate adequate matching funds during
the approved project period.  In its November 9, 1992, reply brief OCS
increased the disallowance taken on this basis to $466,407.  OCS Reply
Br. at 5-7; BSRC Ex. I. 4/

Analysis

OCS contended that BSRC failed to meet the applicable matching fund
requirements for this grant.  Moreover, OCS asserted that BSRC made no
significant progress toward achieving the grant's goals and objectives,
either within the twice-extended grant period or in the years that
followed.  Consequently, OCS argued that its decision to deny a third
no-cost extension was reasonable.  See generally OCS Br. at 10-13; OCS
Reply Br.  at 2-5.

BSRC maintained that OCS's refusal to provide a no-cost extension was
arbitrary and capricious.  BSRC challenged OCS's assertion that it had
drawn down federal money in the absence of the necessary matching funds.
BSRC interpreted OCS's position as requiring that matching funds must be
received before federal funds could be expended.  BSRC noted that it had
obtained some matching funds and argued that OCS "clearly understood"
that the joint venture partner would be the source of the remainder.
Further, BSRC asserted, neither the Program Announcement, the grant
application, nor the audit required obtaining the matching funds in
advance.  Additionally, BSRC insisted that it had made  "substantial
progress and efforts" toward completion of the project in spite of the
problems chronicled in its Final Narrative Report.  BSRC First Reply Br.
at 3-7; OCS Ex. D-5.

BSRC's arguments are not convincing for a number of reasons.

BSRC ignores the requirements for matching funds stated clearly at Part
III, Section D., of the Program Announcement.  An applicant was required
--

 to obtain commitment of minimum prescribed amounts of private or
 public funds . . . to match each OCS dollar awarded.  This match
 may be one private sector dollar or two public sector dollars to
 each dollar of OCS discretionary funds awarded. . . .  The firm
 commitment of these required matching funds must be documented
 in the project application. . . .  Matching funds must be
 definite, or contingent only on the receipt of the OCS grant. .
 . .  Matching funds must be expended or obligated during the
 approved OCS project period.

50 Fed. Reg. 3670, 3674 (January 25, 1985) (BSRC Ex. K).

Given this explicit notice, BSRC cannot reasonably suggest that it was
not aware of the matching funds requirement from the outset of the grant
application process.  While the Program Announcement does not require
that matching funds be spent in advance of OCS funds, it clearly
mandates that the matching funds be definite and be expended or
obligated during the one-year grant period.  Consequently, BSRC's
argument that OCS could not take a disallowance because it "understood"
that matching funds would not be available until a joint venture partner
was secured is not persuasive.  So far as what OCS may have "understood"
regarding the source of the matching funds, BSRC's grant application
painted a very positive picture concerning the existence of a joint
venture partner and BSRC's general ability to garner financial support.
See OCS Ex. D-1.

BSRC's grant was predicated on the plainly worded matching fund
requirements set out in the Program Announcement.  There is no evidence
that those requirements did not apply to BSRC, nor is there any evidence
from which a different "understanding" may be inferred.  OCS has already
given BSRC two no-cost extensions, so that BSRC has had three years,
rather than the one year specified in its original grant proposal, in
which to secure matching funds.  At this point, seven and one-half years
have passed  since the initial award, and the original project has been
downscaled and revised.  Still, there is no joint venture partner on the
horizon.  In effect, BSRC has argued that it should be allowed to retain
unmatched federal funds on the premise that it will have a suitable
joint venture partner (who will provide the required match) at an
undetermined future date.  Not only is this an unrealistic position, it
is unacceptable because the matching funds had to be made available
during the grant period.  Thus, OCS correctly found that BSRC failed to
satisfy the applicable matching fund requirements. 5/

Moreover, given the applicable legal standard and the facts of this
case, we conclude that OCS acted reasonably in refusing BSRC's January
8, 1990 request for an additional no-cost extension of the Drugstore
Project.  The Department's policy on no-cost extensions is contained in
its Grants Administration Manual (GAM) and is specifically applicable to
all discretionary grants.  See Chapter 1-85; section 1-85-10.  Under the
GAM, OCS has the discretion to award a no-cost extension of a project.
Specifically, section 1-85-80 provides:

 If support for a project is ending, the grants officer may
 noncompetitively extend the project for a limited time, usually
 a few months to provide for an orderly phase-out of Federal
 support.  The grants officer may also extend any budget period
 for a few months for administrative reasons . . . .

There is no evidence, nor does either party contend, that OCS had any
other policy regarding no-cost extensions.

In prior decisions, the Board has examined extensively the discretionary
authority of agencies within this Department to rule on requests for
no-cost extensions.  See Oakwood Child Development Center, Inc., DAB No.
1092 (1989); see also Ironbound Educational and Cultural Center, Inc.,
DAB No. 1302 (1992).  The Board held that the no-cost extensions at
issue in Oakwood and Ironbound were properly denied where the agency's
action was not arbitrary.  In Oakwood, our analysis was premised, in
part, on the general principle of administrative law that a presumption
of regularity attaches to the actions of government officials.  See
Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 415 (1971).
In order to be found arbitrary or capricious an agency's actions must
have been unwarranted in law and without justification in fact. 6/  As
the Board recognized in Oakwood, the standard to be applied is whether
the decision was reasonable, not was it the only decision, or even the
best decision, or even the decision that others might have made.
Oakwood at 8-9.  Applying this standard here, we conclude that OCS's
denial of an additional no-cost extension to BSRC for the Drugstore
Project was clearly reasonable.

BSRC sought to distinguish Oakwood based on the fact that Oakwood had
failed to achieve any of its proposed goals and had eventually offered
three different alternatives to its original grant proposal.  BSRC
contended that it was requesting a no-cost extension to carry out its
original proposal and had made "substantial progress and efforts toward
completion."  BSRC First Reply Br. at 7-8.  However, it is apparent from
the evidence summarized below that the project is far from meeting its
original goals.

Originally, BSRC sought to develop, own and operate two joint-venture
"super drug stores."  Not only has BSRC made little progress toward the
original grant objectives, it has proposed alternative uses for the
grant funds which are substantially different from the original project.
For example, in December 1986, one year after the grant was awarded,
BSRC indicated that the drugstore project was not yet complete.  Rather,
BSRC was attempting to build a "small supermarket-drugstore" on one site
and lease a second site for a drugstore.  BSRC proposed splitting the
original OCS grant between these two projects.  See OCS Ex. D-3.  In
January 1990, BSRC indicated that it had purchased and renovated the
Fulton Street site, expending more than $500,000, but did not yet have a
finalized joint venture agreement.  See OCS Ex. D-4.  In September 1990,
BSRC conceded that the joint venture had not materialized.  It
acknowledged that the Fulton Street site was "unacceptable as a drug
store site."  BSRC proposed that the project definition be changed and
an extension be provided through September 1991 in order to start a
venture other than a drugstore.  See OCS Ex. D-5.  In March 1991, BSRC
informed OCS that, six months earlier, it had leased the Fulton Street
site to a construction company, apparently through March 1992.  Even
then, BSRC did not reconcile the impact of the lease on the project.
See OCS Ex. D-7.

Realistically, these events cannot be characterized as "substantial
progress" toward the objectives of the original project.  BSRC is
apparently no closer to putting anything, let alone two super
drugstores, into its community than it was eight years ago.  Simply,
this project failed.  Given the scope of its failure, there was no point
in extending the grant.  This was not a grant for an indefinite period
or one designed to expend funds, even in small part, on general good
works throughout the community.  BSRC was bound to develop two
drugstores and provide permanent jobs in those stores for targeted
residents.  By BSRC's own admission, that has not occurred.

BSRC also asserted that OCS had taken statements in BSRC's  September
1990 Final Narrative Report regarding the unsuitability of the Fulton
Street site for this project out of context.  BSRC contended that this
statement was "not intended . . . to mean that the site was not
originally, or would never be, appropriate for a drugstore."  BSRC First
Reply Br. at 6.  In view of the grant's history to that point, it is
hard to imagine what other reasonable interpretation could be placed on
BSRC's statement.  The project was going nowhere.  The statement was
made five years after the grant award not once, but twice within the
Report.  This Report and the earlier submissions to OCS, in evidence
here, chronicled this project's litany of failure.  Moreover, in the
Report, BSRC proposed a change of project definition.  Given these
facts, BSRC's argument is simply unrealistic.

Throughout this case, BSRC has emphasized the positive effects of its
community involvement over the years.  This disallowance should not be
interpreted as an attempt to discredit BSRC's overall value to the
community.  However, in accepting the grant award, BSRC took on the
general responsibilities incumbent upon any grantee, which are to expend
awarded funds for the stated program objective in accordance with
applicable laws, regulations and guidelines.  Thus, BSRC's past
accomplishments are irrelevant to the issue of whether BSRC's
performance under this grant warranted a no-cost extension.

Based on the analysis above, we conclude that OCS correctly found that
BSRC had failed to satisfy the matching fund requirements applicable to
this grant and that OCS's denial of a third no-cost extension was
reasonable.  Consequently, we sustain, in principle, the disallowance
relative to BSRC's Drugstore Project grant.  We address the amount of
that disallowance in Part III, section A below.

II.  THE HOMELESS PROJECT  (Docket No. A-92-127)

Background

Responding to a February 10, 1986 Federal Register Program Announcement,
BSRC requested $600,000 in OCS discretionary grant funds for a one-year
project.  BSRC proposed to develop a building for commercial and
residential use by the homeless.  After learning informally that it
would receive a $400,000 award, BSRC submitted a revised request for
that amount.  OCS Br.  at 13-14.  Subsequently, BSRC received a $400,000
grant for the period September 30, 1986 through September 29, 1987.  The
entire award was budgeted for "Construction."  BSRC Ex. E.

New York City was the entity providing the matching funds required for
this project.  Due to the City's delays in disbursement of those funds,
the Homeless Project was not completed within the one-year period
originally envisioned.  Consequently, BSRC requested and received a
no-cost grant extension through September 29, 1988.  OCS Br. at 14.

In an August 4, 1988 progress report to OCS, BSRC indicated that the
closing expected in late May was now anticipated in August.  BSRC
explained:

 As the OCS funded portion of the project (a medical facility and
 commercial space) can be completed independently, . . . [BSRC
 does] not project . . . encountering any particular problem in
 fulfilling our contractual obligations with OCS by the September
 30th deadline.  It is clear, however, that the housing portion
 of the project which is funded by the City of New York will not
 be completed until August 1989.

OCS Ex. H-9.

In a January 8, 1990 letter to OCS, BSRC complained that, since 1982,
general federal funding cuts had impaired its ability to meet its
administrative overhead.  Thus, BSRC indicated that it had expended
"approximately $410,000 of management time . . . completing various
BSRC/OCS projects."  BSRC admitted that it had used general grant funds
(from this and another grant) for payroll and benefits, insurance, audit
fees and past due withholding taxes; expenditures which permitted it to
continue providing community services.  This action was necessary, it
noted, because the grants involved did not provide sufficient
administrative overhead reimbursement.  Consequently, BSRC requested
approval for "an alternative use" of $405,000 in OCS grant funds
($305,000 from the homeless grant and $100,000 from another grant not
involved here) for these expenditures.  OCS Ex. D-4 and Attachment A and
B.  OCS did not grant this request.

The Homeless Project was subject to an independent audit covering the
period July 1, 1985 through June 30, 1988.  The Audit Report revealed
that BSRC had charged $12,680 for expenditures incurred outside the
grant period and had expended $360,371 in grant funds for administrative
expenses in excess of the ten percent ceiling established by the grant
award.  See BSRC Ex. D.  After BSRC was given an opportunity to explain
the adverse audit findings, OCS disallowed these costs.

Analysis

 A.  Excess Administrative Costs

Generally, BSRC asserted that OCS had mischaracterized the costs in
issue.  BSRC maintained that it was not seeking to increase the ten
percent limit on administrative costs as defined by OCS.  Instead, it
was seeking a reallocation of the construction budget line items to
include what it described as "soft costs."  BSRC asserted that the
budget categories used by OCS in this grant were too general since the
only line item funded in the grant award was "construction."  However,
BSRC pointed out that construction costs were not defined in the "Grant
Terms and Conditions" which accompanied the award.  BSRC argued that OCS
arrived at this disallowance by simply lumping all non-brick and mortar
costs together under the administrative cost category.  In reality, BSRC
contended, these were not the type of "administrative costs" envisioned
by the ten percent ceiling.  Rather, they were "direct project-related
development costs used to carry out the Homeless Project itself -- to
bring it on stream, not monitoring expenses țexternalț to the project."
BSRC maintained that these costs were a reasonable, standard and
necessary part of all construction budgets.

In support of its argument, BSRC cited a United States Department of
Housing and Urban Development (HUD) construction budget which contained
a "Total Estimated Development Cost" category.  Within this category
were line items such as Builders and Architects Fees, Carrying Charges
and Financing (taxes, insurance, etc.) and Builder and Sponsor Profit &
Risk (described as an allowable development cost of total project cost
due the builder and developer for assuming the risk and taking the
responsibility for ensuring a project's completion).  BSRC First Reply
Br. at 12-15 and Attachment 1; BSRC Second Reply Br. at 7-9.

Moreover, BSRC asserted that the applicable program regulations
permitted funds earmarked for construction to be used for these soft
costs.  BSRC cited 45 C.F.R. . 74.106 for the proposition that "[u]nless
provided otherwise by the terms of the grant or subgrant, revisions to
construction project budgets do not require approval."  BSRC also cited
45 C.F.R. . 74.107, which states that where a grant provides for both
construction and nonconstruction work, the awarding party may require
prior approval of fund or budget transfers between the two types of
work.  BSRC contended that these provisions permitted the type of
rebudgeting flexibility it sought here.  If this flexibility was denied,
BSRC argued, general grantee participation in needed social programs
would be hindered.  BSRC Br. at 2; BSRC First Reply Br. at 14-15.
Further, BSRC argued that, under 45 C.F.R. . 74.177, OCS can waive the
prior approval requirement for this type of expenditure so long as the
expenditure is otherwise allowable (i.e., reasonable and necessary).
BSRC Br. at 2.

BSRC also contended that, given the fungibility of money, OCS was wrong
to disallow this expenditure simply because the money could not be
traced to brick and mortar.  Thus, BSRC suggested that we consider the
ten percent ceiling, not in terms of the $400,000 OCS grant award but in
terms of the overall project cost.  Under this rationale, the Homeless
Project, which cost $4,030,545, would have a ceiling on administrative
costs slightly in excess of $403,000.  Consequently, BSRC's
administrative expenditure ($360,371) would be allowable.  BSRC First
Reply Br. at 15.  Finally, BSRC argued that, even if we were to conclude
that the disallowance was appropriate in principle, it should not be
required to return the money in question because the project was a
success.  Id. at 15-16; BSRC Second Reply Br. at 10-11.

BSRC's arguments are not convincing.  At the outset, the Program
Announcement under which these funds were available made it clear that
the ten percent ceiling on administrative costs was a condition of any
grant awarded.  See 57 Fed. Reg. 5020, 5021 (February 10, 1986) (BSRC
Ex. F).  The Announcement noted that, while OCS would accept
applications which included administrative costs --

 since grant funds are extremely limited, no awards for only
 administrative costs will be made and no more than 10% of the
 OCS discretionary funds awarded under a single grant may be used
 for administrative purposes. . . . Administrative costs are
 defined as costs that are necessary to protect, monitor and
 properly account for and apply to the approved project, those
 Federal funds awarded.  Costs associated with the internal
 operational management of the approved project are not to be
 considered administrative costs.

Id. at 5024.

The grant award was equally clear.  Paragraph (d) of the award's terms
and conditions (titled "Administrative Costs") provided --

 Unless otherwise specifically provided, OCS funds awarded under
 this grant, up to a limit of ten percent of the Total Federal
 Approved Budget, may be used to meet administrative costs . . .
 .

OCS Ex. H-3 at 3.

In its grant application BSRC indicated that "[n]o funds from OCS are
being requested for administration purposes."  OCS Ex. H-1 at 87.  Later
in the application, BSRC stated that it was "not requesting any direct
administrative support under the application."  Id. at 103 (emphasis in
original).  In its letter accepting the grant, BSRC told OCS that since
the award was $200,000 less than originally requested, the "original
budget" was being reduced by a similar amount (from $2.76 to $2.56
million).  BSRC said that this reduction was made possible by the
elimination of various contingent expenses included in the original
grant proposal as a hedge against inflation.  Citing its experience in
housing projects, BSRC expressed confidence in its ability to bring the
project to successful completion even with the reduced funding.  OCS Ex.
H-2.

Thus, the Program Announcement and the grant award provided clear notice
to BSRC that there was a ten percent limitation on administrative costs.
Moreover, BSRC's original application indicated that BSRC was not
seeking funding for administrative costs.  Further, when told informally
that it would be receiving a reduced grant, BSRC eliminated from its
budget the same type of "soft costs" for which it now seeks federal
funding.

Regarding the general nature of the OCS funding categories compared to
HUD's, early on BSRC emphasized its experience with construction grants.
See OCS Ex. H-2.  Given its expertise, it is not likely that BSRC became
aware of the general differences in OCS and HUD budgets only when faced
with the possibility of a disallowance.  Rather, at the time it applied
for the OCS grant, BSRC was aware of OCS's clearly expressed concern
with limiting federal expenditures for administrative costs.
Ultimately, this concern was translated into a condition for the
allowability of grant funds as awarded.  There is no evidence that, at
the time it accepted the grant, BSRC did not understand the ten percent
ceiling to apply as suggested by OCS.  It has raised a question only
after having received this disallowance.  Even assuming for the sake of
argument that the funds were expended on "soft costs," if BSRC had a
question concerning the manner in which "soft costs" would be
categorized for purposes of determining their allowability, it should
have sought a clarification from OCS prior to committing federal funds
to them.

Moreover, while on appeal BSRC characterized the costs in issue as
typical construction soft costs, its January 8, 1990 letter to OCS
requesting rebudgeting painted an entirely different picture.  There,
BSRC characterized these expenditures as general administrative costs
which had permitted it to continue providing community services.  OCS
Ex. D-4.  Elsewhere in that document, BSRC indicated that these
expenditures had been made for "general operations."  Id. at Attachment
A.  Further, in March 1991, BSRC explained to OCS what had happened to
the $360,000 of the grant award that was not spent on construction.
More than $49,500 was identified as direct project expenses (generally
identified as a management consultant, insurance, engineers and
architects, housing specialists and miscellaneous).  "The balance of
funds were used to support administrative costs related to the project .
. . ."  OCS Ex. D-7.  These statements provide clear support for a
conclusion that BSRC is seeking retroactive approval for administrative
expenditures of the type limited by OCS.

Similarly, we find BSRC's attempt to redefine these administrative costs
as only ten percent of the overall project costs to be inconsistent with
its prior statements regarding this grant.  Specifically, BSRC described
as OCS's part of the project the medical facility and the commercial
space that were completed within the grant period.  See OCS Ex. H-9.

Furthermore, the OCS funds were clearly earmarked for "construction," so
that none of the regulations cited by BSRC support its position that the
majority of funds may be redesignated for administration of the overall
project.  BSRC cites 45 C.F.R. . 74.106 for the proposition that there
is no need to obtain prior approval to rebudget costs in a construction
grant.  However, BSRC ignored limiting language in that regulation which
provides that there is no need for prior approval "[u]nless provided
otherwise by the terms of the grant . . . ."  This grant specifically
restricted the expenditures for administrative expenses; consequently,
this regulation is totally inapplicable.  For the same reason, BSRC's
reliance on 45 C.F.R. . 74.177(c) is equally unavailing.  That
regulation permits the awarding agency to waive the prior approval
requirements contained in the cost principles for certain types of
costs.  When the awarding agency waives the requirement for approval of
a particular cost, that cost if incurred is allowable so long as other
conditions for allowability are met.  Since the costs at issue here are
unallowable because they exceed the specific restriction on
administrative costs, OCS's authority to waive certain approval
requirements, which were not even at issue here, is irrelevant.  The
regulation at 45 C.F.R. . 74.107, which states that the awarding party
may require prior approval of fund or budget transfers between
construction and nonconstruction work, is also totally inapplicable.
While, as BSRC asserted, this regulation may demonstrate that OCS has
the flexibility to permit a budget transfer, that flexibility is
available only where a grant provides for construction and
nonconstruction work.  This grant was for one purpose -- construction.

We also reject BSRC's contention that OCS's determination should be
overturned because the Homeless Project was ultimately a success.  The
success of the grant is irrelevant to the allowability of funds in
issue.  As OCS noted, it is unfortunate that BSRC applied OCS funds to
administrative costs in excess of those reimbursable under the grant.
However, the limitation on administrative costs was clear.  Thus, we
conclude that OCS's disallowance of $360,371 in excess administrative
costs was proper.

 B.  Expenditures Incurred Outside the Grant Period

When first asked by OCS to address this issue, BSRC stated:  "These
costs are questioned because they occurred outside the grant period.
Management did not pursue a no-cost time extension during this period."
OCS Ex. D-7 at 3.  Before this Board, BSRC did not address these costs
until its initial reply brief (following OCS's brief).  There it noted
that part of the disallowance for the Homeless Project consisted "of
$12,680 which the parties agree was spent outside the grant period for
project-appropriate expenses."  BSRC First Reply Br. at 11.  BSRC then
reasoned that since OCS did not dispute that this expense represented an
otherwise legitimate payment, OCS should provide it with a no-cost
extension.  BSRC indicated that the extension would not be used to
undertake further grant activities, but would "provide technical relief
. . . to avoid a clear injustice."  Id. at 16-17.

OCS did not address the issue of whether this expenditure was for an
otherwise allowable cost.  Rather, OCS seized on BSRC's admission that
these funds were indeed spent on expenditures incurred outside the grant
period as the most compelling argument for sustaining this aspect of the
disallowance.  See OCS Br. at 16-17 and OCS Reply Br. at 9.  Further,
OCS dismissed BSRC's request for a no-cost extension as unjustified
based on the facts as presented.  OCS Reply Br. at 9.

The audit report identified the expenditure in issue as professional
fees incurred for a housing specialist.  See Audit Report, Bedford
Stuyvesant Restoration Corporation Awards # UR0097 and UR0165 at 6 (BSRC
Ex. D).  Even if these costs were a type generally allowable, this
expenditure was properly disallowed.  Grant funds may be used only for
costs which are allowable and allocable to the activities for which the
grant was awarded.  See Action, Inc., DAB No. 1400 (1993) (and cases
cited there).  BSRC conceded that this expenditure was incurred outside
the extended grant period.  Thus, the expenditures were not allocable to
this grant.  That fact alone provides a sufficient basis for the
disallowance.

BSRC also asserted that a further no-cost extension would prevent a
clear injustice.  Presumably, that "injustice" would be the disallowance
of an otherwise allowable cost simply because it was incurred outside
the grant period.  A grantee bears the burden of proving the
allowability of costs claimed for federal reimbursement.  BSRC failed to
meet this burden.  Even if, as BSRC asserted, the professional fees in
question were "routine," they were undocumented.  Absent documentation,
the costs could be disallowed even if they were incurred within the
grant period.

Moreover, BSRC did not request a no-cost extension until it filed what
normally would have been its final brief in this case. 7/  Thus, OCS was
faced with a request for a no-cost extension for an unsubstantiated
expenditure incurred outside the grant period, several years prior to
the request.  As discussed earlier, a decision denying a no-cost
extension need only be reasonable.  The decision need not be the only
one, the best one or even one others might have made.  See Oakwood at 9.
Applying this standard to the circumstances here, OCS's decision
refusing to provide a no-cost grant extension to cover these costs was
clearly reasonable.

Accordingly, OCS properly disallowed $12,680 for expenditures incurred
outside the grant period.

III.  SUBSIDIARY ISSUES

 A.  Revision of the Drugstore Project Disallowance

During the course of the briefing for this case, OCS increased the
amount of the disallowance by $96,637 (from $369,770 to $466,407).  OCS
stated that this disallowance was premised on the same legal theory as
the original disallowance, i.e., BSRC's failure to expend sufficient
matching funds during the grant period.  OCS indicated that the increase
was based on a review of the independent audit report of the Drugstore
Project by this Department's Office of the Inspector General and an
additional internal review.  Specifically, the audit report indicated
that a total of $533,593 was spent on the Drugstore Project during the
grant period.  That amount consisted of $500,000 in OCS funds and
$33,593 in matching funds from BSRC.  Thus, OCS now seeks to recover the
entire unmatched amount, $466,407 ($500,000 minus $33,593).  OCS
asserted that consideration of this issue here would be efficient and
consistent with the Board's previously stated position that issues not
raised in an original disallowance letter may be considered so long as
an appellant has an opportunity to respond.  See All Indian Pueblo
Council, Inc., DAB No. 976 (1988).  OCS Reply Brief at 5-7.

BSRC objected to the increased disallowance.  BSRC argued that Pueblo
Council was inapplicable here.  Specifically, BSRC pointed to the
disallowance letter which provided --

 . . . Federal funds totaling $369,770 are to be returned to the
 granting agency.  It is also determined that the expenditure
 incurred outside the grant period totaling $96,637 is addressed
 by the resolution on the matching share.  No further recovery of
 those funds is warranted.

BSRC Ex. L.

BSRC contended that the audit report had been available to OCS since
mid-1990 and that it was "wholly inappropriate at this late point . . .
for OCS to attempt to reverse an express finding" set out in the
disallowance letter. 8/  BSRC Second Reply Br. at 2-3.

In the paragraph prior to that cited by BSRC above, the disallowance
letter, paraphrasing the audit report, noted --

 It was recommended that . . . [BSRC] return to the granting
 agency the entire Federal grant of $500,000 if an acceptable
 joint venture partner was not located within the period of
 resolution.  This recommendation incorporated the questioned
 cost of $96,637 previously referenced.

BSRC Ex. L.

Clearly, OCS's review of the audit was sloppy.  When it composed the
disallowance letter, instead of using the amount of federal funds that
were not matched during the approved project period, OCS mistakenly used
the amount of unmatched funds for the entire audited period.  This gave
BSRC credit for the $96,637 in private funds that it spent after the end
of the approved project period.  However, since during the approved
project period BSRC had applied the entire $500,000 of OCS funds and
only $33,593 in unrestricted (private) funds to this project, BSRC was
actually entitled only to the $33,393 that it matched as required by the
terms of the grant award.  Thus, $466,407 of the OCS funds were not
matched during the project period, and OCS is entitled to the return of
these funds.

As a practical matter, OCS has not alleged any new basis for taking the
disallowance, because the new figure is merely an adjustment to the
amount of the disallowance.  Additionally, BSRC had an opportunity to
reply to the increase.  Other than challenging the timing of the
increase, BSRC's basic argument for reversal of the disallowance did not
change.  See generally BSRC Second Reply Br. at 1-7.  Thus, BSRC has not
been prejudiced by OCS's failure to disallow earlier the full amount OCS
is entitled to recover. 9/

Obviously, the financial impact of the $96,637 is significant.  The fact
remains, however, that OCS is entitled to an accurate accounting of
federal funds provided to grantees.  This money is no more allowable
than the $369,770 initially disallowed.  OCS has a right to recoup this
money.  BSRC did not show that the general basis for the disallowance
was wrong.  It would certainly be counter to the purpose of this appeal
process, which is to provide appellants with an expeditious resolution
of grant disputes, to require OCS to pursue separately and for us to
decide separately what is simply an adjustment to correct an understated
disallowance amount.

We therefore sustain OCS's revision of the disallowance (to $466,407) in
connection with the Drugstore Project.

 B.  BSRC's Motion to Strike

On September 30, 1992, the Board granted OCS's request to respond to
what OCS characterized as new issues raised in BSRC's reply brief.  In
that same ruling, BSRC was given the opportunity to answer OCS's
response.  BSRC's response included a "Motion to Strike Material
Improperly Included in . . . [OCS's] Second Reply Brief."  The Motion
addressed arguments by OCS concerning the Drugstore Project.

BSRC moved to strike --

 o  OCS's rebuttal of what it asserted was BSRC's
 mischaracterization of the matching fund requirements (OCS Reply
 Br. at 2-3);

 o  OCS's explanation of its reliance on Oakwood in denying
 BSRC's request for a no-cost extension (OCS Reply Br. at 3-4);
 and


 o  OCS's increase in the amount disallowed relative to the
 Drugstore Project (OCS Reply Br. at 5-7).

Generally, BSRC argued that OCS had exceeded the scope of the response
permitted by the Board.  BSRC asserted that, rather than address new
issues, OCS had continued the "argument-rebuttal process on points
already placed in issue."  Further, according to BSRC, by increasing the
disallowance, OCS had raised a "totally new issue."  BSRC Second Reply
Br. at 1-4 and accompanying Attachments 2 and 3.

BSRC's Motion is not persuasive.  In its initial brief, BSRC generally
argued that the decision denying the no-cost extension for the drugstore
project was not reasonable.  BSRC Br. at ii and 6.  Then, in what would
normally have been its final brief,  BSRC specifically superseded the
arguments in its first brief  and expanded its discussion of the
Drugstore Project to include extensive argument on its interpretation of
the matching fund requirements as well as arguments distinguishing
Oakwood.  BSRC First Reply Br. at 1, 3-10.

In its initial reply brief, BSRC not only recrafted its arguments, but
did so after having had the benefit of examining OCS's brief.  Thus, as
a practical matter BSRC, not OCS, deviated from the usual briefing
process because, from a procedural perspective, all issues in BSRC's
reply brief were raised for the first time.  Generally, the differences
between these briefs were so significant that we do not find that OCS
exceeded the parameters set by the Board for its reply brief, i.e., that
OCS respond to the new arguments only. 10/  Moreover, as in our usual
briefing process, BSRC was given, and took, the opportunity to file the
final brief in this proceeding, so that it could respond fully to all
OCS' contentions.

For the preceding reasons, we deny BSRC's Motion to Strike.

 C.  BSRC's Proposed Remedy for the Drugstore Project

BSRC suggested that, if the denial of its no-cost extension was upheld,
it should be permitted to sell the 1583 Fulton Street site and provide
OCS with the net proceeds from the sale in full satisfaction of the
disallowance relative to the Drugstore Project.  BSRC insisted that this
would be a fair resolution of the dispute especially since it had
cross-claims against the building.  However, BSRC also asked that a
no-cost extension be granted if, during the pendency of the sale, a
suitable joint venture partner was found.

As OCS noted, sale of the Fulton Street property would be consistent
with the regulations concerning disposition of real property not used
for authorized purposes.  See 45 C.F.R. . 74.134(c).  However, OCS
indicated that it would expect to be paid the full amount owed by BSRC
as the result of the disallowance.  Consequently, it would not waive the
difference if sale of the property was not sufficient to cover that
amount.  Moreover, OCS indicated that it would refuse a no-cost
extension even if a suitable joint venture partner was found prior to
the sale.  OCS Reply Br. at 4-5.

OCS is entitled to recover the full amount disallowed.  Since this
building was never used for grant purposes, BSRC is not obliged to sell
it to satisfy its obligation to repay the unmatched funds, and may
continue to seek a joint venture partner on its own.  We have already
found that OCS acted reasonably when it denied the additional no-cost
extension requested for the Drugstore Project.  BSRC's request that it
be permitted to continue to seek a joint venture partner while the
building is on sale amounts to a reiteration of the extension request
which OCS has already denied with good reason.  BSRC must realize that
this grant is finished.  Now, OCS may reasonably expect BSRC to return
the full amount of the OCS funds for which BSRC failed to provide the
requisite match without regard to the disposition of the building. 11/

D.  BSRC's Possible Bankruptcy

At the outset of both appeals BSRC alleged that repayment of the
disallowances would force it into bankruptcy.

BSRC's possible bankruptcy is not relevant to our consideration of
these, or any, disallowances.  In effect, BSRC is seeking equitable
relief (i.e., the disallowances should be forgiven, not because OCS is
wrong, but because BSRC cannot afford to repay).  The Board is empowered
to resolve legal and factual disputes.  We cannot provide equitable
relief; we are bound by all applicable laws and regulations.  45 C.F.R.
. 16.14.  We conclude above that the law applicable to these
disallowances clearly requires BSRC to repay the disallowed grant funds.

 E.  OCS's Refusal to Participate in Mediation

After the close of the extended briefing in this case, BSRC wrote to the
Board requesting mediation of the two disallowances.  We delayed our
consideration of the appeals until OCS could reply. OCS vehemently
opposed "the proposed diversion of these cases to mediation."  OCS
stated that the cases were not appropriate candidates for mediation, and
suggested that BSRC's proposal was made in bad faith, since it was made
so late in the appeals process.  Letter from OCS to the Board (March 5,
1993).  The Board then notified the parties that since mediation
requires two willing participants, and OCS was not willing, the Board
would close the record and proceed to decision.  Ruling on Request for
Mediation (March 8, 1993).

Although the Board had closed the record, BSRC wrote a letter on March
12, 1993 which it asked to be made part of the record.  In its letter,
while recognizing that mediation could not take place without OCS's
consent, BSRC sought to rebut certain contentions made by OCS.  BSRC
also contended that OCS's refusal to participate in mediation
demonstrated that OCS was behaving unreasonably in refusing BSRC's
request for a no-cost extension.

It would appear unfair to permit OCS's allegation of bad faith to go
unanswered, and we will therefore grant BSRC's request to add its
rebuttal letter to the record.  OCS's strong reaction may have been
based on a misapprehension that the Board might somehow force OCS to
submit the case to mediation.  However, the Board does not have
authority to take such an action; we provide mediation services only
where both parties consent.

OCS was also mistaken in asserting that BSRC's request was not timely
made or that BSRC was somehow prolonging the period in which it had use
of the money OCS had disallowed.  Parties in Board proceedings are
permitted to negotiate a settlement at any time during the process.

 

 

 

 

 

 

 


Conclusion

Based on the preceding analysis we sustain OCS's determinations
disallowing a total of $839,638 in federal funds awarded to BSRC under
the Community Services Block Grant Program.  The individual
determinations consist of $466,407 disallowed in connection with BSRC's
Drugstore Project and $373,231 disallowed in connection with BSRC's
Homeless Project. 12/

 


       _________________________
       Cecilia Sparks
       Ford

 


       _________________________
       Norval D. (John)
       Settle

 


       _________________________
       M. Terry Johnson
       Presiding Board
       Member


1.     OCS originally disallowed $369,770 for the Drugstore Project.
Upon further review of the audit OCS increased the disallowance by
$96,637.  However, the underlying rationale for the disallowance,
failure to obtain required  matching funds, remained the same.  OCS
Reply Brief (Br.) at 5.


2.     From the record it appears that the parties remained in
communication from the July 1987 no-cost extension to this point.
However, those communications, if any, were not detailed in the record.


3.     "Store 24" is a convenience store chain.


4.     We limit our analysis here to the substantive legal issues
presented by the disallowance.  We address the issue of whether OCS
could properly increase the amount of the disallowance in Part III.


5.     Additionally, BSRC's assertion that the disallowance should be
forgiven because the audit report did not indicate that the matching
funds should be raised in advance (BSRC First Reply Br. at 7) is equally
unavailing.  This assertion underscores not only BSRC's misunderstanding
of the matching requirement, but also its apparent misunderstanding of
the audit process.  An audit is a retrospective examination of a
grantee's financial stewardship.  Thus, contrary to what BSRC argument
implies, the audit's failure to restate explicitly the grant notice's
requirement for fund matching during the grant period cannot serve as a
basis for forgiving the disallowance.


6.     The scope of judicial review under the Administrative Procedure
Act, when ruling on a challenge to informal agency action, includes
whether the agency action was "arbitrary, capricious, an abuse of
discretion, or otherwise not in accordance with law."  5 U.S.C. . 706.
The "arbitrary and capricious" standard of review has been stated to be
a highly deferential one, which presumes the agency action to be valid.
The standard is also a narrow one, which forbids a court from
substituting its judgment for that of the agency; it mandates judicial
affirmance if a rational basis for the agency's decision is presented,
even though the court might otherwise disagree.  Environmental Defense
Fund v. Costle, 657 F.2d 275, 283 (D.C. Cir. 1981).  The burden of
overcoming the presumption of the validity of agency action is upon the
party challenging it.  Id. at n.28.


7.     The Board's normal process was modified so that both parties
could file an additional brief.


8.     BSRC also raised this issue in its Motion to Strike parts of the
OCS reply brief, asserting that it was a new issue improperly raised by
OCS for the first time in its reply brief.  We address BSRC's Motion in
section B., below.


9.     Indeed, BSRC arguably benefitted from OCS's failure to disallow
the $96,637 at an earlier date since interest on that amount did not
begin to accrue until 30 days after the date of the OCS brief notifying
BSRC of the increase.  OCS Reply Br. at 6 n.2.


10.     We have previously considered and rejected BSRC's arguments on
the increase of the amount of the disallowance.  Thus, we need not
revisit that issue here.


11.     BSRC asserted that it had "cross claims" against the proceeds
from the sale of the building which could potentially diminish the
amount that it paid to OCS.  This assertion is without merit since
BSRC's obligation to return unmatched OCS funds in no way depends on the
amount or timing of BSRC's receipt of the proceeds from any sale of the
building.  Any "cross claims" which BSRC might have could not reduce its
debt to OCS.


12.     While our decision here is the final determination of the
Department of Health and Human Services that OCS's disallowance is
proper, OCS is not precluded from negotiating within its delegated
authority the timing and terms of BSRC's repayment of the disallowed
funds.