Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Inter-Tribal
Council DATE: June 3, 1993
of
California Docket No. A-92-71
Decision
No. 1418
DECISION
The Inter-Tribal Council of California (ITCC) appealed a disallowance
by
the Administration on Children and Families (ACF) of $147,312.
The
disallowance was based on a financial review of ITCC's Head
Start
Program for the period January 1, 1990 through June 21, 1991,
which
questioned various expenditures.
For the reasons stated below, we reduce the disallowance to
$139,498.62.
We affirm the disallowance of $32,143 for handicapped programs,
$66,217
for salaries and fringe benefits, $3,254 for computers and
related
equipment, and $25,247 for truck purchases. We reverse the
disallowance
of $2,757 for paid annual leave of three employees. We
modify the
disallowance for central office facility rental costs and
cost-of-living
adjustments and salary differentials; we find that ACF should
have
disallowed only $163.62 for rental costs and $12,474 for
cost-of-living
adjustments. We remand the matter to ACF to determine
whether the
disallowance must be reduced because of the $60,854 in tribal
funds
which ITCC's independent audit reported as spent for Head Start
during
the January - December, 1990 budget period. To the extent tribal
funds
may be applied to some unallowable expenditures, there is no basis
for
also disallowing federal monies paid to ITCC.
BACKGROUND
The following facts are not in dispute. ITCC is a
non-profit
organization representing Indian tribes and tribal organizations
within
the state of California. During the time period relevant to
this
disallowance, ITCC operated Head Start programs at multiple
locations
within the state, enrolling several hundred children. ITCC
Brief (Br.)
at 1.
On June 23-27, 1991, ACF conducted a site visit to ITCC's main office
in
Sacramento, California for the purpose of performing a fiscal
review.
ACF Br., Tab A, at 1; Tab B, at 1. On July 31, 1991, ACF issued
a
fiscal site report summarizing its findings and ITCC's
potential
disallowances for the relevant period. ITCC responded to the
site visit
report on September 30, 1991, and ACF sent ITCC a final
disallowance
letter on December 24, 1991. See ACF Answers to Questions
(Ans. to
Ques.), Tab O; ACF Br., Tab A, at 1. The disallowance included
various
expenditures which ACF found were unallowable either because
the
expenditures were not properly documented, were incurred in a
manner
which otherwise violated applicable cost principles, or were not
used
for the purposes for which funds were awarded. ACF Br., Tab A, at
1-3.
ANALYSIS
I. Costs not supported by adequate documentation
A. Standards of Documentation
Part 74 of Title 45 of the U.S. Code of Federal Regulations contains
the
requirements for administering Department of Health and Human
Services
(DHHS) grants and the principles for determining allowable
costs. 45
C.F.R. . 74.1. Part 74 is made specifically applicable
to Head Start
grantees by Head Start regulations. 45 C.F.R. .
1301.10(a). The cost
principles of Office of Management and Budget
Circular A-122 (OMB Cir.
A-122), applicable to non-profit grantees of the
federal government, are
also made applicable to DHHS grantees who receive
Head Start funds by 45
C.F.R. . 74.174(a). Under these cost principles,
a cost which is
charged to federal funds must be adequately documented in
order to be
allowable. OMB Cir. A-122, Attachment A, . A.2.g;
LAU-FAY-TON Community
Action Agency, DAB No. 1126 (1990). Grantees are
required to maintain
records which "identify adequately the source and
application of funds
for grant . . . supported activities" and to support
accounting records
by source documentation such as canceled checks, paid
bills, and
contract documents. 45 C.F.R. . 74.61(b) and (g). The
documentation
must be contemporaneously prepared. Lac Courte Oreilles
Tribe, DAB No.
1132 (1990). Based on these provisions, the Board has
repeatedly held
that a grantee bears the burden of documenting the existence
and
allowability of its costs. E.g., Louisiana Housing Assistance
Corp.,
Inc., DAB No. 1310 (1992); Lac Courte Oreilles at 5, n.4.
Paragraph 6(l) of OMB Cir. A-122, Attachment B, provides the
additional,
more specific, documentation requirements for salaries and wages
charged
to a grant. It provides that salary and wage expenditures must
be
accompanied by personnel activity reports which reflect
an
after-the-fact determination of the distribution of activity for
each
employee whose time is charged in whole or in part to the grant.
It
further provides that each report must account for the total
activity
for which employees are compensated and must be signed by the
individual
employee or a supervisory official who has first-hand knowledge of
the
employee's activities. Id.; see also Louisiana Housing at 3.
The Board
has previously held that summary time sheets, which indicate the
time
that an employee actually worked on grant-related projects,
accompanied
by signed affidavits, may constitute adequate documentation for
wage and
salary expenditures under cost principles requiring time
sheets.
California Dept. of Health Services, DAB No. 1155 (1990). 1/
However,
affidavits accompanying payroll time sheets which do not reflect
which
program(s) an employee was working on are inadequate. Second
Street
Youth Center, Inc., DAB No. 1270 (1991).
B. Personnel Costs and Related Fringe
Benefits
ACF alleged that ITCC did not adequately document the salaries and
fringe
benefits of seven administrative employees of Head Start by
keeping personnel
activity reports of their program-related activities,
as required by the cost
principles. Based on information gathered
during the fiscal site
review, ACF disallowed $66,217 in salaries and
fringe benefits for calendar
year 1990. ACF Br., Tab A, at 3; Tab B, at
15-16. The disallowed
amount was derived from estimates made of the
percentage of time each of
these administrative employees spent on Head
Start activities (ranging from
50% to 90%), and was based on interviews
conducted with these
employees. Rather than submitting documentation
supporting these
estimates or providing detailed notes of its interviews
with the employees,
ACF submitted a single handwritten page which
contained a column entitled
"estimate of time per interview." ITCC Ans.
to Ques., Tab N. The
column contained roughly the same figures for
allowable time charged to Head
Start for each employee as the final
disallowance letter. 2/
ITCC argued that, with the exception of the Head Start Director and
her
secretary, who each spent only 90 percent of her time on Head
Start
activities, all other Head Start employees spent 100 percent of
their
time on the program. ITCC Reply Br. at 7-11; ITCC Reply to ACF
Ans. to
Ques., Tab 22, at 3. ITCC conceded that $6,517 should be
disallowed
based on the time that the Head Start Director and her secretary
spent
on other programs. ITCC challenged the remaining portion of
the
disallowance for salary and fringe benefit costs. Id. ITCC
submitted
affidavits signed by each of the employees whose salary was at
issue
stating the percentage of time each employee purportedly worked for
the
Head Start program during the relevant time period. ITCC Br., Tab
9.
ITCC also submitted descriptions of the positions of these
employees.
ITCC Ans. to Ques., Tab 18.
This issue is particularly troublesome because, while each party asserts
a
different amount of time that each of ITCC's administrative employees
spent
on Head Start activities, neither party presented the Board with
complete
documentation substantiating its position. We are troubled
that ACF
presented no detailed notes or affidavits showing the Board
what was said in
interviews with the ITCC employees regarding
percentages of salaries and
fringe benefits which ACF sought to
disallow.
On the other hand, ITCC had the burden of keeping personnel
activity
reports showing the distribution of activity for each employee
working
part- or full-time on Head Start-related activities. ITCC did
not deny
that ACF conducted interviews with its employees or that its
employees
made statements which might have led ACF to believe the employees
were
not working full-time on Head Start. ITCC did not explain what was
said
in the interviews or how ACF might have misunderstood ITCC's
employees'
remarks. ITCC made no attempt to explain the inconsistencies
between
what its employees apparently told ACF and what its affidavits
assert.
We find that ITCC failed to meet its burden to document salaries
and
fringe benefit costs charged to its Head Start grant. We do not
find
position descriptions to be adequate documentation since
these
descriptions indicate only what an employee's responsibilities
were
intended to be, rather than what activities were actually
performed.
Based, in part, on our previous decisions, we find that the
affidavits
presented here likewise do not provide sufficient documentation
for the
personnel expenditures at issue since they were not submitted with
any
type of personnel activity reports or summary time sheets.
Furthermore,
the affidavits are neither contemporaneous nor consistent with
ITCC's
arguments. 3/ We find that, while ACF could have provided the
Board
with additional information to substantiate its position, ACF made
some
efforts to determine the actual percentage of time chargeable to
the
grant rather than disallowing the costs entirely based on lack
of
documentation. Given ITCC's failure to properly document
these
personnel costs or to adequately explain the apparent
inconsistencies
between what its employees told ACF and what they said in
their
affidavits, we see no reason to disturb ACF's estimates. For
these
reasons, we uphold the disallowance of $66,217.
C. Usage of Computers by Head
Start
ACF disallowed $3,254, which represents 15 percent of the total
amount
expended by ITCC for eight computers and related supplies. 4/
ACF Br.,
Tab A, at 2. ACF claimed that ITCC did not properly document
that the
computers were being used full-time for the Head Start
program. ACF
claimed, based on its fiscal site review, that ITCC was
using the
computers for Head Start purposes only 85 percent of the time
even
though 100 percent of the costs had been charged to Head Start.
ACF Br.
at 12-14. ACF based this estimate on the average amount of time
it
found that the administrative employees, to whom the computers
were
assigned, were working on Head Start-related activities during
the
relevant time period. ACF Reply to ITCC Ans. to Ques. at 3-4.
On the
other hand, ITCC alleged that it was using seven of the eight
computers
100 percent of the time for Head Start and the other computer
solely for
another federal program. ITCC argued that it would be more
appropriate
to disallow fully the cost of one computer rather than 15 percent
of the
cost of each computer. ITCC Br. at 10.
We find that ITCC did not adequately meet its burden to document the
usage
of the computers. While ACF stated that it would accept
any
contemporaneous documentation, ITCC has provided no records which
show
what the computers were used for. Specifically, ITCC has not
presented
any evidence to support its assertion that one computer was
used
full-time for the Low-Income Home Energy Assistance Program (LIHEAP)
and
seven computers were used for the Head Start program. Furthermore,
even
if ITCC had presented such evidence, it would not support
disallowing
one-eighth of the total cost of the computers, as ITCC
suggested: the
eight computers were not equal in value and ITCC did not
indicate which
computer was being used by the LIHEAP program. See ITCC
Br., Tab 5;
ITCC Ans. to Ques. at 4.
Absent documentation showing the actual usage of the computers, we find
it
was reasonable for ACF to disallow a portion of the cost of the
computers
based on its estimate of time spent by the employees with
access to the
computers on activities unrelated to Head Start. We
uphold the
disallowance of $3,254 for the purchase of computers and
related
supplies.
D. Expenditures for Handicapped
Programs (Program Account
26)
ITCC received $32,143 for calendar year 1990 to be expended
for
handicapped programs, or "Program Account 26" (PA 26). 5/
ACF
disallowed the full amount of the PA 26 funds on the grounds that
ITCC
did not properly document its expenditures of these funds by
separately
accounting for them. ACF Br., Tab A, at 3. ITCC
conceded that $7,051
was properly disallowed due to poor documentation.
ITCC Reply to ACF
Ans. to Ques., Tab 22, at 3. As for the remaining
expenditure totaling
$25,092, ITCC argued that, while it did not separately
account for these
funds, it had spent at least this amount in handicapped
program-related
expenditures for 1) half of the salary and fringe benefits of
the health
and handicapped coordinator, 2) travel costs of the health
and
handicapped coordinator and other personnel involved with
handicapped
programs, and 3) other non-personnel costs. ITCC Reply Br.
at 5-7.
ITCC provided the Board with copies of receipts for expendi-tures
for
certain non-personnel items such as supplies, medical care, and
other
incidental items. Id., Tab 4.
The Indian and Migrant Program Division Head Start Management Manual
for
the Coordination of Programs for the Handicapped (IMPD Manual),
issued
by ACF and distributed to all Indian Head Start grantees, embodies
the
Head Start policy on expenditure of PA 26 funds for the relevant
time
period. See Responses of ACF to Request to Supplement the Record,
at 1.
The IMPD Manual provides that handicapped program funds may be used
only
for seven types of costs: 1) development or continuation of a
core
capability; 6/ 2) screening, assessment, and diagnosis of
handicapped
children; 3) special services to handicapped children; 4)
transportation
of handicapped children; 5) special equipment and materials
for
handicapped programs; 6) modification of physical facilities; and
7)
training and technical assistance to provide handicapped programs
and
services. IMPD Manual at VII-64 to -66. The handicapped
program funds
"are dedicated to supplemental activities that go beyond
minimal basic
types of programs normally provided for through regular Head
Start
funds." Id. at II-5.
Since there are no exceptions in Part 74 excluding PA 26 funds
from
documentation requirements, these expenditures must be documented in
the
same manner as any other Head Start grant funds awarded to
non-profit
organizations. ITCC requested that the Board allow 50
percent of the
health and handicapped coordinator's salary to be charged to
PA 26 funds
on the ground that the handicapped coordinator spent at least 50
percent
of his time on handicapped programs and services. However, ITCC
has
provided no personnel time sheets or other documentation which
would
verify that this is the case. The job description of the health
and
handicapped coordinator's duties does not constitute
adequate
documentation because it does not show what the employee actually
did,
but instead reflects the employee's proposed duties.
Furthermore, even if a job description could constitute
adequate
documentation under the cost principles, it would appear that
very
little of this employee's time was spent on activities which
uniquely
benefitted handicapped children, as required by the IMPD
Manual. In the
job description, there are three brief references to the
coordinator's
duties regarding the handicapped program. ITCC Reply Br.,
Tab 5. 7/
However, these are three references out of approximately
five
single-spaced pages describing his duties, the majority of which are
not
in any way related to or suggestive of handicapped programs or
services.
Id. Furthermore, it is not clear that the three duties which
reference
handicapped programs contemplate services unique to
handicapped
programs. For these reasons, we find that ITCC did not
adequately
document that 50 percent of the health and handicapped
coordinator's
salary could be properly charged to the PA 26 fund.
As for other costs which ITCC sought to charge to PA 26 funds,
ITCC
submitted several travel expense vouchers. ITCC Reply Br., Tab
4.
However, these travel vouchers do not indicate what the travel
costs
were incurred for and whether the travel was related to
handicapped
programs or services. There are also check requests for
"consultant
fees," "T.B. Shot for Mary Aronson," and a "drug-free
ribbon." Id.
ITCC did not explain how these represent expenses which
are unique to
the handicapped program. Furthermore, some of the check
requests are
related to expenditures in 1991 rather than 1990, the period of
time at
issue in this item of disallowance. Id.
ITCC also submitted records showing that a number of children
had
undergone extensive testing for handicapping conditions. See ITCC
Ans.
to Ques., Tab 17. While testing is one of the seven
enumerated
expenditures for which handicapped program funds can be spent,
none of
the records submitted by ITCC indicate what, if anything, was paid
for
the testing services. Since many of the services were provided by
local
public school systems, it is not unreasonable to assume, absent
receipts
or other proper documentation, that the services were provided at
no
cost to Head Start. Even if this were an erroneous assumption, ITCC
has
provided no documentation on which ACF could even begin to estimate
the
actual cost of these services. Therefore, we find the travel costs
and
non-personnel items were not properly documented.
For the above reasons, we find that ITCC did not properly document
its
expenditure of handicapped program funds, and we uphold this portion
of
the disallowance.
E. Rental Payments for the Central
Office Facility
ACF disallowed $3,313 for rental payments made by ITCC for its
central
office space for the period January 1, 1990 through March 31,
1991. ACF
Br., Tab A, at 2. ACF claimed that ITCC did not provide
sufficient
documentation to show that it had properly allocated the rental
payments
between Head Start and other programs which also used the central
office
space. ACF claimed, based on a review performed by ITCC's
financial
consultant which ACF had accepted, that ITCC was to allocate only
87.73
percent, rather than 100 percent, of the charges for the central
office
facility to Head Start. ACF Br., Tab B, at 6. ACF also
claimed that
ITCC admitted that central office rents had not been properly
allocated
as of the time of the site visit in June of 1991. Moreover,
ACF claimed
that ITCC had not properly restored to the grant the portions of
the
rent which were improperly paid by Head Start funds. ACF Ans. to
Ques.
at 5, citing Tab O, at 10-11.
ITCC asserted that rental payments were properly allocated between
Head
Start and other programs and that ITCC had submitted
sufficient
supporting documentation. ITCC Br. at 8-9. In support
of its argument,
ITCC submitted two exhibits. With its initial brief,
ITCC submitted a
copy of an independent audit report by a certified public
accounting
firm covering the three years ending March 31, 1991, 1990 and
1989. See
ITCC Br., Tab 1. With its reply brief, ITCC submitted
two pages
entitled "Schedule of Rents," which purport to show a breakdown
of
rental payments owed for each Head Start and LIHEAP facility for
the
relevant time period. See ITCC Reply Br., Tab 2. However,
because the
figures vary slightly between the audit report and the schedule
of
rents, we rely solely on the audit report since it indicates
rental
payments for which Head Start funds were actually applied.
The audit report submitted by ITCC indicates the rental payments
allocable
to Head Start and LIHEAP for all facilities rented by ITCC for
the relevant
time periods. See ITCC Br., Tab 1, at 10-11. The report
shows
that Head Start funds were applied to $14,957 of the total rental
payments
for 1/1/90-3/31/90, $38,239 for 4/1/90-12/31/90, and $16,611
for
1/1/91-3/31/91. The report shows that LIHEAP funds were applied to
a
total of $997 of rental payments for 10/1/89-3/31/90, $1,436
for
4/1/90-9/30/90, and $1,436 for 10/1/90-3/31/91. Id. 8/ While
the audit
report does not show a breakdown of Head Start rents for the
program's
various facilities, the fiscal site review indicates that the total
rent
for the central office facility was $1,800 per month for each of the
15
months at issue.
We find that the audit report provides sufficient documentation to
show
the percentage of rent for the central office facility which was
being
charged to Head Start. We are basing this determination on
the
assumption that all of the LIHEAP rent was paid for the central
office
facility, since there is no indication in the record that the
LIHEAP
program was operated out of any other facilities, unlike the Head
Start
program. From the LIHEAP rent figures in the audit, we can
determine
that LIHEAP paid an average monthly rent for the central office
facility
of $239.33 per month for the period 4/1/90-3/31/91, 12 of the 15
months
at issue in the disallowance. 9/ ITCC Br., Tab A, at 10.
Therefore, we
can determine that LIHEAP paid 13.30 percent of the monthly
rent for the
central office facility for these 12 months ($239.33/$1,800.00 =
.133 or
13.30%). Since there were no other programs paying rent for the
central
office facility for this time period, we can determine that Head
Start
paid 86.70 percent of the total central office facility rent.
That
figure is lower than the 87.73 percent figure which ACF had
asserted
should be allocated to Head Start central office facility
rent;
consequently, no disallowance should have been taken for this
12-month
period.
However, a different result is required for the period of 1/1/90
through
3/31/90. The audit shows that $14,957 was paid by Head Start
for rent
during this time period for all of its facilities. ITCC Br.,
Tab A, at
11. We have estimated that LIHEAP paid $499 for the central
office
facility for this quarter (see footnote 8, supra), and we know that
the
total central office facility rent was $5,400 ($1,800 x 3).
Therefore,
based on this estimate, LIHEAP paid only 9.24 percent of the
central
office facility rent for this three-month period. Since there
is no
indication that any other program paid any rent for the central
office
facility for this quarter, we conclude that Head Start paid
90.76
percent of the total rent. Since this exceeds the 87.73
percent
allowable portion by 3.03 percent, we find that Head Start paid
$163.62
(3.03% x $5,400) in excess of what could be allocated to Head Start
for
these three months, and we uphold the disallowance to that extent.
We do not find any merit to ACF's argument that, while ITCC did
not
originally allocate the central office facility rent properly, ITCC
has
not restored these "borrowed" funds to the Head Start account. See
ACF
Ans. to Ques. at 5. The audit report shows what was actually
applied to
the Head Start and LIHEAP accounts as of the close of the year for
rent
during the relevant time periods. Even if Head Start funds were
used to
pay excess portions of the rental costs during a particular grant
year,
the audit report for that year would indicate if Head Start had
paid
more in rent than what was properly allocated to it and would
indicate
an "accounts receivable" from LIHEAP if the Head Start funds had
not
been restored. Since ACF did not claim the audit report
was
unacceptable, we find that Head Start was not charged more than
its
share of rent for the central office facility except for the
$163.62
which was overpaid for the period of 1/1/90-3/31/90.
For the above reasons, we uphold $163.62 of the disallowance for
the
central office facility and reverse $3,149.38.
II. Costs found to be unallowable because they
otherwise violated
applicable cost principles
A. Applicable Standards for Prior and Retroactive Approval
The applicable requirements provide that certain costs identified in
the
cost principles are allowable charges to a grant only if they
are
pre-approved by the grantor agency. See 45 C.F.R. . 74.177.
Other
costs which are not specified do not require prior approval.
The
regulations provide the following with respect to costs which
require
prior approval:
(b)(1) When the costs are treated as direct costs, they must
be
approved in advance by the awarding party.
(2) If the costs are specified in the budget,
approval of
the budget shall constitute approval of the costs.
(3) If the costs are not specified in the
budget, or there
is no approved budget, the recipient shall obtain
specific prior
approval in writing from the awarding party.
45 C.F.R. . 74.177(b) (emphasis added). Based on these requirements,
it
is clear that when an expenditure requires prior approval, a grantee
may
spend federal grant monies only for items which are either
specifically
identified in its budget, as approved by the notice of grant
award, or
for which a grantee has otherwise obtained permission. One
category of
items identified in the cost principles as needing prior approval
are
capital expenditures for equipment used for general purposes if the
cost
of the equipment exceeds the threshold amount and the equipment has
a
useful life of two or more years. OMB Cir. A-122, Attachment B,
.
13(a)(1)(b). 10/
However, in addition to these requirements for prior approval,
the
Department of Health and Human Services Grants Administration
Manual
(HHS/GAM) provides that retroactive approval may be granted where
the
transaction would have been approved had the organization
requested
approval in advance and where the organization agrees to
institute
controls to ensure that prior approval requirements are met in
the
future. HHS/GAM Ch. 1-105-60, . B.1. Since the provision
is
permissive, the Board has previously held that the provision does
not
preclude an agency's consideration of all relevant factors, such as
a
grantee's fiscal management history. Economic Opportunity
Atlanta,
Inc., DAB No. 313 at 3 (1982). However, the Board also has
held that
while an agency has considerable discretion in granting or
denying
retroactive approval, that discretion is not unbounded and the
agency
must state, in more than conclusory terms, the basis for its
decision.
Economic Opportunity at 3 and 7. The agency "may not deny
retroactive
approval based on unsubstantiated conclusions or on bases
so
insubstantial that the decision fairly can be described as
capricious."
Id.
B. Purchase of Pick-up Trucks
ACF disallowed $25,247 which ITCC expended for the purchase of two
pick-up
trucks. ACF Br., Tab A, at 2-3. ACF disallowed the full cost
of
the trucks on the grounds that ITCC did not have prior approval for
the
purchase of any trucks. ACF further alleged that the trucks
were
purchased for the general use of ITCC staff and not specifically
for
Head Start purposes. See generally ACF Br. at 14-16. ACF
based this
allegation on the fact that ACF found during the site visit that
the two
employees who were using the trucks were spending less than 100
percent
of their time on Head Start activities during 1990 and therefore,
absent
evidence to the contrary, could be assumed to be using the trucks
for
other purposes also. ACF Ans. to Ques. at 7.
ITCC alleged that it believed it had received oral permission to
purchase
the trucks. ITCC Br. at 11. When asked for details of the
oral
communication, ITCC alleged that an ACF program official had stated
to ITCC's
Head Start Director that purchase of the trucks would be "a
good idea."
ITCC Ans. to Ques. at 5-6. ITCC argued that the trucks
were being used
solely for Head Start purposes and submitted mileage
logs which indicated
that the trips taken with the trucks for the time
covered by the logs were
for Head Start purposes. ITCC Br. at 11; Tab
6. 11/
Clearly, the provisions requiring prior approval of capital
expenditures
for general use equipment apply to the purchase of the trucks at
issue
here, which were bought for more than $12,000 each and which could
be
expected to have a useful life of two or more years. ITCC did
not
argue, much less prove, that it had written permission to purchase
the
trucks. Even if we assume for the sake of argument that an ACF
program
official stated that purchase of the trucks would be "a good idea,"
a
fact which ACF denied, stating that something is "a good idea"
simply
does not constitute approval where the cost principles require
that
there be specific prior approval in writing. See ACF Reply to ITCC
Ans.
to Ques. at 4; Tab X. Assuming ITCC relied
on the oral statement
alleged, it was unreasonable of ITCC to rely on this
type of casual
comment as constituting agency permission to make a major
equipment
purchase such as the purchase of the two pick-up trucks at issue
here.
ITCC requested retroactive approval of the purchase. ITCC Br. at
12.
ACF denied retroactive approval, stating that the purchase of the
trucks
was not the best use of the money and that there were more
pressing
needs for which Head Start funds should have been used. ACF
Br. at
15-16.
While ITCC argued that purchase of the trucks was cost effective,
we
conclude that the agency's decision to deny retroactive approval
was
reasonable and was based on substantial grounds. ITCC
originally
requested approval for the purchase of one truck, and later
requested
funds for three vans and three buses. ACF Ans. to Ques., Tab
M; Tab Q.
ACF approved only the later request for three vans and three
buses.
Id., Tab V. ITCC instead purchased two vans, two buses, and two
trucks
despite the fact that the notice of supplemental award was
absolutely
clear that the three buses and three vans were to be
purchased. Trucks
are not equivalent to buses or vans since, unlike
pick-up trucks, buses
or vans can be used to transport children.
For the above reasons, we hold that the denial of retroactive approval
was
within the agency's sound discretion. We uphold the disallowance
of
$25,247 for the purchase of the two pick-up trucks.
C. Paid Leave for Three Employees
ACF disallowed $2,757 which ITCC paid to three administrative employees
in
addition to their regular salaries for working through their annual
leave
time during 1990 at ITCC's request. ACF Br., Tab A, at 2.
ACF
alleged that ITCC did not obtain prior approval for these payments
as
required by the cost principles. ACF originally characterized
these
payments as unauthorized pay increases but later characterized them
as
overtime payments. See generally ACF Br. at 6-9.
ITCC alleged that there were emergency conditions which made it
necessary
for the three employees to refrain from taking their accrued
annual leave
time in order to work, and that, according to ITCC policy,
the employees
would have lost their leave time if they did not use it
before the close of
the year. 12/ ITCC Br. at 7-8; ITCC Reply Br. at 2.
ITCC concurred in
ACF's characterization of the payments as overtime
payments. ITCC Reply
Br. at 2.
While the cost principles do not define "overtime payments" (and while
we
might not have characterized the payments at issue here as such), we
will
consider ITCC's payments to the three employees as overtime
payments since
the parties agreed they were. The cost principles
provide that payments
for overtime, extra-pay shifts, and multi-shift
work are allowable only with
the prior approval of the awarding agency
except:
a. When necessary to cope with emergencies, such as
those
resulting from . . . occasional operational bottlenecks of
a
sporadic nature. b. When employees are performing
indirect
functions such as administration . . . .
OMB Cir. A-122, Attachment B, . 27. ACF referred to this provision
but
stated that ITCC had not shown that any of the exceptions of
paragraph
27 applied. We do not agree. ITCC stated that its
emergency was caused
by the award of an expansion grant which required that
extra time be put
in by ITCC's administrative staff in order to get the
expanded program
functioning as soon as possible. ITCC Ans. to Ques. at
4. We find that
this qualifies under exceptions (a) and (b) of
paragraph 27, as quoted
above. Furthermore, despite ACF's argument that
emergencies requiring
overtime can usually be avoided by better planning on
the part of a
grantee, we do not see how that would have applied here.
See ACF Br. at
9. Clearly, it would not have made sense for ITCC to
begin working on
administration of its expansion grant until it had been
notified that
funds for that purpose had been awarded.
Finally, we find this case to be distinguishable from National
Health
Plan, Inc., DAB No. 871 (1987). While the facts of the two cases
are
similar, National Health Plan did not address the cost principles of
OMB
Cir. A-122, which apply here. Furthermore, the grantee in that case
did
not argue that payments for unused vacation time constituted
overtime
payments; rather, the grantee distinguished vacation time payments
from
overtime payments because the former did not involve working
beyond
regular business hours. Id. at 5-6.
For these reasons, we find that these payments were allowable as
overtime
payments without prior approval under the exceptions stated in
OMB Cir.
A-122, Attachment B, . 27(a) and (b). We reverse the
disallowance of
$2,757 for paid leave which was given to three
administrative employees.
III. Costs found to be unallowable because they were
spent for
unauthorized purposes
On August 20, 1990, ITCC was awarded $19,710 in order to
give
cost-of-living adjustments (COLAs) and $3,795 to give
salary
differential increases to its employees, for a total award of
$23,505.
ACF Br., Tab B, Attachment A. ITCC had applied to receive
these funds
for the specific purpose of giving COLAs and salary
differential
increases, and the award to ITCC came from funds which had
been
earmarked for these purposes by the agency. See ACF Ans. to Ques.,
Tabs
I and K. The Notice of Grant Award from the agency awarding the
$23,505
stated that "[t]his action approves the salary differential and cost
of
living application." ACF Br., Tab B, Attachment A. The COLAs
were to
be given retroactive to January 1, 1990 and the salary
differentials
were to be effective on September 1, 1990. ACF Ans. to
Ques., Tab I, at
2; Tab S, Attachment, at 3. However, a review of
payroll indicated that
staff received COLAs and salary differentials from the
date of the
award, and that ITCC did not apply the COLA increases retroactive
to
January 1, 1990. ACF Br., Tab A, at 1-2; Tab B, at 4-5. ITCC
conceded
that it did not apply the COLAs retroactively but spent the funds
on
other Head Start purposes. ITCC Br. at 7. ACF disallowed
$14,381,
which according to ACF represented the pro-rated share of the
$23,505
award for both COLAs and salary differentials for January 1,
1990
through August 19, 1993. 13/
The award notice clearly stated that the funds were awarded for
COLAs
retroactive to January 1, 1990, the beginning of ITCC's program year
for
its basic Head Start award. The HHS Information Memorandum of
February
2, 1990 specifically stated that --
[t]he 2.5 percent [cost of living] increase will be
made
available to grantees on the grantee's refunding date.
The
remaining funds will be allocated so that each program
will
receive enough funds in FY 1990 to be able to put
its
differential salary increase into effect on September 1, 1990.
ACF Ans. to Ques., Tab I, at 2. On March 1, 1990, ACF sent Indian
Head
Start grantees information on applying for expansion grants.
This
mailing enclosed a document dated February 8, 1990 entitled "FY
1990
Head Start Funding Guidance." Page Three of the Funding Guidance
states
that --
Regional Offices are to award the 2.5 percent [cost of
living]
increase being given to all programs effective on the
grantee's
refunding date. * * * The differential funding
increases will
be effective for all programs on September 1, 1990.
ACF Ans. to Ques., Tab S, Attachment, at 3. Furthermore, the
document
stated that --
Grantees which have serious fiscal problems or chronic
Carry
Over Balances or that are unable or unwilling to use these
funds
solely for increasing salaries and fringe benefits should not
be
given any of this increase . . . .
Id. (emphasis added).
It is clear that ITCC had an obligation to use these funds to grant
COLA
increases from January 1, 1990 and to grant salary
differential
increases from September 1, 1990. Instead, ITCC conceded
that it gave
increases beginning on August 20, 1990 and spent the remaining
funds on
other Head Start expenditures. This was in violation of the
specific
conditions placed on the funds, and it was clearly improper for ITCC
to
apply any of these funds to Head Start expenditures unrelated to
COLAs
and salary differential increases. For these reasons, we uphold
the
disallowance of the unrelated expenditures.
However, we find that there is an obvious error in ACF's calculation.
ACF
prorated the total amount for both COLAs and salary differential
increases
($23,505) on a per diem basis for the entire year and
disallowed the portion
which should have been paid to employees for
January 1 - August 19,
1990. However, both the Information Memorandum
and the Funding Guidance
clearly stated that salary differential
increases were to be effective on
September 1, 1990. Therefore, no
disallowance should have been taken
for the portion of the award
designated for salary differential increases
($3,795). For this reason,
we recalculate the disallowance on a per
diem basis, as did ACF, but
using only the portion of the award designated
for COLAs ($19,710). We
disallow that portion covering the period of
January 1 - August 19,
1990, as follows:
$19,710 = $54.00 per day 365 days
$54.00 x 231 days (Jan 1 - Aug. 19, 1990) = $12,474
Therefore, $12,474 is the correct amount for this item of
the
disallowance.
ITCC requested that ACF grant retroactive approval of the funds which
were
not spent for COLAs as required. ITCC Br. at 7; ITCC Reply Br.
at
2. ACF has previously declined to do so on the grounds that it
would
not be proper for it to grant retroactive approval where it would
not
have granted prior approval if requested in advance. ACF argued
that it
would not have granted prior approval here because the funds which
were
given to ITCC for COLAs and salary differential increases were paid
from
funds which were earmarked specifically for those purposes. ACF
Br. at
5-6. We agree. The Notice of Grant Award specifically
stated that
funds had been made available for the purpose of granting COLAs
and
salary differential increases, and ITCC clearly applied for these
funds
in response to that Memorandum. In all likelihood, ACF's
program
personnel would not have even been authorized to grant prior
approval
for a different use where these funds had been earmarked for
specific
purposes. For this reason, it was not capricious for ACF to
deny
retroactive approval of use of these funds for other purposes, nor
was
such denial based on insubstantial grounds.
IV. Expenditure of non-federal funds in excess of
grant award
The Board asked the parties to address whether some reduction in
the
disallowance should be made because ITCC's independent fiscal
audit
report showed that ITCC spent $60,854 of tribal funds on the Head
Start
program between April 1, 1990 and December 31, 1990. ITCC Br.,
Tab A,
at 10. 14/ ITCC asserted that a downward adjustment of the
disallowance
was warranted based on this fact. ITCC Ans. to Ques. at
12. ACF,
however, asserted that no such adjustment should be made
because "[t]he
expenditure [in excess of the grant award] was not authorized
under the
1990 grant and would not be an allowable cost." ACF Ans. to
Ques. at
18.
ACF clearly missed the point. While ITCC cannot recover federal cash
in
excess of the amount of the Head Start grant award (including
any
unobligated balance approved for carry over from prior budget
periods),
it may certainly spend its own funds on its Head Start program
should it
choose to do so. Moreover, ITCC's expenditures of tribal
funds for Head
Start may be a basis for reducing the amount disallowed.
The audit
report appears to indicate that the $60,854 came from general
corporate
funds of ITCC, and not from any source which restricted use of the
funds
to particular purposes. To the extent that expenditures from
the
$60,854 in tribal funds were not needed to meet ITCC's non-federal
share
requirement (which must be applied to allowable costs), the tribal
funds
could be applied to unallowable costs thus reducing the amount
of
federal funds disallowed. 15/
A grantee may account for federal funds by demonstrating that it
incurred
and paid allowable and allocable program costs. Economic
Opportunity
Council of Suffolk, Inc., DAB No. 679 (1985). Also, as we
explained in
Dallas County Community Action Committee, Inc., DAB No.
1265 (1991) --
There are a number of payment limits which affect the amount
of
federal cash ultimately recovered by a grantee. The amount
of
federal cash which a grantee is entitled to be paid is
limited
by the amount of federal funds awarded (or the federal share
of
the approved budget), by the amount of allowable costs
incurred,
and by non-federal share or match requirements. 16/
Id. at 12-13 and n.12. Therefore, in order to determine the amount
of
federal funds properly disallowed under the particular
circumstances
here, ACF must determine both the extent to which tribal funds
may be
applied to unallowable costs, thereby reducing the disallowance
by
offset, and also determine the maximum amount of federal cash to
which
ITCC is entitled based on the applicable payment limits.
For this reason, we remand the matter to ACF to determine the extent
to
which the $60,854 has not yet been accounted for. Should ITCC
disagree
with ACF's final determination of the amount of the disallowance,
ITCC
may return to the Board within 30 days of its receipt of ACF's
final
determination for a review of this limited calculation issue only.
CONCLUSION
For the above reasons, we uphold ACF's finding of $139,498.62
in
unallowable costs. We remand the matter to ACF to determine the
extent
to which ITCC's expenditure of $60,854 of non-federal funds for
Head
Start purposes should have been applied to reduce the amount
properly
recovered based on the expenditures upheld as unallowable.
____________________________
Judith
A.
Ballard
____________________________
M.
Terry Johnson
____________________________
Cecilia
Sparks
Ford
Presiding
Board Member
1. California Dept. of Health Services involved the cost
principles of
OMB Cir. A-87, applicable to governments, rather than the
cost
principles of OMB Cir. A-122, applicable to non-profit
organizations.
While the language of these two sources is similar, it is not
identical.
OMB Cir. A-87 requires time recording documents "or their
equivalent."
OMB Cir. A-122 requires personnel activity reports "except when
a
substitute system has been approved in writing."
2. The only difference between the two documents is that there
were no
figures in the final disallowance letter for allowable time for
employee
K.G., although it is not clear why. Furthermore, the
nutritionist's
salary was allowed at 90% in the final disallowance rather
than at 0% as
referred to in the site visit notations. We presume that
this is
because this item was found to have been both payable out of and in
fact
paid out of Head Start rather than United States Department
of
Agriculture funds.
3. While ITCC argued that the Head Start Director and one
secretary
each spent 90% of her time on Head Start activities and therefore
that
90% of their time should be charged to Head Start, the
affidavits
indicate that these employees spent 85% and 100%, respectively, on
Head
Start activities.
4. ITCC originally had prior approval for the purchase of only
one
computer. However, ACF retroactively approved the purchase of the
seven
additional computers in its December 24, 1991 disallowance
letter. ACF
Br., Tab A, at 2.
5. This consisted of $27,109 which was awarded as part of the
base
grant award on January 12, 1990, $678 which was awarded on August
20,
1990, and $4,356 which was awarded on September 20, 1990. See ACF
Br.,
Tabs F and G.
6. "A core capability is defined as the capability to recruit,
enroll,
diagnose, and provide or arrange for services to handicapped
children."
IMPD Manual, at VII-64.
7. These three brief references are:
1) the responsibility to develop an
"annual health and
handicap plan;"
2) the responsibility to coordinate the
provision of health
services to children, "including handicapped
children;" and
3) the responsibility to provide that a
mental health
professional be available to the children.
ITCC Reply Br., Tab 5.
8. The figure of $997 for the period 10/1/89 - 3/31/90 was
derived
from adding the $260 and $737 LIHEAP rental payments for the
relevant
time period, as indicated on page 11 of the audit. See ITCC
Br., Tab 1,
at 11.
LIHEAP did not have a specific breakdown of figures for the period
of
1/1/90-3/31/90. For this reason, we are estimating that LIHEAP
spent
approximately $499 for this three month period from the figures
provided
for the six-month period 10/1/89-3/31/90. Id.
9. The monthly rental figure was calculated as follows:
($1,436 x 2) = $239.33 per month 12 months
10. General purpose equipment means "equipment which is usable
for
other than research, medical, scientific, or technical activities . .
.
. Examples . . . include . . . motor vehicles . . . ." OMB Cir.
A-122,
Attachment B, . 13(a)(4).
11. While the mileage logs which were submitted by ITCC cover a
period
of time not at issue in the disallowance, we find that they
were
submitted in order to show that Head Start was the primary, if not
sole,
beneficiary of the truck purchases, and we proceed upon this
assumption.
12. There was some inconsistency in ITCC's briefs regarding
whether
the annual leave had to be used by the end of the calendar year or
the
fiscal year. See ITCC Br. at 7-8; ITCC Ans. to Ques. at 3. We
agree
with ACF that if the time had to be used by the end of the fiscal
year
(March 31), ITCC's argument regarding the possibility of the
employees
losing their accrued time disappears. See ACF Reply to ITCC
Ans. to
Ques. at 2, n.1. For this reason, we are proceeding under
the
assumption that ITCC's policy contemplated a calendar year annual
leave
schedule and that the use of the word "fiscal" was a misstatement
since
an annual schedule is an underlying presumption to ITCC's argument
and
ACF presented no contrary evidence.
13. The final disallowance letter actually disallowed $14,808 in
cost
of living adjustments. After discovering a calculation error,
ACF
reduced this amount to $14,381 by letter dated October 15, 1992.
See
generally ACF Br., Tab A, at 1; ACF Adjustment to
Disallowance,
10/15/92.
14. This $60,854 figure is designated as "Transfer to Corporate"
in
the audit. While this designation on its face is unclear, ITCC
argued
that this amount represented tribal funds in excess of the federal
grant
award which ITCC spent on Head Start. ACF did not dispute
this
assertion, nor did it allege that the independent audit was flawed.
15. To properly be used to cover the unallowable costs,
the
non-federal funds which a grantee used must be:
1) not restricted to specific costs;
2) not needed to meet non-federal share; and
3) applied to expenditures in the same
budget period as the
unallowable expenditures the funds are used to
offset.
16. The methodologies for calculating the amount of federal funds
to
which a grantee is entitled are explained in the Grants
Administration
Manual of the Department of Health and Human Services, Chapter
1-401
(September 30, 1981 and November 30,