Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Arizona Affiliated Tribes, Inc.
DATE: November 4, 1994
Docket Nos. A-94-4 and A-94-63
Control No. A-09-93-21254
Decision No. 1500
DECISION
Arizona Affiliated Tribes, Inc. (AATI) appealed two disallowances by the
Administration for Children and Families (ACF) totalling $1,043,163 in
federal funding awarded under the Head Start program during the period
January 1, 1990 through December 31, 1993. AATI administers Head Start
programs for children of migrant families at several locations in the
state of Arizona.
In Docket No. A-94-4, ACF disallowed $184,274 awarded during the 1990
program year. The disallowance consisted of $150,259 in grant funds,
including expenditures for installing a modular building unit in the
town of San Luis, Arizona which were liquidated more than 90 days after
the end of the budget period, $24,000 in excess expenditures for that
modular unit, and $10,015 that AATI spent towards six buses instead of
the five buses and one van for which funds were awarded. During the
course of the appeal ACF stated that the $24,000 spent on the modular
unit was already included in the disallowance of $150,259 in
expenditures not timely liquidated, and reduced the disallowance by that
amount. However, ACF also stated that $64,000 of the $150,259 was not
spent as authorized and would be disallowed as unauthorized expenditures
if AATI prevailed on the liquidation issue. ACF also increased the
disallowance of funds spent on the buses to $26,595, and stated that the
expenditures not timely liquidated included $1,333 spent on a
refrigerator, a range, and a typewriter purchased for use at a Head
Start center which did not open.
In Docket No. A-94-63, ACF disallowed $866,309 in Head Start funds
awarded during the 1991, 1992, and 1993 program years. ACF stated that
this amount consisted of $539,750 AATI received for an expansion of the
Head Start program at three locations that did not occur (expansion
funds); $323,423 awarded for the operation of a center- based Head Start
program for 40 children in 1991 and 1992 at another Arizona location,
Queen Creek, which did not open as planned; $2,736 in travel expenses,
and $400 in affiliation dues. During the course of the appeal, ACF
reduced the disallowance of expansion funds to $373,673.
At AATI's request, the two appeals were consolidated for decision. In
addition to the appeal files and briefs permitted under 45 C.F.R.
16.8, the record before the Board also includes several submissions
designed to clarify the complex factual issues in this case, the
transcript of a telephone conference held on July 7, 1994, and several
documents filed subsequently in an effort to resolve issues raised
during the telephone conference.
For the reasons explained below, we find as follows for each of the
contested items.
In Docket No. A-94-4:
o We reverse the disallowance of expenditures for installing the
modular unit at San Luis which were within the $90,000 awarded for
that purpose but not liquidated within 90 days of the close of the
budget period. We sustain the disallowance of additional funds spent
on the San Luis unit which were awarded for other purposes. However,
we remand the appeal to ACF to determine these exact amounts.
o We reverse the disallowance of $1,333 spent on a refrigerator, a
range, and a typewriter.
o We sustain the disallowance of $26,595 spent on a bus.
In Docket No. A-94-63:
o We reverse the disallowance of the $373,673 in expansion funds which
remained at issue in this appeal.
o We sustain most of the disallowance of $323,423 awarded for the
operation of a center-based Head Start program at Queen Creek in 1991
and 1992; however, we find that AATI did open a center-based program
there for approximately 20 children at the end of 1992, and we remand
the appeal to ACF to determine the amount of AATI's allowable
expenditures for the operation of that center.
o We reverse $1,066 and sustain $1,670 of the disallowance of travel
expenses.
o We sustain the disallowance of $400 that AATI paid for affiliation
dues.
I. $148,916 spent on the modular unit at San Luis 1/
The disallowed funds were part of a $288,282 grant award made in
September 1990 which, along with a $224,000 award made at the same time,
was for expansion of the program to serve 70 additional children, the
purchase of additional facilities, and reduction of class size. ACF
Exhibits (Exs.) C, D; AATI Brief (Br.) A-94-4, at 2-3; ACF Br. A-94-4,
at 1-2. ACF based the disallowance on an auditor's report for the
budget period ended December 31, 1990, which determined that AATI had
liquidated certain expenditures more than 90 days after the end of the
1990 budget period. 2/ AATI Ex. 22, at 23.
ACF argued during these proceedings that $64,000 of the disallowance was
also unallowable because it was expended in excess of the amount awarded
for the San Luis modular unit. ACF argued that AATI had been authorized
to spend only $90,000 for the installation of the modular classroom unit
at San Luis, but spent an additional $40,000 that had been awarded for a
modular classroom unit at Queen Creek, and $24,000 diverted from other
Head Start purposes, to make site improvements at the San Luis location.
3/ ACF argued that these additional expenditures for San Luis required
prior approval since they involved a significant change to the approved
project and were acquisitions of equipment costing more than $500. ACF
stated that these expenditures would be disallowed as unallowable
charges to Head Start funds if AATI prevailed on the issue of untimely
liquidation.
As discussed below, we reverse the disallowance of expenditures for the
San Luis unit that were within the $90,000 awarded for that purpose but
disallowed solely on the basis that they were not timely liquidated, as
we conclude that ACF has not provided a rational basis for denying
AATI's request for retroactive approval to liquidate those funds beyond
the applicable deadline. We sustain the disallowance of funds not
timely liquidated which exceeded the $90,000 awarded for the San Luis
unit, approximately $64,000. We find that AATI altered the scope of the
grant award by spending these extra funds at San Luis without obtaining
the necessary prior approval, and that ACF's denial of retroactive
approval was appropriate. As explained below, we remand the appeal to
ACF for the purpose of determining the precise amount of this portion of
the disallowance. Since we uphold this portion of the disallowance on
grounds other than untimely liquidation, and since we conclude that ACF
should have granted retroactive approval for an extension of the timely
liquidation deadline with respect to expenditures within the $90,000
award, we need not resolve the issue of whether the timely liquidation
requirement applied in this case. 4/
a. Applicable law, regulations, and policies
The Head Start regulations provide that the administration of Head Start
grants is governed by 45 C.F.R. Part 74. 45 C.F.R. 1301.10. See also
45 C.F.R. 74.4. The cost principles of Office of Management and
Budget (OMB) Circular (Circ.) A-122 are made applicable to nonprofit
grantees such as AATI by 45 C.F.R. 74.174(a). OMB Circular
A-122 provides that to be allowable, a cost must conform to any
limitations set forth in the award as to types or amounts of cost items.
Id., Attachment (Att.) A, A.2.b.
The Office of Human Development Services Discretionary Grants
Administration Manual (HDS/GAM) sets forth the applicable administrative
policies and procedures for recipients of discretionary project grants
and is incorporated by the terms of the grant awards in question here.
5/ ACF Exs. A-D.
With regard to liquidation of obligations, the HDS/GAM provides that:
All obligations incurred by a grantee should be liquidated within 90
days of the end of the project period to coincide with the submission
of the final FSR [financial status report] (SF-269). Grantees with
"indefinite" project periods (e.g., Head Start) should submit a final
adjusted expenditure report 90 days after the end of each budget
period. [This final adjusted report reflects the liquidation of
obligations which remained outstanding at the time the fourth quarter
report was submitted.]
If it is not possible to liquidate totally all obligations within the
90-day period specified for submission of a final report, grantees
shall notify the HDS Grants Officer in writing and request approval
for an extension of time in which to liquidate obligations.
Chapter (Ch.) 1, I.3, at 1-8.
OMB Circular A-122 and the HDS/GAM also provide that prior approval is
required for the purchase of general purpose equipment with a useful
life of more than two years and an acquisition cost of more than $500
per unit. OMB Circ. A-122, Att. B, 13.a,b; HDS/GAM Ch. 1,
L.3.a, at 1-12. Additionally, Part 74 requires prior approval for a
significant change to the scope of the approved project. 45 C.F.R.
74.103(b).
The HDS/GAM provides that prior approval is not required for certain
budget changes:
(e)xcept for items of cost requiring prior approval, recipients may
transfer funds between and among the object class categories of the
grant/subgrant approved budget without the approval of the granting
officer.
HDS/GAM, Ch. 1, L.2, at 1-11. See also 45 C.F.R. 74.105.
b. AATI'S request for retroactive approval for an extension of the
deadline to liquidate obligations of 1990 grant funds
AATI argued that it should have been granted retroactive approval for an
extension of the deadline to liquidate expenditures of funds awarded in
the 1990 budget period. AATI explained that expenditures for the San
Luis unit were not timely liquidated because it wanted to assure that
the unit had been installed satisfactorily before making final payment.
AATI noted that ACF had allowed a $13,000 payment with 1990 grant funds
for the installation of a modular unit at another location, Eloy, and
stated that the only difference between the two situations was that AATI
paid for the Eloy unit within 90 days of the end of the 1990 program
year. AATI argued that it was unreasonable for ACF to penalize it for
acting in what it described as a prudent manner with respect to the San
Luis unit. AATI asserted that the funds were used for appropriate
purposes, and that the installation at San Luis was completed within ten
months after ACF provided funding.
AATI requested retroactive approval to spend $150,259 from 1990 funds on
the San Luis unit during 1991 in letters dated May 7, 1992, and June 23,
1992. AATI Exs. 24, 25. AATI explained that it had believed that it
could spend those funds for the expansion and later learned that it
needed retroactive approval to spend them beyond 90 days after the end
of the 1990 budget period. ACF did not respond to either request.
During the appeal, ACF declined to approve AATI's retroactive request
for an extension of the deadline for liquidating the expenditures,
stating that AATI could not give a satisfactory explanation of how it
had used the funds, or of the excess cost of the San Luis unit. ACF
also asserted that AATI was engaged in a knowing and persistent effort
to evade the requirements of its grant.
It is a well-established principle that in grant programs generally,
retroactive approval may be granted for transactions that would have
been approved had the grantee requested approval in advance. Department
of Health and Human Services Grants Administration Manual, Ch. 1-105-60,
B.1; New York State Dept. of Social Services, DAB No. 1394, at 33
(1993); Iowa Dept. of Human Services, DAB No. 1340, at 5-6 (1992). The
Board has held that in making its determination on a request for
retroactive approval, the federal agency has considerable, but not
completely unbounded, discretion. The agency may consider all relevant
factors, such as a grantee's fiscal management history, in deciding
whether to ultimately grant retroactive approval where prior approval
was required but not obtained. Although the Board will not interfere
when the federal agency appropriately exercises its discretion, the
agency must state the basis for its decision and may not deny
retroactive approval based on unsubstantiated conclusions or on bases so
insubstantial that the decision fairly can be described as capricious.
Economic Opportunity Atlanta, Inc., DAB No. 313 (1982).
However, the Board has also held that it would uphold a decision
committed to the agency's discretion, including a decision to deny
retroactive approval, unless that decision was arbitrary. Under this
standard, we consider only whether ACF's decision was reasonable, not
whether it was the best or the only possible decision. New Century
Development Corp., DAB No. 1438 (1993); City of Charleston, DAB No. 866
(1987).
ACF awarded AATI $90,000 to install a modular unit at the San Luis
location, and AATI spent that $90,000 on the San Luis unit. ACF
determined that most of this amount was unallowable because it was paid
out more than 90 days after the end of the 1990 budget period, and
because AATI failed to obtain prior approval for an extension of the
deadline to liquidate the expenditures. ACF denied AATI's request for
retroactive approval on the ground that AATI could not explain what it
did with the unliquidated funds. However, ACF has not disputed that
AATI spent on the San Luis unit the entire $90,000 that ACF authorized
for that purpose. ACF also averred that AATI did not request prior
approval because ACF "might have asked embarrassing questions which
would have forced AATI to divulge the changes in its purchasing plans,"
and that ACF might then have objected to those changes. ACF Br. A-94-4,
at 8. With respect to funds not liquidated timely that were within the
$90,000 authorized for San Luis, however, the request for an extension
of the deadline for liquidation did not entail any change in AATI's
purchasing plans. Those funds were spent as proposed.
ACF's argument about changes in AATI's purchasing plans appear to
concern the 1990 grant funds that AATI spent on the San Luis unit in
excess of the $90,000 awarded for that purpose, funds that had been
awarded to install a modular unit at Queen Creek and for other Head
Start purposes. As discussed below, we find that ACF was justified in
declining to retroactively approve those changes to the grant project.
However, with respect to expenditures within the $90,000 awarded for the
San Luis unit but not liquidated within 90 days of the close of the
budget period, AATI provided a reasonable basis for the late liquidation
by explaining that it delayed payment until the project was completed.
We also note that these funds were awarded late in the budget period,
and AATI thus did not have the full 12-month budget period to complete
the installation of the modular unit and timely make payment.
We thus conclude that ACF failed to articulate a rational basis for its
decision to deny a retroactive extension of the timely liquidation
deadline. The fact that AATI may have ignored its grant requirements by
not requesting prior approval to spend more than the $90,000 authorized
on the San Luis unit is not dispositive of whether it was reasonable to
liquidate after the 90-day deadline expenditures for San Luis that did
ACF authorize. Accordingly, we reverse this portion of the disallowance
to the extent that it was based solely on untimely liquidation, on the
grounds that retroactive approval of an extension of the deadline to
liquidate the funds should have been granted.
c. AATI's request for retroactive approval to exceed the budget
authorized for the San Luis unit
Above, we determined that ACF had failed to state a rational basis for
denying AATI's request for a retroactive extension of the deadline for
liquidating expenditures for the San Luis unit from 1990 funds, up to
the $90,000 awarded for that purpose. However, AATI spent far more than
$90,000 installing the San Luis unit. According to the parties, the
additional funds consisted of $40,000 awarded to install a modular unit
at Queen Creek, and approximately $24,000 that had been awarded for
other Head Start purposes.
AATI did not request prior approval for these changes to its approved
project. In its letters of May and June 1992, AATI requested
retroactive approval to spend $154,583 on the San Luis unit, and
reported that it had spent $64,583 on site work at San Luis, in addition
to the $90,000 spent on the modular unit itself. AATI Exs. 24, 25.
ACF did not respond to these requests. On appeal AATI argued that the
additional funds were spent on site improvements at San Luis necessary
to comply with substantial zoning requirements. AATI also asserted that
it could not purchase as many modular units as planned because the used
modular units it had intended to employ in its expansion did not meet
state fire specifications for child care facilities, and that a modular
unit was not needed at Queen Creek because the migrant population there
turned out to be much lower than expected. Accordingly, AATI utilized
the $40,000 earmarked for installing a modular unit at Queen Creek, plus
other funds, towards installing the San Luis unit.
For the reasons explained below, we find that the terms of the grant
award and the applicable regulations and policies required AATI to
obtain prior approval to spend these additional funds on the San Luis
unit, and that ACF had reasonable grounds for its denial of AATI's
request for retroactive approval.
AATI proposed the purchase of three modular units for $142,000,
consisting of one classroom unit for $90,000 for the San Luis location,
one modular office unit for $12,000 for the Eloy location, and one
classroom unit for $40,000 for the Queen Creek location. ACF Br.
A-94-4, at 8; ACF Ex. F at 9. AATI was awarded $142,000 for the
purchase of modular units, including the $90,000 that had been requested
for a modular unit at San Luis. ACF Ex. D. Ignoring the cost of the
Eloy unit, since it is not at issue in this appeal, AATI was thus
authorized to install two modular units at two locations for $130,000,
but ended up installing only one unit, at one site, for approximately
$154,000. The DHHS/HDS Terms and Conditions attached to the grant
awards provide that the recipient organization must carry out the
project according to the application as approved. ACF Ex. A. OMB
Circular A-122 provides that only expenditures authorized under a grant
are allowable. OMB Circ. A-122, Att. A, A.2.b. By deciding to incur
costs far in excess of the amount that had been awarded for the San Luis
unit, AATI failed to carry out the project according to its grant as
approved and incurred unauthorized expenditures. These modifications
were a significant change to the scope of the approved project which
required prior approval. 45 C.F.R. 74.103(b).
Our holding in analogous situations supports this conclusion. New
Century Development Corp. involved a grant to create new jobs for
low-income people in a depressed area by renovating a building to be
occupied by a bakery, and by relocating a vegetable processing plant to
that building. When the grantee later spent the entire amount moving
the vegetable processing plant, the Board determined that reallocating
the grant funds and abandoning the bakery project constituted a change
to the scope and objectives of the grant requiring prior approval under
45 C.F.R. 74.103(b), and upheld the disallowance of the amount
originally designated for the bakery. Similarly, in City of Charleston,
a prior approval case, the Board found that a grant of $110,000 to
purchase five houses at an average cost of $22,000 was far different
from a grant to purchase and rehabilitate only one house for over
$50,000, and that prior approval was required for the change. The Board
thus sustained the disallowance of $43,019 spent rehabilitating the
house.
Applying similar reasoning, we find here that AATI's grant to purchase
two modular units at a total cost of $130,000 was not equivalent to a
grant to purchase one modular unit for $154,000. Accordingly, we
conclude that AATI changed the scope of the approved project by
abandoning the Queen Creek installation and spending the entire amount
awarded for Queen Creek, plus other Head Start funds, on the unit at San
Luis.
During this appeal, ACF initially stated that it had declined to grant
retroactive approval because AATI could not provide a satisfactory
explanation for the excess cost of the modular unit at San Luis. This
reason alone would not support ACF's denial of retroactive approval,
since, as indicated above, AATI provided some explanation for the
increased expenditure.
Subsequently, however, ACF noted that AATI's decision to use some
$64,000 in grant funds for purposes other than those authorized deprived
ACF of the opportunity to consider if there were other, potentially more
important uses for those funds. ACF noted during the telephone
conference that the Queen Creek funds were intended for program
expansion; accordingly, AATI deprived ACF of the opportunity to fund
Head Start program expansion in other areas. ACF also noted that
transferring the funds to San Luis prevented AATI from opening a program
at Queen Creek, as AATI had informed ACF that there were no other
facilities available in this remote area (which was why a modular unit
was proposed and funded). Transcript at 22, 36. As ACF pointed out in
its brief in Docket No. A-94-63, it is the federal agency which
is charged with allocating limited federal funds among all grantees
serving migrant children, and is accordingly in the best position to
know how those funds may best be spent towards that end.
As noted above, the Board has held that it would uphold the federal
agency's decision to deny retroactive approval unless that decision was
arbitrary. By stating that it was deprived of the opportunity of
considering other uses for the excess funds, ACF provided a reasonable
basis for not retroactively approving AATI's decision to spend $40,000
awarded for a modular classroom unit at Queen Creek, and some $24,000
awarded for other purposes, installing the modular unit at San Luis.
Unlike the funds that were within the $90,000 budget for San Luis but
not timely liquidated, for which we found retroactive approval to be
appropriate, these funds were not spent as authorized in the grant.
While AATI may have had reasons for its decision to change this project,
these reasons do not provide a sufficient basis for us to reverse ACF's
decision to deny retroactive approval for those changes. Accordingly,
we find that ACF did not act arbitrarily in denying AATI's retroactive
request to spend the additional funds at San Luis.
AATI also argued that prior approval was not required for its decision
to spend other Head Start funds on site improvements at San Luis. AATI
noted that the HDS/GAM permits grantees to transfer funds between and
among the object class categories of the approved budget without prior
approval. HDS/GAM, Ch. 1, L.2, at 1-11. This provision permits
grantees to make budgetary adjustments to deal with exigencies that may
arise in the administration of their programs, without having to go
through the process of seeking prior approval each time. However, it
does not obviate the need to seek prior approval where budgetary
adjustments change the scope of the approved project, as here. 6/
As discussed above, we reverse the disallowance of funds disallowed for
untimely liquidation that were within the authorized budget for San
Luis, and we sustain the disallowance of funds spent in excess of the
authorized budget for the San Luis unit which had been awarded for other
Head Start purposes which also were not liquidated timely. These other
funds consisted of the $40,000 awarded for Queen Creek, plus an
additional amount ACF has reported as $24,000 but which has not been
precisely determined. 7/ The difficulty in determining the precise
amount of the disallowance stems from the fact that ACF has never stated
how much of the $90,000 authorized expenditure at San Luis was untimely
liquidated and thus included in the disallowance, and how much was
timely liquidated. 8/ Accordingly, we remand the appeal to ACF for a
precise determination of these amounts. If AATI disagrees with ACF's
determination it may return to the Board on that limited issue within 30
days after receipt of ACF's determination.
II. $1,333 spent on a refrigerator, range, and typewriter
ACF disallowed $1,333 spent on a refrigerator, range, and typewriter on
the grounds that AATI had proposed purchasing these items for use at the
Queen Creek unit but used them at San Luis, and that they were paid for
beyond the 90-day deadline for timely liquidation of obligations of
grant funds. 9/ ACF argued that AATI requested funding for the
refrigerator, range, and typewriter in its proposal for expansion at
Queen Creek and prior to submitting its proposal for expansion at San
Luis, meaning that the items were intended for Queen Creek, not San
Luis. ACF stated specifically that AATI requested funds for the
refrigerator, range, and typewriter in a $224,000 proposal for expansion
at Queen Creek and another location, Mesa, that was submitted with a
cover letter dated July 1, 1990. ACF Ex. E. Included in that proposal,
ACF reported, were one large capacity refrigerator, one large oven, and
two electric typewriters for use at the expansion sites. Id. at 9. ACF
asserted that AATI did not request funds for purchase of a modular unit
at San Luis until later, as part of a request for $288,282.
AATI argued that its grant proposals and awards did not restrict these
items to use at Queen Creek, and requested retroactive approval for the
untimely liquidation of the funds used to purchase them. ACF declined
to grant retroactive approval on the same grounds on which it based the
disallowance.
We conclude that ACF erred in disallowing these costs. While the record
clearly shows that AATI requested funds to purchase the refrigerator,
range, and typewriter, it does not show that the two grant awards at
issue here -- which were both issued on the same day -- limited these
items exclusively for use at Queen Creek. Rather, the record reflects
some confusion over which projects were proposed and which were funded.
Specifically, we note that:
o The $224,000 grant proposal (which requested funds for the items)
proposed providing services at Queen Creek by acquiring a building
which formerly housed a church. ACF Ex. E at 176; AATI submission
9/16/94, Ex. 1 at 176. ACF did not argue that it approved or funded
this plan for expansion at Queen Creek. Instead, ACF awarded funds
for the installation of a modular classroom unit at Queen Creek, a
plan that the $224,000 proposal does not discuss. The $224,000
proposal also referred to the need for services at Mesa. 10/
o Funds for the purchase of a modular unit at Queen Creek were sought
in AATI's subsequent $288,282 grant proposal, submitted with a cover
letter dated August 28, 1990, the proposal which ACF stated was for
the San Luis modular unit. AATI submission 9/16/94, Ex. 2, at 9;
ACF Ex. F at 9. This proposal requested $40,000 for a modular unit
for 40 children at San Luis, and $90,000 for a modular unit for 60
children at Queen Creek. Id. However, the parties did not dispute
that the $90,000 award was for a unit at San Luis, while the $40,000
was awarded for a unit for 40 children at Queen Creek.
o The $224,000 grant award for program expansion dated September 19,
1990, which listed the refrigerator, range, and typewriter on the
budget explanation sheet, did not refer to the purchase of modular
units or to expansion at Queen Creek, and stated only that it
approved funds for the expansion of 70 additional children. ACF Ex.
C. Modular units are instead listed on the budget explanation sheet
for the $288,282 grant award, which was also dated
September 19, 1990. ACF Ex. D.
o The $288,282 award referred to the purchase of three modular units
for $40,000, as well as to one self- contained unit for $90,000, and
one office unit for $12,000. However, the parties agreed in their
pleadings that $40,000 was awarded for the purchase of one modular
unit, at Queen Creek.
ACF had an obligation to clearly state in the award notices any
applicable conditions which limited the ways that the funds could be
spent. Community Action Council for Lexington-Fayette, Inc., DAB No.
1258 (1991). The two awards did not reflect the precise plans for
expansion proposed in AATI's applications, and did not contain the
restrictions ACF now seeks to apply. Without a specific limitation that
clearly links the equipment to Queen Creek, ACF cannot expect AATI to
guess that it could not use these items elsewhere in its program.
Accordingly, the record does not establish that the refrigerator, the
range, and the typewriter were funded exclusively for use at Queen
Creek.
ACF thus had no reason to disallow these expenditures beyond failure to
request prior approval to liquidate them more than 90 days after the end
of the budget period. As with the approved $90,000 expenditure for the
San Luis unit, ACF has provided no substantive reason for holding AATI
to the deadline for liquidating an amount that was awarded relatively
late in the budget period and which was spent on authorized items.
Accordingly, we reverse the disallowance of $1,333 spent on the
refrigerator, the range, and the typewriter.
III. $26,595 spent on a bus
a. Background and arguments
In 1990 AATI received $185,000 to purchase six vehicles: $167,000 for
five buses, and $18,000 for a van. AATI did not purchase the van, and
instead bought six buses for $193,595, using the $185,000 in vehicle
awards plus $8,595 in other Head Start funds. ACF disallowed $26,595,
the amount by which the cost of the six buses exceeded the amount
awarded for the purchase of five buses, on the grounds that: (a) AATI
was authorized to purchase a van, not an additional bus, (b) AATI spent
more for the vehicles than authorized, and (c) AATI had received funds
for the van to provide transportation for children at Queen Creek but
used the bus it purchased instead at San Luis because the classroom
center at Queen Creek did not open. ACF argued that AATI violated the
terms of the award by changing the purchase and exceeding the approved
funding for vehicles. ACF further argued that AATI failed to get prior
approval to purchase this bus as required for equipment with a useful
life of more than two years and an acquisition cost of more than $500
per unit. OMB Circ. A-122, Att. B, 13.a,b; HDS/GAM Ch. 1, L.3.a,
at 1-12. ACF disallowed the entire $18,000 awarded for the van, plus
the $8,595 in other Head Start funds which AATI used with the van award
towards purchasing the buses.
AATI did not dispute ACF's position that prior approval is generally
required for the purchase of a bus. Instead, AATI argued that purchasing
the bus was consistent with the authorization it received to purchase a
van, since the bus could perform the same functions. AATI cited the
Board's holding in Inter-Tribal Council of California, DAB No. 1418
(1993), as refuting ACF's contention that it violated the terms of the
grant award by purchasing a bus instead of the van. In that case, the
Board upheld a disallowance based on a grantee's purchase of pick-up
trucks instead of the vans for which funds were awarded, noting that the
trucks were not equivalent to vans, which could be used to transport
children. AATI asserted that the functional analysis employed in that
case supported its position, since the bus that it purchased could
perform the same functions as the van would have, and because the bus
provided safer and more comfortable transportation for a larger number
of children than a van. The purchase of the bus was thus consistent
with and exceeded the objectives of the grant awards, AATI argued. AATI
asserted that even if prior approval was required to purchase the bus,
it was entitled to retroactive approval. AATI noted that in a letter to
ACF dated May 7, 1992 it reported the purchase of six buses instead of
five buses and one van and requested retroactive approval to spend
additional funds. AATI Ex. 24. ACF did not respond to that request, but
stated during the appeal that it had declined to grant retroactive
approval because AATI had not provided an adequate justification for the
purchase of a bus instead of a van.
AATI also argued that using $8,595 in additional Head Start funds to
purchase six buses instead of five buses and a van was a reasonable
business decision in the best interests of the Head Start program,
because it got a good price by buying six buses at once. In addition,
AATI argued that the purchase of a bus instead of the van did not
require prior approval because the HDS/GAM permits grantees to transfer
funds between and among the object class categories of the approved
budget without prior approval.
AATI further argued that the awards of funds for purchase of a van and a
bus did not earmark those vehicles to Queen Creek or any particular
site. 11/ AATI argued that it did not use the bus at San Luis, as ACF
stated, but only stored it there. AATI reported that the bus was used
at Queen Creek when a center-based program was opened there in December
1992.
Finally, AATI challenged ACF's calculation of the disallowance,
asserting that ACF was "double counting" by disallowing both the $18,000
awarded for the van, and the $8,595 spent over the budget for six
vehicles. AATI argued that the most that ACF was entitled to recover if
it prevailed was $14,266, the amount spent by AATI for the sixth bus
(based on the average cost per bus) over the amount budgeted for a van
($193,595/6 - $18,000).
b. Analysis
At the outset, we note that ACF's calculation of the disallowance does
not result in double counting, as AATI argued. ACF is allowing only the
$167,000 awarded for five buses, and is not disallowing the same funds
twice. AATI assumed that the purchase of the sixth vehicle was proper,
and that only the added cost of purchasing a bus instead of a van was
unallowable. However, it is clear that ACF is disallowing that portion
of AATI's total expenditure for six buses which exceeded the $167,000
awarded for five buses. Had ACF applied AATI's method of using the
average cost per bus to calculate the disallowance, it might have
disallowed $32,266, AATI's reported average cost for one bus. 12/ ACF's
calculation resulted in a lower disallowance. Accordingly, we conclude
that ACF's calculation of the disallowance, while not the only possible
method, was not erroneous.
We find that ACF was justified in disallowing the additional costs for
the purchase of the sixth vehicle because the bus that AATI purchased
was not equivalent to the van, and AATI was thus required to obtain
prior approval to purchase the bus. The functional analysis in
Inter-Tribal Council of California to which AATI referred supports this
conclusion. 13/ The evidence here indicates that the bus sat idle for
some time because it was not needed at Queen Creek, and because AATI
apparently did not have a properly licensed driver to operate the bus.
AATI reported to ACF's Migrant Program Branch in a letter dated December
21, 1992 that a bus purchased for Queen Creek could not be used by its
staff because a chauffeur's license was needed, and that AATI's
insurance did not permit volunteers to operate the bus. Consequently,
the bus was being stored at San Luis, where it had been used when one of
the San Luis buses was being repaired. ACF Ex. W. AATI did not assert
that it also would have been unable to use a van due to such problems
had it purchased one. Moreover, since the Queen Creek expansion did not
occur as planned, there is no basis for concluding that the requested
vehicle was actually needed.
AATI also provided no evidence to support its conclusion that the bus
was either safer or more comfortable than the van. Additionally, there
is no evidence that a larger number of children were served because the
bus was purchased instead of the van. We also find that the explanation
AATI provided for buying the bus instead of the van, essentially, that
it got a good deal by buying six buses at once, does not justify
overriding ACF's discretion to deny the request for retroactive
approval, given the practical differences between the two vehicles and
the difficulties AATI encountered by purchasing the bus instead of the
van. Under these specific circumstances, then, the bus was not the
equivalent of the van, and AATI's authorization to purchase the van did
not constitute prior approval to purchase the sixth bus.
Moreover, as we noted in our discussion of the disallowance of grant
funds spent on site preparation at San Luis, AATI's argument that the
use of $8,595 in other Head Start funds for the purchase of the bus was
a transfer of funds between and among object class categories, for which
no prior approval is required, is without merit. As noted previously,
the HDS/GAM provision in question does not permit such a transfer where,
as here, prior approval was required for the purchase.
For the reasons stated above, we sustain the disallowance of $26,595
spent on the sixth bus in excess of the award for five buses, consisting
of $18,000 awarded for a van, and $8,595 in other Head Start funds.
IV. $539,750 awarded for Head Start program expansion
In the disallowance at issue in Docket No. A-94-63, ACF disallowed
$539,750 awarded in 1991 for expansion of AATI's Migrant Head Start
program to serve 160 new children at three Arizona locations through the
purchase of modular classrooms, buses, and equipment. 14/ It is
undisputed that the expansion did not occur, and ACF asserted that AATI
spent most of the funds for other purposes, including the costs of
operating its existing Head Start program.
The disallowed funds were part of a $630,000 supplemental grant for
program expansion awarded on September 30, 1991. ACF Ex. L. The funds
were carried over to 1992 pursuant to a revised grant award dated
September 30, 1992, and were again carried over to 1993. 15/ During the
course of the appeal ACF reduced the disallowance of the expansion funds
to $373,673, which it described as that portion of the funds that AATI
spent for non- expansion purposes during 1993. 16/
ACF calculated this portion of the disallowance based on records of
AATI's awards, drawdowns, and expenditures of federal Head Start funds
for the period 1988 through 1993 (and the beginning of 1994). ACF Ex.
AC. ACF stated that these records show that AATI drew down $702,300
during the first quarter of 1993, which was $46,078 more than the only
award of 1993 funds it had received up to that time, a $656,222
continuation award dated March 9 and covering the period January 1
through June 30, 1993. Having exhausted that award, AATI continued to
draw down Head Start funds, drawing down $327,595 in the second and
third quarters of 1993, even though it did not receive any more 1993
funds until being given a $958,880 supplemental award in September.
(AATI received a six- month no-cost extension dated July 1, 1993.) ACF
Exs. Q- S. ACF asserted that AATI thus improperly drew down a total of
$373,673 ($46,078 + $327,595) derived from the award of expansion funds
during periods in 1993 when there were no 1993 funds available.
ACF asserted that AATI used the expansion funds to pay for its 1993 Head
Start operations as a supplement to its 1993 awards. ACF argued that
AATI improperly changed the scope of the expansion grants by failing to
expand and by spending these funds for other purposes. ACF also
reported that, as of April 7, 1994, AATI had drawn down all of its
authorized Head Start funds except for $26,751, which meant that the
expansion funds had been almost entirely expended.
AATI admitted that it had used expansion funds to pay for its 1993
program operating expenditures while awaiting receipt of 1993 funds, and
asserted that ACF had effectively approved this practice. AATI noted
that since it had been granted a six-month no-cost extension on July 1,
1993, it was expected to provide services, even though its first award
of 1993 funds had been exhausted. AATI also argued that at the end of
1993, at the time that ACF took the disallowance, the expansion funds
had not been drawn down, and could have been recovered by ACF, but were
instead used for operating expenses in 1994.
As explained below, we find that while AATI indeed drew down expansion
funds to finance its 1993 Head Start operations, those expansion funds
were replaced by the new 1993 program operation funds awarded in
September 1993. Thus, funds in an amount adequate to cover the
disallowed expansion funds were undrawn at the end of 1993, at the time
this disallowance was taken, and could have been recovered by ACF at
that time. Instead, ACF issued AATI an additional six-month award in
January 1994, described on the award document as a no-cost extension,
which required AATI to continue to provide Head Start services through
June 30, 1994, even though no new federal funds were awarded at that
time. ACF Ex. AR. We conclude that, under the unique circumstances of
this case, ACF effectively gave AATI permission to spend funds from the
expansion award on its Head Start program operations in 1994 by granting
this no-cost extension for 1994. ACF cannot reasonably expect AATI not
to use the funds awarded for expansion and available for draw down when
it had little or no other federal funds available but was expected to
continue its program operations.
Our conclusion that funds adequate to cover the disallowed expansion
funds remained undrawn at the end of 1993 is supported by the financial
records supplied by ACF. Those records show that AATI, which had been
awarded $630,000 in 1991 for program expansion, had $634,427 aggregate
undrawn authorization remaining at the end of 1993, of which only
$174,036 was attributable to the $1,615,102 that AATI was awarded in
1993 (not including expansion funds carried over). ACF Ex. AC. Thus,
according to ACF's records, some $460,391 ($634,427 - $174,036) of the
undrawn authorization remaining at the end of 1993 was not attributable
to AATI's 1993 awards, and must have included an amount adequate to
cover the disallowed expansion funds, which had been carried over to
1993. 17/
AATI had two sources of funds available during 1993: the undrawn
expansion funds, and the funds awarded to operate its Head Start program
in 1993. At the end of 1993, AATI had a substantial undrawn
authorization which was equivalent to approximately 39.3% of the amount
awarded for program operations in 1993 ($634,427 ö $1,615,102). During
1993 AATI operated its Head Start program and provided full Head Start
services but did not undertake the expansion. 18/ Accordingly, the
funds remaining undrawn at the end of 1993 must have included the
disallowed expansion funds.
When asked how ACF could have reasonably believed that AATI finished
1993 with over one-third of its operating funds unspent, ACF argued that
it was reasonable for AATI to have had a substantial amount of 1993
program operation funds left over at the end of 1993 since AATI had
received over $900,000 in 1993 funds in September. Transcript at 53-55.
However, ACF did not address how AATI was expected to fund its 1993
operations before it received that supplemental award in September,
having already exhausted the 1993 funding it had received in March. As
explained above, AATI did not need to draw down all of the new 1993
program operation funds received in September, since the program's 1993
expenses had been paid for with the expansion funds. Consequently, a
portion of the program funds received in September served to replace the
expansion funds that AATI used to run its Head Start program.
Our finding that the expansion funds drawn down to pay for program
operations were later replaced by program operation funds is analogous
to our holdings in cases involving the disallowance of interfund
transfers, federal Head Start funds drawn down but transferred to other,
non-Head Start programs. Although noting that Head Start funds may only
be spent for Head Start purposes, the Board has held that grantees could
account for the transferred funds by replacing them with non-Head Start
funds by the end of the budget period (which could then be reprogrammed
or returned to the awarding agency), or by incurring allowable Head
Start expenses in the current budget period equal to the transferred
funds, and paying for them with non-Head Start funds. See Evangeline
Community Action Agency, Inc., DAB No. 1379 (1993); Economic Opportunity
Council of Suffolk, Inc., DAB No. 679 (1985). Under this principle, the
non-Head Start funds that the grantee puts into the Head Start program
effectively replace and become the Head Start funds that the grantee had
originally transferred to other accounts. As the Board noted:
In an ideal world, a grantee would receive federal cash only as
needed and immediately apply that cash to pay for allowable Head
Start expenditures which have accrued. Often, however, there is some
delay in receipt of federal funds and a grantee must use its own cash
to pay program costs. In recognition of this, accountability for
grant funds is framed generally in terms of allowable costs. If a
grantee has used its own funds to pay allowable costs, these costs
may be used to discharge the grantee's obligation for federal funds
even though not directly paid with federal cash . . . . If a grantee
has received more grant funds than it can account for in allowable
costs, it must have cash on hand which can then either be
reprogrammed to be used in a subsequent period or returned to the
Federal Government.
Suffolk at 3.
Here, AATI used expansion funds to pay for its program costs. Once the
program funds were received, they replaced the expansion funds which had
been drawn down. At the end of the 1993 budget period, AATI thus had
allowable program expenses and an undrawn federal Head Start funding
authorization sufficient to account for both its 1993 grant awards and
the disallowed expansion funds. While a federal grantee must account
for federal grant funds by incurring allowable expenditures or by
returning them to the agency, it is not required to show that the funds
that it used for those expenditures, or the funds returned to the
agency, were the same specific funds that had been originally awarded.
19/
Accordingly, we conclude that the disallowed expansion funds remained
undrawn and unspent at the end of 1993. In January 1994, ACF issued AATI
a six-month no-cost extension which required AATI to continue to provide
Head Start services through June 30, 1994, but which awarded no new
funds. ACF Ex. AR. Moreover, AATI had been placed on high-risk status
in May 1993 and its expenditures were being paid monthly on a
reimbursement basis, with ACF issuing monthly authorizations for fund
drawdowns. ACF expected AATI to provide full Head Start services for
six months in 1994 with no additional funding, and thus it was not
surprising that AATI interpreted the no-cost extension and the monthly
reimbursement system as permission to spend the funds remaining undrawn
at the end of 1993. As explained above, these funds were derived
largely from the award of expansion funds.
While ACF has asserted that it believed that the funds left over at the
end of 1993 (and which were reprogrammed to 1994) were unspent 1993
operating funds, the record shows that ACF had significant information
indicating that a substantial amount of the funds remaining undrawn and
unspent at the end of 1993 represented expansion funds. As noted above,
ACF's records show that AATI's total undrawn authorization at the end of
1993 was $634,427, or approximately 39.3% of its total 1993 awards. ACF
knew that the expansion had not taken place at least as early as a
fiscal review in July 1993, and withdrew authority for the expansion in
a grant award dated September 29, 1993. 20/ Transcript at 53.
Accordingly, we find that ACF should have known that AATI's undrawn
funding authorization at the end of 1993 included amounts from the
expansion award, and that ACF effectively gave AATI permission to use
these funds for program expenses by instructing AATI to provide Head
Start services during the first half of 1994 while awarding no
additional funding. There is no basis in the record for concluding that
AATI has drawn down amounts from the expansion award which it is now
obliged to repay to ACF. Consequently, we are reversing this portion of
the disallowance. 21/
IV. $323,423 awarded for the operation of a center-based Head Start
program for 40 children at the Queen Creek location in 1991 and
1992
AATI was awarded $323,423 ($161,214 in 1991 and $162,209 in 1992) to
provide Head Start services at Queen Creek, Arizona. ACF disallowed the
full amount of those awards (the entire Queen Creek operating budget) on
the ground that AATI had failed to operate a center-based Head Start
program for 40 migrant children as it had proposed, and instead ran a
home-based program for only 15 children. ACF determined that this was a
change in the scope and objectives of the approved project for which
AATI failed to get prior approval.
AATI reported that it did not open a Head Start center at Queen Creek as
planned because the migrant population at Queen Creek (and thus the
demand for Head Start services) was much lower than had been
anticipated, as a consequence of weather-related agricultural
difficulties, a lack of housing, and a white fly crop infestation. AATI
asserted that the decision to open a home-based program instead of a
center-based program was reasonable under the circumstances, and stated
that the funds awarded for operating the center-based program were used
to provide services at other locations. AATI argued that neither the
lower enrollment in the home-based program nor the postponement of the
center-based program was a change in the scope of the program requiring
ACF's prior approval. AATI noted that Head Start regulations permit
Head Start grantees the option of operating several kinds of programs,
including home-based programs, and argued that it should have received
retroactive approval for its decision to open a home-based instead of a
center-based program. AATI reported that it still achieved the overall
Head Start enrollment capacity that it had proposed in its grant
application, and met all requirements as to quality of services. AATI
also noted that it did open a center-based program in November 1992.
We sustain the disallowance in principle. We find that prior approval
was required to open a home-based program, and that AATI changed the
scope and nature of its approved program by operating a home-based
program for significantly fewer children instead. However, we also find
that AATI did operate a center-based Head Start program at Queen Creek
beginning around November 30, 1992, and we reverse the disallowance
attributable to the period in 1992 during which that center was in
operation. Accordingly, we remand the disallowance to ACF to determine
how much was properly allowable as expenses incurred in operating the
center-based program from November 30 through December 31, 1992.
We first find that the Head Start regulations cited by AATI giving it
discretion to operate a home-based program, as opposed to a center-based
program, required that prior approval be obtained from ACF for its
decision. These regulations, at 45 C.F.R. Part 1304, Appendix A,
"Program Options for Project Head Start," set forth "the policy
governing the development and implementation of variations in program
design by Head Start programs." Id. Section N-30-334-1-20 recognizes
the following five program models: the standard Head Start model
(defined as a five-day-per-week, center-based classroom format),
variations in center attendance, double sessions, home-based models, and
locally-designed variations. The regulations permit (and encourage)
grantees to consider other models in addition to the standard Head Start
model, and to select the program option best suited to the needs of the
children served and the capabilities and resources of the program staff.
However, the regulations also require that a community must demonstrate
in an acceptable proposal that whatever option is chosen will result in
a quality child development program at reasonable cost and meet Head
Start guidelines, as well as various conditions specified in the
regulation. Thus, the regulations clearly contemplate that a grantee's
program selection is contingent on the agency's review and approval. 22/
Moreover, as ACF argued, center- and home-based programs are
substantially different. Home-based Head Start programs focus on the
parent, center-based programs on the child. In a home-based program, a
worker goes out to the home for approximately one-and-a-half hours a
week, whereas a center-based program provides services for some six to
eight hours a day. Center-based programs must also provide services for
children not needed in home- based programs, such as nutrition and
transportation. Transcript at 69-71. AATI did not take issue with ACF's
description of the differences between center- and home- based Head
Start programs. Given these differences, ACF's approval of a
center-based program could not have been construed as approval to open a
home-based program, or any of the other options permitted by section
1304, Appendix A.
Given that AATI did not request prior approval to open a home-based Head
Start program at Queen Creek, we must now consider whether retroactive
approval is appropriate. As discussed in our analysis of the
disallowance of funds used to install a modular unit at San Luis,
retroactive approval may be granted for transactions that would have
been approved had the grantee requested approval in advance. The Board
has also held, however, that it would uphold the agency's decision
unless arbitrary. Under this standard, we consider only whether ACF's
decision was reasonable, not whether it was the best or the only
possible decision.
ACF stated that if AATI had provided timely notice of the circumstances
which led it to operate a home-based program at Queen Creek, the funds
that had been awarded to open and operate the Head Start center at that
location could have been devoted to other Head Start programs with more
significant needs for expansion. However, by deciding not to seek
approval for a home- based program, AATI deprived ACF of the opportunity
to seek information about the decision to forgo opening a center-based
program at Queen Creek and to determine how the limited funds available
could best be applied. Accordingly, ACF has provided a rational basis
for declining to grant retroactive approval for the decision to open a
home-based program instead of a center-based program.
Additionally, AATI failed to show that it would have received prior
approval for the decision to change to a home-based program, had it
requested approval in advance. Other than the brief explanation of the
circumstances leading to the unanticipated drop in the migrant
population at Queen Creek, AATI failed to address the specific
requirements of Appendix A to Part 1304 and show how they were satisfied
by the home-based program. AATI did not provide information showing
that a home-based program would result in a quality child development
program at a reasonable cost which would have met the other guidelines
in Part 1304.
Accordingly, we conclude that AATI has not shown that it would have
received approval to operate a home-based program at Queen Creek, and
that ACF did not act arbitrarily in declining to retroactively approve
AATI's decision to operate the home-based program instead of the
center-based program it had proposed.
AATI also asserted that it subsequently did open and run a center-based
Head Start program at Queen Creek in late 1992. In a submission dated
August 30, 1994, AATI further reported that it opened a center-based
program for 20 children beginning in November 1992 using the Queen Creek
School District as a delegate agency, and that it opened another center
on its own for 20 more children in 1993.
AATI provided a copy of an agreement calling for Queen Creek Unified
School District No. 95 to provide center- based services for 20 eligible
Migrant Head Start children for the period November 1 through December
31, 1992. The agreement was signed by Ralph Pomeroy, the Superintendent
of the Queen Creek Unified School District, on November 30, 1992. AATI
also submitted an affidavit from Thomas Welter, a social worker who was
employed by Queen Creek Unified School District No. 95 from June 1992
through June 1993, stating that pursuant to the agreement signed on
November 30, 1992, services were provided for 20 children at the Queen
Creek Child Care Center from November 30, 1992 through May 14, 1993.
AATI submission 8/30/94, Exs. 1, 2. The affidavit also states that AATI
provided services to 20 additional children at the Queen Creek
Elementary School from February through May 14, 1993. AATI reported
that it paid $5,980 to Queen Creek Unified School District No. 95 for
services provided in December 1992. AATI also reported that it incurred
a total of $17,662.30 in costs allocable to the Queen Creek center in
1992, including the $5,980 payment. These costs were attributable to
administrative and planning work, including hiring staff, negotiating
contracts, purchasing supplies and recruiting children, AATI reported.
AATI also submitted other documentation in support of its claim that
services were provided in 1992. These documents included:
o An internal AATI request for a $5,980 payment to Queen Creek Unified
School District No. 95 as reimbursement for providing services to 20
children for 23 days, from November 30 through December 31, 1992 at
the rate of $13.00 per child per day.
o A bill from the Queen Creek Family Resource Center to AATI dated May
21, 1993 requesting payment for day care and preschool services for
Migrant Head Start children for the months December 1992 through
April 1993 and indicating 22 days of service during December 1992 at
a rate of $15.35 per day per child.
o A report of expenses incurred by Queen Creek Unified School District
No. 95 during the month of December 1992, reflecting total monthly
expenses of $6,578, as well as expense reports for the months of
January through May 1993.
o A statement of in-kind contributions from the Queen Creek School
District dated May 28, 1993 and reflecting provision of office rent,
a classroom and a playground during December 1992.
AATI submission 8/30/94, Exs. 3-8.
ACF disputed AATI's claim that center-based Head Start services were
provided at Queen Creek during 1992. ACF submitted a statement from its
counsel reporting a conversation with Kathryn L. Cue, the Acting
Superintendent of Queen Creek Unified School District No. 95, who
asserted that the Queen Creek School District was not a party to a Head
Start delegate agreement with AATI for the period November to December
1992, and that the school district did not provide Head Start services
during that period. ACF submission 8/15/94. ACF subsequently provided
a letter from Ms. Cue dated August 12, 1994 enclosing documentation
which allegedly showed that the Queen Creek School District received no
services for November or December of 1992, and that AATI did not begin
its program until October 1993. These materials included a letter to
the Queen Creek School District No. 95 from AATI dated January 13, 1993
discussing the planned opening of a Migrant Head Start Center at the
Queen Creek Elementary School, as well as records purportedly reflecting
services beginning in October 1993. ACF submission 8/16/94.
We find that the evidence AATI submitted is more persuasive than that
provided by ACF, and reasonably establishes that AATI did operate a
center-based program at Queen Creek using Queen Creek Unified School
District No. 95 as a delegate, at least during the month of December
1992.
We find the affidavit of Thomas Welter to be more persuasive and more
directly relevant to this issue than the statements of Kathryn L. Cue.
Mr. Welter's statement appears to have been based on direct personal
knowledge. It is not clear that Ms. Cue's statement was based on
personal knowledge, since another individual was superintendent of the
school district at the time that the delegate agreement was signed, and
it is not shown in the record when Ms. Cue became the acting
superintendent.
Mr. Welter's statement is also more detailed than Ms. Cue's. Her
written statement avers that the Queen Creek School District received no
services in 1992; however, AATI did not assert that it provided services
to the school district in 1992, but rather that the school district
provided the services, through the delegate agreement. Mr. Welter's
statement is consistent with AATI's assertion that there were two
center-based programs at Queen Creek: the program AATI reported was
started in November 1992 for 20 children at the Queen Creek Child Care
Center pursuant to the delegate agreement, and the program for 20
additional children operated directly by AATI at the Queen Creek
Elementary School from February through May 1993. Ms. Cue's statement,
by contrast, does not address the existence of two separate programs,
and it is possible that she was referring to the program operated
directly by AATI when she asserted that AATI did not provide services
until October 1993. Similarly, the letter from AATI dated January 13,
1993, which ACF introduced in support of its claim that AATI did not
provide center-based services during 1992, discusses the planned opening
of a Migrant Head Start Center at the Queen Creek Elementary School, and
thus appears to be referring to the program that AATI reported operating
at the school beginning in 1993, and not to the program run by the
school district at the Queen Creek Day Care Center beginning in November
or December 1992.
Additionally, Ms. Cue's oral statements to ACF counsel are not supported
by her subsequent written statement. While ACF stated that she told
ACF's counsel that the Queen Creek School District was not a party to a
Head Start delegate agreement with AATI for the period November to
December 1992, and that the school district did not provide Head Start
services during that period, her written statement does not address the
delegate agreement at all, and reports only that the Queen Creek School
District received no services for November or December of 1992, and that
AATI did not begin its program until October 1993. Her oral statement
to ACF's counsel that there was no delegate agreement is also
contradicted by the agreement itself, which AATI subsequently provided.
Accordingly, we find that the evidence supports AATI's claim that it did
operate a center-based Head Start program for migrant children at Queen
Creek during 1992. However, there is insufficient information in the
record for us to make any findings on the precise number of children
served (which AATI reported as 20) or the date that services commenced
(reported variously as November 30 and December 1, 1992) or as to the
allowable costs that AATI incurred. We therefore remand this portion of
the appeal to ACF to determine the amount of allowable expenditures
incurred by AATI. If AATI disagrees with ACF's determination of the
allowable expenditures incurred in operating a center-based program at
Queen Creek in 1992, it may return to the Board on that limited issue
within 30 days after receipt of ACF's determination.
V. $2,736 in travel expenses and $400 in affiliation dues
ACF disallowed $2,736 in travel expenses: $1,066 spent sending two
staff members to the National Migrant Health/Disability and Social
Services/Parent Involvement Institutes in San Antonio, Texas in January
1992; $1,290 to send staff to the annual National Council of La Raza
(NCLR) meeting in Los Angeles, California in July 1992; and $380 for air
travel from Phoenix to Baltimore. AATI did not appeal the $380
disallowance. ACF also disallowed $400 paid for AATI's 1992 and 1993
NCLR membership dues. Below, we first address the disallowance of funds
spent on the San Antonio conference. Because the issues of membership
in NCLR and attendance at the NCLR annual meeting are related, we then
address those portions of the disallowance together.
a. The San Antonio conference.
The costs in question were for travel for two AATI staff persons who
made presentations at the conference (out of a total of four persons
AATI sent to the conference with Head Start funds). ACF disallowed the
costs on two grounds, neither of which we find persuasive.
First, ACF asserted that AATI was duplicating funds already available
through the budget of a contractor whom ACF paid to organize the
conference. AATI responded that the contractor provided no travel costs
for the staff who made presentations, and suggested that ACF should seek
reimbursement from the contractor.
That ACF may have awarded a contract to organize the San Antonio
conference which included presenters' travel costs has no bearing on the
question of whether AATI's expenses in sending staff to that conference
were allowable. ACF did not allege or demonstrate that the contractor
either paid the travel costs of the two AATI presenters or claimed
reimbursement from ACF for those costs. Thus, we find that ACF did not
show that AATI was being paid for the travel costs twice.
Second, ACF asserted that it had informed AATI prior to the conference
that it would not pay the presenters' travel costs, and that it
accordingly sought a change in AATI's proposed travel budget. ACF
reported that it customarily funds travel to conferences and training
institutes for the staff of Migrant Head Start programs, and noted that
grantees typically request such funding as part of their applications
for funding. As part of this process, ACF reported, its Migrant
Programs Branch sent Head Start grantees a letter dated October 8, 1991
listing training institutes and conferences for which Head Start funding
was authorized. The letter stated that grantees could send as many as
four persons to the San Antonio conference in January 1992, and that it
was expected that these individuals would be in attendance at the
appropriate training opportunities offered at the institutes. ACF Ex.
Z.
Despite these instructions, ACF reported, AATI proposed sending five
persons to the San Antonio conference, including two presenters, in a
grant application which also had a proposed overall travel budget far in
excess of the amount actually discussed in the text of the proposal.
ACF Ex. T at 13, 70, 183. ACF asserted that it several times sought
changes and clarifications in AATI's grant proposal without success, and
granted the entire proposal so that continued Head Start funding would
be assured. ACF said that it had trusted AATI to act in good faith and
make any amendment to the travel plans that ACF had sought.
The federal regulations and policies applicable to Head Start grants do
not specify that travel and conference expenses must be approved in
advance. The HDS/GAM refers to maximum per diem and subsistence rates
contained in the federal travel regulations, but does not specify when
travel costs are allowable. HDS/GAM Ch. 3, D, at 3-7. In the absence
of specific guidelines, we must rely on the general provisions of OMB
Circular A-122 that to be allowable, a cost must be reasonable for the
performance of the grant award and allocable to the award. OMB Circ.
A-122, Att. A, A.2.a. Among the factors in determining the
reasonableness of a cost is whether the cost is of a type generally
recognized as ordinary and necessary for the operation of the
organization or the performance of the award. Id. at A.3.a.
Here, ACF informed grantees that they could send staff to the San
Antonio conference, and so there is no question that costs of attending
that conference were reasonable and necessary costs under OMB Circular
A-122. The only issue is thus whether sending presenters violated the
terms of AATI's grant award. As discussed below, we find that the
record establishes only that ACF authorized AATI to send four persons to
the conference, and does not support a finding that ACF informed AATI
that the two staff who made presentations could not attend or raised
concerns about AATI's travel plans that would have given AATI notice
that presenters could not attend.
As indicated above, ACF's Migrant Programs Branch sent an October 8,
1991 letter to grantees stating that it was expected that individuals
attending the conferences would be in attendance at the appropriate
training opportunities. ACF Ex. Z. However, this letter did not
provide specific notice to AATI that the two presenters could not
attend. Rather, the cited statement appears to be merely a general
notice to grantees that staff attending the conferences at federal
expense would be expected to actually participate in them. AATI could
have reasonably concluded that the presenters' participation in the
conference would meet this requirement. The letter and the grant awards
did not clearly state the conditions limiting the ways that the funds
could be spent which ACF now seeks to enforce. See Community Action
Council for Lexington-Fayette, Inc., DAB No. 1258 (1991).
ACF also asserted that it raised questions about AATI's travel plans in
a letter dated December 5, 1991. However, that letter, which stated that
an AATI reorganization plan was not being approved and requests 18 items
of information on AATI's operations, does not contain any questions
about sending presenters, and does not refer specifically to the San
Antonio conference at all. ACF Ex. AJ. ACF's subsequent letter to
AATI, dated February 12, 1992, stated that total out-of-state travel "is
not consistent with the money requested in the SF 424" (AATI's grant
application), and requested AATI to "explain the purpose of, and the
personnel that are proposed to attend the six administrative meetings
projected in the proposal." ACF Ex. AM. Again, this letter made no
reference to the question of sending presenters to the San Antonio
conference, which, in any event, took place before that letter was sent.
Rather, it appears that the principal concern ACF raised in the letter
was the apparent inconsistency within AATI's grant proposal in the total
amounts requested for travel. That inconsistency has not been cited as
a basis for disallowing the cost of the San Antonio conference related
to the individuals who made presentations, however, and ACF has not
asserted that sending the two presenters caused AATI to exceed its total
authorized travel budget.
Accordingly, we reverse the disallowance of $1,066 used to send two of
AATI's staff to the National Migrant Health/Disability and Social
Services/Parent Involvement Institutes in San Antonio, Texas in January
1992.
b. The NCLR conference and NCLR membership
ACF disallowed $1,290 in travel expenses incurred sending staff to the
annual NCLR meeting, as well as a total of $400 for AATI's NCLR
membership dues in 1991 and 1992, on the ground that these expenses were
not directly related to AATI's Head Start activities. ACF also noted
that the NCLR conference was not on the list of conferences for which
travel was authorized that ACF provided grantees. ACF Ex. Z.
AATI argued that its Migrant Head Start program benefitted from its
membership in NCLR, and from its attendance at NCLR's annual meeting.
AATI described NCLR as the largest constituency-based organization
representing AATI's client population and the best source of information
on migrant farm worker issues, and reported that NCLR provides a network
to bring the needs of the migrant farm workers to the attention of the
larger Hispanic-American community. ACF also stated that NCLR has
provided materials on health issues of interest to AATI's clients which
have been beneficial to the work performed by AATI's health specialist.
AATI argued that membership in NCLR, and attendance at NCLR's annual
meeting, thus benefitted AATI's Migrant Head Start program.
In support of its claim, AATI provided materials describing NCLR. These
materials included a letter from NCLR inviting AATI to the 1992 annual
meeting which enclosed the meeting agenda and questions on seven areas
of concern that would be addressed at the meeting: civil rights
enforcement, community development and housing, education, the elderly,
employment and training, health/substance abuse and AIDS, and poverty.
AATI Ex. 40. AATI also provided copies of executive summaries and
tables of contents from several NCLR publications, including For My
Children: Mexican American Women, Work, and Welfare; Hispanics and
Health Insurance; Hispanic Education: A Statistical Portrait 1990;
State of Hispanic America 1991: An Overview; as well as excerpts from
the NCLR Education Network News, the NCLR AIDS/SIDA Network News, and a
letter soliciting membership in the NCLR Hispanic Health Network. AATI
Ex. 49. AATI also provided an agenda for an NCLR consultative meeting
on disabilities held in Washington, D.C. in January 1994. AATI Ex. 52.
The materials indicate that NCLR addresses a wide range of areas of
concern to the Hispanic community, many of which are not directly
related to the specific purposes for which AATI's Head Start grants were
awarded, or to the purpose of Head Start program grants in general:
[T]he planning, conduct, administration, and evaluation of a Head
Start program focused primarily upon children from low-income
families who have not reached the age of compulsory school attendance
which (1) will provide such comprehensive health, nutritional,
educational, social, and other services as will aid the children to
attain their full potential; and (2) will provide for direct
participation of the parents of such children in the development,
conduct, and overall program direction at the local level.
42 U.S.C. 9833.
While, as ACF conceded, AATI's organizational interest in NCLR is
understandable, AATI failed to demonstrate how the specific Head Start
functions identified above are directly served by NCLR's broad scope of
concern. Accordingly, based on our review of the materials supplied by
AATI, we concur with ACF that membership in NCLR, and attendance at
NCLR's annual meeting, were not necessary for the performance of AATI's
Head Start grant awards, and that the associated costs were thus not
allowable charges to the grants. See OMB Circ. A-122, Att. A, A.2.
Conclusion
For the reasons explained above, in Docket No. A-94-4:
o We reverse the disallowance of funds spent installing the modular
unit at San Luis which were within the $90,000 awarded for that
purpose but not liquidated within 90 days of the close of the budget
period, and we sustain the disallowance of additional funds spent on
the San Luis unit beyond the deadline for timely liquidation which
were awarded for other purposes. However, we remand the appeal to ACF
to determine these exact amounts.
o We reverse the disallowance of $1,333 spent on a refrigerator, a
range, and a typewriter.
o We sustain the disallowance of $26,595 spent on a bus.
In Docket No. A-94-63:
o We reverse the disallowance of the $373,673 in expansion funds
remaining at issue in this appeal.
o We sustain most of the disallowance of $323,423 awarded for the
operation of a center-based Head Start program at Queen Creek in 1991
and 1992; however, we find that AATI did open a center-based program
there for approximately 20 children at the end of 1992, and we remand
the appeal to ACF to determine the amount of federal funding that
AATI is entitled to receive in connection with the operation of that
center.
o We reverse $1,066 and sustain $1,670 (including $380 not disputed by
AATI) of the disallowance of travel expenses.
o We sustain the disallowance of $400 that AATI paid for affiliation
dues.
If AATI disagrees with ACF's determination of the amounts of the
disallowance that the Board has remanded, it may return to the Board on
that limited issue within 30 days after receipt of ACF's determination.
Cecilia Sparks Ford
Donald F. Garrett
M. Terry Johnson Presiding Board Member
1. The amount at issue was originally $150,259. During the appeal,
ACF reduced this amount to $150,249 based on an error in addition, and
indicated that $1,333 represented funds spent on a refrigerator, a
range, and a typewriter, which we address separately. ACF submissions
7/6/94, 7/14/94.
2. ACF also disallowed these expenditures on the grounds that they
had not been obligated within the budget period. However, during the
telephone conference in this appeal ACF stated that it was no longer
pursuing this basis for the disallowance.
3. The $90,000 awarded for the San Luis unit and the $64,000 that
was awarded for other purposes are together greater than the amount
disallowed, as ACF has not specified how much of the $90,000 awarded for
the San Luis unit was not liquidated timely.
4. AATI argued that ACF effectively waived the timely liquidation
requirement because it failed to request that AATI repay $377,737.61 in
unliquidated funds AATI reported on a Financial Status Report (FSR)
dated February 22, 1991, and because ACF failed to raise any concerns as
to the unliquidated funds even after receiving a report from AATI's
auditor for the 1990 budget period which listed the unliquidated amount.
AATI Ex. 15. However, the FSR lists the $377,737.61 as unobligated, not
unliquidated, and so provided no notice to ACF that obligations from the
1990 budget period remained unliquidated as of February 22, 1991.
Additionally, the Board has held that the mere submission of a financial
report which included an unobligated balance did not establish approval
to carry over the unobligated amount. Rapid City American Indian
Development, Inc., DAB No. 1401, at 3-4 (1993). By analogy, the
submission of the financial report here did not satisfy AATI's
obligation to report the unliquidated amount and seek approval for an
extension of the deadline to liquidate those funds. AATI also
questioned whether the applicable policies require timely liquidation of
grant funds, since they provide alternative courses of action in the
event funds are not timely liquidated. Inasmuch as we conclude below
that ACF should have granted retroactive approval for an extension of
the deadline to liquidate expenditures on the San Luis unit up to the
$90,000 awarded for that purpose, we need not discuss AATI's arguments
further here.
5. The Office of Human Development Services was one of the component
agencies of the Department of Health and Human Services combined in 1991
to form ACF.
6. The section of the HDS/GAM containing this provision qualifies it
by stating recipients may transfer funds between and among the object
class categories of the grant/subgrant approved budget "(e)xcept for
items of cost requiring prior approval." HDS/GAM, Ch. 1, L.2, at
1-11.
7. ACF stated that AATI's 1991 audit report showed that AATI spent
$24,000 on San Luis from other Head Start sources (in addition to the
$40,000 awarded for Queen Creek). ACF Br. A-94-4, at 2; AATI Ex. 22, at
23. However, AATI's request for retroactive approval dated May 7, 1992
states that it spent $64,583 above the authorized $90,000 budget on site
work at San Luis (i.e., $40,000 from Queen Creek and $24,583 from other
Head Start funds). AATI Ex. 24.
8. For example, if ACF were to determine that the entire $90,000
authorized for San Luis was not timely liquidated, then our decision
would result in $90,000 of the disallowance being reversed. In this
respect, we note that AATI reported that it paid $1,343 for work at San
Luis prior to March 31, 1991. AATI Ex. 25. This amount would
presumably not be included in the disallowance of funds which were not
liquidated timely.
9. This amount was included in the $150,249 disallowed as untimely
liquidated.
10. ACF offered to clarify some confusion between the parties about
the precise contents of AATI's 1990 proposal seeking $224,000, and AATI
objected to the receipt of any more evidence into the record, on the
ground that it would further delay an already protracted proceeding.
Since we find that uncertainty over the site that the disallowed items
were intended for is evident from parts of the record which are not in
dispute, the Board has determined that further clarification of the
grant proposal is unnecessary.
11. The funds for the six vehicles were included in two grant awards
dated September 19, 1990. One awarded funds for one 30-passenger bus
for $35,000 and one 12-passenger van for $18,000, and the other
provided funds for four 35-passenger buses for $132,000. ACF Exs. C,
D.
12. That amount can also be derived as follows: AATI received
$167,000 for five buses, but spent only $161,329 for five buses, based
on AATI's reported cost per bus ($193,595/6), and is thus allowed only
that amount of federal funding. The amount by which total federal
funding used for the six buses exceeded this amount, $32,266, would thus
be subject to disallowance.
13. ACF cited Inter-Tribal Council of California for the general
proposition that federal funds spent in violation of OMB Circular A-122
are subject to disallowance.
14. These funds were not part of the funds awarded for the modular
units at San Luis and Queen Creek which were disallowed in Docket No.
A-94-4.
15. The record contains no specific notice of grant award
reprogramming the expansion funds to 1993. However, ACF's disallowance
letter stated that AATI was authorized to use the expansion funds in
1992 and 1993, and ACF never disputed AATI's assertion that it was
authorized to use the funds for expansion in 1993.
16. ACF had also argued that some of the expansion funds were spent
for non-expansion purposes during 1992, and that it was not clear how
the funds were used. However, since ACF is now disallowing only
expansion funds it found were used for other purposes during 1993, the
discussion which follows primarily concerns AATI's grant awards and
expenditures during 1993.
17. This is consistent with ACF's records, which show a $460,391
aggregate undrawn authorization remaining at the end of 1992. ACF Ex.
AC.
18. ACF has not alleged that AATI failed to provide those services,
or that the program was underfunded in 1993 as might be expected if a
substantial portion of the 1993 operational funds remained undrawn at
the end of that year.
19. We also note that ACF permitted AATI to replace expansion funds
with program funds in the first quarter of 1993. ACF reported that AATI
drew down $467,300 in the first quarter, a figure apparently determined
by adding AATI's draw downs from December 31, 1992 through March 31,
1993. ACF Br. A-94-63, at 9; ACF Ex. AO. Of that amount, $319,600 was
drawn down prior to March 9, 1993, when AATI received a $656,222
continuation award, its first award of 1993 grant funds. ACF Ex. AO.
AATI was thus using the expansion funds, the only funds reported to have
been carried over from 1992, to finance its 1993 program operations
before the 1993 grant funds became available. When funds were made
available for draw down under that award, they effectively replaced the
expansion funds that AATI spent on its 1993 program operations. As AATI
noted, ACF has not disallowed expenditures for program operations made
from the funds AATI drew down prior to receiving the first 1993 award.
20. ACF disputed AATI's assertion that this federal assistance award
deobligated the expansion funds. However, the parties agreed that this
notice meant that AATI was not to proceed with the expansion. AATI Ex.
48; ACF Br. A-94-63, at 13.
21. Our reversal of this part of the disallowance does not mean that
AATI is entitled to the expansion funds even though the expansion has
not taken place. ACF may withdraw the obligation of the expansion funds
so long as it fully funds AATI's current operational expenditures.
There is no danger that AATI could draw down funds derived from the
expansion award without ACF approval, as it has been on high-risk
status, with a monthly reimbursement schedule, since May 1993. AATI
suggested early in this proceeding that ACF could simply recover the
funds from the account. If ACF provides operating funds sufficient to
cover AATI's approved operating budget for 1994, there should be funds
enough to cover a subsequent deobligation by ACF of the expansion funds.
We note that AATI reported during the telephone conference that it
received a $438,776 award dated May 2, 1994, for the period through June
30, 1994. Transcript at 11.
22. AATI appeared to be aware of the need to obtain approval for the
selection of a home-based program model, as it had earlier submitted an
application proposing to establish a home-based program in remote areas
of Cochise County. ACF Ex.