Putnam-Clay-Flagler Economic Opportunity Council, Inc., DAB No. 1521 (1995)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: Putnam-Clay-Flagler Economic Opportunity Council, Inc.

DATE: July 12, 1995
Docket No. A-95-007
Audit Control No. A-04-94-26346
Decision No. 1521

DECISION

Putnam-Clay-Flagler Economic Opportunity Council, Inc.
(PCFEOC) appealed a disallowance by the Administration
for Children and Families (ACF) dated September 12, 1994
in the amount of $159,475. The disallowance was taken
with regard to expenditures made by PCFEOC's Head Start
program for the program year ending October 31, 1992. In
its appeal brief, PCFEOC conceded that $82,080 of the
disallowed costs should be repaid to ACF. 1/ In its
response brief, ACF modified its position regarding some
of the remaining disallowed costs, reducing the
disallowance by an additional $33,855 based on PCFEOC's
explanations and documentation which were contained in
its appeal file. 2/ Thus, the parties before us are
disputing only the remaining $43,540. This amount
consists of $36,628 claimed for a check which was not
cashed or deposited during the program year to which it
was charged, $4,212 for rental costs for a building which
was mostly unoccupied for four months of the program
year, and $2,700 for overreprogrammed funding.

For the reasons stated below, we reverse the disallowance
of $36,628 for the unliquidated check. We uphold in full
the disallowance of the remainder of the disputed costs,
consisting of $4,212 for rental costs and $2,700 for
overreprogrammed funding (as well as the $82,080 which
PCFEOC conceded should be repaid, which we do not address
in this decision).


BACKGROUND

ACF administers the federal program known as Head Start.
The purpose of Head Start is to provide comprehensive
health, educational, nutritional, social, and other ser-
vices to economically disadvantaged pre-school children
and their families. 42 U.S.C.  9831. To carry out the
program, ACF provides federal funding to qualified public
and private agencies totalling generally 80% of the
program's Head Start budget, and the public or private
agency contributes 20% in matching funds or services.
42 U.S.C.  9833 and 9835(b); 45 C.F.R.  1301.20.

Under the Head Start regulations, program funds may be
used only for certain expenditures. 45 C.F.R. 
1301.10(a). Part 74 of title 45 C.F.R. contains the
requirements for administering Department of Health and
Human Services (HHS) grants and the principles for
determining allowable costs. 45 C.F.R.  74.1; see also
45 C.F.R.  1301.10(a) (making Part 74 specifically
applicable to Head Start grantees.) The cost principles
used in determining allowable costs for non-profit
grantees are contained in Office of Management and Budget
Circular (OMB Cir.) A-122, and are made specifically
applicable to grantees receiving HHS grants by 45 C.F.R.
 74.174(a) (1992). 3/

Under the 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) (1993). 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., Inter-Tribal Council of
California, DAB No. 1418 at 2 (1993); Lac Courte Oreilles
Tribe, DAB No. 1132 at 5, n.4 (1990). Moreover, under
the cost principles, a cost is allocable to a Head Start
program grant only in accordance with the relative
benefits received by the program. OMB Cir. A-122,
Attachment A,  (A)(4)(a).

To ensure that all expenditures are in compliance with
applicable regulations and project requirements, each
Head Start grantee must be audited annually by an
independent auditor. The independent auditor must
determine whether the grantee's financial statements are
accurate, whether the grantee is complying with the terms
and conditions of the grant, and whether appropriate
financial and administrative procedures and controls have
been installed and are operating effectively. 45 C.F.R.
 1301.12.

PCFEOC has been a grantee under the Head Start program
since the mid-1960s. On April 29, 1993, an independent
auditor issued the required annual audit report covering
the year ending October 31, 1992. See generally Putnam-
Clay-Flagler Economic Opportunity Council, Inc. Financial
Statements and Independent Auditor's Report, October 31,
1992 (submitted at PCFEOC Tab 7). In that report, the
auditor questioned the costs which ACF subsequently
disallowed.

Below, we discuss each of the costs remaining in dispute.


ANALYSIS

1. Unliquidated Check

ACF disallowed $36,628 for a check which ACF found was
written and charged to the grant, but which was not
cashed or deposited during the program year in question
(or within 90 days following the program year). 4/
PCFEOC stated that the initial $36,628 check (check no.
14129, dated January 27, 1993) was written to a bus
manufacturing company for the purchase of a 65-passenger
bus, but was never actually issued to the company. 5/
PCFEOC Tab 1 at 1-2. According to its records, the
invoice for the bus was dated January 22, 1993. PCFEOC
stated that on May 19, 1993, check number 14129 was
voided and another check for the same amount (check no.
15400) was issued in its place. Id. PCFEOC stated that
it was not clear from its records why the first check was
never issued to the bus company, but there was some
indication in its audit response that "services had not
been rendered and completed." PCFEOC Tab 1 at 1. Copies
of the bus purchase order and invoice, a copy of check
number 14129 on which is machine-printed "Not Negotiable"
and on which is handwritten "voided," and a copy of check
number 15400 are contained in the record. PCFEOC Tab 1,
attachment 1-B.

ACF stated in response that the documents which PCFEOC
submitted were insufficient to meet the requirements of
the regulations and cost principles relating to adequate
documentation of expenditures, as interpreted by the
Board in previous cases. ACF Br. at 1-2. ACF stated
that it would accept as sufficient documentation either
copies of PCFEOC's Head Start account bank statements
showing that check number 14129 never cleared the bank,
or copies of the front and back of that check showing
that it was voided and was never negotiated. Id. at 2.
ACF argued that PCFEOC submitted what was essentially a
carbon copy of check number 14129, as evidenced by the
fact that the words "not negotiable" were printed on it.
Moreover, ACF argued, even if it had been the original
check, PCFEOC did not submit a copy of the back of the
check showing that it was not deposited or cashed prior
to having "voided" written on it. Id.

In its reply brief, PCFEOC stated that it could not
locate the original voided check number 14129. PCFEOC
Reply Br. Tab 1 at 1 (unnumbered). However, PCFEOC
attached copies of bank statements covering the months of
January, 1993 through May, 1994. Each of those bank
statements references a certain bank account number at
the "First Union National Bank of Florida, Palatka
Office." The copies of both check number 14129 and 15400
which were in the record indicate that they were each
drawn on that same account number at the First Union
National Bank of Florida, Palatka, Florida. It is clear
from these bank statements that check number 14129 in the
amount of $36,628.80 (or in any amount) was never cashed
or deposited. PCFEOC Tab 1. However, check number 15400
in the amount of $36,628.80 was liquidated on May 25,
1993.

As indicated previously, ACF stated in its brief that
copies of bank statements for the year following the
purported writing of check number 14129 would be
sufficient to address this item if such bank statements
indicated that check number 14129 was never liquidated.
PCFEOC submitted statements for the following 17 months,
and those bank statements collectively indicate that
check number 14129 never cleared the bank. Thus, we find
that the documentation which PCFEOC has introduced
sufficiently addresses this item.

For the reasons stated above, we reverse the disallowance
for $36,628 for the unliquidated check.


2. Rental Costs

ACF disallowed $4,212 based on the auditor's determina-
tion that space in a building rented by PCFEOC and
charged in full to Head Start was 77% vacant during four
months of the program year in question. PCFEOC conceded
that this vacancy occurred, and stated that it occurred
because of some internal problems among staff members who
were designated, but unwilling, to relocate to the new
office space. PCFEOC stated that the space is now fully
occupied and that it has "implemented procedures
sufficient to correct this finding." PCFEOC Tab 4 at 1.
ACF argued in response that while there should be no
further disallowance if the problem was corrected, PCFEOC
did not adequately address why a disallowance should not
be taken for the time the area was not fully utilized.
ACF Br. at 2.

In its reply brief, PCFEOC stated that the staff did move
to the new space during the program year at the
insistence of the Board of Directors and under pressure
from the news media. PCFEOC Reply Tab 2 at 1. PCFEOC
introduced statements purportedly from four of its
employees who were required to move to the new space
which stated, in essence, that they were told to move to
the vacant space for the 1992-93 school year and that
they did so move.

We agree with ACF that PCFEOC has not met its burden of
showing that the cost for the vacant space was an
allowable cost of the program. PCFEOC conceded in its
initial brief that the space was largely unoccupied for
the four months:

The building space intended for the HeadStart field
staff housed partitions and storage records, but for
all intensive purposes [sic], remained unoccupied
during this period of time. The field staff
subsequently completed the move to the Martin Luther
King Building.

PCFEOC Br. Tab 4 at 1. While the statements of the four
employees indicated that they were told to move to the
under-utilized space for the 1992-93 school year, the
statements do not indicate on what exact date they moved.
Moreover, while the record is not clear which four months
of rental costs were disallowed, the disallowance covered
the year ending October 31, 1992; thus, any move made by
the employees for or during the 1992-93 school year would
not fully satisfy this part of the disallowance. The
fact that the employees moved at some point is not in
issue, given that PCFEOC alleged that the space is now
fully utilized and ACF has not questioned that assertion.

The cost principles of OMB Circular A-122 essentially
state that charges cannot be made to a grant where the
federal program received no corresponding benefit from
the expenditure of those funds. OMB Cir. A-122,
Attachment A,  (A)(4)(a). Thus, PCFEOC could not
properly charge the program for 100% of the cost of
renting building space where the Head Start program did
not use 77% of the space during the rental period.

In its reply brief, PCFEOC also cited to OMB Circular A-
122, Attachment B, which addresses the allowability of
"idle facilities and idle capacity:"

The costs of idle facilities are unallowable except
to the extent that . . . [a]lthough not necessary to
meet fluctuations in workload, they were necessary
when acquired and are now idle because of changes in
program requirements, efforts to achieve more
economical operations, reorganization, termination,
or other causes which would not have been reasonably
foreseen.

PCFEOC Reply Br. Tab 2, citing OMB Circular A-122,
attachment B,  16(b)(2). PCFEOC stated that, under this
section, the costs of the vacant space should be
allowable. However, paragraph 16(b)(2) addresses
situations where vacant space occurs because of
unavoidable events which could not be foreseen. In this
situation, the vacancy occurred because employees who
were within the exclusive control of PCFEOC resisted
using the space as planned. PCFEOC had the authority to
insist that the employees move to the vacant space when
it was available. PCFEOC has not stated any reason why
the Head Start program should bear the cost of PCFEOC's
employees' insubordination.

PCFEOC did not challenge ACF's calculation of 77% as the
proper percentage of the space which was vacant, nor did
it challenge $4,212 as the proper portion of the rent
which should be disallowed. Thus, for the above reasons,
we uphold the disallowance of $4,212 for rental costs in
full.


3. Unobligated Balance

ACF disallowed $2,700 based on an unreconciled difference
between the amount of unobligated funds shown on PCFEOC's
financial report (Form SF-269) for the year ending
October 31, 1992, which was required to be submitted to
ACF within 90 days after the close of the program year,
and the amount of such funds shown on the independent
auditor's report for the same year. While not denying
that the lower amount stated in its independent audit was
the correct amount of unobligated funds for the year,
PCFEOC stated that a review of its records did not
conclusively reveal why this discrepancy occurred.
PCFEOC requested that ACF adjust its current program year
funding to account for these excess unobligated funds
shown on Form SF-269 rather than requiring repayment of
them; PCFEOC argued that it had had unobligated balances
in excess of this amount in each of the three consecutive
program years beginning with the year in question and
therefore had not overspent its budget. PCFEOC Tab 6.

The funding which is at issue here is referred to as
"overreprogrammed" funding. Overreprogrammed funding
occurs when a grantee reports on a Form SF-269 that it
has unobligated funds for a budget year, ACF reprograms
those funds to the following year (thus reducing the
amount of money ACF puts into the grantee's account for
the next year but not the total program budget), and the
grantee later discovers (usually through the required
independent audit) that it had fewer funds which could be
applied to the following year than it had originally
reported. See Office of Human Development Services
Discretionary Grants Administration Manual (OHDS/GAM),
Ch. 1,  J; Rural Day Care Association of Northeastern
North Carolina, DAB No. 1384, at 9-10 (1993). The Board
has previously held that a grantee bears the risk if it
over-reports its unobligated balance and ACF then
reprograms the reported amount to the following year.
Rural Day Care at 12.

Grantees bear the burden of overreprogrammed funding
because ACF has a limited amount of funding appropriated
by Congress each year to use for Head Start programs.
Head Start program regulations require grantees to have
an accounting system which lets them know how much they
spent in a program year, at least by 90 days after the
close of that year when they are required to report such
information on their annual Form SF-269. OHDS/GAM Ch. 1,
 I; 45 C.F.R.  74.73 (1992). ACF should be able to
rely on grantees to report, within 90 days after the
close of a program year, what funds they actually have
available to be reprogrammed to the next year or returned
to ACF.

PCFEOC conceded that it had overreprogrammed funds due to
an overreporting of its unobligated balance for the year
in question here. Thus, we conclude that the
disallowance was proper.

Moreover, the disallowance is consistent with ACF policy.
ACF stated that grantees have been notified that ACF will
not award additional federal funds to offset a deficit if
a grantee's actual audited unobligated balance is less
than that previously reported on a Form SF-269. ACF Br.
at 3-4. PCFEOC did not dispute that it had notice of
this policy.

The Board does not have jurisdiction over determinations
concerning the disposition of unobligated balances
reported by a grantee. 45 C.F.R. Part 16, Appendix A, 
(C)(a)(1). Thus, the Board cannot direct ACF to
allow PCFEOC to offset the overreprogrammed funds
with unobligated balances from subsequent program years,
as requested by PCFEOC. Moreover, it is possible that
ACF gave additional funds to new or existing programs
based on PCFEOC's assurances that it already had a
certain amount of funding available to it for the
following year. Consequently, PCFEOC's assumption that
its mistake can be corrected by offset from later program
years without harm to the Head Start program is
unfounded.


CONCLUSION

For the above reasons, we reverse the disallowance of
$36,628 for an unliquidated check. We uphold the
disallowance of $88,992 consisting of $4,212 for under-
utilized rental space and $2,700 for overreprogrammed
funding, as well as $82,080 for renovation costs (which
PCFEOC conceded).

___________________________
Donald F. Garrett

___________________________
Norval D. (John) Settle

___________________________
M. Terry Johnson
Presiding Board Member


1. This amount consisted of funds drawn down by PCFEOC
for construction of a new Head Start center, which was
never built. See PFCEOC Tab 1.

2. The $33,855 in costs which ACF dropped from the
disallowance consisted of $8,330 for differences in
accounts payable, $19,376 for contractor costs, $6,080
for construction costs, and $69 for unauthorized
expenditures. See, generally, ACF Brief (Br.) at 1-2.

3. 45 C.F.R. Part 74 was amended on August 25, 1994.
In the current regulations, former section 74.174(a) is
now section 74.27(a).

4. It is unclear from the disallowance letter on what
basis ACF disallowed this amount. There were two
findings in the underlying audit report that included
this issue. One was that some expenditures were not made
within 90 days of the close of the program year. The
January 27, 1993 check, if cashed, would have come within
that period, however, and ACF never contended in this
proceeding that the subsequent purchase of the bus was
unauthorized. The second finding related to PCFEOC's
issuing checks but not mailing them, which is apparently
what happened here. ACF might have believed that the
second check was issued to cover the expense, thus
resulting in a possible double-charging of the grant.
Nonetheless, since we find that PCFEOC has introduced the
documentation identified by ACF during this proceeding as
sufficient to resolve this disallowance item, we are
reversing this part of the disallowance and the precise
rationale thus becomes irrelevant.

5. It is further unclear from the record and briefs why
this amount was disallowed for the year ending October
31, 1992, the period covered by this disallowance, when
the check was not written until January 27, 1993. It
might have been based on the fact that the bus purchase
order was dated October 26, 1992.