Campesinos Unidos, Inc., DAB No. 1546 (1995)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: Campesinos Unidos, Inc.

Docket No. A-95-83
Decision No. 1546

DECISION

Campesinos Unidos, Inc. (CUI) appealed a determination by
the Administration for Children and Families (ACF) to
disallow $306,653 related to CUI's Migrant Head Start
awards for the period September 1, 1991 through August
31, 1994 (program years 20, 21, and 22). 1/ ACF made
findings addressing cost allowability or funding issues
in eight general areas of CUI's program. During Board
proceedings, ACF reduced the disallowance by $11,630.
CUI requested a hearing, and ACF opposed this request,
arguing that there was no genuine dispute of material
fact. In a telephone conference held by the Board, the
parties agreed that the Board should first issue a
decision addressing: 1) jurisdictional issues raised by
CUI late in the proceeding; 2) threshold legal issues
raised by the parties; and 3) CUI's hearing request.

For the reasons discussed below, the Board Chair (who is
a member of the panel issuing this decision) rejects
CUI's arguments opposing jurisdiction. The ACF
determinations here clearly fall within the Board's
jurisdiction at 45 C.F.R. Part 16, Appendix A, C(a)(1).

As explained below, we resolve certain threshold legal
issues in ACF's favor, concluding that CUI has raised no
genuine dispute of material fact requiring a hearing on
the related ACF findings. Based on our analysis of these
issues, we uphold ACF's determination with respect to the
following: $23,178 in rent payments; certain amounts
associated with expansion of CUI's Heber Center --
$50,000 awarded for salaries, fringe benefits, and
supplies, part of the $14,000 disallowance for playground
equipment (in an amount to be determined), and $9,252 for
a modular unit set-up; $7,040 for program income (sale of
vans); and $4,800 for literacy training. We reject ACF's
position with respect to $56,613 for the Migrant Head
Start Director's salary for two different program years
and $3,705 for tax payments, and reverse the
disallowances of these items. With respect to the
remaining amounts in dispute, we do not fully accept
either party's position. While ACF's findings raise
substantial questions concerning these items, CUI's
response accurately pointed out that the findings are
insufficient as a basis for us to uphold ACF's
determination without further development. Rather than
our further developing the record at this time or finding
in favor of CUI, however, we have determined that a
remand to ACF is more appropriate. ACF's initial
findings were based on a program-related review, and
could be clarified in light of recent audits. In
addition, to prevail, CUI must present additional
documentation, rather than testimony. With the guidance
we provide below, together with audit findings currently
being developed, we think that the parties should be able
to resolve these issues--or at least narrow them--on
their own. Specifically, we are remanding the following
determinations: the remainder of the $14,000 for
playground equipment; $33,892 for insurance refunds; and
$92,543 in quality improvement funds. CUI may return to
the Board on these limited issues, in accordance with the
guidance below.

Applicable Authority and Background

The Head Start Act, 42 U.S.C. 9831 et seq., establishes
a program to provide developmental services primarily to
low-income preschool children. 2/ Some Head Start funds
are set aside to serve migrant children and their
families.

Head Start projects are approved for indefinite periods,
but grantees must apply for continuation awards for each
program year to operate their basic programs. In
addition, if other funds are available, grantees may
separately apply for supplemental awards for specific,
limited purposes, such as expansion or quality
improvement.

Federal grant funds may be spent only for allowable costs
of activities for which a grant was awarded. 45 C.F.R.
74.170. 3/ The grantee has the burden to document the
allowability of costs claimed under the grant program.
45 C.F.R. 74.61(b); Office of Management and Budget
(OMB) Circular (Cir.) A-122, Attachment (Att.) A,
A.2(g). The documentation must consist of records
adequately identifying information pertaining to grant
awards, authorizations, obligations, unobligated
balances, assets, outlays and income. 45 C.F.R.
74.61(b). The records must be supported by source
documentation such as canceled checks, paid bills, and
payrolls. 45 C.F.R. 74.61(g). A grantee is required
to submit reports to be used to monitor cash advanced and
disbursements or outlays for each grant. 45 C.F.R.
74.74. Additionally, a grantee must ultimately account
for all grant funds received by documenting that it
incurred and actually paid program-related expenditures.
45 C.F.R. 74.112.

CUI, a community action agency, had been operating three
Migrant Head Start Centers in Southern California: the
Brawley Center, the Coachella Center, and the Heber
Center. CUI had a total approved budget of $1,172,088
for its Migrant Head Start program for program year 20,
the period September 1, 1991 through August 31, 1992
(basic funding of $1,019,765 and a supplemental award of
$152,323 for one-time program improvements). For program
year 21, the period September 1, 1992 through August 31,
1993, CUI received a total of $1,262,534 in Migrant Head
Start funds (basic funding as well as supplemental
funding for expansion, quality improvement, and service
to an additional 24 children). For program year 22, the
period September 1, 1993 through August 31, 1994, CUI
received a total of $1,546,367 (including basic funding
and supplemental funding for cost of living adjustments,
quality improvement, disability services and training,
and technical assistance). ACF's June 19, 1995 brief
(br.) at 2 and exhibits (Ex.) C-E.

In March 1994, ACF conducted a site visit of CUI's
Migrant Head Start program. ACF's review included use of
the On-Site Program Review Instrument and selected CUI
records dating from September 1, 1991 through March 24,
1994. Based on its review, ACF issued a "potential
disallowance" notice. ACF also denied CUI's application
for continuation funding for program year 23 (1994-1995).
ACF issued a "final disallowance decision" only after
CUI's appeal of the denial of refunding had been pending
for some time. CUI separately appealed ACF's
disallowance decision under 45 C.F.R. Part 16; the Board
ruled that the disallowance matter should proceed
separately and that ACF could not rely on findings
related to the disallowance for its denial of refunding.
4/ By decision dated May 24, 1995, the Board upheld
ACF's denial of refunding. See Campesinos Unidos, Inc.,
DAB No. 1518 (1995). 5/

ACF's final decision addressed eight general areas, some
with several different items, as follows:

1. Rent paid to Valley Cam Tech
2. Heber expansion
a. Salaries, fringe benefits, and supplies
b. Playground equipment
c. Modular unit set-up
3. Migrant Head Start Director
a. 1992-93 program year
b. 1993-94 program year
4. Program income (sale of vans)
5. Insurance refunds (workman's compensation
credits)
6. Tax Payments
7. Literacy Training
8. Quality Improvement

In its reply brief submitted July 26, 1995, CUI argued
for the first time that, with the exception of the rent
paid to Valley Cam Tech and the tax payments, the Board
lacked jurisdiction over its appeal of ACF's findings.
CUI requested that the Board dismiss those findings. By
submission dated August 10, 1995, ACF commented on CUI's
request. The Board provided CUI an opportunity to reply
in a telephone conference held September 8, 1995, which
also addressed CUI's request for a hearing in this case
and threshold legal issues raised by the parties.

Below, we first provide an analysis of the general
jurisdictional objection raised by CUI. We then analyze
each of the eight areas of ACF's determination,
addressing the threshold legal questions, as well as
CUI's jurisdictional arguments that were specific to any
of those areas.

General Jurisdictional Issues

The Board's regulations at 45 C.F.R. Part 16, Appendix A,
C, provide, in relevant part, with respect to direct,
discretionary project grant programs such as Head Start:

(a) The Board reviews the following types of final
written decisions . . . .
(1) A disallowance or other determination denying
payment of an amount claimed under an award, or
requiring return or set-off of funds already
received. This does not apply to determinations of
award amount or disposition of unobligated balances,
or selection in the award document of an option for
disposition of program-related income.

(Emphasis added.)

ACF here initially issued a determination it called a
"potential disallowance" and then issued a determination
it called a "final disallowance." The final disallowance
informed CUI that, unless CUI appealed to the Board
within 30 days, the ACF determination would also become
the final decision of the Department. For each of the
areas addressed in the determination, ACF concluded
either that CUI had charged to Migrant Head Start funds
specific cost items that were unallowable, that CUI had
not expended funds for the purposes for which they were
awarded, or that CUI had not properly credited amounts
that should have been credited to its Migrant Head Start
awards. ACF's "final disallowance" notified CUI that it
would be required to pay back funds to the federal
government "from non-Federal sources for the total
disallowance." ACF Ex. B at 10. Thus, the determination
here falls within the plain language of the regulations.

CUI argued conclusorily that "the Board hears only those
matters involving the expenditure of Federal funds" and
that this meant "disallowance of the expenditure of funds
on unallowable costs as that term is defined . . . by OMB
Circular A-122." CUI July 26, 1995 br. at 2. This
argument is unclear since OMB Circular A-122 includes
both general considerations in determining allowability
of costs and provisions on the allowability of specific
types of cost items. CUI argued, however, that "ACF
repeatedly confuses program considerations with cost
disallowances," implying that program considerations were
outside the Board's jurisdiction. Id. CUI provided no
support for its interpretation based on the wording or
history of the Board's regulations or in past rulings by
the Board Chair on jurisdiction.

The Board has consistently interpreted the term
"disallowance" to cover determinations that find that
charges to federal funds are not allowable, even if the
basis for the finding is not a specific cost principle.
This includes, for example, questions of whether costs
are allocable (i.e., of benefit) to a particular grant or
budget period and of whether funds were expended for the
purposes for which they were intended. In addition, the
Board regulations specifically cover determinations
requiring return of funds, so long as the determination
is not within the listed exceptions. This could include
determinations that a grantee's failure to account
properly for program income or applicable credits
resulted in the grantee charging more to federal funds
than permitted.

CUI's jurisdictional arguments, for the most part, rely
either on CUI's characterization of the bases for ACF's
determinations as going to what CUI calls "programmatic
concerns" or on other grounds that challenge the bases
for ACF's determinations. These arguments go to the
merits of whether ACF properly disallowed costs or
otherwise required a return of funds, not to whether
ACF's determinations are properly within the Board's
jurisdiction. In addition, some of CUI's arguments
relate to ACF's reasons for rejecting CUI's position in
response to ACF's original determination, not to the
original determination itself. Thus, CUI did not provide
any valid reason for finding that ACF's determinations
are not within the Board's jurisdiction.

Analysis of ACF's determinations

1. Rent paid to Valley Cam Tech

ACF found that, for the 30-month period under review, CUI
paid $37,250 in rent to Valley Cam Tech, a wholly owned
subsidiary of CUI, for use of facilities referred to as
the Brawley Center. Valley Cam Tech then reimbursed
CUI's corporation account. Thus, in effect, CUI was
paying rent to itself. ACF determined that this
arrangement represented a less-than-arms-length
transaction between CUI and Valley Cam Tech. Applicable
cost principles specifically provide: "Rental costs
under less-than-[arms]-length leases are allowable only
up to the amount that would be allowed had title to the
property vested in the organization." OMB Cir. A-122,
Att. B, 42.c.; see 45 C.F.R. 74.174.

CUI did not deny that the rental arrangement was less-
than-arms-length, nor challenge the applicability of the
cost principle. Instead, CUI maintained that it had
incurred depreciation costs, which, when set off against
the disallowance, would result in a credit due to CUI of
$4,737. CUI asserted that it was entitled to
depreciation for its main office and for the Coachella
Center, as well as for the Brawley Center.

ACF had accepted CUI's claim to a charge of depreciation
on the Brawley Center and agreed to reduce the potential
disallowance from $37,250 to $23,178. However, ACF
rejected CUI's claim for substitution of depreciation
charges on CUI's main office and CUI's Coachella Center
for the remainder of the disallowed amount. ACF
contended that for the costs to have been authorized, CUI
would have had to have included them in its proposed
budgets for the period in question, and have had the
expenditure approved by ACF. Moreover, ACF asserted that
federal guidelines as set forth in OMB Circular A-122,
Attachment B, 42.c. do not permit such a substitution.
ACF maintained that the applicable provision permits a
grantee to make a partial recovery in a "deceptive
leasing arrangement;" however, according to ACF, the
recovery is limited to the allowable depreciation on the
facility subject to the "deceptive leasing practice."
ACF June 19, 1995 br. at 5 and 7. ACF also said that CUI
had failed to provide adequate documentation of
depreciation for the main office and the Coachella
Center.

CUI argued that nothing in OMB Circular A-122 or the Head
Start regulations prevents CUI from combining the amount
of depreciation for each facility for the period in
question to offset ACF's disallowance. CUI also argued
that ACF could not properly raise the documentation issue
because it had not been raised in the disallowance
letter.

CUI's arguments do not provide a basis for us to reverse
ACF's determination that CUI improperly charged to its
grant rent for the Brawley Center, to the extent that
that rent exceeded ownership costs on the Brawley Center.
The cost principle contemplates a limit on rent for a
particular property under a less-than-arms-length
transaction.

CUI's arguments, however, raise the question of whether
additional depreciation costs, not previously charged to
its Migrant Head Start grant, may now be so charged to
offset the disallowance amount for rent or other costs.
The Board has previously held that the mere fact that a
grantee charged unallowable costs to a grant does not
necessarily mean that it has not discharged its
obligation to account for federal funds and must return
funds in the disallowed amount; if a grantee can
demonstrate that it incurred additional allowable costs
previously covered with its own funds, which it did not
use to fulfill its non-federal share requirement, this
could be an adequate accounting for part or all of the
federal funds awarded. See Seminole Nation of Oklahoma,
DAB No. 1385 (1993) at 5 and cases cited therein;
Institute for Technology Development v. Brown, 63 F.3d
445 (5th Cir. 1995); see also 45 C.F.R. 74.112.

Such an offset claim, however, must be independently
analyzed. Here, we disagree with ACF that the cost
principle in OMB Circular A-122 precludes CUI's claim;
that principle merely establishes the amount of rent
which may be charged in a less-than-arms-length
transaction. CUI is correct that OMB Circular A-122
elsewhere provides for compensation for the use of
buildings, including depreciation costs, so long as
certain conditions are met. OMB Cir. A-122, Att. B, 9.

ACF also failed to provide support for its argument that
CUI's failure to include depreciation costs in its
budgets for the program years in question is by itself
"fatal" to CUI's claim. Where prior approval for a
particular type of cost is required, inclusion in the
budget will constitute such approval. 45 C.F.R.
74.177. If prior approval is not required, however, a
grantee is not generally precluded from a budget revision
transferring amounts from one category of cost to
another. See 45 C.F.R. Part 74, Subpart L. On the other
hand, the fact that CUI did not include these amounts in
the budgets raises substantial questions which CUI did
not satisfactorily answer here. For example, it is
highly possible that depreciation on the main office was
not included in the budget because this inclusion would
mean that CUI would exceed the 15% limit on
administrative costs for Head Start programs or because
the costs were treated as indirect costs (see section 5
below). Other possible explanations for why depreciation
costs were not included in the budget are: 1) CUI was
using these costs as part of its non-federal match; 2)
CUI was charging them (at least in part) to its other
programs; or 3) CUI had previously determined that they
did not meet the conditions for claiming depreciation
costs, including that the costs of the depreciated
buildings or improvements may not have been borne
originally by federal funds. See OMB Cir. A-122, Att.
B., 9.

Moreover, ACF is correct that the documentation of
depreciation costs that CUI provided is inadequate. CUI
provided mainly a summary of the costs, with supporting
documentation that addresses only the division between
the value of the land on which the buildings sit (which
is not allowable) and the value of the improvements on
that land. See CUI Exs. A-C. 6/ More complete
supporting documentation is required generally by the
provisions discussed above, and by the cost principle on
depreciation, which addresses what records must be kept
to support depreciation claims. OMB Cir. A-122, Att. B,
9. Such documentation would be particularly critical
here since these costs were not charged to its Migrant
Head Start grants during the periods in question and
therefore were likely not audited as part of CUI's
ongoing program audits.

Contrary to what CUI argued, ACF did not improperly raise
the question of documentation of these costs. ACF raised
the issue in response to CUI's offset claim, and CUI had
ample opportunity to respond and to provide adequate
documentation of the costs.

Thus, we reject CUI's offset claim. CUI maintained that,
at the very least, a hearing is needed to address this
issue. However, there are no genuine disputes of
material fact the resolution of which would be assisted
by oral testimony, nor would a hearing be helpful on this
issue. Only documentation would be adequate evidence of
depreciation costs; CUI had an opportunity to provide
such documentation and failed to do so. Therefore, we
uphold the disallowance of $23,178 for rent paid to
Valley Cam Tech, without permitting offset of claimed
depreciation on the Coachella Center and the main office.

2. Heber Expansion

In program year 21, CUI was awarded $152,323 in
supplemental funds to expand its facilities for serving
migrant children in the Calexico area. In applying for
these funds, CUI stated that the funds would be used for
relocation of the center in Heber, California to
Calexico, California. The application included $14,000
for specific items of playground equipment for the new
site, and $9,252 for installation costs for a modular
unit. At the same time, CUI applied for other funds
related to what it called the "Heber expansion,"
specifically: $50,000 for teachers' salaries, fringe
benefits, and supplies. It is undisputed that, because
of problems with obtaining the necessary approvals for
the facility in Calexico, the expansion was delayed, and
no center was opened in Calexico prior to ACF's action
denying refunding of CUI's Migrant Head Start program.

ACF disallowed: (a) the $50,000 awarded for teachers and
supplies; (b) the $14,000 for playground equipment; and
(c) the $9,252 for a modular unit installation at the
Calexico site. We discuss each of these disallowances
below.

(a) $50,000 for salaries

ACF took the position that the $50,000 was awarded for
teachers at the planned Calexico site and that, because
the facility never opened within the period for which the
funds were awarded, the expenditure of the $50,000 was
unallowable. CUI argued that it served additional
children during the period in question at its existing
Heber Center, and that this was consistent with its
funding proposal. CUI maintained that the funds were
"used to cover expenses for the two additional teachers
needed to meet child/teacher ratios (at a total of
$41,365) and to pay for supplies and similar items."
CUI's May 17, 1995 br. at 3; see CUI May 17, 1995 Ex. 1,
8 at 2-3. CUI argued that its program was expanded and
that it spent the funds as authorized.

ACF maintained that CUI had violated the terms of the
award, by spending funds for purposes that were not
authorized. Moreover, ACF contended that CUI had failed
to submit any evidence that it did, in fact, serve an
additional 24 children at the Heber Center. In response,
CUI submitted a list of children from the Calexico area
served at the Heber Center, and offered to provide
further evidence at a hearing. Transcript of September
8, 1995 Telephone Conference (Tr.) at 27. CUI also
argued that, since ACF had not alleged that CUI spent the
$50,000 on something other than teacher salaries, fringe
benefits, and supplies, the Board did not have
jurisdiction.

First, CUI's jurisdictional argument has no merit. ACF
determined that CUI must return the $50,000 because it
was not spent on authorized purposes, and further that
the costs of any salaries and supplies for services at
the Heber Center are not allowable charges to these
funds. As noted above, this type of determination falls
within the plain language of the Board's regulation on
jurisdiction.

With respect to the merits, we conclude that ACF's
position is supported by the record and applicable
authority. In arguing that it was authorized to spend
the funds for teachers and supplies at the Heber Center,
CUI argued that the purpose of the award was for salaries
and supplies to serve 24 additional children from the
Calexico area and that purpose of the award was different
from the award for physical expansion. CUI argued that
it was irrelevant whether the money went for teachers at
a new or old facility. Tr. at 24. CUI's position
ignores language in CUI's application for the $50,000,
however, as well as the context in which the application
was made. The application includes as the descriptive
title of the project: "Increase in service to mobile
migrant children (3-5 years of age) in Calexico, CA."
ACF Ex. U, unnumbered p. 1 (emphasis added). Given that
CUI had also applied for funds to establish a new
facility in Calexico, this language clearly suggests that
the service was to be provided at the new center, not the
existing one. This interpretation is confirmed elsewhere
in the application, where it states the following:

The Parent Policy Council approved expansion to
serve 24 additional children in the Calexico area
where there are presently 138 unserved mobile
migrant preschool children, only after ACF approval
of our one time request for Heber Center relocation
to Calexico, CA.

ACF Ex. U, unnumbered p. 10.

Thus, we hold that use of the funds to serve children at
the existing Heber Center constitutes a change in the
scope of the project, which would require prior approval.
Section 74.103(b) of 45 C.F.R. provides, in relevant
part:

Changes to project scope or objectives. The
recipient shall obtain prior approval for any change
to the scope or objectives of the approved
project. . . .

See also HDS Grants Administration Manual (GAM) at 1-13;
OMB Cir. A-122, Att. A, (2)(a) (costs "must conform to
any limitations or exclusions set forth . . . in the
award.").

CUI did not dispute that it had not obtained prior
approval for this change, but suggested that, if the
Board held for ACF on the threshold issue, the Board
should hold a hearing into whether retroactive approval
should be given.

ACF asserted that it has more than adequate grounds for
declining any request for retroactive approval of the
expenditures of funds earmarked for use at Calexico. ACF
cited the Board's decision in Campesinos Unidos, Inc.,
DAB No. 1518 (1995), for its position that ACF had
established that CUI has performed poorly in virtually
every aspect of its Migrant program since 1990. Id. ACF
also noted that it had previously found in On-Site
Performance Reviews that the Heber Center facility was
overcrowded, so that ACF would not have approved serving
additional children at that facility, and that it had
found that CUI did not meet enrollment requirements.
Finally, ACF challenged the adequacy of the documentation
provided by CUI to show that it in fact served additional
children. Additionally, ACF had previously questioned
whether CUI had, in fact, hired additional teachers,
noting that "CUI's employee lists have consistently shown
substantially fewer staff than its budget calls for."
ACF August 10, 1995 br. at 6, n. 5.

While the Board has recognized that retroactive approval
may be granted under certain circumstances, an agency has
considerable discretion when determining whether to grant
such approval, and may consider factors such as the
grantee's past fiscal performance. See Arizona
Affiliated Tribes, Inc., DAB No. 1500 at 7 and cases
cited therein. ACF's stated reasons for denying
retroactive approval are reasonable on their face since
they raise substantial questions about whether additional
children could have been adequately served at the Heber
Center and about whether CUI did in fact spend the funds
as it said it did. CUI did not specifically deny that
ACF had previously found that the Heber Center was
overcrowded, but said it could provide "testimony about
the practicalities of running a migrant program, that
there is in-flows and out-flows of children and we can
have extensive testimony by CUI about how they served
those additional children and why their license capacity
was not exceeded." Tr. at 27.

We do not think a hearing is required or would be useful
on this issue. CUI provided no documentation that
additional teachers were hired beyond those authorized in
its basic budget. Indeed, CUI did not specifically
dispute ACF's assertions that CUI consistently hired
fewer teachers than budgeted. Nor did CUI offer now to
show that the findings it failed to dispute in the
proceedings leading to Decision No. 1518 (such as failure
to meet enrollment requirements) were erroneous. The
reasons on which no documentation or testimony was
offered by CUI provide an adequate basis for the denial
of retroactive approval. Thus, the testimony offered by
CUI would not be sufficient to support a conclusion that
ACF abused its discretion in denying retroactive approval
here. 7/

Moreover, CUI had an opportunity to provide documentation
to support its assertion that it served 24 additional
children at the Heber Center. The documentation
originally provided was for the wrong time period. The
documentation ultimately submitted is inadequate because
it merely shows the names of some children and that they
were from the Calexico area. See Attachment to CUI
September 13, 1995 submission. Since CUI's application
for expansion funds indicated CUI was already serving
some children from the Calexico area (5 to 7 miles away
from the Heber Center), the list is insufficient to show
that CUI in fact expanded its program to serve other
children from the Calexico area. This is the type of
issue where documentation would be the best evidence, and
ACF is not unreasonable in denying retroactive approval
based on CUI's failure to submit such documentation when
provided the opportunity.

We therefore uphold the disallowance of $50,000 awarded
for salaries and supplies for a Calexico facility and
determine that no additional proceedings are required on
this issue.

(b) $14,000 for playground equipment

CUI received $14,000 to purchase playground equipment for
the new Calexico site. As noted above, however, the site
did not open. CUI first stated that the equipment had
been purchased and used elsewhere in its program. Later,
CUI stated that the equipment was being held, at no
additional charge, by M&M Playgrounds, the company from
which CUI purchased the equipment. Finally, in a
September 25 telephone conference, CUI said that part of
the equipment had been used elsewhere in the program and
that part of it had been stored. Tr. at 39-40.

ACF asserted that if the equipment was stored but not
used, the cost must still be disallowed because the
children in the program have not benefitted from it.
Further, ACF provided a list of the playground equipment
that the $14,000 was awarded to CUI to purchase. See
ACF's August 10, 1995 br. at 7; ACF Ex. B at 2-15 to 2-
16. ACF argued that the number of pieces of equipment
listed in CUI's May 17, 1995 submission at Exhibit 2 as
being stored is significantly less than the number CUI
itemized for purchase.

CUI replied that the fact that it failed to use the
equipment as planned because the Calexico Center did not
open is not a question of cost but rather a question of
programmatic objectives, and that the Board therefore
lacked jurisdiction. On the merits, CUI argued that it
was reasonable in purchasing the equipment when it did,
in anticipation of the Calexico site opening. CUI also
claimed that it had made the equipment available for the
interim grantee which replaced CUI after it was denied
refunding. ACF responded that the equipment is not part
of the inventory of equipment slated to be turned over to
the interim grantee. Further, ACF argued that even if
ACF accepted the stored equipment, it is clear that the
Migrant Head Start program has never benefitted from such
equipment. ACF maintained that costs are not allocable
and allowable unless they actually further the objectives
of the grant. Id. at 7-9.

CUI's jurisdictional argument is without merit. ACF
determined here that the funds were not expended in
accordance with applicable requirements and that CUI must
return them. This determination falls within the plain
language of the Board's regulations, as discussed above.

CUI's documentation is sufficient to show that CUI
purchased in 1992 and stored some playground equipment
which meets the description of the equipment to be
purchased with the $14,000 supplemental award. See ACF
Ex. G; CUI May 17, 1995 br. Ex. 2. CUI did not provide
any documentation, however, to support any finding that
the remainder of the funds were used to purchase
equipment that was used elsewhere in the program. While
there is documentation showing the equipment CUI had, CUI
presented nothing to connect this equipment with the time
period involved, much less with the award of the
supplemental funds for CUI's Migrant Head Start program.
The absence of such documentation provides a basis for
upholding ACF's determination with respect to that part
of the $14,000 (which should be determined on remand, as
indicated below) not used for equipment that was
purchased within the scope of the award authorization and
was stored. With respect to this amount, we do not need
to reach the issue of whether CUI could properly use
funds awarded for equipment for the Calexico site to
purchase equipment used at other sites. CUI failed to
provide any documentation that this is, in fact, how it
used the funds.

With respect to the equipment which CUI purchased but
stored, the key issue is whether ACF properly determined
that the costs did not benefit CUI's Migrant Head Start
program because the children did not actually use the
equipment. The term "benefit" is a term of art used in
grant programs which relates to the principle that costs
must be allocable to an award to be charged to an award.
This concept is essentially an accounting concept, and a
finding of lack of actual use is not determinative.
Indeed, in specified circumstances, costs of idle
facilities or equipment are allowable. OMB Cir. A-122,
Att. B, 16. For such costs to be allowable, however,
idle facilities (which can include equipment) must have
been necessary when acquired and idle for causes which
could not have been reasonably anticipated. Id. ACF
apparently meant "benefit" in this sense, to mean that
CUI was not reasonable in buying the equipment, just to
store it. OMB Circular A-122 provides generally that
costs must be "reasonable in nature and amount" and sets
out considerations in determining reasonableness,
including that a cost must not exceed that which would be
incurred by a prudent person under the circumstances
prevailing at the time the decision was made to incur the
cost. OMB Circular A-122, Att. A, A.3.

CUI argued that it was reasonable in purchasing the
equipment under the circumstances, and presented evidence
to support its assertion that it encountered
unanticipated delays in receiving the necessary permits
for the Calexico site. While this documentation supports
CUI's position that it encountered unanticipated delays
in opening the Calexico site (a position that was not
directly disputed by ACF), we cannot evaluate whether
these were the circumstances prevailing at the time of
the purchase of the equipment. The documentation
provided regarding the stored equipment indicates only
that it was purchased in 1992, not giving a specific
date. The record indicates that CUI thought it was on
schedule in May 1992 and knew about the delays by May
1993, but it is unclear what knowledge CUI had between
May and December 1992 regarding potential delays. ACF
Ex. G at unnumbered p. 9; ACF Ex. I at 2. Moreover,
while this documentation lists the type of equipment
purchased it does not state what the purchase price was
for each item of equipment.

In view of the fact that CUI did provide some
documentation regarding this equipment, and asserted that
it could turn over the stored equipment, we have
determined that the appropriate action at this time is to
remand to ACF. CUI should be provided an opportunity to
document the cost of the stored equipment, to provide
further documentation about the timing and the
circumstances at the time CUI incurred the cost. If CUI
did appropriately charge the costs of the stored
equipment, it must nevertheless account for the equipment
by turning it over. See OMB Cir. A-122, Att. B, 16.
To the extent that CUI does not adequately document the
expenditure for stored equipment, in accordance with the
authorized use of supplemental funds, the disallowance is
upheld.

ACF argued that CUI's expenditure of $9,252 for costs
connected with installation of a modular unit at the
Calexico site did not benefit the Migrant Head Start
program. ACF asserted that at the end of the 1992-93
program year, the year in which the Calexico program was
to be established, the modular unit was in storage. 8/
ACF maintained that the modular unit still stood unused
as of March 1995. According to ACF, when CUI became
aware that it would be unable to install and use the
modular unit at Calexico during the 1992-93 program year,
it had the obligation to request authority to carry over
the funds earmarked for that purpose. Since CUI did not
make such a request, ACF asserted, CUI must bear the
consequences of its decision.

CUI argued that it did not "claim" the funds allocated
for set-up of the modular unit for the 1992-93 program
year since installation of the modular units was delayed.
CUI asserted, however, that the modular units were
purchased and have now been installed, and that the cost
of installation was properly charged to CUI's 1993-94
Migrant Head Start grant. Thus, in CUI's view, the Board
lacks jurisdiction to dispose of ACF's allegation that
"the funds were never expended" during the program year.
CUI July 26, 1995 br. at 10.

First, the Board has jurisdiction over ACF's
determination here. ACF's position that the funds were
never expended for authorized purposes in the period for
which awarded, and not properly spent later, is a
determination that the costs were unallowable and is
clearly within the Board's jurisdiction.

On the merits, we uphold ACF's determination. CUI
conceded that it did not install the modular unit set-up
in the 1992-93 program year, and CUI did not allege that
it had timely obligated the funds for this or any other
purpose. Therefore, CUI was required to treat the amount
at issue as an unobligated balance for the 1992-93
program year. The granting agency has discretion
concerning whether an unobligated balance remaining at
the end of a budget period will be carried over into a
later period (and if so, how) or will be deobligated.
GAM at 1-8. CUI did not deny that it did not have
authorization from ACF to carry these funds over as an
unobligated balance into the 1993-94 program year to be
used for installation of the modular unit in that year.
Absent such an authorization, the funds were not
available for expenditure in the later program year. 9/

Accordingly, we uphold the disallowance of the $9,252 in
costs for installation of the modular unit.

3. Migrant Head Start Director

ACF disallowed: (a) $12,207 for the 1992-93 program year
based on its finding that CUI did not have a Migrant Head
Start Director from July 3, 1993 through August 31, 1993;
and (b) $44,406 for the 1993-94 program year based on its
finding that the person employed by CUI (to whom we refer
as N.E.) was unqualified for the position and had not
been approved by ACF.

CUI admitted that, from July 3-August 18, 1993, the Head
Start Director's position was vacant. CUI May 17, 1995
br. at 6, n.5. 10/ CUI argued, however, that on August
18, 1993, N.E. was hired to serve as CUI's Migrant Head
Start Director, and that she served in that capacity
until March 7, 1994, when she was succeeded by another
person. CUI asserted that she was qualified because of
her experience in CUI's program, including as a head
teacher, and because she herself had been a migrant
worker, was from a migrant family and understood the
needs of migrant children. CUI May 17, 1995 Ex. 3 at 7.
CUI said that it did not know why ACF apparently
determined that N.E. was unqualified, and requested a
hearing on how ACF made the determination that she was
unqualified and on her qualifications generally. CUI
asserted that the salary paid to N.E. was $31,824, not
$47,736 as stated by ACF. Thus, CUI argued, at the very
least the amount of the disallowance should be adjusted.

Finally, CUI argued that there is no dispute that the
"funds designated for the salary of the Migrant Head
Start director during the periods in question were
expended for that purpose." CUI July 26, 1995 br. at 12.
Thus, according to CUI, ACF's claim is not properly
before the Board "inasmuch as it does not involve the
misexpenditure of funds." Id.

CUI's jurisdictional argument has no merit. Again, CUI
is challenging the sufficiency of ACF's basis for a
disallowance, rather than giving a reason why the
determination does not fall within the scope of the
Board's jurisdictional regulation.

The first issue on the merits is whether CUI was required
to obtain approval before hiring N.E. We determine that
such approval was not required. Prior approval for
changes in key personnel of grants (other than research
grants) was required only if the "terms of the award"
made the provision at 45 C.F.R. 74.103 applicable. 45
C.F.R. 74.103(c); GAM at 1-13. As CUI pointed out, the
terms of its Migrant Head Start award for the 1992-93
program year provided for "a basic Head Start grantee"
merely that--

the grantee shall notify the HDS grants officer as
soon as possible of any change in the status of the
Head Start Director.

ACF Ex. D, DHHS/HDS Terms and Conditions. This is
described as an exception to the rule that prior approval
must be obtained for changes in status of the program
director. Id.

For its position that prior approval was required, ACF
relied on letters it sent to CUI. Specifically, by
letter dated June 29, 1993, ACF advised CUI that it
needed to obtain ACF's approval of a new Head Start
Director. After CUI's selection of N.E., ACF on August
20, 1993 informed CUI that CUI needed to submit
documentation with respect to the selection process and
qualifications of the applicant prior to hiring. By
letter dated August 27, 1993, ACF again requested
information prior to approval and noted that approval of
the salary listed in CUI's refunding application,
$47,736, was contingent on CUI's hiring of a highly
qualified individual. ACF's reliance on these letters as
establishing a prior approval requirement is misplaced.
As indicated above, under 45 C.F.R. 74.103, prior
approval for changes in key personnel may be required
only by the "terms of the award." The award in effect at
the time of ACF's June 29, 1993 letter, and at the time
N.E. was hired in August, specifically exempted basic
Head Start grantees. Thus, we conclude that CUI was not
required to obtain prior approval for hiring a new
Director.

With respect to the issue of N.E.'s qualifications, no
hearing is required to address how ACF determined that
she was unqualified. How ACF made this determination is
irrelevant here; the Board provides de novo review of
agency determinations in this type of case. Moreover,
ACF clearly stated here that the basis for its
determination was CUI's own standards. ACF contended
that CUI's announcement of the position included the
qualifications that candidates were to have a Bachelor of
Arts in education or a related field, at least 12
semester units or equivalent in Early Childhood
Education, three years in pre-school programs and three
years in a responsible supervisory or management
position. ACF maintained that documentation provided by
CUI regarding N.E.'s qualifications clearly demonstrates
her lack of educational qualifications and experience
necessary to function as a Migrant Head Start Director.
Further, ACF asserted that CUI had previously taken the
educational qualifications seriously in selecting a
candidate, since the Migrant Head Start Director who
preceded the one at issue here had one Master's degree
and was pursuing a second in Early Childhood
Administration.

As CUI pointed out, however, its position announcement
listed only "Desired Qualifications." See ACF Ex. J.
ACF did not allege that any other policies of CUI treated
these qualifications as mandatory. The mere fact that
CUI might have previously hired a Director who met or
exceeded the desired qualifications does not transform
them into a policy to require those qualifications.
Thus, there is no basis for determining that CUI's hiring
of N.E. contravened CUI's own standards, as ACF alleged.
11/

ACF also argued that, because N.E. was unqualified, the
costs for her salary did not "benefit" the Migrant Head
Start program. CUI is correct, however, that there has
been no finding that she did not provide services as a
Migrant Head Start Director during the relevant period.
Thus, to the extent the term "benefit" is used to address
the question of whether costs are allocable to a program,
we find that the salary costs did benefit the program
here because the relevant cost objective was the Migrant
Head Start program.

ACF's arguments, however, suggest that the real issue
raised by ACF is whether CUI was unreasonable in hiring
N.E., given what the documentation of her credentials
shows and the fact that she did not meet the desired
qualifications. ACF pointed out that she did not have a
Bachelor's degree and said she did not have the years of
experience listed in CUI's desired qualifications. CUI
emphasized that the documentation showed she was working
on a Bachelor's degree, had worked three years as a
regular teacher and three more years as a head teacher in
CUI's Migrant Head Start program, and had a certificate
from California in child development. CUI also argued
that she was uniquely qualified because she had herself
been raised in a migrant family. CUI asked for a hearing
on her qualifications.

We do not think a hearing is required, because we do not
think the documentation ACF relied on is sufficient to
justify a disallowance of N.E.'s salary. Her lack of
desired educational credentials and experience does not
per se make the cost unreasonable. By not adopting
specific standards for Directors itself, ACF has, at
least in part, left this evaluation up to the judgment of
the grantees. While we understand why ACF would have
some concern about her academic credentials, CUI could
reasonably take other factors into account, such as her
experience with CUI's program and her migrant background.

On the other hand, CUI did not challenge the authenticity
of the documentation of N.E.'s qualifications, nor ACF's
documentation about the much higher qualifications of the
prior Director. That documentation supports a conclusion
that CUI could not reasonably pay to N.E. the full amount
budgeted for the Director's salary based on the prior
Director's qualifications. Moreover, CUI was
specifically informed by ACF's letter of August 27, 1993
that only a highly qualified applicant could justify this
salary level. ACF Ex. O. More important, CUI admitted
in a response letter that its own policies provided that
CUI could pay N.E. no more than $3,000 or a 20% increase
over what she was making as a head teacher. ACF Ex. P.
(CUI requested a waiver of this policy, which it never
obtained.)

ACF argued that CUI had failed to document that it paid
N.E. a yearly salary of only $31,824, but did not state
why CUI's documentation was insufficient to show that.
Nor did ACF argue that CUI exceeded what was authorized
by its own policy. CUI's employee action notice shows a
monthly salary increase for N.E., associated with her
replacing the prior Director, to $2,209.68. CUI July 26,
1995 Ex. 3. The notice then shows an additional increase
to $2,652 based on it being the new program year 1993-94.
Id. Thus, it appears that during the 1993-94 program
year, N.E. was paid at a level of $31,824 and that this
amount was consistent with CUI's policies.

We disagree with ACF, however, that the mere fact that
CUI paid less than the $44,406 budgeted for the
Director's position during the period in question means
that CUI must pay back the difference between N.E.'s
salary and the $44,406. CUI could account for this
amount with other allowable costs either for salaries or
within other categories to which CUI was permitted to
transfer costs. Similarly, the mere fact that $12,207
was budgeted for the Director's position for a period
during the part of which the position was vacant does not
mean that CUI did not properly account for the funds.
Absent a finding that CUI applied these amounts to
unallowable costs, we do not have a sufficient basis for
upholding the disallowance of these amounts.

Accordingly, we reverse the disallowance of the $12,207
and of the $44,406. In view of findings ACF previously
made that CUI was not always reconciling actual to
budgeted costs, however, our decision does not preclude
ACF from examining whether CUI charged more to its
Migrant Head Start grant for the salary of a Migrant Head
Start Director than it authorized and actually paid.

4. Program Income (sale of vans)

ACF determined that, on November 2, 1991, CUI sold eight
vans that had been purchased with Migrant Head Start
funds, and that CUI did not report proceeds from the sale
as program income. ACF found that CUI instead
transferred the funds to its corporation account, and not
to its Migrant Head Start grant, and reported the funds
as income on its 1991 tax return. CUI admitted that, in
1991, it sold eight vans which had been purchased with
Migrant Head Start funds and failed to report this income
on its financial status report for that year. CUI July
26, 1995 br. at 14-15. CUI asserted, however, that the
proceeds were used in 1991 to make minor repairs at its
Brawley Center and generally to upgrade that center. CUI
argued that Head Start regulations specifically allow CUI
to use the funds in this manner. CUI relied on 45 C.F.R.
74.42(b)(1), arguing that this provision meant that CUI
could retain program income and, in accordance with the
terms and conditions of the award, add the income to
funds committed to the project or program and used to
further eligible project or program objectives. CUI May
17, 1995 br. at 7-8. CUI also cited to the cost
principle at OMB Circular A-122, Attachment B, 23,
which provides that costs incurred for necessary
maintenance, repair, or upkeep of buildings are allowable
under certain conditions.

ACF replied that CUI did not establish that the program
income from the sale of vans purchased with Migrant Head
Start funds was used to further the purposes of the
Migrant Head Start program. ACF maintained that the
facility at Brawley houses programs funded under migrant
and non-migrant Head Start programs. ACF pointed out
that CUI had offered no documentation to support its
claim to have used the funds for purposes which further
benefit Head Start. 12/

In its reply brief, CUI argued that ACF had failed to
invoke the Board's jurisdiction because ACF merely raised
an issue as to CUI's accounting methods. CUI also said a
hearing was needed on certain issues related to this
issue.

CUI's argument that the Board does not have jurisdiction
here is without merit. As discussed above, the plain
language of the relevant jurisdictional statement
includes both a determination by ACF that a grantee must
pay back funds because it has failed to document proper
use of program income and a determination that costs are
unallowable.

The first issue on the merits is whether CUI's admitted
failure to include the $7,040 as program income on its
Financial Status Report means that CUI failed to account
properly for this amount. CUI did not specifically argue
that it was not required to report this amount and such
reporting was clearly required by 45 C.F.R. 74.73. The
purpose of requiring grantees to report such income is to
ensure accountability for the funds. The mere fact that
CUI may have applied the actual proceeds of the sale to
improve the Brawley Center does not satisfy that
accountability, without a further showing that those
costs of improving the Brawley Center were not otherwise
charged to Migrant Head Start federal funds or to funds
from other grants CUI had.

Moreover, proper accounting for the funds would require
documentation that CUI in fact did incur the costs CUI
said it incurred. Contrary to what CUI argued, ACF did
not improperly raise the documentation issue. CUI
asserted that it had spent the funds for allowable costs
and therefore had a burden to support its assertion (as
well as its general burden to document the allowability
of costs). There was nothing improper in ACF pointing
out that CUI had failed to do so.

We further reject CUI's argument that it was authorized
by 45 C.F.R. 74.42(b)(1) to retain the income and to
use it to further eligible project or program objectives.
CUI's reliance on this section is misplaced. This
section applies only to "general program income."
"General program income" is defined to exclude special
categories of income, including "proceeds from the sale
of equipment and supplies purchased under a grant . . .
and intended primarily for use in the [grant-supported]
project." 45 C.F.R. 74.42(a); 74.43(b). Such proceeds
are instead governed by Subpart O of Part 74. See
74.43(a). Subpart O provides that equipment (other
than equipment with a unit acquisition cost of less than
$1,000 or with no further use value) "may be retained or
sold and the Federal Government shall have a right to an
amount calculated by multiplying the current market value
or the proceeds from sale by the Federal share of the
equipment." 74.139(b)(1). Subpart O further provides:

If the grantee's project or program under which the
equipment was acquired is still receiving grant
support from the same Federal program and if the
granting agency approves, the net amount due may be
used for allowable costs of that project or program.
Otherwise the net amount must be remitted to the
granting agency by check.

74.139(b)(2) of 45 C.F.R.

CUI admitted that it purchased the vans with federal
Migrant Head Start funds, and the nature of the equipment
and the fact that CUI admittedly sold them for an average
of almost $900 apiece establishes that this is the
provision that governs. See also ACF Ex. B at 5-2
(indicating a purchase price of $10,500 for each van).
Since CUI did not allege that it had ACF approval to use
the proceeds for allowable costs of its Migrant Head
Start program, CUI was required to remit the proceeds to
ACF.

CUI requested a hearing on whether "ACF would have
granted CUI retroactive approval to spend proceeds from
the sale of vans . . . to make minor repairs and upgrade
CUI's centers." CUI July 26, 1995 br. at 27. We do not
think a hearing is required on this issue. ACF could
reasonably deny retroactive approval based on CUI's
admitted failure to report the program income, the
failure to dispute ACF's assertion that the Brawley
Center served purposes other than the Migrant Head Start
program, and CUI's failure to document that in fact CUI
used the funds to improve the Brawley Center (or any of
its other centers). Moreover, only documentation of the
use of the funds would satisfy program requirements, so
we would not consider a hearing necessary or helpful on
whether CUI used the proceeds for additional project
costs or as income to the corporation.

The other issue on which CUI sought a hearing was the
significance of ACF's finding that CUI reported the
proceeds as income on its tax return. As previously
noted, we consider this issue immaterial and do not rely
on ACF's finding for our conclusions here.

Thus, we uphold ACF's determination regarding $7,040 for
program income from the sale of vans.

5. Insurance Refunds

ACF originally determined that CUI had been the recipient
of "insurance refunds" during the years 1988-1992 in the
amount of $543,477, which was later revised to $252,734.
Further, ACF determined that no credits to the grant had
been recorded for the recovered insurance overpayments.
CUI's August 17, 1994 response to the potential
disallowance asserted that 1) it did not receive
insurance refunds but instead earned dividends from its
Workman's Compensation Insurance Fund based on CUI's low
rate of claims; and 2) only $33,892 of the total was
attributable to payments made under its Migrant Head
Start program. As a result, ACF adjusted the
disallowance to the current amount, but rejected CUI's
claim that the dividends were not required to be applied
to its Migrant Head Start program. ACF reasoned that:
(1) the portion of the Workers' Compensation Insurance
premiums paid by CUI with Migrant Head Start funds
resulted in a return; (2) that return would not have been
received had ACF not initially provided CUI with Migrant
Head Start funds for its insurance expenses; (3)
accordingly, CUI was required to use the return on those
funds to offset expenses under its Migrant Head Start
program. ACF cited in support of its conclusion OMB
Circular A-122, Attachment A, A.1, which provides that
"the total cost of an award is the sum of the allowable
direct and allocable indirect costs less any applicable
credits."

CUI alleged that it was not required to pay back the
$33,892 because the dividends had been used to upgrade
the Coachella Center in 1991, and the costs of these
repairs were reasonable under OMB Circular A-122.
Additionally, CUI asserted that the Division of Cost
Allocation (DCA) is the agency within HHS that negotiates
and settles indirect cost rate matters. CUI argued that
ACF was not the proper HHS division to determine the
disposition of the credits because the Workman's
Compensation payments were indirect costs; therefore, CUI
alleged the Board must reject jurisdiction of this issue.
Finally, CUI argued that, since its indirect costs are
between 18% and 19%, but Head Start allows only a maximum
of 15%, CUI did not recover the entire amount of its
allowable indirect costs from Head Start. Thus, CUI
maintained that it should be allowed to keep these
amounts to recover its indirect costs not reimbursed by
Head Start.

First, CUI's claim that the Board has no jurisdiction
over ACF's determination here lacks merit. When asked to
support its argument that the issue related to indirect
costs, CUI said that the final disallowance letter
"stated that these were indirect costs." Tr. at 8. As
ACF pointed out, however, that letter merely stated that
"insurance costs are generally charged to the indirect
cost pool." ACF Ex. B at 8. This statement was made,
however, when ACF thought (based on the title of CUI's
account) that the amounts were insurance refunds; CUI
later clarified that they were credits to Workman's
Compensation payments. While some of the original
Workman's Compensation costs involved would have been
charged indirectly, CUI's own budgets show it was
claiming fringe benefits (which would ordinarily include
Workman's Compensation) for some employees as a direct
cost of its Migrant Head Start program. See ACF Exs. R
and Z. Thus, we cannot accept the proposition that only
indirect costs are involved here.

Moreover, as ACF pointed out, DCA's role is in the
negotiation of indirect cost rates; the negotiation of a
rate does not preclude an agency from later determining
that a rate was inflated because misinformation was
provided by the grantee. See CUI July 26, 1995 Ex. 5.
Where an issue relates to programs of only one program
agency, nothing in HHS policy or regulations precludes
that agency from addressing the issue (although, as we
discuss below, it may have been helpful here if ACF had
consulted with DCA). In any event, once the program
agency has made a determination which falls within the
types of determinations the Board reviews, as this does,
the Board has jurisdiction. 13/

On the merits, ACF is correct that a grantee is required
to subtract any applicable credits from its total program
costs, as is clearly required by OMB Circular A-122,
Attachment A, A.1. Applicable credits is defined in
the Circular as "those receipts, or reduction of
expenditures which operate to offset or reduce expense
items that are allocable to awards as direct or indirect
costs." OMB Cir. A-122, Att. A, A.5. The fact that
the amounts received by CUI here are not strictly
speaking "insurance refunds" does not alter their nature
as applicable credits, which properly should have been
applied to reduce Workman's Compensation costs. CUI did
not deny that it failed to treat the $33,892 as credits
to its Migrant Head Start program.

In order to sustain a disallowance based on failure to
account for applicable credits, however, we must also
find that CUI's failure to subtract any applicable
credits from its costs resulted in an overcharge to its
Migrant Head Start program. In this case, ACF did not
examine this question as part of its finding. To the
extent that the credits would be applied to offset
indirect costs, there is a substantial question here as
to whether any overcharge resulted. ACF did not dispute
CUI's position that, because of Head Start's 15% limit on
reimbursement of administrative costs, CUI was being
under-reimbursed for its indirect costs, which averaged
between 18% and 19%. 14/ Thus, even if CUI had properly
treated the amounts involved as applicable credits, there
would likely have been no reduction in the amount it
could properly charge to its Migrant Head Start program
as indirect costs. Moreover, even if some of the costs
were charged as direct costs, there was no finding here
regarding the specific years to which those costs were
charged or what the effect would be of applicable credits
to those years' costs.

Therefore, we reverse the "insurance refunds"
disallowance of $33,892. Our decision does not preclude
ACF from further examining whether CUI's failure to treat
the amounts as applicable credits might have resulted in
overcharges to its Migrant Head Start program. If ACF
does this, however, it should consult with DCA concerning
the extent to which Workman's Compensation costs were
included in CUI's indirect cost proposals and what
effect, if any, this had on CUI's indirect cost rate.

6. Tax payments

ACF determined that CUI charged 50% of the property taxes
on the Coachella Center to the Migrant Head Start program
in program year 21, 1992-93, for a total of $3,705. ACF
disallowed the cost.

CUI agreed that it charged property taxes incurred for
the Coachella Center to its Migrant Head Start program.
CUI argued, however, that it is entitled to charge such
taxes in accordance with OMB Circular A-122. 15/

ACF argued that CUI's expenditure of Migrant Head Start
funds for taxes on the Coachella facility was
unauthorized and therefore not allowable in spite of the
circular provision. ACF contended that CUI had submitted
a budget for the 1992-93 program year as part of its
application for refunding dated May 28, 1992. ACF stated
that, while CUI requested funds for rent, utilities,
telephone, child liability insurance and
maintenance/repair, CUI did not request funds for "Other
Occupancy" which might have included expenditures for the
taxes on the Coachella Center. ACF June 19, 1995 br. at
23-25. Further, ACF argued that, while taxes may be an
allowable cost under some circumstances, taxes are not
allowable where the expenditure conflicts with the terms
of the grant. Id. at 24-25.

OMB Circular A-122, Att. B, 46(a) provides, in relevant
part:

In general, taxes which the organization is required
to pay and which are paid or accrued in accordance
with generally accepted accounting principles . . .
are allowable . . . .

ACF did not find here that these taxes were not paid in
accordance with generally accepted accounting principles
(and costs associated with real property used for a Head
Start Center owned by a grantee are a typical charge to
Head Start grants in our experience). Nor did ACF point
to anything in the terms of CUI's awards that
specifically precludes charging such taxes.

While a budget is in a sense a "term" of an award,
grantees are given some discretion to transfer costs from
one budget category to another, and ACF did not find here
that use of funds to pay the taxes was an unauthorized
transfer. See GAM at 1-11. Moreover, the financial
assistance application approval/negotiation sheet for the
1992-93 program year, which received final approval on
September 16, 1992, and the 1992-93 financial assistance
award to CUI, which received final approval on September
24, 1992, both included $84,078 in the "Other" budget
category which may have included anticipated taxes. See
ACF Ex. D.

Accordingly, we reverse the disallowance of $3,705 in
property taxes. The fact that CUI did not specifically
include these tax costs in its budget, however, may raise
a question about whether CUI used all or some part of the
taxes to satisfy it non-federal share requirement. Thus,
our decision does not preclude ACF from seeking evidence
from CUI to show that these taxes were not also claimed
as costs to meet CUI's non-federal share requirement.

7. Literacy Training

CUI was awarded $6,680 in supplemental funds for the
1992-93 program year to operate a literacy training
program for parents of Migrant Head Start children. ACF
determined that CUI's records only support expenditures
for sessions conducted in two out of ten months, which
totalled an allowable expenditure of $1,880. Thus, ACF
disallowed the remaining $4,800.

CUI argued that CUI had used the funds during the 1992-93
program year on allowable Migrant Head Start costs other
than literacy training costs. 16/ CUI maintained that,
under the principle of budget flexibility in the GAM, CUI
was entitled to spend the funds designated for the
literacy program on other allowable expenses. With
regard to the Board's jurisdiction, CUI argued that ACF
was challenging the way in which CUI carried out its
program objectives, and that ACF had not alleged that the
funds had been improperly expended.

ACF asserted that, while federal grants policy does
permit in certain circumstances the shifting of costs
between approved budget categories, there is no authority
under the statute, regulations, applicable OMB Circulars,
or agency policy directives that would permit a grantee
to shift funds allocated for specified authorized
purposes to cover activities or costs which were never
part of a grantee's budget and were never authorized by
the federal agency.

CUI's jurisdictional argument is without merit based on
the Board's regulations, discussed above.

On the merits, we agree with ACF that CUI incorrectly
interpreted the principle of budget flexibility in the
GAM. While the GAM provides that certain transfers may
be done without prior approval, section L.2. of the GAM
at 1-11, provides, in relevant part:

There are . . . various types of changes . . . which
may occur after the grant . . . is awarded and which
require prior approval . . . . These changes are
summarized below . . . .

a. Budget Changes

* * *

Transfer of funds between or among grant functions
or activities.

b. Programmatic Changes

Change in project scope or objective.