SUBJECT:

Waccamaw Economic Opportunity Council, Inc.

DECISION

The Waccamaw Economic Opportunity Council, Inc., (Waccamaw) appealed the determination of the Division of Cost Allocation (DCA) disallowing $54,834 in Head Start funds that Waccamaw spent during 1994 and 1995 to purchase a pension for its former executive director, covering her employment from July 1967 through June 1992.

This disallowance was previously before the Board in Waccamaw Economic Opportunity Council, Inc., DAB No. 1679 (1999). There, the Board remanded the appeal to DCA to determine if any of the disallowed amount was allowable under cost principles that provide specific guidance for determining the amount of pension contributions that may be charged to federal grants but which DCA had not addressed in taking the disallowance or in presenting its case before the Board. DCA determined on remand that those cost principles did not provide a basis for allowing any of the pension payments, and this appeal followed.

The record consists of the parties’ submissions in the two appeals and the transcript of a telephone conference convened by the Board on December 10, 1999 to discuss the issues on appeal. As explained below, we find that the costs at issue do not meet specific standards applicable to pension payments covering past years of service, and we sustain the entire disallowance.

Applicable law

The allowability of charges to federal funds by nonprofit organizations such as Waccamaw is governed by Office of Management and Budget Circular A-122 (OMB A-122), made applicable to HHS grants first by former 45 C.F.R. § 74.171, and then by 45 C.F.R. § 74.27(a) (1994), as well as 45 C.F.R. § 92.22 (1988). See 45 Fed. Reg. 46,022 (1980). OMB A-122 provides a uniform set of cost principles for determining costs of grants, contracts, and other agreements and is designed to promote efficiency and understanding between nonprofit grantees and the federal government. Home Education Livelihood Program, Inc., DAB No. 1598 (1996). It provides general principles on allowable costs, as well as guidance on specific cost items. Id.

OMB A-122 requires that in order to be allowable charges to a grant award, costs must be reasonable for the performance of the grant award and allocable thereto. OMB A-122, Attachment (Att.) A, ¶ A.2.a. A cost is reasonable if, in its nature or amount, it does 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 costs. ¶ A.3. A cost is allocable to a particular cost objective, such as a grant, contract, project, service, or other activity, in accordance with the relative benefits received. ¶ A.4.a.

OMB A-122 provides specific guidance on the extent to which the costs of pension plans for a grantee’s employees may be allowable charges to federal grants:

OMB A-122, Att. B, ¶ 7.h.⁽¹⁾

Background

Waccamaw’s Board of Directors voted to join the South Carolina Retirement System (SCRS) in August 1993, and Waccamaw’s former executive director retired in March 1994. Prior to her retirement, but after Waccamaw had joined the SCRS, the former executive director purchased 24 years, 11 months and 16 days worth of retirement coverage from the SCRS, covering her employment from July 1967 through June 1992. In March 1994 the SCRS billed Waccamaw $60,541.19 for its employer contribution towards the retirement coverage. Waccamaw requested a periodic payment plan from the SCRS and made two annual payments of $8,225.61 in June 1994 and August 1995 before making a lump sum payment of $51,079.32 to save on interest charges associated with the payment plan. ⁽²⁾

In DAB No. 1679, DCA had disallowed $48,155, the Head Start share of the $51,079.32 lump sum payment, on the grounds that it was not reasonable and allocable to federal programs as required by OMB A-122. Before the Board, however, DCA primarily argued that the pension payment violated a principle of federal appropriations law, that federal agencies may obligate their appropriated funds only to meet legitimate needs arising in the year of the appropriation. DCA argued that Waccamaw violated this principle by using funds appropriated and awarded for Head Start expenses arising in 1995 to pay for pension costs related to earlier years. The Board determined that this principle governed federal agencies’ obligations of their appropriations but did not directly apply to a grantee’s expenditure of funds received under a federal award.

The Board also found that accounting principles prescribed in Accounting Principles Board Opinion No. 8 (APB 8), referenced in OMB A-122, at paragraph 7.h.1.c of Attachment B, permit using current year funds to pay past pension costs associated with years of employee service prior to the adoption of the pension plan.⁽³⁾ APB 8 provides that annual pension contributions may include as much as 10 percent of costs attributable to periods of service prior to the adoption of the pension plan.⁽⁴⁾ As these provisions had not been previously addressed in the appeal, the Board remanded the disallowance for DCA to consider whether any of the disputed pension payment would be an allowable charge to federal funds thereunder.

On remand, DCA agreed that APB 8 permits the payment of pension costs associated with prior years of service, but determined that it did not apply to the disallowed charges. DCA stated that the amortization concept expressed in the accounting opinion assumes a future benefit to the organization from payment of past service pension costs, whereas the disallowed payments provided no future benefit because the Head Start director had retired.⁽⁵⁾ In support of its conclusion that APB 8 did not apply, DCA noted that Waccamaw in 1995 charged the outstanding debt as a lump sum payment, instead of amortizing it as would have been the case if there was some future benefit to Waccamaw from the payment. DCA also enlarged the disallowance to $54,834 to include, in addition to the $48,155 Head Start share of the lump sum payment, amounts attributable to the two previous periodic pension payments that Waccamaw made in 1994 and 1995. Waccamaw did not dispute DCA’s revised calculation of the disallowance amount.

Waccamaw argued that the payments satisfied OMB A-122's general standards of reasonableness and some of its specific requirements for pension plan payments. Waccamaw argued that the payments were reasonable in amount when allocated over the former executive director’s nearly 25 years of service and did not cause Waccamaw to exceed its budgeted indirect costs for 1994 or 1995, as the money for the lump sum payment was available due to staff vacancies that would have been funded via indirect costs. Waccamaw argued that it acted prudently in providing pension coverage for its employees, who then acquired the option of purchasing pension coverage for prior years, and that it followed its and the SCRS’s policies and procedures in joining the SCRS, which are factors establishing reasonableness under OMB A-122, at paragraph 3 of Attachment A. Waccamaw also pointed out that the pension payments were required by state law once Waccamaw opted to join the SCRS and the former executive director elected to purchase coverage for prior periods of employment.

Analysis

This Board has long held that a grantee bears the burden of documenting the allowability of costs charged to federal funds. See, e.g., Community Improvement Council, Inc., DAB No. 1647 (1998); Acadia-Vermillion Community Action Program, Inc., DAB No. 1201 (1990). A Head Start grantee is thus obligated to show that its charges comply not only with the general requirements of reasonableness in OMB A-122 that apply to all charges to federal funds, but also with any applicable standards for specific items of cost found in Attachment B of OMB A-122.

Here, the grantee used federal Head Start funds awarded in 1994 and 1995 to purchase a pension for its former executive director that covered her employment from July 1967 through June 1992, prior to the time that Waccamaw joined the SCRS. The only provision in OMB A-122 for charging federal grant funds with pension payments attributable to periods of employment prior to the adoption of the pension plan is APB 8, incorporated by reference at paragraph 7.h.1.c of Attachment B. As noted above, APB 8 provides that past service costs may be amortized, or paid off over time, in small amounts, ranging as high as 10 percent each year. It was to consider the applicability of APB 8 that the Board remanded the disallowance to DCA in the prior decision.

Upon remand, however, both parties agreed that the disputed charges were not past service costs within the meaning of APB 8 (or FASB 87). As noted earlier, DCA stated that the charges were not properly treated as past service costs because the amortization concept expressed in the accounting opinion assumes a future benefit to the organization from the payments, whereas Waccamaw and the Head Start program received no benefit from the charges as the executive director had retired. During the telephone conference, Waccamaw’s accountant agreed that the pension payments were not past service costs, and argued that the payments were properly charged as a lump sum to current period grants. Tr. 23-26.

Paragraph 7.h does not permit the wholesale charging of lump sum pension payments attributable to past periods of service. Such charges are generally barred by the "six-month rule" of paragraph 7.h.1.d, which requires that pension plan costs be funded within six months after the end of a grantee's fiscal year. Lake County Economic Opportunity Council, Inc., DAB No. 502 (1984).⁽⁶⁾ Paragraph 7.h.1.c’s incorporation of the accounting principles in APB 8 thus provides a narrow exception to the prohibition on claiming pension costs more than six months after the period to which they are attributable.⁽⁷⁾ Here, there were lump sum payments not charged as past service costs. Thus, the payments do not fall within the specific provisions of OMB A-122 permitting the charging to federal grants of pension contributions attributable to periods of employment prior to the adoption of the pension plan. Since the pension payments for service prior to Waccamaw’s initiation of a pension plan do not conform to these narrow standards, they are not allowable charges to Waccamaw’s Head Start grant for the years 1994 and 1995.

Waccamaw’s other arguments do not provide a basis for overturning the disallowance. The mandatory nature of the payment or the reasonableness of Waccamaw’s desire to provide a pension plan for its employees cannot establish the allowability of payments that fail to comply with standards specifically applicable to pension costs for past years of service. Waccamaw’s argument that it was reasonable to provide a pension plan for its employees begs the question of whether it was reasonable to charge federal grant programs in a lump sum with the costs resulting from a decision to provide pension coverage relating to the employment of a single individual during grant periods that have been closed out for many years. That Waccamaw had grant funds left over due to staff vacancies did not authorize Waccamaw to spend funds intended for those positions on expenses otherwise unallowable.

During the telephone conference, Waccamaw likened the pension payments to severance pay, in that severance pay may be allowable when (among other factors) it is required by state law, as was the pension payment. Tr. 23; OMB A-122, Att. B, ¶ 49. As DCA noted, the standards in OMB A-122 for severance pay do not apply here. OMB A-122 defines severance pay as "dismissal wages . . . a payment in addition to regular salaries and wages, by organizations to workers whose employment is being terminated." Id. Waccamaw reported that the employee here retired voluntarily, and has not argued that she was terminated entitling her to severance pay. The fact that the standards on the allowability of severance pay consider whether the payment was legally required only highlights the absence of such a factor from paragraph 7.h applicable to pension plan costs.

For the reasons discussed above, we sustain the disallowance of $54,834.

Donald F. Garrett

M. Terry Johnson

Cecilia Sparks Ford
Presiding Board Member

^{(1) OMB A-122 was revised and recompiled effective June 1, 1998. 63 Fed. Reg. 29,793 (1998). Prior to the revision, the cost principles applicable to pension payments at paragraph 7.h of Attachment B were found at paragraph 6.h, the designation cited by Waccamaw in its appeal. No other changes were made to this provision, and for convenience we cite to the current version. DAB No. 1679 incorrectly referred to this paragraph as being located in Attachment A.}

^{(2) Waccamaw reported that it had a prior pension plan in effect from December 1991 through October 1993, in which the former executive director participated. Waccamaw paid $8,424.29 for the former executive director into that plan; these costs were included in Waccamaw's indirect cost pool.}

⁽³⁾ The Board also observed that A-122's adoption of APB 8 is qualified by the further requirement that pension costs assigned to a given fiscal year be funded for all plan participants within six months after the end of that year. OMB A-122, Att. B, 7.h.1.d.

⁽⁴⁾ APB 8 refers to prior service cost, defined as the pension cost assigned, under the actuarial cost method in use, to years prior to the date of a particular actuarial validation. Prior service cost includes any remaining past service cost, which is the pension cost assigned, under the actuarial method in use, to years prior to the inception of a pension plan or to a particular valuation date.

^{(5) DCA noted that APB 8 had been superseded in December 1995 by Statement of Financial Accounting Standards No. 87 (FASB 87), "Employers' Accounting for Pensions." DCA reported being orally advised by OMB that the provisions of FASB 87 should be used since APB 8 no longer exists in currently effective accounting literature. The only difference between the two accounting issuances that DCA noted was in the rate at which past service costs are to be paid off, or amortized: DCA stated that FASB 87 calls for amortization of past service costs over the average remaining service period of employees expected to receive benefits, estimated to average 25 - 30 years, whereas APB 8 provided for stipulated amortization periods ranging from 10 to 40 years. During the telephone conference, DCA described these differences as "technical," and noted that both issuances recognize the concept of future benefits flowing from the payment of past service costs. Tr. 13, 53. DCA also indicated that it was bound to apply APB 8 until OMB A-122 is amended to cite FASB 87. Tr. 52. For convenience, we refer to APB 8.}

⁽⁶⁾ In Lake County, the grantee did not make its actual contribution to the pension plan until over eight months after the end of the fiscal year to which the pension contribution was attributable and charged to Head Start funds. The Board found, however, that the payment could not be disallowed under the six-month rule because the then-new OMB A-122 did not apply to the fiscal year in question.

⁽⁷⁾ While DCA initially argued that the six-month rule would appear to make most prior period pension costs unallowable, DCA acknowledged during the telephone conference that the six-month rule in principle does not bar the payment of properly amortized past service costs, which are allowable through OMB A-122's adoption of APB 8. Tr. 51.