SUBJECT:

Texas Migrant Council, Inc.,

Petitioner,

DECISION

Texas Migrant Council, Inc. (TMC), appealed a determination by the Administration for Children and Families (ACF) disallowing $53,396 in costs charged to TMC's Head Start grant. The disallowed amount represented fees paid by TMC to the voting members of its Board of Directors for their attendance at TMC Board meetings. ACF determined that any charge to Head Start funding for the fees in question would violate federal cost principles.

For the reasons discussed below, we find that the questioned payments to TMC's Board members are not allowable costs under the applicable federal cost principles. Accordingly, we sustain the disallowance.

Background

On June 8 - 11, 1999, ACF conducted a review of selected financial records for TMC's Head Start program for the period January 1996 through January 1999. This review determined that TMC had improperly charged $53,396 to the Head Start program for payments made to the TMC Board of Directors as "fees" for the voting members' attendance at Board meetings.⁽¹⁾ TMC paid each voting member of its Board $300 per day as fees to attend TMC Board meetings.⁽²⁾ ACF calculated the amount of the disallowed costs by adding each voting Board member's days of attendance at meetings during each year, multiplying that number by $300, and then multiplying that number by the Head Start program's "indirect cost pool rate" for the account from which the Board members' fees were paid. September 9, 1999 Notice of Disallowance at 2. Under this formula, ACF determined that $7,987 was paid to Board members in program year 1996, $17,775 in program year 1997, $25,952 in program year 1998, and $1,682 in January 1999. Id. TMC did not contest the use of this formula or the accuracy of ACF's calculations. Nor did TMC contest that it in fact received reimbursement in the amount of the disallowed costs under the Head Start program.

ACF found that such fees constituted an unallowable cost to the program in violation of the cost principles set forth in Office of Management and Budget (OMB) Circular A-122, "Cost Principles for Non-Profit Organizations."⁽³⁾ In its notice of disallowance, ACF stated that the fees to the Board members were unallowable on the basis of provisions in the cost principles concerning compensation for personal services at OMB Circular A-122, Att. B, ¶ 7.a. Subsequently, in response to questions posed by this Board in two orders to develop the record, ACF argued, referring to OMB Circular A-122, Att. A, ¶ A.2.a., that the fees were also unallowable because they violated a "basic consideration" of the cost principles, in that they were not "reasonable" for the performance of the award. Since we agree with ACF that the fees were not "reasonable" under the cost principles, we do not consider whether they could also be unallowable under the cost principles pertaining to personal services.

Conclusion

For the reasons discussed above, we sustain the disallowance of $53,396.

OMB Circular A-122 provides that, as a "basic consideration" in determining whether a cost is "allowable," the cost must be "reasonable for the performance of the award." Att. A, ¶ A.2.a. The definition of "reasonable costs" in the Circular includes the following:

o 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;

o the question of reasonableness of specific costs must be scrutinized with particular care in connection with the particular organization receiving the federal support;

o reasonable costs must be recognized as ordinary and necessary for the operation of the organization or performance of the award; and

o reasonable costs must be recognized as prudent considering the individuals' responsibilities to the organization as a whole, its clients and the public at large.

In an order for further record development dated June 23, 2000, the Board focused on these requirements and raised eight questions to the parties bearing on the "reasonableness" of the Board members' fees in the context of these standards.

In its response to the Board's order, ACF took the position that it has no evidence that any Head Start grantee has ever sought to use a federal award to pay for fees for members of its board of directors and that the record contains no indication that other non-profit organizations that perform functions similar to those performed by TMC routinely pay fees to their directors. An ACF official submitted a declaration, in which he stated that he contacted five Head Start grant management officials and three senior ACF regional grants officials, none of which knew of a board member of a Head Start grantee receiving a fee for attending a board meeting. McCarron Declaration. ACF argued that there is no basis in the record to conclude that the fees in question were "ordinary" costs for the operation of the organization or performance of the award or that the amount of the fees is comparable to those ordinarily paid. ACF cited several Departmental Appeals Board decisions concerning the grantee's burden to document the allowability of its claimed costs, including the reasonableness of such costs. ACF also argued that TMC failed to meet its burden to document that the fees in question are consistent in amount with fees for similar personal services within the "labor markets" from which TMC must draw its Board members.

We agree with ACF that TMC has failed to meet its burden to demonstrate the reasonableness of these costs. As the Departmental Appeals Board has consistently held, it is a fundamental principle of grants management that a grantee is required to document its costs, and that the burden of demonstrating the allowability and allocability of costs for which funding was received under a grant rests with the grantee. See, e.g., Ute Indian Tribe, DAB No. 1739, at 4 (2000); Child Opportunity Program, Inc., DAB No. 1700, at 1 (1999); see, also, 45 C.F.R. §§ 74.50 - 74.53 (1994).

First and foremost, TMC failed to demonstrate that directors' fees were an ordinary and necessary cost for the operation of the organization or the performance of the award. ACF initially substantiated that it had no record of any other Head Start organization ever paying fees to its board of directors. McCarron Declaration. ACF would presumably be aware of any such payments, as Head Start grantees are subject to numerous reporting and auditing requirements (e.g., annual applications for refunding showing detailed budgets, annual independent audits, on-site program reviews by ACF personnel every three years, and the review of expenditures in the disallowance process). Although given ample opportunity, TMC did not provide any evidence of other Head Start organizations or of other comparable non-profit organizations who paid fees to their Board members. Nor did TMC provide any evidence that it was necessary for the operation of its Head Start program to pay a fee to Board members in order to get qualified individuals within its service area to participate in that position. Indeed, to the contrary, TMC suggested that when it discontinued paying fees, the two Board members who resigned at that time did so for reasons unrelated to the discontinuance of the fees. TMC's Response to Order for Further Record Development at 4. Thus, we conclude that TMC failed to provide any evidence to establish that the fees in question were ordinary or necessary costs for the organization. The cost principles clearly require the consideration of the nature of the funding program involved and the type of client being served in determining whether a cost is ordinary and necessary. Here, we conclude that the nature of the Head Start program, the purpose of which is to serve low-income clients (see 42 U.S.C. § 9831), and the lack of any evidence showing that this type of cost has routinely been charged by grantees within the program throughout its history, supports ACF's conclusion that the fees are not reasonable in nature.⁽⁴⁾

The fact that TMC's Board members themselves presumably made the decision to pay the fees in question and to set the amounts, even though they were the very individuals who would benefit from payment of the fees, also calls into question the reasonableness of the fees. There was never any independent judgment made even within the organization that the fees were reasonable in nature or amount.

Moreover, the amount of the fees appears unreasonable on its face. The Board members were uniformly paid $300 per Board meeting, when those meetings usually averaged only two to three hours in length and were routinely held on Saturdays. TMC Response to ACF's Response to Order for Further Record Development at 4; TMC Response to Order for Further Record Development at 2; Notice of Disallowance, Att. C. Furthermore, TMC also provided the Board members with full per diem and travel reimbursements to cover any actual expenses they incurred in attending Board meetings. TMC failed to provide any evidence to suggest that a fee of up to $150 per hour under such circumstances would be consistent with any fee paid by a similar organization for similar services.

Accordingly, we find that TMC has failed to prove that the payments to its Board members were reasonable as required by OMB Circular A-122.

Judith A. Ballard

M. Terry Johnson

Donald F. Garrett
Presiding Board Member

1. A second finding by ACF that TMC improperly charged the program $99,587 in health insurance premiums for voting members of TMC's Board of Directors was not appealed by TMC.

2. TMC originally described the payments to its Board members as reimbursement for "lost wages" experienced by the Board members because of their attendance at Board meetings. In the course of this appeal, TMC stated that the term "lost wages" was used in error and "board fees" was the proper description for the payments to the Board members.

3. Regulations applicable to the Head Start program provide that the allowability of costs incurred by non-profit organizations is to be determined in accordance with the provisions of OMB Circular A-122. 45 C.F.R. § 74.27(a).

4. Furthermore, TMC's argument that its policy of paying fees to its Board members has been in effect for some time without being questioned by ACF is not persuasive. The fact that an agency may have paid a grantee's claims in the past does not constitute approval of the costs as allowable and does not preclude the agency from enforcing grant requirements at a later time. See New Jersey Dept. of Human Resources, DAB No. 1549, at 16 (1995). Moreover, it is uncertain whether ACF was aware of the past payment of fees to TMC Board members, as TMC charged those fees to its indirect cost pool account entitled "Travel - Board of Directors." ACF Ex. 1, att. B-3.