SUBJECT: The Human Development Corporation
of Metropolitan St. Louis

DECISION

The Human Development Corporation of Metropolitan St. Louis (HDC) appealed the June 9, 2000 determination of the Administration for Children and Families (ACF) disallowing $117,390 charged to HDC's Head Start grant for the period December 1, 1995 through November 30, 1998. (The total amount of the disallowance, $117,599, included $209.56 related to a travel advance that HDC did not dispute was unallowable.) ACF disallowed $83,960 for 40 computers ordered by HDC in November 1995 on the ground that HDC's receipt of the computers could not be verified. ACF also disallowed $33,430 representing the total of HDC's non-federal share shortfalls for fiscal years 1996 and 1997. HDC argued that the disallowance of the computer costs should be reversed because the computers were accounted for in an inventory of the computers in HDC's warehouse after the grant ended. HDC also argued that the non-federal share requirement for its Head Start program for the two years in question could be met by previously unreported contributions to several other federal programs that provided services to Head Start children and families.

As explained in detail below, we conclude that HDC accounted for some, but not all, of the computers in question. Accordingly, we reverse the disallowance of computer costs in the amount of $37,782 and sustain it in the amount of $46,178. We further conclude that HDC's contributions to other federal programs could not properly be used to meet the non-federal matching requirement for HDC's Head Start program because these contributions were not allowable costs of that program, and we sustain the $33,430 disallowance representing the non-federal shortfalls.

Computer Costs

HDC was the designated Head Start agency in St. Louis, Missouri, from the early years of the Head Start program until HDC relinquished its grant effective August 31, 2000. During the period covered by the audit on which this disallowance was based, HDC was budgeted to serve an enrollment of about 2,500 children. Disallowance letter dated 6/9/00, at 2.

On November 30, 1995, HDC's Director of Administrative Services signed a purchase order for 40 IBM compatible 486 computers at a unit cost of $2,099, for a total of $83,960. HDC Ex. 22, at 0146 (Purchase Order No. (P.O.) HS-622-95-663). HDC's inventory records show the acquisition date of all of the computers referenced to P.O. HS-622-95-663 as July 16, 1996. See, e.g., ACF Exs. 2 and 3. The computers were paid for on January 27, 1997, using Head Start funds from HDC's program year ended November 30, 1995. HDC Ex. 10, at 0042; HDC Ex. 22, at 0146.

A review of HDC's Head Start program for the period December 1, 1995 through November 30, 1998 was conducted under contract with the Office of the Inspector General, Department of Health and Human Services (HHS), by Leon Snead & Company, P.C. (Snead). In its report, Snead found that "$83,960 was disbursed in January 1997 for the purchase of equipment which we and HDC could not determine had been received. The equipment had also not been entered into the agency's property management system." HDC Ex. 18, at 0101. According to Snead's workpapers, during its review in March 1999, Snead was unable to locate several computers at two sites where an inventory provided by HDC showed they were located. The workpapers state that "[b]ecause of the inconsistencies in the items listed on the actual inventory listing and the equipment maintained in the identified rooms, it was not worthwhile to continue the actual inventory based on the information provided." HDC Ex. 9, at 0023. Snead questioned $83,960 as a duplicate payment after finding that "a second check in the same amount was issued and disbursed in 1997 . . . although only one order of computer equipment was received for the amount of $83,960." Id. at 0102.

ACF's disallowance letter identified $83,960 as a duplicate payment for computer equipment. Letter dated 6/9/00, at 1, 3. ACF subsequently stated, however, that it had determined that no duplicate payment was made and that what was at issue was whether HDC had received computers in 1996. Confirmation of Telephone Conference, dated 7/27/00, at 2. Since the record reflects a second payment by HDC of $83,960 on January 15, 1998 for 40 computer workstations on a different purchase order, P.O. HS-622-95-714 dated 10/23/97 (HDC Ex. 10, at 0029, 0033; HDC Ex. 24, at 0208), ACF is correct that the $83,960 at issue here, paid on January 27, 1997, is not a duplicate payment.

The record also includes purchase orders for two other purchases of computers for HDC's Head Start program: P.O. HS-622-95-712, dated 11/30/95, for 17 486 computers at $2,049 each (HDC Ex. 33, at 0304), and P.O. HS-622-97-386, dated 10/3/97, for 22 computer workstations at $2,099 each (HDC Ex. 23, at 0181-0183).

In briefing before the Board, ACF took the position that because HDC "did not record the required information about each computer upon receipt, there is no way to accurately account for the computers now." ACF Br. at 4, 6. It appears that ACF was referring to the requirement in 45 C.F.R. § 74.34(f)(1) that a grant recipient's property management standards provide that equipment records be maintained accurately and include, among other things, a description of the equipment, manufacturer's serial number or other identification number, source of the equipment, including award number, acquisition date, location and condition of the equipment, and unit acquisition cost.⁽¹⁾ There is no evidence that HDC recorded the serial numbers and other pertinent information about the computers on P.O. HS-622-95-663 when the computers were delivered to it (or even shortly thereafter).

HDC did not dispute that there were deficiencies in its property management system, but argued instead that any such deficiencies were immaterial because it accounted for all but one of the computers on P.O. HS-622-95-663 in an inventory of computers in HDC's warehouse after the grant ended. The inventory was done by Baird, Kurtz, & Dobson (BKD), the CPA firm which performed HDC's annual audits, in September 2000 (BKD inventory) (HDC Ex. 26).⁽²⁾ According to HDC, the inventory identified 39 486 computers as related to P.O. HS-622-95-663. HDC documented that one of its computers had been confiscated by the HHS Office of Inspector General and three of its computers had been stolen (HDC Ex. 25), suggesting that the computer missing from this inventory was one of these.

We note preliminarily that HDC's statement in its reply brief that "the agency's evidence is insufficient to prove that the computers were never received" (Reply Br. at 2) reflects a misunderstanding of where the burden of proof lies in this case. The Board has consistently held that 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., Texas Migrant Council, Inc., DAB No. 1743 (2000), and decisions cited therein; see also 45 C.F.R. §§ 74.50 - 74.53 (1994). Thus, it was HDC's responsibility to establish that it properly charged Head Start funds for the computer costs in question.

As ACF argued, HDC did not account for the computers in the required manner since it failed to fully comply with the property management standards in 45 C.F.R. § 74.34(f)(1) by recording the serial numbers and other pertinent information about the computers when they were delivered. This does not definitively show that the computer costs should be disallowed, however. Instead, it places a burden on HDC to account for the computers in a way that satisfactorily overcomes the questions raised by its failure to comply. Thus, we proceed to consider HDC's claim that it accounted for the computers on the BKD inventories.

We conclude that HDC adequately accounted for some but not all of the computers in question. Specifically, we conclude that there is sufficient evidence in the record to establish that HDC received and used for its Head Start program 18 of the 40 computers on P.O. HS-622-95-663.

We note first that the BKD inventory lists 38 486 computers, not 39 as represented by HDC, since one serial number appears twice. Thus, at most, the BKD inventory could account for only 38 of the 40 computers.

Second, although the BKD inventory references all 38 computers to P.O. HS-622-95-633, we find that this is not dispositive. The 40 computers on P.O. HS-622-95-663 were not the only 486 computers purchased by HDC: P.O. HS-622-95-712 also identified the type of computers being ordered as 486. The two other purchase orders do not specify the type of computers being ordered. Thus, some or all of the 38 486 computers in HDC's warehouse could have been attributable to purchase orders other than the one questioned by ACF - P.O. HS-622-95-633. (It appears that HDC may have mistakenly instructed BKD that all 486 computers in the warehouse were attributable to P.O. HS-622-95-663, since HDC indicated in its reply brief that it had overlooked P.O. HS-622-95-712 in accounting for its purchases of computers for Head Start in its prior briefing. HDC Reply Br. at 2, citing HDC Ex. 33, Supplemental Affidavit of David S. McDowell.)

To determine whether each of the 38 computers was in fact attributable to P.O. HS-622-95-663, we attempted to trace the serial number of each computer on the BKD inventory back to prior inventories in the record. Where a computer's serial number appeared on a prior inventory, we treated the computer as attributable to whatever purchase order was referenced for that serial number on that inventory. Where the serial number did not appear on a prior inventory, we treated the computer as attributable to a purchase order other than P.O. HS-622-95-663, since the burden was on HDC to establish that the computers in the warehouse were attributable to P.O. HS-622-95-663.

We relied primarily on an inventory prepared by HDC in June 2000 as part of its grant close-out process. Only 18 of the 38 serial numbers from the BKD inventory are referenced to P.O. HS-622-95-663 on the June 2000 inventory. Compare ACF Ex. 4 and HDC Ex. 26 (serial numbers 96-1105-103, 96-1105-102, 96-1105-106, 96-1105-104, 96-1105-109, 96-1105-108, 96-1105-112, 96-1105-121, 96-1105-113, 96-1105-118, 96-1105-117, 96-1105-124, 96-1105-123, 96-1105-130, 96-1105-126, 96-1105-137, 96-1105-135, and 96-105-122). Eleven of the serial numbers from the BKD inventory are referenced to P.O. HS-622-95-712 on the June 2000 inventory. Id. (serial numbers 95-200-293, 95-200-292, 95-200-291, 95-200-297, 95-200-296, 95-200-305, 95-200-304, 96-1105-101, 96-1105-133, 96-1105-132, and 96-1105-116). One of the serial numbers from the BKD inventory is not on the June 2000 inventory but is referenced to P.O. HS-622-95-712 on an inventory dated 11/30/98 (ACF Ex. 3, at 11, serial number 95-200-300). None of the remaining eight serial numbers from the BKD inventory appears on any of the prior inventories in the record (dated 11/30/97, 6/16/98, and 11/30/98, ACF Exs. 2, 3, and 4, respectively). Thus, the record supports a finding that 18 of the 38 computers on the BKD inventory were attributable to P.O. HS-622-95-663.

We further find that HDC did not account for any of the remaining 22 computers by documenting that they were confiscated or stolen. The serial number of the confiscated computer appears on a prior inventory, but is identified as a 386 computer (ACF Ex. 3, at 19, serial number 120197122). A 486 computer was reported stolen on 8/11/97 but the serial number for this computer appears on HDC's close-out inventory dated 6/12/00 (ACF Ex. 4, at 5, serial number 96-1105-119). The serial numbers of the other two computers do not appear on any of the prior inventories in the record, so they cannot be identified as 486 computers or traced to P.O. HS-622-95-663.

Thus, HDC accounted for a total of 18 of the 40 computers on P.O. HS-622-95-663. We note that our review of the record shows that none of the sites at which the 18 computers were located prior to their transfer to the warehouse was a site where Snead said it was unable to locate any computers on HDC's inventory list. Moreover, none of the computers was located at the site where ACF reviewers said they could not locate any computers. See HDC Ex. 6 and 7. Accordingly, there is no evidence that contradicts the inventory records showing receipt on July 16, 1996 of these 18 computers or that indicates that HDC was not in fact using the computers for Head Start purposes.

We note that HDC suggested that reversal of the entire disallowance of computer costs was justified because ACF had requested that HDC turn the computers in the warehouse over to the interim grantee. We disagree. Section 74.34(h) of 45 C.F.R. provides that the HHS awarding agency reserves the right to order the transfer of equipment acquired by a recipient with HHS funds to a third party named by the awarding agency when such third party is otherwise eligible under existing statutes. To the extent that the computers in the warehouse were not shown to be attributable to P.O. HS-633-95-663, however, the transfer of the computers to the interim grantee would not satisfy HDC's obligation to account for the federal funds used to purchase these computers.

Accordingly, we reverse the disallowance of the computer costs in the amount of $37,782 ($2,099 x 18) and sustain the disallowance in the amount of $46,178 ($2,099 x 22).

Non-federal share requirement

The Head Start Improvement Act of 1992, Public Law No. 102-40, provides in section 2(c) that "[f]inancial assistance extended under this subchapter for a Head Start program shall not exceed 80 percent of the approved costs of the assisted program or activities," and gives the Secretary the authority to reduce the required non-federal share below 20% if she determines that certain circumstances are present. 42 U.S.C. § 9835(b). The applicable regulations at 45 C.F.R. § 1301.20(a) provide that "Federal financial assistance granted under the act for a Head Start program shall not exceed 80 percent of the total costs of the program" except in certain circumstances. (The regulations have not been amended to reflect the Secretary's expanded authority under the Head Start Improvement Act of 1992 to reduce the required non-federal share.) The regulations further provide:

(b) The non-Federal share will not be required to exceed 20 percent of the total costs of the program.

(c) Federal financial assistance awarded to Head Start grantees for training and technical assistance activities shall be included in the Federal share in determining the total approved costs of the program. Such financial assistance is, therefore, subject to the 20 percent non-Federal matching requirement of this subpart.

In addition, Department-wide regulations contain requirements for cost sharing or matching which applied here pursuant to 45 C.F.R. § 1301.10. Section 74.23 of 45 C.F.R. provides in pertinent part:

(a) To be accepted, all cost sharing or matching contributions, including cash and third party in-kind, shall meet all of the following criteria:
(1) Are verifiable from the recipient's records;
(2) Are not included as contributions for any other federally-assisted project or program;
(3) Are necessary and reasonable for proper and efficient accomplishment of project or program objectives;
(4) Are allowable under the applicable cost principles;
(5) Are not paid by the Federal Government under another award, except where authorized by Federal statute to be used for cost sharing or matching;
(6) Are provided for in the approved budget; and
(7) Conform to other provisions of this part, as applicable.

ACF found that HDC exceeded the allowable federal share of Head Start costs in fiscal year 1996 by $18,135 and in fiscal year 1997 by $15,295. HDC did not dispute this finding. HDC explained that its auditors had not realized that the costs of training and technical assistance must be considered in determining the required non-federal share,⁽³⁾ and had therefore "been utilizing, for HDC's audit reports, only as much of the available non-Federal matching funds as were needed to meet the regulations, leaving the balance unreported." HDC Br. at 7. HDC provided workpapers prepared by BKD for purposes of this appeal which HDC asserted showed that it had "additional non-federal match amounts [that] are more than sufficient to satisfy" the required non-federal match for each of the years in question. Id. at 8. The workpapers show that, for fiscal years 1996 and 1997, HDC made non-federal contributions not previously reported as part of its non-federal share for Head Start to the following programs: Community Services Block Grant (CSBG) program; Women, Infants and Children (WIC) program; and Energy Crisis Intervention Program (ECIP). HDC Ex. 28, at 272, 278. The contributions to these programs for each of these fiscal years exceeded the non-federal shortfall for that year. In addition, ACF agreed with HDC's representation that CSBG, WIC and ECIP did not require a non-federal share, so that HDC complied with the requirement at 45 C.F.R. § 74.23(a)(2) that cost sharing contributions not be included as contributions for any other federal assistance program. 45 C.F.R. § 74.23(a)(2).

We conclude that none of HDC's contributions to the CSBG, WIC or ECIP programs may be used to satisfy the non-federal share requirement for its Head Start program, however. The Board has previously observed that a Head Start grantee's non-federal share must be comprised of costs that are both allowable and allocable to the grant. Child Opportunity Program, Inc., DAB No. 1700, at 26 (1999); see also Pickens Community Action Committee, Inc., DAB No. 1460, at 2 (1994). This observation is supported by the statutory provision, noted above, that the federal share of the costs of a Head Start program may not exceed 80% of the "approved costs of the assisted program or activities." Furthermore, section 1301.20(c) also refers to the "total approved costs of the program." Thus, a grantee is required to provide a non-federal share which is a percentage of the total approved costs of the Head Start program, assuring that there are adequate funds to provide all of the planned Head Start services to qualified children. Clearly, a grantee cannot meet this requirement by making cash or in-kind contributions to federal programs other than Head Start. Moreover, 45 C.F.R. § 74.23(a)(6) specifically requires that the cash or in-kind contributions be "provided for in the approved budget." It is apparent that none of the costs of the CSBG, WIC or ECIP programs on which HDC relied were included in the approved budget for its Head Start program. Thus, HDC's contributions for the CSBG, WIC and ECIP programs did not qualify as non-federal share for HDC's Head Start program.

HDC argued nevertheless that it satisfied the requirement in 45 C.F.R. § 74.23(a)(3) that cost sharing or matching contributions be necessary and reasonable for proper and efficient accomplishment of project or program objectives. According to HDC, the "objectives and target populations of the CSBG, WIC and ECIP programs are fully compatible with those of the Head Start program" and the former programs "supported [HDC's] Head Start families and in fact provided referrals of children and families to the Head Start program and vice versa." HDC Reply Br. at 5. HDC also noted that the Head Start performance standards at 45 C.F.R. § 1304.40 require a grantee to "work collaboratively with all participating parents to identify and continually access, either directly or through referrals, services and resources" such as those provided by CSBG, WIC and ECIP, and contain provisions for Early Head Start services to pregnant women enrolled in programs such as WIC. Even if the provision of services under the CSBG, WIC or ECIP programs was necessary to accomplish the objectives of the Head Start program, however, that does not obviate the separate requirement, discussed above, that costs used as non-federal match be part of the total approved costs of the program for which the match is required.

Accordingly, the disallowance attributable to the non-federal share shortfalls is sustained.

Conclusion

For the foregoing reasons, we reverse the disallowance of $37,782 attributable to the purchase of 18 computers and sustain the remaining disallowance.

Judith A. Ballard

M. Terry Johnson

Donald F. Garrett
Presiding Board Member

1. The provisions of 45 C.F.R. Part 74 cited in this decision are made applicable to Head Start grants by 45 C.F.R. § 1301.10.

2. HDC also relied on an inventory prepared by HDC's Management Information Services Director in July 2000 (HDC Ex. 22, at 0147), after the computers were first warehoused. The BKD inventory includes the same serial numbers as the July 2000 inventory, except for one serial number shown as "not found." Thus, we refer below only to the BKD inventory.

3. This requirement was added to 45 C.F.R. § 1301.20 in 1992.