SUBJECT: Utica Head Start Children and Families, Inc.

DECISION

Utica Head Start Children and Families, Inc. (Utica), appealed a determination by the Administration for Children and Families (ACF) to disallow $109,360 in costs charged to Utica's Head Start grant. The disallowed costs were all costs that arose in association with a conflict of interest matter involving Utica's Executive Director and Utica's Fiscal Director. The conflict of interest was previously addressed by the Board in an earlier decision, Board Docket No. A-2000-4, in which the Board upheld the termination of Utica's Head Start grant. Utica Head Start Children and Families, Inc., DAB No. 1749 (September 27, 2000).

In its notice of appeal concerning the subject disallowance, Utica incorporated by reference all of its arguments made in Board Docket No. A-2000-4. Utica subsequently decided not to submit any briefs pertaining to its appeal of the disallowance, relying solely on its notice of appeal and the arguments it submitted pertaining to the termination of its Head Start grant. Since both parties recognized that the issues raised here were related to the issues from the earlier appeal and relied on their submissions made in that appeal, without submitting separate briefs pertaining to the subject disallowance, we incorporate the entire record of Board Docket No. A-2000-4 here.

For the reasons discussed below, we sustain the disallowance in its entirety.

Factual Background

The factual background to this dispute is set forth in full detail in DAB No. 1749, at pages 4 through 12. As relevant to the issues in dispute here, ACF became aware in 1998 that Utica's Executive Director, Mattie Brown, was the mother of Utica's Fiscal Director, Deborah Brown. ACF notified Utica that this relationship represented a conflict of interest barred by statute and regulation. In order to resolve this conflict, Mattie Brown, without the approval of Utica's Board of Directors, entered into a severance agreement with Deborah Brown in July 1999, under which Deborah Brown received four checks totaling $151,940. Of this sum, $100,000 was charged to Utica's Head Start grant. As a result of intervention from Utica's Treasurer, however, Deborah Brown never retained any of the money specified in the severance package. While Deborah Brown's departure from Utica was effective July 30, 1999 under the severance agreement, she nevertheless received paychecks for the pay periods ending August 27 and September 10, 1999. Also, on September 18, 1999, a purchase in the amount of $21.95 was charged to Utica's American Express corporate credit card assigned to Deborah Brown.

In its June 1, 2000 determination, ACF took the following actions:

• disallowed $9,338 related to salary and fringe benefit payments to Utica's fiscal director after her departure from the organization;
  
  
• disallowed the $21.95 credit card purchase charged to the fiscal director's corporate credit card; and
  
  
• directed Utica to submit evidence within 30 days of an accounting adjustment which reversed the charge of $100,000 to its Head Start account for the severance payment to the fiscal director.
  

Discussion

I. The salary and fringe benefit payments

It is uncontested that Deborah Brown received several paychecks from Utica despite her departure from Utica as a result of the severance agreement. Although Deborah Brown's employment at Utica allegedly ended July 30, 1999, she still received paychecks for the pay periods ending August 27, 1999 and September 10, 1999. ACF Ex. 29. Moreover, for the pay period ended August 27, 1999, Deborah Brown received a paycheck for double her stated salary for a two-week pay period, $5,783 versus $2,892. Id. at 2.

Utica argued that the employment status of Deborah Brown in August and September 1999 was "in limbo" because the payment terms of her severance agreement were not honored. Utica further asserted that Deborah Brown performed several activities normally performed by a financial officer during this period, including the submission of the Federal Cash Transaction Report for the period April 1, 1999 through June 30, 1999, and signing bank withdrawal slips from Utica's account. Utica maintained that it was not illegal under these circumstances for Deborah Brown to continue to be paid by Utica and that the charges to the Head Start grant for her salary were reasonable.

In order for a cost to be allowable under a grant, it must be allocable to the grant and reasonable for the performance of the award, with the reasonableness of the cost being determined by such factors as whether the cost was ordinary and necessary for the operation of the grant. Office of Management and Budget Circular A-122, Attachment A, ¶ 2.a., ¶ 3.a., and ¶ 4.a. (made applicable to nonprofit grantees by 45 C.F.R. § 74.27(a)). Contrary to Utica's assertions, we do not find that these costs were reasonable or allocable to the grant. Furthermore, the requirement to document costs is a fundamental principle of grants management, and the burden to demonstrate the allowability and allocability of costs claimed in a grant program rests with the grantee. Lac Courte Oreilles Tribe, DAB No. 1132, at 5, n.4 (1990). We find that Utica has failed to document these salary and fringe benefits costs.

The President of Utica's Board of Directors testified at the hearing held in the prior appeal that the Board of Directors was unaware that Deborah Brown was involved in the operations of Utica after July 31, 1999. Transcript (Tr.) at 399. The President further testified that he did not know how or why Deborah Brown was reinstated on Utica's payroll. Tr. at 403 - 04. The acting Executive Director of Utica during the period of time for which the salary checks were issued to Deborah Brown testified that she did not see Deborah Brown working on Utica's premises, save for cleaning out her office, and that she specifically ordered Deborah Brown to leave Utica's premises on August 10, 1999. Tr. at 478. The acting Executive Director further testified that she had no idea that Deborah Brown was back on Utica's payroll or how that occurred. Tr. at 504 and 511. Utica provided no evidence to contradict this testimony.

Thus, the evidence in the record before us is that Deborah Brown received the salary and fringe benefits at issue for a period when her employment status at Utica was, at best, in limbo. Utica failed to document the actual time Deborah Brown spent at Utica during this period or that any work efforts on her part merited the salary payments at issue. More fundamentally, it is undisputed that any time Deborah Brown may have spent at Utica beyond July 31, 1999, and hence any salary or benefits she received, still posed the conflict of interest problem that Utica was ordered to resolve by July 31, 1999. Accordingly, we sustain the disallowance for this item because the questioned costs were unreasonable, not allocable to the grant, and not documented.

II. The credit card charge

On September 18, 1999, a charge of $21.95 was incurred for "AOL Online Service" on the Utica American Express corporate credit card assigned to Deborah Brown. ACF Ex. 36.

Utica asserted that, while this charge was incurred on the credit card issued to Deborah Brown, it was actually used by Deborah Brown for the purpose of paying the internet service provider costs for internet access in Utica's finance department. Utica argued that the fact the charge was incurred on the credit card assigned to Deborah Brown did not show that it was not a necessary and proper expense for the finance department.

Utica, however, offered no evidence for this proposition that the internet service was for the finance department nor any explanation as to how this charge appeared on a Utica corporate credit card assigned to Deborah Brown after her departure from Utica. If access to the internet was a necessary and regular requirement for Utica's finance department, it might reasonably be expected that charges for such a monthly service would be paid from an account for administrative services rather than by credit card. Utica offered no documentation to show that AOL internet access was a regular monthly expense for the finance department.

If Utica could show that the charged item was for Utica's benefit, and not for Deborah Brown personally, then arguably this item would be allowable. Utica has failed to demonstrate that. Accordingly, we sustain the disallowance of $21.95 for this item.

III. The $100,000 charge relating to the severance agreement

ACF stated in its disallowance letter that the $100,000 severance payment was charged against Utica's Head Start account, but that no expenditure in that amount and for that purpose was ever incurred. ACF asked Utica to submit evidence of an accounting adjustment, which reversed the charge of $100,000 to its Head Start grant, as a means of avoiding this disallowance. In its notice of appeal, Utica contended that the $100,000 had not been expended as a severance payment. Utica argued that, since the $100,000 had not been expended, no disallowance for a cost in that amount would be justified. Utica, however, misses the point of ACF's disallowance entirely.

It is undisputed that Utica drew down $100,000 in Head Start funding to make a severance payment. Utica asserted that the $100,000 was never expended for this purpose. That assertion was consistent with the Board's finding in the prior appeal. There is no indication, however, of what happened to the $100,000 cash drawn down for this purpose after the severance payment was canceled. Utica now must account for what happened to this cash. This Board has repeatedly held that a Head Start grantee must fully account for all of the cash it draws down, including cash drawn down to cover anticipated costs that were never actually incurred. See, e.g., Delta Foundation, Inc., DAB No. 1710 (1999); South Plains Community Action Agency, DAB No. 1639 (1997).

Whenever a grant is closed out for any reason, including termination, the grantee is required to submit financial reports within 90 days. 45 C.F.R. § 74.71. It is apparent that Utica up to this time has failed to adhere to this responsibility, which had to be completed by December 26, 2000, as all ACF is seeking in regard to this item is an updated report on the charges Utica made to its Head Start grant.

We therefore find that Utica is required by the regulations to account for the $100,000 by submitting the paperwork necessary for the close-out of its grant, and that the failure of Utica to make the accounting adjustment justifies ACF's imposition of a disallowance for the $100,000. If Utica subsequently shows that the $100,000 was used for allowable expenses allocable to the Head Start program or that the money was returned to ACF, ACF can then withdraw its disallowance determination for this item.

Conclusion

For the reasons discussed above, we sustain the disallowance of $109,630.

Judith A. Ballard

M. Terry Johnson

Donald F. Garrett
Presiding Board Member