SUBJECT: Idaho Division of Financial Management

DECISION

The Idaho Division of Financial Management (Idaho) appealed the decision of the Division of Cost Allocation (DCA) requiring repayment of $238,648 in federal funding awarded under various federal programs for the fiscal year ending June 30, 1999.

That amount represents the federal share of $1,142,732 paid into an internal service fund that Idaho uses to provide routine maintenance, repair, custodial, security and other services at state-owned buildings housing Idaho state agencies, some of which administer various federal programs that provided the funding pursuant to Idaho's approved Cost Allocation Plan (CAP).

DCA determined that Idaho had transferred the moneys to a different fund (not part of Idaho's CAP) that was established primarily for capital projects such as the construction, renovation, repair and remodeling of state buildings. DCA sought repayment of the funds on the grounds that they were not used as Idaho agreed in its CAP and were not spent in a manner that was consistent with the purposes for which they were awarded.

Idaho argued that the transferred funds were spent on routine repair and maintenance and represented allowable charges to the federal programs that awarded them.

For the reasons explained below, we uphold DCA's determination. We find that Idaho failed to comply with applicable requirements for internal service funds, and did not adequately support its claim that it spent the transferred funds on allowable charges to the federal programs that paid into the internal service fund.

Applicable Law, Regulations, and Cost Principles

The allowability of costs claimed by state governments under federal grants is governed by Office of Management and Budget (OMB) Circular A-87. 45 C.F.R. §§ 74.27(a) and 92.22(b). In order to be allowable, a cost must be necessary and reasonable for proper and efficient performance and administration of a federal award and allocable to the award. OMB Circular A-87, Attachment (Att.) A, ¶ C.1. A cost is allocable to a particular cost objective if the goods or services involved are chargeable or assignable to such cost objective in accordance with relative benefits received. OMB Circular A-87, Att. A, ¶ C.3.a.

This dispute concerns the disposition of federal funds that Idaho received for central service costs incurred in the administration of federal programs. Central service costs are the costs of services provided by a state on a centralized basis to its various departments and agencies, which in turn may receive federal funding in those costs, to the extent they administer federally-funded programs. Central services typically include computer services, transportation services, insurance, fringe benefits, general accounting, personnel administration and purchasing. Central service costs are either billed to benefitting agencies and programs on an individual fee-for-service or similar basis (billed central service costs), or allocated to the agencies and programs on some other reasonable basis (allocated central service costs). OMB Circular A-87, Att. C, ¶¶ A.1, B.1, B.2. In this case, the central services include routine repair and maintenance for certain state-owned buildings used in the administration of federal programs. Idaho charges the state agencies located in those buildings for those services based on the amount of space they occupy. Idaho Response to Board Question 'B'.

To identify central service costs and assign them to benefitting federal programs and activities on a reasonable and consistent basis, OMB Circular A-87 establishes a process for submission and approval of a central service (or statewide) cost allocation plan (CAP). OMB Circular A-87, Att. C, ¶ A.1. A CAP means the documentation identifying, accumulating, and allocating or developing billing rates based on the allowable costs of services provided by a governmental unit on a centralized basis to its departments and agencies. OMB Circular A-87, Att. A., ¶ B.4. "In essence, the CAP identifies the central support services that qualify for federal financial participation and describes how central support agencies allocate the costs." Alabama v. Shalala, 124 F. Supp. 2d 1250, at 1253 (M.D. Ala. 2000). The CAP describes the method by which the costs will be distributed to different programs, as well as all costs and other data used to distribute the costs included in the plan. OMB Circular A-87, Att. C, ¶ A.1. The requirements for CAPs are listed in OMB Circular A-87, and in an implementation guide issued by the Department of Health and Human Services (HHS) pursuant to OMB Circular A-87, "A Guide for State and Local Government Agencies: Cost Principles and Procedures for Establishing Cost Allocation Plans and Indirect Cost Rates for Agreements with the Federal Government" (ASMB C-10). OMB Circular A-87, Att. C, ¶ A.2.

For each year that a state claims central service costs, it must submit a CAP for review, negotiation and approval by the cognizant federal agency. OMB Circular A-87, Att. C., ¶¶ D.1, F.1. HHS has been designated as the cognizant federal agency for the Idaho Division of Financial Management. 51 Fed. Reg. 552 (1986). CAPs must include all central service costs that will be claimed under federal awards. Costs of central services omitted from the plan will not be reimbursed. OMB Circular A-87, Att. C, ¶ C. Additionally, all costs and other data used to distribute the costs included in the plan should be supported by formal accounting and other records that will support the propriety of the costs assigned to federal awards. Id., Att. C, ¶ A.1.

The moneys that a state collects from its agencies through billings for centralized services and goods pursuant to its CAP are typically deposited into an "internal service fund" (ISF), which the state uses to finance those services and goods. Because ISFs are typically funded through periodic billing cycles, the cost principles permit them to maintain a working capital reserve to enable payment of expenses as they arise. OMB Circular A-87 permits an ISF to maintain a working capital reserve as part of its retained earnings sufficient to cover up to 60 days cash expenses for normal operating purposes. OMB Circular A-87, Att. C, ¶ G.2. When the revenue collected for billed central costs exceeds the allowable costs of providing the services and goods (including an amount sufficient to maintain an ISF reserve of up to 60 days cash expenses for normal operating purposes), an adjustment must be made for the difference, so that federally-funded programs are not overcharged. OMB Circular A-87, Att. C., ¶ G.4. The allowance for a working capital reserve, and its recognition of reserve contributions as allowable costs, is a deliberate exception to the general policy that federal grantees are not allowed to make a profit by charging the federal grant more than the cost of the services. Id.; ASMB C-10, ¶ 1.6, Question 1-4. As part of the CAP, a state government must provide specific documentation about ISFs, including a fiscal year-end reconciliation schedule showing the revenues, costs, and year-end balance. OMB Circular A-87, Att. C, ¶¶ E.3.b(1), G.4; ASMB C-10, ¶ 4.8, Question 4-7.

Background

The Facilities Services component of Idaho's Department of Administration "manages, maintains, protects and services the buildings and grounds within the Capitol Mall and surrounding State office buildings, and the Lewiston and Idaho Falls Office Buildings." Idaho 2001 CAP, DCA Exhibit (Ex.) 2-1. The costs of those services are charged, recovered, and paid for by Idaho's Facilities Services Internal Services Fund (FS ISF). The FS ISF bills agencies for those services based on the amount of space they occupy in state-owned buildings, at the rate of up to $9.90 per square foot.⁽¹⁾ That figure comprises general maintenance ($4.58), lease payments ($2.27), facility repair and renovation ($1.24), security ($0.79), custodial ($0.72), and grounds keeping services ($0.30). State agencies then charge federal funding for their FS ISF billings based on different allocation methods, such as the number of employees or amounts of office space dedicated to federal functions. Idaho 2001 CAP, DCA Ex. 2-2. The cost-per-square-foot rate is adjusted yearly to account for any differences between actual and estimated costs. Id.; Idaho Response to Board Question 'B.' According to DCA, all expenses of the FS ISF are considered indirect costs, meaning costs that are incurred for a common or joint purpose benefitting more than one program or cost objective, and are not readily assignable to the cost objectives specifically benefitted, without effort disproportionate to the results achieved. DCA Brief (Br.) at 2; OMB Circular A-87, Att. A, ¶ F.1.

The cost principles permit the FS ISF, like any ISF that receives federal funding pursuant to an approved CAP, to retain earnings to maintain a working capital reserve sufficient to cover up to 60 days cash expenses for normal operating purposes. However, Idaho treated the FS ISF reserves as also limited by a provision of Idaho law effectively requiring that any reserves over $200,000 at the end of the fiscal year be transferred to Idaho's Permanent Building Fund (PBF). The relevant provision of Idaho law states:

MANAGEMENT OF STATE FACILITIES. The director of the department of administration may pay personnel costs and operating expenditures incurred in the operation and management of the state capitol mall and the multi-agency facilities constructed through the state building authority from the rents received therefrom. Proceeds accruing from such rental contracts and lease agreements after payment of personnel costs and operating expenditures which are in excess of two hundred thousand dollars ($200,000) at the end of the fiscal year shall be deposited to the credit of the permanent building account. Proceeds from the rental of parking spaces in the capitol mall shall be deposited upon receipt to the credit of the permanent building account. Said proceeds shall not be expended without an appropriation and shall only be appropriated for the security, maintenance and upkeep of the state capitol mall.

Idaho Code § 67-5709.

The function of the PBF is described in Idaho law:

PERMANENT BUILDING FUND CREATED -- USE OF FUND. The permanent building fund is hereby created and established in the state treasury to which shall be deposited all revenues derived from taxes imposed and transfers authorized pursuant to the provisions of this act. All moneys now or hereafter in the permanent building fund are hereby dedicated for the purpose of building needed structures, renovations, repairs to and remodeling of existing structures at the several state institutions and for the several agencies of state government. The state treasurer shall invest the idle moneys in the fund, and the interest earned on such investments shall be retained by the fund.

Idaho Code § 57-1108.

DCA determined that during the fiscal year ending June 30, 1999 (FY 1999), Idaho had transferred FS ISF reserves of $1,193,242 to the PBF, which had ultimately spent $1,142,732 of this amount during that time, and that 20% of the amount transferred, or $238,648, consisted of federal funds. DCA Ex. 1-1. Idaho did not dispute these determinations. The CAP documentation Idaho submitted to DCA for FY 1999, as part of the A-87 reconciliation process, showed no transfers out of the FS ISF. The transfer to the PBF was instead included in a $3,161,007 entry reported as a disbursement in the category "Trustee & Benefit Payments." DCA Ex. 2-3.

Parties' Arguments

DCA sought repayment of the federal share of the transferred funds on two principal grounds. One, DCA argued that Idaho's retention of the federal share of the transferred funds was barred by the cost principles' prohibition on reimbursing costs that are omitted from a state's CAP. DCA noted that the PBF, which received and spent the transferred funds, was not part of Idaho's approved CAP, meaning that the use of funds in the PBF was not subject to DCA oversight and reporting requirements. OMB Circular A-87, Att. C, ¶ C. Two, DCA argued that Idaho violated basic principles of grants law by using the transferred funds for purposes other than for which they were awarded. DCA argued that the funds were awarded and contributed to the FS ISF to pay the costs of current operations such as routine maintenance and repair of specified state facilities used by state agencies working on contributing federal programs, whereas the PBF is dedicated primarily to tasks of a different nature, long term capital projects and improvements. Related to this point, DCA also argued that Idaho failed to adequately document the allowability of its expenditures of the transferred funds.

Idaho did not question DCA's authority generally to require repayment of funds removed from a CAP and spent outside the CAP process, but argued that any amount repaid should be reduced here. Idaho argued that it spent the transferred funds on allowable repair and maintenance of state-owned buildings consistent with the purpose for which the funds had been contributed to the FS ISF. With its notice of appeal, Idaho submitted a list of 18 expenditures made with the transferred funds in FY 1999, totaling $1,142,732 out of the $1,193,242 transferred. Idaho questioned DCA's refusal to accept Idaho's documentation, arguing that the information it provided about these expenditures was similar to and no less detailed than the documentation that DCA has routinely accepted for other expenditures from the ISFs in its CAP for which Idaho receives federal funding.

Idaho disputed that it was not complying with the requirements of OMB Circular A-87 for CAPs and ISFs, and pointed out that the Circular does not require paying for expenditures from any particular pool of funds. Idaho also argued that DCA had approved the transfer of funds to the PBF in earlier years, and had further approved its reporting of the transfer in the A-87 reconciliation process as not a transfer, but as an expense in the trustee and benefits payments category. Idaho characterized its reporting of the transfer as simply reclassifying costs from one category to another.

Idaho also disputed that the transferred funds were spent on capital projects rather than current operating expenses consistent with the FS ISF. Idaho argued that applicable accounting principles mandated that the questioned expenditures of the transferred fund be classified as non-capital expenditures that must be charged in their entirety to current grants ("expensed"), rather than being charged in small amounts each year through depreciation or a use allowance. The non-capital nature of the expenses demonstrated that they were consistent with the purposes for which federal funds been paid into the FS ISF, Idaho argued. Idaho further argued that DCA's offer during negotiations to settle the dispute meant that DCA had acknowledged that the transfer was within the bounds of the law and OMB Circular A-87. (Idaho reported that it rejected the proposed settlement offer because the offer would have required Idaho, in the future, to capitalize expenses that it maintained were properly treated as current expenses by the accounting principles.)

1. Idaho's treatment of the FS ISF reserve was inconsistent with the approved CAP methodology and with federal requirements for ISFs.

Contrary to what Idaho argued, the record here does not support a conclusion that Idaho was complying with OMB Circular A-87. Instead, we agree with DCA that how Idaho reported the transfer mischaracterized how the funds were used and was inconsistent with the requirements for ISFs.⁽²⁾

The documentation that Idaho provided as part of its routine CAP approval process did not report any transfer of funds, and instead inaccurately included the total amount transferred as if it were an expenditure for trustee and benefit payments. DCA Ex. 2-3. Idaho did not deny that the transferred funds were not, in fact, spent for trustee and benefit payments, and that some of the transferred funds were not spent in FY 1999. Treating the transferred amount as allowable expenditures chargeable to the FS ISF in FY 1999 resulted in inflating the total allowable operating expenditures for that year and therefore resulted in an inaccurate calculation of the amount of the allowable reserve and the amount of the excess reserve at the end of the year. OMB Circular A-87, Att. C, ¶ G.2, 4. Irrespective of what Idaho was told by a DCA negotiator (an issue we discuss below), Idaho clearly should have known that this treatment did not comply with the federal requirements for ISFs.

In addition, the amount and timing of the transfer of funds from the FS ISF to the PBF are not consistent with Idaho's attempt to characterize what it did as merely paying costs chargeable to one pool of funds from another pool of funds, which is then reimbursed by a transfer. The Idaho Code required Idaho to transfer reserves in excess of $200,000 at the end of a fiscal year, after paying personnel costs and operating expenditures incurred in that year from the building rents. Idaho's report on the FS ISF indicates that the amount transferred was the reserve amount in excess of $200,000 reported at the beginning of FY 1999 (the end of FY 1998). DCA Ex. 4-9. Assuming Idaho was complying with the Idaho Code, the transfer would have taken place at the beginning of FY 1999 or shortly thereafter. Thus, neither the amount nor the timing of the transfer was related to the expenditures paid from PBF funds during FY 1999 which Idaho now seeks to use to justify the transfer.

Moreover, the transfer of funds out of the FS ISF resulted in overstated charges to federal programs in two ways. First, any excess reserves over the amount permitted by OMB Circular A-87 should have been credited to the billed agencies (and therefore to federal programs) in one of the ways specified in OMB Circular A-87, but were not.⁽³⁾ See OMB Circular A-87, Att. C, ¶ G.4.

Second, the transfer deprived the FS ISF of interest it would have otherwise earned by holding the funds pending disbursement. States are required to report the interest earned by their ISFs. OMB Circular A-87, Att. C, ¶ E.3.b. The interest that the FS ISF would have earned could have been applied to reduce the FS ISF's expenses and ultimately, the billing rates.⁽⁴⁾

The provision of OMB Circular A-87 permitting states to maintain ISF reserve funds is an exception to the principle that grantees may not realize a profit from the use of federal grant funds. OMB Circular A-87, Att. A, ¶ A.1; ASMB C-10, ¶ 1.6, Question 1-4. The cost principles permit an ISF to maintain a working capital reserve because ISFs typically operate pursuant to periodic billing cycles. Wisconsin Dept. of Administration, DAB No. 1766, at 3 (2001). The reserve permits an ISF to meet ongoing expenses that may arise prior to receipts of revenue. That Idaho was able to transfer reserves in excess of $200,000 from the FS ISF (of which $50,510 remained unspent a year later) apparently without hindering its operation indicates that those reserves exceeded the amount reasonably necessary to fulfill the aim of an ISF reserve.

More important, the exception is permitted on the condition that the ISF is included in an approved CAP and the applicable requirements are met. The FS ISF is included in Idaho's approved CAP, and its activities and expenses were subject to DCA's review; the PBF is not. The mandate that all central service costs for which a state claims federal funding be included in the state's approved CAP is not merely a pro forma requirement. Because the costs of central services, such as those performed through the FS ISF, are not readily assignable to the various federal programs that pay for and benefit from them, it is important that they be claimed only under an approved CAP methodology subject to DCA's scrutiny. By that scrutiny, DCA may assure that costs claimed through an ISF are allowable types of costs, billed at supportable rates determined based on the costs of the services provided, that interest on reserve funds is accounted for, and that any excess reserves resulting from billing rates that were set too high are identified, so that they may be returned to the federal programs through one of the permitted methods.

Given that Idaho did not report any of the expenditures it now claims were expenditures for maintenance or repairs in the correct categories in its report on the FS ISF, DCA's concern that Idaho removed the expenditures from the required scrutiny has merit. DCA Ex. 2-3. By spending the federal funds from its PBF, Idaho nullified the efficiencies underlying the CAP process. The individual ISFs in a state's CAP serve specific, distinct functions, each furnishing a different type of service to state agencies that administer federal programs. (The names of various ISFs in Idaho's CAP, for example, link them with readily identifiable functions: the Department of Administration (DOA) Bureau of Telephone, the DOA Bureau of Communications - Microwave and Radio; the DOA Bureau of Copy and Record Storage - Photocopy; the DOA Office of Group Insurance. Idaho January 14, 2002 Supplemental (Supp.) Br., Exs. B, D, F.) This dedication of ISFs to specific, known functions provides DCA with a reasonable degree of assurance, through the CAP review process, that federal funds provided to those ISFs will be spent on those functions, consistent with the purposes for which the federal funds were awarded. This assurance obviates the need for DCA to conduct a detailed review of each ISF expenditure. By taking funds from one ISF that was part of Idaho's approved CAP, and transferring them en masse to another fund outside of Idaho's CAP, Idaho vitiated that assurance, and with it, any reasonable presumption Idaho might have enjoyed that the funds were being spent consistent with the purposes for which they had been awarded. Absent that assurance, it was eminently reasonable and prudent for DCA to demand repayment of the federal share of the transferred funds.

Finally, Idaho failed to support its argument that DCA had approved the transfer of the funds to the PBF, or that DCA instructed Idaho to report the transfer under the "Trustee & Benefit Payments" expense category. The affidavit of Idaho's former State Fiscal Officer recounting conversations and correspondence with DCA negotiators regarding their questions about expenditures under Idaho's CAP does not establish Idaho's claim. At most, that affidavit, along with two declarations that DCA submitted from a former negotiator and one from the Director of its Western Field Office, indicates that Idaho, when questioned, told DCA that Idaho had reported the transfer in this category in the past; no explanation is provided for how Idaho originally came to report the transfers in the trustee and benefits payments category in the first place. Affidavit of David O. Tolman, enclosed with Idaho January 14, 2002 Supp. Br.; Declaration and Supp. Declaration of Robert W. Lee, enclosed with DCA December 18, 2001 Supp. Br. and DCA January 24, 2002 submission. Much of the discussion relates to other ISFs that are not the subject of this appeal, and DCA's failure to question or demand payment of transfers to the PBF from those other ISFs. None of this demonstrates that DCA approved the transfer here or the method of reporting it.

2. Idaho did not adequately document the expenditures it said should reduce the amount of the reimbursement DCA sought.

Idaho argued that it spent most of the disputed funds on allowable charges to federal grant programs that were consistent with the purposes for which the funds were provided to the FS ISF, so that DCA's demand for repayment should be reduced by the amount of those charges. Idaho argued that the fact that the expenditures were originally paid out of a different fund should not preclude Idaho from treating them as legitimate expenses of the FS ISF if they could have appropriately been paid with FS ISF funds to begin with.

DCA expressed concern that permitting such reclassification after the fact would undercut the CAP process. For reasons discussed above, we agree that these concerns are legitimate. In any event, we conclude that the full amount of the transfer should be repaid. For reasons discussed in this section, we conclude that Idaho's documentation is insufficient to demonstrate that the repayment amount should be reduced. Moreover, as we discuss in the next section, the information that Idaho did produce raises additional questions concerning the appropriateness of charging the expenditures to the FS ISF.

First, a basic principle of grants law, cited numerous times by the Board, is that recipients of federal grant funds bear the burden of documenting the allowability of their charges to those funds. See, e.g., Oklahoma; Nebraska Health and Human Services System, DAB No. 1660, at 8 (1998); Alabama Dept. of Finance, DAB No. 1635, at 7-8 (1997). Moreover, we agree with DCA that there is a need for a higher level of documentation here than if Idaho itself had originally paid for the expenditures directly out of the FS ISF and identified them to appropriate, specific categories of FS ISF expenditures.

The descriptions of the FS ISF and the PBF in Idaho state materials show that they serve inherently different functions. The PBF is dedicated by statute to "building needed structures, renovations, repairs to and remodeling of existing structures," whereas according to Idaho's CAP, the FS ISF "manages, maintains, protects and services" the buildings. DCA Exs. 4-1, 2-1. These descriptions support DCA's claim that the FS ISF is geared towards providing current operations, while the PBF funds long-term capital expenditures. Although there is some apparent overlap in the functions of the FS ISF and the PBF, there is greater divergence. While the $9.90 per square foot that the FS ISF billed state agencies included $1.24 for facility repair and renovation, functions that are also within the PBF's mission of renovation and repair of existing buildings, the remainder of the FS ISF charges are for general maintenance, lease payments, security, and custodial and grounds keeping services, which are ongoing current operations that are not the sort of activities to which the PBF is dedicated by statute.

Idaho argued that a different section of its code, the statute requiring the transfer of the funds, specifies that the transferred funds be used only for security, maintenance and upkeep. However, it is not clear from the language of the statute if that is indeed its effect. After first requiring that proceeds from lease payments in excess of $200,000 at the end of the fiscal year be deposited to the credit of the permanent building account, the statute goes on to address the rental of parking spaces, stating that--

Proceeds from the rental of parking spaces in the capitol mall shall be deposited upon receipt to the credit of the permanent building account. Said proceeds shall not be expended without an appropriation and shall only be appropriated for the security, maintenance and upkeep of the state capitol mall.

Idaho Code § 67-5709. Thus, it is not clear that the requirement to use proceeds for what could be considered current operating expenses applies to all the transferred funds, and not just proceeds from parking space rentals. Idaho provided no legislative clarification on this question or other authoritative statement such as an attorney general's opinion. Moreover, as we discuss below, the documentation that Idaho submitted indicates that at least some of the costs paid out of the transferred funds were capital expenditures under Idaho financial policy, in keeping with the role of the PBF, and not the security, maintenance and upkeep referred to in the statute and consistent with the functions of the FS ISF.

Second, Idaho did not even adequately describe the expenditures. In support of its contention regarding the PBF's expenditures of transferred funds, Idaho submitted a list of 18 expenditures made in FY 1999, totaling $1,142,732 out of $1,193,242 transferred. The list is cursory and provides little information to assess Idaho's claim that all of the listed items would have been allowable charges to the FS ISF. For each of the 18 items of expenditure, the list provides a one-line, several word description and a project number. This list hardly constitutes the detailed information that Idaho reported having provided to DCA. Idaho Reply Br. at 3; Idaho January 14, 2002 Supp. Br. at 2. Prior to its final decision demanding repayment, DCA requested that Idaho provide specific information about the expenditure of the transferred funds. For expenditures on Idaho's list that exceeded $5,000 (except three items that DCA considered capital expenditures), DCA requested that Idaho furnish a list of relevant work orders, service contracts, purchase orders or other documentation, along with dates, reference numbers, amounts, project numbers, titles, and descriptions. DCA Ex. 4-8. DCA reiterated the request in two written submissions during the course of the appeal.

With its last submission to the Board, Idaho enclosed another list, addressing 16 of the 18 items of expenditure on the original list, and covering $829,737 of the $1,142,732 shown on the first list. With the exception of one item on the original list ($213,222 for "ADM CAPITOL MALL CARPET SERVICE"), this list provides only slightly more detail. Even with the additional documentation provided, we are still unable to determine whether the listed items would have been allowable charges to the FS ISF. That DCA in past years or as part of negotiations, may have accepted less detailed documentation in support of the expenditures of the FS ISF or other ISFs in Idaho's CAP does not oblige DCA to accept summary documentation here, or bar DCA from requesting additional information about Idaho's use of federal funds. The applicable cost principles provide that the requirement for documentation supporting ISF expenditures may be modified, expanded, or reduced by the cognizant agency on a case-by-case basis, and that additional documentation may be requested. ASMB C-10, ¶ 4-8, Question 4-7. Once funds have been removed from a CAP and an ISF prior to being spent, and once questions have been raised about allowability, DCA is reasonable in seeking additional documentation. Absent such documentation, we find Idaho failed to provide sufficient information about the timing and nature of the expenses to ensure the accountability for the federal funds that is otherwise lacking here because of Idaho's own actions.

3. Some of the listed expenditures do not appear to be the types of expenditures that would have been permissible charges to the FS ISF, even if they had been paid directly from the FS ISF and properly documented.

On its face, considered with other documents that Idaho submitted, the expenditure lists include costs that are questionable as charges to the FS ISF. For example some of the items appear to be general costs of government, which are unallowable charges to federal funds, with exceptions not relevant here. Unallowable general costs of government include salaries and expenses of the office of the governor of a state; salaries and other expenses of state legislatures; costs of the judiciary branch of a government; and other general types of government services normally provided to the general public. OMB Circular A-87, Att. B, ¶ 23; ASMB C-10, ¶ 3.4, Question 3-41. Thus, expenditures attributable to Idaho's legislature would be unallowable. Two items on Idaho's initial list of expenditures totaling $109.610 appear to fall within this prohibited category: one described as "LEG: B & Petitioner, JFAC ROOM ACOUSTICS" ($5,256) and the other as "LEG: LEGISLATIVE SERVICES REMODEL" ($104,354). Idaho's second list offered no additional information on these projects, other than that they were single projects conducted on the capitol building. The second list casts doubt on the allowability of another item, identified on the original list as "ADM: CAPITOL MALL CARPET SERVICE" ($213,222). The second list discloses 24 individual expenditures for carpeting in eight different buildings; five of these items, attributable to "Legislative services," "Governor Office" and "Democratic Office," are questionable. The second list also discloses expenditures described as "Painting in Senate Chambers" ($940) and "Inaugural Platform" ($49,343) that may be general costs of government.⁽⁵⁾

While theoretically a billing allocation method could ensure that these general costs of government were not allocated to federal programs, this would be true only if the space associated with general government functions were included in the space used as the allocation base and billed for the services provided by the FS ISF. Yet, the FS ISF report of revenues for FY 1999 shows no or little revenue from accounts such as "Senate," "House of Representatives," and "Judicial Department." Idaho CAP at 54, enclosed with Idaho's Answers to Board Questions. Indeed, overall Idaho failed to provide sufficient information to show that the state agencies and departments that benefitted from the PBF's expenditures of FS ISF funds were among the same agencies that occupied space that was served by, and billed by, the FS ISF.

In addition, the record indicates that at least some of the listed expenditures were capital expenditures, and not the sort of current operating expenses for which federal funds were paid to the FS ISF. Idaho's own guidelines appear to require that some of the PBF expenditure items be treated as capital expenditures. Idaho's Fiscal Policy User Manual defines "Capitalized Assets" as fixed assets with a unit cost of at least $5,000. "Fixed Assets" are in turn defined as tangible assets with a life expectancy of more than two years. Idaho Ex. 5. With some listed exceptions not applicable here, all fixed assets with a unit cost of $5,000 are to be capitalized. Id. The manual also specifically includes heating and air conditioning equipment within its definition of a building. The manual further requires that expenditures increasing future benefits from a fixed asset shall be capitalized where they increase the useful life or capacity of the existing asset, or substantially improve the quality of output from the existing asset. Id.

Thus, under the manual, an HVAC (heating, ventilation and air conditioning) system described as "ADM: UPGRADE HVAC, 954 JEFFERSON" ($211,469), characterized in Idaho's reply brief as an HVAC replacement, was more likely a capital expenditure inconsistent with the mission of the FS ISF and the purposes for which it received federal funding. Idaho Reply Br. at 7. Another item, listed in the original list as "ADM: JRW BUILDING FIRE ESCAPE" ($2,500), is further described on the second list as "Project completion CPW Funded original Project of $450,000." We cannot tell whether the $2,500 was for repair of a fire escape or, whether it was part of the cost of adding a new fire escape. If the latter, the entire project may have been a capital expense, since Idaho's Fiscal Policy User Manual indicates that structures affixed to buildings are capital improvements. Also questionable were two expenditures for parking lots, totaling $312,996, that Idaho reported on the first list, but not on the second. These expenses would appear to be permanent improvements adding value to land, which under Idaho's Fiscal Policy Manual are fixed assets that must be capitalized when costing more than $5,000. Idaho Ex. 5.

Additionally, Idaho offered conflicting characterizations of three of the items discussed above, the HVAC and the two parking lot expenditures. Idaho's report in its notice of appeal that it had capitalized the costs for a major upgrade to an HVAC and a major renovation to a parking lot conflicts with its later assertion that the HVAC system was properly charged as current expenditures rather than capitalized. Idaho Notice of Appeal at 2; Idaho Reply Br. at 7. Idaho's argument that any concessions it may have made as to capitalizing any expenditures of the transferred funds were made as part of a settlement proposal intended to resolve the dispute does not explain its initial characterization of these items before the Board. These items together account for $524,465 of the $1,193,242 transferred to the PBF. Moreover, while claiming that the HVAC replacement was not a capital expenditure, Idaho conceded that some of the remaining items "may still be capital expenditures and we will depreciate it if it turns out to be the case and include it in the A-87 reconciliation as an unallowed expense." Idaho Reply Br. at 7. Idaho's uncertainty as to the nature of these expenses, together with its failure to provide any evidence as to how in fact its accounting system treated the costs, is troublesome. If we permitted such costs to be treated as FS ISF expenditures, but the Idaho accounting system treated them as capital expenditures to be recouped through depreciation or a use allowance in future years, this could result in duplicate charges to federal funds.

Idaho also argued that generally accepted accounting principles and the cost principles of OMB Circulars A-87 and A-122 permit some of the expenditures of the transferred funds to be charged to current year awards rather than capitalized.⁽⁶⁾ Idaho did not explain why those principles controlled here, overriding its own state requirements. (In any event, OMB Circular A-122, Cost Principles for Non-Profit Organizations, is not applicable here.) Permitting Idaho to charge federal programs in a single year for the full cost of items that its state policy required to be capitalized (and thus charged to contributing programs in increments over several years through depreciation or a use allowance) could result in higher charges to federal programs than to those funded solely by the state. Yet, OMB Circular A-87 requires that costs be accorded consistent treatment, and be consistent with policies, regulations, and procedures that apply uniformly to both federal awards and other activities of the governmental unit, and that costs must be authorized or not prohibited under State or local laws or regulations. OMB Circular A-87, Att. A, ¶ C.1.c, e, f.

In sum, Idaho's documentation is insufficient and raises more questions than it answers. Even if some of the costs might be allowable types of costs, Idaho had to show that the costs were properly chargeable to the FS ISF and therefore properly reimbursed with revenues paid into the FS ISF. Idaho failed to do so.

Conclusion

For the reasons discussed above, we sustain DCA's decision requiring repayment of the federal share of the transferred reserve funds.

Donald F. Garrett

M. Terry Johnson

Judith A. Ballard
Presiding Board Member

1. The $9.90 rate applies to what Idaho's CAP refers to as "Class 'A'" space; lower rates apply to "Class 'B'" and other types of space, such as storage and warehouse. DCA Ex. 2-2.

2. Among the information Idaho was required to provide for its FS ISF were: a revenue/expenses statement with revenues broken out by source; a list of nonoperating transfers (as defined by generally accepted accounting principles) into and out of the fund; a description of the methodology used to charge the costs of each service to users, including how billing rates are determined; a schedule of current rates; and a schedule comparing total revenues (including imputed revenues) generated by the service to the allowable costs of the service under OMB Circular A-87, with an explanation of how variances will be handled. ASMB C-10, ¶ 4.5.2.

3. As noted above, OMB Circular A-87 permits a reserve of up to 60 days operating expenses. Exactly what that amount would be for the FS ISF is difficult to determine since Idaho's treatment of transferred amounts as expenditures also affected Idaho's calculation of the 60 days operating expenditures. DCA took the position that since the Idaho Code treated $200,000 as a sufficient reserve for the FS ISF, any amount over $200,000 should be treated as an excess for federal purposes. This is not an unreasonable position under the circumstances here, but of course should be reconsidered if the Idaho Code provision at issue is repealed (or interpreted as not applying to the FS ISF).

4. Interest income falls within the plain meaning of "applicable credit" since earnings derived from federal funds are clearly receipts which offset grant costs, and the Board has held in a variety of contexts that interest is an applicable credit within the meaning of OMB Circular A-87. See, e.g., Oklahoma Office of State Finance, DAB No. 1668 (1998); West Virginia Dept. of Administration, DAB No. 1465 (1994); Pennsylvania Office of the Budget, DAB No. 1234 (1991), aff'd, 996 F.2d 1505 (3rd Cir. 1993), cert. denied, 510 U.S. 1010 (1993).

5. A notation on the second list regarding the inaugural platform, "cash donated from private sources," raises the additional question of whether Idaho had any net expenditure for the platform, or should have treated the donated cash as an applicable credit. See OMB Circular A-87, Att A., ¶ C.1.i.; Tennessee Dept. of Human Services, DAB No. 1094 (1989); West Virginia Dept. of Human Services, DAB No. 956 (1988).

6. Idaho also contended that DCA had conceded the propriety of these expenditures under the applicable principles when DCA offered to settle. Any offer or concession that DCA may have made during the attempt to mediate this dispute or as part of informal settlement negotiations between the parties has no bearing on our decision. The Board's Practice Manual provides that mediation does not bind the parties except to the extent that they agree to be bound, and say so in writing, and does not add anything to the record except the final written agreement, if any. Moreover, the Board has noted that a federal agency is not bound to hold open an earlier settlement offer made but not accepted during the parties' negotiations. See, e.g., Maine Dept. of Administrative and Financial Services, DAB No. 1659 (1998); Ohio Dept. of Public Welfare, DAB No. 500 (1984).