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CASE | DECISION | JUDGE

Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
IN THE CASE OF  


SUBJECT: Central Piedmont Action Council, Inc.

DATE: April 16, 2004
   


 

Docket No.A-02-124
Control No. A-03-02-00550
Decision No. 1916
DECISION
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DECISION

Central Piedmont Action Council, Inc. (CPAC) appealed the July 26, 2002 determination of the Administration for Children and Families (ACF) disallowing $78,774 in Head Start funds awarded to Central Piedmont for the years 2000 and 2001. ACF took the disallowance on the grounds that CPAC spent Head Start grant funds awarded for the year 2001 on expenses from the years 2000 and 1999, and funds awarded for the year 2000 on expenses from the year 1999, in violation of applicable cost principles.

CPAC did not dispute the basis for the disallowance. Instead, CPAC argued that the disallowance should be reduced because CPAC incurred other documented and allowable Head Start expenses in the appropriate time period that would substantiate its claims for federal funding. During the appeal, CPAC provided documentation showing that it incurred total Head Start expenses chargeable to federal funds during the year 2001 in an amount sufficient to offset $37,638 of the disallowed funds that were spent on costs from the year 2000. ACF did not question the allowability of the expenditures shown in this documentation, and did not dispute CPAC's representation as to the actual amount of Head Start expenses that CPAC incurred during 2001. Accordingly, for the reasons explained below, we reverse the disallowance of $37,638, and sustain the disallowance of $41,106. Since our decision to reverse a portion of the disallowance is based on documentation that CPAC submitted while the appeal was pending, our decision does not preclude ACF from reviewing further the claimed costs that CPAC reported in that documentation (or other costs reported for the year), and disallowing those that ACF determines are not allowable under applicable cost principles. CPAC may appeal any such disallowance to the Board.

CPAC also argued that the disallowance should be reversed because it acquired additional resources for use in the Head Start program, and because its use of funds to pay prior year costs did not cause any diminution of Head Start services. As explained below, these additional arguments do not provide a basis to reverse the remainder of the disallowance.

The record in this appeal consists of the parties' briefs and appeal files. CPAC submitted documentation with its notice of appeal, its brief, and its reply brief. The Board permitted ACF to comment on the materials that CPAC submitted with its reply brief, and permitted CPAC to submit a surreply following receipt of ACF's comments. The record also includes CPAC's responses to questions from the Board prepared after receipt of all of the parties' submissions.

Background

The Head Start program provides federal funding for grantee agencies to promote school readiness by enhancing the social and cognitive development of low-income children by providing them and their families with health, educational, nutritional, social, and other necessary services. See 42 U.S.C. § 9831. CPAC is a community action agency and Head Start grantee that serves approximately 350 children in South Central Virginia. ACF Exhibit (Ex.) 1, at 6. CPAC received federal funds from ACF to administer the Head Start program totaling approximately $1,950,850 in calendar year 2000, and $2,315,501 in calendar year 2001. Id.; CPAC Ex. B-2. CPAC's Head Start grants were provided on a calendar year basis. ACF Ex. 1, at 6.

ACF based the disallowance on an April 2002 review of CPAC costs by the HHS Office of Inspector General (OIG). Id., OIG Report, CIN No. 03-02-00550 (Apr. 2002). The review was prompted by concerns over deficits that CPAC incurred in Fiscal Years (FY) 1999 and 2000, and concerns over whether CPAC had properly calculated and recorded in-kind contributions. ACF Ex. 1, at 6. At ACF's request, OIG performed a "limited scope review" of selected financial practices at CPAC for the year 2000 and the first half of 2001, with field work at CPAC during October and November 2001. Id., at 7. OIG determined that CPAC:

  • Spent $75,023 in funds awarded for the year 2001 to pay for 51 expenses from the year 2000;
  • Spent $3,698 in funds awarded for the year 2000 to pay for 20 expenses from the year 1999;
  • Spent $23 in funds awarded for the year 2001 to pay for one expense from the year 1999.

OIG based these determinations on a review of 82 expenses from the year 2000 and 37 expenses from March 1 to December 31, 1999. OIG determined that the $75,023 in year 2001 funds that CPAC spent on 51 expenses from the year 2000 comprised $52,000 in payroll expenses, $10,521 in unspecified administrative costs, and $9,360 in mileage, transportation, and fuel, with the remainder described as expenses for speech therapy, utilities, automobile repairs, sewer charges, and education. Id. at 8. Of the 51 expenses from 2000 paid out of funds awarded for 2001, 44 were from December 2000, and seven were incurred from September through December 2000. The OIG report also stated that CPAC used $2,022,175 in federal funds during 2000, and reported federal expenses for that year of $1,950,850, with the difference of $71,325 consisting of $75,023 in funds awarded for the year 2001 that CPAC spent on year 2000 expenses, less the $3,698 in funds awarded for the year 2000 that CPAC spent on expenses from the year 1999. Id.

ACF adopted the determinations in the OIG report in taking the disallowance. ACF determined that CPAC's use of funds awarded for a specific program or grant year to pay for the expenses from a previous year violated applicable cost principles requiring that costs that a grantee charges to a federal grant award must be allocable to that award and forbidding the shifting of costs among different awards. We discuss those cost principles below, as well as the other principles that place the burden of documenting the allowability of charges to federal grant funds squarely on grantees.

Arguments and analysis

1. Applicable legal principles support the basis for the disallowance.

The applicable legal principles require that grant funds awarded for one funding period be used to pay for expenses from that year only, and not for any other program year. The regulations governing HHS grants to non-profit organizations such as this Head Start grantee state that where a funding period is specified in a grant award (e.g., a program year, which in this case was the calendar year), a recipient may charge to the award only allowable costs resulting from obligations incurred during the funding period. 45 C.F.R. § 74.28, titled "Period of availability of funds." Similarly, the cost principles of Office of Management and Budget Circular A-122 (OMB Circ. A-122), made applicable to HHS grants by 45 C.F.R. § 74.27(a), provide that costs allocable to a particular award may not be shifted to other Federal awards to overcome funds deficiencies, or to avoid restrictions imposed by law or by the terms of the award. OMB Circ. A-122, Attachment (Att.) A, ¶ A.4.b.

The prohibition on using federal grant funds awarded for a specific year to pay for expenses from a previous year (which should be charged to grant funds awarded for that previous year) reflects the general requirement in OMB Circular A-122 that allowable costs charged to a federal grant award must be allocable to the award. OMB Circ. A-122, Att. A, ¶ A.2.a. Costs arising in a particular program year are allocable to the award for that year, and not to the awards for other years. The Board recognized this restriction when it rejected a grantee's attempt to reduce a disallowance of funds awarded for one year by identifying unclaimed costs attributable to a different program year. Seminole Nation of Oklahoma, DAB No. 1385 (1993). Grant expenditures incurred outside of the applicable budget periods are not allocable to awards for those budget periods, and this violation of the requirement of allocability is a basis for a disallowance. Delta Foundation, Inc., DAB No. 1710, at 41 (1999), citing Bedford Stuyvesant Restoration Corporation, DAB No. 1404, at 15 (1993). Permitting a grantee to use current year awards to pay for expenses from an earlier budget period effectively increases the prior period's award beyond the amount specified in the grant award document.

Head Start projects are approved for indefinite periods, but grantees must apply for continuation awards for each program year to operate their basic programs. Campesinos Unidos, Inc., DAB No. 1546, at 2 (1995). A Head Start grantee such as CPAC receives a discrete grant award for each program year. The OIG review report and a federal financial status report (form SF-269) for the year 2001 that CPAC submitted indicate that the funding of CPAC's Head Start grant was based on budget periods lasting one calendar year. CPAC Brief (Br.), Att. B-2. Thus, grant funds awarded to CPAC for the year 2001 were allocable only to that year and could not be spent on costs arising from and allocable to earlier program years.

Here, CPAC did not dispute the determination in the OIG review report that CPAC used funds awarded for 2001 and 2000 for expenses that were attributable to prior years. CPAC explained that most of these prior year costs were personnel expenses from December that it paid in January of the subsequent year, a situation that it described as an ongoing problem. Notice of appeal at 1. This situation was apparently related to the fact that CPAC operated on a fiscal year ending each June 30, while its Head Start grants were on a calendar year basis, and to the fact that CPAC did not adopt the accrual basis of accounting until July 1, 2001. CPAC also did not dispute the general principle that it may not spend funds awarded for a particular program year on expenses allocable to other program years. We thus uphold in principle the basis for the disallowance. We next address CPAC's arguments that the disallowance should be offset to reflect its total allowable charges during 2001 that were eligible for Head Start.

    2. The materials that CPAC submitted indicate that CPAC incurred sufficient Head Start costs attributable to the year 2001, including previously unclaimed costs, to offset a portion of the disallowance.

CPAC's principal argument was that the disallowance relating to $75,023 awarded for the year 2001 that OIG determined was spent on 51 expenses from the year 2000 should be reduced because ACF and OIG had not considered the total amount of allowable Head Start costs that CPAC incurred in the year 2001 that were eligible for federal Head Start reimbursement. CPAC argued that this total included food-related costs eligible for partial reimbursement by the Head Start program but for which CPAC had not initially claimed federal Head Start funding because the costs were also partially reimbursed by the U.S. Department of Agriculture (USDA). CPAC also argued that the OIG review report did not accurately depict its total Head Start charges during the year 2001 because OIG completed its review prior to the end of the 2001 budget year. CPAC argued that its total federal Head Start costs for the year 2001, not including the 51 expenses from the year 2000, were $37,385 less than the total federal Head Start funds that it drew down for that year, and that this difference was the amount that it should be required to return to ACF.

In its reply brief, CPAC asserted that bank reconciliations and support documentation examined as part of a reconstruction of its 2001 accounting records showed that its "year 2001 actual expenditures," were $2,277,916, and that CPAC drew down $2,315,501 in year 2001 federal Head Start funds (out of a 2001 grant award of $2,317,881), "resulting in a reduction of the items in question paid with 2001 grant funds from $75,023 to $37,385." CPAC Reply Br. at 1-2; CPAC Att. B-2. With its reply brief, CPAC enclosed a 66-page spread sheet list of "2001 Head Start expenses." The spread sheet lists each expense in order of its "G/L" code, which refers to accounts from CPAC's general ledger based on the type of expenditure (e.g., salaries, advertising, utilities, kitchen supplies, field trips/transportation, vehicle repair, fuel oil, etc.). The listing for each expense includes the G/L code, the date, the name of the expense or the payee, a check number where applicable, a description of the transaction, a "DocNUm", and the amount. CPAC Att. D.

In a subsequent submission in response to questions from the Board, CPAC stated that in analyzing its expenses for the year 2001 and compiling the 66-page list of 2001 Head Start expenses, it removed the 51 expenses attributable to the year 2000 that OIG identified as having been paid with funds awarded for expenses attributable to the year 2001. CPAC asserted that its failure to accurately report those costs earlier was due to problems with its accounting software, to the absence of staff familiar with CPAC's fiscal operations, and to a CPAC employee's mistaken belief that CPAC could not claim federal Head Start funding for the food-related costs that were partially reimbursed by USDA.

ACF did not question the allowability of the costs that CPAC reported in the 66-page list of 2001 federal Head Start expenses that CPAC submitted with its reply brief. ACF's only comment on the 66-page list was to point to an obvious discrepancy: although CPAC was reporting 2001 federal Head Start expenditures of $2,277,916, the expenses on the 66-page list totaled $2,461,160.40, an amount more than CPAC's 2001 Head Start grant award of $2,317,881. This discrepancy, ACF stated, caused it to have additional concerns.

CPAC addressed ACF's concerns in its response to ACF's comments, and in its subsequent response to questions from the Board. CPAC explained that the 66-page list of 2001 federal Head Start expenditures included some expenditures for food-related items that were partially reimbursed by USDA. CPAC reported that it had received $183,244.66 in USDA funding for these items during 2001. Subtracting the USDA funding from the $2,461,160.40 in 2001 federal Head Start expenditures shown by the 66-page list left $2,277,916 eligible for Head Start reimbursement from ACF. Materials that CPAC submitted with its notice of appeal indicate that expenses for food-related items eligible for partial reimbursement from USDA had never been submitted for Head Start reimbursement for the portions of the expenses not covered by USDA. August 21, 2002 memorandum to Ken Ackerman, CPAC Interim Exec. Dir., from Steve Barnett, Mid-Iowa Community Action.

ACF did not dispute CPAC's assertions regarding the USDA funding, nor CPAC's underlying assertion that it had a total of $2,277,916 in federal 2001 Head Start expenses that were eligible for reimbursement from ACF. ACF specifically declined the opportunity to comment on CPAC's responses to the Board's questions in which CPAC stated those assertions.

The Board has recognized that a grantee may reduce or offset a disallowance by documenting that it incurred unclaimed, allowable and allocable costs that it paid for with its own funds. Campesinos Unidos, Inc.; Seminole Nation of Oklahoma. In effect, a grantee may substitute, for unallowable costs, allowable costs for which it did not claim federal funding. Additionally, because the Head Start statute requires a Head Start grantee to pay for 20% of its total approved Head Start costs with non-federal funds, a grantee seeking to reduce a disallowance by identifying unclaimed costs would have to establish that the unclaimed costs were distinct from and in addition to the 20% of total approved Head Start costs that grantees are required to pay with non-federal funds. 42 U.S.C. § 9835(b); 45 C.F.R. § 1301.20.

We conclude that CPAC reasonably demonstrated that it incurred Head Start expenditures for the year 2001 in an amount sufficient to reduce the disallowance relating to funds awarded for that year that were used to pay for costs from the year 2000. The basis of this portion of the disallowance was that CPAC charged costs from the year 2000 to Head Start funds awarded for the year 2001. By identifying Head Start expenses from the year 2001 in a quantity sufficient to make up for a portion of the 2001 funds originally applied to 2000 costs, CPAC has removed the basis for that portion of the disallowance. As ACF during these proceedings did not provide any reason to question the allowability of the costs that CPAC reported, reversal of that portion of the disallowance is appropriate. The following considerations support our conclusion:

  • ACF did not provide us a reason not to accept CPAC's documentation, which appears credible on its face. It lists each expenditure of federal funds, including the date, the payee, the purpose, a check number where applicable, and an account classification number. ACF did not question the allowability of the items listed in this documentation. The only question that ACF raised was with respect to the total amount of the expenditures, which CPAC answered by pointing out that the list included $183,244.66 worth of items paid for with federal funds received from USDA. ACF did not dispute this explanation.


  • The OIG review report provides no basis to question CPAC's report of unclaimed Head Start expenses from 2001 or its supporting documentation. OIG performed only a limited scope review of selected financial and management practices at CPAC before the end of the 2001 program year, and focused on amounts claimed on forms SF-269 (financial status reports) only through June 30, 2001. The 82 judgementally selected expenses that OIG reviewed in determining that CPAC had paid prior year expenses were from the year 2000, and thus shed no light on the allowability of expenditures that CPAC incurred during 2001. ACF Ex. 1, at 8. OIG could not determine if CPAC's financial statements for the fiscal year 2001 were fairly presented because they were not complete at the conclusion of OIG's field work. Id., at 7. (Head Start regulations require that programs be audited annually by an independent auditor. 45 C.F.R. § 1301.12(a).) OIG did not issue a draft report and, at ACF's request, did not discuss its findings and recommendations with CPAC officials and thus did not obtain their views. Id., at 6. Thus, at the time it completed its review, OIG would not have had access to a complete picture of CPAC's Head Start expenses for the year 2001.
  • The OIG review report shows that OIG did review invoices related to administrative expenses from 2000 and 2001, and determined that CPAC claimed $67 in unsupported travel expenses during 2001, and $966 in unnecessary building repair costs during 2000. Id. at 11. However, ACF's disallowance letter addressed only the issue of expenses paid from subsequent year funds, and did not adopt OIG's recommendation that ACF recover unallowable administrative expenses. CPAC would not have had the opportunity to present OIG with evidence concerning its determination as to the unsupported administrative expenses, because, as noted above, OIG did not discuss its findings with CPAC officials. In any event, ACF is free to disallow the costs that CPAC reported in its list of expenditures if ACF determines that they do not meet the standards of allowability in the applicable cost principles.

  • The record indicates that the 2001 Head Start costs that CPAC reports having paid out of its own funds were not part of the 20% share of total approved costs that all Head Start grantees are required to pay with non-federal funds. 42 U.S.C. § 9835(b); 45 C.F.R. § 1301.20. As the Board noted in its questions to CPAC, an effect of this requirement is that a grantee seeking to reduce a disallowance by identifying unclaimed costs would have to show that the unclaimed costs were distinct from and in addition to the required non-federal share. Here, the record indicates that CPAC provided its non-federal share through in-kind contributions, as permitted by 45 C.F.R. § 74.23. While the OIG review found that CPAC had overvalued its in-kind contributions during the period January 1, 2000 through June 30, 2001, OIG also found that if CPAC's in-kind contributions were reduced by the amount of the overvaluation, they would still exceed 20% of year 2000 and 2001 funds and thus not require a reduction in federal Head Start funds. ACF Ex. 1, at 9.

    The OIG determination is consistent with information that CPAC provided in its response to Board questions noting the requirement that unclaimed costs used to reduce a disallowance of Head Start funds must not be part of a grantee's required 20% non-federal share. CPAC reported that reducing the $969,753 in total in-kind contributions that CPAC reported on its financial status report for the year 2001 by the $27,488 in in-kind contributions that CPAC identified as among the additional resources acquired during 2001 would result in adjusted total in-kind contributions of $942,265. Based on actual federal Head Start expenditures of $2,277,916, this would result in a non-federal share contribution of 29.26% of total program costs ($2,277,916 plus $942,265). As noted above, ACF declined the opportunity to respond to CPAC's response to the Board's questions. Earlier, ACF accepted CPAC's assertion as to the amount of additional resources (which included in-kind contributions) that CPAC acquired during 2001. ACF response to request for agency information at 1. ACF thus provided no basis to find that reducing the disallowance of 2001 federal funds spent on year 2000 costs to reflect the amount of total 2001 federal Head Start expenses that CPAC reported in its reply brief would reduce CPAC's non-federal share of total Head Start expenses for the year 2001 below the required 20 percent.

  • CPAC's undisputed report that it acquired additional resources during 2001 indicates that it likely had sufficient non-federal funds to incur $37,638 in previously unclaimed costs. CPAC reported that these additional resources totaled $81,130 and comprised $33,626 in cash, $27,488 in in-kind services, $6,000 realized by eliminating payment for staff lunches, and $14,016 realized through cost containment. CPAC Br. at 2. ACF conceded that CPAC had submitted data to support its claim that it acquired sufficient non-federal resources to cover costs that would otherwise have been paid with federal funds and to offset the funds expended from the year 2001 on costs from the year 2000. ACF response to request for agency information at 1. ACF is free to take appropriate action if it determines that any of the funds that CPAC used to pay for the year 2001 expenses that CPAC reported during the appeal were provided by other federal grant awards.
  • Past Board decisions are consistent with CPAC's claim that portions of food-related costs that were not covered by partial USDA reimbursement were allowable Head Start costs. The Board has observed that USDA under its child care food program furnishes grants to assist states in providing non-profit food service programs for children in public and private institutions providing child care, including Head Start centers, and that the Head Start program covers those costs not covered by USDA. Cayuga County Action Program, Inc., DAB No. 1151 (1990); see also Evangeline Community Action Agency, 1379 (1983); Camden County Council on Economic Opportunity, DAB No. 881 (1987). (ACF is free, of course, to disallow any costs for which duplicate federal funding may have been claimed, in violation of the requirement that an allowable cost not be included as a cost or used to meet cost sharing or matching requirements of any other federally-financed program. OMB Circ. A-122, Att. A, ¶ A.2.f.)

In appeals of disallowances of unallowable costs, the Board has repeatedly held that a grantee bears the burden of documenting the existence and allowability of its costs. Ohio Valley Opportunities, Inc., DAB No. 1390 (1993), and cases cited therein. The regulations governing HHS grants to non-profit organizations require grantees to maintain records that identify adequately the source and application of funds for HHS-sponsored activities, as well as accounting records, including cost accounting records, that are supported by source documentation. 45 C.F.R. §§ 74.21(b)(2), (7), incorporated by the Head Start regulations at 45 C.F.R. § 1301.10. The issue of whether CPAC can meet these burdens has not arisen because ACF has not questioned the costs that CPAC reported in the documentation that it submitted during the appeal, or otherwise made any formal determination as to their allowability. Because CPAC's documentation of those costs appears valid on its face, and ACF has not disputed CPAC's representation that the documentation shows allowable Head Start expenditures during 2001, we find that the CPAC has presented a basis to reduce the disallowance. If ACF upon review of those costs questions their allowability, CPAC would have the burden to demonstrate their allowability as required by Board decisions and the applicable regulations. As ACF has not rendered a formal determination as to the allowability of the expenditures reported during the appeal, our decision does not preclude ACF from reviewing these expenditures and disallowing those that do not meet the standards of allowability in the applicable cost principles. CPAC may appeal any such disallowance to the Board.

As noted above, ACF did not dispute CPAC's report of its 2001 expenditures and did not provide any basis for questioning their allowability. The materials that CPAC submitted show that its 2001 Head Start expenses, not including the 51 expenses from the year 2000 totaling $75,023, were $37,385 less than the $2,315,501 that CPAC received in year 2001 federal Head Start funding. That difference is not accounted for by the total year 2001 expenses and must be refunded. CPAC effectively demonstrated that it used its own funds to pay for $37,638 of the $75,023 in Head Start funds for the year 2001 that CPAC spent on costs from the year 2000. Accordingly, of the disallowance of $75,023 in 2001 funds spent on costs from the year 2000, we reverse $37,638, and sustain $37,385 of the disallowance for the year 2001.

However, CPAC's documentation did not provide a basis to reverse the remainder of the disallowance. CPAC's argument that the disallowance should be reduced to reflect its total 2001 costs addressed only the $75,023 in Head Start funds awarded for 2001 that CPAC spent on costs from the year 2000. CPAC did not dispute the OIG findings that CPAC also spent $3,698 in funds awarded for the year 2000 on 20 expenses from the year 1999, and $23 in funds awarded for the year 2001 funds on one expense from the year 1999. CPAC did not assert that when compiling the 66-page list of 2001 Head Start expenses, it removed the $23 expense from the year 1999 that OIG identified as having been paid for out of year 2001 funds (as CPAC did with the 51 expenses from 2000, an assertion that ACF did not dispute). As we discuss below, CPAC's other arguments do not provide a basis to reverse the remainder of the disallowance. Accordingly, we sustain the disallowance of $3,721 in funds awarded for the years 2000 and 2001 that were spent on costs attributable to 1999.

    3. CPAC's claims that it acquired additional resources, including in-kind contributions, do not provide a basis to reduce the disallowance further.

CPAC also argued that the disallowance should be reversed because CPAC acquired additional resources during 2001 sufficient to offset the disallowance, including in-kind contributions. CPAC also argued that its expenditure of Head Start funds on prior year costs did not result in any decrease in Head Start services. As we explain below, these arguments do not provide a basis to reverse the remainder of the disallowance.

CPAC contended that the disallowance should be reduced by the amount of additional resources that CPAC acquired during 2001. CPAC argued that the 2001 funds spent on 2000 payroll expenses were "offset by the additional non-federal resources obtained by [CPAC] to cover Year 2001 costs that would otherwise have been paid with Federal funds." CPAC Reply Br. at 2. CPAC argued that these additional resources amounted to $81,130, comprising $33,626 in cash, $27,488 in in-kind services, $6,000 realized by eliminating payment for staff lunches, and $14,016 realized through cost containment. CPAC Br. at 2.

However, CPAC failed to explain why the acquisition of additional resources to spend on the Head Start program, by itself, would provide a basis to reduce the disallowance. Additionally, the amounts that CPAC described as in-kind services and cost containment are not costs that could have been charged to federal funds and which could thus reduce or offset the disallowance.

The Board has held that, although the value of third party in-kind contributions may be used to satisfy a cost sharing or matching requirement, such contributions are not by their nature regarded as obligations chargeable to federal funds. Cayuga County Action Program, DAB No. 1151 (1980), citing Project Bravo, Inc., DAB No. 925 (1987). Thus, in-kind contributions may be used as part of the 20% share of total Head Start expenses that grantees are required to finance with non-federal funds, but they are not actual costs to the grantee for which the grantee receives federal reimbursement. 45 C.F.R. § 74.23. The additional in-kind contributions that CPAC identified were not costs that CPAC could have charged to federal funds, which may be used to offset unallowable costs that CPAC charged to its 2001 grant award.

We also reject CPAC's claim regarding cost savings. In Seminole Nation, the Board considered a similar claim, that the disallowance should be reduced by the amount of cost savings that the grantee realized by having employees forfeit annual leave and work without pay. The Board found that the forfeiture of annual leave and wages by the grantee's employees did not reduce the amount of federal funds expended on excess salaries, and did not result in the identification of additional, allowable costs allocable to the same program year as the disallowance that could be substituted for excess salaries charged to the grant. The Board also found that the grantee did not show that it considered annual leave as an expense at the time that it was earned, and did not show that it used an accrual basis of accounting during the relevant time period. The Board in Seminole Nation affirmed the basic notion that "[wh]ere an unallowable expenditure is financed with federal funds, the grantee must reimburse the federal agency -- in this case ACF -- with cash from non-federal sources, or by documenting that the grantee has incurred and paid with its own funds allowable, allocable costs that were not previously charged to federal funds, but could have been. Seminole Nation, DAB No. 1385, at 5, citing Project Bravo; Gila River Indian Community, DAB No. 264 (1982).

The Board in Seminole Nation did suggest that a grantee that overpaid an employee with federal funds in one year, and reimbursed ACF for the excess payment, could withhold the excess salary from the employee in the following year but treat the full value of the employee's time as an allowable cost in that following year. However, this suggestion by the Board assumes that the grantee reimbursed ACF for the unallowable payment, whereas here the grantee is attempting to use costs savings to avoid repaying the disallowance.

Finally, CPAC's arguments that its expenditure of 2001 funds on expenses from prior years did not cause its Head Start program to suffer any diminution of services -- either because CPAC acquired additional resources on its own, or because any funds spent on prior year expenses were made up for with funds from subsequent years -- does not provide a basis for reversing the disallowance. The Board has noted that grantees have sometimes presented the equitable claim that they used disallowed funds to further program goals, regardless of how imperfectly they were able to trace those expenditures after the fact. Council of the Southern Mountains, DAB No. 1861, at 11 (2003). We noted there that this equitable argument is flawed for disregarding how central it is to any responsible handling of federal funds that their ultimate use be demonstrably in the service of the ends for which those funds were appropriated. Hence, the requirement to document costs is a fundamental principle of grants management, not a mere technicality, and thus the burden to demonstrate the allowability and allocability of costs claimed in a grant program rests with the grantee. Id., citing Lac Courte Oreilles Tribe, DAB No. 1132 at 5, n.4 (1990).

Conclusion

Based on the above analysis, we reverse the disallowance of $37,638, and sustain the disallowance of $41,106. Since our decision to reverse a portion of the disallowance is based on documentation that CPAC submitted while the appeal was pending, our decision does not preclude ACF from reviewing further the claimed costs that CPAC reported in that documentation (or other costs reported for the year), and disallowing those that ACF determines are not allowable under applicable cost principles. CPAC may appeal any such disallowance to the Board.

 

JUDGE
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Judith A. Ballard

Cecilia Sparks Ford

Donald F. Garrett
Presiding Board Member