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


SUBJECT: Ohio Department of Job and Family Services

DATE: February 1, 2005
       

 


 

Docket No. A-04-80
Decision No. 1961
DECISION
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DECISION

The Administration for Children and Families (ACF) disallowed claims by the Ohio Department of Job and Family Services (ODJFS) for federal financial participation (FFP) in costs of $1,564 incurred by Ohio's title IV-D program (1) for an employee recognition luncheon. ODJFS claimed that the costs of the meal were allowable as "employee morale" costs. As we explain below, we sustain the disallowance because applicable cost principles generally preclude claims for meal costs and do not include such costs within the scope of allowable employee morale costs.

Factual and Procedural Background

In a Single Audit Report (2) (SAR) submitted by the state of Ohio for the fiscal year ending June 30, 2002, state auditors questioned $1,564 in costs incurred for an October 2001 employee recognition luncheon. ACF Ex. 1 at 197-98. The luncheon was held by the Lucas County child support enforcement agency to recognize certain of its employees for length of service, perfect work attendance, or educational achievement. ACF Ex. 2, at 18. An accounts payable voucher and other documents reflect that Lucas County paid a catering company $1,563.75 for food and other items for the luncheon. See documentation faxed by ODJFS to the Board on December 1, 2004. (3) Both agency employees and local community officials (such as state legislators and county law enforcement and judicial personnel) attended the luncheon. Id. The SAR indicated that the auditors found this expenditure to be unallowable under federal cost principles, and indicated that the auditors had reviewed two particular principles (both of which are discussed below) dealing with unallowable "entertainment" costs and allowable "employee morale" costs. ACF Ex. 1, at 197. The SAR noted that ODJFS did not concur with the audit findings, asserting that the luncheon was not an unallowable entertainment cost but instead an allowable employee morale cost. ACF Ex. 2, at 18. ODJFS also noted that its position was consistent with cost principles set forth in Ohio administrative issuances. Id.

ACF, the federal agency with responsibility for overseeing title IV-D grants, disallowed the luncheon costs. ODJFS then filed this appeal.

Statutory and Regulatory Framework

Title IV-D of the Social Security Act provides for FFP in state expenditures under approved State plans for the title IV-D program. ODJFS administers Ohio's title IV-D program through county-level agencies. See Ohio Dept. of Human Services, DAB No. 1719 (2000).

FFP is available only for "necessary" title IV-D expenditures made in accordance with an approved State plan and other regulatory requirements. 45 C.F.R. §§ 304.15 and 304.20(b). In determining necessary and proper state expenditures, the cost principles set forth in Office of Management and Budget (OMB) Circular A-87 ("Cost Principles for State and Local Governments") are applicable. 45 C.F.R. §§ 74.27(a) and 304.10. (The Circular has been amended over the years, most recently in May 2004. 69 Fed. Reg. 25,970 (May 10, 2004). When the costs at issue here were incurred, the version of the Circular in effect was the one issued on August 29, 1997. See 62 Fed. Reg. 45,934 (indicating that the Circular's text is available on OMB's website). Unless otherwise indicated, our references and citations to the Circular are to the August 29, 1997 version.)

OMB Circular A-87 states that a cost is allowable under a federal award if it is, among other things, "necessary and reasonable for proper and efficient performance and administration" of the grant program. (4) OMB Cir. A-87, Att. A, ¶ C.l.a. A grantee bears the burden of documenting the existence and allowability of its costs. OMB Cir. A-87, Att. A, ¶ C(j); New York State Dept. of Health, DAB No. 1636 (1997).

Attachment B of the Circular sets forth, in 42 numbered sections, principles for determining the allowability of several items or types of costs. The Circular states that "[f]ailure to mention a particular item of cost in these [42] sections is not intended to imply that it is either allowable or unallowable; rather, determination of allowability in each case should be based on the treatment or standards provided for similar or related items of cost." OMB Cir. A-87, Att. B.

The parties' dispute over meal costs primarily concerns two sections in Attachment B of the Circular. One is section 18, which states:

Entertainment. Costs of entertainment, including amusement, diversion, and social activities and any costs directly associated with such costs (such as tickets to shows or sports events, meals, lodging, rentals, transportation, and gratuities) are unallowable.

OMB Cir. A-87, Att. B, § 18 (emphasis added). (5)

The other relevant section of OMB Circular A-87, Attachment B, is section 17, which states:

Employee morale, health, and welfare costs. The costs of health or first-aid clinics and/or infirmaries, recreational facilities, employee counseling services, employee information publications, and any related expenses incurred in accordance with a governmental unit's policy are allowable. Income generated from any of these activities will be offset against expenses.

OMB Cir. A-87, Att. B, § 17.

The Ohio Administrative Code, at section 5101-1-15, and section 1505.4 of the ODJFS Administrative Procedure Manual, both contained the following language in 2001:

Costs associated with entertainment are generally unallowable. An exception is the cost associated with an employee or volunteer recognition/award dinner. Costs including meals, facility rental, and supplies or printing (e.g., a plaque) related to the award function can be considered allowable if the award is to an employee or volunteer solely in recognition of exemplary service in the efficient performance of duties associated with administration of state/federal programs. There must be a connection between the event and the benefit to the programs in that it provides incentives to other workers and may cause the programs to be operated in a more efficient manner[.]

ACF Ex. at 4, at 2-4; see also ACF Ex. 6.

Discussion

With respect to meal costs, the Board has stated that "[e]xpenses for meals are subject to strict scrutiny in view of the cost principles' prohibition against paying for entertainment costs with federal grant funds." Mid America Health Systems Agency, DAB No. 420, at 11 (1983). The Board has further indicated that "meals not taken in connection with travel are presumed to be a personal expense unless the business transacted is documented, and the reason for conducting business over a meal is also documented." Id. In Humanics Associates, DAB No. 860 (1987), the Board, applying an entertainment cost provision similar to that in OMB Circular A-87, denied reimbursement for certain meal costs in part because the grantee had presented no evidence that the costs were necessary for any "business purposes." Humanics Associates at 17.

ODJFS argues that it had established that the meal costs should not be disallowed as "entertainment" because the luncheon was not designed for the amusement of employees. This argument is not persuasive because the cost principle referring to entertainment is not limited to "amusement." Consistent with our prior cases, referenced above, the key issue is whether there was a documented business purpose for ODJFS to furnish a meal to employees and non-employees.

ODJFS argues that the business purpose for the meal was to recognize exemplary employee service and that such costs are allowable as "employee morale" costs under section 17 of Attachment B. For purposes of argument, we accept ODJFS's assertion that recognizing employees for their accomplishments or length of service generally enhances employee morale and thus makes the title IV-D program run more efficiently. Even so, we find that the provision of meals is, in general, not the type of activity that section 17 contemplates as an allowable employee morale cost. While the title of section 17, "employee morale, health and welfare costs," appears broad, the listed components are more limited. The section describes expenditures for activities that directly improve employee mental or physical health, or disseminate employment-related information, specifically "[t]he costs of health or first-aid clinics and/or infirmaries, recreational facilities, employee counseling services, employee information publications, and any related expenses . . . ." Meals served to employees and non-employees may have some indirect benefits for the workplace, but they are not of the same nature as these listed benefits because they do not directly improve employee mental or physical health or disseminate employment-related information. (6)

Because meal costs are not the type of costs generally included as allowable "employee morale" costs under federal cost principles, we are not persuaded that the disallowance should be reversed in light of Ohio Administrative Code and Manual provisions that meal costs associated with employee recognition functions are an exception to the general prohibition on the allowability of entertainment costs. No such exception exists under federal cost principles, and these state provisions are not directly relevant in determining allowable costs for purposes of federal grants. Moreover, these provisions support the general principle that meal costs are properly considered entertainment costs, because otherwise no "exception" would be required for employee recognition events.

Furthermore, we do not agree that ODJFS has established that serving a meal was an integral part of recognizing employee achievements and accomplishments. The program for the Lucas County employee recognition luncheon indicates that it began with a ceremony (that included speeches) to recognize the honored employees. See documentation faxed by ODJFS to the Board on December 1, 2004. A meal followed the ceremony. (7) Id. There was no indication that business of any sort was conducted over the meal, or even that employee recognition activities were an integral part of the meal. Given the sequence of the meal after the recognition ceremony, the large number of attendees (more than 200), the fact many attendees were not program employees, and the absence of documentation that business was conducted at the meal, we conclude that the meal was provided as a social activity rather than as a necessary cost to improve employee morale. Thus, ODJFS did not establish that the meal costs were necessary for the proper and efficient administration of Ohio's title IV-D program.

In short, we conclude that the disallowed costs do not withstand the strict scrutiny accorded to meal costs. ODJFS did not document that serving a meal to employees and non-employees was necessary for a clear business purpose, and thus we conclude that the costs are unallowable under OMB Circular A-87, Attachment B, section 18, as "entertainment costs."

Conclusion

For the reasons above, the Board sustains ACF's disallowance of $1,564 in costs incurred by Ohio's title IV-D program for an employee recognition luncheon.

 

JUDGE
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Judith A. Ballard

Cecilia Sparks Ford

Daniel Aibel
Presiding Board Member

FOOTNOTES
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1. Pursuant to title IV-D of the Social Security Act, 42 U.S.C. §§ 651-669, the federal government provides grant funding to states to enable them to operate child support enforcement programs (also known as title IV-D programs).

2. The Single Audit Act requires a non-federal entity (such as a state government) that spends more than $300,000 in federal grant funds during a fiscal year to conduct a single, comprehensive financial and compliance audit of its programs for that year. 31 U.S.C. § 7502(a)(1)(A); OMB Circular A-133. Each federal agency that makes a grant to the entity must review the single audit findings and determine whether prompt and appropriate action has been taken to correct problems identified by the audit. 31 U.S.C. § 7502(f)(1)(B).

3. In the December 1, 2004, oral argument before the Board, a question was raised about whether the amount at issue was solely for meal costs or included other associated expenditures. In a December 20, 2004 letter, ODJFS indicated that Ohio's Office of the Auditor of State had verified that "[t]he only payment voucher related to the [employee recognition] event that was pulled and questioned [by auditors] was the Polar Bear Catering invoice for $1,563.75," and that it was standard practice for auditors to round up a questioned expense to the whole dollar. December 20, 2004 letter from Marcia Slotnick to Board. We accept this representation that the questioned costs were all associated with the meal because it is supported by a payment voucher in the record for same amount (except for the rounding factor). Accordingly, the issue before us is whether $1,564 in meal costs charged to the title IV-D program are allowable.

4. The Board has said that a cost is "necessary" for "proper and efficient administration" if it can fairly be considered "'integral to overall efficient program operation.'" New York State Dept. of Health, DAB No. 1636 (1997) (quoting New York State Dept. of Health, DAB No. 1072 (1989)). A cost need not be indispensable to attain program objectives, but it must be shown to make the program run efficiently or help it achieve its objectives. Id. Costs that are "tangential" or unrelated to program goals are not necessary for proper and efficient administration. Id.

5. Aside from section 18, meal costs are expressly referenced only in section 30 of Attachment B. Section 30, which covers costs of "memberships, subscriptions, and professional activities," states that "[c]osts of meetings and conferences where the primary purpose is the dissemination of technical information, including meals, transportation, rental of meeting facilities, and other incidental costs are allowable." Neither party relied on section 30 in this case.

6. This reading is consistent with ACF's statement that section 17 of Attachment B could be interpreted as allowing the cost of token acknowledgments of employee achievement, such as plaques or certificates, which are in the nature of disseminating employment-related information. ACF Brief at 6.

7. According to an invitation, the entire event (the ceremony and the post-ceremony meal) was scheduled to last two and one-half hours. Id.

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