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


SUBJECT: Renaissance III

DATE: June 22, 2006
 


 

Docket No. A-05-85 and A-05-86
Decision No. 2034
DECISION
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DECISION

Renaissance III (Renaissance), (1) a Texas non-profit corporation, appealed May 13, 2005 decisions by the Centers for Disease Control and Prevention (CDC) to terminate two cooperative agreements under which Renaissance received federal funds to perform Human Immunodeficiency Virus (HIV) prevention activities. (2) CDC terminated these cooperative agreements because it found, during a March 2005 site visit, that Renaissance materially failed to comply with the agreements' terms and conditions. In particular, CDC found that Renaissance had used federal funds provided under the agreements for unauthorized or improper purposes, had failed to adopt or implement internal managerial or accounting controls to ensure that federal funds were not misspent, and had failed to obtain CDC's advance approval for key personnel changes.

As we discuss below, the record substantiates CDC's finding that Renaissance materially failed to comply with the terms and conditions of the two cooperative agreements. (3) This material [Page 2] failure to comply is a legally sufficient basis for termination under the applicable regulations. We therefore uphold CDC's decision to terminate the two cooperative agreements.

Case Background

CDC has two programs under which it provides financial assistance to community-based organizations that engage in HIV prevention activities aimed at high-risk minority populations and other groups. CDC initiated one of the programs under Program Announcement 01163 (June 21, 2001), and the second under Program Announcement 04064 (December 2, 2003). CMS Exs. 4-5. (We will refer to each program by its program announcement number. (4))

In 2001, CDC issued a cooperative agreement to Renaissance under the 01163 program. CMS Ex. 18. In 2004, CDC issued a similar agreement to Renaissance under the 04064 program. CMS Ex. 17. (A cooperative agreement is a funding mechanism under which the awarding federal agency plays a substantial role in the performance of the funded project. See 31 U.S.C. § 6305(2).)

Projects approved under CDC cooperative agreements receive federal funding in annual increments, or budget periods. Under Renaissance's cooperative agreement for the 01163 program, Renaissance received $316,586 in federal funds for the budget period from September 30, 2004 through September 29, 2005. CMS Ex. 18, at 1. Under its agreement for the 04064 program, Renaissance received $257,222 in federal funds for the budget period from July 1, 2004 through June 30, 2005. CMS Ex. 17, at 1.

[Page 3] In early 2004, Dallas County (Texas) performed an audit to determine whether Renaissance had properly spent and accounted for non-CDC federal funds that Renaissance had received under certain county-administered grants. (5) CDC Ex. 7. The county auditor found "material weaknesses" in Renaissance's internal financial management system, including a lack of internal controls to ensure that expenses were properly charged and allocated to the organization's federal funding sources. Id. at 4-5. Among other problems, the auditor found that: (1) most of Renaissance's operating expenses had been charged to an American Express card whose only user was Don Sneed, Renaissance's Executive Director at the time; (2) Sneed appeared to have full control of financial transactions with no oversight or review by Renaissance's Treasurer or Board of Directors; (3) there was "no evidence" that Renaissance's Board of Directors had reviewed the corporation's financial records or independent audit in order to verify their accuracy; (4) Renaissance failed to submit a "reliable" general ledger for the period under audit; (5) performance bonuses paid to Renaissance employees "were not supported by the agency's policies and procedures, minutes of the board of directors, or employer-employee hiring agreements"; and (6) there was "[n]o budget line item or other method of control . . . in place to prevent unallowable line items from being charged to the various grants." Id.

The Dallas County auditor summarized the audit findings as follows:

Our review of financial statements, general ledger, internal control checklist, and test sample of transactions indicates material internal control weaknesses in the overall cash management of the agency. We noted noncompliance with allowable costs, cost allocation, contractual guidelines and federally mandated reporting requirements.

The review led us to conclude that the agency's financial management system failed to provide accurate, [Page 4] current and complete disclosure of the agency's financial position. There is no independent verification of financial transactions to determine the reasonableness and allowability of costs. There is no indication of Board of Directors active oversight or control specifically regarding the salary of the Executive Director. . . .

CDC Ex. 7, at 13.

Renaissance filed a response to the audit findings in September 2004. CDC Ex. 8, at 1. The county auditor reviewed the response but found its key concerns "unresolved," noting, among other things, that Renaissance's response "only provides further evidence . . . [of] internal control weaknesses in the overall cash management of the agency, including noncompliance with allowable costs, cost allocation, contractual guidelines and federally mandated reporting requirements." Id. at 16.

On March 25, 2005, Don Sneed resigned as Renaissance's Executive Director. App. Ex. 1. On March 28, 2005, Renaissance named Ray Dyer as its new Executive Director. Id.

On March 29, 2005, CDC performed a site visit of Renaissance to review its "financial status," assess "progress made" under the two cooperative agreements, meet a newly appointed Board of Directors, and conduct a preliminary assessment of allegations made by a former Renaissance employee to the HHS Inspector General. CDC Ex. 2, at 1; CDC Ex. 3, at 1. The CDC reviewers met with various Renaissance employees during the visit, including Ray Dyer, the new Executive Director, and Renol Ratchford, who Renaissance had recently appointed to serve as Project Director for the CDC-funded projects, replacing Kirk Myers, who had been fired on March 18, 2005. CDC Ex. 2, at 1; CDC Exs. 19, 21.

The CDC reviewers prepared written reports of the site visit. CDC Exs. 2-3. According to these reports, the reviewers determined that Renaissance was not in compliance with the terms and conditions of its cooperative agreements. The reports describe various deficiencies, including the following:

• Renaissance had replaced its Executive Director (Sneed) and program director (Myers) without first obtaining CDC approval for these personnel changes, as required by the cooperative agreements. CDC Ex. 2, at 1.

[Page 5] • Renaissance had only $40,000-$45,000 on hand to carry out its CDC-approved activities for the remaining six months of the budget period for the 01163 program and for the remaining three months of the budget period for the 04064 program. Renaissance needed a financial plan to keep its HIV prevention programs "fully operational with private funding." CDC Ex. 2, at 2.

• Renaissance did not have a "fiscal officer." Its former fiscal officer had recently resigned after two or three years of service to the organization. When Executive Director Dyer indicated that he planned to assume the role of fiscal officer, a CDC reviewer cautioned him that serving in both roles, as Executive Director and fiscal officer, would be inconsistent with accepted accounting practices and represent a "clear conflict of interest." CDC Ex. 2, at 2.

• Renaissance did not have an "active" Board of Directors, and it was unclear how long Renaissance had operated without one prior to the site visit. CDC Ex. 2, at 2.

• A sign on the front door of office space leased by Renaissance (with federal funds) showed the name of an additional organization: National Headquarters for KingX Continuum, or Kixcon, Inc. Ray Dyer told the CDC reviewers that he was unsure what this organization was. The reviewers reported that former Executive Director Sneed may have used Renaissance's leased office space to run Kixcon, Inc. CDC Ex. 2, at 3.

• Renaissance had a studio that produced videos and DVDs for the populations targeted by one of its CDC-funded HIV prevention programs. Two DVDs were shared with the reviewers. Neither was related to HIV prevention. One DVD was entitled "Abe Lincoln Black Republican Caucus Rally." According to the reviewers, the DVD contained "what seemed to be the launch of the political campaign for the former executive director[.]" The second DVD showed Sneed rebutting allegations made against him by former employees. It was unclear how many of these DVDs were purchased and distributed using CDC funds. CDC Ex. 2, at 3; CMS Ex. 3, at 2.

• Renaissance's general ledger did "not agree with the profit loss statement" for the period reviewed, and the ledger had no separate accounts for the two CDC cooperative agreements. Funds from one program were used to pay the expenses of the other. CDC Ex. 3, at 2.

[Page 6] • Available documentation appeared to show that CDC funds were used to pay for clothing, travel, and other expenses that were unreasonable, excessive, or unrelated to Renaissance's CDC-approved HIV prevention programs. (6) CDC Ex. 3, at 2.

The CDC reviewers also expressed concern that former Executive Director Sneed had received a questionable severance payment, and that he had been paid as a subcontractor while simultaneously receiving compensation as a Renaissance employee for the same or similar work. CDC Ex. 3, at 1-2.

On May 13, 2005, CDC issued notices terminating Renaissance's cooperative agreements pursuant to 45 C.F.R. § 74.61. CDC Ex. 1, at 1, 3. CDC stated in these notices that its decision to terminate the agreements was based in part on Renaissance's failure "to provide proper and adequate stewardship of Federal funds" in violation of 45 C.F.R. § 74.21. Id. The termination notices specified five elements of this alleged noncompliance: (1) "Funds used for personal expenditures"; (2) "Funds used for other projects"; (3) "Funds used for travel unrelated to the cooperative agreements"; (4) "No financial management system in place"; and (5) "No separate accounting system (allocation of proper system)." Id. CDC also found that Renaissance was in "material noncompliance" with 45 C.F.R. § 74.25 because it: (1) failed to obtain prior approval for key personnel; (2) did not have an active Board of Directors in place; and (3) allowed a 25 percent reduction in time devoted to its HIV prevention projects by the approved project director. Id.

In response to the May 13, 2005 termination notices, Renaissance filed the pending appeals. (7) In accordance with the regulations [Page 7] governing Board appeals, the Board directed each party, beginning with Renaissance, to file a brief or other written statement setting out the arguments for its position as well as an "appeal file" containing copies of the documents on which its arguments are based.

Renaissance submitted its written arguments in a four-page letter (App. Letter) signed by Executive Director Ray Dyer. Renaissance also submitted an appeal file consisting of eight exhibits. (8)

In Renaissance's appeal letter, Dyer concedes that Renaissance was "mismanaged" by the previous Executive Director, Don Sneed, and that "funds were inappropriately abused by him." App. Letter at 1. Dyer asserts that Sneed and others in the company were responsible for its mismanagement, and that Renaissance and the community it serves should not be "punished" for their [Page 8] misconduct. Id. In response to CDC's finding that Renaissance had "no financial system in place" and "no separate accounting system" for each cooperative agreement, Dyer states that the "breakdown of the accounting system was due to the fact that there was no active Board Treasurer to approve and oversee expenditures for the company." Id. Dyer states that "[w]ithout proper controls, Mr. Sneed was able to electronically draw down over 90% of the funds available for the grants in question with most of the grant term [budget period] still outstanding." Id.

In response to Renaissance's submissions, CDC filed a brief with an appeal file containing 23 exhibits. CDC contends in its brief that Renaissance has failed to provide any evidence or argument showing that the termination decisions were incorrect or unjustified.

CDC's exhibit file contains, among other things, copies of receipts of expenses charged by Don Sneed to Renaissance's corporate American Express card in late 2004 and early 2005. CDC Exs. 9-12. The charged expenditures include purchases of clothing, jewelry, antiques, movie tickets, and other items. In addition, CDC presented copies of e-mails from Sneed indicating that he was the founder or chief officer of Kixcon, Inc., whose name the CDC reviewers saw on the door of office space leased by Renaissance. CDC Ex. 15.

Although Renaissance had an opportunity to file a reply to CDC's submissions, it did not do so. (9)

[Page 9] Discussion

As indicated, CDC terminated Renaissance's cooperative agreements pursuant to 45 C.F.R. § 74.61. That regulation provides that an award of federal financial assistance may be terminated in whole or part by the HHS awarding agency "if a recipient materially fails to comply with the terms and conditions of an award." 45 C.F.R. § 74.61(a)(1). The terms and conditions of Renaissance's cooperative agreements include the requirements in 45 C.F.R. Part 74, which govern awards of federal financial assistance to various types of entities, including non-profit organizations (like Renaissance). See 45 C.F.R. § 74.1; CDC Exs. 17-18. (10)

CDC found that Renaissance had failed to comply with two provisions in Part 74: section 74.21 and section 74.25. Of primary significance -- and the focus of our discussion -- is Renaissance's alleged noncompliance with section 74.21(b).

Section 74.21(b)(3) requires an award recipient to "adequately safeguard all such assets and assure they are used solely for authorized purposes." Section 74.21(b)(3) requires the recipient to have a financial management system that maintains "[e]ffective control over and accountability for all funds, property, and other assets[.]" And section 74.21(b)(2) requires the recipient to maintain a system that generates accounting records that "identify adequately the source and application of funds for HHS-sponsored activities."

Based on its site visit, CDC found that the Renaissance had failed to safeguard federal assets, having used federal funds received under the cooperative agreements for expenses unrelated to the HIV prevention activities authorized by those agreements. CDC also determined that during the relevant budget periods, Renaissance had operated with serious deficiencies in financial management, including an inactive Board of Directors, ineffective or nonexistent oversight of employees' financial transactions, and an accounting system that did not ensure a proper allocation [Page 10] of allowable expenses to the corporation's federal funding sources.

These findings clearly describe a violation of section 74.21(b). Moreover, Renaissance does not dispute them. It concedes that CDC funds were spent for purposes unrelated to its HIV prevention activities, including, it appears, the political activities of its former Executive Director. Renaissance also fails to deny or rebut CDC's findings regarding the deficiencies of its financial management system (findings that are buttressed by the results of the 2004 Dallas County audit). For example, Renaissance does not deny that, prior to Ray Dyer's installation as Executive Director, Renaissance lacked or failed to implement an accounting system to track and properly allocate expenses to federal funding sources. Indeed, Renaissance expressly admits to a "breakdown of the accounting system." App. Letter at 1.

Termination of an award is authorized only for a "material" failure to comply, and Renaissance's admitted failure was material because it resulted in the misuse or waste of (or the inability to account for) a significant portion of the federal funding provided under the two cooperative agreements. In addition, the absence of an adequate financial management system would have made it difficult for CDC to determine if Renaissance's HIV prevention programs were being operated efficiently. A tangible consequence of Renaissance's mismanagement was a substantial cash shortfall that put at risk the organization's ability to achieve programmatic objectives. A CDC onsite review report indicates that as of late March 2005, six months into the most recent annual budget period for the 01163 program, and nine months into the most recent budget period for the 04064 program, Renaissance had only $40,000-45,000 left to finance program-related activities for the remainder of the budget periods. The amount remaining was less than eight percent of the total funds received by Renaissance for the budget periods. (11)

Instead of contesting the merits of CDC's findings, Renaissance attempts to blame former employees, especially Don Sneed, for its noncompliance. Although the record confirms that former employees contributed to Renaissance's predicament, that fact does not absolve Renaissance. Ultimate responsibility for corporate governance and conduct rests with the Board of [Page 11] Directors, not the employees. See CDC Ex. 14, at 1 (Renaissance by-laws stating that the "affairs of the corporation shall be managed by its Board of Directors"). As the corporation's governing authority, Renaissance's Board of Directors was responsible for adopting sound managerial policies, retaining necessary and competent personnel (such as a corporate treasurer), overseeing the financial affairs of the corporation, and assuring compliance with applicable law. Also, by accepting the terms and conditions of the cooperative agreements, Renaissance's Board of Directors became a fiduciary of federal funds. It therefore was responsible for ensuring that those funds were properly spent and accounted for. This responsibility encompassed the supervision of employees, including the Executive Director and accounting personnel. Rio Bravo Assoc., DAB No. 1161 (1990); see also Action for Youth Christian Council, Inc., DAB No. 1651 (1998) (despite employee misconduct, the grantee was responsible for accounting for the use of grant funds); Metro Community Health Centers, Inc., DAB No. 1098 (1989) (noting that the grantee's governing board was ultimately responsible for complying with an explicit grant condition even if the Executive Director was at fault). In other words, the Board of Directors was obligated to institute and oversee the implementation of a system of financial management designed to ensure that any one employee or group of employees did not misuse or dissipate federal assets.

Renaissance also suggests that termination is an inappropriate remedy because it has (since the site visit) corrected the noncompliance. Renaissance asserts that its corrective action included: (1) securing the resignation of Don Sneed and John Wallace (the former accounting manager); (2) changing the name of the organization; (3) "enjoining" Sneed from coming onto the organization's premises; and (4) seeking reimbursement from Sneed for improperly spent federal funds. App. Letter at 1. Renaissance also asserts that it has a "new active Board Treasurer that approves all expenditures and a proper segregation of accounting duties that will prevent" the problems found by CDC from recurring. Id. at 2.

We find that Renaissance's alleged corrective action is irrelevant in this circumstance. Having determined that Renaissance materially failed to comply with the terms and conditions of its cooperative agreements, CDC acted within its legal authority to terminate those agreements immediately. Although an awarding agency may, as a matter of policy or prudence, give an award recipient the opportunity to correct [Page 12] noncompliance before imposing termination, nothing in the applicable regulations required CDC to do so in this case. (12)

In any event, the record does not show that Renaissance has taken meaningful corrective action. For example, although there is evidence that Renaissance appointed a new Treasurer, there is no evidence verifying the Treasurer's role, authority, or responsibilities within the organization. In addition, Renaissance presented no evidence that provides assurance that its new Board of Directors will competently and reliably meet its fiduciary obligation to safeguard federal funds. Nor has Renaissance presented evidence that it has modified or upgraded its accounting system to ensure that expenses are properly allocated to federal funding sources and that its Board of Directors receives timely and accurate information about the corporation's financial condition.

Finally, Renaissance contends that terminating the cooperative agreements will "victimize" the community it serves and "be of no benefit to anyone." App. Letter at 2, 4. Renaissance asserts that its prevention services are desperately needed in Dallas, that these services have served thousands of clients, and that Dallas has no other organization with the necessary expertise and experience in serving the African-American community. Id. at 2. Renaissance asserts that with community support, it has achieved or is capable of achieving the objectives of its prevention programs. Id.

Although HIV prevention is critical and necessary work, that fact alone does not require the federal government to continue its financial relationship with Renaissance. An award recipient must do more than show that its work is beneficial and supported by the community. The recipient must also manage itself to ensure that taxpayer money is spent properly, in compliance with federal requirements. Metro Community Health Centers, Inc. at 18 ("Community support and the needs of the patient population are relevant factors in evaluating grant proposals . . . but these [Page 13] factors do not address the question posed here of whether Metro complied with the terms and condition of the grant already awarded").

Because we conclude that CDC had a sufficient basis for terminating Renaissance's provider agreements based on its material failure to comply with the financial management requirements in section 74.21, we need not discuss the other ground cited by CDC for the termination decisions (namely, that Renaissance violated section 74.25 by failing to get CDC's advance approval for certain changes in key personnel or the involvement of those personnel in CDC-funded activities).

Conclusion

For the reasons stated, we uphold CDC's decision to terminate Renaissance's two cooperative agreements (numbers U65/CCU620950-4 and U65/CCU623869-01) pursuant to 42 C.F.R. § 74.61.

 

JUDGE
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Donald F. Garrett

Sheila Ann Hegy

Judith A. Ballard
Presiding Board Member

FOOTNOTES
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1. The record shows that Renaissance recently changed its corporate name to "Dallas African America Resource Center." We will refer to the appellant as "Renaissance," the name under which it received federal funding under the two cooperative agreements at issue.

2. The Board assigned a docket numbers to each appeal. Docket number A-05-85 is assigned to the appeal of CDC's termination of the cooperative agreement bearing grant number U65/CCU623869-01, and docket number A-05-86 is assigned to the appeal of CDC's termination of the cooperative agreement bearing grant number U65/CCU620950-4.

3. As described more fully below, the record on appeal includes: (1) a four-page appeal letter (App. Letter); (2) Renaissance's appeal file consisting of eight numbered exhibits (App. Ex.); (3) CDC's September 6, 2005 response brief (Response Br.); and (4) CDC's appeal file consisting of 23 numbered exhibits (CDC Ex.).

4. The 01163 program is entitled "HIV Prevention Projects for Community-Based Organizations Targeting Young Men of Color Who Have Sex With Men." CMS Ex. 4. The 04064 program is entitled "Human Immunodeficiency Virus (HIV) Prevention Projects for Community-Based Organizations." CMS Ex. 5. Renaissance's cooperative agreement for the 01163 program is grant number U65/CCU620950-4. CMS Ex. 18, at 1. The cooperative agreement for the 04064 program is grant number U65/CCU623869-01. CMS Ex. 17, at 1.

5. Prior to 2005, Renaissance received federal funding under grants administered by the Dallas County Health and Human Services Department. See CDC Exs. 6-7. Some of this funding was provided under a program established by the Ryan White Comprehensive Resources Emergency Act, Pub. L. No. 101-381 (as amended). See CDC Ex. 6. That program provides funding to states and localities to improve health care and support for persons with HIV/AIDS.

6. The reviewers stated that "[w]ith the absence of a full audit it appears that CDC funds were used to pay these bills due to CDC being [Renaissance's] only source of funding." CDC Ex. 3, at 2.

7. In filing the appeals with the Board, Renaissance bypassed the procedures in 42 C.F.R. Part 50, which provide for a preliminary appeal to a review committee appointed by CDC. See 42 C.F.R. §§ 50.401-.406. The Board reviews "final decisions" of HHS agencies, and the Board's regulations indicate that it will not take an appeal unless the appellant has exhausted any available preliminary appeal process, such as the process described in 42 C.F.R. Part 50. See 45 C.F.R. § 16.3(c). However, the May 13, 2005 notices of termination issued by CDC in this case state that they are HHS's final decisions and appealable to the Board. After Renaissance filed its appeals, the Board informed the parties that the appeals would continue unless CDC indicated that its May 13, 2005 termination notices were not "final decisions" or unless Renaissance elected to pursue its challenge to the terminations before a CDC review committee. Neither party objected to having the Board proceed to resolve the dispute.

8. These exhibits are: (1) copies of the relevant Notices of Cooperative Agreement; (2) a March 22, 2005 letter by Don Sneed stating that he would resign as Renaissance's Executive Director on March 25, 2005; (3) a March 28, 2005 letter signed by Vicki Smith, the chairwoman of Renaissance's Board of Directors, notifying addressees of Sneed's resignation and the appointment of Ray Dyer as Renaissance's new Executive Director; (4) articles of amendment changing the name of the corporation from Renaissance III, Inc. to Dallas African American Resource Center; (5) an April 14, 2005 letter from Vicki Smith to Don Sneed expressing appreciation for Sneed's service to Renaissance but directing him not to visit Renaissance's facilities in Dallas; (6) Renaissance's 2004 and 2005 profit-and-loss statements for the two cooperative agreements at issue; (7) minutes of Renaissance's April 2005 Board of Directors meetings; (8) an April 5, 2005 letter from Ray Dyer and Renol Ratchford (Renaissance's current program director for the CDC-funded HIV prevention projects) informing CDC of changes in "key personnel" at Renaissance; and (9) copies of signed petitions urging CDC to continue funding Renaissance's HIV prevention activities.

9. On October 19, 2005, after the deadline for the filing of Renaissance's reply brief, CDC filed an unsolicited motion for summary disposition, asserting that there were no genuine disputes of material fact and that it was entitled a decision in its favor as a matter of law. In support of the motion, CDC submitted a brief that merely repeats the arguments contained in its initial brief. The Board offered Renaissance an opportunity to file a response to CDC's motion, but Renaissance did not do so. Given that the Board did not authorize the motion and had informed the parties in its June 16, 2005 acknowledgment letter that disputes of fact might be resolved based solely on the parties' written submissions, we are not disposing of this case on motion but are simply issuing a final disposition based on the initial briefs and appeal files.

10. Each cooperative agreement at issue is memorialized in a "Notice of Cooperative Agreement." CDC Exs. 17-18. The Notice of Cooperative Agreement states that the award of federal financial assistance is subject to the statute and regulations that authorize or govern the cooperative agreement program, the terms and conditions of the award notice, the Public Health Service (PHS) Grants Policy Statement in effect as of the beginning date of the budget period, and the regulations in 45 C.F.R. Parts 74 and 92. See, e.g., CDC Ex. 17, at 1.

11. The amounts provided by CDC in the most recent budget periods were $316,586 for the 01163 program and $257,222 for the 04064 program, for a total of $573,808. CDC Exs. 17-18.

12. Section 8 of the PHS Grants Policy Statement (April 1994), available at http://grants.nih.gov/grants/policy/gps, states that a decision by an awarding office to terminate a grant may be made "if appropriate corrective action (or the acceptable promise of such action) is not taken during the period of suspension or if the deficiency is so serious as to warrant immediate termination" (italics added). This provision also states that "[i]mmediate termination action may also be taken if deemed to be in the best interest of the Government."

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