GAB Decision 014
March 10, 1976 Education Commission of the States, Denver, Colorado;
Docket No. 75-13 Dukes, David; Malone, Thomas Mason, Malcolm
Grantee is a nonprofit organization of 45 states, Puerto Rico and the
Virgin Islands, established by the "Compact for Education" to provide
a
partnership between educational and political leadership for the
advancement of education throughout the nation. An audit showed
significant weaknesses in administration and accounting generally.
For the grantee's fiscal year ending September 30, 1973, and for the
following quarter year, it has been determined on audit that grantee has
a liability to the Federal Government for interest charges in the amount
of $52,878 and that with respect to costs associated with computer
operations and legal fees grantee has a liability to the Federal
Government of $65,520, resulting from failure to allocate costs on an
equitable basis properly to the activities involved. Both of these
determinations were sustained by the Office of Education. Grantee
appeals the interest liability in its entirety and the computer
operations and legal fees liability to the extent of $28,930, conceding
liability as to $36,590.
Imputed Interest
The interest charge is based upon a finding that grantee improperly
drew down advance payments of Federal funds beyond immediate operating
cash requirements of grant activities and should reimburse the
Government for interest on such excessive draw-downs. Grantee
apparently does not question that they were in excess of authorized
operating expenses of the specific grants, the funds of which were drawn
down. Grantee argues, however, that the draw-downs were made in good
faith to pay operating expenses of federally funded projects for which
the Federal Government had failed to provide timely financing. Grantee
contends that assuming the draw-downs to be improper there is
nevertheless no legal basis for requiring payment to the Government of
interest imputed and not actually earned.
(2) The grant provides for repayment to the Government of interest
earned on grant funds. It does not provide for repayment of imputed
interest and no provision of law, regulation or policy statement has
been cited supporting the demand for repayment which appears to be
contrary to well established Government-wide grant practice. The Grant
and Procurement Management Division (GPMD) argues that the excess draw
downs were improper, and stresses that the grantee used more than
$677,000 of the improperly drawn funds for its own working capital
needs. Grantee does not concede that it violated the terms of the
relevant instruments, although its statement on this point is a
conclusion without supporting detail. Assuming that the draw downs were
improper, as they seem to have been, the Office of Education (OE) had
available to it a wide spectrum of possible responses. These included
to it a wide spectrum of possible responses. These included possible
termination if the offense were deemed clear enough and important
enough, refusal to renew, renewal only on terms imposing much tighter
monitoring and particularly closer fiscal controls, ranging to
admonition for the future. The response selected by OE is one for which
no authority is shown, although OE was specifically invited to brief the
question. It runs cunter to well established practice.
OE is right in feeling that the present practice is not altogether
satisfactory and deserves further thought and effort at improvement.
This is, however, a complex matter with important considerations pushing
in opposing directions.
When grantees draw down interest-free monies in excess of the needs
of the programs for which the draw downs were authorized, the Treasury
is forced to incur interest costs to borrow that money. An unfair
burden is clearly placed on the Government. But there are
considerations on the other side to which the Government gives weight.
The Letter of Credit system was deliberately designed to give grantees a
margin of flexibility which experience has shown is a real need. Even
daily reporting and auditing is possible but except perhaps for the
largest grantees would impose on the Government monitoring costs and on
the grantee reporting requirements that may be excessively burdensome.
For years a practical compromise has been in effect which requires
grantees to reimburse the Federal Government for interest earned on
money drawn down prematurely, but not for interest imputed but not
actually earned by the grantee. Moreover, in the case of states, a
deliberate policy judgment has been made some years ago not to recover
even interest actually earned by the grantee on money drawn down
prematurely. This is a statutory rule which the agencies are not free
to alter unilaterally (Sec. 203, Intergovernmental Cooperation Act of
1968 ((PL90-577; 82 Stat 1101)); cf. FMC 74-7 attachment E; HEW
Administration of Grants, 45 CFR 74.42(b); General Provisions for OE
Programs, 45 CFR 100a.232, 100b.232). As an unincorporated association
of states, the grantee may be legally entitled to treatment as a state.
It asserts without contradiction that in practice (3) it has always
hitherto been treated in audit as a state. In any case, a change in the
established rules in this field should not be made by tinkering with
solutions for a particular case. The counterbalancing considerations
must be weighed on a comprehensive basis. Substantial thought is indeed
being given to this problem by the Treasury and the Agencies and may
result in legislative or other broad solutions taking account of the
full scope of the problem.
Computer Center Costs and Legal Fees
With respect to the computer center costs and legal fees, the Office
of Education has degermined that such costs were not properly allocated
to specific activities on an equitable basis and thus were in part not
properly allowable as expenses of the Federal grants charged. In the
negotiation of grantee's indirect cost rate a reallocation of these
items was made resulting in an adjustment of the rate which covered
these items to the extent that they were allowable at all. This
adjustment is reflected in the audit report (Control No. 08-51453), page
15, and in the statement of the final indirect cost agreement dated
February 24, 1975. Grantee contends that only a portion of these
charges were in fact included in the indirect rate and the balance is
still properly chargeable as direct costs. If, as appears from GPMD's
statement, computer costs and legal costs were fully discussed, portions
were challenged, and an agreed adjustment in the rate was made to cover
the entirety of such costs to the extent they were to be allowed and
reflected in a final rate agreed to by both parties, ther would appear
to be no basis for the grantee's present claim.
In its response (January 10, 1975) to the draft audit report, grantee
agreed "with the audit fact that $11,669 was charged to NAEP (National
Assessment of Educational Progress) in excess of proper charges," but
argued that instead of being refunded they should be allocated to the
general fund and reallocated through the indirect cost reimbursement
system (p. 18) and that computer center costs similarly be reallocated
in the indirect cost computation (p.11). These reallocations were
apparently made to the extent allowable to a negotiated rate signed by
both parties. The audit recommendation concluded that the amounts
involved must be removed from direct charges.
(4) No material facts are in serious dispute. Grantee asserts that
the costs now disallowed were determined to be allowable by the HEW
Audit Agency. If true this would not be controlling in the fact of the
contrary determination by the Regional Director. Grantee cites no
documentary evidence of this, however, and has not responded with
specifics but only with generalities to an express invitation to discuss
this contention and in particular the concessions made in its response
to the draft audit acknowledging charges in excess of proper charges.
Grantee makes a further contention that its signing of the indirect
cost rate agreement did not bind it because it was a necessary step to
having an appealable issue. This argument is without any persuasiveness
in fact and without any merit in law.
Well known rules of grant administration which are expressly stated
in the indirect cost rate agreement signed by the parties require
similar costs to be accorded consistent treatment and preclude splitting
a cost between direct cost treatment and indirect cost treatment. Its
present attempt to get direct cost treatment for a portion of the costs
which were considered but not fully reflected in the indirect cost rate
runs up against that rule by which it is bound. The Agency's position,
that those portions of the costs in question not covered by the
adjustment made in the indirect cost rate were thereby rejected as
unallowable, is further supported by this consideration which grantee
has not addressed in any persuasive way although invited to do so.
Substantially the foregoing summary of the facts and issues was
furnished to the parties who were afforded an opportunity to correct any
misunderstanding, respond to specific questions and brief any aspect of
the case they wished. Their responses have been considered and noted
herein.
(5) DECISION
The appeal is sustained with respect to the issues of recovery of
imputed interest. The appeal is denied with respect to the issue of
computer costs and legal costs.
OCTOBER 22, 1983