GAB Decision 044
August 14, 1978 University of Minnesota; Docket No. 77-4 Dukes, David;
DeGeorge, Francis Yourman, Edwin
The University of Minnesota has appealed a decision of the Public
Health Service (PHS), which disallowed $10,140 of claimed salary and
related costs for training under a Special Health Career Opportunity
Grant authorized by Section 774(b) of the PHS Act.
On August 2, 1972, PHS /1/ made a grant to the University's School of
Dentistry for the first year of a contemplated three-year training
project, to commence September 1, 1972. The action contemplated
continution awards for the two succeeding years at a level of
approximately $175,000 per year, and the University was informed:
"Budgets to be negotiated annually contingent upon availability of
funds."
On March 3, 1975, the HEW audit agency, reporting on an audit of
operations under the grant for the first two years of the project,
stated that, in the second year, ending August 31, 1974, the University
claimed $10,140 in excess of the approved budget for that year. The
University responded that it intended to apply the excess expenditure to
the continuation grant for the third year under the National Insitutes
of Health (NIH) Policy Statement 78-9 of September 1, 1972, which
provided: /2/
The grantee institution may, at its own risk prior to the beginning
date of a continuation award, incur expenditures which exceed NIH
authorization, but which are considered essential to the conduct of the
training project. The NIH awarding unit will allow reimbursement of
such expenditures from the continuation grant when awarded, provided
that the items concerned are incorporated in the approved budget of the
continuation grant and that, where required for restricted categories,
prior approval was obtained.
In a letter dated March 27, 1975, some seven months after the start
of the third-year continuation grant, the University requested that PHS
apply the amount of the questioned claim to the budget for the third
year and allow it. That request was denied by the Regional Health
Administrator, and his denial was upheld on March 17, 1977, by the PHS
Regional Grant Appeals Board. The denials were based on (a) fact that
the items were not incorporated in the approved budget continuation
grant, and (b) the failure of the University to show that the
expenditures were essential to the project. (The underlined words are
from the NIH policy statement which is quoted more fully above).
The PHS officials explained that the grantee should have known before
the end of the second grant year that it required additional funds. If
a request had been made at that time, PHS could have authorized a
transfer to the budget for the second year if it considered that to be
appropriate. In fact, a similar adjustment was made just one month
before the end of the second year when PHS authorized the transfer of
$21,105 from third- to second-year use for a special summer program.
PHS objected to the University's reliance on NIH interpretation of its
policy for other projects, rather than on prompt consultation with PHS
officials in the Regional Office. They held that, in any event, the
University had failed to meet the requirement that the expenditures be
"essential" to the project.
The regional Grant Appeals Board summed up its holding by stating:
The purpose of the policy cited by the grantee is to provide
flexibility in case of rare, unusual circumstances or in the event of an
emergency.It is not a general authorization to spend funds against the
next year's award. If it were, it would destroy any point in submitting
yearly budgets and the word "approved" would be without meaning.
After this appeal was taken, PHS further explained its position on
the essential nature of the expenditures by stating in a memorandum
dated May 23, 1977, addressed to the Executive Secretary of this Board:
The University in all its correspondence claims that these salary
costs were essential to the conduct of the project. However, at no time
did it demonstrate the purpose of these costs, the individual or
individuals to whom these salary costs applied, the allowability of
these salaries, or whether these services were actually performed.
The Panel Chairman considered this to raise an additional question
which involved the most elementary principle of grant administration: a
requirement that a grantee have documentation to show that claimed
expenditures were, in fact, incurred to further the purposes of the
project. /3/ He, therefore, requested the grantee to provide a detailed
explanation of exactly what services were provided and by whom, as well
as documentation that they were reasonable, project-related, and
accorded consistent treatment with other project costs. Unfortunately,
the grantee's response and the PHS comments were not sufficiently
enlightening on this point to enable us to decide this issue. The
grantee submitted names of individuals and the amounts paid them for
what it says were project-related activities for the month of August
1974. The Board, however, had no information as to the type of
documentation of these expenditures on the University's records nor
whether the amounts claimed here duplicate any of the $185,508 of
expenses which were previously allowed.
The PHS action appealed from did not turn on the issue of proper
documentation and, in light of the inadequacy of the record, the Board
is confining its present consideration to the grounds on which PHS
originally based its disallowance. Our decision leaves the way open for
PHS to consider as part of its administrative process the inadequacy of
documentation of the expenditures and whether they have already been
allowed in the $185,508 referred to in Footnote 3 of this decision. PHS
may be able to make such a determination on the basis of the payroll and
other records already in its files but which are not a part fo the
record here.
DISCUSSION
a. The requirement that the expenditure be "incorporated in the
approved budget of the continuation grant"
The University requested the budget change in its letter of March 27,
1975, five months prior to the closing period of the continuation grant.
While plenty of time remained to amend the budget for the third year,
PHS viewed the policy as one which gave it broad discretion to withhold
the authorization. They thought that the request for a budgetary change
should have come even prior to the end of the year in which the
expenditure was incurred. Since the University's request of March 27,
1975, was not timely in the PHS view, they disallowed the claim.
The difficulty with the disallowance is that neither the NIH policy
nor the consistent application by NIH specified any time by which a
request for incorporation in the budget for the continuation grant
should take place. In fact, NIH had applied the policy as not requiring
the budget for the continuation year to include a particular amount for
the specific purpose of the prior year's expenditure, but only to
include otherwise unused funds which could be available to cover the
prior expenditures. The interpretation is confirmed by the language of
the restatement of the policy contained in PHS Grants Policy Statement,
DHEW Publication (OS) 77-50,000, Rev. October 1, 1976, page 22. That
statement makes no mention of incorporating the expenditures in the
budget for the continuation grant. In light of the prior NIH
application, this change is a clarification of what was intended by the
prior NIH policy. The menorandum of May 2, 1977, from Dr. Robert P.
Akers, Policy and Procedures Officer, OERT, NIH, to the Director,
Division of Grants and Contracts, ORM/EAM, confirms that the October
1976 statement is "an excellent refinement of a policy that has been
existing for over 14 years."
Even if the incorporation of a specific expenditure had been
required, PHS could not frustrate the quoted policy by arbitrarily
denying the University's request. The policy affirmatively authorizes a
grantee to make expenditures in one year to be charged to the grant for
the continuation year. It does not state that this option is not
available if the grantee could, or should, have foreseen the need soon
enough to amend the current budget, or in time at obtain prior approval.
True, it specifies that the grantee incurs the expenditure "at his own
risk," but means only that it must risk the later availability of
sufficient funds for the continuation year to cover both the needs of
the project during that year and have left over enough to cover the
expenditure incurred in the prior year.
The PHS Regional Grant Appeals Board expressed concern that
construing the policy as applicable to other than unusual or emergency
situations would constitute a general authoriztion for a grantee to
spend funds against the next year's award, in which case "it would
destroy any point in submitting yearly budgets and the word "approved"
would be without meaning." Such concern ignores the fact that the
grantee has responsibility for the continued conduct of the project, and
it can be called to account should it borrow against funds for the
following year to an extent which places the proper continuation of the
project in jeopardy.
The policy specifically authorizes an expenditure without a prior
approval of the item. If the intent had been to confine that policy to
unusual situations or emergencies, grantees could not be expected to
make use of it when needed if their judgment were subject to a
judgmental decision by PHS, unrestrained by any criteria. The policy
makers could either have set out standards or left the matter to the
judgment of the grantees, subject only to restrictions prescribed in the
policy. They did the latter and, apparently, the NIH practice of
accepting grantee judgment has not demonstrated cause for change
because, as noted above, the policy was not made more restrictive when
it was restated in the October 1976 publication.
b. The requirement that the expenditure be "considered essential"
to
the project
Although the prior administrative action was based, in part, on the
University's failure to show that the expenditure was "essential"
to the
project, there is no indication that the University was asked to make
such a showing or that it was informed as to the interpretation of
"considered essential."
PHS assumed, without discussing it, that the expenditures must be
"considered essential" by them. Viewed in that light, the University
might have to convince them that, but for the expenditure, the project
(almost certainly? probably? possibly?) would have failed. It is not
likely that the policy intended to make grantees gamble that PHS
officials would later consider the expenditure to be essential,
particularly since no criteria are stated as to what would be essential.
Rather, the intent must have been that it is grantee which must consider
the expenditure to be essential. This is a way of telling the grantee
that it should not make an expenditure to be charged to the budget for
the next year, unless it considered in good faith that such action was
of compelling importance and urgency. There is no indication that
Federal officials were supposed to second-guess such a judgment. As
shown by the NIH application of the policy, Federal review should be
based on the general requirement that the expenditure be
project-related. The potential for abuse under such a practice is no
greater than under the policy which permits a grantee unilaterally to
shift items in an approved budget. Moreover, if there is a danger of
abuse, it can be obviated by a change in the policy which more clearly
limits grantee action.
CONCLUSION
The grounds used by PHS to disallow the expenditure were not valid.
The amount should be allowed unless PHS now determines either that: (a)
the University does not have the proper documentation that the claimed
items are related to the project and were not previously allowed or (b)
the budget for the continuation year did not contain an otherwise unused
amount which could have been applied to the expenditure as requested in
the University's letter of March 27, 1975. Any further PHS determination
which is adverse to the grantee may, of course, be appealed to this
Board. /1/ "PHS" is used in this decision to refer only to that part
of
the agency, including regional officials, which has jurisdiction over
the grant here. /2/ The grant was made by the PHS Office of
Health Manpower Opportunity, which is not a part of NIH. That office,
however, notified the grantee that the NIH policy statement would be
applied to the administration of the grant. /3/ The audit report
also questioned $185,508 in personnel costs, other than those involved
here, on the basis that the records did not contain after-the-fact
documentation that such an amount was spent on project activities. The
record contains a letter from the University to PHS, dated February 4,
1976, which refers to enclosures, including all payroll sheets and
appointment records for each individual employed on the project, to
document personnel costs for the first two years. Those enclosures were
accepted by PHS as adequately documenting the questioned $185,508. They
were not, however, included in the record before us.
OCTOBER 04, 1983