Gab Decision 103
June 9, 1980 Community Action Agency of Memphis and Shelby County
Docket No. 78-44 Dell'Acqua, Frank; Przybylinski, Donald Chernock,
Harry Panel Chairman
The Community Action Agency of Memphis and Shelby County ("grantee")
appealed by letter dated June 9, 1978, from the May 16, 1978,
determination of the Director, Grants Administration Division, Office of
Human Development Services (OHDS), Region IV, disallowing $32,548
expended in excess of the authorized budget for its program year I Head
Start grant. The appeal was accepted after grantee in a corrective
filing submitted a copy of the notification of disallowance as well as
several other documents requested by the Board's Executive Secretary.
This decision is based on grantee's application for review as
supplemented by this later submission, the relevant audit report (Audit
Control No. 04-76194) and OHDS's response to the appeal and to a
subsequent request for additional information made by the Board's
Executive Secretary as well as to an Order to Develop Record issued by
the Panel Chairman. Although the Order was addressed to both parties,
grantee did not file any response.
I
The major issue in this appeal is whether grant funds awarded for
grantee's program year J (calendar year 1977) may be used to pay for
excess costs incurred during the preceding program year I (calendar year
1976). Grantee was awarded $1,273,442 in Federal funds for program year
I. These funds were to be spent in accordance with separate budgets for
each of three program accounts: PA 23 (full-year, full-day program), PA
22 (full-year, variable program), and PA 26 (handicapped children's
program). $985,884 in Federal funds was allocated for PA 23, but
grantee expended $67,423 in excess of that amount (actually $70,803 with
a $3,380 set-off for underexpenditures in various budget categories),
with overexpenditures for the following budget line items:
amount budgeted costs incurred over
personnel $761,304 $824,938 travel
3,535 3,631 space cost 8,700
13,140 and rentals consumable supplies 15,118
17,751
At grantee's request, OHDS permitted grantee to set off against the
$67,432 of overexpenditures in PA 23 an unexpended balance of $34,875 in
PA 22 in program year I. It denied grantee's request to offset the
remaining deficit of $32,548 with a surplus of $34,670.29 which grantee
projected for PA 22 and PA 23 in program year J, however.
The notification of disallowance stated that the determination of
OHDS "that the $32,548 overexpenditure of Federal funds remain a
disallowed cost" was based on "45 CFR Part 1301.2-5" and "45
CFR Part
74.101" (corrected in the OHDS response to the appeal to read "45
CFR
Part 74.102(b)(2)" and on OHDS "Terms and Conditions" (later
specifically identified as sections 3 and 5 of the program year I grant
terms and conditions.)
Hoping to stimulate informative advocacy, the Order to Develop Record
raised several questions regarding whether OHDS could properly rely on
these provisions. It noted that 45 CFR 1301.2-5 was published as part
of a proposed rule but never promulgated as a final rule, that 45 CFR
74.102(b)(2), which requires that prior approval be obtained for budget
revisions resulting in the need for additional Federal funding, was,
arguably, not violated here since grantee asked not for additional
funding for program year I but rather to charge the amount of the
overexpenditure to the next year's grant, and that during the time in
question, this provision was applicable only to State and local
government grantees. The Order also suggested that the terms and
conditions might not be controlling with respect to the question whether
grantee could properly charge certain costs to the program year J grant
since the terms and conditions were included only with the program year
I grant award, and since they were not published in the Federal
Register. Section 2928f(d) of 42 U.S.C. requires the publication of all
rules, regulations, guidelines, and instructions for the Head Start
program in the Federal Register at least 30 days prior to their
effective date. Although these questions were included in the Order's
request for briefing, we do not decide them since the appeal can be
disposed of on other grounds, also suggested in the Order, as indicated
below.
II
The Order suggested that a provision of the cost principles
applicable to nonprofit institutions, published at 45 CFR Part 74,
Appendix F, several years before the grants in question were awarded,
might support the disallowance. Paragraph B.2 of Appendix F provides
that a cost in order to be allowable must be allocable to a grant, and
Paragraph B.4(a) provides, in pertinent part, that a cost is allocable
to a grant if it "(is) incurred specifically for the grant . . . ."
The
Order noted that in its decision in Southern Methodist University, DGAB
Docket No. 76-8, Decision No. 41, October 19, 1977, the Board found,
based on an identical provision applicable to an Upward Bound grant,
that the grantee had improperly charged room and board costs incurred
under one year's grant to the succeeding year's grant, since "(no)
benefit from incurrence of such cost could inure to (the succeeding
year's grant)." (In a more recent decision, the Board cited the same
provision in rejecting grantee's contention that funds expended in
excess of the authorized budget should be offset by funds from a
subsequent year's grant. Pinellas Opportunity Council, Inc., DGAB
Docket No. 79-58, Decision No. 80, February 6, 1980, at p. 3.) In the
instant case, accordingly, the Order requested that grantee indicate
whether (and explain why) any of the expenditures in question were of
benefit (and therefore allocable) to the program year J grant. Since
grantee has chosen not to respond to the Order, we must assume that none
of the costs were allocable to program year J. Thus, the cited
provision would preclude grantee from applying its unexpended program
year J funds to the excess costs incurred in program year I.
In its response to the Order, however, OHDS asserted that grantee was
not in fact a nonprofit organization but was instead a local government
agency, and that Appendix F was therefore not binding on grantee. In
support of its position, OHDS submitted an Office of Child Development
form captioned "Eligibility of Applicant" which is signed by an
Assistant County Attorney and indicates that grantee was a public
agency. Grantee, having neither responded to the Order nor availed
itself of the opportunity afforded by the Order to reply to OHDS's
response, has provided no indication as to whether this document
correctly represents its status.
We note, nevertheless, that 45 CFR 74, Appendix C, which is
applicable to State and local governments (published in the Federal
Register prior to 1976), provides, like Appendix F, that to be allowable
under a grant program, costs must be allocable to it. Appendix C, Part
I, paragraph C.1.a. It further provides that "(a) cost is allocable to
a particular cost objective to the extent of benefits received by such
objective," Appendix C, Part I, paragraph C. 2.a. Thus, regardless of
whether grantee was a nonprofit organization or a local public agency,
the use of program year J funds to offset the overexpenditure in program
year I is prohibited by the applicable regulations.
This case is distinguishable from that presented in Knox County
Economic Opportunity Council, Inc., DGAB Docket No. 78-14, Decision No.
68, October 29, 1979, in which the Board, granting the appeal, found
that costs disallowed as in excess of grantee's program year I grant
were allocable to its program year J grant as well.
III
The audit report for grantee's program year I indicated that at the
end of that year grantee had $22,820 in unexpended funds in PA 26
(handicapped children's program). OHDS was therefore asked in a letter
from the Executive Secretary "why these funds were not set off against
the excess in expenditures for PA 23 in the same manner that the $34,875
in unexpended funds for PA 22 were set off against the excess
expenditures." The reply from OHDS was that such use of these funds was
"prohibited by legislation." No such legislative prohibition was
identified by OHDS, and none was apparent from our own perusal of the
Head Start -- Follow Through Act (42 U.S.C. 2921 et seq.).
This Board has previously stated that it "will not engage in grant
administration by transferring authorizations from one account to
another, at least in the absence of a showing that the administering
officials arbitrarily refused to make such a transfer." Community Action
Agency of Memphis and Shelby County, DGAB Docket No. 76-9, Decision No.
38, p. 2, July 5, 1977 (Emphasis supplied). Since refusal to permit
such a transfer or offset because of an erroneous belief by the
administering agency that it is precluded by law from effecting such a
transfer could have the effect of arbitrary action against a grantee,
the Order requested documentation as to the alleged legislative
prohibition. In its response to the Order, OHDS conceded that there was
no legislative prohibition, but argued that the offset should not be
allowed since the Handicapped program was intended to be a separate and
distinct part of the Head Start program. It noted (among other things)
that the program years I and J grant awards contained special conditions
relating solely to the Handicapped program and the administration of PA
26 and that the Handicapped program was funded for a different period of
time than the normal grant program year. OHDS's position that the
offset should not be permitted appears, therefore, not to be arbitrary,
and it is consistent with the Board's decision in a recent case
involving another grantee not to direct such an offset on the ground
that it would constitute an inappropriate exercise of grant
administration by this Board. Anderson-Oconee Headstart Project, Inc.,
DGAB Docket No. 79-80, Decision No. 90, April, 28, 1980.
The Order also noted that grantee had attributed the bulk of its
overexpenditures to the fact that, during the period in question, it had
no control over the fringe benefits paid to permanent Head Start
employees, who were employees of the City of Memphis. This situation
was in contravention of Office of Child Development Instructions which
required that a grantee's personnel policies be approved by the Head
Start Policy Council whose membership includes parents of enrollees.
The Order noted further that OHDS's response to the appeal cited this
violation of the OCD Instructions, and questioned whether an improper
personnel arrangement would be an appropriate basis for a cost
disallowance. In its response to the Order, however, OHDS indicated
that this was not a basis for the disallowance.
Conclusion
Applicable regulations prohibit grantee from using grant funds
awarded for program year J to pay for excess costs incurred during the
preceding program year I, since none of the excess costs are shown to be
allocable to program year J. Further, the Board will not direct that
unexpended funds in the Handicapped program account for program year I
be used to offset the excess costs. Accordingly, the appeal is denied.
OCTOBER 04, 1983