DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: Butler County DATE: September 29, 1989
Children's Center, Inc. Docket No. 88-234 Decision No.
1106
DECISION
The Butler County Children's Center, Inc. (Butler County/Grantee)
appealed a determination by the Office of Human Development Services
(OHDS/Agency) disallowing $29,230 in federal Head Start funds claimed
for the period April 1, 1985 through March 31, 1986. The disallowance
represents personnel and fringe benefit costs paid to a terminated
employee pursuant to a negotiated settlement of the employee's grievance
against the Grantee.
OHDS determined that the cost of the settlement was not an allowable
charge to federal funds. The Agency's position was based on an
arbitrator's finding that the Grantee violated its collective bargaining
agreement in discharging the employee. The Grantee asserted that the
award was a reasonable charge to the grant and that the Agency had in
fact approved payment of this award with federal funds.
The record in this case consists of the parties' initial briefs,
exhibits, and subsequent affidavits. The Grantee chose not to file a
reply brief. Additionally, the Grantee withdrew its request for an
evidentiary hearing which it made at the start of these proceedings.
Based on the following analysis, we sustain the disallowance.
Background
A. The Grieved Personnel Actions
While holding the position of "Parent Involvement Coordinator" in
Butler
County's Head Start program, S.L. was issued a warning on May 10, 1983,
for allegedly violating the Grantee's rules and regulations concerning
dishonesty and client confidentiality.
At the time of this warning, S.L. had received five prior "warning"
notices based upon various rules infraction charges since her initial
employment on September 22, 1980. She had been placed in a probationary
or performance improvement plan status for a two-month period which
started on March 1 and ended on May 1, 1983. S.L. promptly challenged
the May 10 disciplinary warning, denying the charges on which it was
based. Butler County's Grievance Committee rejected her grievance and
sustained the warning on June 9, 1983.
On May 19, while her May 10 disciplinary warning was still being
considered in the grievance procedure, S.L. was notified that she would
be terminated from employment. The decision to terminate her was based
on a May 17 review of her entire employment and discipline record. The
Grantee alleged that the employee's on-going history of disciplinary
actions and performance deficiencies established just cause for the
termination. S.L. was discharged on May 23, and she immediately filed a
second grievance which was rejected by the Grievance Committee on June
14, 1983. The discharge grievance and the warning grievance were both
appealed to an arbitrator as authorized under the parties' collective
bargaining agreement. Subsequently, on July 7, 1983, S.L. was advised
that the Grievance Committee had conducted an independent investigation
(on June 30th), and that the charge that she had violated client
confidentiality had been dropped as a basis for the disciplinary warning
action.
On November 17, 1983, the Arbitrator issued a decision sustaining the
grievance. The Arbitrator found that the Grantee's actions in
terminating S.L. violated the collective bargaining agreement between
the Grantee and its employees. Specifically, the Grantee's actions
created a double jeopardy situation for S.L. The Arbitrator ruled that
the warning and subsequent termination should be set aside, that both
actions should be removed from S.L.'s personnel files, that she should
be reinstated to her former status, and made whole for any pay and other
benefits lost on account of those "improper" actions. See OHDS Exhibit
(Ex.) 4.
The Grantee appealed the Arbitrator's decision to the Court of Common
Pleas for Butler County. The court affirmed the Arbitrator's decision.
Specifically, the court found that the Arbitrator's decision drew its
essence from the parties' collective bargaining agreement. The court
also characterized the Grantee's termination procedures in this instance
as "faulty." See Butler County Day Care, Inc. v. Butler County Day
Care
Association, MsD. No. 83-122, Book 43, p. 244 (September 9, 1985); OHDS
Ex. 5, pp. 6-9. The Grantee then appealed to the Pennsylvania Superior
Court. The parties settled their dispute, in February 1986, before that
court could decide the appeal. The Grantee included the cost of the
settlement in its funding request for the budget period ending March 31,
1986.
B. The Grantee's request for federal reimbursement
On June 30, 1986, in a letter from a Grants Management Specialist to the
Grantee's Executive Director, OHDS rejected the Grantee's request for
federal reimbursement for the settlement costs. The Agency asserted
that the Grantee had substantially deviated from its personnel policies
and union contract by discharging S.L. without a formal evaluation. The
Agency also questioned the reasonableness of the amount of the costs,
noting that the appellant's decision to appeal the Arbitrator's decision
(in spite of language in the appellant's collective agreement which
provides that an arbitrator's decision is final and binding) increased
the settlement costs. See OHDS Ex. 1.
In September 1986 the Grantee sought further Agency review of the
decision to deny funding. The Agency affirmed its decision on February
19, 1988. OHDS Ex. 2. The formal disallowance was issued on November
8, 1988, at which time OHDS set out the same basic rationale for
disallowing the funding request and added that the costs had not been
adequately documented.
Analysis
It is a fundamental principle of federal grant law that grant funds may
be used only for the allowable costs of activities for which the grant
was awarded. 45 C.F.R. 74.170. The regulation at 45 C.F.R. 74.174(a)
establishes that the cost principles to be used in determining allowable
costs for non-profit grantees, such as Butler County, are set out in
Office of Management and Budget (OMB) Circular No. A-122. Among other
requirements for allowability, a cost must "[b]e reasonable for the
performance of the award and allocable thereto . . . ." OMB Circular
A-122, Attachment A, section 2.a. Section 3 of Attachment A defines a
reasonable cost as one which "does not exceed that which would be
incurred by a prudent person . . . . " That section provides that
factors to be considered in determining the reasonableness of a cost
include --
b. The restraints or requirements imposed by such factors
as generally accepted sound business practices . . . .
c. Whether the individuals concerned acted with prudence in
the circumstances, considering their responsibilities to the
organization, its members, [and] employees . . . .
The collective bargaining agreement between the Grantee and its
employees' union provided the employees with the right to grieve
discharge proceedings. See OHDS Ex. 6, p. 7. That agreement also
provided that the decision of an arbitrator in a grievance proceeding
"shall be final and binding . . . ." Id. at 5.
A. The costs at issue are not allowable under the Cost Principles.
Butler County's argument for the allowability of these costs ignores the
fact that the Arbitrator's decision (which was sustained on appeal)
found that the Grantee had acted improperly in firing S.L. Generally,
the Arbitrator found that the Grantee had subjected S.L. to a measure of
double jeopardy by disciplining her twice for the same offense. See
OHDS Ex. 4, pp. 10-11.
As we noted above, the applicable program regulations explicitly require
that grant funds be used only for the activities for which the grant was
awarded. See also Community Action Agency of Chambers-Tallapoosa-Coosa,
Inc., DAB No. 1066 (1989). Attachment B of OMB Circular A-122 provides
that routine salaries and fringe benefits are allowable costs. However,
these settlement costs cannot be regarded as an ordinary expenditure
incurred in the operation of the Grantee's program since the Grantee's
action was wrongful and the ensuing cost not that of a prudent business
decision. Rather, the costs resulted from the Arbitrator's remedy which
was designed to make whole the employee wronged by the Grantee's
improper personnel action.
Moreover, OHDS noted that in determining the allowability of these costs
it also relied on its Policy Interpretation Memorandum No. 9 issued on
May 31, 1979 (Memo), which set out five specific factors governing the
allowability of legal fees and settlement costs for personnel
litigation. The Memo provided that although they are generally
allowable, the "allowability of particular . . . settlement costs must
be determined on a case by case basis." In relevant part the Memo
provided that settlement costs are allowable where:
1) A grantee does comply with their [sic] personnel policies and
procedures.
2) There was no pattern of harassment or other grossly unfair personnel
practices, although the grantee's personnel policies and procedures were
followed.
* * *
The Arbitrator's decision sustaining the grievance was based on a
finding that the Grantee did not follow its personnel policies in
discharging S.L. Thus, it is obvious that the Grantee did not incur
these costs as a result of "sound business practice." See OMB Circular
A-122, Attachment A, section 3.b. Moreover, the Grantee did not act
"with prudence . . . considering . . . [its] responsibilities to the
organization [and] its . . . employees. Id. at section 3.c. Rather,
the Grantee acted improperly in its handling of this employee's
termination. The Grantee is now attempting to underwrite the
consequences of its action with federal funds.
When one considers the Arbitrator's findings measured against the
various components of allowability relied on by the Agency, it is clear
that these costs were neither reasonable for performance of the award
nor allocable thereto. Thus, the costs at issue were properly
disallowed.
B. The Agency did not approve federal funding for these costs prior to
Butler County incurring them.
The Grantee alleged that prior to finalizing the settlement with S.L. it
"received verbal approval of the same from HHS." Butler County Brief,
p. 3 (unnumbered). The Grantee submitted an affidavit from its
Executive Director in support of its position.
The Executive Director alleged that in January 1986 the Grantee's Head
Start Director spoke with the then Regional Program Director for the
Office of Children, Youth and Families within OHDS and explained the
circumstances of the possible ($27,434) settlement to him. The
Grantee's Executive Director asserted that the Program Director approved
the settlement and indicated that it would be charged to the Head Start
budget. See Affidavit of Marilyn Albert.
The Agency submitted an affidavit from the Regional Program Director,
who indicated that in late 1985 and early 1986 he had several
discussions with the Grantee's Executive Director and Head Start
Director regarding the settlement. The Program Director indicated that
he was unable to determine definitively if these costs were subject to
federal reimbursement and referred the question to the Regional Office
of Fiscal Operations. He noted that on March 12, 1986 he received a
call from the Grantee's Executive Director informing him that the
settlement cost would be $28,016, not $38,260 as Butler County had
indicated on a supplemental grant application. At that time the Program
Director received word that the costs might be allowable. Upon further
inquiry, to determine which Health and Human Services account might
serve as a source for these funds if they were allowable, the Program
Director was told on March 14 that the account he was considering could
not be used. The Program Director asserted that, on March 18th, he
informed the Grantee's Head Start Director that "the costs may be
allowable but that . . . [he] did not have a final determination yet,"
and that no source of funds had been found because OHDS did not have
available funding and current year program funds could not be used. The
Program Director asserted that he informed the Head Start Director that
a final decision would come from the Regional Director for the Office of
Community Programs. The question was then presented to the Regional
Counsel's Office for a legal opinion. See Affidavit of Alvin A. Pearis.
The Grantee is, in effect, attempting to estop the Agency from denying
funding for the settlement costs based on the Regional Program
Director's alleged oral assurances, even though the Grantee does not use
the term "estoppel." Under Heckler v. Community Health Services of
Crawford County, 467 U.S. 51 (1984), it is clear that for estoppel to
apply against the federal government the private party must at least
demonstrate that the traditional elements of estoppel are present.
Those elements are that (1) the estopped party must have made a definite
misrepresentation of fact to another person having reason to believe
that the other party will rely upon it, (2) the party asserting estoppel
must have reasonably relied upon it and (3) must have changed its
position in reliance upon the misrepresentation and (4) must have
suffered a detriment as a result.
Comparing the affidavits to determine whether any misrepresentation took
place, we find that the Agency's is the more convincing of the two. The
Agency's affiant was the individual who actually had the conversation
with the Grantee's Head Start Director and supposedly approved these
costs as a charge to federal funds. By contrast, the Grantee's affiant
was not a participant in the conversation and does not purport to recall
any action by the affiant regarding Agency approval of this expenditure.
Rather, the affiant's statement is essentially hearsay, setting out what
she recalls of a conversation between her Head Start Director and the
Regional Program Director in which she apparently did not participate.
Where the Grantee's affiant merely offered an unsupported assertion that
the costs were definitely approved in some time January 1986, the
Agency's affiant depicted a scenario in which as late as March 1986
neither the allowability of the settlement, the amount in issue, or the
availability of funds, was assured. Contrary to the Grantee's general
assertion, the Agency's affiant was able to buttress his statement with
the specific dates on which events supporting the Agency's position
occurred. The Agency's affiant indicated that at the end of his ongoing
discussions with the Grantee's representatives, he informed the Grantee
only that these costs might be allowable (and apparently had no idea how
they would be funded if they ultimately were allowable). We find that
the parties' ongoing discussions in early 1986 and the contemporaneous
actions of the Agency's affiant during that period support the Agency's
assertion that these costs were never approved for federal funding.
Accordingly, we find that the Grantee did not meet its burden of
establishing the traditional elements of estoppel, since the Grantee did
not establish any misrepresentation by the Agency. We note, moreover,
that Supreme Court decisions on estoppel suggest that, if estoppel
applies at all to the federal government, at the very least it requires
a showing of "affirmative misconduct" on the part of federal officials.
See, e.g., Schweiker v. Hansen, 450 U.S. 785 (1981); INS v. Miranda, 459
U.S. 14 (1982). The grantee's evidence falls far short of this
standard.
Conlusion
Based on the analysis above, we sustain the entire disallowance of
$29,230.
________________________
Cecilia Sparks
Ford
________________________
Donald F.
Garrett
________________________
Alexander G.
Teitz Presiding
Board