GAB Decision 122
September 30, 1980
Docket No. 79-190
Massachusetts Rehabilitation Commission;
Przybylinski, Donald; Coster, Clarence Settle, Norval
Introduction
This case involves a determination by the Principal Regional Official
(PRO), Region I, that an indirect cost rate should not have been used to
allocate the costs of operating the Massachusetts Rehabilitation
Commission's Central Departmental Administration (CDA), which serves its
Vocational Rehabilitation (VR) and Disability Determination (DD)
programs, because the cost were charged as direct costs of the VR
program. Both programs are federally funded.
The notification letter, dated August 13, 1979, stated that the use
of an indirect cost rate to allocate CDA costs to DD resulted in a
duplication of charges against the federal government and contravened
federal regulations which provide that to be allowable under a grant
program, "costs must not be allocable to or included as a cost to any
other federally financed program." The determination affirmed a May 14,
1979 decision of the Division of Cost Allocation regarding the use of
the indirect cost rate.
This decision is based on the application for review, the Agency's
response, information provided in several telephone conferences and the
parties' responses to the Board's Order to Show Cause.
Statement of the Case
The Massachusetts Rehabilitation Commission (State), fully federally
funded with the exception of the required state match, receives grant
funds pursuant to the Rehabilitation Act of 1973 from the Rehabilitation
Services Administration (RSA) for its VR program, and has a contract
with the Social Security Administration to perform disability
determinations as part of the DD program. A central departmental office
(CDA) was set up to provide centralized services for the two programs as
a cost saving measure. CDA expenses and salaries were charged in total
as a direct cost to the VR account, though CDA staff also performed
services on behalf of DD. Fixed indirect cost rates applicable to DD
were established in order to recover the portion of CDA costs allocable
to DD. The Agency maintains that the rates were established based on
erroneous information supplied by the State to the Regional Office. The
Agency claims the State misrepresented that it was not receiving any
federal funds from another source for "indirect cost type items."
The
amount disbursed for indirect costs under the DD contract to the State
is reported by the Agency as 77,190 (2.98 percent rate) for the period
July 1, 1977 to June 30, 1978 and $76,650 (2.8o percent rate) for the
period from July 1, 1978 to June 30, 1979. The Agency seeks to
recapture these funds on the basis of 45 CFR Part 74, Appendix C,
Section C.1. which states that to be allowable costs must:
f. Not be allocable to or included as a cost of any other federal
program in either the current or a prior period.
g. Be net of all applicable credits.
The Agency maintains that it has no objection to an allocation of the
expenses of operating CDA between the two programs but claims that the
method used in this case results in the State receiving reimbursement
from two different federal sources.
The Agency claims: "If the state honestly contemplated having the
CDA expenses allocated, then it should not have had the federal
rehabilitation program pay the full amount. Either the state
specifically wanted the federal rehabilitation program to absorb CDA
expenses as a direct grant expense or the state intentionally submitted
a distorted and false budget accounting." Agency letter of November 28,
1979, p. 6.
In its response to the Board's Order, the Agency objected to the
amount of the rates, maintaining that the rates are too high. The Board
will not address this argument at this time inasmuch as the Agency's own
definition of the fixed rate provides that the rate is not subject to
adjustment for the period for which the rate was established. See
Agency letter of September 16, 1980. Any Agency plan to adjust the rate
at some later date is not at issue in this case.
The State does not dispute that it claimed the CDA expenses as a
direct cost of the VR program and as an indirect cost of the DD program.
The State maintains, however, that this does not result in a duplication
of payment. Rather, according to the State, the use of an indirect cost
rate merely allocates CDA costs, initialy charged to the VR account, to
the proper cost objectives for which services were actually performed.
The State explains that these charges to the DD program are then
transferred and credited to the VR federal funds expenditure account in
order to reimburse VR for the costs of services utilized by DD. See
State's response to Order, p. 2. The State maintains that failure to
"reimburse" VR would prevent VR from providing the full level of
services that were contemplated when the grant funds were initially
awarded.
In addition, the State claims that it would be in violation of
federal regulations if DD did not reimburse VR for the amount expended
to adminsiter DD programs, citing Federal Managment Circular (FMC) 74-4,
Attachment A, Section C.2.b. which provides:
Any cost allocable to a particular grant or cost objective under the
principles provided for in this circular may not be shifted to other
Federal grant programs to fund deficiencies, avoid restrictions imposed
by law or grant agreements, or for other reasons. (See also 45 CFR Part
74, Appendix C, Section C.2.b.)
The State argues: "Failure to apply the indirect cost rate as we
have calculated it would violate this section of FMC 74-4 as the
Disability Determination unit would be shifting some of its
administrative costs to the Vocational Rehabilitation program."
Application for Review, p. 3.
Analysis
The Board agrees with the Agency's position that the State did not
use proper methods for claiming the costs of CDA. The State should not
have claimed the total costs of CDA as a direct costs of the VR program
if the State intended to allocate these costs between the two programs.
By charging the costs to VR and applying the rate to charge DD, the
State was in fact claiming twice for the same costs. If, in the future,
the State plans for CDA to serve the two programs and have each pay a
share of the costs, the State will have to develop a different method of
claiming such costs.
The issue before the Board in this case is whether to uphold the
disallowance of costs claimed through the indirect cost rate.Had the
State used the rate to charge DD for its portion of the CDA expenses and
then charged VR only to the extent that DD had not already paid for the
costs of operating CDA, the Board would have approved the use of the
rate. The Agency correctly argues that the State's practice of claiming
the total costs as a direct cost of VR and a portion of the costs as an
indirect costs of DD results in claims for more federal funds than the
State is entitled to receive for those costs. The problem, however, is
not that the State is using a rate to allocate the costs but that the
State charged the VR account for costs of services benefiting another
program.The State argues that the rate is being used to reimburse VR for
funds that it advanced for the payment of DD's share of CDA costs, but
such reimbursement would not have been necessary had VR not been charged
for the total costs of CDA.
The State does, however, express valid concerns that a program should
bear its fair share of costs for services it receives and conversely
that a program ought not divert funds intended for its program purposes
in order to pay the costs of services benefiting another program.
In addition, if the Board decided to uphold the determination
entirely with respect to the rate, the State would receive less than the
federal funding to which it is entitled because of the different
percentage of federal funding for VR and DD costs. The VR costs are 80
percent federally funded with a 20 percent State match. Although it
appears that VR paid the CDA costs entirely from the federal portion of
the budget, in a September 15, 1980 telephone conference both parties
agreed that other costs are paid 100 percent from the State portion.
Therefore, the State in effect receives only 80 percent federal funding
for CDA costs. The DD program receives 100 percent federal
reimbursement for its costs. If the State is required to pay the entire
costs of CDA from the VR account, it would be disadvantaged to the
extent the State is entitled to 100 percent reimbursement for that
portion which represents the costs for services to DD.
Conclusion
The Board emphasizes that the State should not continue this method
of allocating the costs of CDA between the programs. The Board has
fashioned a remedy in this case not to condone the States's actions, but
to satisfy requirements set out in federal regulations at 45 CFR Part
74, Appendix C, Section C.1.f. and g., and Section C.2.b. Upholding the
Agency's position entirely would result in violation of the former which
prohibits duplicate payments of federal funds for the same costs.
Upholding the Agency's position entirely would result in violation of
the latter which requires a program receiving federal funds to expend
these funds only for costs incurred by that program.
In order to reach a result which is equitable, yet comports with
applicable regulations, the Board has decided that the State should be
allowed to use the indirect cost rate to establish DD's share of the
costs of CDA. Further, DD should reimburse VR for the amounts
temporarily advanced to cover those costs. This decision is conditioned
on the State's return to the federal RSA account of that portion of VR
costs it should not have claimed because they were properly chargeable
to the DD account for services rendered to DD. This is to be
distinguished from VR simply crediting its federal account in the amount
received from DD for its share of CDA costs. The funds should be
returned from the same federal account and for the same time period in
which they were claimed. This does not preclude the State from making
claims against the RSA account for other allowable costs of the VR
program during that time period within the statutory limitations.
OCTOBER 04, 1983