Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Urban League of Arkansas, Inc.
DATE: August 2, 1991
Docket No. 90-171
Audit Control No. A-06-90-06153
Decision No. 1269
DECISION
The Urban League of Arkansas, Inc. (Grantee) appealed a determination
by
the Office of Human Development Services (OHDS, the Agency) to
disallow
$28,837 charged to its Head Start grant. 1/ During the course
of the
appeal, OHDS reduced the disallowance to $6,699.02, comprised of
27
items of expenditure, based on documentation supplied by the
Grantee.
In a telephone conference held on June 19, 1991, the Grantee
indicated
that it was limiting its appeal to nine items of expenditure
totalling
$2,907.64. These costs were disallowed essentially on the
basis of the
Grantee's failure to provide documentation and to obtain prior
agency
approval.
For the reasons stated below, we reverse the disallowance of
$1747.10
representing four items of expenditure, and we uphold the
disallowance
of $1160.54 in costs comprised of the remaining five
items. The nine
items of cost comprise five discrete categories.
We will address each
category separately as follows below. The numbers
used to designate
each item of expenditure are those used in the "Schedule of
Auditee
Costs Recommended for Financial Adjustment with OHDS
Final
Determination" that was enclosed with the Agency's disallowance
letter
dated July 23, 1990. These numbers were used by both parties
throughout
the course of the appeal.
Applicable law
The cost principles of OMB Circular A-122 are made applicable to
nonprofit
grantees by 45 C.F.R. 74.174(a). In order to be allowable
under a grant
award, costs charged to federal funds must be adequately
documented. OMB
Circular A-122, Attachment A, A.2.g; LAU-FAY-TON
Community Action Agency, DAB
No. 1126 (1990). The Board has repeatedly
held that a grantee bears the
burden of documenting the existence and
allowability of its costs.
Nisqually Indian Tribe, DAB No. 1210 (1990);
La Courte Oreilles Tribe, DAB
No. 1132 (1990); West Central Wisconsin
Community Action Agency, Inc., DAB
No. 861 (1987). Forty-five C.F.R.
74.62(g) provides that accounting
records must be supported by source
documentation such as canceled checks,
paid bills, and contract
documents.
Applicable cost principles identify certain costs that must be approved
by
the granting agency in order to be allowable. 45 C.F.R. 74.177.
The
OHDS Discretionary Grants Administration Manual (HDS/GAM) provides
that
prior agency approval is required for general purpose equipment
and
other capital expenditures having an acquisition cost of $500 or
more
per unit, and a useful life of more than two years. HDS/GAM Ch.
1,
section L(3)(a).
Analysis
1. Items No. 3 and 5: payments for a typewriter.
The Agency disallowed two payments of $526.00 and $395.10 made in
August
and December, 1987 to Capital Business Machines of Little Rock, on
the
basis that they were for the lease/purchase of a typewriter for
which
the Grantee had failed to obtain prior agency approval.
During the telephone conference, Agency counsel indicated that
these
payments would not have been disallowed if the purchase had
received
prior approval, but added that there was nothing in the record to
show
that this cost was incurred by the Head Start program for Head
Start
purposes. The Grantee asserted that these costs had been approved
by
the Agency as a line item in its budget, and that after closeout of
the
grant, the typewriter was transferred to the new Head Start
grantee.
Subsequent to the telephone conference, the Agency produced a copy
of a
line item budget designating $1,000 for an electric typewriter.
The
Agency continued its disallowance of the typewriter, noting in
an
affidavit from its Supervisory Grants Management Specialist that
while
the Grantee's budget for program year 01 authorized the purchase of
a
typewriter, the Grantee had instead leased the typewriter,
thus
incurring unapproved charges.
We note that 45 C.F.R. 74.177(b)(2) provides that if costs are
specified
in a budget, approval of the budget shall constitute approval of
the
costs, and that Grantee's approved operating budget for program year
01
included $1,000 for an electric typewriter. The Agency has
not
demonstrated that its prior approval of the typewriter in the line
item
budget was contingent on outright purchase, versus lease/purchase
or
lease, of the equipment. Additionally, while the Agency asserted
that
lease of the typewriter was unapproved, it is not clear that
applicable
regulations and cost principles required that the Grantee obtain
prior
approval for the lease of the typewriter.
Although the Agency speculated that the typewriter might not have
been
obtained by the Head Start program for a Head Start purpose, it
was
listed on the inventory of Head Start property located in the
Grantee's
central and regional offices that was provided to an OHDS Region
VI
Community Representative, by letter from the Grantee of June 27,
1988.
While the Agency's Supervisory Grants Management Specialist stated
in
his affidavit that he did not recall receiving an inventory
agreement
from the Grantee showing that it had transferred the assets of the
Head
Start program to the subsequent Head Start grantee, the Agency did
not
dispute that the Grantee had reported the typewriter as Head
Start
property in June, 1988. Based on the above, we conclude that
the
Grantee has met its burden of documenting the existence and
allowability
of these costs, and we reverse the disallowance of items No. 3
and 5
totalling $921.10.
2. Items 12 and 13: salary advances.
The Agency disallowed payments of $385.90 and $339.44 made to an
employee
of the Grantee in February and August, 1987, acknowledged by
the Grantee to
be salary advances. The Agency initially disallowed
these payments on
the basis that they were loans and thus not allowable
cost to grants, and
subsequently on the basis that repayment of the
salary advances was
unsupported.
The Grantee asserted that its records reflected payments from the
employee
equalling $800.00, which more than repaid the disallowed
amount, and that it
was satisfied that this indebtedness had been
repaid. The Grantee
provided a handwritten document titled "Urban
League of Arkansas Headstart
Basic Program Payroll Salary Advance
Register & Reconciliation"
summarizing salary advances made to and
recovered from several of its
employees. During the telephone
conference, the Grantee indicated that
information in this document was
taken from a computer printout of its
employee deductions register,
which it subsequently provided. The
computer printout shows payroll
deductions for the employee over 35 pay
periods, from January 15, 1987
to August 30, 1988.
We conclude that the evidence supplied by the Grantee does not
establish
that the questioned salary advances were repaid. Although the
Grantee's
handwritten summary of advances and recoveries shows that a number
of
salary advances made to the employee were recovered, it shows
no
recovery of the two specific payments that the Agency disallowed.
2/
The Grantee has not demonstrated that these two salary
advances
totalling $725.34 were repaid to the Head Start program, and has
failed
to meet its burden of demonstrating the allowability of these
costs.
Accordingly, we sustain the disallowance of these items.
3. Items 34, 35, and 36: payments for
the lease of a copier
These items consist of checks for $87.11, $225.80, dated April 8,
1987,
and $122.29, dated April 9, 1987, to City Business Machines of
Little
Rock for the lease of a copier. The Agency found these
expenses
inadequately documented. During the telephone conference, the
Grantee
stated that these payments represented the pro-rated portion of the
cost
of the copier lease attributable to the Head Start program. The
Grantee
explained that it determined the payment amounts by calculating
the
number of copies made by the Head Start program as a proportion of
total
copies made during a given month.
The Board need not address the reasonableness of the Grantee's system
for
allocating copier costs among programs, as the evidence does not
establish
that these expenses were attributable to the Head Start
program.
Although there was some discussion during the telephone
conference of
documentation, described as copier logs, that the Grantee
provided by letter
dated January 17, 1991, this documentation does not
relate to the questioned
costs. Instead, these copier logs appear to
concern the disallowance of
item 31, a copier lease payment to a
different company in October, 1987,
which the Grantee conceded during
the telephone conference. We also
note that the "copy control re-cap
sheets" that the Grantee supplied concern
copies made during September
through November, 1985 and May and June, 1987,
whereas the three checks
comprising items 34, 35 and 36 were written on two
consecutive days in
April, 1987. The Grantee pointed to no other
documentation in the
record which would substantiate its explanation of the
basis for the
disallowed payments.
Based on the foregoing, we conclude that the Grantee has failed
to
establish the allowability of items 34, 35 and 36, and we
therefore
sustain the disallowance of these costs.
4. Item 62: cost of an external computer disk drive.
Item 62, a $710.00 payment in January, 1987 to First Class Peripherals
in
Carson City, Nevada, for an external hard disk drive, was disallowed
as
inadequately documented. The Grantee stated during the
telephone
conference that the external disk drive had been purchased to
accompany
an Apple computer that had been donated to the Head Start program,
and
that the computer was used to monitor children's food service,
menus,
medical records, and dental appointments. After closeout of the
grant,
the Grantee asserted, this equipment was transferred to the new
Head
Start grantee. During the telephone conference, the Agency
contended
that there was insufficient source documentation to support
this
expense, and nothing to relate it to a Head Start program objective
or
to show that the Grantee was not using this equipment for
other
programs.
Documentation in the Grantee's appeal file in support of this
expense
included a letter from Omnishore Electronics Manufacturing
Corp.
(formerly First Class Peripherals), dated April 17, 1991 stating
that
the Grantee's Head Start program purchased a 10 megabyte external
hard
drive from First Class Peripherals on January 26, 1987 for $695 plus
$15
shipping, and that the unit was requested on a Head Start purchase
order
and paid for in advance with a Head Start check. During the
telephone
conference, the Agency criticized this letter on the basis that it
was
not contemporaneous with the transaction. Additionally, as with
the
typewriter payments, items 3 and 5, above, the inventory of Head
Start
property that was prepared and submitted to OHDS by letter dated
June
27, 1988 shows an Apple II computer and an external disk drive as
Head
Start central office property.
We conclude that the vendor's letter sufficiently reconstructs
the
circumstances of the transaction as to meet the requirement of
source
documentation. 45 C.F.R. 74.62(g). Along with the Head
Start property
inventory, this documentation demonstrates that the property
was
acquired for Head Start purposes. The Grantee has met its burden
of
documenting the allowability of the questioned cost, and we reverse
the
disallowance of this item.
5. Item 68: Payment for day care
center repairs and lawn work.
The Agency disallowed, as inadequately documented, a payment of $116.00
in
August, 1988 to the Housing Authority of North Little Rock,
consisting of
$50.00 for mowing grass and $66.00 for repair of damages
to windows and a
screen door at the Hemlock Courts Day Care Center in
North Little Rock.
During the telephone conference the Agency
questioned whether the facility
had been used for the Head Start
program, and the Grantee asserted that its
lease for the day care center
required it to do renovation and upkeep.
The Grantee subsequently
provided a copy of a lease agreement with the North
Little Rock Housing
authority for the building and grounds of the Hemlock
Head Start Center
in North Little Rock effective September 1,
1986. The lease provides
that the premises were to be used as a Head
Start center for child
development and a meeting place for the parents of
Head Start children.
The lease agreement charges the Head Start program with
responsibility
for the liability of the children while on the premises, and
provides
that the lessee is responsible for garbage pick up and utilities,
and
that the lessor agrees to maintain the building in a condition that
will
meet health, fire, and license inspections.
We are satisfied that the lease contract is adequate to demonstrate
that
the Grantee was leasing the premises for purposes of the Head
Start
program in accordance with its terms. See 45 C.F.R.
74.62(g). However,
the lease agreement is silent on responsibility for
the cost of
maintenance and repair of damages to the property, and so we must
look
to common law for allocating responsibility for these expenses.
In the absence of statute or of an agreement to the contrary, a
landlord
is not obligated to make repairs upon the demised premises, either
to
put the premises in repair or to keep them in such condition. In
other
words, a landlord is not, in the absence of statute or of
express
covenant or agreement, bound to make repairs on the leased property,
or
to maintain it in a safe and suitable condition for the use
and
occupancy of the tenant. 49 Am. Jur. 2d Landlord and Tenant section
774
(1970). This is the rule in Arkansas, where it is well settled
that
unless a landlord agrees with his tenant to repair leased premises,
he
cannot, in the absence of statute, be compelled to do so or be
held
liable for repairs. Hurst v. Field, 281 Ark. 106, 661 S.W.2d
393
(1983); E.E. Terry, Inc. v. Cities of Helena and West Helena, 256
Ark.
226, 506 S.W.2d 573 (1974). Given these tenets, we conclude that
the
Grantee, as lessee, was reasonably responsible for the questioned
costs,
and that they were reasonable costs of the Head Start program.
We
therefore reverse the disallowance of this expense.
Conclusion
Based on the above analysis, we reverse the disallowance of items no.
3,
5, 62 and 68, totalling $1747.10, and we sustain the disallowance
of
items no. 12, 13, 34, 35, and 36, totalling $1160.54.
Norval D. (John) Settle
Alexander G. Teitz
Cecilia Sparks Ford Presiding Board Member.
1. The Agency's brief describes the disallowance as affecting
costs
for the fiscal year October 1, 1987 through September 30, 1988, and
its
disallowance letter dated July 23, 1990 refers to the program
year
ending September 30, 1988. However, the Agency's "Schedule of
Auditee
Costs Recommended for Financial Adjustment with OHDS
Final
Determination," Exhibit A of the disallowance letter, states that
it
concerns the 25-month period ending September 30, 1988. According
to
the record, all disallowed expenditures were made during January,
1987
through August, 1988.
2. In any event, we note that the Grantee's documentation shows
that
total salary advances exceeded the amounts recovered from the
employee
by more than the amount at issue here. Thus, the Agency
reasonably
disallowed these salary