Ironbound Educational and Cultural Center, Inc., DAB No. 1302 (1992)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT:   Ironbound Educational  and  Cultural Center, Inc. 

DATE:  February 18, 1992
Docket No. 91-51
Decision No. 1302

DECISION

Ironbound Educational and Cultural Center, Inc. (Ironbound) appealed a
decision of the Office of Community Services (OCS) which disallowed
Ironbound's expenditure of $282,000 and denied a further extension of
the grant period related to an award of funds under a program of special
discretionary grants authorized by the Community Services Block Grant
Program (42 U.S.C. .9901 et seq.).  OCS found that Ironbound, despite
prodding and a lengthy extension of time, had failed to perform
substantially and, in particular, had failed to obtain the matching
funds required as a condition of the award.

Based on our review of the record and the analysis below, we uphold the
OCS decision.


Background

A provision of the Community Services Block Grant Program authorizes
discretionary grants for certain special programs of nonprofit community
development organizations to increase employment and business
development opportunities for low-income residents.  42 U.S.C.
.9910(a)(2)(A).  OCS implemented this provision by annually publishing
in the Federal Register an announcement of availability of, and
conditions for, these funds.  The grant involved here was awarded
pursuant to such an announcement published at 52 Fed. Reg. 4090
(February 9, 1987).  Exhibit B to OCS's Brief.  Among other things, the
announcement stated:

 For most projects, the OCS will grant funds for one year.
 However, depending on the circumstances of any individual
 project and the justification presented by the applicant in its
 proposal, a grant may be made for a longer period of time, i.e.,
 up to two years.  Regardless of the time provided in a grant, it
 must be clearly demonstrated that the project work plan will
 achieve measurable results and can be successfully completed
 within the funding period provided in the particular grant.  Id.

The announcement also specified that for the kind of grant Ironbound
eventually sought 1/, the applicant was required to document a "firm
commitment" of a matching share of "either one private sector dollar or
two public sector dollars to each dollar of OCS discretionary funds."
Id., p. 4095.  The announcement also included considerable detail on the
matching requirement, including the statement that:

 Matching funds must be definite, or contingent only on receipt
 of the OCS grant.  Speculative match, or match based on
 independent contingencies (such as receipt of another grant or
 lines of credit at the current market rate . . .) will not be
 counted towards the matching requirement.  Id.

The announcement also specified that grants were subject to the
provisions of 45 C.F.R. Part 74 (this Department's general grant
regulations) and the applicable Office of Management and Budget
Circulars (including A-122, "Cost principles for nonprofit
organizations").  Id., p. 4112.


Ironbound's Approved Project

In April, 1987, Ironbound applied for $382,300 in federal funds (with a
non-federal match of $749,400 from various sources briefly listed in the
application) to support part of an "Ironbound Gateway Development
Project;" the OCS-supported part basically was to expand an historic
church rectory with four floors of space for commercial use.  Some of
the nonfederal funds apparently were earmarked for other parts of the
development project, such as renovation of another historic building and
a park, but there is no question that the OCS-supported project was a
clearly-identifiable portion of the overall development project.  The
application contained a detailed milestone schedule and a
quarter-by-quarter plan for completing work in one year; it noted that
completion of some work might run over the year, but that "the funds
will be fully obligated within the one year time period allotted for the
project, even though the work may take a little longer to complete."
Exhibit C to OCS's Brief, p. 27.  Although the application discussed the
potential availability of matching funds from a wide range of sources,
the record does not show any unambiguous and unconditional commitment of
any substantial or specific amount of funds directly for the project and
for the time period in question.

In September, 1987, after negotiations, OCS awarded (and Ironbound
accepted) $282,000, with the proviso that "the Grantee is required to
match the Federal approved budget with $282,000 in private or $564,000
in public funds."  Exhibit D to OCS's Brief, first (unnumbered) page.
Both the budget period and the project period for the grant were
September 30, 1987 to September 29, 1988.  Id.  The agreement specified
that "failure to comply with any term or condition shall, in accordance
with Title 45 CFR Part 74, subpart M, be considered grounds for
suspension and/or termination of this grant."  Id., second (unnumbered)
page.  The agreement called for a revised budget and scope of work as
agreed during negotiations.

Ironbound submitted the revised budget and scope of work about two weeks
after the award.  Exhibit E to OCS's Brief.  This showed OCS funds being
budgeted for $250,000 in excavation, materials and construction costs,
and $32,000 in administrative costs.  It does not show how matching
funds were to be used.


How the dispute developed

On September 23, 1988, just before the end of the approved one-year
project period, Ironbound asked for an extension of one year, citing
architectural, excavation and other delays.  Exhibits F and I to OCS's
Brief.  By letter of December 13, 1988, OCS approved a no-cost extension
for one year.  Exhibit F to OCS's Brief.  The approval letter specified
Ironbound's obligation to submit final reports and an audit shortly
after the end of the no-cost extension.  The grant award document
attached to the approval letter also repeated the matching obligation.

In December, 1989, Ironbound disclosed that construction still was not
complete, and projected completion in December, 1991 -- two years hence
and four years after award of the original one-year grant.  OCS saw no
evidence that any matching funds had been obtained, and began demanding
more information.  Exhibits G and H to OCS's Brief.  An OCS site visit
in June, 1990, disclosed that only a small portion of work had been
completed, that work was stopped, that little if any of the promised
matching funds had been obtained, and that no audit of expenditures had
been performed.  Exhibit I to OCS's Brief.  Later that month, Ironbound
sent OCS a letter indicating that it now needed $500,000 more to
complete the project, that it had received only $50,000 in matching
funds but anticipated more from fund-raising activities, and that it
needed a no-cost extension of two more years (until June, 1992) to
complete the project.  Exhibit J to OCS's Brief.  In response, OCS
demanded more details immediately on proposed work scheduling,
expenditures, and matching sources, and it threatened a disallowance.
Exhibit K to OCS's Brief.

In August, 1990, OCS wrote denying Ironbound's request for a further
no-cost extension, calling Ironbound's request "inconceivable" and
noting that Ironbound's projection that it could raise $500,000 was
"very speculative and not supported by your experience in such
activity."  Exhibit L to OCS's Brief.  Nevertheless, OCS still did not
take a disallowance immediately; OCS instead offered Ironbound an
opportunity to promptly obtain a firm commitment of project financing
from a bank or elsewhere.  Id.  Meanwhile, OCS had not yet received an
audit of amounts expended, and apparently has not to this day.

In October, 1990, Ironbound advised OCS that it could not get a bank
loan without commitments from tenants to occupy 75% of the office space
which would be built, and that it had engaged a realty firm to help.
However, Ironbound said that it had met the matching requirements,
attaching an otherwise unexplained and very summary list of supposed
donors and amounts (which largely were the same potential sources
listed, equally cursorily, in Ironbound's original application).  OCS
said it never received this letter until it was faxed to OCS in March,
1991.  Exhibits M and N to OCS's Brief.

By letter dated February 27, 1991, OCS demanded return of the grant
funds, essentially for failure to provide the required match or to
perform as required.  In response, in March, 1991, Ironbound sent a copy
of its October, 1990 letter described in the paragraph above to OCS; OCS
chose to treat this as a notice of appeal and eventually sent it to this
Board.  Meanwhile, OCS contacted Ironbound to discuss the matter and
concluded that no more work had been done and that the status of matters
was the same as in the previous fall.  Exhibit N to OCS's Brief. 2/


Ironbound's position

On appeal, Ironbound has acknowledged that it did not complete the
project, arguing that it has not been able to obtain needed additional
funding due to the downturn in the economy.  Ironbound argued, however,
that it had obtained the matching funds and had spent them on the
approved project.  Ironbound requested the opportunity to complete the
project.


Analysis

HHS regulations provide that --

     When a grantee has materially failed to comply with the terms of a
     grant, the granting agency may suspend the grant . . . terminate
     the grant for cause . . . or take such other remedies as may be
     legally available and appropriate in the circumstances.  45 C.F.R.
     .74.113.

OCS included in its program announcement a "special note" indicating
that omission or distortion of information on, inter alia, matching, was
grounds for recovery of grant award funds.  52 Fed. Reg. 4097.

It is well established that grant funds may be used only for allowable
costs of the activities for which the grant was awarded.  45 C.F.R.
.74.170.  Thus, a disallowance is an available and appropriate remedy
for failure to meet material grant conditions and document claims for
federal funds.

Under the Department's Grants Administration Manual, OCS has discretion
to award a no-cost extension of a project.  Specifically, section
1-85-80 of the Departmental Grants Administration Manual states:

 If support for a project is ending, the grants officer may
 noncompetitively extend the project period for a limited time,
 usually a few months, to provide for an orderly phase-out of
 Federal support.  The grants officer may also extend any budget
 period for a few months for administrative reasons . . . .

While this Board will review OCS's exercise of discretion to withhold an
extension, we have determined that the decision to deny an extension
should be upheld unless it was arbitrary.  Oakwood Child Development
Center, Inc., DAB No. 1092 (1989).

Below, we examine three elements of Ironbound's nonperformance which the
record shows justify OCS's actions in this case.


1.  Ironbound's failure to complete the project

It is undisputed that the project is substantially uncompleted; in fact,
Ironbound does not even attempt to rebut OCS's finding that only a
portion, apparently small, of the work has been done.  The project
originally was to be completed by September, 1988.  OCS granted a
one-year extension.  OCS refused any further extension.

In the circumstances of this case, we find no basis for concluding that
OCS was unreasonable in denying a further extension.  As detailed above,
the record clearly shows a pattern of extensive delays with only
superficial explanations.  Ironbound stated that all Federal funds have
been spent, and the record shows that there has been no accounting for
these expenditures.  The possibility for obtaining the substantial
further funds which Ironbound says are needed appears speculative at
best.


2.  Ironbound's failure to provide sufficient evidence of matching funds

OCS also determined that Ironbound failed to obtain required matching
funds and commit those funds to the project.  Ironbound disputes this
determination.  Our examination of the record discloses that, at best,
Ironbound produced some evidence of receipt of some funds; however,
there is nothing persuasive to show how, or even whether, these funds
were expended on the approved project.  What Ironbound provided was no
more than (a) summary lists of supposed funding sources, and (b) copies
of some checks received from some of those sources.  For the reasons
below, we find that OCS reasonably rejected these materials as adequate
evidence that Ironbound met its matching requirement.

At the outset, we note certain inconsistencies between Ironbound's
position here and earlier positions.  The February, 1990, OCS monitoring
report indicated that Ironbound's Executive Director reported that
matching requirements had not been met, and that Ironbound's accountant
did not know how much had been produced.  Exhibit H to OCS's Brief.  A
followup letter Ironbound sent to OCS, dated June 29, 1990, stated:

 We received to-date $50,000 matching funds towards the
 construction of the extension of the former rectory building and
 anticipate to match with funds received for I.E.C.C. memberships
 as a result of extensive promotion activity . . . .  If
 required, we will seek gap funding construction funding from
 Broad National Bank . . . .  Exhibit J to OCS's Brief.

Although OCS pointed this out in its brief, Ironbound did not address
this in its responsive briefs.  Furthermore, even the $50,000 claim is
questionable, as there is no connection shown between this very precise
figure and any specific documentation in the record.

In support of its position that it had met its matching obligation,
Ironbound submitted a list of supposed funding sources and copies of
various documents (checks, deposit receipts) related to the list.  See
Attachments to Ironbound's May 23, 1991 Letter to the Board.  On the
face of it, we note that the list raises a question whether it meets the
OCS requirement of a match of $282,000 from private sources or $564,000
from public sources, because by its own terms (and if proven) it shows
only $338,040 available from public sources and $118,500 from private
sources, for a total of $456,540; while this cumulatively exceeds the
private-source criterion, it is not clear whether the mix meets the OCS
rule.

But we need not resolve that matter because the list cannot be taken at
face value.  The documentation raises as many questions as Ironbound
would have it answer.  For example, the list shows that the major public
source was $225,000 from the New Jersey State Council on the Arts.  The
record includes copies of four checks from New Jersey to Ironbound
totaling $225,000.  However, only two of the checks, totaling $125,000,
show any explicit relation to the Council on the Arts (and one of these
was dated January 27, 1987, eight months before the OCS project was
approved 3/); the other two checks, each for $50,000, are quite
different in appearance and the later of the two (dated February 1,
1989, well into the second year of the project) has on it the statement
"state museum 1989 award -- 2d and final pay" [sic]. 4/  These checks
thus raise as many questions as they purport to answer, not the least of
which is that these documents by themselves show no relationship to the
OCS-approved project.

Similar problems haunt the other copies of checks.  There are four items
included from the city of Newark, but two are actually copies of the
same check, and one is illegible; again, in any event, the documents
show no relationship to the OCS-approved project.  Another example is a
check from New Jersey Bell for $4,000; an accompanying document may be
only a deposit slip for the same check.  There is a U.S. Treasury check
for $50,000 with no identifying explanation (not even in the covering
list of sources), although the check does bear the letters "HUD."
Again, the document is merely enigmatic.  Literally none of these
documents evidence the nature, if any, of the relation to the approved
project, and Ironbound, despite repeated opportunities to make such a
showing to OCS and this Board, has done no more than repeat the
conclusory statement that match was provided.  One of the items
Ironbound described as part of its matching share did not appear until
mentioned in Ironbound's cover summary of sources submitted in October,
1990 -- the claim of $60,000 as the value of a volunteer manager's work.
While such in-kind contributions may be allowable as part of the
matching share under the OCS guidelines, in-kind contributions require
extra justification that does not appear in the record.  45 C.F.R. Part
74, Subpart G; see also OMB Circular A-122, Att. B, Para. 10.a(5)
(referencing the detailed requirements of OMB Circular A-110, Att. E,
Para. 3.b.).

Ironbound had a clear duty under its grant agreement and the project
announcement to produce not just a summary list of sources, but hard and
definitive documentation detailing the commitment, early on, of precise
amounts.  Ironbound failed to do so from the beginning, and has failed
to do so since.  As recently as January 17, 1992, in a letter to this
Board, Ironbound described its latest attempts to produce more funds --
but again, without the requisite commitment. 5/

Ironbound had a clear duty to maintain, and disclose to OCS, detailed
documentation related to project performance, expenditures, and
amounts/sources of matching funds.  See, e.g., 45 C.F.R. Part 74,
Subparts D, G, H; OMB Circular A-122, Att. A, Para. A.2.g.  Ironbound
also bore the responsibility of informing OCS as soon as possible of
details of any development which would "materially impair the ability to
attain the objective of the award."  45 C.F.R. .74.84.  In the OCS
announcement, OCS included a "special note" at the end of the provision
on application requirements (which reiterated matching requirements)
stating that "should OCS discover that the applicant has omitted or
distorted any information . . . it may be grounds for . . . the recovery
of any grant award already made."  52 Fed. Reg. 4097.

For the foregoing reasons, we find that OCS was reasonable in
determining that Ironbound failed to meet a material condition of the
grant by failing to adequately document required matching funds obtained
and used for the project.


3.  Accounting for expenditures

Although the primary focus of the parties' arguments in this case has
been on the issues of matching and extension of the project period,
perhaps a more disturbing element concerns the absence of documentation
in the record to support Ironbound's expenditure of the $282,000 in
federal funds.

Federal regulations clearly require detailed accounts of outlays.  See,
e.g., 45 C.F.R. Part 74, Subpart I.  The OCS program announcement
specified that "quarterly progress and financial reports, as well as an
audit, will be required for any project that receives OCS funds."  52
Fed. Reg. 4091.  OCS's December, 1988, letter authorizing an extension
of one year for the project specified:

 The approval of this extension obligates you to prepare and
 submit final summary financial and program progress reports for
 the entire grant period as well as these same reports for each
 calendar quarter of the grant extension period.  The final
 financial reports . . . and the final progress report will be
 due 60 days after the termination date of the grant.

 A final audit report covering the total grant period will be due
 no later than 90 days after the new termination date of your
 grant . . . we specifically request and will expect you to
 identify an auditor in sufficient time prior to the new
 termination date to ensure that the audit is initiated and
 completed at the earliest possible date, notwithstanding the
 fact that the final date for submission of the grant audit is 90
 days after the grant has ended.  Exhibit F to OCS's Brief, 2nd
 document.

In December, 1989, OCS wrote Ironbound to reject as "not acceptable" as
a final report a three-sentence summary of work progress Ironbound had
submitted as a final quarterly report.  This letter demanded a detailed
final report within 30 days and reiterated the requirement for a final
audit report.  Exhibit G to OCS's Brief.  OCS demanded further
information in February, March, and June, 1990.  Exhibits H and I to
OCS's Brief.

In response, in June, 1990, Ironbound submitted a one-page list of
"adjusted expenses" accompanied by a request for a six-month extension
of the audit due date because, Ironbound said, it was "changing auditors
due to the fact that they have increased their fee."  Exhibit J to OCS's
Brief.  The list of "adjusted expenses" is very summary; for example,
one item is "Excavation, Footings and Foundation" for $49,300.  Hardly
sufficient to explain and document outlays, the list also displays
further confusing elements.  While the bottom-line expenditure shown is
the original grant amount of $282,000, among the expense items is a new
item of $75,289 for architect, engineering and survey fees -- an item
accounting for over 20% of the grant yet not included as an expense in
the original budget of $282,000.  Among other changes, excavation costs
are shown as having jumped from $20,000 budgeted to $49,300 expended.
No back-up documentation or explanations of any kind are included to
show the actual incurrence, payees, or reasonableness of these or any
other costs.  In July, 1990, OCS demanded details on expenditures, to be
submitted within fifteen days.  Exhibit K to OCS's Brief.  There is
nothing in the record, submitted by either party, showing any attempt by
Ironbound to submit an audit or any further explanation of expenses.

Ironbound stated in its Response Brief (3rd (unnumbered) page) that "all
of the funds received by the [Ironbound] have been used on the project
and there simply are no funds available to repay the Grant."
Apparently, some preliminary work was done (cement for a basement floor
and possibly a first floor, cinderblocks enclosing the basement and part
of the first floor).  Exhibit I to OCS's Brief. 6/  There are no
invoices or cancelled checks in the record, however, to explain how this
minimal work added up to $282,000.

Thus, the record shows a clear and remarkable failure on Ironbound's
part to submit anything remotely sufficient as a justification of
expenditures, despite a clear obligation to do so and repeated
opportunities.

Conclusion

Based on the foregoing, we uphold OCS's determinations denying a no-cost
extension and requiring the return of the amount of the grant.

 


     _____________________________
     Cecilia Sparks Ford

 


     _____________________________
     Donald F. Garrett

 


     _____________________________
     Norval D. (John) Settle
     Presiding Board Member


1.  Ironbound applied for a "Priority Area 1.1" grant for an "Urban
Economic Development Program."  See cover letter to Ironbound's
application, Exhibit C to OCS's Brief.  The matching requirements
differed depending on the priority area classification; the description
in this decision relates to area 1.1.

2.  Although Ironbound's letter in response to OCS's demand did not
reach this Board until well after the 30-day deadline for appeals, it
was received and acknowledged by a responsible official within OCS by
the deadline.  In keeping with past Board practice, we treated this
otherwise timely notice of appeal, misdirected to the issuing agency
within HHS, as timely submitted to this Board.

3.  The OCS guidelines specified that "funds expended or obligated prior
to the approved OCS starting date for a grant cannot be considered as
matching funds."  52 Fed. Reg. 4095.  Currently owned assets, of course,
could be applied to the match.  Id.  However, if Ironbound had had these
funds on hand for use at the date the OCS grant was awarded, it
presumably could have merely shown its own bank account balance or
something comparable, rather than a copy of the check received many
months earlier.  We need not speculate, however, as this merely
illustrates the confusing and questionable nature of Ironbound's
documentation.

4.  The record indicates briefly that, in addition to the addition to
the rectory for commercial space, Ironbound was, among other things,
renovating the church building itself for a theater and museum.  See,
e.g., Exhibit C to OCS's Brief, p. 1; Exhibit I, p. 2.  OCS alluded to
this in its brief (p. 14), indicating that funds spent on the museum and
theater were expenditures outside the scope of the approved project.
Ironbound apparently does not dispute this; its reply was essentially
that it had disclosed to OCS in its grant application that some matching
funds would be used for church renovation.  Ironbound Response Brief,
2nd and 3rd (unnumbered) pages.  It is true that the application makes a
reference to use of matching funds for activities outside the OCS
project, including the museum and park.  Exhibit C to OCS's Brief, p.
19.  However, OCS's program announcement specified that matching funds
"must be committed for specific project activities within the OCS
approved project during the duration of the OCS grant."  52 Fed. Reg.
4095.  Ironbound's application clearly indicated that the OCS project
was to be a specific phase of Ironbound's overall Gateway Development
Project, involving extension of the rectory building for new commercial
space.  Exhibit C to OCS's Brief, p. 19.  The OCS-approved project only
related to excavation, foundation, materials and construction for the
building extension and certain associated administrative costs (Exhibit
E to OCS's Brief), although the record does not contain an approved
budget for the expenditure of matching funds and the full scope of the
OCS project in this respect remains unclear.  There is no evidence that
OCS ever affirmatively approved a use of matching funds for non-project
activities (which would have violated its own guidelines); OCS may
either have overlooked the statement referenced above or assumed that it
referred to use of matching funds exceeding amounts needed for the
approved project.  OCS's guidelines encouraged this, stating that
"applicants generating support greater than that required may be
eligible for additional points . . . ."  52 Fed. Reg. 4095.  In any
event, even if one were to determine that matching costs could
appropriately be used for portions of the Gateway project outside the
scope of the OCS portion, there remains the problem for Ironbound that,
as discussed elsewhere in this decision, there simply has been
insufficient proof of the commitment and use of the funds.

5.  Ironbound's letter attached two other letters as evidence of "good
faith effort to complete the project."  While we sympathize with
Ironbound's obvious interest in completing its Gateway project, the two
letters attached are illustrative of Ironbound's dilemma.  The first is
a letter from an attorney who states an "intention" to enter into a
long-term lease, referring to ongoing negotiations.  The second is a
letter from a New Jersey office for development for small, women and
minority businesses, merely stating that an unidentified request from
Ironbound had been sent to another state agency.  OCS's guidelines
clearly specify that speculative or contingent match is unacceptable.
52 Fed. Reg. 4095, 4103.

6.  We express no opinion on whether there may be some portion of costs
which OCS, if it had received otherwise adequate justification, could
have found allowable under its program announcement.  Apart from the
fact that Ironbound clearly has not adequately documented its matching,
and has provided virtually no justification of its expenditures, there
is the fact that whatever partial work may have been done (in the form
of some construction work), the uncompleted project cannot have achieved
the purpose for which the federal funding was provided, which basically
was to promote economic self-sufficiency through creation of permanent
jobs.  52 Fed. Reg. 4090,