Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Center for Employment Training
Docket No. A-92-24
DATE: June 15, 1992
Decision No. 1337
Audit Control No. A-09-90-00118
DECISION
The Center for Employment Training (CET) appealed a determination by
the
Office of Community Services (OCS) of the Administration for
Children
and Families (ACF) to disallow $33,596 charged to a discretionary
grant
awarded under the Community Services Block Grant Act. The
disallowance
was based on an audit by the Office of Inspector General (OIG)
of the
Department of Health and Human Services (HHS). While not
specifically
appealing each of the disallowed items, CET argued that the
disallowance
should be reduced by $33,383.15.
CET asserted that (1) the audit findings supported an upward adjustment
of
$5,000 (in addition to the $5,618 allowed) for costs attributable
to
CET-owned housing used to shelter homeless farmworkers; (2) the
$4,591
disallowed for rental deposits not properly accounted for should
be
reduced by $2,000; and (3) $26,383.15 for certain personnel (salary
and
fringe benefit) costs not previously charged to the OCS project
should
be substituted for other disallowed items. See generally CET
Brief.
As explained more fully below, we uphold the disallowance in full
subject
to downward adjustment by OCS after review on remand of the
allowability of
the $26,383.15 in substitute personnel costs. We find
no basis in the
audit findings for an increase in the amount charged to
the grant for the
costs of CET-owned housing. We further find no basis
to reduce the
amount disallowed for rental deposits for which CET did
not account.
With regard to the personnel costs which CET sought to
substitute for
disallowed expenditures, we remand to OCS for its
determination whether these
personnel costs were .incurred for
activities within the scope of this
project, supported by adequate
documentation, and not already charged to
other CET activities. Within
30 days of receiving this decision, CET
may present to OCS additional
supporting documentation for the substitute
personnel costs. CET may
appeal to the Board within 30 days of
receiving any adverse decision by
OCS. Any further appeal would be
limited to whether these substitute
costs could properly be charged to the
grant.
BACKGROUND
CET is a private, non-profit job training organization incorporated
in
California in 1967. CET has offered comprehensive skills training
and
human development programs throughout California, Idaho, Arizona,
and
Nevada. For the period September 30, 1988 through January 29, 1990,
CET
received a federal matching grant for $158,391. The grant was
awarded
by OCS --
to provide assistance to migrant and seasonal farmworkers
and
their dependents to overcome problems of homelessness and
to
develop increased job skills in and out of agriculture that
will
lead to improved income potential and longer term or
permanent
employment in agriculture or in other private
sector
occupations.
ACF Clarification of the Disallowance (ACF Clar.), Tab A (audit report)
at
1-2.
CET pointed out that it has an annual budget in excess of
$30,000,000,
employs 350 people, and during its last fiscal year placed
2,000
trainees in jobs and provided non-vocational training to 20,000
other
individuals. CET Brief at 2.
This grant was awarded under section 681(a)(2) of the Community
Services
Block Grant Act, which authorizes discretionary grants to
organizations
which propose to meet farmworker needs in the areas of (1)
crisis
nutritional relief, (2) emergency health and social services relief
and
assistance, (3) development of self-help systems of food production,
and
(4) improving job skills in order to qualify for longer-term
or
permanent employment. ACF Clar., Tab A at 1.
On March 8, 1991, OIG issued the results of an audit, which was
conducted
to determine whether grant funds were properly expended and
whether project
objectives.and matching requirements were met. 1/ ACF
Clar., Tab
A. While questioning various expenditures charged to the
grant as well
as finding that CET submitted its final financial and
program reports late,
the audit found that CET was on the whole
successful in meeting the
objectives of the grant. For example, CET
planned to offer housing and
food assistance to 120 homeless migrant and
seasonal farmworkers, but
provided assistance to 149. However, based on
the audit findings that
various expenditures were not properly charged
to the grant, ACF disallowed
$33,596.
.In its appeal, CET did not specifically object to each of the
disallowed
expenditures. Instead, CET argued that the disallowance
should be
reduced by $33,383.15 in the following manner:
(1) an additional $5,000 should be allowed for housing charges based
on
the auditors' finding that CET had charged less to the grant
for
CET-owned housing than was being charged by other
similar-quality
facilities in the area;
(2) an additional $2,000 should be allowed for forfeited
damage
deposits paid to landlords who housed migrant farmworkers during
their
participation in the program on the grounds that forfeited deposits
are
chargeable to the grant and their amount can be estimated from the
audit
report's examination of the disposition of one rental deposit; and
(3) an additional $26,383.15 should be allowed to be substituted
for
other disallowed items to pay the personnel costs of workers in
CET's
overhead pool who left their regular job duties in order to assist
with
disaster relief after the October, 1989 earthquake in San Francisco.
CET Brief at 4-7. These are the only three matters before the
Board.
All other cost items which were identified in the OIG audit report
and
in letters from CET requesting OCS approval for certain
expenditures
were not appealed to the Board and are therefore not at issue.
2/.
ANALYSIS
I. There is no merit to CET's argument that an
additional $5,000
should be allowed for housing charges.
The audit found that CET charged the grant $25,444 for housing provided
to
homeless farmworkers in a CET-owned facility between February, 1989
and
January, 1990. This was based on a charge of $14 per day (or $424
per
month) per room used to house project participants. ACF Clar., Tab
A at
3. OCS had disallowed $19,826 on the grounds that, according to
CET
records, the housing facility was vacant and undergoing renovations
during
the first nine of the twelve months for which CET claimed
reimbursement.
3/ OCS allowed $5,618, which the audit found was
properly charged to
the grant based on a review of occupancy logs
maintained on site at the
housing facility and an analysis of classroom
participation records for
persons residing in the facility for the three
months in which the facility
was in use. Id.
As part of the audit, OIG surveyed comparable housing facilities in
the
local area to determine whether $14 per day was a reasonable
charge.
The audit report stated that daily rates of $24 to $28 per day (or
$720
to $840 per month) were quoted for facilities of approximately the
same
age and which contained similar amenities as the CET-owned
facility.
Id.
CET argued in its brief that it should be allowed to substitute as
the
housing charge the difference between what it originally charged to
the
grant ($424 per room per month) and what was determined to be
a
reasonable amount by the auditor ($720-$840 per room per month),
.which
would amount to an additional $5,000 for the three months in which
the
facility was in use. It argued that
CET's original charge was only done to try and extend
grant
funds as long as possible. Now that costs have been
disallowed,
there is no reason to prevent them [sic] from substituting
the
real cost of housing which has been documented by the auditor.
CET Brief at 5.
There is no merit to this argument. Office of Management and
Budget
(OMB) Circular No. A-122, made applicable to nonprofit
organization
grantees by 45 C.F.R. . 74.174, states that the sum of allowable
direct
and allocable indirect costs can be charged to a federal grant
award.
OMB Circular No. A-122, . (A)(1). The circular then describes
what
costs are allowable and allocable. Id. at .. (A)(2) and
(4).
Throughout these sections, the circular refers to costs which can
be
charged to the program, not reasonable charges, market rates, or
amounts
determined by some other method of measurement. See ACF Brief
at 8.
CET has not provided the Board with any evidence to support an increase
in
the housing charges. There is no reason to conclude that CET in
fact
undercharged this grant simply because the auditor accepted CET's
$424
rate as reasonable based on higher market rental charges for
comparable
facilities. OIG's survey of comparable facilities was used
as a
benchmark and had no direct relationship to CET's actual
expenditures.
In this regard, CET has not argued, much less proven, that its
costs to
operate this facility exceeded the $424 rate. We infer from
the audit
that the surveyed facilities from which the $720-$840 figures
were
derived were not facilities which were owned by CET. There is no
basis
in the record to expect the market rental rate for an
independent
facility to equal the costs incurred and reasonably charged to a
federal
grant for use of a grantee-owned facility. Therefore, we reject
CET's
assertion that the auditor's findings as to market rentals
for
comparable facilities were adequate support for an additional $5,000
for
housing charges.
Furthermore, CET cited no generally accepted accounting principle
which
would support CET's understating its "real" costs "to extend grant
funds
as long as possible." CET Brief at 5. As the auditor noted,
these
housing charges were posted to the accounting records by means of
a
journal entry made one month after the end of the grant period.
ACF
Clar., Tab A at 3. CET pointed to nothing.in its accounting
records
supporting a conclusion that this journal entry reflected
an
understatement of "real" costs or that there was any need at that
point
to reserve the availability of some of the amount awarded.
Moreover, a
grantee's records should reflect all its expenditures associated
with a
particular project. While a grantee is not obliged to spend the
full
amount awarded for a particular project, a grantee is certainly
entitled
to recover the full amount so long as it incurred allowable,
allocable
costs in at least the full amount. Thus, CET's assertion that
it
understated its "real" costs is simply unpersuasive.
II. There is no merit to CET's argument that the
disallowance for
damage deposits should be reduced by $2,000.
The audit report revealed that CET charged the grant $4,591 in
damage
deposits, which were paid to landlords by CET on behalf of
farmworker
participants placed by CET in temporary rental housing. CET
conceded
that it made no effort to recover the deposits once the
participants
moved because it was troublesome to keep track of the
deposits. ACF
Clar., Tab A at 7. While CET argued that checking
for damage deposits
would not have been cost-effective, it conceded that a
lack of a
tracking system might not satisfy auditing requirements. CET
Brief at
5. The audit stated that CET officials said that the deposits
were
probably used to extend the length of stay of the participants.
CET
also stated in a letter to OCS that it "considered these deposits a
part
of the rental assistance payment and left the responsibility to
the
farmworker to settle the account with the landlord." 4/ CET stated
that
in addition to possibly covering extended stays the deposits
were
usually applied to repair or cleaning costs. ACF Clar., Tab G.
The audit report showed that the auditors investigated one $450
deposit
which was charged to the grant and found that $194 was forfeited
to
cover the costs of damage and cleaning; the remaining $256 was
refunded
to the participant. ACF Clar., Tab A at 7. CET noted
.that the
auditors accepted the $194 which was forfeited in that case to
cover
damage and cleaning as properly chargeable to the grant. ACF
Clar., Tab
A at 7. Based on this one example, CET argued that an
estimated
additional $2,000 should be allowed to cover deposits forfeited
by
participants. CET asserted that, notwithstanding the absence
of
documentation accounting for the disposition of the rental deposits,
it
is reasonable to allow an additional $2,000 since in the one
case
investigated $194 of the $450 was accepted. 5/ CET Brief at
5-6.
Grantees must maintain documentation supporting expenditures charged
to
federal grant funds as required by the provisions of 45 C.F.R. Part
74.
6/
Section 74.61(b) provides that
[r]ecords which identify adequately the source and
application of
funds for grant- or
subgrant-supported activities shall be
maintained. These records shall contain information pertaining
to
grant or subgrant awards, authorizations, assets,
outlays, [and]
income.
Section 74.61(g) provides that
[a]ccounting records shall be supported by source
documentation
such as cancelled checks, paid bills, payrolls, contract
and
subgrant award documents, etc.
Previous Board cases have applied these documentation principles
to
grantees. The Board has held that a grantee has the burden to
document
the existence and .allowability of costs claimed in grant
programs.
See, e.g., Lac Courte Oreilles Tribe, DAB No. 1132 (1990); New York
City
Human Resources Administration, DAB No. 1199 (1990). A
grantee's
failure to meet its obligation to document that costs charged to a
grant
were properly spent is a basis for disallowance. American Indian
Center
of Omaha, Inc., DAB No. 1157 (1990).
Clearly, CET bears the burden of adequately documenting that the
amounts
paid for damage deposits are allowable charges to the grant.
CET
conceded that it did not keep track of the damage deposits because
it
was too troublesome. However, there is no basis here to conclude
that
establishing a system for documenting the disposition of damage
deposits
would be unduly burdensome. Because supporting documentation
is
required, there is no basis to allow $2,000 to be charged to the
grant
based on "estimated" forfeited deposits. 7/
Since the rental deposits were not properly accounted for, any
amounts
forfeited or otherwise allowable cannot be accurately
determined.
Accordingly, we sustain the disallowance of $4,591 in rental
deposits.
III. We remand CET's request to charge $26,383.15 in
additional
personnel costs to the grant.
CET argued that it should be allowed to substitute $26,383.15 in
personnel
costs for most of the disallowed expenditures. CET Brief at
6.
CET explained that "[o]nce the [October, 1989 San Francisco]
earthquake hit,
people who were usually desk bound and part of the
overhead pool pitched in
to work on this grant." Id.
In support of its argument concerning the substitution of expenditures
for
other disallowed expenditures, CET quoted from a decision by the
Acting
Comptroller General of the United States, which states that a
grantee may
substitute allowable charges in place of disallowed charges
up to the limit
of a grant award. See CET Brief, .Tab A. We fully
agree that CET
is entitled to substitute these personnel costs if they
are otherwise
allowable and allocable to the grant.
In order to be an allowable cost under an award, the cost must
be
reasonable for the performance of the award and be allocable to it,
as
well as conform to any limitations or exclusions set forth in the
award
as to types or amount of cost items. OMB Circular No. A-122,
Attachment
A, .. (A)(2)(a) and (b). Costs are allocable to a federal
grant "in
accordance with the relative benefits received." Also, costs
must be
"treated consistently with other costs incurred for the same purpose
in
like circumstances." In order to be allocable to a government award,
a
cost may (1) be incurred specifically for the award or (2) benefit
both
the award and other work and be reasonably distributed among
the
benefitting objectives or (3) be necessary to overall operations.
Id.,
Attachment A, . (A)(4)(a).
We cannot determine whether these personnel costs conform to
any
limitations or exclusions contained in the grant since the record
does
not include a copy of the Notice of Grant Award and any modifications
or
amendments thereto. We know from the audit report only that the
grant
was awarded to fund assistance to migrant and seasonal farmworkers
to
enable them to overcome the problems of homelessness and to
develop
increased job skills. ACF Clar., Tab A at 1-2.
Accordingly, it is not
clear that this grant was ever intended to encompass
emergency disaster
relief, such as that rendered by CET following the 1989
earthquake.
Attachment B to OMB Circular No. A-122, .. 6(l)(1) and (2),
provides
standards of documentation for charging salaries and wages to
federal
grants. These sections provide that salaries must be based
on
documented payrolls, supported by personnel activity reports,
which
reflect an after-the-fact distribution of all activities of
each
employee who is working on the grant.
As supporting documentation, CET submitted affidavits signed by
various
employees stating the number of hours and location where each
employee
worked assisting with the housing and placement of homeless migrant
and
seasonal farmworkers after the 1989 earthquake. See generally
CET
Brief, Tab B. CET stated that it asked these employees to prepare
the
affidavits by consulting contemporaneous records and notes made at
the
time the work was performed. CET Brief at 6. CET did not
include in
the record the contemporaneous records and notes which the
employees
were asked to consult. CET conceded,.however, that staff
personnel from
the overhead pool did not keep detailed time records at the
time they
provided the assistance. Id. 8/
ACF has not addressed in its brief whether these expenditures were
for
activities within the scope of the funded project or were
adequately
documented. Moreover, the audit report found that the budget
initially
approved for this project had not included personnel costs, but
that,
based on an approved budget modification, in excess of $20,000
in
personnel costs was allowable. ACF Clar. Tab A at 4.
Presumably then,
OCS would have to specifically approve a budget modification
in order to
allow any additional personnel costs.
Therefore, we remand this matter to OCS to determine whether
these
personnel costs are properly charged to this grant. We note that
CET's
statement that these personnel were part of its overhead pool raises
the
additional issue of whether CET was reimbursed for the services of
these
administrative employees through other federal, state, or
private
programs or through indirect cost rate recoveries. Thus, on
remand, OCS
should determine whether CET has presented sufficient
documentation to
support a decision to allow these costs to be charged to the
grant.
Within 30 days of receipt of this decision, CET may provide OCS
with
copies of the contemporaneous notes and records which the employees
were
asked to review in order to claim reimbursement from the grant, as
well
as any other pertinent documentation which CET relies on to show
that
these expenditures are allowable.
IV. Other Arguments.
CET characterized this case as a matter of "an angry auditor."
CET
alleged that the auditor was apparently unaware of the ability
to
substitute costs and had implied that CET was doing something wrong
in
attempting to do so. CET Brief at 3-4. CET has misread the
audit
report. We do not find that the auditor's comments, as quoted by
CET,
contain any implication of wrongdoing. Rather, we find them to
be
neutral statements as to when the expenditures for grant-related
items
were recorded, and to what level of funding the requests brought
charges
under the grant.
In this regard, we note that the timing of cost transfers and the
adequacy
of the supporting documentation are factors to be considered in
determining
the legitimacy of charges to a grant, particularly if such
costs are being
transferred from other closely related projects. (See
HHS Grants
Administration Manual, .. 6-05-00 and 6-05-20(B)(2)
(transfers of costs to an
HHS grant made long after the charges were
incurred raise serious questions
concerning the propriety of the
transfers); DAB No. 1132 (non-contemporaneous
documentation will be
reviewed but will be closely scrutinized).
Nevertheless, as we stated
earlier, CET can substitute allowable and
allocable costs for disallowed
expenditures up to the full amount of the
grant award.
CET also argued that the three categories of costs which it addressed
in
its brief (housing charges, damage deposits, and personnel costs
for
earthquake relief activities) were all approved by ACF. It
asserted
that "[i]f the issue is now to become that the specific amounts were
not
approved in advance, then we would like the opportunity to request
this
retroactively from ACF and hold this appeal until we have
a
determination." CET Reply Brief at 1. Clearly, OCS
allowed
expenditures both for housing charges and for damage deposits
(which
were adequately accounted for in connection with grant
activities).
There is no issue here concerning approval for these types of
costs.
The amounts at issue on appeal simply were not adequately documented
as
allowable project related expenditures for these two
categories.
However, since the grant award budget did not initially provide
for
salaries or fringe benefits, OCS will have an opportunity, during
the
remand proceedings, to consider whether to approve these
substitute
personnel
costs..
CONCLUSION
We sustain the disallowance of $33,596 in full subject to
downward
adjustment should OCS determine on remand to accept part or all of
the
$26,383.15 in personnel costs which, during Board proceedings,
CET
asserted should be charged to its OCS grant.
___________________________
Donald
F. Garrett
___________________________
Norval
D. (John) Settle
___________________________
Cecilia
Sparks Ford
Presiding Board Member
1. After the audit exit conference, CET submitted letters to the
Agency
dated August 9, 1990 and August 16, 1990 requesting approval for most
of
the items which were questioned by the auditors as well as
for
additional personnel costs not previously charged to this grant (not
the
personnel costs at issue here). See generally ACF Clar., Tabs B and
C.
While the expenditure items were grouped and described
slightly
differently by CET than by the auditors, there is no question
that,
except for the personnel costs item, the expenditures for which
CET
sought approval were questioned by the auditors. By letter
dated
November 15, 1990, the Agency approved most of the requested
budget
modifications. See generally ACF Clar., Tab D. When the
auditors
learned that CET had sought approval for most of the
questioned
expenditures, the auditors contacted the OCS program manager who
stated
that, upon review of the audit report, the approval would
be
reconsidered and perhaps changed. ACF Clar., Tab A at 12. The
final
audit report determined that $33,596 charged to the grant
was
unallowable for reimbursement. The audit report examined both
the
expenditure items totaling the amount recommended for disallowance
which
the auditors had initially questioned as well as the
(largely
duplicative) $32,991 for which CET sought separate approval during
the
audit process. The auditors found none of the particular cost
items,
whether reviewed and questioned initially or as included in the
budget
modification requests, to be allowable charges to the grant.
OCS
specifically disallowed the $33,596 initially questioned as well as
the
$32,991 covered by the budget modification requests. We note that
the
audit report stated a persuasive rationale for the disallowance of
these
items which CET did not seek to rebut before the Board, except
with
regard to a portion of the expenditures for rental deposits.
2. In its reply brief, CET mentioned that it was not addressing
the
"retroactive approval of grant modifications." CET Reply Brief at
1.
As noted above, the budget modifications approved by OCS are not
at
issue in this case. The basis for CET's appeal as developed in both
its
initial and reply briefs concerned whether three discrete
expenditure
items were allowable. The essence of CET's argument for the
housing
charges and damage deposits is that allowable expenditures for
these
categories should be increased based on the audit findings. CET
has not
argued that the amounts disallowed for these categories were
improperly
disallowed due to the retroactive approval. Furthermore, the
personnel
costs for overhead pool employees and the disallowed portion of
the
housing rental charges were never part of the approval request. CET
has
not argued before the Board, in the alternative or otherwise, that
OCS's
approvals somehow precluded the final disallowance. Therefore, we
are
not called upon to decide the legal effect of the OCS's November
15,
1990 and March 11, 1991 approval letters to CET.
3. According to the auditors, CET conceded that an error had
occurred
in claiming costs for these nine months. CET adjusted its
reimbursement
request for this item downward. ACF Clar., Tab A at
4.
4. The audit report stated that "The Emergency Assistance
Application
specifically identifies the period for which assistance was to be
given
to the participant. There was no provision to extend the length
of time
for rental assistance by utilization of the rental deposit
fee." ACF
Clar., Tab A at 7.
5. CET argued that disallowing the full amount would not comply with
a
"Rule of Reason," as allegedly adopted by the Internal Revenue
Service
and other federal agencies. CET did not cite any authorities in
support
of a Rule of Reason and we are not familiar with any. We know
of no
Rule of Reason which has been adopted in cases relating to HHS
grants.
6. ACF refers throughout its brief to 45 C.F.R. Part 92 as
containing
the principles of administration which should be applied to
this
grantee. However, Part 92 only applies to state, local, and
Indian
tribal government grantees.
7. Estimates, even if they were allowable, could not be favored
where
actual data could have substantiated the costs accurately with
a
reasonable amount of effort. In this case, the estimated charges
are
not based on any valid form of measurement and are
totally
unsubstan-tiated. Clearly, one example which is neither argued
nor
proven to be representative of most of the charges cannot constitute
a
valid statistical sample.
8. As noted above, Attachment B to OMB Circular A-122, .. 6(l)(1)
and
(2), provides standards of documentation for charging salaries and
wages
to federal grants. In Acadia-Vermillion Community Action Program,
Inc.,
DAB No. 1201 (1990) the Board applied the OMB Circular
A-122
requirements and found insufficient time and attendance
sheets,
unsupported by contemporaneous personnel activity reports, showing
only
a percentage of time each employee spent on grantee activities.
Also,
as the Board has noted, the sufficiency of
non-contemporaneous
documentation will be carefully scrutinized. See
Lac Courte Oreilles
Tribe, DAB No. 1132