Gab Decision 138
December 1, 1980 Kent Community Mental Health Center Services Board,
Grand Rapids, Michigan Docket No. 78-110 Coster, Clarence; Minow, Nell
Settle, Norval Panel Chairman
The Kent Community Mental Health Center Services Board (grantee)
appealed a decision of the Alcohol, Drug Abuse, and Mental Health
Administration (ADAMHA) Informal Grant Appeals Committee, disallowing
$64,943 in costs claimed for grantee's Community Mental Health Center
staffing project. The issue in this case arises from grantee's use in a
subsequent budget period of funds awarded for use in an earlier budget
period but remaining unobligated at the end of that period (sometimes
called "carryover" funds). The ADAMHA Committee viewed the case as
involving the question of whether the applicable policy statements
prohibited use of carryover funds in a subsequent budget period without
authorization. While we agree that such authorization was required, we
view the matter differently. For the reasons discussed below, we have
determined that, unless the agency can show that there were substantial
programmatic reasons for denying retroactive authorization for grantee's
use of the funds, the disallowance should be reversed.
The record for this decision consists of grantee's application for
review and supplementary submissions and a response to the appeal
submitted by the Public Health Service (PHS), which relied primarily on
the record before the ADAMHA Committee. PHS is the constituent agency
for purposes of Board review of the ADAMHA disallowance.
Background
Grantee's project was approved for an eight year project period from
July 1, 1969, through June 30, 1977. The following chart compares, for
each budget period ending on June 30 of the indicated year, the total
approved federal budget, the amount of the continuation grant award, and
the amount expended:
Budget Approved Amount of Amount
Period Year Budget Award Expended 01
1970 $168,576 $168,576 $121,176 02 1971
250,122 213,022 205,586 03 1972
212,752 202,752 190,357 04 1973
160,650 160,650 160,650 05 1974
112,455 112,455 124,636 06 1975
118,078 118,078 126,158 07 1976
123,981 123,981 149,772 08 1977
123,981 123,981 142,872 Total
$1,223,495 $1,221,207
As the chart indicates, grantee underexpended in the early years of
the project. Of $47,400 in unobligated funds from the 01 budget period,
$37,100 was identified as an unobligated balance on the 02 grant award
notice and the amount of the award calculated as the difference between
that amount and the total approved federal budget ($250,122 - $37,100 =
$213,022). The 03 notice identifies $10,000 as an estimated unobligated
balance from prior budget periods and adjusts the 03 award similarly
($211,752 budget - $10,000 carryover = $202,752 award). The grant award
notices for subsequent budget periods are left blank in the space for
unobligated balances, and the amount of the award always equals the
total approved federal budget.
A Notice of Disposition of Grant Unexpended Balance, dated April 30,
1974 (almost 4 years after the end of the 01 budget period), stated that
$47,400 was transferred to the 02 budget period. A similar notice dated
May 15, 1974, transferred $54,836 to the 03 period. These notices
contain the following language:
When the amount transferred, together with the amount of the award
for the continuation grant period, results in overfunding, THE EXCESS IS
NOT AVAILABLE FOR EXPENDITURES during the current budget period and will
either be withdrawn by means of a revised award or used to support a
future budget.
Although $47,100 of the excess from the 01 period was, in effect,
"withdrawn" by the 02 and 03 notices, excess in subsequent periods
was
never reflected in any award notice revisions.
Grantee began in the 05 budget period to incur costs in excess of the
amount of the approved budget for the period and to charge the costs to
federal carryover funds. This was shown on grantee's report of
expenditures submitted to the agency shortly after the end of the budget
period. The agency took no action. In the 06 and 07 budget periods,
grantee similarly charged costs to carryover funds and then reported it
in a timely manner.
As a result of a site inspection by the agency in early 1977, grantee
became concerned about the lack of written approval to spend the
carryover funds. By letter of February 9, 1977, grantee requested that
use of the carryover funds be authorized and recommended a method by
which this might be accomplished. No action was taken on this request
prior to the end of the project period.
Subsequently, the HEW Audit Agency audited costs claimed by grantee
for the entire project period. The auditors' findings, transmitted to
the grantee in final on November 14, 1977, were that grantee had
properly accounted for federal funds, in general, but had "claimed
$64,943 in costs in excess of the approved grant budget awards . . . ."
Audit Report, ACN 81489-05, p. 2.
By letter of May 22, 1978, the Financial Advisory Services Officer,
ADAMHA, informed grantee that ADAMHA was disallowing $64,943 based on
the auditors' finding that this amount represented excess costs. The
disallowance letter stated: "The Regional Office concurs with the
auditor's finding and has informed us that they have since sent a letter
to the Board disapproving its request for retroactive approval of the
amount claimed in excess of the approved budgets." p. 2. An April 18,
1978 memorandum from the Director, Office of Grants Management, Region
V, to the Regional Health Administrator refers to a meeting at which
grantee's request was discussed. This memorandum indicates that, in
light of the audit report, grantee's request was considered a "claim for
overexpended funds" and concurrence with the auditors' finding was
considered as requiring denial of the request.
Grantee appealed the Financial Advisory Services Officer's decision
to the ADAMHA Committee, which upheld the disallowance on August 17,
1978.
Policies
The project period system of funding, as relevant here, is described
in this Department's Grants Administration Manual, Chapter 1-85, HEW TN
72.7 (6/30/72). Section 1-85-10 of Chapter 1-85 states:
The Project Period System is a technique developed by the Public
Health Service . . . whereby projects are approved for multi-year
support, but are funded in annual increments called budget periods.
Funds surplus to the grantee's needs in one budget period are available
for its use in in the next. . . .
The procedure is described, in part, as follows:
If (a project is) approved for support, a grant is awarded in an
amount estimated to be the necessary Federal share of costs for the
first budget period. These funds are available for use by the grantee,
however, for the entire project period. It is, however, entirely
appropriate for the operating agency to reduce future awards on the
basis of apparent surpluses. Section 1-85-40 A.
Chapter 1-85 further states:
After completion of a budget period the grantee submits a report of
expenditures. Any unobligated balance shown on the report of
expenditures will, when added to the funds awarded for the current
budget period, be compared with the operating agency approved budget for
that budget period. Based upon this examination the operating agency
may issue a revised award to either raise or lower the funding level, as
appropriate to the approved budget.
The ADAMHA disallowance was based on the PHS Grant Policy Statement,
DHEW Publication No. (OS) 74-50,000, dated July 1, 1974. This Policy
Statement provides on page 8:
At the option of the awarding component, estimated or actual
unobligated balances remaining at the end of a budget period may be
treated in the following ways:
1. As an offset (deduction) from the continuation award, if there is
one.
2. As a carryover for use in a subsequent budget period, as
additional authority for purposes requested and justified in the
continuation year application.
3. As a refund to the Government.
Grantee argued that its position that an unobligated balance in one
budget period automatically carries over to the next is supported by the
DHEW Federal Assistance Financial System Instruction Book (1974). This
document states that the project period method of reporting "eliminates
the problems of carryover of unexpended balances at the close of each
budget period of support and automatically makes the balance available
currently." (Section 7.0) As the ADAMHA Committee pointed out, however,
this statement is qualified by the sentence following it which states,
"Use of these funds are governed by the approved operating budget or
other policies of the DHEW Awarding Agencies."
Discussion
Both the Financial Advisory Services Branch, ADAMHA, and the ADAMHA
Committee viewed this dispute as a question of whether the auditors'
finding was correct and was based on a clear PHS policy. Accordingly,
they based their decisions on a determination that PHS policy was clear
that authorization for use of carryover funds was required and that
agency inaction could not be considered as authorization. In viewing
the issues this narrowly, PHS failed to consider all of the relevant
factors.
Nothing in the applicable policy statements requires that
authorization be given prior to the expenditures. PHS could have given
retroactive approval, revising grantee's award notices as requested by
grantee in February 1977. The only apparent basis for denying this
request was that the auditors had questioned grantee's use of carryover
funds as expenditures in excess of the approved budgets. This reasoning
is circular, however. If approval had been given in a timely manner,
the auditors would not have questioned the costs.
This Board has taken the position in the past that it would not
normally interfere in questions of approval of project expenditures
where denial of approval is an exercise of programmatic judgment. Here,
however, no programmatic reasons were given for denial of approval.
Furthermore, although denial of approval may be a matter generally
committed to the granting agency's discretion, it is nevertheless
subject to certain standards.
Under the Administrative Procedure Act, courts will set aside agency
action which is "arbitrary, capricious, an abuse of discretion or
otherwise not in accordance with law." 5 U.S.C. Sec. 706 (2)(A).
Applying this standard, the Supreme Court has stated that the court
reviewing an agency decision "must consider whether the decision was
based on a consideration of the relevant factors and whether there has
been a clear error of judgment." Citizens to Preserve Overton Park,
Inc., v. Volpe, 401 U.S. 402, 416 (1971). See, also, Bowman
Transportation, Inc. v. Arkansas Best Freight Sys., Inc., 419 U.S. 281,
285-6 (1974).
In McNutt v. Hill, 426 F. Supp. 990 (D.D.C. 1977), the District Court
for the District of Columbia found a determination of the Under
Secretary of the Department of Housing and Urban Development (HUD)
relating to discrimination in employment of a handicapped person to be
arbitrary and capricious in two respects. The Under Secretary's
decision relating to retroactive promotion and back pay for the employee
discriminated against was defective "because no reasons for the
conclusion were given." 426 F. Supp. at 1004. With respect to the issue
of HUD's employment policy as a whole, the Court found the Under
Secretary's failure to address the issue, due to a misunderstanding as
to whether the employee's complaint had properly raised the issue, to be
arbitrary and capricious. Courts have also overturned agencies'
discretionary decisions if there is "no evidence to support the decision
or if the decision is based on an improper understanding of the law."
Digilab, Inc. v. Secretary of Labor, 357 F. Supp. 941 (D. Mass. 1973),
remanded on other grounds 495 F. 2d 323, cert denied 419 U.S. 840.
Applying the guidance in case law, and considering the particular
circumstances in this case, we have determined that the PHS decision was
defective in that it failed to address the issue of whether retroactive
approval should have been given, considering all of the relevant
factors. Although an auditor's recommendations must be seriously
considered by a program agency, an agency should not blindly adopt those
recommendations where it is within the agency's power to remove the
basis for the auditor's objections. As explained above, denial of
retroactive approval because of the auditor's findings here involves
circular reasoning.
Having decided that the PHS reasoning process was defective, however,
we must next address the issue of what remedy is proper. Since approval
is normally committed to agency discretion and since the record here is
unclear as to whether the agency had programmatic reasons for denying
approval, we have decided to remand this case to PHS for a determination
as to whether retroactive approval should now be given. We suggest that
this determination be made within 30 days of the date of this decision.
It must be based on articulated reasons set forth in a written decision
sent to the grantee and filed with the Board. If this determination is
adverse to the grantee, or if it is unreasonably delayed, grantee may
reopen its case with this Board for further review. If the Agency
cannot show that there were programmatic reasons for denying approval,
documented at the time, we might decide to reverse the disallowance.
Cf. Operation SHARE Foundation, DGAB Docket No. 77-19, Decision No. 96,
May 2, 1980.
In examining whether retroactive approval should be given here, PHS
should bear in mind certain legal principles and factual considerations.
First, the Administrative Procedure Act, in providing review of agency
action which is "unlawfully withheld or unreasonably delayed," 5 U.S.C.
Sec. 706 (1), recognizes the harm which may be caused by agency failure
to act in a timely manner. In addition, courts have established the
principle that agency departure from its past practice may be arbitrary
if not adequately explained Secretary of Agriculture v. United States,
347 U.S. 645, 652-3 (1954); F.T.C. v. Crowther, 430 F.2d 510, (D.C.
Cir. 1970). Here it is arguable that grantee relied on agency practice.
The policy statements place responsibility for acting on the agency.
Agency action, where taken, was either by means of an adjustment to a
subsequent award notice, or by means of a much later transfer of the
carryover to subsequent budget periods. Grantee's reports beginning
with the 05 budget period showed grantee's use of the carryover funds.
When it was called to grantee's attention that reliance on the agency's
inaction might be misplaced, grantee promptly requested written
authorization.
There are a number of other considerations in grantee's favor.
Because grantee's funding was solely for staffing purposes, there was
only one line item in grantee's budgets, i.e. "personnel services."
Grantee expended the carryover funds for these same purposes. For the
entire eight-year project period, grantee spent less federal funds than
the amount awarded. PHS is correct that budgets are "non cumulative,"
in that a problem of allocability arises where funds awarded for an
earlier budget period are applied to costs incurred in a later budget
period. This problem would never have arisen, however, if PHS had acted
in a timely manner to adjust the award notices. Not having acted in a
timely manner, PHS should not have refused retroactive approval later
solely on the basis that the problem existed, where that very approval
would have removed the problem.
We note also that PHS has not claimed that the funds were not
expended for project purposes. With the relatively insignificant
exception of $2,550 identified as interest on federal funds which had
not been repaid, the auditors found that grantee's accounting system and
internal controls were generally acceptable. Grantee should, perhaps,
have known that it should not have expended the carryover funds without
explicit authorization to do so. The policy statements are not so
clear, nor grantee's interpretation of the accounting system manual so
unreasonable, however, as to warrant denial of retroactive approval
solely on that basis.
In reaching our conclusion, we note that these circumstances are not
likely to recur. Grantee here confused automatic carryover of funds
with automatic authorization to spend the funds carried over. Under a
revision to Chapter 1-85 issued in 1978, carryover of unobligated
balances remaining at the end of a budget period would no longer be
automatic under the project period system.
Conclusion
For the reasons stated above, we remand this case to PHS and request
PHS to promptly issue a determination on whether to grant retroactive
approval based on consideration of all the relevant factors. We note
for the record that there is a $2,288 difference between the total
amount awarded and the total expenditures. Furthermore, although the
parties have several times included in the appealed amount the $2,550
questioned by the auditors as interest on federal funds, grantee
specifically chose not to contest this finding at an earlier stage in
this case. (Letter of June 20, 1978 from grantee to Administrator,
ADAMHA.) If grantee has not already refunded these two amounts to the
federal government, grantee should do so promptly.
OCTOBER 04, 1983