GAB Decision 139
December 24, 1980 University of California -- Letter of Credit; Docket
No. 80-83 Ford, Cecilia; Garrett, Donald Settle, Norval
This case involves an appeal by the University of California
(grantee) from a decision by the Deputy Assistant Secretary, Finance,
Department of Health and Human Services (HHS), that the grantee owed to
HHS the interest income attributable to premature drawdowns from its HHS
Letter of Credit (LOC). The Deputy Assistant Secretary accepted the
grantee's calculation of $767,662 of interest income for the period July
1, 1976 through June 30, 1978, and also accepted the grantee's decision
to defer consideration of an analysis of interest income for the period
July 1, 1978 through June 30, 1979 pending a binding determination that
the grantee must, in fact, turn over the interest to HHS.
There are no material issues of fact in dispute. We have, therefore,
determined to proceed to decision based on the written record: the
application for review, the relevant Audit Report (Audit Control No.
01025-09), pertinent correspondence between the parties, and the
grantee's response to an Order to Show Cause issued by the Board Chair.
The Agency was not required to respond to the Order and did not do so.
For the reasons stated in the Order and below, we conclude that the
decision of the Deputy Assistant Secretary should be upheld.
Applicable Law
Section 74.47(b) of Title 45 CFR, in accordance with the
Intergovernmental Cooperation Act of 1968, provides that a state /1/ as
defined in the Act is not accountable to the Federal Government for
interest earned where the income is attributable to grants-in-aid.
However, grants-in-aid as defined in the Act specifically exclude:
. . . (4) loans or repayable advances; . . . (6) payments under
research and development contracts or grants which are awarded directly
and on similar terms to all qualifying organizations, whether public or
private; or (7) payments to States. . . as full reimbursement for the
costs incurred in paying benefits or furnishing services to persons
entitled thereto under Federal laws. 42 U.S.C. Sec. 4201(6).
Absent the exemption under the Intergovernmental Cooperation Act of
1968 for grants-in-aid to states, "grantees shall remit to the Federal
Government any interest or other investment income earned on advances of
HHS grant funds." 45 CFR 74.47(a).
Discussion
The Agency decision was based on audit findings that the grantee's
withdrawal pattern from its LOC resulted in the grantee maintaining cash
in excess of its daily needs. The auditors determined that the
investment of the excess cash resulted in interest income, which was not
credited to HHS. The Agency found that in such a situation the
provisions in Section 74.47 of Title 45 of the Code of Federal
Regulations require that the interest earned be remitted to the Federal
Government. The grantee did not dispute the fact that it prematurely
drew down from its LOC based on its daily needs for those programs
covered by the LOC.
The grantee also did not dispute the applicability of the
Intergovernmental Cooperation Act of 1968 or HHS's implementing
regulations. In addition, the grantee did not dispute the Board's
preliminary finding that the grantee is a "state" as defined in the
Intergovernmental Cooperation Act of 1968, nor did it dispute the
Board's preliminary finding that the interest income was attributable to
specifically excluded items under the definition of grants-in-aid as
defined in the Act. Based on the foregoing, the Board concludes that 45
CFR 74.47 requires the grantee to remit to the Federal Government the
interest income earned on the premature drawdowns from its HHS LOC.
The grantee has argued that it would be inequitable to require
payment of the interest income to HHS when in its total cash
relationship with the U.S. Treasury, the grantee was in a creditor
position. The grantee was essentially arguing that since the Federal
Government owed it money, there could be no Federal cash available in
the grantee's possession upon which interest could be earned. The
grantee's characterization of the appeal is that "it concerns a major
government contractor's/grantee's internal allocation of funds pending
final determination of whether the Government and the Appellant are in a
'net debtor' or 'net creditor' position vis-a-vis one another." In
support of its position the grantee cites three Comptroller General
opinions for the proposition that, by virtue of 31 U.S.C. Sec. 71, the
Federal Government has a duty to set off claims between a party and the
Government so that only the balance is certified for payment or
collection.
The grantee's characterization of the central issue in this appeal is
incorrect. This appeal does not involve the grantee's internal
allocation of funds. It involves the grantee's use of Federal grant
funds, available through its LOC, in a manner contrary to the applicable
Federal requirements. The factors cited by the grantee have no bearing
on its obligation to remit interest earned on advances of HHS grant
funds under 45 CFR 74.47(a).
The Instructions to Recipient Organizations for Use of Letter of
Credit (Instructions) /2/ dated August 19, 1974 and reissued on
September 3, 1976, to reflect procedural changes resulting from the
implementation of the Departmental Federal Assistance Financing System,
established the requirements for the proper use of the letter of credit.
The Audit Report relied on provisions in these Instructions as a basis
for their final recommendations. Since the grantee has not disputed
this reliance nor that these Instructions were routinely distributed to
grantees financed through a letter of credit including this grantee, we
conclude the grantee had notice of the provisions contained in the
Instructions.
The grantee regarded Federal funds it received from various sources
as fungible. This is evidenced by the grantee's statement in the notice
of appeal that "(to) minimize the impact on University cash, the
University considered any Federal cash on hand as being available to
assist in these expenditure requirements." Such action is contrary to
express provisions in the Instructions dealing with the relationship of
the LOC to programs and projects.
Section XI(F)(1) of the Instructions provides that the LOC is a
fiscal device to be used only in accordance with the grant
authorization. Section XI (F)(2) provides that "(at) no time should
cash be drawn to cover unliquidated encumbrances, . . . until actual
program disbursements are made." Finally, Sec. XI(F)(3) states that
"(it) is important that recipients use the cash draws for any given
letter of credit only for the Federal share of disbursements against
programs or projects covered by the letter of credit. To do otherwise
results in improper charges to Federal appropriations." The grantee's
use of grant funds from its HHS Letter of Credit to temporarily finance
the cost of other Federal projects was improper under existing
regulations and policy statements. The Board therefore rejects the
grantee's argument as without merit.
Conclusion
For the reasons stated above, the decision of the Assistant
Secretary, Finance, is upheld. As was stated in our letter of May 20,
1980, Board review is limited to the issue of whether the grantee failed
to discharge its obligation to account for direct, discretionary project
grant funds. The Board at this time, however, does not have the
necessary information to ascertain how much of the amount in dispute
relates to direct, discretionary project grant funds.Therefore, the
Board directs the parties to make a determination as to the amount
involved. If the parties are unable to reach an agreement, the Board
will entertain an appeal on the amount involved at that time. /1/
"State" is defined in the Act to include any agency or
instrumentality of a state, and the definition does not exclude an
institution of higher education which is such an agency or
instrumentality. 42 U.S.C. Sec. 4201(2). /2/ These instructions
implement Treasury Circular No. 1075 (Revised) as published in the
Federal Register, February 27, 1973.
OCTOBER 04, 1983