Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Ohio Valley Opportunities, Inc.
DATE: February 16, 1993
Docket No. A-92-92
Audit Report No. A-05-91-15576
Decision No. 1390
DECISION
Ohio Valley Opportunities, Inc. (Ohio Valley, the Grantee) appealed
a
determination by the Department of Health and Human Services Office
of
Audit Resolution (OAR) disallowing $8,686 charged to the Head
Start
program ($4,227 for 1988 and $4,459 for 1989) for salary payments
to
Ohio Valley's executive director. 1/ OAR disallowed the
executive
director's entire Head Start salary for both years on the grounds
that
(1) the Grantee failed to adequately document the executive
director's
Head Start activities; and, (2) the salary was unreasonably high
for the
Head Start duties she performed and in comparison to her
regular
non-Head Start salary. For the reasons stated below, we
conclude that
the evidence reasonably establishes that the executive
director
performed Head Start functions for which Ohio Valley was entitled
to
receive funding, although at a lower rate than originally
claimed.
Accordingly, of the original disallowance of $8,686, we reverse
$3,071
($1,489 for 1988 and $1,582 for 1989), and sustain $5,615 ($2,738
for
1988 and $2,877 for 1989).
Applicable law
The Head Start regulations provide that the administration of Head
Start
grants is governed by the provisions of 45 C.F.R. Part 74. 45
C.F.R. .
1301.10. The cost principles of Office of Management and
Budget (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
(Circ.)
A-122, Attachment (Att.) 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);
Lac Courte
Oreilles Tribe, DAB No. 1132 (1990); West Central Wisconsin
Community
Action Agency, Inc., DAB No. 861 (1987). Section 74.62(g) of
45 C.F.R.
provides that accounting records must be supported by
source
documentation such as canceled checks, paid bills, and
contract
documents.
Parties' arguments
The disallowance was comprised of $3,932 in salary costs and $295 for
the
employer's portion of social security taxes for 1988, and $4,148 in
salary
costs and $311 in social security taxes for 1989. The
executive
director's Head Start salary was in addition to her full-time
salary of
$31,654 in 1988 and $33,656 in 1989 for operating Ohio Valley's
non-Head
Start division. OAR asserted that Ohio Valley's documentation
was
inadequate to establish the allowability of the Head Start salary
paid
to the executive director for the following reasons:
o Personnel activity reports showing the
hours worked by the
executive director were defective. The reports, or
time sheets,
provided space to report seven days of work, but were offered
to
document efforts made during a two-week pay period. The time
sheets
thus failed to indicate the specific dates on which Head Start work
was
performed. OAR argued that the Board has rejected documentation
offered
in lieu of personnel activity reports when it did not establish
the
specific dates on which the effort in question was performed,
citing
Second Street Youth Center, Inc., DAB No. 1270 (1991).
o Other documentation of the executive
director's Head Start
activities that Ohio Valley provided in addition to the
time sheets did
not establish precisely the amount of time that the executive
director
devoted to Head Start-related functions. OAR conceded that
this
documentation established that certain functions related to the
Head
Start program were performed at least occasionally, but
characterized
Ohio Valley's estimates of the amount of time these duties
required as
after-the-fact speculation.
o The documentation focused solely on the
executive director's
Head Start activity, and did not account for her work on
non-Head Start
functions. OAR reported that the executive director
worked a 40- hour
week for a division of Ohio Valley that administers
programs other than
Head Start, and that her salary charged to the Head Start
grant was in
addition to the full-time salary she received from Ohio
Valley's
non-Head Start division. According to OAR, the documentation
thus
failed to conform to the requirements of Circular A-122 that
personnel
activity reports account for the total activity for which employees
are
compensated and reflect the distribution of activity of each
employee.
OMB Circ. A-122, Att. B, . 6.l.2.
OAR also argued that the executive director's Head Start salary
was
unreasonably high. Based on her time sheets, which reported 3.5
hours
of Head Start work for each two-week pay period, or 91 hours a year,
OAR
determined that her hourly Head Start wages were $43.20 and $45.58
in
1988 and 1989, respectively. By contrast, OAR stated that the
executive
director received hourly wages of $15.22 in 1988 and $16.18 in 1989
for
her full-time work for Ohio Valley's non-Head Start division. 2/
OAR
asserted that it was not reasonable for Ohio Valley to charge the
Head
Start program over two-and-a-half times the regular wage that
the
executive director received for full-time non-Head Start employment.
OAR argued that the discrepancy between the executive director's rates
of
pay showed that her Head Start salary did not meet the standard
of
reasonableness in OMB Circular A-122 that a cost be no more than
would
be incurred by a prudent person under circumstances prevailing at
the
time. OMB Circ. A-122, Att. A, . A.3. The salary was
also
unreasonable, OAR asserted, under the Circular's instruction to
consider
whether a cost is a significant deviation from the established
practices
of the organization which may unjustifiably increase the award
costs.
Att. A, . A.3.d. OAR characterized the executive director's Head
Start
responsibilities -- described by Ohio Valley in its notice of appeal
as
including signing and approving all cash disbursements and
payroll
checks, reviewing financial reports, attending meetings of the board
of
directors on behalf of the Head Start program, and assisting
in
resolving any issues which would arise relative to the program --
as
routine duties which did not justify a salary so high in comparison
to
her regular compensation. OAR noted that the Board had
held
unreasonable a consulting fee that a grantee paid to a former
employee
that was greatly in excess of the wage the employee had received
when
employed full time. Health Pro, Inc., DAB No. 574 (1984).
In response to the flaws that OAR identified in the time sheets,
Ohio
Valley provided documentation of the executive director's Head
Start
duties. The documentation consisted of records of meetings that
she
attended, checks she signed, and various federal and state tax
and
grant-related forms that she completed. 3/ Ohio Valley asserted
that
this documentation showed that the executive director
provided
administrative and technical support to the Head Start program,
and
estimated that the executive director spent at least 133 hours per
year
performing the Head Start activities represented by these documents
(in
comparison to the claimed 91 hours per year). 4/
Ohio Valley described the executive director's Head Start salary as
a
reasonable and necessary program cost which was approved by its
Head
Start policy council and budgeted within the Head Start program.
Ohio
Valley stated that the payments in question amounted to 11.05%
and
10.97% of the executive director's total salary (including Head
Start)
of $35,586 and $37,804 for 1988 and 1989, respectively, which
was
comparable to the 11.54% of total time devoted by Ohio Valley
employees
to the Head Start program. 5/
Ohio Valley argued in addition that the executive director had
complete
responsibility for the activities of the Head Start program and that
the
program benefited from her efforts. The Grantee asserted that
time
sheets and wage reports it provided supported the time worked
and
charged to the program, and the amount paid to the executive
director.
Analysis
OAR asserted that the time sheets Ohio Valley provided for its
executive
director did not establish the specific dates on which Head Start
work
was performed and did not account for her non-Head Start
activities. In
response to the defects cited by OAR, Ohio Valley
provided documentation
to demonstrate that the executive director performed
substantial Head
Start duties. OAR conceded that Ohio Valley's
documentation showed that
the executive director performed functions related
to the Head Start
program at least occasionally. Thus, it is clear that
the executive
director provided some services which were properly chargeable
to Ohio
Valley's Head Start grant. At issue, however, is what
compensation for
these services is supported by the documentation in the
record.
We conclude that the time sheets, when viewed in conjunction with
the
other materials that Ohio Valley submitted, reasonably established
that
the Grantee was entitled to funding for the executive director's
Head
Start salary for 91 hours per year. However, we also conclude that
the
hourly Head Start wage that Ohio Valley paid the executive director
was
excessive.
OAR's criticism of the time sheets used to report the executive
director's
Head Start work focused on their structure and their failure
to account for
the executive director's non-Head Start activity. As OAR
noted, the
time sheets provided space to report only seven days but were
used for
two-week pay periods, and so did not establish which days the
executive
director worked. However, although the time sheets did not
accurately
identify the precise days of the efforts, they did certify
that at least 3.5
hours of work was performed every two weeks. This is
consistent with
the Ohio Valley Head Start employment verification forms
signed by the
executive director that the Grantee provided, which
indicated that she would
be compensated for a maximum of 3.5 hours of
Head Start work per two-week pay
period, for a total of 91 hours per
year.
Moreover, Ohio Valley estimated that the executive director spent over
133
hours per year on Head Start work, and supported this with
extensive
documentation of her various Head Start responsibilities.
While OAR is
correct that this documentation did not demonstrate precisely
how much
time the executive director spent on each individual activity,
we
conclude that given the number, extent and scope of the
documented
activities, Ohio Valley satisfied its burden of demonstrating that
she
spent at least 91 hours performing Head Start functions.
Therefore,
based on the time sheets, the employment verification forms, and
the
extensive additional documentation presented, we find that the
Grantee
established entitlement to funding for salary payments to the
executive
director for 91 hours of Head Start work.
In Second Street Youth Center, Inc., unlike in this case, the
grantee
never produced any personnel activity reports, and none of the
grantee's
documents, other than the checks for the disallowed
payments,
specifically related to the questioned expenditures. The
Board also
observed that substantial portions of the disallowed salary
payments
were apparently intended to cover services provided during a period
when
the grantee did not operate a Head Start program, which was not
the
situation here.
The fact that the executive director was paid for a 40-hour week spent
on
non-Head Start functions did not preclude her from receiving
appropriate
payment for additional work which benefited the Head Start
program. OAR
did not dispute that the executive director spent time
working for the Head
Start program in addition to her full-time
employment with the Grantee's
non-Head Start division. OAR reported
that there is no Head Start
policy precluding the executive director
from receiving a supplemental amount
for Head Start activities above and
beyond the 40-hour work week for other
activities. In the absence of a
policy restriction in that respect,
there is no reason why such
supplementation of her regular salary would not
be permissible. OAR
also questioned in its initial brief whether the
time sheets complied
with OMB Circular A-122's requirement to account for the
executive
director's total activity. However, Ohio Valley has been able
to
document adequately that the executive director worked 3.5 hours
every
two weeks solely for Head Start activities in addition to her
full-time
efforts for Ohio Valley's non-Head Start division. No
questions have
been raised about the appropriateness of her receiving a full
salary for
her non-Head Start work.
While we find that the evidence reasonably established that the Grantee
is
entitled to funding for Head Start salary costs for 91 hours per
year, we
agree with OAR that the amounts paid to the executive director
for Head Start
work were excessive. As OAR noted, the hourly wage she
received for her
Head Start activities deviated significantly from the
established practices
of Ohio Valley, as evidenced by the hourly wage
she received for her regular,
non-Head Start duties. The Grantee did
not show or allege that the
duties that the executive director performed
for its Head Start division were
significantly more difficult than her
duties for the non-Head Start
division. Accordingly, we conclude that
her Head Start hourly wage was
beyond what a reasonably prudent person
would have paid under the same
circumstances. OMB Circ. A-122, Att. A,
. A.3.
Ohio Valley asserted that the percentage of the executive director's
total
salary that was charged to the Head Start program was comparable
to the
percentage of the total time of all of Ohio Valley's employees
that was
devoted to Head Start. However, this comparison is misleading,
as it
ignores the fact that the proportion of the executive director's
total time
devoted to Head Start was far less than the proportion of her
total salary
charged to Head Start.
Accordingly, based on OAR's unchallenged determination that the
executive
director received $15.22 and $16.18 per hour for her non-Head
Start
responsibilities in 1988 and 1989, respectively, we conclude that
salary
payments to the executive director of $1,385 and $1,472 were
allowable.
6/ Since the allowable payments comprise 35.2% and 35.5% of
the amounts
actually paid to her for those two years, Ohio Valley is
also entitled to
recover a pro rata share of federal social security
taxes paid for the
executive director, or $104 for 1988 and $110 for
1989. 7/ Thus, the Grantee
was entitled to federal funding in the amount
of $1,489 and $1,582 for those
years, for a total of $3,071.
Conclusion
Based on the above analysis, we reverse the disallowance of $3,071,
$1,489
for 1988 and $1,582 for 1989. The remaining disallowance of
$5,615 is
sustained.
Judith A. Ballard
Cecilia Sparks Ford
Donald F. Garrett Presiding Board Member
1. The Agency also initially disallowed $54,808 claimed for
payroll
costs, but withdrew that portion of disallowance after
reviewing
documentation supplied by Ohio Valley during the course of the
appeal.
2. OAR's calculation of the executive director's hourly wage for
work
performed for Ohio Valley's non-Head Start division was based on
2080
hours per year, or 40 hours weekly for 52 weeks.
3. The additional documentation consisted of the following items:
o Minutes or sign-in sheets of eight Head
Start policy council
meetings attended by the executive director from March
7, 1988 to
December 4, 1989.
o Minutes of eight Ohio Valley board of
directors meetings and one
Board training meeting from October 29, 1987 to
August 31, 1989. The
executive director was referred to in the minutes
of five of the
meetings and the training meeting.
o Thirteen Ohio Valley Project Head Start
checks from April 1,
1988 to November 13, 1989, and four checks from Ohio
Valley to the
Indiana Department of Revenue for withholding from August 11,
1988 to
August 10, 1989.
o One Indiana Department of Employment
and Training Services
quarterly contribution report dated July 28, 1989.
o Six Indiana employer's withholding tax
returns from August 17,
1988 to August 14, 1989.
o Two employer's quarterly federal tax
returns, dated January 27
and July 25, 1989.
o One Indiana Department of Revenue
annual reconciliation of
employer's withholding tax return, dated February
27, 1989.
o Six Ohio Valley Project Head Start financial status reports.
o Four project approval information forms
from June, 1988 to June,
1989.
o Four Ohio Valley Head Start certificates of hiring.
o One IRS Form 6559 dated February 23, 1989.
o One certificate of Head Start
administrative costs dated June 2,
1988.
o One Department of Health and Human
Services assurance of
compliance form dated June 2, 1988.
o One federal cash transactions report
signed dated February 15,
1988.
4. Ohio Valley reported that the 133 hours per year that the
executive
director devoted to Head Start were comprised of the
following
responsibilities:
o 24 hours per year attending monthly
two-hour Head Start policy
council meetings, and three hours per year
attending monthly two-hour
board meeting of which 12-13% were allocable to
Head Start.
o Six hours per year preparing, reviewing
and approving all
monthly and annual payroll tax reports.
o 20 hours per year reviewing, approving
and signing cash
disbursements for 1,300 checks per year.
o Four hours per year reviewing and
approving all quarterly
financial status reports and comparing the
information to the general
ledger.
o 48 hours per year, or four hours per
month, assisting in the
preparation of annual, supplemental, and expansion
grant applications;
reviewing Head Start budgets; and in continuous
monitoring of monthly
financial statements.
o Four hours per year actively
participating in the hiring of
employees for the Head Start program,
including interview sessions.
o 24 hours per year, or two hours per
month, spent on other
miscellaneous services on behalf of the Head Start
program.
Ohio Valley stated that this list of services and hours was probably
not
inclusive of all of the executive director's Head Start functions.
5. Ohio Valley reported that 14.6 of 126.5 full time
equivalent
employees were devoted each year to Head Start program
responsibilities.
6. 91 hours at $15.22 and $16.18 per hour.
7. 35.2% of the $295 paid in social security taxes for 1988, and
35.5%
of the $311 paid for