Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Bedford Stuyvesant Restoration Corporation
DATE: April 16, 1993
Docket Nos. A-92-127 and A-92-128
Audit Control Nos. CIN-A-02-91-14535 and CIN-A-02-91-14405
Decision No. 1404
DECISION
The Bedford Stuyvesant Restoration Corporation (BSRC) appealed
two
determinations by the Office of Community Services (OCS). At issue
is
$839,638 in federal funds obtained by BSRC under the Community
Services
Block Grant Program. Docket No. A-92-127 concerns a
disallowance of
$373,231 in connection with a grant to BSRC for a Homeless
Project. Of
this amount $360,371 represented allegedly excess
administrative costs
claimed by BSRC and $12,860 represented expenditures
incurred outside
the grant period. Docket No. A-92-128 concerns
$466,407 disallowed in
connection with BSRC's Drugstore Project. These
funds were disallowed
based on BSRC's failure to expend or obligate adequate
private or public
matching funds during the grant period. 1/
Although BSRC filed separate appeals, the parties agreed to the
Board's
suggestion that the two appeals be considered jointly.
See
Acknowledgment of Notice of Appeal and Notice of Joint Consideration
in
Docket Nos. A-92-127 and A-92-128 (May 1, 1992). The record upon
which
this decision is based consists of the parties' briefs and
exhibits.
Based on the analysis below, we sustain these disallowances in
their
entirety.
We first address separately the issues specific to each disallowance.
In
Part I, we consider BSRC's Drugstore Project (the earlier grant).
In
Part II, we examine the Homeless Project. In Part III, we
address
several subsidiary issues raised by BSRC during the course of
the
appeal. Those issues are 1) whether, during this appeal, OCS
could
increase the amount of the disallowance relative to the
Drugstore
Project, 2) whether, in its reply brief, OCS exceeded the scope
of
argument permitted by the Board, 3) whether, in the event it lost
the
appeal, BSRC's proposed procedures for disposition of the
Drugstore
Project property would satisfy its debt to OCS, 4) whether BSRC's
claim
of possible bankruptcy should affect the Board's analysis of
these
disallowances, and 5) whether BSRC may respond to OCS's refusal
to
participate in mediation after the Board has closed the record in
this
case.
I. THE DRUGSTORE PROJECT (Docket No. A-92-128)
Background
Responding to a January 25, 1985 Federal Register Program
Announcement,
BSRC requested $1,200,000 in discretionary grant funds for a
one-year
project. BSRC proposed to develop, own and operate two
joint-venture
"super drug stores." BSRC expected this project to
provide 104
permanent jobs at the end of the first year and a total of 130
jobs
within three years. BSRC targeted 90% of these jobs for
low-income
teenagers and female-heads-of-households. BSRC envisioned
the project
generating approximately $320,000 by the end of its third
year. This
money would be partially allocated for expansion and
reinvestment into
youth programs, housing and community-related
programs. BSRC's
timetable anticipated completion of the project within
twelve months and
substantial completion of construction within nine
months. BSRC
indicated that the project would require $3,110,000 for
completion ($1.2
million in grant funds and $1,910,000 in matching
funds). OCS Exhibit
(Ex.) D-1.
Based on BSRC's proposal, OCS awarded BSRC a $500,000 grant for the
period
September 30, 1985 through September 29, 1986. The grant
award
specified that BSRC's matching requirement "ranges from $500,000
private
to $1,000,000 public funds." BSRC Ex. J. This meant that
BSRC would be
required to obtain a commitment of one private sector dollar or
two
public sector dollars to each dollar of OCS funds awarded.
Program
Announcement OCS-85-1, 50 Fed. Reg. 3670, 3674 (January 25, 1985)
(BSRC
Ex. K).
BSRC submitted a progress report dated December 2, 1986, for the
quarter
ending September 30, 1986. There, BSRC indicated that the
drugstore
project was not yet complete. However, BSRC stated that it
intended to
split the grant between the following two projects. In
conjunction with
an independent operator who owned two other supermarkets in
the "C-Town
chain," BSRC would build a "small supermarket-drugstore" on one
site
(Myrtle and Sumner Avenues) as "mentioned in the original
proposal."
The site was an abandoned building owned by BSRC.
Additionally, BSRC
would lease a second site (Washington Avenue) for a
drugstore. BSRC
projected that construction for the second store would
begin in August
(presumably 1987, although a specific year was not
identified), all
financing would be in place by September and the store would
open by
October. OCS Ex. D-3.
On April 6, 1987 BSRC requested a no-cost extension through September
29,
1987. OCS granted that extension on July 15, 1987. OCS Br. at
7;
OCS Ex. D-2. Thereafter, on a date which OCS concedes is unknown,
the
grant was extended for another year through September 30, 1988. OCS
Br.
at 7.
BSRC and OCS officials were scheduled to meet January 11, 1990 to
discuss
the Drugstore and Homeless Project grants and one other. 2/ In
a letter
preceding that meeting (January 8th), BSRC indicated that it
had purchased
and renovated a store site at 1583 Fulton Street. BSRC
also noted that
while more than $500,000 had been spent on this project,
BSRC had not yet
finalized a joint venture agreement, although it was
still negotiating with
two potential partners. BSRC sought another
one-year no cost extension
for the grant. OCS Ex. D-4.
Following the meeting, OCS informed BSRC that it was "appalled" by
the
status of all three grants. OCS alleged that BSRC had "violated
the
terms and conditions of these grants by utilizing grant funds at
its
discretion" and that BSRC had "failed to implement the
approved
projects." OCS indicated that before it approved any further
no-cost
extensions or alternate use of grant funding, BSRC was to have
the
grants audited. OCS also requested final narrative and
financial
reports on the grants setting out their accomplishments and
detailing
the use of the OCS and matching funds. BSRC Ex. A.
In the Final Narrative Report for the Drugstore Project (September
21,
1990) BSRC conceded that "this joint venture never materialized."
BSRC
offered several reasons for the grant's status:
o Management changes within BSRC from 1985 to 1989 resulted
in
inconsistency and personnel shortages;
o The original site selected was unacceptable to the
original
prospective joint venture partner (Pathmark) due to size
and
location;
o Pathmark was involved in a leveraged buyout in 1986
and
sharply curtailed new ventures in order to conserve cash;
o A 1987 fire in the building caused further delays;
o BSRC indicated that it had discussions with another
potential
joint venture partner which were unsuccessful and terminated
in
1989; and
o BSRC did not timely seek additional extensions or
discuss
possible alternatives with OCS.
However, BSRC asserted that the project was "not dead." BSRC
proposed
that the project definition be changed and an extension be
provided
through September 1991. This would permit an "acceptable job
intensive
venture," other than a drugstore, to be started. In
conclusion, BSRC
acknowledged that the Fulton Street site "appears to be
unacceptable as
a drug store site." OCS Ex. D-5.
The independent audit report on the Drugstore Project was issued August
3,
1990. The auditors determined that BSRC incurred total
project
expenditures of $630,230, made up of $500,000 in OCS funds and
$130,230
in unrestricted (non-grant) funds during the period September 30,
1985
through May 31, 1990. The auditors questioned certain costs
($96,637)
incurred outside the approved project period, i.e., after September
30,
1988. During the approved project period BSRC applied $33,593
in
unrestricted funds and $500,000 in OCS funds. BSRC Ex. I at 6.
Based
on this analysis, the auditors concluded that BSRC had failed to
meet
its matching requirement for the grant. The auditors blamed
BSRC's
failure to meet the matching requirement on the absence of a
joint
venture agreement. The auditors determined that the most recent
joint
venture negotiations had been terminated subsequent to August 24,
1989
and there were still no firm plans to complete the project and open
the
drugstore. However, they noted that BSRC was still seeking a
joint
venture partner. BSRC Ex. I.
On January 28, 1991, OCS sought additional information from BSRC
regarding
ownership of the building and the potential placement there of
a venture
other than the drugstore. See OCS Ex. D-6. In its March 26,
1991
response, BSRC stated that it had paid off the mortgage in January
1990 and,
in May 1990, had entered into discussions with "the President
of Store
24." This person had expressed interest in putting a franchise
at the
site and had submitted a tentative proposal in June 1990. 3/
BSRC noted that
although this prospective partner was still interested
in the site, it was
looking for an "appropriate franchise
owner/manager." BSRC indicated
that, in the interim, it had taken steps
to defer various building-related
costs. Specifically, in September
1990 it had leased the site for 18
months to the construction company
renovating Fulton Street. BSRC also
noted that Fulton Street had been
converted to a one-way street for the
duration of the renovation, making
"it difficult to establish a store at this
site until the construction
is completed." OCS Ex. D-7.
Rather than granting a further no-cost extension, on March 23, 1992,
OCS
disallowed $369,770 charged to grant funds. The disallowance was
based
on BSRC's failure to expend or obligate adequate matching funds
during
the approved project period. In its November 9, 1992, reply
brief OCS
increased the disallowance taken on this basis to $466,407.
OCS Reply
Br. at 5-7; BSRC Ex. I. 4/
Analysis
OCS contended that BSRC failed to meet the applicable matching
fund
requirements for this grant. Moreover, OCS asserted that BSRC made
no
significant progress toward achieving the grant's goals and
objectives,
either within the twice-extended grant period or in the years
that
followed. Consequently, OCS argued that its decision to deny a
third
no-cost extension was reasonable. See generally OCS Br. at 10-13;
OCS
Reply Br. at 2-5.
BSRC maintained that OCS's refusal to provide a no-cost extension
was
arbitrary and capricious. BSRC challenged OCS's assertion that it
had
drawn down federal money in the absence of the necessary matching
funds.
BSRC interpreted OCS's position as requiring that matching funds must
be
received before federal funds could be expended. BSRC noted that it
had
obtained some matching funds and argued that OCS "clearly
understood"
that the joint venture partner would be the source of the
remainder.
Further, BSRC asserted, neither the Program Announcement, the
grant
application, nor the audit required obtaining the matching funds
in
advance. Additionally, BSRC insisted that it had made
"substantial
progress and efforts" toward completion of the project in spite
of the
problems chronicled in its Final Narrative Report. BSRC First
Reply Br.
at 3-7; OCS Ex. D-5.
BSRC's arguments are not convincing for a number of reasons.
BSRC ignores the requirements for matching funds stated clearly at
Part
III, Section D., of the Program Announcement. An applicant was
required
--
to obtain commitment of minimum prescribed amounts of private
or
public funds . . . to match each OCS dollar awarded. This
match
may be one private sector dollar or two public sector dollars
to
each dollar of OCS discretionary funds awarded. . . . The
firm
commitment of these required matching funds must be
documented
in the project application. . . . Matching funds must
be
definite, or contingent only on the receipt of the OCS grant.
.
. . Matching funds must be expended or obligated during
the
approved OCS project period.
50 Fed. Reg. 3670, 3674 (January 25, 1985) (BSRC Ex. K).
Given this explicit notice, BSRC cannot reasonably suggest that it was
not
aware of the matching funds requirement from the outset of the
grant
application process. While the Program Announcement does not
require
that matching funds be spent in advance of OCS funds, it
clearly
mandates that the matching funds be definite and be expended
or
obligated during the one-year grant period. Consequently,
BSRC's
argument that OCS could not take a disallowance because it
"understood"
that matching funds would not be available until a joint venture
partner
was secured is not persuasive. So far as what OCS may have
"understood"
regarding the source of the matching funds, BSRC's grant
application
painted a very positive picture concerning the existence of a
joint
venture partner and BSRC's general ability to garner financial
support.
See OCS Ex. D-1.
BSRC's grant was predicated on the plainly worded matching
fund
requirements set out in the Program Announcement. There is no
evidence
that those requirements did not apply to BSRC, nor is there any
evidence
from which a different "understanding" may be inferred. OCS
has already
given BSRC two no-cost extensions, so that BSRC has had three
years,
rather than the one year specified in its original grant proposal,
in
which to secure matching funds. At this point, seven and one-half
years
have passed since the initial award, and the original project has
been
downscaled and revised. Still, there is no joint venture partner
on the
horizon. In effect, BSRC has argued that it should be allowed to
retain
unmatched federal funds on the premise that it will have a
suitable
joint venture partner (who will provide the required match) at
an
undetermined future date. Not only is this an unrealistic position,
it
is unacceptable because the matching funds had to be made
available
during the grant period. Thus, OCS correctly found that BSRC
failed to
satisfy the applicable matching fund requirements. 5/
Moreover, given the applicable legal standard and the facts of this
case,
we conclude that OCS acted reasonably in refusing BSRC's January
8, 1990
request for an additional no-cost extension of the Drugstore
Project.
The Department's policy on no-cost extensions is contained in
its Grants
Administration Manual (GAM) and is specifically applicable to
all
discretionary grants. See Chapter 1-85; section 1-85-10. Under
the
GAM, OCS has the discretion to award a no-cost extension of a
project.
Specifically, section 1-85-80 provides:
If support for a project is ending, the grants officer
may
noncompetitively extend the project 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 . . . .
There is no evidence, nor does either party contend, that OCS had
any
other policy regarding no-cost extensions.
In prior decisions, the Board has examined extensively the
discretionary
authority of agencies within this Department to rule on
requests for
no-cost extensions. See Oakwood Child Development Center,
Inc., DAB No.
1092 (1989); see also Ironbound Educational and Cultural
Center, Inc.,
DAB No. 1302 (1992). The Board held that the no-cost
extensions at
issue in Oakwood and Ironbound were properly denied where the
agency's
action was not arbitrary. In Oakwood, our analysis was
premised, in
part, on the general principle of administrative law that a
presumption
of regularity attaches to the actions of government
officials. See
Citizens to Preserve Overton Park v. Volpe, 401 U.S.
402, 415 (1971).
In order to be found arbitrary or capricious an agency's
actions must
have been unwarranted in law and without justification in fact.
6/ As
the Board recognized in Oakwood, the standard to be applied is
whether
the decision was reasonable, not was it the only decision, or even
the
best decision, or even the decision that others might have
made.
Oakwood at 8-9. Applying this standard here, we conclude that
OCS's
denial of an additional no-cost extension to BSRC for the
Drugstore
Project was clearly reasonable.
BSRC sought to distinguish Oakwood based on the fact that Oakwood
had
failed to achieve any of its proposed goals and had eventually
offered
three different alternatives to its original grant proposal.
BSRC
contended that it was requesting a no-cost extension to carry out
its
original proposal and had made "substantial progress and efforts
toward
completion." BSRC First Reply Br. at 7-8. However, it is
apparent from
the evidence summarized below that the project is far from
meeting its
original goals.
Originally, BSRC sought to develop, own and operate two
joint-venture
"super drug stores." Not only has BSRC made little
progress toward the
original grant objectives, it has proposed alternative
uses for the
grant funds which are substantially different from the original
project.
For example, in December 1986, one year after the grant was
awarded,
BSRC indicated that the drugstore project was not yet
complete. Rather,
BSRC was attempting to build a "small
supermarket-drugstore" on one site
and lease a second site for a
drugstore. BSRC proposed splitting the
original OCS grant between these
two projects. See OCS Ex. D-3. In
January 1990, BSRC indicated
that it had purchased and renovated the
Fulton Street site, expending more
than $500,000, but did not yet have a
finalized joint venture
agreement. See OCS Ex. D-4. In September 1990,
BSRC conceded that
the joint venture had not materialized. It
acknowledged that the Fulton
Street site was "unacceptable as a drug
store site." BSRC proposed that
the project definition be changed and
an extension be provided through
September 1991 in order to start a
venture other than a drugstore. See
OCS Ex. D-5. In March 1991, BSRC
informed OCS that, six months earlier,
it had leased the Fulton Street
site to a construction company, apparently
through March 1992. Even
then, BSRC did not reconcile the impact of the
lease on the project.
See OCS Ex. D-7.
Realistically, these events cannot be characterized as
"substantial
progress" toward the objectives of the original project.
BSRC is
apparently no closer to putting anything, let alone two
super
drugstores, into its community than it was eight years ago.
Simply,
this project failed. Given the scope of its failure, there was
no point
in extending the grant. This was not a grant for an indefinite
period
or one designed to expend funds, even in small part, on general
good
works throughout the community. BSRC was bound to develop
two
drugstores and provide permanent jobs in those stores for
targeted
residents. By BSRC's own admission, that has not occurred.
BSRC also asserted that OCS had taken statements in BSRC's
September
1990 Final Narrative Report regarding the unsuitability of the
Fulton
Street site for this project out of context. BSRC contended that
this
statement was "not intended . . . to mean that the site was
not
originally, or would never be, appropriate for a drugstore." BSRC
First
Reply Br. at 6. In view of the grant's history to that point, it
is
hard to imagine what other reasonable interpretation could be placed
on
BSRC's statement. The project was going nowhere. The statement
was
made five years after the grant award not once, but twice within
the
Report. This Report and the earlier submissions to OCS, in
evidence
here, chronicled this project's litany of failure. Moreover,
in the
Report, BSRC proposed a change of project definition. Given
these
facts, BSRC's argument is simply unrealistic.
Throughout this case, BSRC has emphasized the positive effects of
its
community involvement over the years. This disallowance should not
be
interpreted as an attempt to discredit BSRC's overall value to
the
community. However, in accepting the grant award, BSRC took on
the
general responsibilities incumbent upon any grantee, which are to
expend
awarded funds for the stated program objective in accordance
with
applicable laws, regulations and guidelines. Thus, BSRC's
past
accomplishments are irrelevant to the issue of whether
BSRC's
performance under this grant warranted a no-cost extension.
Based on the analysis above, we conclude that OCS correctly found
that
BSRC had failed to satisfy the matching fund requirements applicable
to
this grant and that OCS's denial of a third no-cost extension
was
reasonable. Consequently, we sustain, in principle, the
disallowance
relative to BSRC's Drugstore Project grant. We address the
amount of
that disallowance in Part III, section A below.
II. THE HOMELESS PROJECT (Docket No. A-92-127)
Background
Responding to a February 10, 1986 Federal Register Program
Announcement,
BSRC requested $600,000 in OCS discretionary grant funds for a
one-year
project. BSRC proposed to develop a building for commercial
and
residential use by the homeless. After learning informally that
it
would receive a $400,000 award, BSRC submitted a revised request
for
that amount. OCS Br. at 13-14. Subsequently, BSRC
received a $400,000
grant for the period September 30, 1986 through September
29, 1987. The
entire award was budgeted for "Construction." BSRC
Ex. E.
New York City was the entity providing the matching funds required
for
this project. Due to the City's delays in disbursement of those
funds,
the Homeless Project was not completed within the one-year
period
originally envisioned. Consequently, BSRC requested and received
a
no-cost grant extension through September 29, 1988. OCS Br. at
14.
In an August 4, 1988 progress report to OCS, BSRC indicated that
the
closing expected in late May was now anticipated in August.
BSRC
explained:
As the OCS funded portion of the project (a medical facility
and
commercial space) can be completed independently, . . .
[BSRC
does] not project . . . encountering any particular problem
in
fulfilling our contractual obligations with OCS by the
September
30th deadline. It is clear, however, that the housing
portion
of the project which is funded by the City of New York will
not
be completed until August 1989.
OCS Ex. H-9.
In a January 8, 1990 letter to OCS, BSRC complained that, since
1982,
general federal funding cuts had impaired its ability to meet
its
administrative overhead. Thus, BSRC indicated that it had
expended
"approximately $410,000 of management time . . . completing
various
BSRC/OCS projects." BSRC admitted that it had used general
grant funds
(from this and another grant) for payroll and benefits,
insurance, audit
fees and past due withholding taxes; expenditures which
permitted it to
continue providing community services. This action was
necessary, it
noted, because the grants involved did not provide
sufficient
administrative overhead reimbursement. Consequently, BSRC
requested
approval for "an alternative use" of $405,000 in OCS grant
funds
($305,000 from the homeless grant and $100,000 from another grant
not
involved here) for these expenditures. OCS Ex. D-4 and Attachment A
and
B. OCS did not grant this request.
The Homeless Project was subject to an independent audit covering
the
period July 1, 1985 through June 30, 1988. The Audit Report
revealed
that BSRC had charged $12,680 for expenditures incurred outside
the
grant period and had expended $360,371 in grant funds for
administrative
expenses in excess of the ten percent ceiling established by
the grant
award. See BSRC Ex. D. After BSRC was given an
opportunity to explain
the adverse audit findings, OCS disallowed these
costs.
Analysis
A. Excess Administrative Costs
Generally, BSRC asserted that OCS had mischaracterized the costs
in
issue. BSRC maintained that it was not seeking to increase the
ten
percent limit on administrative costs as defined by OCS. Instead,
it
was seeking a reallocation of the construction budget line items
to
include what it described as "soft costs." BSRC asserted that
the
budget categories used by OCS in this grant were too general since
the
only line item funded in the grant award was "construction."
However,
BSRC pointed out that construction costs were not defined in the
"Grant
Terms and Conditions" which accompanied the award. BSRC argued
that OCS
arrived at this disallowance by simply lumping all non-brick and
mortar
costs together under the administrative cost category. In
reality, BSRC
contended, these were not the type of "administrative costs"
envisioned
by the ten percent ceiling. Rather, they were "direct
project-related
development costs used to carry out the Homeless Project
itself -- to
bring it on stream, not monitoring expenses �external� to the
project."
BSRC maintained that these costs were a reasonable, standard
and
necessary part of all construction budgets.
In support of its argument, BSRC cited a United States Department
of
Housing and Urban Development (HUD) construction budget which
contained
a "Total Estimated Development Cost" category. Within this
category
were line items such as Builders and Architects Fees, Carrying
Charges
and Financing (taxes, insurance, etc.) and Builder and Sponsor Profit
&
Risk (described as an allowable development cost of total project
cost
due the builder and developer for assuming the risk and taking
the
responsibility for ensuring a project's completion). BSRC First
Reply
Br. at 12-15 and Attachment 1; BSRC Second Reply Br. at 7-9.
Moreover, BSRC asserted that the applicable program regulations
permitted
funds earmarked for construction to be used for these soft
costs. BSRC
cited 45 C.F.R. . 74.106 for the proposition that "[u]nless
provided
otherwise by the terms of the grant or subgrant, revisions to
construction
project budgets do not require approval." BSRC also cited
45 C.F.R. .
74.107, which states that where a grant provides for both
construction and
nonconstruction work, the awarding party may require
prior approval of fund
or budget transfers between the two types of
work. BSRC contended that
these provisions permitted the type of
rebudgeting flexibility it sought
here. If this flexibility was denied,
BSRC argued, general grantee
participation in needed social programs
would be hindered. BSRC Br. at
2; BSRC First Reply Br. at 14-15.
Further, BSRC argued that, under 45 C.F.R.
. 74.177, OCS can waive the
prior approval requirement for this type of
expenditure so long as the
expenditure is otherwise allowable (i.e.,
reasonable and necessary).
BSRC Br. at 2.
BSRC also contended that, given the fungibility of money, OCS was wrong
to
disallow this expenditure simply because the money could not be
traced to
brick and mortar. Thus, BSRC suggested that we consider the
ten percent
ceiling, not in terms of the $400,000 OCS grant award but in
terms of the
overall project cost. Under this rationale, the Homeless
Project, which
cost $4,030,545, would have a ceiling on administrative
costs slightly in
excess of $403,000. Consequently, BSRC's
administrative expenditure
($360,371) would be allowable. BSRC First
Reply Br. at 15.
Finally, BSRC argued that, even if we were to conclude
that the disallowance
was appropriate in principle, it should not be
required to return the money
in question because the project was a
success. Id. at 15-16; BSRC
Second Reply Br. at 10-11.
BSRC's arguments are not convincing. At the outset, the
Program
Announcement under which these funds were available made it clear
that
the ten percent ceiling on administrative costs was a condition of
any
grant awarded. See 57 Fed. Reg. 5020, 5021 (February 10, 1986)
(BSRC
Ex. F). The Announcement noted that, while OCS would
accept
applications which included administrative costs --
since grant funds are extremely limited, no awards for
only
administrative costs will be made and no more than 10% of
the
OCS discretionary funds awarded under a single grant may be
used
for administrative purposes. . . . Administrative costs
are
defined as costs that are necessary to protect, monitor
and
properly account for and apply to the approved project,
those
Federal funds awarded. Costs associated with the
internal
operational management of the approved project are not to
be
considered administrative costs.
Id. at 5024.
The grant award was equally clear. Paragraph (d) of the award's
terms
and conditions (titled "Administrative Costs") provided --
Unless otherwise specifically provided, OCS funds awarded
under
this grant, up to a limit of ten percent of the Total
Federal
Approved Budget, may be used to meet administrative costs . .
.
.
OCS Ex. H-3 at 3.
In its grant application BSRC indicated that "[n]o funds from OCS
are
being requested for administration purposes." OCS Ex. H-1 at
87. Later
in the application, BSRC stated that it was "not requesting
any direct
administrative support under the application." Id. at 103
(emphasis in
original). In its letter accepting the grant, BSRC told
OCS that since
the award was $200,000 less than originally requested, the
"original
budget" was being reduced by a similar amount (from $2.76 to
$2.56
million). BSRC said that this reduction was made possible by
the
elimination of various contingent expenses included in the
original
grant proposal as a hedge against inflation. Citing its
experience in
housing projects, BSRC expressed confidence in its ability to
bring the
project to successful completion even with the reduced
funding. OCS Ex.
H-2.
Thus, the Program Announcement and the grant award provided clear
notice
to BSRC that there was a ten percent limitation on administrative
costs.
Moreover, BSRC's original application indicated that BSRC was
not
seeking funding for administrative costs. Further, when told
informally
that it would be receiving a reduced grant, BSRC eliminated from
its
budget the same type of "soft costs" for which it now seeks
federal
funding.
Regarding the general nature of the OCS funding categories compared
to
HUD's, early on BSRC emphasized its experience with construction
grants.
See OCS Ex. H-2. Given its expertise, it is not likely that
BSRC became
aware of the general differences in OCS and HUD budgets only when
faced
with the possibility of a disallowance. Rather, at the time it
applied
for the OCS grant, BSRC was aware of OCS's clearly expressed
concern
with limiting federal expenditures for administrative
costs.
Ultimately, this concern was translated into a condition for
the
allowability of grant funds as awarded. There is no evidence that,
at
the time it accepted the grant, BSRC did not understand the ten
percent
ceiling to apply as suggested by OCS. It has raised a question
only
after having received this disallowance. Even assuming for the
sake of
argument that the funds were expended on "soft costs," if BSRC had
a
question concerning the manner in which "soft costs" would
be
categorized for purposes of determining their allowability, it
should
have sought a clarification from OCS prior to committing federal
funds
to them.
Moreover, while on appeal BSRC characterized the costs in issue as
typical
construction soft costs, its January 8, 1990 letter to OCS
requesting
rebudgeting painted an entirely different picture. There,
BSRC
characterized these expenditures as general administrative costs
which had
permitted it to continue providing community services. OCS
Ex.
D-4. Elsewhere in that document, BSRC indicated that these
expenditures
had been made for "general operations." Id. at Attachment
A.
Further, in March 1991, BSRC explained to OCS what had happened to
the
$360,000 of the grant award that was not spent on construction.
More than
$49,500 was identified as direct project expenses (generally
identified as a
management consultant, insurance, engineers and
architects, housing
specialists and miscellaneous). "The balance of
funds were used to
support administrative costs related to the project .
. . ." OCS Ex.
D-7. These statements provide clear support for a
conclusion that BSRC
is seeking retroactive approval for administrative
expenditures of the type
limited by OCS.
Similarly, we find BSRC's attempt to redefine these administrative
costs
as only ten percent of the overall project costs to be inconsistent
with
its prior statements regarding this grant. Specifically, BSRC
described
as OCS's part of the project the medical facility and the
commercial
space that were completed within the grant period. See OCS
Ex. H-9.
Furthermore, the OCS funds were clearly earmarked for "construction,"
so
that none of the regulations cited by BSRC support its position that
the
majority of funds may be redesignated for administration of the
overall
project. BSRC cites 45 C.F.R. . 74.106 for the proposition that
there
is no need to obtain prior approval to rebudget costs in a
construction
grant. However, BSRC ignored limiting language in that
regulation which
provides that there is no need for prior approval "[u]nless
provided
otherwise by the terms of the grant . . . ." This grant
specifically
restricted the expenditures for administrative expenses;
consequently,
this regulation is totally inapplicable. For the same
reason, BSRC's
reliance on 45 C.F.R. . 74.177(c) is equally unavailing.
That
regulation permits the awarding agency to waive the prior
approval
requirements contained in the cost principles for certain types
of
costs. When the awarding agency waives the requirement for approval
of
a particular cost, that cost if incurred is allowable so long as
other
conditions for allowability are met. Since the costs at issue
here are
unallowable because they exceed the specific restriction
on
administrative costs, OCS's authority to waive certain
approval
requirements, which were not even at issue here, is
irrelevant. The
regulation at 45 C.F.R. . 74.107, which states that the
awarding party
may require prior approval of fund or budget transfers
between
construction and nonconstruction work, is also totally
inapplicable.
While, as BSRC asserted, this regulation may demonstrate that
OCS has
the flexibility to permit a budget transfer, that flexibility
is
available only where a grant provides for construction
and
nonconstruction work. This grant was for one purpose --
construction.
We also reject BSRC's contention that OCS's determination should
be
overturned because the Homeless Project was ultimately a success.
The
success of the grant is irrelevant to the allowability of funds
in
issue. As OCS noted, it is unfortunate that BSRC applied OCS funds
to
administrative costs in excess of those reimbursable under the
grant.
However, the limitation on administrative costs was clear. Thus,
we
conclude that OCS's disallowance of $360,371 in excess
administrative
costs was proper.
B. Expenditures Incurred Outside the Grant Period
When first asked by OCS to address this issue, BSRC stated:
"These
costs are questioned because they occurred outside the grant
period.
Management did not pursue a no-cost time extension during this
period."
OCS Ex. D-7 at 3. Before this Board, BSRC did not address
these costs
until its initial reply brief (following OCS's brief).
There it noted
that part of the disallowance for the Homeless Project
consisted "of
$12,680 which the parties agree was spent outside the grant
period for
project-appropriate expenses." BSRC First Reply Br. at
11. BSRC then
reasoned that since OCS did not dispute that this expense
represented an
otherwise legitimate payment, OCS should provide it with a
no-cost
extension. BSRC indicated that the extension would not be used
to
undertake further grant activities, but would "provide technical
relief
. . . to avoid a clear injustice." Id. at 16-17.
OCS did not address the issue of whether this expenditure was for
an
otherwise allowable cost. Rather, OCS seized on BSRC's admission
that
these funds were indeed spent on expenditures incurred outside the
grant
period as the most compelling argument for sustaining this aspect of
the
disallowance. See OCS Br. at 16-17 and OCS Reply Br. at 9.
Further,
OCS dismissed BSRC's request for a no-cost extension as
unjustified
based on the facts as presented. OCS Reply Br. at 9.
The audit report identified the expenditure in issue as professional
fees
incurred for a housing specialist. See Audit Report, Bedford
Stuyvesant
Restoration Corporation Awards # UR0097 and UR0165 at 6 (BSRC
Ex. D).
Even if these costs were a type generally allowable, this
expenditure was
properly disallowed. Grant funds may be used only for
costs which are
allowable and allocable to the activities for which the
grant was
awarded. See Action, Inc., DAB No. 1400 (1993) (and cases
cited
there). BSRC conceded that this expenditure was incurred outside
the
extended grant period. Thus, the expenditures were not allocable
to
this grant. That fact alone provides a sufficient basis for
the
disallowance.
BSRC also asserted that a further no-cost extension would prevent a
clear
injustice. Presumably, that "injustice" would be the disallowance
of an
otherwise allowable cost simply because it was incurred outside
the grant
period. A grantee bears the burden of proving the
allowability of costs
claimed for federal reimbursement. BSRC failed to
meet this
burden. Even if, as BSRC asserted, the professional fees in
question
were "routine," they were undocumented. Absent documentation,
the costs
could be disallowed even if they were incurred within the
grant period.
Moreover, BSRC did not request a no-cost extension until it filed
what
normally would have been its final brief in this case. 7/ Thus,
OCS was
faced with a request for a no-cost extension for an
unsubstantiated
expenditure incurred outside the grant period, several years
prior to
the request. As discussed earlier, a decision denying a
no-cost
extension need only be reasonable. The decision need not be the
only
one, the best one or even one others might have made. See Oakwood
at 9.
Applying this standard to the circumstances here, OCS's
decision
refusing to provide a no-cost grant extension to cover these costs
was
clearly reasonable.
Accordingly, OCS properly disallowed $12,680 for expenditures
incurred
outside the grant period.
III. SUBSIDIARY ISSUES
A. Revision of the Drugstore Project Disallowance
During the course of the briefing for this case, OCS increased the
amount
of the disallowance by $96,637 (from $369,770 to $466,407). OCS
stated
that this disallowance was premised on the same legal theory as
the original
disallowance, i.e., BSRC's failure to expend sufficient
matching funds during
the grant period. OCS indicated that the increase
was based on a review
of the independent audit report of the Drugstore
Project by this Department's
Office of the Inspector General and an
additional internal review.
Specifically, the audit report indicated
that a total of $533,593 was spent
on the Drugstore Project during the
grant period. That amount consisted
of $500,000 in OCS funds and
$33,593 in matching funds from BSRC. Thus,
OCS now seeks to recover the
entire unmatched amount, $466,407 ($500,000
minus $33,593). OCS
asserted that consideration of this issue here
would be efficient and
consistent with the Board's previously stated position
that issues not
raised in an original disallowance letter may be considered
so long as
an appellant has an opportunity to respond. See All Indian
Pueblo
Council, Inc., DAB No. 976 (1988). OCS Reply Brief at 5-7.
BSRC objected to the increased disallowance. BSRC argued that
Pueblo
Council was inapplicable here. Specifically, BSRC pointed to
the
disallowance letter which provided --
. . . Federal funds totaling $369,770 are to be returned to
the
granting agency. It is also determined that the
expenditure
incurred outside the grant period totaling $96,637 is
addressed
by the resolution on the matching share. No further
recovery of
those funds is warranted.
BSRC Ex. L.
BSRC contended that the audit report had been available to OCS
since
mid-1990 and that it was "wholly inappropriate at this late point . .
.
for OCS to attempt to reverse an express finding" set out in
the
disallowance letter. 8/ BSRC Second Reply Br. at 2-3.
In the paragraph prior to that cited by BSRC above, the
disallowance
letter, paraphrasing the audit report, noted --
It was recommended that . . . [BSRC] return to the
granting
agency the entire Federal grant of $500,000 if an
acceptable
joint venture partner was not located within the period
of
resolution. This recommendation incorporated the
questioned
cost of $96,637 previously referenced.
BSRC Ex. L.
Clearly, OCS's review of the audit was sloppy. When it composed
the
disallowance letter, instead of using the amount of federal funds
that
were not matched during the approved project period, OCS mistakenly
used
the amount of unmatched funds for the entire audited period. This
gave
BSRC credit for the $96,637 in private funds that it spent after the
end
of the approved project period. However, since during the
approved
project period BSRC had applied the entire $500,000 of OCS funds
and
only $33,593 in unrestricted (private) funds to this project, BSRC
was
actually entitled only to the $33,393 that it matched as required by
the
terms of the grant award. Thus, $466,407 of the OCS funds were
not
matched during the project period, and OCS is entitled to the return
of
these funds.
As a practical matter, OCS has not alleged any new basis for taking
the
disallowance, because the new figure is merely an adjustment to
the
amount of the disallowance. Additionally, BSRC had an opportunity
to
reply to the increase. Other than challenging the timing of
the
increase, BSRC's basic argument for reversal of the disallowance did
not
change. See generally BSRC Second Reply Br. at 1-7. Thus,
BSRC has not
been prejudiced by OCS's failure to disallow earlier the full
amount OCS
is entitled to recover. 9/
Obviously, the financial impact of the $96,637 is significant. The
fact
remains, however, that OCS is entitled to an accurate accounting
of
federal funds provided to grantees. This money is no more
allowable
than the $369,770 initially disallowed. OCS has a right to
recoup this
money. BSRC did not show that the general basis for the
disallowance
was wrong. It would certainly be counter to the purpose of
this appeal
process, which is to provide appellants with an expeditious
resolution
of grant disputes, to require OCS to pursue separately and for us
to
decide separately what is simply an adjustment to correct an
understated
disallowance amount.
We therefore sustain OCS's revision of the disallowance (to $466,407)
in
connection with the Drugstore Project.
B. BSRC's Motion to Strike
On September 30, 1992, the Board granted OCS's request to respond to
what
OCS characterized as new issues raised in BSRC's reply brief. In
that
same ruling, BSRC was given the opportunity to answer OCS's
response.
BSRC's response included a "Motion to Strike Material
Improperly Included in
. . . [OCS's] Second Reply Brief." The Motion
addressed arguments by
OCS concerning the Drugstore Project.
BSRC moved to strike --
o OCS's rebuttal of what it asserted was
BSRC's
mischaracterization of the matching fund requirements (OCS
Reply
Br. at 2-3);
o OCS's explanation of its reliance on Oakwood in
denying
BSRC's request for a no-cost extension (OCS Reply Br. at
3-4);
and
o OCS's increase in the amount disallowed relative to
the
Drugstore Project (OCS Reply Br. at 5-7).
Generally, BSRC argued that OCS had exceeded the scope of the
response
permitted by the Board. BSRC asserted that, rather than
address new
issues, OCS had continued the "argument-rebuttal process on
points
already placed in issue." Further, according to BSRC, by
increasing the
disallowance, OCS had raised a "totally new issue." BSRC
Second Reply
Br. at 1-4 and accompanying Attachments 2 and 3.
BSRC's Motion is not persuasive. In its initial brief, BSRC
generally
argued that the decision denying the no-cost extension for the
drugstore
project was not reasonable. BSRC Br. at ii and 6. Then,
in what would
normally have been its final brief, BSRC specifically
superseded the
arguments in its first brief and expanded its discussion
of the
Drugstore Project to include extensive argument on its interpretation
of
the matching fund requirements as well as arguments
distinguishing
Oakwood. BSRC First Reply Br. at 1, 3-10.
In its initial reply brief, BSRC not only recrafted its arguments, but
did
so after having had the benefit of examining OCS's brief. Thus, as
a
practical matter BSRC, not OCS, deviated from the usual briefing
process
because, from a procedural perspective, all issues in BSRC's
reply brief were
raised for the first time. Generally, the differences
between these
briefs were so significant that we do not find that OCS
exceeded the
parameters set by the Board for its reply brief, i.e., that
OCS respond to
the new arguments only. 10/ Moreover, as in our usual
briefing process,
BSRC was given, and took, the opportunity to file the
final brief in this
proceeding, so that it could respond fully to all
OCS' contentions.
For the preceding reasons, we deny BSRC's Motion to Strike.
C. BSRC's Proposed Remedy for the Drugstore Project
BSRC suggested that, if the denial of its no-cost extension was upheld,
it
should be permitted to sell the 1583 Fulton Street site and provide
OCS with
the net proceeds from the sale in full satisfaction of the
disallowance
relative to the Drugstore Project. BSRC insisted that this
would be a
fair resolution of the dispute especially since it had
cross-claims against
the building. However, BSRC also asked that a
no-cost extension be
granted if, during the pendency of the sale, a
suitable joint venture partner
was found.
As OCS noted, sale of the Fulton Street property would be consistent
with
the regulations concerning disposition of real property not used
for
authorized purposes. See 45 C.F.R. . 74.134(c). However,
OCS
indicated that it would expect to be paid the full amount owed by
BSRC
as the result of the disallowance. Consequently, it would not
waive the
difference if sale of the property was not sufficient to cover
that
amount. Moreover, OCS indicated that it would refuse a
no-cost
extension even if a suitable joint venture partner was found prior
to
the sale. OCS Reply Br. at 4-5.
OCS is entitled to recover the full amount disallowed. Since
this
building was never used for grant purposes, BSRC is not obliged to
sell
it to satisfy its obligation to repay the unmatched funds, and
may
continue to seek a joint venture partner on its own. We have
already
found that OCS acted reasonably when it denied the additional
no-cost
extension requested for the Drugstore Project. BSRC's request
that it
be permitted to continue to seek a joint venture partner while
the
building is on sale amounts to a reiteration of the extension
request
which OCS has already denied with good reason. BSRC must
realize that
this grant is finished. Now, OCS may reasonably expect
BSRC to return
the full amount of the OCS funds for which BSRC failed to
provide the
requisite match without regard to the disposition of the
building. 11/
D. BSRC's Possible Bankruptcy
At the outset of both appeals BSRC alleged that repayment of
the
disallowances would force it into bankruptcy.
BSRC's possible bankruptcy is not relevant to our consideration of
these,
or any, disallowances. In effect, BSRC is seeking equitable
relief
(i.e., the disallowances should be forgiven, not because OCS is
wrong, but
because BSRC cannot afford to repay). The Board is empowered
to resolve
legal and factual disputes. We cannot provide equitable
relief; we are
bound by all applicable laws and regulations. 45 C.F.R.
. 16.14.
We conclude above that the law applicable to these
disallowances clearly
requires BSRC to repay the disallowed grant funds.
E. OCS's Refusal to Participate in Mediation
After the close of the extended briefing in this case, BSRC wrote to
the
Board requesting mediation of the two disallowances. We delayed
our
consideration of the appeals until OCS could reply. OCS
vehemently
opposed "the proposed diversion of these cases to
mediation." OCS
stated that the cases were not appropriate candidates
for mediation, and
suggested that BSRC's proposal was made in bad faith,
since it was made
so late in the appeals process. Letter from OCS to
the Board (March 5,
1993). The Board then notified the parties that
since mediation
requires two willing participants, and OCS was not willing,
the Board
would close the record and proceed to decision. Ruling on
Request for
Mediation (March 8, 1993).
Although the Board had closed the record, BSRC wrote a letter on March
12,
1993 which it asked to be made part of the record. In its letter,
while
recognizing that mediation could not take place without OCS's
consent, BSRC
sought to rebut certain contentions made by OCS. BSRC
also contended
that OCS's refusal to participate in mediation
demonstrated that OCS was
behaving unreasonably in refusing BSRC's
request for a no-cost extension.
It would appear unfair to permit OCS's allegation of bad faith to
go
unanswered, and we will therefore grant BSRC's request to add
its
rebuttal letter to the record. OCS's strong reaction may have
been
based on a misapprehension that the Board might somehow force OCS
to
submit the case to mediation. However, the Board does not
have
authority to take such an action; we provide mediation services
only
where both parties consent.
OCS was also mistaken in asserting that BSRC's request was not timely
made
or that BSRC was somehow prolonging the period in which it had use
of the
money OCS had disallowed. Parties in Board proceedings are
permitted to
negotiate a settlement at any time during the process.
Conclusion
Based on the preceding analysis we sustain OCS's
determinations
disallowing a total of $839,638 in federal funds awarded to
BSRC under
the Community Services Block Grant Program. The
individual
determinations consist of $466,407 disallowed in connection with
BSRC's
Drugstore Project and $373,231 disallowed in connection with
BSRC's
Homeless Project. 12/
_________________________
Cecilia
Sparks
Ford
_________________________
Norval
D. (John)
Settle
_________________________
M.
Terry Johnson
Presiding
Board
Member
1. OCS originally disallowed $369,770 for the
Drugstore Project.
Upon further review of the audit OCS increased the
disallowance by
$96,637. However, the underlying rationale for the
disallowance,
failure to obtain required matching funds, remained the
same. OCS
Reply Brief (Br.) at 5.
2. From the record it appears that the parties
remained in
communication from the July 1987 no-cost extension to this
point.
However, those communications, if any, were not detailed in the
record.
3. "Store 24" is a convenience store chain.
4. We limit our analysis here to the substantive
legal issues
presented by the disallowance. We address the issue of
whether OCS
could properly increase the amount of the disallowance in Part
III.
5. Additionally, BSRC's assertion that the
disallowance should be
forgiven because the audit report did not indicate
that the matching
funds should be raised in advance (BSRC First Reply Br. at
7) is equally
unavailing. This assertion underscores not only BSRC's
misunderstanding
of the matching requirement, but also its apparent
misunderstanding of
the audit process. An audit is a retrospective
examination of a
grantee's financial stewardship. Thus, contrary to
what BSRC argument
implies, the audit's failure to restate explicitly the
grant notice's
requirement for fund matching during the grant period cannot
serve as a
basis for forgiving the disallowance.
6. The scope of judicial review under the
Administrative Procedure
Act, when ruling on a challenge to informal agency
action, includes
whether the agency action was "arbitrary, capricious, an
abuse of
discretion, or otherwise not in accordance with law." 5 U.S.C.
. 706.
The "arbitrary and capricious" standard of review has been stated to
be
a highly deferential one, which presumes the agency action to be
valid.
The standard is also a narrow one, which forbids a court
from
substituting its judgment for that of the agency; it mandates
judicial
affirmance if a rational basis for the agency's decision is
presented,
even though the court might otherwise disagree.
Environmental Defense
Fund v. Costle, 657 F.2d 275, 283 (D.C. Cir.
1981). The burden of
overcoming the presumption of the validity of
agency action is upon the
party challenging it. Id. at n.28.
7. The Board's normal process was modified so
that both parties
could file an additional brief.
8. BSRC also raised this issue in its Motion to
Strike parts of the
OCS reply brief, asserting that it was a new issue
improperly raised by
OCS for the first time in its reply brief. We
address BSRC's Motion in
section B., below.
9. Indeed, BSRC arguably benefitted from OCS's
failure to disallow
the $96,637 at an earlier date since interest on that
amount did not
begin to accrue until 30 days after the date of the OCS brief
notifying
BSRC of the increase. OCS Reply Br. at 6 n.2.
10. We have previously considered and rejected
BSRC's arguments on
the increase of the amount of the disallowance.
Thus, we need not
revisit that issue here.
11. BSRC asserted that it had "cross claims"
against the proceeds
from the sale of the building which could potentially
diminish the
amount that it paid to OCS. This assertion is without
merit since
BSRC's obligation to return unmatched OCS funds in no way depends
on the
amount or timing of BSRC's receipt of the proceeds from any sale of
the
building. Any "cross claims" which BSRC might have could not reduce
its
debt to OCS.
12. While our decision here is the final
determination of the
Department of Health and Human Services that OCS's
disallowance is
proper, OCS is not precluded from negotiating within its
delegated
authority the timing and terms of BSRC's repayment of the
disallowed
funds.