SUBJECT: Telamon Corporation

FINAL DECISION ON REVIEW OF

ADMINISTRATIVE LAW JUDGE DECISION

The Telamon Corporation (Telamon) appealed a determination by the Administration for Children and Families (ACF) disallowing $57,465 in Head Start grant funds. The basis for the disallowance was Telamon's alleged failure to satisfy the non-federal matching requirement for the program year (PY) August 1, 1991 to July 31, 1992.

Telamon contended that the disallowance should be adjusted to $35,688, reflecting additional non-federal match, the majority of which was related to an increase in the value of donated land. In the course of this appeal, ACF accepted additional non-federal match of $1,496 and reduced the disallowance amount to $56,268.⁽¹⁾ ACF, however, refused to accept the increased value of the donated land as non-federal match because Telamon had already claimed the land in the prior program year at its fair market value as part of Telamon's non-federal match. ACF also took the position that Telamon was ineligible for a waiver of the non-federal match. ACF acknowledged that, as part of the debt collection process, ACF can authorize a grantee to repay a debt with overmatch from the current or a subsequent grant year. However, ACF asserted that consideration of this issue was outside the scope of the Board's review.

For the reasons discussed below, we find that Telamon may not claim the increased value of the land as part of its non-federal matching share. Additionally, we find that the Board does not have authority to grant a waiver of the non-federal matching requirement or to authorize the application of the current or a subsequent year's overmatch to Telamon's non-federal shortfall. Accordingly, we sustain the disallowance in the reduced amount of $56,268. This decision does not preclude Telamon from requesting that ACF consider whether the current or a subsequent year's overmatch can be applied to its non-federal shortfall as part of the debt collection process.

Statutory and Regulatory Background

ACF administers the federal program known as Head Start. The purpose of Head Start is to provide comprehensive health, educational, nutritional, social, and other services to economically disadvantaged pre-school children and their families. 42 U.S.C. � 9831. To carry out the program, ACF provides federal funds to qualified public and private agencies totalling generally 80 percent of the program's Head Start budget, and the public or private agency contributes 20 percent in matching funds or services. 42 U.S.C. �� 9833 and 9835(b); 45 C.F.R. � 1301.20.

During the relevant time period, the Head Start Act provided:

Financial assistance extended under this subchapter for a Head Start program shall not exceed 80 percent of the approved costs of the assisted programs or activities, except that the Secretary may approve assistance in excess of such percentage if the Secretary determines, in accordance with regulations establishing objective criteria, that such action is required in furtherance of the purposes of this subchapter.

A Head Start grantee is therefore required to contribute 20 percent of the total cost of the program. The requirement for non-federal matching may be waived, however, so that federal funding is in excess of 80 percent of program costs, if the Head Start grantee submits a written application that demonstrates that --

the Head Start agency has made a reasonable effort to meet its required non-federal share but is unable to do so; and the Head Start agency is located in a county:
(a) That has a personal per capita income of less than $3,000 per year; or
(b) That has been involved in a major disaster.

45 C.F.R. � 1301.21 (1991).⁽²⁾

Factual Background

Telamon, a North Carolina non-profit corporation, was awarded a grant on July 6, 1990, to operate a Head Start program in Kent County, Delaware, serving 96 children and their families. The first grant program year (PY) was for the seven and one-half month period beginning June 15, 1990 and ending January 31, 1991. Following requests from Telamon, ACF changed the ending date of PY 1 to July 31, 1991 to allow Telamon additional time to earn sufficient non-federal match for PY 1.

Telamon's major complication in implementing its Head Start grant was the lack of suitable space to accommodate the children it was to serve. On October 1, 1990, Telamon received expansion funding for an additional 61 children, allowing it to increase the total funded enrollment to 157 children and their families, and $412,940 to expend toward purchase and installation of seven modular units for classroom space.

During PY 1, in anticipation of the expansion, Telamon purchased a 1.5 acre parcel of land for $34,000 as the site of its proposed new Head Start facility. Telamon claimed this $34,000 as part of its non-federal share for PY 1. Telamon made a non-federal match of 22.6% in PY 1, exceeding its match requirement by 2.6%, or $10,932.

On September 30, 1991, Telamon received a financial assistance award of $546,627 for PY 2, which included further expansion of its Head Start program with an enrollment of an additional 17 children. On October 23, 1991, Telamon received an amended financial assistance award reprogramming $420,221 from PY 1. In a letter to Telamon accompanying the award, ACF described these funds as unobligated "due to factors beyond the grantee's control." Telamon Ex. 8, at 1. According to Telamon, it was unable to obligate these funds--most of which were intended to purchase modular units--during PY 1 because of the difficulty in securing land, delays in the site approval, and schedule changes by the vendor. Telamon stated that the infusion of these unobligated funds was primarily responsible for its inability to meet the matching requirement in PY 2.

In letters dated March 3, 1993 and October 14, 1994, Telamon sought a waiver from ACF of the non-federal shortfall for PY 2. Telamon Exs. 16 and 17. Both letters referred to a provision of the Head Start Improvement Act of 1992 as the basis for the waiver request. In the October 17, 1994 letter, Telamon also asked ACF if the overmatch from PY 1 could be applied to the undermatch from PY 2. Telamon Ex. 17, at 3. Telamon asserted that it also intended in its letter to request application of its overmatch from a subsequent year. Telamon Reply Br. at 3; Summary of Telephone Conference, dated November 16, 1996, at 2.⁽³⁾

In a March 6, 1995 letter, ACF informed Telamon that a waiver of the non-federal match for PY 2 was not available because the cited provision of the Head Start Improvement Act was inapplicable to grants before the 1993 fiscal year. That letter also stated that using an overmatch from the prior year was not an acceptable method of satisfying Telamon's debt. In addition, the letter indicated that, while applying overmatch from a subsequent year was a possible method of debt collection, it was "authorized only as a last resort." ACF Ex. 6, at 2.

Discussion

I. Proposed adjustments to the disallowance amount.

Accepted adjustments. In its notice of appeal, Telamon noted three "minor omissions" in the documentation it had originally submitted to ACF that affected the calculation of the non-federal match:

-- an arithmetic error in the sum of the non-federal match, with the actual figure being $148,012 as opposed to $147,588, representing a difference of $424;
-- fringe benefits, amounting to $991, for volunteers serving as teacher aides and custodial and clerical support were not included; and
-- the value of the use of parents' homes was not included as an in-kind donation, as permitted by section 3.05 of the Grants Administration Manual. Telamon calculated the value of the use of the parents' homes as the average monthly mortgage or rent ($410) divided by the number of hours reported (141.25) to establish a rate of $2.90 per hour, with $2.90 multiplied by 141.12 hours to obtain a match of $410.

ACF accepted as additional non-federal match the $424 attributable to the mathematical error and the $991 related to fringe benefits. As for the value of the use of the parents' homes, ACF contended that the monthly rent should be divided by the number of hours in a 30-day month (720) to determine the hourly value ($.57) of the use of the homes. According to ACF, this rate multiplied by the number of hours (141.25) resulted in an additional $81 which was acceptable as non-federal share. Telamon did not dispute ACF's recalculation of the amount of non-federal match attributable to the use of parents' homes for home-based Head Start services.

Thus, ACF accepted additional match of $1,496 ($424 + $991 + $81).

Unaccepted adjustments. As noted above, Telamon purchased land as the site of a Head Start building in PY 1 for $34,000 and claimed that amount as non-federal match. During PY 2, the Board of Assessment in Kent County assessed the value of this land at $54,800. Telamon argued that it is permissible to use the fair market value of land at the time of its donation as non-federal match. According to Telamon, subtracting the purchase price of the land from the 1992 assessed value of the land would leave $20,800 available as non-federal match for PY 2.

ACF responded that it had initially erred in allowing the purchase price of the land to be used as non-federal match for PY 1 and that its error in doing so cannot be "grandfathered" to allow a further improper match for PY 2. Citing a regulation in effect during the relevant time period, ACF contended that only the fair rental value of land can be counted as non-federal match, provided that a third party has donated the land and only if the purchase or rental of the land would be approved as an allowable direct cost. Here, ACF pointed out, Telamon claimed the full market value of land which it had purchased itself. ACF further argued that the land could only be donated once and claimed once as non-federal share, and that Telamon chose to donate and claim the land in PY 1.

ACF is correct that the regulations in effect during the second year of Telamon's Head Start grant did not provide for a grantee to use the fair market value of donated land as non-federal match.⁽⁴⁾ Telamon nevertheless alleged that ACF knowingly allowed it to claim the fair market value of the land in PY 1 based on extraordinary circumstances. However, Telamon could not reasonably rely on this alleged action as a basis for claiming the increase in the fair market value in PY 2 since the regulation clearly limited the value for purposes of non-federal match to rental value. Even if the fair market value of donated land could be used as non-federal match, as ACF mistakenly permitted Telamon to do in PY 1, we see no basis for allowing Telamon to use the increased value of the same parcel of land as non-federal match in a later year.⁽⁵⁾ Under Telamon's theory, the same parcel of land could be used in perpetuity as non-federal match each time the value of the land received an upward assessment. Clearly, this is unreasonable. One of the purposes of requiring a grantee to contribute to the costs of a Head Start program was to demonstrate a local commitment to the success of the program. H.R. Rep. No. 763, 102nd Cong., 2nd Sess. 14 (1992). That purpose would be defeated by allowing a Head Start grantee to claim the same asset each year as all or part of its share of the program's costs. (The same reason would prevent a Head Start grantee from claiming part of the value of a donation which did not increase in value in each of two or more successive years.)⁽⁶⁾ We therefore conclude that under the applicable regulation Telamon cannot use the increased value of the parcel of land as part of its matching share for PY 2.

II. The possibility of a waiver of the non-federal matching requirement.

Telamon acknowledged that it did not provide the full non-federal share for the period in question. Telamon Br. at 2. Telamon contended, however, that consideration should be given to the following mitigating circumstances it faced during this period:

o It was a replacement grantee operating under emergency situations to salvage Kent County's Head Start program.
o There was rapid expansion during the first months of the grant.
o No suitable facilities existed at the time of the grant award; therefore, besides attempting to initiate Head Start activities, Telamon was required to locate and purchase land on which to place a Head Start center.
o Most of the costs were start-up related. Thus, staff efforts were limited to preparing for Head Start activities rather than organizing the community to generate the non-federal match.
o Since 1992, Telamon has established a track record of exceeding the match based on the groundwork laid during the initial years of the program.

Telamon argued that it has striven to provide the necessary Head Start functions in Kent County and that the disallowance will result in severe financial hardship for Telamon. Telamon noted that its commitment to the success of the Head Start program in Kent County is evidenced by the fact that in the six years it has provided services in Kent County it failed to meet the matching requirement only in the unique circumstances of PY 2, while in the other five years it exceeded the matching requirement. Telamon contended that the challenges it faced in PY 2, the expansion of its program and the need to acquire facilities to serve an increasing number of children, were known and even encouraged by ACF regional officials and that Telamon should not now be penalized for failing to meet what amounted to an unreasonable matching requirement. Telamon therefore maintained that it should have received a waiver of the matching requirement.

ACF, however, denied Telamon's 1994 request for a waiver on the basis that Telamon was ineligible for a waiver under the regulation in effect during the program year at issue. That regulation, 45 C.F.R. � 1301.21, provided that a waiver to the non-federal matching requirement may be granted to a Head Start agency if the agency submitted a written application showing that it has made a reasonable effort to meet the non-federal share requirement and is located in a county that either has a per capita income of less than $3,000 per year or has experienced a major disaster. There is no indication in the record before us, nor has Telamon argued, that either of the qualifying circumstances was present here. Therefore, on its face, ACF's denial of the waiver request was reasonable.

Telamon nevertheless argued that ACF's position on its waiver request was arbitrary and capricious, given that legislation was enacted during PY 2 that gave the Secretary much greater latitude in granting waivers of the matching requirement. Telamon referred to the Head Start Improvement Act of 1992, Public Law No. 102-401. Section 2(c) of that Act expanded the Secretary's authority to reduce the amount of the required non-federal match, setting forth the following factors which the Secretary may consider in determining whether to waive the matching requirements:

(1) the lack of resources in the community that may prevent the Head Start agency from providing all or a portion of the non-Federal contribution that may be required . . .;
(2) the impact of the cost the Head Start agency may incur in initial years it carries out such program;
(3) the impact of an unanticipated increase in the cost the Head Start agency may incur to carry out such program;
(4) whether the Head Start agency is located in a community adversely affected by a major disaster; and
(5) the impact on the community that would result if the Head Start agency ceased to carry out such program.

Telamon argued that its situation in PY 2 clearly met these criteria. As ACF advised Telamon when it denied the waiver request, however, these amendments did not apply to fiscal years beginning before October 1, 1992 (after PY 2). Section 4(b) of the Head Start Improvement Act.

Telamon faulted ACF for relying on the timing of statutory and regulatory policies as the basis for the denial of a waiver. Telamon contended that it was caught in the "lag period" between the expansion of the Head Start program in the early 1990's and the realization by ACF, recognized by the Head Start Improvement Act, that this expansion placed an overwhelming matching burden on grantees. Telamon Reply Br. at 3. Telamon argued that there was nothing in the original Head Start Act to prevent the Secretary from expanding the two narrow criteria in the regulation for waiving the nonfederal match. Telamon also argued that ACF regional officials have granted waivers of the non-federal match of start-up funds in the past and that the Migrant Branch of the Head Start Bureau has routinely waived non-federal matching requirements.

In light of ACF's failure to grant a waiver, Telamon requested the Board to "reconsider" the disallowance. Telamon asked the Board to "agree that, if ACF can request grantees to enter into ventures with known pitfalls, then the Secretary can use her discretionary authority to mitigate harsh consequences, particularly when relevant administrative decisions are inconsistent with the intent of the [Head Start] Act." Telamon Response Br. at 6. According to Telamon, the Board should grant a waiver in view of ACF's failure to exercise the discretion granted it by both the original Head Start Act and 1992 amendments and "the absence of fair, clear, and duly published policies conscientiously and uniformly applied." Id. at 7. See also Telamon submission dated 11/29/96, 7th unnumbered page.

ACF has not disputed the events cited by Telamon as contributing to Telamon's inability to meet the matching requirements.⁽⁷⁾ Nor is Telamon's dedication to the Head Start program and its commitment to the program's success at issue. But the undisputed fact is that Telamon failed to meet the matching requirement mandated by statute and regulation. The Board is bound by applicable laws and regulations (45 C.F.R. � 16.14) and does not have the authority to grant a waiver of the non-federal match. See, e.g., Seminole Nation of Oklahoma, DAB No. 1385 (1993), and Sumter County Opportunity, Inc., DAB No. 1200 (1990). By regulation, that authority is vested solely in the responsible DHHS official. 45 C.F.R. � 1301.21.

In any event, the fact that later legislation may have liberalized the criteria for granting a waiver is not relevant to the conditions that were in effect during the period in dispute unless that legislation was intended to be applied retroactively. The Head Start Improvement Act, however, specifically stated that its amendments to the waiver conditions would not apply to fiscal years beginning before October 1, 1992. Telamon therefore has no legal basis for claiming a waiver under the provisions of that legislation.

Nor has Telamon shown that ACF acted in an arbitrary or capricious manner here by denying its request for a waiver of the non-federal match. Even assuming ACF officials knew about Telamon's difficulties in providing the required non-federal match, they were not authorized to disregard the then applicable regulatory provisions governing waivers. Even if ACF waived the matching requirement for other grantees, this does not establish that ACF acted improperly in denying Telamon's waiver request since the other grantees, unlike Telamon, may have met the criteria for a waiver.

Moreover, the issue of whether Telamon is entitled to apply excess non-federal match from the current or a subsequent year to cover an undermatch is outside the scope of the Board's review. The failure of a grantee to satisfy the matching requirements results in a disallowance or a debt owed to the granting agency. Under 45 C.F.R. Part 16, the Board has jurisdiction to review disallowances issued by the component agencies of the Department of Health and Human Services. However, once the Board concludes, as here, that there is a valid debt, 45 C.F.R. Part 30 provides a separate process for the Secretary (or her designee within an operating division or regional office) to determine how the debt should be repaid.⁽⁸⁾

Nevertheless, we note that ACF acknowledged that, under the debt collection process, a grantee may be permitted to offset a debt with excess non-federal share from the current or a subsequent year. Summary of Telephone Conference, dated November 18, 1996. (Telamon argued that this mechanism was available not only as part as the debt collection process, but also as a grants management tool to prevent a grantee from incurring a debt in the first place. Even in the latter case, however, this is clearly a matter within the discretion of ACF, which is responsible for administering the Head Start program.) Although ACF counsel expressed doubt that ACF would grant Telamon this relief (asserting specifically that the circumstances under which excess non-federal share from a subsequent year could be applied were very narrow), nothing precludes Telamon from requesting formal consideration by ACF of a request for such relief.

Conclusion

For the reasons discussed above, we sustain the disallowance in the reduced amount of $56,268.

M. Terry Johnson

Norval D. (John) Settle

Cecilia Sparks Ford
Presiding Board Member

1. To calculate the original disallowance amount, ACF subtracted the $147,588 non-federal match reported by Telamon from 20% of the $1,025,263 actual total program cost for PY 2 (which consisted of $877,675 charged to federal funds plus the $147,588 non-federal match). Telamon Ex. 1, at 1. The $147,588 non-federal match was increased by $1,496 to calculate the revised disallowance.

2. Unless otherwise noted, citations are to regulations in effect during the relevant time period.

3. As noted previously, Telamon had excess non-federal match of $10,932 from PY 1. Telamon also had substantial excess non-federal match in PY 3, PY 4, PY 5, and PY 6. See Telamon Br. at 10.

4. The provision cited by ACF, 45 C.F.R. � 74.56, has since been redesignated and amended. Current regulations do allow a Head Start grantee, with approval from the awarding agency, to claim the value of property donated by the grantee as a non-federal match based on the property's fair market value at the time of the donation. 45 C.F.R. �� 74.23(c), (h)(1) (1994). ACF nevertheless asserted that these regulations imply that property may only be donated once and claimed once as non-federal share.

5. ACF questioned whether the value assigned by the Board of Assessment for tax purposes accurately reflected the fair market value of the property. The regulation then in effect permitted the granting agency to require that the value of donated land be established by an independent certified property appraiser or a representative of the General Services Administration. 45 C.F.R. � 74.57. In the absence of such an appraisal, ACF accepted the actual purchase price of the land as its value in PY 1.

6. While Telamon argued that matching share can now be provided on a multi-year basis for Head Start grants, Telamon did not cite any authority for this proposition.

7. Telamon originally requested a hearing in this appeal. In its reply brief, however, Telamon left the decision as to whether to hold a hearing to the Board's discretion. As there are no material issues of fact in dispute, we have determined that a hearing is not necessary to decide this appeal.

8. In 1990, ACF's predecessor, the Office of Human Development Services, adopted a procedure which calls for an initial decision by the Regional Administrator regarding whether there is justification for a grantee to use overmatch to satisfy a disallowance due to inadequate non-federal share, with the final decision to be made by the Division of Grants and Contracts Management. See ACF Ex. 11.