1997.12.15 DAB1639 South Plains Community Action Agency v. Administration for Children and Families (ACF)

Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division

DATE: December 15, 1997

SUBJECT: South Plains Community Action Agency

Docket Nos. A-97-111 and A-97-131
Control No. A-06-96-0062
Decision No. 1639

DECISION

South Plains Community Action Agency, Inc. (SPCAA) appealed two determinations by the Administration for Children and Families (ACF) disallowing a total of $297,677 charged to SPCAA's annual Head Start grants for the period March 1, 1992 through February 28, 1996. While the appeals were pending before the Board, SPCAA repaid several disallowance items, leaving $246,243 in dispute. See SPCAA letter dated August 4, 1997, at 1, n.1. The remaining disallowed items consisted of salaries of administrative staff which were charged directly to the personnel class category in SPCAA's approved Head Start budget. ACF disallowed most of the salary costs in question solely because they exceeded the amounts budgeted each year for personnel. ACF also determined that some of the salary costs were not necessary and reasonable. In the case of one employee, ACF found that salary costs were improperly charged to SPCAA's Head Start grant rather than another grant.

As discussed in detail below, we conclude that ACF did not have an adequate basis for disallowing any of the salary costs in question, with the possible exception of one item in the amount of $1,537, as to which we remand the appeal to ACF. ACF's position that salary costs in excess of the amount budgeted for personnel were unallowable reflects a fundamental misunderstanding of the nature of grant funding. Where there is no specific prior approval requirement, a grantee has flexibility to shift costs among budget categories (as long as such shifts do not result in underfunding of critical program activities). ACF's position here is an example of what the Board long ago observed to be "an unfortunate tendency toward excessive requirement of advance approvals . . . not supported by statutory or regulatory provision." Point Park College Pittsburgh, Pennsylvania, Decision No. 16 (1976).

Moreover, the other bases for ACF's disallowance of the salary costs also have no merit, except possibly in the case of one item. Accordingly, we reverse the remaining disallowance in the amount of $244,706 and remand the disallowance in the amount of $1,537. Below, we discuss each of the disallowed salary costs separately.

$59,742 in salary costs paid to construction representative

At issue are $59,742 in salary costs paid to J. G., an SPCAA employee, from February 23, 1994 to March 8, 1995. ACF Follow-Up Review Report, Att. C. Effective February 11, 1994, J.G. was designated as SPCAA's representative to oversee the renovation of a Head Start facility, known as the SHAPES Teaching Academy. SPCAA letter dated 8/4/97, Ex. C. J.G.'s duties were described as providing "liaison" between SPCAA and the contractor "with regard to technical aspects of the project," and "interfac[ing]" with "the architect/engineer on the project." Id. Documentation provided by SPCAA established that J.G. provided oversight of the project on a daily basis, noting the progress being made and dealing with such problems as the removal of a fuel tank discovered on the construction site. Id., Ex. B. He also signed invoices and change orders and conducted an internal audit of all contract items and costs. Id.

ACF disallowed J.G.'s salary costs on the ground that the approved Head

The applicable regulations regarding budget revisions, at 45 C.F.R.

ACF pointed out that the budget submitted by SPCAA with the grant application for

Furthermore, we are not persuaded that the costs were unreasonable, as alleged by

In support of its contention that SPCAA had a contract with Webb for oversight of

ACF also argued that it was unnecessary for SPCAA to pay J.G. to oversee the ACF also took the position that, even if there were no other provisions for oversight

$14,424 in salary costs paid to Director of Early Childhood Education

At issue are $14,424 in salary costs paid to A. D., the SPCAA Director of Early

$8,050 in salary costs paid to maintenance worker

At issue are $8,500 in salary costs paid to L. P. from April 8, 1992 to January 4,

As discussed above, the Head Start regulations provide that an agency may require

We further find that there was no conflict of interest or code of conduct violation

In any event, this provision would provide a basis for disallowing only payments

As noted previously, ACF also asserted that the costs in question were unallowable

The Board also raised the question whether it was reasonable for SPCAA to pay L.P.

$162,490 in salary costs paid to Executive Director, Finance Officer, and maintenance/custodian staff

At issue are $162,490 in salary costs paid to SPCAA's Executive Director, Finance

$1,537 in salary costs paid to Administrative Assistant

At issue are $1,537 in salary costs paid to P. M., an Administrative Assistant at the

We find that the documentation in question establishes that SPCAA repaid the Head

ACF also argued, however, that the matter could not be resolved by crediting the

Conclusion

For the foregoing reasons, we reverse the remaining disallowance in the amount of

____________________________
Cecilia Sparks Ford

____________________________
Norval D. (John) Settle

____________________________
M. Terry Johnson
Presiding Board Member Start budget did not include these costs and that SPCAA did not obtain prior approval to revise its budget. As an additional basis for the disallowance, ACF found that J.G.'s services were neither reasonable nor allocable to the Head Start grant. We find that the disallowance was not warranted on any of these grounds, however. . 74.25, specify the circumstances under which a grantee must obtain prior approval for a budget revision. If none of the specified circumstances are present, a grantee may transfer amounts in an approved budget from one category of cost to another. ACF did not identify any provision in the regulations which would have required SPCAA to seek ACF's approval before incurring the salary costs in question here. Instead, ACF argued that, under the applicable regulations, any costs not included in a grantee's approved budget require Agency approval prior to being incurred. ACF relied on the statement in 45 C.F.R. . 74.25(b) that "[r]ecipients are required to report deviations from budget and program plans, and request prior approvals for budget and program plan revisions, in accordance with this section." However, ACF ignored the following sentence, which states that "[e]xcept as provided at .. 74.4 [deviations for classes of awards or recipients], 74.14 [special award conditions], and this section, HHS awarding agencies may not impose other prior approval requirements for specific items." Reading this provision as a whole, it is plain that the rule is that prior approvals are generally not required, and that any prior approval requirement must be expressly imposed, by regulation or by a specific term or condition of the grant. each year in question identified the administrative salary costs by name, title, or function of the individual to whom payment was to be made. ACF Follow-Up Review Report, at 12; ACF Br. dated 9/22/97, Ex. 1, at 3. However, ACF did not identify any authority which required SPCAA to obtain prior approval to charge salary costs that exceeded or differed from those specifically itemized in the budget. ACF. The cost principles for non-profit organizations at Office of Management and Budget (OMB) Circular A-122, Att. A, .A (made applicable to Head Start grants by 45 C.F.R. . 74.174, now . 74.27) provide that, in order to be allowable, a cost must be reasonable, i.e., of the type generally recognized as ordinary and necessary for the operation or performance of the grant award. ACF contended that J.G.'s services were not necessary because the construction firm under contract to do the renovations, Pharr Construction, had an oversight function built into its contract and SPCAA also contracted with another construction firm, Webb Construction, for oversight of the renovation project. ACF failed to substantiate these contentions, however. ACF submitted a Substantial Completion form signed by Pharr's president on October 26, 1994. ACF letter dated 11/7/97, Ex. 3, 2nd page. This form merely certifies that Pharr reviewed the work performed under its contract and found it to be substantially complete, and does not indicate that Pharr was responsible for oversight while the work was ongoing. Moreover, even if Pharr's contract did contain an oversight provision, we agree with SPCAA that a contractor cannot reasonably be expected to oversee its own work, particularly a large construction project such as the one involved here. SPCAA need not have established that Pharr was either inexperienced or incompetent to justify employing an objective third party to oversee its work. the renovation project, ACF relied principally on the statement in the audit report to this effect. See 11/12/97 Confirmation of Telephone Conference at 2. However, this statement is not probative of the existence of such a contract, which SPCAA denied existed. In addition, the documentation provided by ACF which shows that SPCAA had contracts with Webb for management of other construction projects does not prove that SPCAA had such a contract in this instance. Finally, documentation supplied by SPCAA at ACF's request shows that Webb itself contracted to perform additional renovations while J.G. was still being paid to oversee the renovations (after Pharr certified its completion of the project in October 1994). See 11/5/97 SPCAA letter at Atts. A-E. This lends further support to SPCAA's contention that Webb was not an independent entity capable of overseeing the project. renovation project since plans for the renovation were drawn up by an architect, who could be considered an independent third party. However, ACF did not point to anything which indicated that the architect had any involvement with the renovation after drawing up the plans.

of the renovation, the services provided by J.G. did not benefit the Head Start grant but only benefitted SPCAA. OMB Circular A-122, Att. A, .A, requires that, in order to be allowable, a cost must be allocable to the grant, i.e., of benefit to the grant. However, ACF did not establish that J.G.'s services were not of benefit to the Head Start grant. The fact, noted by ACF, that SPCAA owned the building which was being renovated, is not dispositive since the purpose of the renovations was to make the building suitable for use by the Head Start program, not for SPCAA's operations generally. Moreover, the fact, also noted by ACF, that J.G. was an employee of SPCAA, does not mean that his salary could not properly be paid from the Head Start grant for the period of time he performed services that benefitted Head Start. ACF also noted that the Head Start program paid rent for use of the building in addition to paying for the renovations of the building. However, there is no evidence that the other costs paid by Head Start were intended to cover the oversight services provided by J.G. The fact that Head Start paid for related expenditures is not a basis for disallowing expenditures which were otherwise allowable; in fact, it furnishes further evidence that ACF regarded the Head Start program as benefiting from renovations to this building. Childhood Education, from June 28, 1995 to February 21, 1996. ACF disallowed the salary costs on the ground that the approved Head Start budget did not include these costs and that SPCAA failed to obtain prior approval to revise its budget. ACF relied specifically on the requirements for prior approval where there is a change in the scope or objective of the project or program (45 C.F.R. . 74.25(c)(1)) or where there is a need for additional federal funding (45 C.F.R. . 74.25(c)(4)). However, ACF did not explain how the additional salary costs in question here resulted from a change in the scope or objective of SPCAA's Head Start program. In addition, there is nothing in the record which indicates that SPCAA charged to its Head Start grant costs in excess of the approved award amount for the year in which these salary costs were incurred (or any year in which disallowed costs were incurred). As discussed above, the Head Start regulations provide that an Agency may require prior approval of only those costs specified in the regulations, and otherwise permit transfers of amounts in an approved budget from one category of cost to another. Accordingly, the disallowance of these costs is unwarranted. 1996. L.P. was employed by SPCAA as an air conditioning and heating maintenance systems worker, and was also paid by SPCAA for repairs to the air conditioning and heating systems on an as needed basis. The record showed that L.P. maintained these systems in all of SPCAA's buildings, and that the charges at issue here were for Head Start's allocable share of his salary. ACF disallowed the salary costs on the ground that the approved Head Start budget did not include these costs and that SPCAA failed to obtain prior approval to revise its budget. As an additional ground for the disallowance, ACF alleged that the repair work was performed by L.P. in violation of the conflict of interest provisions at 45 C.F.R. . 74.42 as well as the code of conduct in SPCAA's personnel policies. prior approval of only those costs specified in the regulations, and otherwise permit transfers of amounts in an approved budget from one category of cost to another. ACF did not identify any provision in the regulations which would have required SPCAA to seek ACF's approval before incurring the salary costs in question here. Accordingly, we find that the disallowance was unwarranted on this basis. which would render the salary costs unallowable. Section 74.42 of 45 C.F.R. provides in pertinent part that "[n]o employee, officer, or agent shall participate in the selection, award, or administration of a contract supported by Federal funds if a real or apparent conflict of interest would be involved. Such a conflict would arise when the employee, officer, or agent . . . has a financial or other interest in the firm selected for an award." (There was a comparable provision in the regulations in effect prior to March 1, 1995 at 45 C.F.R. Part 74, Appendix H ("Procurement Standards" from OMB Circular A-110), .3.a.) ACF contended that there was a violation of this provision because, as an employee, L.P. was in a position to determine when the air conditioning and heating systems needed repairs and he was then paid to perform the repairs. We conclude that this situation did not involve a conflict of interest within the meaning of the regulations, however, since ACF did not establish that L.P. either awarded the repair contract to himself or administered the contract. made to L.P. for repairs made under the contract, not L.P.'s regular salary for routine maintenance of the systems. It is clear from the record that the $8,500 disallowed consisted of salary payments. The audit workpapers show that the disallowance was based on SPCAA's payroll records showing payments to L.P. of $175 per month (Head Start's share of monthly payments of $500). ACF letter dated 11/17/97, Ex. 4. Although SPCAA itself represented that L.P. was technically only a contractor and that SPCAA ran these monthly payments through its payroll just for convenience, the record shows that SPCAA paid the employer's share of F.I.C.A. (Federal Insurance Contributions Act) payments on the amounts shown in its payroll as paid to L.P. and deducted the employee's share of F.I.C.A. payments from those amounts. SPCAA letter dated 11/17/97, attached Declaration, .5. Accordingly, ACF improperly disallowed the salary payments based on a provision which applied instead to payments under contract awards involving a conflict of interest. because SPCAA violated the provisions in its personnel policies on outside employment, which stated in pertinent part that "[b]ecause of the possibility of conflicts of interest, employees are not allowed to work for any other organization or engage in business for themselves without the express written permission of the Executive Director." ACF letter dated 11/7/97, Ex. 5, at 21. SPCAA maintained, however, that this provision was inapplicable because it applied only to full-time employees and L.P. worked part-time. ACF did not dispute that the provision applied only to full-time employees. Since SPCAA documented that L.P. was a part-time employee (see SPCAA letter dated 11/17/97, at 2, citing 8/4/97 letter, Ex. E), this provision was not a proper basis for disallowing the costs in question. both a monthly salary for air conditioning and heating systems maintenance and labor costs for air conditioning and heating system repairs on an as needed basis. Letter to parties dated 10/22/97, enclosure. SPCAA responded that L.P. was paid a relatively small amount for routine maintenance of air conditioning and heating systems in a large number of Head Start facilities and that it was reasonable to pay him additional amounts for any necessary repairs to those systems. We agree. The monthly maintenance fee of $175 appears to be relatively modest given the fact reported by SPCAA's auditors that SPCAA operated a Head Start program in 19 counties. Moreover, ACF provided copies of only five invoices for repairs performed by L.P. for the period September 1995 through January 1996, totaling only $660. ACF letter dated 11/7/97, Ex. 4. While ACF asserted in response to the Board's question that the payments to L.P. were unreasonable and unnecessary, it did not explain the basis for its assertion. Consequently, we conclude that there is no basis in this record for this part of the disallowance. Officer, and maintenance/custodian staff for the period March 1992 through February 1996. ACF considered the amounts paid for these positions over a four-year period as a single disallowance item. The sole reason for the disallowance stated by ACF was that the approved Head Start budget did not include these costs and that SPCAA did not obtain prior approval to revise its budget. As discussed above, the Head Start regulations provide that an agency may require prior approval of only those costs specified in the regulations, and otherwise permit transfers of amounts in an approved budget from one category of cost to another. ACF did not identify any provision in the regulations which would have required SPCAA to seek the Agency's approval before incurring the salary costs in question here. Accordingly, we find that the disallowance was unwarranted on this basis. Teaching Academy, for the pay periods ending December 26, 1996 and January 10, 1997. ACF disallowed these costs on the ground that they were charged to the wrong grant. SPCAA did not dispute that the costs were erroneously charged to the Head Start grant rather than the Teaching Academy grant (and in fact charged all of P.M.'s later salary costs to the Teaching Academy grant). However, SPCAA contended that it had repaid this amount to the Head Start account. ACF nevertheless questioned whether the documentation provided by SPCAA established that SPCAA had repaid the Head Start account for the grant year to which the costs were originally charged (1996). ACF stated that SPCAA could not repay the Head Start account by crediting the amount in question to the Head Start account for the following grant year. Start account for the correct grant year (1996). The documentation shows that in March 1997 SPCAA credited $1,537.60 to account "3326400," the account for Head Start wages. SPCAA letter dated 11/17/97, attached Declaration, Atts. 1 and 2. (That same document shows a credit of $453.44 to account "3326445," the account for Head Start fringe benefits.) Furthermore, the documentation shows that account codes beginning with 3326 were for the 1996 grant year. Id., attached Declaration at para. 2 and Att. 1. Head Start account for the 1996 grant year after the end of that year, and that SPCAA should have instead refunded the amount in question directly to ACF as unobligated funds. While it is true that the regulations at 45 C.F.R. . 74.71(d) require the prompt refund of any balances of unobligated cash that are not authorized to be retained for use in other projects, it is not clear that SPCAA has not complied with this requirement. The regulations also require that a grantee submit its financial status report no later than 90 calendar days after the end of the reporting period. 45 C.F.R. . 74.52(a)(1)(iv). Since SPCAA's 1996 grant year ended February 28, 1997 and the amount in question was credited to SPCAA's Head Start account in March 1997, SPCAA may have accounted for the amount in question in its final financial status report for the 1996 grant year. Accordingly, we remand the appeal as to this issue to ACF. If ACF determines that SPCAA has not accounted for the amount in question, ACF may require SPCAA to refund it. SPCAA may appeal any written demand by ACF for a refund pursuant to 45 C.F.R. Part 16 if there is any further dispute as to this matter. $244,706 and remand it in the amount of $1,537.