SUBJECT: Vermont Slauson Economic Development Corporation

DECISION

The Vermont Slauson Economic Development Corporation (VSEDC) appealed a determination by the Administration for Children and Families (ACF) disallowing $89,581 in federal grant funds awarded to VSEDC by the Office of Community Services (OCS) for the period September 1995 through September 2000. The disallowance was based on ACF's conclusion that VSEDC failed to adequately document personnel costs claimed under the grant.

For the reasons discussed below, we sustain the disallowance because we conclude that VSEDC did not adequately document the claimed costs.

Statutory and Regulatory Background

The grant at issue was awarded by OCS to VSEDC pursuant to then section 681(a)(1) and (b) of the Community Services Block Grant (CSBG) Act, 42 U.S.C. � 9910(a)(1) and (b)(1995). ⁽¹⁾ Section 681 authorized the Secretary to make grants to nonprofit organizations for community economic development activities in economically distressed areas.

Part 74 of 45 C.F.R. sets forth uniform administrative requirements for grants made to various types of entities, including nonprofit organizations such as VSEDC. The provisions of 45 C.F.R. Part 74 apply to this grant. 45 C.F.R. � 74.1(a)(1); ACF Ex. 3, at 4. Section 74.21(b)(2) requires grantee records to identify adequately the source and application of funds. Section 74.27(a) provides that the allowability of costs incurred by nonprofit organizations is determined in accordance with Office of Management and Budget (OMB) Circular A-122.

OMB Circular A-122 provides a uniform set of cost principles for determining costs of grants to nonprofit grantees. OMB Circular A-122, Attachment (Att.) A, � A.2 requires that, to be allowable under an award, a cost must be reasonable for the performance of the award, allocable to the award, and adequately documented.

OMB Circular A-122, Att. B.4.a. defines "allocable costs," in part, as follows: "A cost is allocable to a particular cost objective, such as a grant . . . in accordance with the relative benefits received." Thus, a cost may benefit several cost objectives and may only be allocated to the federal cost objective in accordance with the relative benefits received by the federal cost objective.

OMB Circular A-122 sets forth documentation standards, specifically Attachment B, � 7.m describes how charges for salaries and wages should be documented.

Factual Background

VSEDC is a private, nonprofit, tax-exempt corporation located in South Central Los Angeles, California. OCS awarded VSEDC a CSBG grant for the period September 1995 through September 1998. In its grant application, VSEDC stated that the objective of the grant was to develop "a 55,000 square foot commercial building in South Central LA (Empowerment Zone) for use as a retail store and small business incubator operated by VSEDC that will provide 112 permanent jobs." ACF Ex. 2, at 5. VSEDC proposed to accomplish this through a joint venture with a landowner of a specific parcel of property in the South Central area. The first two floors of the new building were to be used by the landowner as a retail furniture and appliance store. The third floor was to be used by VSEDC as a "business incubator" for new business ventures. Id. at 5, 17.

In its first program progress report, for the period September, 1995 through March, 1996, VSEDC stated that it was having difficulty in negotiations with the landowner because the price and terms of the land sale had changed. VSEDC Ex. H, at 1. This problem continued and, in the program progress report for October, 1996 through March, 1997, VSEDC indicated that it was related to the landowner's concerns about the planned retail furniture and appliance store. Id. at 3. The following progress report states that VSEDC consequently began researching the possibility of using some of the space for franchise restaurant operations, and indicated that the landowner was interested in this strategy. Id. at 4. Indeed, this alternate strategy was apparently so attractive to the landowner that, in the program progress report for April to September, 1998, VSEDC stated that the landowner had determined to pursue this strategy without VSEDC. In that same report, VSEDC indicated that it intended to find a new joint venture partner to pursue a development project. Id. at 6. Significantly, VSEDC indicated that "[w]e have not drawn on any of funds to date, because we want to apply these funds toward land acquisition. We have used other funds thus far to finance pre-development costs." Toward the end of September, 1998, VSEDC requested and was granted a 12-month no-cost extension of the grant. ACF Exs. 9, 10. A second no-cost extension through September 2000 was subsequently approved by ACF. ACF Ex. 11. VSEDC never acquired a site for the project. VSEDC charged $89,581 in personnel costs to the grant.

In July 2001, the Office of the Inspector General began an audit of the grant. The auditors found that VSEDC did not accomplish the goals of the grant, did not adequately manage grant funds, and failed to adequately document costs claimed for personnel. VSEDC Ex. C at 1. Based on the audit, ACF disallowed $89,581 claimed for personnel costs on the ground that the costs were inadequately documented. VSEDC Ex. 5.

Discussion

As noted earlier, OMB Circular A-122 provides that, to be allowable, a cost must be reasonable for the performance of the award, allocable to the award, and adequately documented.

The grantee bears the burden of adequately documenting the allowability, including allocability, of costs charged to federal grants. 45 C.F.R. �� 74.21(b)(7), 74.27(a); OMB Circular A-122, Att. A, � A.2.g; Delta Foundation, Inc., DAB No. 1710, at 29 (1999), aff'd 303 F.3d 551, 568-570 (5^th Cir. 2002); Action for Youth Christian Council, Inc., DAB No. 1651, at 8 (1998) and cases cited therein; Mexican American Unity Council, DAB No. 1341, at 13 (1992), aff'd United States v. Mexican American Unity Council, No. 5A-95-CA0320 (W.D. Tex. June 25, 1996).

OMB Circular A-122 sets out specific requirements for the documentation of salaries and related expenses:

(1) Charges to awards for salaries and wages . . . will be based on documented payrolls approved by a responsible official(s) of the organization. The distribution of salaries and wages to awards must be supported by personnel activity reports as prescribed in subparagraph (2) below . . .

(2) Reports reflecting the distribution of activity of each employee must be maintained for all staff members (professionals and nonprofessionals) whose compensation is charged, in whole or in part, directly to awards. . . . Reports maintained by nonprofit organizations to satisfy these requirements must meet the following standards:

(a) The reports must reflect an after-the-fact determination of actual activity of each employee. Budget estimates (i.e., estimates determined before the services are performed) do not qualify as support for charges to awards.

(b) Each report must account for the total activity for which employees are compensated and which is required in fulfillment of their obligations to the organization.

(c) The reports must be signed by the individual employee, or by a responsible supervisory official having first hand knowledge of the activities performed by the employee, that the distribution of activity represents a reasonable estimate of the actual work performed by the employee during the periods covered by the reports.

(d) The reports must be prepared at least monthly and must coincide with one or more pay periods.

OMB Circular A-122, Att. B, � 7.m. ⁽²⁾

VSEDC acknowledges in its submissions on appeal that it does not have monthly documentation which satisfies these requirements. VSEDC Br. at 4; Reply Br. at 1. It argues, however, that the records it does have constitute adequate documentation. VSEDC states that it provided the auditors with "quarterly reports evidencing that personnel time spent on the Project did in fact amount to $89,581." VSEDC Br. at 4. It further states that it attached the quarterly reports as Exhibit G and had "daily time records which support the allocations shown on the quarterly reports." Id. at n.8.

VSEDC's wage documentation consists of a cover sheet and nine quarterly reports (the cover sheet presumably summarizes data from the quarterly reports). VSEDC G. We conclude that this documentation is not adequate for a number of reasons.

• First, VSEDC does not explain, in briefing or exhibits, how the documentation at VSEDC Exhibit G justifies its claim for $89,581. The quarterly report form and entries thereon are not self explanatory, the entries on the forms that are ostensibly related to an OCS project do not support the amount of the claim, and we cannot determine the relationship between the entries on the quarterly reports and entries on VSEDC's cover sheet in which it concludes that $89,581 should be allocated to this grant. ⁽³⁾
  
  
• Second, VSEDC employees never separately recorded time spent on the OCS grant. The audit report states that "the quarterly allocation schedules contained percentages of time spent by employees on various programs and functions, but the schedules did not include the OCS grant." VSEDC Ex. C at Audit Report at 8. Rather, the auditors state that they were told "time worked . . . on the OCS grant was included in the allocation percentages for the management and general account." Id. OMB A-122 requires personnel reports to capture the "actual activity of each employee." Reporting time spent on the OCS grant in a "Management & General" category with other activities fails to capture the actual activity of an employee in a manner which allows it to be allocated to a specific grant. ⁽⁴⁾



• Third, while VSEDC represented that its quarterly reports were based on available daily time reports, it did not submit any such daily reports to the Board or, apparently, to the auditors. Its allegation about the content of daily reports is unsupported by the record. Further, if, as the audit states, OCS grant time was reported as part of management and general activities, these daily reports would not provide the sort of detail necessary to satisfy OMB Circular A-122, Attachment B, � 7.m. ⁽⁵⁾



• Fourth, VSEDC has not shown that its quarterly reports reflect expenditures consistent with the representations made in its grant application and Program Progress Report to OCS for the period ending September 30, 1998. In the grant application, VSEDC represented that it had a project design (including a site, complementary financing, and type of building), and would be using OCS grant funds for construction costs (termed hard and soft costs). ACF Ex. 2. The quarterly reports contain insufficient information about the activities performed to document that they represent activities described in the grant application. As important, in the Program Progress Report for the period ending September 30, 1998, VSEDC represented that: "We have not drawn on any of funds to date, because we want to apply these funds towards the land acquisition. We have used other funds thus far to finance pre-development costs." VSEDC Ex. H at 6. In light of this representation that VSEDC had not used grant funds for the project before September 1998, the quarterly reports for the time period April 1996 through June 1998, which were relied on by VSEDC in this case as proof of its allowable expenditures, do not support its claim.
  

Therefore, the wage documentation VSEDC offered is inadequate to support the allocation of $89,581 to this grant.

VSEDC relies on other exhibits, such as Program Progress Reports to OCS, an undated feasibility study and an undated market analysis, as evidence of its work pursuant to the grant. VSEDC Br. at 5, citing VSEDC Exs. H, I, J. These documents are inadequate. First, they are in no way comparable to the documents required by OMB Circular A-122, Attachment B, � 7.m. Second, they provide no measures by which to calculate allowable personnel costs or allocate them to this grant.

VSEDC argues that this was its first OCS grant that allowed reimbursement for personnel costs and it was therefore unfamiliar with the "technical reporting requirements for recording personnel time." VSEDC Br. at 4. This argument is unavailing. First, a grantee should be aware of the federal cost principles applicable to its grants. Second, OCS specifically informed VSEDC in the notice of grant award that the grant was subject to 45 C.F.R. Part 74. ACF Ex. 3, at 3; see also ACF Ex. 1, at 40. Third, VSEDC failed to produce documents that provided any means of reasonably allocating allowable personnel costs to this grant. And, fourth, VSEDC's documents were not defective merely on technical grounds, but did not document expenditures that were consistent with the grant application and progress reports filed by VSED. Therefore, VSEDC not only failed to meet the "technical reporting requirements" of OMB Circular A-122, but also failed to produce any credible documentation supporting its personnel costs.

VSEDC makes a number of assertions about why "justice and fairness should allow [it] to retain the disputed funds." VSEDC Br. at 5. It represents that it worked hard to bring this project to fruition; that this is its first "non-compliance issue with a grant" in its 20-year history; that it has brought "innumerable benefits" to the Vermont Slauson community and "grown from a small grassroots neighborhood organization to a well-known and highly regarded community institution with a proven track record of success"; and that repayment of the disallowance would cause financial strain and diminish its ability to "continue its development of the Vermont Slauson Community." Id. at 5-6; see also VSEDC Reply Br. at 1-2.

Assuming all of these representations to be true does not alter the requirement that grantees adequately document costs according to federal cost principles. Under the provisions of OMB Circular A-122, Attachment B, � 7.m, VSEDC was required to supply documentation which reflected "the distribution of activity of each employee" and "account for the total activity for which employees are compensated." By any measure, it failed to do this.

In its Reply Brief, VSEDC argues that "the difficulties encountered by Appellant in executing its development project should not penalize Appellant in this proceeding." VSEDC Reply Br. at 2. VSEDC is not being penalized for the difficulties it encountered. The disallowance is based on VSEDC's lack of documentation as to personnel costs allocable to this grant, not for its failure to successfully complete the project for which it was funded. ⁽⁶⁾

VSEDC also argues in its Reply Brief that it was at least entitled to retain the $30,000 approved in its initial budget for personnel and fringe benefits. ACF Ex. 3, at 3. It asserts:

VSEDC's documentation clearly demonstrates the expenditure of funds far in excess of the budgeted amount for personnel costs and fringe benefits directly related to the project. At a minimum, the government should not disallow the funds that were reflected in the approved budget and clearly were spent in furtherance of the project.

VSEDC Reply Br. at 2.

This argument is not persuasive. As discussed above, there is no credible documentation in the record as to any amounts that VSEDC actually spent for personnel in furtherance of the OCS grant. While it is reasonable to assume that VSEDC did incur personnel costs in furtherance of this project, 45 C.F.R. � 74.21(b)(2) requires those costs to be documented. Here VSEDC neither documented its personnel costs in accordance with OMB Circular A-122 nor provided documentation of its costs that would enable the Board to calculate reimbursement on some basis comparable to that required by OMB Circular A-122.

Conclusion

For the reasons discussed above, we sustain the disallowance.

Judith A. Ballard

Donald F. Garrett

Daniel Aibel
Presiding Board Member

1. The CSBG Act was substantially revised by the Communities Opportunities, Accountability, and Training and Educational Services Act of 1998, P.L. 105-285. The Secretary's discretionary authority under the CSBG is now set forth under section 680 of the Act, 42 U.S.C. � 9921.

2. OMB Circular A-122 was revised in 1998. 63 Fed. Reg. 29,794 (June 1, 1998). The paragraph quoted above previously appeared at Attachment B, � 6.l.

3. The summary sheet lists salaries and the percent of time employees spent on the OCS grant. It is undated and was apparently prepared for the auditors or for this litigation. It is based on forms titled "VSEDC Function Allocation Schedule for the Month Ended __________." While the forms are titled "monthly," VSEDC represents they were actually quarterly reports. VSEDC Br. at 4. There are nine reports covering the quarters ending June 1998, March 1998, December 1997, September 1997, June 1997, March 1997, December 1996, September 1996, and June 1996.

The quarterly reports list "Functions," many of which are acronyms, down the left margin. People's names and "%" are listed across the top margin. Handwritten numbers are entered in the intersecting grids indicating the percent of time that quarter that person worked on that project.

The only function acronym which corresponds in any way to the grant at issue is under "Project Development" as "BEC - OCS." This function does not appear to be related to this grant because there are not sufficient entries posted to the function to support the representations made on the summary sheet. The total time reported to this function on the quarterly reports is 5 percent for one employee for three quarters. However, on the summary sheet, VSEDC represents four employees devoted 20 percent over four quarters to the grant before us, one employee devoted 10 percent over four quarters and one employee devoted 10 percent over two quarters.

4. A comparison of the cover sheet summarizing the quarterly reports with the quarterly reports shows how VSEDC's conclusions in the cover sheet cannot be derived from simply reviewing the quarterly reports. For example, on the cover sheet, the Executive Director is reported to have devoted 20 percent of her time over an unspecified 12-month period to this grant. On the quarterly reports, which cover a 27-month period, the Executive Director reported 10 percent of her time to "Management & General" in 6 quarters, 15 percent in two quarters, and 25 percent in one quarter. How these numbers translate to the results on the cover sheet is undeterminable because, at a minimum, the time was not separately captured.

5. The absence of VSEDC daily time reports in the record supports the inference that, even if there were any such daily reports, they did not separately allocate time to the OCS grant.

6. Even if we were to find that the personnel costs were adequately documented, the costs would not necessarily be allowable. For example, the audit raises questions as to whether VSEDC's activities were within the scope of the grant because VSEDC had not obtained proper approval of changes it made to the grant objectives. VSEDC C at Audit at 3. The grant award was made for hard and soft construction costs incurred for a particular project described in the grant application. That project was terminated because the joint venture partner withdrew. While it is apparent that, during this time and after, VSEDC, as a economic development corporation, continued to try to foster commercial development in South Central Los Angeles, it is not clear which of these activities would be considered "reasonable for the performance" of the award OCS made in 1995 and extended in 1998.