GAB Decision 239
December 16, 1981 Central New York Health Systems Agency, Inc.; Docket
No. 80-148 Ford, Cecilia; Settle, Norval Garrett, Donald
Central New York Health Systems Agency, Inc. (Grantee) appealed a
decision of the Public Health Service (PHS) Grant Appeals Board,
disallowing a portion of a $6,250 charge to Grant No. 02-P-000124-04.
The cost disallowed represents part of an annuity paid to Grantee's
Interim Executive Director. For reasons discussed below, we reverse the
disallowance.
This decision is based on Grantee's Application for Review, the PHS
response, relevant documents submitted by both parties, our Order to
Show Cause issued September 9, 1981 and the parties' response to that
Order. Grantee's response to the Order included a request for an
evidentiary hearing on the issue of reasonableness. Since, as we
discuss more fully below, Grantee has persuasively demonstrated the
reasonableness of the annuity, we have determined that a hearing is
unnecessary.
Background
Grantee is a Health Systems Agency (HSA) founded in 1976 pursuant to
P.L. 93-641 and funded under 42 CFR Part 51, Subpart B. When Grantee's
original Executive Director resigned, Grantee appointed its former
President as Interim Executive Director for a six month period at a
salary of $25,000 plus an annuity equal to 25% of that figure (or
$6,250). The PHS Regional Office (Region II) was notified of the
appointment, but was not informed of the specific terms of employment.
Region II issued a notice of disallowance on May 7, 1980, which
stated the following:
(It) has been our responsibility to insure uniform application of
fringe benefits to all employees within an agency. In addition we also
consider reasonableness of cost, a basic concept in the Cost Principles
of 45 CFR Part 74. In this circumstance, a retirement annuity of 25% of
salary is considered unreasonable and not uniformly applied within the
HSA.
(2) Grantee was directed to make the appropriate adjustments to bring
the annuity in line with that given to other employees, 11.2% of salary.
Grantee appealed to PHS, arguing that the annuity was reasonable,
because while the controlling regulation required an equal award of
benefits to employees in similar positions, the position of Executive
Director was unique, so there was no basis for comparison between his
annuity and that of other employees. Grantee further noted that the
Interim Director had enjoyed a high annuity in his previous position
(Department Head, S.U.N.Y./Morrisville) and his professional life would
likely be disrupted by the transition in jobs. Grantee argued that its
need for capable interim leadership, and consideration for the sacrifice
the Interim Director was making in accepting the position, justified the
annuity. Grantee also asserted that the Applicable regulations did not
require prior approval from Region II in order to provide the annuity.
PHS upheld the disallowance, noting that its Grants Policy Statement
allowed the employer's share of an annuity to be charged as a direct
cost to a grant only to the extent such payment was made under formally
established and consistently applied institutional policies (PHS Grants
Policy Statement, 1976, p. 19; PHS Decision, p. 3). PHS observed that
Grantee had no policy which provided a higher annuity for temporary
employees. PHS recognized the fact that Grantee claimed it had been
paying the 2.5% annuity to its former Executive Director since 1977, but
asserted that there was no evidence of such a rate in corresponding
grant applications, which referred only to an annuity rate of 11.2%.
Ultimately, PHS found that the general direction of the conditions of
the grant, combined with a reasonable interpretation of PHS policy and
regulations, should have been interpreted by Grantee as requiring, at a
minimum notification of Region II. Grantee having failed in this
regard, PHS disallowed that portion of the annuity which exceeded 11.2%
of the Interim Executive Director's salary.
Grantee appealed to this Board, contending that Region II was on
notice as to the appointment of the Interim Executive Director and was
bound by the consequences of such notice. Grantee also claimed that the
25% annuity was reasonable based upon the cost principles outlined in 45
CFR Part 74, Appendix F.
Discussion
I. Cost Principles
The Grantee's authority to charge the costs of an annuity to its
grant is governed by various cost principles applicable to nonprofit
institutions. As noted above, PHS based its disallowance, in part, upon
a provision in its own Policy Statement. This provision merely (3)
states that fringe benefits are allowable "to the extent that such
payments are made under formally established and consistently applied
institutional policies." The cost principle at 45 CFR Part 74, Appendix
F, G.6(g)(5) more broadly states:
Costs of fringe benefits . . . are allowable to the extent required
by law, employer-employee agreement, or an established policy of the
institution.
PHS does not deny that the Part 74 cost principle applies, or that
the annuity at issue was provided pursuant to an employer-employee
agreement. Thus, the annuity here is an allowable type of fringe
benefit under an applicable cost principle.
A general requirement of reasonableness also applies to costs claimed
by nonprofit institutions. A cost is reasonable if:
(In) its nature or amount, it does not exceed that which would be
incurred by an ordinarily prudent person in the conduct of a competitive
business. (45 CFR Part 74, Appendix F, B.3)
Other requirements closely realted to reasonableness apply to
compensation costs. These costs are allowable if:
(1) Compensation is paid in accordance with policy, programs, and
procedures that effectively relate individual compensation to the
individual's contribution to the grant or contract work, result in
internally consistent treatment of employees in like situations . . . .
(45 CFR Part 74, Appendix F, G.6(b))
In our Order to Show Cause we indicated that the annuity here may not
be consistent with the guidelines of Section G.6(b)(1) of Appendix F.
For purposes of our preliminary analysis we measured the reasonableness
of the annuity in light of the Interim Director's overall compensation
package. In its response to the Order, Grantee argued that the focus of
our attention should have been a comparison of the Interim Director's
compensation with that of his predecessor.
The Original Executive Director received a $46,000 annual salary.
The salary of the Interim Director was $25,000 for six months. PHS
conceded that the temporary nature of the position may have justified
the higher salary and it was, in fact, approved by Region II (Decision,
p. 4). Both men received the sam annuity, 25% of their salary.
Grantee's primary concern upon the resignation of the original (4)
Director was to find a person of the same caliber, capable of
maintaining the momentum which the original Director had initiated. It
argued that the pressure it felt was compounded in part by the
relatively short notice (one month) it had received, as well as the less
than uniform demographic area which it served Grantee's response to the
Order (Brief), Sec. A). Grantee thought it necessary to seek a
replacement from outside its organization as a safeguard against
internal dissension and program disturbance. In order to attract
qualified applicants to a temporary position, Grantee decided to offer a
compensation package approximating that of its Original Director (Brief,
Sec. B).
In the Order to Show Cause we indicated to PHS that the disallowance
might be reversed if Grantee could produce evidence sufficient to
convince us that the annuity was reasonable (Order , pp. 7-8). PHS
questioned the reasonbleness of the annuity, yet, in presenting its
position to the Board, largely made conclusory references to the concept
of reasonableness of cost. Region II stated in its disallowance letter
simply that: "We (Region II) consider reasonableness of cost, a basic
concept of the Cost Principles of 45 CFR Part 74, Appendix F."
PHS apparently accepted the judgment of Region II on its face, for in
its decision it stated that "the Regional Office correctly applied the
test of reasonableness to the annuity in question." In its initial
response to this appeal, PHS supplied the Board with a memorandum from
Region II which attempted to explain its application of reasonableness
to the facts in issue. The position outlined in the memorandum compared
the reasonableness of the annuity which the Interim Executive Director
was to receive to that which he received in his position at Morrisville.
Grantee contends that the reasonableness of the annuity should be
measured in the context of the position the Interim Director was
filling, rather than that which he was leaving.
We find Grantee's argument and evidence on this issue convincing.
Grantee's decision to offer a 25% annuity resulted from careful
consideration of a number of pertinent factors. Further, although PHS
has questioned the reasonableness of the annuity, it has not
sufficiently developed its position on this issue to support the
conclusion that the annuity was unreasonable. Accordingly, we find the
Interim Director's annuity to be reasonable in amount.
II. Prior Approval
In its response to Grantee's appeal, PHS argued extensively that the
annuity package required prior agency approval as it was in excess of
the annuity rate specified for all employees in the grant award. PHS
supported its position by citing various sections of its own (5) Policy
Statement and Grants Administration Manual which, it claimed, mandated
prior approval in this instance.
The more comprehensive PHS Policy Statement provides:
Documentation of the approved budget on the Notice of Grant Award
constitutes prior approval for the performance of activities and the
expenditure of funds for specific purposes and items described in the
grant application unless otherwise restricted by the Notice of Grant
Award. (pp. 4-5)
PHS also relies on 45 CFR Sec. 74.176, which continas a comparable
provision.
We conclude that prior approval is not required in this instance.
Our conclusion is based on the PHS Grant Appeals Board Decision (p. 4),
which stated that prior approval was not specifically required by the
conditions of the grant award, and on the fact that neither Part 74 nor
the PHS Policy Statement establish a requirement of prior approval for
fringe benefits. Further, the policies relied on by PHS do not require
prior approval for any specific cost item but merely describe what
constitutes prior approval, where that approval is required by
applicable cost principles.
Conclusion
For the reasons stated above, we reverse the disallowance. Grantee
may charge the full cost of the annuity ($6,250) to Grant No.
02-P-000124-04.
OCTOBER 22, 1983