GAB Decision 324
June 30, 1982 Northwest Rural Opportunities, Inc.; Docket No. 81-144
Teitz, Alexander; Ford, Cecilia Settle, Norval
Northwest Rural Opportunities, Inc. (NRO) appealed a disapproval by
the Public Health Service (PHS or Agency) of continued funding for a
health clinic for migrant farm workers at Pasco, Washington (Grant
Number 10 H 500124 02). It was not clear whether the Board had
jurisdiction over the dispute, but PHS consented to Board review and the
Board accepted the case.
Background.
Sections 329 and 330 of the Public Health Service Act authorize
discretionary grants for migrant health services and community health
centers. 42 U.S.C. 254b, 254c. Under these provisions, PHS awarded two
migrant/community health services grants to NRO: one for a clinic in
Walla Walla, Washington, and one (the grant involved in this dispute)
for the Pasco clinic.
PHS terminated the Walla Walla grant and denied further funding for
the Pasco grant. /1/ NRO sought review by the Board only of the
determination concerning the Pasco clinic. However, the record contains
material concerning the Walla Walla project, because the Agency's
determination on the Pasco project relied in part on problems at Walla
Walla.
(2) The standard for denying continuation funding.
A discretionary grant, such as the Pasco grant here, is approved on a
multi-year basis (the "project period"), but funded by successive,
specific, annual grant awards (the "budget periods"). Under this
system, the grantee is informed that there is no assurance that
successive awards will be made after the initial budget period. /2/ PHS
Grants Administration Manual Chapter 1-85, section 30.C.1 and 2 (1976);
PHS Grants Policy Statement (1976), p. 6. Funds for subsequent budget
periods, within an approved project period, must be requested in an
annual application, called a non-competing continuation application.
Id.
It was not disputed that the particular funding arrangement for Pasco
involved a non-competing continuation grant. PHS Brief, p. 6. Pasco's
project period was from January 1, 1980 through March 31, 1983, and the
first budget period was from January 1, 1980 through March 31, 1981.
PHS Brief, Exhibit 1.The application for continued funding which was
denied was for the succeeding budget period (i.e., April 1, 1981-March
31, 1982).
In the context of its argument regarding the Board's jurisdiction
over this matter (Application for Review, pp. 3-4), NRO argued that the
Agency's determination in its letter of May 29, 1981 was that the action
taken was a termination as well as a disapproval, and that the letter
specifically stated that the termination action might be appealed.
Appellant argued that the action taken was a termination and was
reviewable as such. In support of its argument, appellant cited
southern Mutual Help Association, Inc. v. Califano, 574 F.2d 518 (D.C.
Cir. 1977) for the proposition that a termination of a multiple year
project in the middle of the project is reviewable as a termination. We
disagree.Southern Mutual Help, supra, was decided on the basis of the
regulations then in existence; the period of 1972 through 1974. Since
that decision, the Agency, in 1978, clarified its regulation to
specifically distinguish a termination of previously awarded funds from
a denial of further funding. See, footnote 1. It is this clarified
regulation which applies here. This clarification coupled with the
policies stated in the PHS Grants Administration Manual and PHS Grants
Policy Statement cited above precludes the Board from reviewing the
dispute here as a termination.
While denial of continued funding for a successive budget period
during a project period is not a termination (and thus is not (3)
subject to the narrow standard of failure to comply with a material
grant condition; see, footnote 1), PHS acknowledged that "neither is
PHS fee to exercise unlimited discretion in deciding to withhold funding
. . . ." PHS Brief, p. 6. The PHS Grants Administration Manual states
that continued funding can be denied for "justifiable reasons" (Chapter
1-85, section 30.C.2), which include the following very broad examples:
c. A grantee fails to show satisfactory progress in achieving the
objectives of the project or otherwise fails to meet the terms and
conditions of the award;
d. A grantee's management practices fail to provide adequate
stewartship of Federal funds; or
e. Any reason which would indicate that continued funding would not
be in the best interests of the Government.
Thus, the Board reviewed the record in this case to determine whether
PHS acted reasonably in determining that there were "justifiable
reasons" such as the foregoing to deny continued funding.
PHS "justifiable reasons": generally.
PHS' "termination" letter dated May 29, 1981 (Appeal File, Item
C)
/3/ stated that the following problems were the basis of the disapproval
of the Pasco clinic's grant application: (4) 1. No developed plans to
achieve administrative and clinical indicator standards, or program
requirements.
2. No developed second year objectives.
3. No developed nutrition plan.
4. No submission of Governing Board membership or Bylaws.
The letter also referred to a "termination action of the Pasco
clinic" /4/ based on the following reasons:
1. Unsatisfactory progress in achieving first year objectives,
administrative indicators, and program requirements.
2. Inadequate grantee stewardship of Federal funds. NRO managed
another clinic (Walla Walla) supported by Public Health Service. The
other clinic overspent their 02 year budget by $76,078. The
significance of the overspending was not provided to Public Health
Service until nearly two months after the end of the budget period.
(5) The relationship of determintions on the Walla Walla project to the
decision to discontinue funding for Pasco.
NRO argued that PHS had decided to terminate both Walla Walla and
Pasco in late 1980 or early 1981, that this decision was based "entirely
on NRO's allegedly inadequate stewardship at Walla Walla," and that "the
allegations of inadequate performance at Pasco were nothing more than
post hoc rationalizations." See, e.g., NRO's Brief, p. 49 We agree that
the early correspondence does indicate that the determination to
"terminate" the Pasco grant does not appear related to anything
independent of the concern about failings at Walla Walla. The PHS
letter dated December 31, 1980 (Appeal File, Item D) which notified NRO
of PHS' intent to terminate both grants "if NRO fails to satisfactoryily
respond to the following issues" relates only to problems at the Walla
Walla clinic (which we infer from the specific references exclusively to
Walla Walla and from the budget year identification of "02"; the Pasco
grant was still in its 01 budget period). Similarly, the March 12, 1981
termination letter (Appeal File, Item A) did not specify any problems at
Pasco, but instead relied on inadequacies at Walla Walla.
However, we are not persuaded by NRO's argument that the foregoing
somehow condemns PHS' determination as an improper post hoc
rationalization, for four reasons. First, NRO's argument apparently is
founded on the presumption that NRO was, in fact, dealing with
termination of an existing grant, so that the Agency had to show some
violation of the Pasco grant terms and conditions (see, e.g., NRO Brief,
p. 4, bottom). As we discussed above, that is simply incorrect; the
Agency never terminated the Pasco grant. If PHS had terminated the
first year Pasco grant, NRO might have had a point with regard to that
termination, but that is not the case before us. Second, the December
and March letters apparently were not responding to NRO's application
for a second year of funding for the Pasco project.They were, indeed,
dealing primarily with the (6) Walla Walla project, and as a subsidiary
matter with a threat of termination of the Pasco project. In contrast,
the May 29 letter did contain a response to the application, which
included both reasons specific to the application and a collateral
reason related to NRO's management at Walla Walla. Third, the record
indicates that consideration of problems with the Pasco application was
proceeding contemporaneously with the course of the dispute over the
Walla Walla project; see, e.g., Exhibit 19 to PHS' Brief, which is a
PHS letter dated December 11, 1980 dealing exclusively with the Pasco
application (and noting five problems with it). The letter preceded the
December 31, 1980 PHS letter notifying NRO of PHS' intent to terminate
Walla Walla. Fourth, in any event, we conclude that it was reasonable
for PHS to look at management of the Walla Walla project in determining
whether to extend funding for the Pasco project. Here, the Agency was
dealing with the same grantee operating two similar projects under the
same PHS program at the same time in the same state. While, arguably,
termination action might have required that PHS look narrowly to
performance of the grantee on its terminated grant, /5/ we conclude that
the "justifiable reasons" standard applicable to continuation funding
clearly is broad enough to accommodate a wider scope of review. Chapter
1-85, section 30.C.2, paragraph c appears to relate to performance on
the grant per se, but paragraphs d and e (see above) clearly can be read
to provide authority, at a minimum, to look to the grantee's activities
on other similar PHS grants. NRO argued that section 30.C.2 "does not
on its face" authorize examination of experience on a different grant
from the one in question, and that "at most, the regulation is
ambiguous. . . ." NRO's Reply Brief, p. 2. The provision does not
explicitly direct attentions to experience on other grants, but the
language really is not ambiguous; simply, it is not restrictive on the
scope of inquiry about a "grantee's management practices." If one
were
to find the provision ambiguous, then it would seem the ambiguity would
still be resolved in favor of PHS' reading, by contrasting the language
of paragraph c -- where a failure of satisfactory progress specifically
relates to "the project" and "the award" -- with paragraphs
d and e,
which are not project- or award-specific.
The Walla Walla experience.
Having determined that it was not unreasonable for the Agency to
refer to NRO's experience in managing the Walla Walla project, we now
review the problems that PHS found there. (7) A major problem
identified by PHS in the May 29 letter /6/ was the overexpenditure by
NRO on the Walla Walla project of about $76,000. NRO did not deny the
overexpenditure, but attempted to explain its reasonableness. NRO's
Application for Review, pp. 2-3; NRO's Brief, p. 5. NRO argued that
the expenditure was, after all, for "program" expenditures (meaning
presumably that the $76,000 went for thing the grant would have paid for
if there had been enough money, rather than something otherwise
unallowable). On the face of it, this has little mitigating import, the
point being that NRO overspent a $250,000 grant by $76,000, which
reasonably raised questions about the fiscal management capability of
NRO. PHS Brief, p. 8. NRO alleged that the expenditure was
attributable to the difficulty of attracting qualified doctors,
inexperienced clinic personnel, a high personnel turnover rate, and a
higher-than-anticipated rate of failure to collect charges for
treatment. NRO's Application for Review, pp. 2-3. Assuming these to be
correct, they reasonably may be characterized as the kind of factors
which NRO simply should have managed better; the Agency said these type
of management problems "resulted from systemic deficiencies in NRO's
administrative and management practices" and that there were apparently
"no meaningful efforts to remedy these critical management
deficiencies." PHS Brief, pp. 8-9.
In its reply brief, NRO characterized the Agency's statements about
the overexpenditure as a "conclusory" response to NRO's "good
faith"
explanation. NRO's Reply Brief, pp. 2-3. But NRO's excuses were no
less conclusory and, in addition, may have been beside the point.
We conclude that the substantial overexpenditure on the Walla Walla
project was a factor the Agency properly and reasonably considered in
determining whether to award continued funding to NRO on another similar
grant. Although NRO questioned the weight, if any, which should be
attached to this problem in connection with the Agency's position on
Pasco, we need not determine whether the overexpenditure at Walla Walla
would have been sufficient by itself, for the Agency had other reasons,
related to the Pasco project itself, for denying continued funding.
Determinations concerning the Pasco project.
The PHS letter of May 29, 1981 described four bases of disapproval of
the Pasco grant application, and one basis for "termination action"
directly related to the Pasco clinic (see above). Since (8) we
concluded that the Pasco grant was not terminated, but rather that the
continuation application was denied, we will treat the basis stated for
"termination action" as an apparent additional basis for the
application's disapproval and denial of continued funding. /7/
As stated, NRO was on notice of Defects on the application as early
as its receipt of PHS' letter of december 11, 1980 (Exhibit 19 to PHS'
Brief), and had had notice of problems at the Pasco clinic as early as
July, 1980 (Exhibits 3 and 4). While the statement of reasons in the
PHS letter of May 29 is relatively cursory, the record indicates that
PHS gave considerable attention to the problems with the Pasco clinic
and communicated with Pasco about those problems. PHS' Brief, pp. 2-4;
Exhibits 19, 24, 25, 26a and 26b to PHS' Brief. The record directly
contradicts NRO's implication that the Pasco determination was based
primarily on problems at Walla Walla.
When the Board accepted this case, we agreed with NRO's observation
that the determinations in PHS' May 29, 1981 letter were too vague to
enable NRO to respond adequately, and we asked PHS for more detail. The
record before us now indicates that NRO problably was, or should have
been, aware of what its deficiencies were alleged to be by the time it
received the May 29 letter. Nevertheless, the Agency did submit a
three-page memorandum dated January 18, 1982. Appeal File, Item K.
Against the foregoing background, we examine below the alleged
deficiencies, and NRO's response, to see whether PHS reasonably
determined that it had further "justfiable reasons" for denying
continued funding for the Pasco project, in addition to the management
problems it had identified at Walla Walla.
Unsatisfactory progress in achieving first year objectives, and
deficiencies in meeting program indicators and requirements.
PHS described four specific first year objectives in the January 18
letter which it alleged NRO did not meet on time. With regard to "other
objectives" PHS also concluded with an observation that "in every
case
first year objectives were either delayed or were not accomplished" with
the fifteen-month first budget period. NRO did not present persuasive
evidence to rebut PHS's allegations. NRO effectively admitted that it
did not meet most of the first (9) year objectives; its rsponse simply
was to present "explanations for the delay." NRO's Brief, p. 7. On
their face, these explanations are not unreasonable, but the Agency
reasonably could have been more concerned with the delay that with the
legitimacy of excuses. The Agency responded that the objectives were
specifically related to the first year, were objectives which were to be
met by the times specified, and were to be distinguished from full
compliance with administrative indicators and program requirements. PHS
Brief, p. 7. NRO's reply brief did not specifically respond.
In response to PHS' allegations of NRO's failure to meet
administrative indicators, NRO said that the Agency had advised project
directors that projects not yet operational for two years did not have
to meet these performance standards per se, as long as they were able to
"show progress toward meeting these requirements." Appeal File, Item
N,
p. 1.
The Agency admitted the lesser standard on performance standards for
new projects, stating that although full compliance with administrative
indicators was not mandatory until the second year of operation,
satisfactory progress toward meeting these was required. PHS Brief, p.
7. To aid the Agency in making a determination of satisfactory
progress, the Agency had established qualitative standards describing
satisfactory progress. Id. But the Agency argued that Pasco had not
made even satisfactory progress. The Agency chose to detail, as an
example, NRO's alleged failure to provide at least 2,700 medical
encounters annually (one of the qualitative standards). Id. NRO
responded essentially that it was meeting the standard if one examined
the number of encounters per month for the period when the clinic was
open. NRO's Reply Brief, p. 3. The Agency responded, in some detail,
that it was incorrect to deal with gross numbers of medical encounters,
because the standard was actually the result of a formula which, when
applied to Pasco, accommodated the shorter time period. Transcript, pp.
4-7. NRO disagreed. Id., p. 7. The Board is unable to make a
determination on this particular factor, because the record is so
confusing. We conclude that the Agency failed to adequately explain to
NRO, much less to the Board, why NRO failed to meet this particular
standard.
Nevertheless, this was only one standard, chosen as an example for
detailed analysis (perhaps unfortunately) by the Agency. PHS, however,
also alleged in the January 18 letter that NRO "substantially exceeded"
the administrative indicator standard for average cost per medical
encounter (NRO's cost per encounter late in the budget period was $54,
compared to the standard of between $16 and $24). Since the high cost
was observed late in the period of the grant, the Agency said this did
not reflect "satisfactory progress." NRO did not rebut this
determination. NRO generally (10) said PHS was not abiding by its
determination to ease compliance standards, and presumably NRO meant
this argument to apply to the medical encounter cost determination. But
PHS made its determination explicitly in terms of "progress" towards
the
standard, and the PHS determination seems reasonable on its face given
when the cost was observed and how high it was.
NRO attempted to exploit a PHS admission in the record that few
projects were in "full compliance" with these standards, alleging
unequal treatment. NRO's Brief, pp. 7-8. But the record does not
indicate that PHS was trying to extract "full compliance" from NRO;
rather, PHS determined that NRO did not meet the less stringent
standards of "satisfactory progress" towards compliance.
The January 18th letter also specified nine incidents of failure to
meet program requirements. NRO's response was that several items
related to deficiencies which were corrected in, or by the time of,
submission of the revised grant application (NRO's Brief, p. 9). NRO
said it was "not aware of the program requirements identified in items
5-8." Id. We cannot accept NRO's argument on corrected deficiencies.
This argument overlooks the fact that these nine incidences were
characterized as failures to meet program requirements, apparently
within the first year of operation, not deficiencies in the
non-competing application. NRO has not rebutted the Agency's argument
that these requirements were not timely met, or that there was not
satisfactory progress towards meeting these requirements, during the
first year of operation. Further, NRO's mere statement that it was "not
aware" of certain other requirements is an insufficient basis to find
that the Agency unreasonably determined that the Pasco clinic was
deficient in those areas.
In sum, although the Agency failed to adequately support the
determination that NRO had made satisfactory progress towards meeting
the medical encounter standard on the Pasco project, the other
determinations survive critical review. These determinations, coupled
with the determination related to management of funds at the Walla Walla
clinic, provide substantial support for the Agency's decision that there
were "justifiable reasons" for not continuing funding at the Pasco
clinic. When coupled with the Agency's determination on the Pasco
continuation grant application (the discussion of which follows), the
Agency's position becomes even more persuasive.
Deficiencies in the Pasco grant application.
The analysis above all related to item 1 ("unsatisfactory progress")
under "termination action" in the PHS letter of May 29, 1981, and
the
expansion in the PHS letter of January 18, 1982. The May 29 (11) letter
also specified four deficiencies in the Pasco grant application. NRO
made no response directly to these points, /8/ and instead complained
that the Agency should have "worked with NRO to develop an approvable
application." NRO's Brief, p. 9. However, the record indicates that PHS
did expend considerable effort to interact with NRO concerning
deficiencies in the first application. The record indicates, and NRO
did not dispute, that as early as December 11, 1980, the Agency notified
NRO that the Pasco application was deficient. PHS Brief, Exhibit 9. It
is also apparent from the record that during the following weeks, the
application was reviewed by the appropriate Health Systems Agency which
found the application unacceptable. PHS Brief, Exhibit 23. These
problems were communicated to NRO, and the Agency pointed out that NRO
did not submit supplemental materials until March 10, 1981. PHS Brief,
Exhibit 25. By that time, however, the Agency had completed its review
of NRO's application and by letter dated March 13, 1981, informed NRO of
its disapproval action based, in part, on deficiencies found in the
application. Despite the Agency's disapproval action, NRO resubmitted a
corrected application on April 17, 1981 (more than two weeks after the
end of the budget period, and more than four months after the deadline
date for the application).
In the best of all possible worlds, PHS might be able to provide the
intensive continuing assistance NRO apparently expected; but we are
aware of no requirement for such effort, and it seems axiomatic that NRO
ultimately was responsible for developing a complete application by the
specified deadline of December 2, 1980. PHS Brief, Exhibit 5. And as
the Agency points out, by the time NRO resubmitted a complete corrected
application on April 17, 1981, the 01 budget period had ended and it was
necessary to award a grant, on an emergency basis, to another entity in
order to carry on the health center programs (PHS' Brief, p. 10).
Summary
This case was unfortunately complicated (particularly for NRO) by
PHS' imprecise use of the term "termination" in relation to a
continuation award. Had the precise circumstances been made clear from
the beginning, the dispute either would not have arisen or, at least,
would have allowed NRO to see more clearly what the issues actually
were. (12) Furthermore, PHS was not successful in substantiating all of
the elements it put forward in support of its case.
Nevertheless, we conclude that there remains ample support for the
reasonableness of the PHS determination that there were "justificable
reasons" not to continue this discretionary grant, based on an incident
of questionable management on a related project; on certain
deficiencies in how the Pasco project has been operated under the first
grant; and on deficiencies in the application. While one might
speculate that this record would not have supported a termination of an
existing grant, it was sufficient to justify not awarding a
discretionary continuation grant under the PHS standard made applicable
through the grant agreement. Certainly, the record would not support
the relief which NRO sought: displacement of the new grantee which PHS
chose to run the clinic after NRO's failure. Transcript, p. 16.
Conclusion.
Based on the foregoing analysis, we uphold the PHS determination not
to award a continuation grant for the Pasco project. /1/ NRO frequently
referred to the "termination" of the Pasco grant, presumably due
in part to PHS' own imprecision in application of the term in early
stages of the dispute (see, e.g., Appeal File, Exhibit L). The Agency
bears a more specific burden in defending a termination than it does in
defending a refusal to continue funding. "Termination" is defined
in
regulations to mean withdrawal of authority to use previously awarded
funds, and the defintion explicitly excludes refusal to extend a grant
or award new funds, citing as an example, the refusal to make a
non-competing continuation award. 45 CFR 74.110 (1979). The Agency can
only terminate unilaterally if the grantee "has materially failed to
comply with the terms of the grant." 45 CFR 74.115(a) (1979). A
description of the broader standard for denial of a continuation award
is set forth on the following page. n2 The Notice of Grant Award stated
that it was subject to the terms and conditions in the PHS Grants
Administration Manual chapters in effect as of the beginning date of the
budget period and PHS Grants Policy Statement in effect as of the
beginning of the budget period. PHS Brief, Exhibit 1. /3/ The record in
this case is complicated by an earlier withdrawn "termination"
letter. As NRO stated in its first submission to this Board: This
grant was originally terminated by letter dated March 12, 1981. By
letter dated April 10, 1981 . . . NRO appealed the March 12 termination
(to PHS). By letter dated May 28, 1981, the March 12 termination letter
was withdrawn by the agency. Accordingly, NRO withdrew its April 10
appeal. However, the May 29 termination letter again terminated the
grant. NRO's Application for Review, dated August 28, 1981. The Agency
explained the situation as follows: . . . negotiations ultimately
culminated in an agreement whereby NRO basically agreed to voluntarily
relinguish the Walla Walla grant and turn over the clinic facility and
equipment to the replacement grantee, while PHS in turn agreed to
support a close out budget for Walla Walla . . . and to withdraw the
original termination letter. Additionally (because PHS had no objection
to subjecting its Pasco disapproval decision to third party review), PHS
agreed to reissue a "termination letter" on the Pasco application
"for
failure to comply with the terms of the prior year's grant and failure
to submit an acceptable plan for the second year," thereby establishing
a basis for Grant Appeals Board review. PHS Brief, p. 4 (emphasis
added). NRO did not appear to dispute this, other than to express
displeasure with the reinstated "termination" of Pasco. NRO's brief,
p.
1. The original termination letter of March 12, 1981, described
activities characterized as "poor financial management" on the part
of
NRO, and referenced the Walla Walla grant and the first Pasco grant (but
the letter did not specify to what extent the cited activities occurred
at Pasco, and did not refer to the application for funds for the second
year for Pasco). Appeal File, Item A. /4/ The record does not
indicate what was being terminated, since the budget period of the first
Pasco grant was already over when this letter was sent. We do not have
before us any claim for return of any amounts under the earlier Pasco
grant. The Agency took the position in its brief filed in this case
that there was no "termination" of the Pasco grant, and explicitly
stated that "PHS did not withdrw NRO's authority to obligate previously
awarded funds. . . Rather, PHS refused to award additional funds . . .
." PHS Brief, p. 10; see also, pp. 4-6. Thus, it appears that the
mention of "termination" of the Pasco grant was simply erroneous.
In
any event, both parties dealt with the substance of the additional
reasons for "termination" as part of their case on the validity of
the
denial of continued funding. However, the Agency's imprecision in using
the term "termination" apparently misled NRO initially, so that NRO
thought that the Agency had to prove NRO had materially failed to comply
with the terms of the grant. See, e.g., NRO's Application for Review,
pp. 2, 5. NRO was put on notice that this was not the case by the
Agency's brief, and NRO had an opportunity to respond both in its reply
brief and in a conference held in this case by telephone. See, e.g.,
Transcript, p. 10. /5/ We do not decide here the question
whether, under 45 CFR 74.110 and 74.115, the Agency would be restricted
to an examination of performance under a grant to be terminated, as that
question is not before us in this case. /6/ The record indicates
that PHS identified other problems, but these were not specifically
addressed in PHS's May 29 letter (nor in subsequent submissions to the
Board), and so we decline to consider them here.See, e.g., NRO's
Application for Review, p. 3; NRO's Brief, p. 5 /7/ Our
treatment here is supported further by the fact that the basis for
"termination action) in the May 29, 1981 letter is not a ground for
termination as set forth in 45 CFR 74.115 but rather a ground for denial
of continued funding under PHS Grants Administration Manual Chapter
1-85, section 30.C.2. /8/ NRO does argue that some of the deficiencies
mentioned in the January 18, 1982 letter were corrected in the
subsequent Pasco grant application. But this argument does not reach
the application deficiencies noted in the May 29 letter, and in any
event deals more with issues related to "progress" in performance
under
the first grant.
OCTOBER 22, 1983