GAB Decision 359
November 30, 1982 Ventura County Commission on Human Concerns and
Community Development; Docket No. 82-110 Ford, Cecilia; Settle, Norval
Teitz, Alexander
The Ventura County Commission on Human Concerns and Community
Development (Grantee) appealed the disallowance by the Office of Human
Development Services (Agency) of $18,747 in costs claimed under the
Headstart program for the year ended March 31, 1981. The disallowance
was based on recommendations contained in the audit report prepared by
Grantee's CPA firm. The Agency determined that Grantee had (1)
overexpended the grant budget by $3,189 and (2) sustained unallowable
bad debts in the amount of $15,558.
The Agency reduced the disallowance by $3,189 to $15,558 upon
Grantee's submission of documentation that the $3,189 in
overexpenditures were for items allowable under, and allocable to, the
Head Start grant program.
For the reason stated below, we uphold the remainder of the
disallowance. This decision is based on the written record, including
materials submitted by the parties subsequent to a telephone conference
conducted by the Board.
The Disallowance
The record indicated that Grantee claimed $15,558 which represented
uncollectible receivables that had been written off as bad debts. The
audit report stated that these receivables were due from programs which
were no longer in existence and from agencies that were unable to repay
the amounts due.
The Agency, therefore, disallowed the $15,558, on the basis that bad
debts were not allowable costs under the appropriate cost principles.
Bad Debts
It is clear from the regulations, (45 CFR Part 74, Appendix F,
Paragraph G.2 (1980)) as well as the Office of Human Development Grants
Administration Manual (OHD GAM Paragraph 1-7-5(b)) (42 Fed. Reg. 21046,
April 22, 1977) (2) that bad debts are unallowable as claims for federal
funds. Indeed, Grantee had admitted that the bad debts related to this
appeal were unallowable. (Notice of Appeal, p. 1) Grantee argued that
the disallowance should be offset by the amount of certain in-kind
contributions and unobligated sums from prior years.
In-Kind Contributions
Grantee argued that it should be allowed to use Grantee contributions
in excess of the statutory requirement to offset the disallowance. In
the Agency's response to the Board's acknowledgment of the notice of
appeal, the Agency stated that Grantee's excess non-federal share was in
the form of in-kind contributions and as such could not be used to
offset the disallowance of bad debts.
Grantee failed to respond to the Board's request to state what
portion, if any, of the excess non-federal share was in cash, supplied
no documentation that the contribution was in cash, and did not deny the
Agency's assertion that the excess non-federal share was in the form of
in-kind contributions. We therefore find that Grantee's excess
non-federal share was in the form of in-kind contributions and not cash.
The Agency asserted that the disallowed funds had to be reimbursed in
the form of cash from non-federal sources because the disallowance was
for bad debts financed by cash supplied by the federal government, and
that in-kind contributions could not be substituted for cash.
A disallowance made because of the unallowable nature of the
expenditure of federal funds must result in a reduction of the amount of
federal funds used by Grantee. The bad debts were financed with cash
and Grantee must reimburse the federal government with cash from
non-federal sources. Otherwise, the grantee would effectively be
returning nothing to the Agency and the disallowance would be
meaningless. Therefore, we conclude that the Agency acted appropriately
in not allowing Grantee to use these excess in-kind contributions to
offset the disallowance of bad debts.
Unobligated Funds From Previous Years
Grantee sought to use unobligated funds from previous years to offset
the disallowance. The Agency took the position that these funds could
not be used to offset the disallowance of bad debts because the OHD GAM
prohibited such use.
(3) Grantee may not use the unobligated funds from previous years to
offset the disallowance of bad debts because there would be no reduction
in the amount of federal funds used by the Grantee for the unallowable
expenditure. (See discussion of in-kind contributions above.) In
addition, Chapter 1-1-3 F of OHD GAM states that with regard to
unobliagted balances:
In no instance may a grantee use an unobligated balance in a budget
period subsequent to that for which the funds were awarded without prior
written approval from the authorized official of the granting office.
In this appeal there was no prior written approval for the use of
these unobligated funds nor was the Agency willing to give retroactive
approval to use prior year's funds to offset unallowable costs. From
the above, we conclude that the Agency acted appropriately in not
allowing Grantee to use these unobligated funds to offset the
disallowance of bad debts.
Additional Arguments
Grantee asserted that its obligation to reimburse the Agency should
be forgiven because Grantee had no funds to make the reimbursement and
that during the period in question, the County controlled the federal
funds provided under the grant. Grantee asserted that the County had
commingled federal and non-federal funds for a number of different
programs. As a result of this practice, Grantee argued that it could
not identify specific amounts and should not be held responsible for the
bad debts.
Although the Agency has not responded to these arguments, there is no
basis for the Board to forgive the Grantee's obligation to return the
disallowed funds. Grantee admitted that it became responsible for the
bad debts through a successor in interest agreement (Notice of Appeal,
p. 1). Although Grantee may have not sustained the unallowable bad
debts, it is responsible for them.
Conclusion
For the reasons stated above we uphold the disallowance in the
reduced amount of $15,558.
OCTOBER 22, 1983