Los Angeles County Superintendent of Schools, DAB No. 461 (1983)

GAB Decision 461
Docket No. 83-28

August 31, 1983

Los Angeles County Superintendent of Schools;
Settle, Norval; Teitz, Alexander Garrett, Donald


The Los Angeles County Superintendent of Schools (Grantee) appealed a
determination by the Office of Human Development Services (Agency)
involving the Grantee's Head Start award for the period September 1,
1980 through June 30, 1981. The Agency determined that the Grantee had
expended grant funds for certain unallowable items of cost and had
earned interest on grant funds. The Agency asked the Grantee to
calculate the amount of interest earned and to remit that amount to the
Agency. While the appeal was before the Board, the parties settled the
issue raised by the Grantee about the disallowed costs. The parties
continued to dispute whether the Grantee is an "instrumentality of the
State" and, therefore, exempt from repaying the interest earned on the
federal funds. The Agency notified the Board about the settlement and
argued, for the first time, that the Board did not have jurisdiction
over the issue of repayment of earned interest.

Below, we first address whether the Board has jurisdiction over an
appeal from the Agency's demand for repayment of interest earned on Head
Start funds. We conclude that the Board does have jurisdiction under 45
CFR Part 16, Appendix A, Para. C(a)(1).

We then address the issue of whether the Grantee must repay the
interest earned. We conclude that the Grantee is not exempt from the
requirement to repay earned interest, and that the regulation imposing
that requirement is valid. Moreover, we conclude that the Grantee had
adequate notice of that regulation.

This decision is based on the written record and a conference.

Background

The Grantee became a Head Start agency in the 1979-1980 fiscal year.
It administers the Head Start program in the Los Angeles County area.
In the grant year involved here (1980-1981), the Grantee received a Head
Start grant in the amount of $19,298,111. Agency Response, May 18,
1983, p. 3. The Agency paid the award to the Grantee in monthly
installments of equal amount. Conference Transcript, August 2, 1983 (2)
(Tr.), p. 16. The Grantee is required by State law to maintain all
funds it receives in the Los Angeles County Treasury. Tr., p. 11. All
these funds earn interest. Tr., p. 14.

The Agency has promulgated regulations which apply to all Head Start
programs. 45 CFR Parts 1301 through 1305 (1980). Section 1301.10(a)
provides that other Departmental regulations of a cross-cutting nature
also apply to Head Start grants. These regulations include 45 CFR Part
16 governing this Board and 45 CFR Part 74 governing the administration
of grants.

The Grantee's auditors pointed out that the Grantee had earned
interest on the Head Start funds it received for the grant year ended
June 30, 1981. Government Exhibit A, Combined Report on Financial and
Compliance Examination of Head Start Program Grant No. 09-CH-2-02/0, p.
22. The Agency asked the Grantee to return the interest earned on Head
Start funds, as required by 45 CFR 74.47. /1/


The Board's Jurisdiction

The jurisdiction of the Board for direct, discretionary project
programs such as Head Start is set out at 45 CFR Part 16, Appendix A,
Para. C, and includes, at (a)(1):

A disallowance or other determination denying payment of an amount
claimed under an award, or requiring return or set-off of funds already
received. This does not apply to determinations of award amount or
disposition of unobligated balances, or selection in the award document
of an option for disposition of program-related income.

The Agency, and later the Grantee, argued that the Board does not
have jurisdiction over the question of repayment of interest earned on
Head Start funds because the Agency's decision is not a "disallowance"
or other determination as (3) set out in Para. C(a)(1). /2/ The parties
suggested that the interest earned on federal funds might be more
closely related to those areas specifically excluded from the Board's
jurisdiction by Para. C(a)(1).


When the Board pointed out that, in the past, it has decided other
cases involving repayment of interest, the Agency attempted to
distinguish two of the Board's decisions on the basis that the
collection method used was a set-off against grant funds. North
Carolina Department of Human Resources, Decision No. 361, November 30,
1982, and San Carlos Apache Tribe of Arizona, Decision No. 369, December
29, 1982. The Agency also attempted to distinguish Decision No. 369 by
noting that the interest question there involved a small amount ($7057)
which was a "tag item" to other items which had been disallowed. Tr.,
p. 95.

The Board asked the Agency whether there was any policy reason for
excluding interest repayment questions from the Board's jurisdiction.
The Agency argued that due process requires administrative review when
the Agency is attempting to collect interest earned by setting off that
amount against a grant award and, therefore, review by the Board is
appropriate. On the other hand, the Agency argued, where the Agency
does not use set-off as the method of collection, the Agency should have
direct recourse to the courts.

The Board concludes that it has jurisdiction over this appeal for the
following reasons.

* Departmental practice has not limited the scope of "disallowance"
determinations to funds specifically awarded but has included other
types of project funds. The Board has reviewed as "disallowances"
Agency determinations involving grant-related income and other funds
such as the grantee's required non-federal (4) share or funds improperly
drawn down to cover overexpenditures. /3/ Interest and other investment
income earned on advances of grant funds is grant-related income. 45
CFR 74.40.

* The Agency's OHD Grants Administration Manual (which applies to the
Head Start program, 42 Fed. Reg. 21046, April 22, 1977) specifically
stated that grantees are accountable to the Agency for income generated
by activities performed under projects supported by Agency grants, and
the Manual includes in that category interest earned. Chapter 3, B.1.a.
The Agency has not shown why interest, as grant-related income, is any
different from other funds for which a grantee is accountable under the
terms of the award. The Manual provides that a grantee has appeal
rights from Agency decisions that the grantee has failed to discharge
its obligation to account for project funds. Chapter 3, S.1.b. The
Agency's regulations provide that the Board's procedures apply to Head
Start grants. 45 CFR 1301.10 and 1301.34. The logical implication,
therefore, is that the obligation to account for interest income is part
of the grantee's general obligation to account for project funds, and
that a determination about that requirement is, therefore, appealable to
the Board.

* Repayment of interest does not fall within the exceptions
specifically set out in Para. C(a)(1), nor is it the same type of
determination. Determinations of award amount are pre-award questions
involving program policy. Agency determinations about disposition of
unobligated balances similarly affect the amount of funds made available
for project purposes. Departmental regulations set out options for
disposition of program-related income, and the choice of option is made
at the outset of the grant award.

* The Agency's choice of collection procedure should not determine
the Board's jurisdiction. The effect of such a policy would be to
permit the Agency to defeat (5) a right of appeal merely by its choice
of collection procedures.

* The Board has considered the question of earned interest several
times. The Agency and other constituent agencies never questioned the
Board's jurisdiction. Education Commission of the States, Denver,
Colorado, Decision No. 14, March 10, 1976; University of California -
Letter of Credit, Decision No. 139, December 24, 1980; Family Health
Program, Inc., Decision No. 201, July 31, 1981; North Carolina
Department of Human Resources, supra; San Carlos Apache Tribe of
Arizona, Decision No. 369, supra. The Agency attempted to distinguish
Decision No. 369 by saying that the interest question was considered by
the Board there because disallowed items over which the Board had
jurisdiction had been appealed as well, and the amount of interest
involved was relatively small. The Agency argued that that decision
should not be a precedent for this appeal because here the amount of
interest is large and as yet undetermined, and because the primary issue
in this appeal, the Agency's disallowance of cost items, is no longer
before the Board. This argument is not persuasive. There was no
indication in the appeal resolved by Decision No. 369 that the Agency
believed the Board's consideration of the interest repayment question to
be gratuitous. A right to appeal a particular type of Agency
determination cannot be defeated merely by the Agency's choice of
accompanying determinations. Nor should the size of the disallowed item
affect the Board's jurisdiction. /4/

* The history of the Board's current regulations shows no intent to
narrow the scope of the Board's jurisdiction over direct, discretionary
programs. See 46 Fed. Reg. 1645, January 6, 1981 and 46 Fed. Reg.
43817, August 31, 1981.

Thus, we conclude that the Board has jurisdiction over questions
about the repayment of interest earned on Head Start funds.

(6) Repayment of the Interest Earned on Head Start Funds

The Agency's basis for its request that the Grantee repay the
interest earned on Head Start funds during 1980-81 was 45 CFR 74.47,
which says, in part:

(a) Except when exempted by Federal statute (see paragraph (b) of
this section for the principal exemption), grantees shall remit to the
Federal Government any interest or other investment income earned on
advances of HHS grant funds.

(b) In accordance with the Intergovernmental Cooperation Act of 1968
(Pub. L. 90-577), States, as defined in the act, shall not be
accountable to the Federal Government for interest or investment income
earned by the State itself, or by its subgrantees, where this income is
attributable to grants-in-aid, as defined in the act (42 U.S.C. 4213).

The Grantee set forth three reasons why it should not have to repay
the interest earned: (1) the Grantee is an "instrumentality of the
State" and, therefore, is exempt from repaying the interest; (2) if the
Grantee is not an "instrumentality of the State," the interest recovery
provision of section 74.47 is invalid and unenforceable; (3) the Agency
did not provide any guidance or otherwise notify the Grantee that the
Agency considered the interest obligation applicable to the Grantee. We
discuss each of these points below.

1) Whether the Grantee is an "instrumentality of the State."

The Intergovernmental Cooperation Act of 1968 (the Act), 42 U.S.C.
4201 et seq., provides that federal departments and agencies shall
schedule transfer of grant-in-aid funds so as to minimize the time
elapsing between the transfer of such funds and the disbursement by a
State. The provision also stated:

States shall not be held accountable for interest earned on
grant-in-aid funds, pending their disbursement for program purposes.

42 U.S.C. 4213.

The Act defines "State" as:

. . . any of the several States of the United States, the District of
Columbia, Puerto Rico, any territory or possession of the United States,
or any agency or (7) instrumentality of a State, but does not include
the governments of the political subdivisions of the State.

42 U.S.C. 4201(2).

The Act equates the term "political subdivision" and "local
government," and defines them as:

. . . a local unit of government, including specifically a county,
municipality, city, town, township, or a shool or other special district
created by or pursuant to State law.

42 U.S.C. 4201(3).

The Act defines two types of units of local government -- general and
special purpose. General local government units are a county, city,
town, parish, village or other general purpose political subdivision.
42 U.S.C. 4201(4). A special purpose unit of local government is --

. . . any special district, public-purpose corporation, or other
strictly limited-purpose political subdivision of a State, but shall not
include a school district.

42 U.S.C. 4201(5).

The Grantee argued that it is exempt from the requirement to repay
earned interest because it is an "instrumentality of the State" as
defined in the Act. The Agency argued that the Grantee is not exempt
because it is a "local unit of government" or "political subdivision."

Below we summarize the information offered by the parties about the
status of the Grantee. We then consider this information in light of
the definitions provided by the Intergovernmental Cooperation Act and
State law's classification of the Grantee. We conclude that the Grantee
is not an "instrumentality of the State" and, thus, cannot qualify for
the exemption set out in the Act and section 74.47.

The County Superintendent of Schools

The California Constitution created a County Superintendent of
Schools for each of the counties in the State, including Los Angeles
County. There are approximately 50 County Superintendents. Tr., p.
28. State law provides for offices at the State and county levels: a
State Board of Education, State Department of Education and a State
Superintendent of Schools; and County Boards of Education and County
Superintendents of Schools. The California Education Code lists the
State offices under "State Educational Agencies," (8) section 33000 et
seq., and the county offices, including the County Superintendent of
Schools, under county Educational Agencies," section 1200 et seq.
Moreover, the California Government Code, section 24000, includes
superintendents of schools as county officers. Section 24000(k).

The Grantee (County Superintendent) performs a largely administrative
function, transferring funds and administering programs which are
actually carried out by local agencies or delegate agencies. Tr., p.
13. The Grantee also operates certain educational programs for the
county juvenile halls and provides special education for the county, in
conjunction with the local school districts. The Grantee channels funds
to 95 local school districts as well as to other local agencies. Tr.,
pp. 10-11, 30. The Grantee receives 70-80% of its funds from the State,
10-15% from local and federal sources, and the remainder from other
sources such as private foundations. Tr., pp. 15-16. The Grantee is
required by State law to keep all its funds in one account held by the
County Treasury. Tr., p. 11. On the other hand, State law requires all
funds received by the State from the federal government to go to the
State Treasurer. Tr., p. 120. The County Treasurer employs banking
practices which ensure that all funds in the Treasury earn interest.
Tr., p. 14. The interest earned by the Grantee's account is applied to
reduce the Grantee's administrative costs for administering the
programs. Tr., p. 15. The Grantee receives monthly installments of its
Head Start grant from the Agency. These payments are in equal amounts
and do not reflect the actual costs incurred by the Grantee at a
particular time. The Agency determined the system of payment. Tr., p.
46. The Grantee does not deny that it earned interest on these Head
Start funds.

The County Superintendent of Schools is appointed by the Los Angeles
County Board of Supervisors (in some counties, the Superintendent is
elected). Tr., p. 31. The County Board of Education approves the
Grantee's budget. Tr., p. 38. The Grantee's office expenses are paid
out of the county's general fund. California Education Code, section
1202. The Grantee's employees are not county employees but are
considered employees of the County Superintendent of Schools. Tr., p.
39. State law provides that the Grantee's legal counsel will be
provided through the County Attorney's office, Tr., p. 64.

Analysis

The Grantee argued that it is not a "political subdivision" or "local
unit of government" because it is not a school or (9) other special
district. /5/ The Grantee argued that the Superintendent's powers and
duties are markedly different from those exercised by the school
districts and local units of government, and that the Superintendent's
function is an extension of the responsibilities of the State
Superintendent of Schools. The Grantee argued that it is a part of the
statewide common school system and, therefore, is an "instrumentality of
the State." Tr., pp. 32-33.


Both parties suggested that the Grantee does not fit precisely the
definition of either "instrumentality of the State" or "political
subdivision." /6/ Tr., pp. 116-124. However, the Agency argued, and we
agree, that the Grantee is not an "instrumentality of the State" and,
therefore, not exempt from repaying earned interest.


We first address the question of what is a state agency or
instrumentality within the meaning of the Act. The Act omits
definitions for these terms, and neither party provided us with a
definition of state agency or instrumentality. /7/ The fact that the
Grantee was created by State law is not determinative of its status for
purposes of the Act, because the definition of "political subdivision"
includes "special districts created by or pursuant to State law." As we
noted above, the California Education Code does not list the County
Superintendents of Schools under "State Educational Agencies." The
Grantee did not indicate that it has any direct links with the State
Educational Agencies, except that it reports to them about the local
implementation of statewide educational policy. The Grantee sought an
opinion from the County Attorney's office in February 1981 and again in
August 1982 about its status for purposes of exemption from the
requirement to repay earned interest. Attachments D and E, Grantee
submission, April 13, 1983. Neither opinion contains reasons for the
County Attorney's conclusion that the Grantee is an "instrumentality of
the State." Moreover, (10) the record contains no opinion by the State
Attorney General about the status of the Grantee.


Thus, we have no clear indications in the record that State law
classifies the Grantee as an "instrumentality of the State." Since local
units of government, including school districts, serve in part to
implement state-directed functions, such as the administration of
justice, assessment of property, and education of the citizenry, we
cannot assume that the mere fact that the Grantee implements state-wide
educational policy and receives money from the State to do so makes the
Grantee an "instrumentality of the State."

Since State law does not clearly indicate the Grantee's status, we
will consider the reasonableness of the Agency's determination that the
Grantee is not an "instrumentality of the State." /8/ There are many
ways in which the Grantee is "local." The Superintendent is appointed by
the County Board of Supervisors and the Grantee's funds must be
deposited in the County Treasury and are subject to banking controls by
the Treasuer. The Grantee's legal counsel is the County Attorney's
office. The Grantee's functions serve the needs of the county, even
though the Grantee is implementing state, federal or private programs.


The Agency also pointed out that the statute authorizing the Head
Start program limits award of these grants to a recipient that is a
"local public or private non-profit agency." 42 U.S.C. 9836(a) (formerly
42 U.S.C. 2928c). The Agency argued persuasively that the Grantee
cannot claim a local status for purposes of receiving a Head Start award
and then claim that it is an instrumentality of the State in order to be
exempt from repaying interest it earns on the federal funds.

(11) Clearly the Grantee is not a county, municipality, city, town or
township. We also think that the Grantee is correct in pointing out
that it is not a school district. /9/ However, the statute does not
limit the term "political subdivision" to these entities. The
definition uses the word "including," thereby implying that other
similar entities may also be included in the term. Moreover, we think
that the Grantee's status is at least analogous to a "specisal
district." The Agency also suggested that possibility. Tr., p. 119.
The Act defines a special purpose unit of local government as a special
district, public purpose corporation or other strictly limited-purpose
political subdivision of a state. See above, p. 7. Special districts
are generally created to serve specific purposes, for example, water or
sewer districts or health or park districts. These districts frequently
overlap with local governments because they attempt to administer a
function which the local unit of government might otherwise do, but
cannot do adequately. This is precisely what the Grantee argued its
purpose was -- to handle educational functions which the local agencies
could not. Tr., pp. 10-11.


Thus, in summary, State law does not clearly label the Grantee as a
State agency, and if anything, implies otherwise. The State Attorney
General has not rendered an opinion about the Grantee's status. Since
school districts are not State instrumentalities under the Act, there is
no reason to consider the Grantee an "instrumentality of the State"
simply because it is part of the state-wide school system. The Grantee
is closely connected to the county whose needs it serves. The Grantee
was required to have a local status for purposes of acquiring the Head
Start funds. Thus, we think it is reasonable to conclude that the
Grantee is not an "instrumentality of the State" for purposes of the
Act. Furthermore, the Grantee's status is analogous to special purpose
entities of a local nature and it is reasonable to (12) conclude that
the Grantee is a form of special district, and, thus, a "political
subdivision."

2) Whether the interest recovery provision of section 74.47 is valid

The Grantee argued that, if it is not an instrumentality of the
State, then the regulation is invalid as applied to the Grantee. The
Grantee argued that, under the rationale expressed by the Supreme Court
in Pennhurst State School and Hospital v. Halderman, 451 U.S. 1, 16-17
(1981) and other recent cases discussed briefly below, a regulation is
invalid if it imposes a burdensome affirmative obligation not clearly
required by a federal statute. The Grantee alleged that no federal
statute, including the Intergovernmental Cooperation Act of 1968 and the
statutory authorization for the Head Start program, authorizes
collection of interest from entities that are not states. Furthermore,
he Grantee argued that the regulation imposes a burdensome affirmative
obligation on the Grantee and bears no reasonable relationship to the
Head Start program. The Grantee also suggested that fairness should
prevent the Agency from collecting the earned interest. For example,
the Grantee pointed out that it must advance funds to its delegate
agencies for their operating costs and that, in at least two months, the
Grantee advanced its own funds to cover expenses incurred for the
program. The Grantee also noted that there is no federally-imposed
obligation on the part of the Grantee to invest Head Start funds.

Initially we note that this Board is bound by applicable laws and
regulations. 45 CFR 16.14. As we stated in the Background above, 45
CFR Part 74 applies to the Grantee's Head Start award, and, as we
concluded in section (1), the Grantee is not exempt from section 74.47.
Thus, we see no need to discuss the Grantee's argument ons the validity
of section 74.47 in great detail. However, we have concluded that the
regulation is valid. Our conclusion is based on the following points.

* We think that the cases relied on by the Grantee do not set out a
standard that controls this appeal. Two of the cases are
distinguishable from the appeal before us because they arose in the
context of whether the federal government can impose affirmative program
obligations on a State, as a condition of the award, when the statutory
obligation to provide the services is not clear. Pennhurst, supra;
Board of Education of Hendrick Hudson Central School District Bd. of
Ed., Westchester County v. Rowley, 102 S.Ct. 3034 (13) (1982). /10/
Here, the Agency is not imposing an affirmative program obligation, but
rather a financial management condition. The third case referred to by
the Grantee, Bell v. New Jersey and Pennsylvania, 103 S.Ct. 2187 (1983),
actually supports the Agency's position rather than the Grantee's
arguments. In Bell the Supreme Court held that the Elementary and
Secondary Education Act and its legislative history clearly provided for
recovery of misspent funds. When the State of New Jersey argued that
imposing liability on it for misspent funds interfered with its state
sovereignty, violating the Tenth Amendment, the Supreme Court said that
it did not. At 2197.

* We know of nothing which requires an Agency to have specific
statutory authority to impose a reasonable financial management
requirement on grantees. Congress or the federal government may impose
terms and conditions on federal grants as long as the grantee's
participation in the program is optional and the grantee is free to
withdraw. Oklahoma v. United States Civil Service Commission, 330 U.S.
127, 143 (1947); King v. Smith, 392 U.S. 309, 333 (1968). Here,
section 4213 of the Act requires a minimal lapse of time between
advances of federal funds to states or political subdivisions. Yet the
Act specifically exempts only states from repayment of interest. Thus,
the Act, read as a whole, implies that other entities such as political
subdivisions, may be required to repay interest earned on federal funds.

* The Agency's regulation has a specific purpose which is reasonably
related to the implementation of the Head Start program. When the
Agency made Part 74 applicable to the Head Start program, it explained
that the Head Start program needed a set of definitive program and
grants administration rules which apply uniformly to all grants offered
by the (14) Department of Health and Human Services. 41 Fed. Reg.
18606, May 5, 1976. The reason for the requirements set out in sections
74.47 and 74.61(e) /11/ is that funds are paid to a grantee to
accomplish the purposes of the grant, not to provide opportunities for
profit at the expense of the United States Treasury. 1 Comp. Gen. 652
(1922); GAO Report on Letter of Credit Procedures Used by the
Department of Health and Human Services, in Federal Contracts Report
39:116, January 10, 1983.

* As we conclude in section (3), the Agency's requirement to repay
earned interest is unambiguous and has been in existence for a number of
years. Thus, even if Pennhurst applied to this appeal, the Agency
clearly notified the Grantee of its obligation to repay earned interest.

* The Grantee has not shown how its arguments about unfairness
provide a basis for concluding that the regulation is invalid or that it
should not be applied here.

3) Whether the Grantee had adequate notice that the requirement to repay
interest applied to the Head Start award.

We noted above that the Head Start regulations made 45 CFR Part 74
applicable to all Head Start grants. Furthermore, 45 CFR Part 74 says
that it applies to all Departmental grants. 45 CFR 74.4(a). Both Part
74 and the Head Start regulations were published in the Federal Register
prior to the Grantee's award. 43 Fed. Reg. 34076, August 2, 1978; 44
Fed. Reg. 24061, April 24, 1979. The Grantee testified that the Agency
supplied it with copies of numerous regulations and guidelines which
applied to its grant, including Part 74, and that particular persons
within its office were responsible for analysing the requirements to
which the Grantee was subject. Tr., p. 51. The Grantee also testified
that it provided its auditors with copies of these requirements and that
the question of repayment of interest first arose when the auditors
identified the existence of earned interest. Tr., pp. 59-60.

Despite this, however, the Grantee argued that it had received no
advice or assistance from the Agency about the (15) requirement to repay
interest. Moreover, the Grantee argued, the Agency did not enforce this
requirement during the first year of the Grantee's award (1979 - 1980).

The Grantee clearly had constructive notice of the applicability of
Part 74 and the requirement in section 74.47, when these regulations
were published. The Grantee has testified that it had copies of alls
the applicable terms and conditions, including Part 74, and that it
provided its auditors with these regulations. The auditors then
identified the existence of such interest. Government Exhibit A. We
know of no requirement that the Agency individually counsel each grantee
about its responsibilities and point out each applicable requirement.
Although the Agency does issue interpretations or clarifications of
ambiguous regulations, we see nothing ambiguous or unclear about this
requirement. There is no evidence that the Grantee asked the Agency
about its responsibility to repay interest.

Moreover, there is no evidence that the Agency failed to enforce
section 74.47 during the first year of the award. Apparently the
auditors did not identify the existence of earned interest during the
first year. Tr., p. 59. Since the Agency generally acts on the basis
of audits or other information identifying unallowable costs or other
violations, the Agency would not have acted unless it had notice that
the Grantee had earned interest. The Agency has indicated that it now
intends to collect all interest earned. See n.1 above.

We conclude that the Grantee had adequate notice of the requirement
to repay earned interest.

Conclusion

We conclude that the Grantee is not exempt from the Agency's
requirement to repay interest because it is not an "instrumentality of
the State." We also conclude that section 74.47 is valid and that the
Grantee had adequate notice of its applicability to the grant award.
The Grantee admits that it earned interest on the Head Start funds.
However, since all the Grantee's money is in one account maintained by
the County Treasurer and the funds earn variable interest rates on a
daily basis, the Grantee claims that it is burdensome and expensive to
determine how much interest should be allocated to the Head Start funds.
The Grantee has estimated the amount of interest earned by the grant
over a three year period and testified that the County Treasurer reports
for each account the amount of interest earned. Therefore, the Grantee
should be able to identify how much of that interest is appropriately
allocated to the Head Start funds. The Agency has indicated in a letter
to the Grantee that the reasonable cost of calculating the (16) interest
earned on the award is an allowable charge to the grant, and that the
Regional Office is available to provide assistance in making the
calculation. Agency submission, August 12, 1983.

Thus, we uphold the Agency's disallowance of the amount of interest
earned on the Head Start award for the period in question. /1/ The
parties have not identified the amount of interest in dispute
here. The Grantee indicated that the total amount of interest earned
for three years of the award is approximately $1 million and that it has
not been able to allocate that estimated amount to particular years of
the award. Tr., p. 74. The Agency stated that it intends to demand
repayment of interest for other grant years as well. Agency Response,
May 18, 1983, p. 2., n.1. /2/ Normally the Board will not
consider an appeal that the parties do not want the Board to hear. The
circumstances in this appeal were unusual, however. The Agency included
the repayment of interest question in its notice of disallowance, and
that notice instructed the appellant of its appeal rights under 45 CFR
Part 16. The Agency later challenged the Board's jurisdiction and, at
the same time, requested the Board to issue an advisory opinion on the
merits. Although the Grantee agreed with the Agency about the Board's
jurisdiction, it objected to the Board rendering an advisory opinion.
Neither party, however, wanted to voluntarily withdraw the appeal from
the Board's consideration. The parties asked the Board to rule on
jurisdiction and, if necessary, decide the merits. /3/ See,
e.g., The Neighborhood House Association, Decision No. 136, December 1,
1980; Combined Community Child Development Services, Inc., Decision No.
292, April 30, 1982; Southeast Mississippi Community Action Agency,
Decision No. 320, June 30, 1982; Ventura County Commissions on Human
Concerns and Community Development, Decision No. 359, November 30, 1982.
/4/ When the Board revised its regulations in 1981, it invited comment
on whether cases of under $5000 should be reviewed. Based on the
response, the Board determined that it should continue to review small
cases. See 46 Fed. Reg. 43816, August 31, 1981. /5/ The Act
merely provides that a "political subdivision" is not an
"instrumentality of the State." However, even if an entity is not a
"political subdivision," it is not necessarily an "instrumentality of
the State." /6/ The Grantee, on its application for a Head Start
grant, under box 8, Type of Applicant/Recipient, did not check either
State or County, but instead checked "other." Tab B, Agency Submission,
May 18, 1983. /7/ The Agency referred to federal cases that define what
is a "federal agency." We do not think these cases are relevant
here because the meaning of state agency is not necessarily analogous to
the meaning of federal agency. /8/ The Comptroller General
considered the basis for determining which entities are entitled to the
exception set out in the Act, and concluded that a federal grantor
agency is bound by the classification of an entity in State law. 56
Comp. Gen. 353, 357 (1977), in Principles of Federal Appropriations Law,
U.S. General Accounting Office, 1982, p. 13-40. The Comptroller General
also concluded that, in the absence of a clear indication of the status
of the entity in State law, the federal agency may make its own
determination based on reasonable standards. /9/ The Grantee
argued that California State court cases have held that the beneficial
ownership of public school system property is in the State, and that
local zoning and building codes do not apply to school property.
Moreover, the Grantee argued that state case law provides that school
boards are separate entities for purposes of suit and for entering into
contracts. However, the Grantee has already pointed out that it is not
a school district. Moreover, simply because the school system's
property is not controlled by local units of the State does not mean
that a school district is an "instrumentality of the State," and, in
fact, the Act's definition of "political subdivision" includes school
districts. /10/ The Court in Pennhurst held that states are
entitled to know the limits of federal funding at the time they incur
expenditures. The Court found that Congress did not clearly notify the
states that they were obligated to provide certain services if they
received federal funding under the Developmentally Disabled Assistance
and Bill of Rights Act of 1975. In Rowley, the Supreme Court held that
the Education for All Handicapped Children Act did not require a state
to "maximize the potential of each child" by providing a sign-language
interpreter for hearing-impaired children. /11/ 45 CFR 74.61(e)
requires procedures which minimize the time elapsing between transfer of
federal funds and a grantee's disbursement of them. Section 74.47( c)
specifically notifies grantees that they are subject to section
74.61(e).

NOVEMBER 14, 1984