GAB Decision 488
Docket No. 83-163
December 20, 1983
South Central Florida Health Systems Council, Inc.;
Ford, Cecilia; Garrett, Donald Settle, Norval
South Central Florida Health Systems Council, Inc. (Council) appealed
a decision (Docket No. PHS 83-1, dated July 13, 1983) of the Public
Health Service (PHS) Grant Appeals Board (PHS Board) disallowing, as a
cost under a grant to the Council for its budget year beginning in April
1982, a severance payment of $5,954.90 to its executive director. The
payment was made after the executive director voluntarily resigned from
his position. The PHS Board determined that the Council's written
policy on severance pay authorized payment only where an employee was
formally dismissed. As discussed below, we find that the PHS Board's
decision was not clearly erroneous, and uphold the disallowance. /1/
Background
The Council was the health systems agency for a ten-county area of
Florida. Its primary responsibility was the provision of effective
health planning for its area and the promotion of the development within
the area of health services, manpower, and facilities which would meet
identified needs, reduce documented inefficiencies, and implement its
health plans. 42 CFR 122.10(a) (1982).
Because of uncertainties about how much money Congress would finally
appropriate for health systems planning for federal fiscal year 1982 and
whether the fiscal year 1983 appropriation would support area health
systems agencies like the Council, PHS required the Council to submit
both a 12-month operating budget and a three-month closeout budget for
the Council's budget year starting in April 1982. The Council did so in
May 1982. In September, when the situation more clearly called for a
phasing out of area health systems agencies, PHS requested revised
budgets predicated on nine (2) months of operation, from April through
December 1982, and a three month closeout, from January through March
1983. The Council submitted these in November 1982. The Council ceased
its regular operations, already significantly retrenched during 1982, at
the end of that year, and during the period from January through March
1983 took the actions necessary to close down entirely.
By letter dated August 25, 1982, the executive director informed the
president of the Council:
Enclosed is my letter of resignation as Executive Director of the
South Central Florida Health Systems Council, Inc.
* * *
We have talked many times about this being a very trying year for the
health planning program. In particular, we have seen drastic budget
cuts in the program and HSA's, including South Central Florida, are
being asked to continue their activities with less resources. Because
of this lack of funds, and the resources needed to operate our Agency, I
must tender my resignation.
With a number of assignments needing to be completed and to provide a
smooth transition, I will work part-time during the month of October.
In this way the Council will have completed all the administrative
activities to keep it viable throughout its fiscal year.
The letter enclosed with the one just quoted was also dated August
25, 1982 and was addressed to the president and the board of directors.
The opening paragraph stated:
After due deliberation and with deep regret, I am submitting my
resignation as Executive Director of the South Central Florida Health
Systems Council, Inc., effective October 31, 1982.
This letter did not state any reasons for the resignation. On
October 14, 1982 the president of the Council instructed the
administrative assistant by letter, "In conformance with Council policy,
on October 31, 1982 . . . (the executive director) should receive a
check . . . (to) cover his work through the month of October and
severance pay balance. . . ." Also on October 14, the officers committee
of the board of directors voted to recommend to the board of directors
that the executive director be retained as a consultant at a minimum of
five hours per week at $50 per hour for the remainder of the fiscal
year. At the same time, the officers committee voted to recommend that
the board appoint the director of planning as acting executive director
(3) at an annual salary rate of $33,000, $11,240 less than the former
executive director's salary. At its October 20, 1982 meeting, the board
of directors approved the recommendations essentially as presented. The
executive director's consultant contract was signed by the president and
him on November 1, 1982. It provided that the executive director would
perform certain services including developing the nine-month budget and
the three-month closeout budget. PHS later disapproved of the
contract's $50-per-hour rate and decided that only $25 per hour could be
charged to the grant. That decision is not in issue.
Council's Severance Pay Policy
Since 1978 (and possibly earlier) the Council had a written policy
providing for severance pay for employees laid off or dismissed because
of termination of position or lack of funds. In October 1982 the policy
read:
In the event an employee is dismissed by the South Central Florida
Health Systems Council because of the termination of the position or
lack of funds, the employee will be given a two weeks notice and
provided funds are available receive severance pay on a pro rata basis
as follows:
YEARS OF SERVICE 1 year 1 week 2 years
3 weeks 3 years 5 weeks 4 years 7
weeks 5 years + 9 weeks
The executive director had four years of service, so the
corresponding table amount for him was 7 weeks of salary.
PHS Board Decision
The PHS Board disallowed the cost of the severance payment on the
grounds that the Council's severance pay policy explicitly limited the
payment of severance pay to those employees who received notice of
dismissal because their positions were being terminated due to lack of
funds, that the executive director was not formally dismissed but
voluntarily resigned and that his position was filled by an acting
executive (4) director. The PHS Board cited OMB Circular A-122,
Attachment B, 44.a., /2/ which provides that --
Severance pay, also commonly referred to as dismissal wages, is a
payment in addition to regular salaries and wages, by organizations to
workers whose employment is being terminated. Costs of severance pay
are allowable only to the extent that in each case, it is required by
(i) law, (ii) employer-employee agreement, (iii) established policy that
constitutes, in effect, an implied agreement on the organization's part,
or (iv) circumstances of the particular employment.
Further, the PHS Board noted that, under Attachment A to OMB Circular
A-122, one factor which must be considered in determining if a cost is
allowable is whether or not the cost is "accorded consistent treatment"
with other costs incurred for the same purpose. In this connection, the
PHS Board found that the Council followed its severance pay policy as
interpreted by the PHS Board with respect to other employees who
received severance pay, sending them notices that their positions were
being terminated due to lack of funds.
In sum, the PHS Board adjudged the severance pay cost unallowable on
the ground that "voluntary resignation was outside the scope of the cost
principles and grantee's own policy regarding severance pay."
Applicability of Council's Severance Pay Policy
The Council took the position that the payment was allowable since it
was required by the Council's written policy on severance pay. The
Council stated that --
(it) was clearly the intent of the policy . . . to issue severance
compensation to employees who left the Council due to lack of funds or
when a position was terminated. In this specific case the employee left
the Council and his position (Executive Director) was, in fact,
terminated. The record shows that a new Executive Director was not
hired because the Council terminated the position and because there were
insufficient funds to pay someone (5) in that position. The Director of
Planning was appointed acting only and was in charge of close out
activities.
(Letter from Bossert to Settle, dated September 12, 1983, p. 1)
The Council also asserted that the executive director, by his
resignation, saved the Council an additional five months' pay, which was
beneficial to the Council in view of the fact that federal funding had
been reduced, and federal legislation for continued health planning
agencies was doubtful at the time. The Council argued that, under the
circumstances, it was "reasonable to view (the executive director's)
termination as a dismissal . . . ." (Letter from Bossert to Director,
Division of Grants and Contracts, dated May 6, 1983)
In response, PHS pointed to the dismissal letters that the Council
had issued to all other staff who received severance pay. These
letters, PHS argued, illustrated that the Council and the executive
director recognized the distinction between termination and resignation.
(Memorandum from Director, Division of Grants and Contracts, to Regional
Health Administrator, dated June 1, 1983, p. 2)
PHS also challenged the Council's position that the resignation was
prompted by the Council's lack of funds. PHS noted that annual salary
rate increases for four staff members including the executive director
between May and October 1982 amounted to $15,179; that the Council
budgeted $5,100 for the executive director's severance payment; and
that the $5,000 budgeted for the executive director's consultant
contract came to an hourly rate more than double that of his prior
salary as executive director. (Memorandum from Director, Division of
Grants and Contracts, to Regional Health Administrator, dated June 1,
1983, pp. 1-2)
We conclude that PHS did not clearly err in determining that the
severance payment was not allowable on the basis that the executive
director voluntarily resigned. This Board has previously held that a
personnel policy providing for severance pay only in the context of a
dismissal "was a decision to preclude its award in any instance of
voluntary resignation." Alcoholism Center for Women, Decision No. 222,
October 29, 1981, p. 4. We are not persuaded that the circumstances in
the instant case make that precedent inapplicable. The Council's
closeout budget, submitted to PHS in May 1982, includes $5,100 for
severance pay to the executive director. The accompanying budget
justification states that "(included) in the line item is severance pay
based on Council policy. . . ." (Letter from Bossert to Reich dated May
25, 1983, enclosures, pp. 8, 10) From this, (6) one might infer that the
Council intended to dismiss the executive director and award him
severance pay. However, there is no indication in the record that the
Council would have dismissed the executive director before it ceased
operations in March 1983, at which time it in fact dismissed the acting
executive director. Since the resignation preceded a likely dismissal
by five months, we cannot find that PHS clearly erred in not viewing the
resignation as tantamount to a dismissal. /3/
Even if the resignation is viewed as tantamount to a dismissal, there
has been no clear showing that the resignation was due to "the
termination of the position or lack of funds" within the terms of the
Council's policy on severance pay. Although the Council asserted that a
new executive director was not hired, the board of directors
specifically voted to appoint one of its staff members as acting
executive director. (Minutes of the October 20, 1982 meeting of the
board of directors, p. 14) Contrary to the Council's suggestion, we see
no reason why this individual should have been paid as much as his
predecessor to be considered as having filled the position. Nor does
the fact, noted by the Council, that the acting executive director was
only in charge of closeout activities mean that he did not fill the
position, since his predecessor would also have performed such duties
had he not resigned. Moreover, the president on February 28, 1983 sent
a letter to this individual stating that "your position as Acting
Executive Director . . . will be terminated . . . ." If the position of
executive director had previously been terminated, it would not have
been necessary to later terminate the position of acting executive
director. Thus, we conclude that the executive director's departure was
not due to the termination of his position.
Furthermore, it is not clear that the executive director's departure
was due to a lack of funds for the position. The Council asserted that
his departure saved five months' salary. At an annual rate of $44,240,
the savings would have (7) been $18,435. However, as PHS pointed out,
this savings was offset in part by the $5,000 consultant contract /4,/,
an expense which would not have been incurred if the executive director
had continued in his position. /5/
Moreover, the Council did not dispute that salary increases totalling
over $15,000 were granted from the period May to October 1982. (The
record is not clear, however, with respect to how much of this increase
was paid out from the time the executive director resigned until the
Council ceased operations.) Thus, the Council could have substantially
offset the savings from the executive director's resignation by
foregoing the salary increases. We note, moreover, that the executive
director's salary was increased from $40,000 to $44,000 annually. To
the extent that the savings from the resignation reflected this
increase, the savings could be regarded as illusory. The individual
appointed acting executive director went from a salary of $26,000 to a
salary of $33,000. To the extent that this increase was due to his new
position, it was an unnecessary expense absent the executive director's
resignation.
The Council argued that, under its policy, an employee is entitled to
severance pay even where "the lack of funds is not complete" as long
as
there are insufficient funds to pay the employee's entire salary.
(Letter from Bossert to Director, Division of Grants and Contracts,
dated May 6, 1983, pp. 1-2) However, there would have been sufficient
funds to cover the executive director's entire salary in view of the
offsetting factors discussed above.
Accordingly, we find that the executive director's resignation was
outside the scope of the Council's severance pay policy for the further
reason that it was not due to the "termination of the position or lack
of funds."
(8) Circumstance of the Particular Employment
In an Order issued in this case, the Presiding Board Member indicated
tentative agreement with PHS's position that the payment in question was
not "required by . . . established policy," but invited further
information and argument regarding whether the payment was "required by
. . . circumstance of the particular employment," another criterion in
OMB Circular A-122, Attachment B, 44.a. (Order dated October 7, 1983)
In response, the Council argued that the payment was required by
equity, asserting that the executive director resigned in reliance on
the understanding that he would receive severance pay. It also
reiterated its position that his action promoted the Council's welfare
in that the Council had insufficient funds to meet its payroll. (Letter
from Bossert to Settle dated October 18, 1983) The Agency stated that
"none of the documentation . . . indicated that the employment
circumstances were unique in any way." (Memorandum from Director,
Division of Grants and Contracts, to Presiding Board Member,
Departmental Grant Appeals Board, dated November 10, 1983)
In Decision No. 222, cited above, the Board commented on the
grantee's argument that there were "circumtances of the particular
employment" requiring severance pay as follows:
The regulatory provision allowing severance pay where particular
circumstances require it cannot reasonably be viewed as a catchall
clause which would allow severance pay when it cannot be justified by
any of the other criteria in the regulation. The regulations evidence
an intent to establish limits for the allowability of severance pay.
Such pay is allowable "only to the extent" that it is required. An
appropriate example would be where an institution such as Grantee would
be harmed if an incompetent executive director were to remain in that
position for a full term. Thus, the element of give and take would
exist where Grantee gives severance pay and the employee steps down in
advance of a predetermined time. (See Health Systems Agency of Western
New York, Inc., Decision No. 221, October 21, 1981.) (p. 4)
Since we have found that the severance payment was not required by
the Council's established policy, to find that the payment was "required
by . . . circumstances of the particular employment" would effectively
make the latter criterion "a catchall clause which would allow severance
pay when it cannot be justified by any of the other criteria in the
regulation." The passage quoted from Decision No. 222 suggests that the
"circumstances of the particular employment" criterion would be
applicable in a situation where the (9) severance pay was a quid pro quo
for some benefit to the grantee from an individual's departure. In the
instant case, however, there is no clear showing that the Council in
fact saved money as a result of the executive director's resignation, or
that the Council could not have met its payroll absent any savings
actually realized.
The Council's allegation that the executive director resigned in
reliance on the understanding that he would receive severance pay has no
bearing on the matter before us. Although the Council's closeout
budget, which included $5,100 for severance pay to the executive
director, was approved by PHS prior to the executive director's
resignation, PHS had no way of knowing that the severance payment would
be based on a voluntary resignation or that it would not comply in other
respects with the Council's policy on severance pay. Thus, there is no
basis for finding that PHS was estopped from disallowing the payment.
Whether the executive director was nevertheless entitled to the
severance payment (to be made from non-federal funds) by virtue of any
reliance on receipt of severance pay is beyond the scope of this appeal.
Conclusion
For the foregoing reasons, we conclude that the PHS Board's
determination that severance pay was unallowable under OMB Circular
A-122, Attachment B, 44.a, was not clearly erroneous, and we sustain the
disallowance. /1/ The appeal procedure here was that provided by 45 CFR
16.12(d) for certain expedited appeals in which our review is
restricted, generally, to whether the appealed decision was clearly
erroneous. /2/ OMB Circular A-122, which sets forth cost
principles for grants to nonprofit organizations like the Council, was
incorporated by reference on June 9, 1981 in the Department's general
regulation on administration of grants, 45 CFR Part 74. This in turn
was incorporated by reference in the notices of grant award to the
Council. /3/ Explaining his action, the executive director later
stated that -- (in) my professional career I have never been fired or
terminated from a position. I felt that such a record could penalize me
in the future. I took the initiative of writing to the Board President .
. . . (Letter to Lyons dated March 22, 1983, p. 2) However, even
accepting this explanation, it is not clear that it was necessary for
the executive director to resign five months early. /4/ Since PHS cut
the rate of pay under the contract by half, the actual
expenditure would have been less than the $5,000 budgeted. However, the
Council would have looked at the budgeted amount at the time it decided
to award severance pay to the executive director. /5/ PHS implied that,
in addition, the Council would have saved the amount of the
severance payment had the executive director not resigned. However, it
appears that he would have been dismissed as of March 31, 1983, and
received severance pay at that point.
NOVEMBER 14, 1984