GAB Decision 560
Docket No. 84101
August 13, 1984
Missouri Department of Social Services;
Garrett, Donald; Teitz, Alexander Ballard, Judith
The Missouri Department of Social Services (Missouri, Grantee)
appealed the decision of the Regional Director of the Department of
Health and Human Services (Agency) affirming the decision of the
Division of Cost Allocation disallowing $24,512.77 in federal financial
participation in costs charged to federal programs. The Agency
determined the costs were unallowable interest payments the Grantee was
making pursuant to an agreement between the Grantee and IBM. The
Grantee argued that the charges should be allowable since the Grantee
applied sound management practices when it negotiated the contract with
IBM, and, in any event, the costs, although labeled "Price Differential
(Finance Charge)," were not unallowable interest payments, but simply
charges for the cost of doing business.
For the reasons stated below, we have determined that the costs in
question were unallowable interest payments, and we sustain the Agency
disallowance.
Our decision is based on the submissions of the parties and the
recording of a telephone conference call.
DISCUSSION
The Agency based the disallowance on its finding that the charges
stated in the agreement between Missouri and IBM (the "Missouri
Agreement") fell within the prohibition of paragraph D.7 of Office of
Management and Budget (OMB) Circular A-87, Attachment B, which provides:
/1/
Interest on borrowings (however represented), bond discounts, cost of
financing and refinancing operations, and legal and professional fees
paid in connection therewith, are unallowable. . . .
(2) Missouri argued that the provisions of OMB Circular A-87, when
taken as a whole, would allow the questioned costs. OMB Circular A-87,
in general, provides that a state, in administering federally-funded
programs, must apply sound management practices, expend funds in a
manner consistent with the underlying agreements and program objectives,
and employ organization and management techniques which assure proper
and efficient administration of the program. OMB Circular A-87,
Attachment A, A.2. According to data presented by the Grantee the
"Missouri Agreement," which it characterized as a lease-purchase
agreement, saved State and federal programs over one million dollars in
data processing costs when compared with IBM's full service rental
agreement. Grantee's Appeal file, Ex. A. Missouri argued that the
principles of OMB Circular A-87 require a grantee to enter into the most
fiscally responsible agreement possible, and Missouri did this when it
negotiated the "Missouri Agreement." Missouri asserted it would
therefore be untenable for the Agency to disallow costs when Missouri
had followed the general mandates of OMB Circular A-87.
Even if the agreement was the most fiscally responsible Missouri
could have entered into (and we do not reach that issue), simply
entering into the most economically sound agreement will not convert
specifically prohibited costs into allowable ones. The sound management
provision does not, by its terms, serve as an exception for otherwise
prohibited costs. This Board has held in other decisions where grantees
have presented arguments for allowing interest expenses for the purchase
of computer equipment that the Board cannot disregard the cost
principles prohibiting federal reimbursement of those costs which have
been implemented by Departmental regulations. See, e.g., Alameda County
Cost Plan, Decision No. 281, April 23, 1982; Vermont State-Wide Cost
Allocation Plan, Decision No. 84, February 26, 1980. /2/
Missouri also argued that the charges were not unallowable interest
payments, but were merely a cost of doing business. Missouri argued
that several provisions of the agreement made it more akin to a lease
agreement and less like the typical purchase agreement. The Grantee
argued that a clause titled "Funding" allowed the Grantee to choose
to
not renew the agreement, and that this is more typical of a lease
agreement. Agency's Appeal File, Ex. 4, p. 8. Missouri also cited
provisions that title remained with IBM until completion of all payments
and that IBM bore the risk (3) of loss during the agreement period, and
said these were attributes of a lease with a purchase option. Agency's
Appeal File, Ex. 4, pp. 7 and 9. Missouri asserted that the "Price
Differential (Finance Charge)" was a charge for Missouri's option to
cancel provided for in the Funding Clause, and that the charges were
therefore not unallowable interest.
We conclude, after examining the agreement and the other documents
submitted by the Grantee, that the charges labeled "Price Differential
(Finance Charge)" are unallowable interest charges. Missouri correctly
pointed out that the fact that the charges are denominated finance
charges is not determinative of the issue. See, Illinois Department of
Administrative Services, Decision No. 271, March 31, 1982. When several
other factors are considered as well, however, it is difficult to
conclude that the charges here are merely charges for Missouri's option
to cancel.
In Illinois, the appellant argued that the questioned payments were
termed interest in the agreement merely to provide tax benefits to the
lessor-seller. The appellant in Illinois did not prevail, however,
because, after examining the agreement, the Board concluded that the
agreement had the attributes of a sale, and, therefore, the charges were
interest. In this case, Missouri argued that the questioned charges
were labeled "Price Differential (Finance Charge)" to disclose how
monies were allocated for accounting purposes. Similarly, we find that
the charges here were interest because the "Missouri Agreement" has
many
attributes of a purchase, and charges labeled "Price Differential
(Finance Charge)" have attributes which are associated with interest on
a long-term purchase agreement. The charges are a percentage of the
purchase price, and the price differential decreases over a period of
time as the monthly payments are made, a characteristic of interest
payments. Similarly, the agreement includes a provision that Missouri
may at any time pay in advance the full amount due and the price
differential will be adjusted to reflect the shorter payment period.
Title in the equipment, passes to Missouri at the end of three years.
Furthermore, the "Missouri Agreement" states that it is an amendment
to
an agreement for the "purchase" of equipment. Missouri is also required
to keep the machines in good repair and operating condition. Grantee's
Appeal File, Ex. B. These are characteristics of a purchase agreement.
Although Missouri argued that the amounts denominated "Price
Differential (Finance Charge)" were payments for the clause giving
Missouri the option to cancel, the Grantee could not show any connection
between the payments and this clause. (4) Missouri argued that the
Funding Clause in its agreement is different from the one discussed in a
different Board case, Alameda, supra., since in the Funding Clause in
this case, Missouri has an option not to renew for any reason, while in
Alameda the funding clause provided for nonrenewal only in the event
funds were not appropriated for the lease or purchase of the equipment.
In that case, the Grantee maintained that the funding clause in the
Agreement for Purchase was evidence that the Grantee was paying IBM for
the use (rather than the purchase) of the equipment. This Board
reasoned that the funding clause was simply protection for IBM and the
Grantee against default if funds were not appropriated, and went on to
decide that several factors--including the denomination of the agreement
as one for purchase and the fact that title passed to the
Grantee--indicated that the questioned charges were interest payments.
We do not find the difference between Missouri's Funding Clause and the
one in Alameda by itself sufficient to overcome the persuasive evidence
that the payments were finance charges. Missouri did not show that it
had negotiated with IBM before the final agreement to pay the questioned
costs for an option to cancel. Indeed, Missouri's Request for Proposal
for data processing equipment and IMB's response indicate that the
Funding Clause was simply included in the agreement and that no separate
price was to be paid for the inclusion of the Clause. Agency's Appeal
File, Ex. 2, p. 75.
CONCLUSION
For the reasons stated, we uphold the disallowance in the entire
amount of $24,512.77. /1/ The principles contained in OMB Circular A-87
(previously designated as FMC 74-4) are made applicable to HHS
governmental grantees at 45 CFR 74.171 (1982). /2/ Although
encouraged to amend the no-interest rule to allow for reimbursement of
interest costs connected with the purchase of computer equipment, OMB
did not. See, 45 Fed. Reg. 27363, April 22, 1980.
JANUARY 08, 1985