Bronx Professional Standards Review Organization, DAB No. 953 (1988)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT: Bronx Professional Standards Review Organization

Docket No. 87-182
Decision No. 953

DATE:  May 10, 1988

DECISION

The Bronx Professional Standards Review Organization (Grantee/Bronx)
appealed a determination by the Health Care Financing Administration
(HCFA) disallowing $55,512.03 in federal funds for the project period
December 31, 1979 through September 30, 1984, 1/ during which the
Grantee was a federally- funded Professional Standards Review
Organization (PSRO).  Based on its PSRO status, the Grantee claimed an
entitlement to federal funding for payments under its severance pay plan
to employees terminated in 1987.  HCFA's principal reason for denying
this claim was that the employees in question were not terminated either
during the grant period or due to the withdrawal of federal funding, so
that the Grantee's claim was not a reasonable charge to federal funds.

Based on the following analysis, we sustain this disallowance.

Background

The Grantee received a federal grant to operate as a PSRO from December
31, 1979 through September 30, 1984.  In April 1984, in anticipation of
the grant's expiration, the Grantee submitted a Closeout Budget and Plan
to HCFA.  See HCFA Ex. R-2; and Bronx Ex. A, pp. 4-6.  In its Closeout
Plan the Grantee asserted that, since a majority of its contracts were
with New York State, it intended to remain open and would not be
terminating employees, nor seeking federal funds for severance pay.  The
Grantee indicated that if its State contracts were terminated, it "would
at that time submit a second phasedown plan including requested
severance pay."  Bronx Ex. A, pp. 4-5.  HCFA's June 15, 1984, evaluation
of the Grantee's Closeout Plan, evidenced its understanding that the
Grantee was remaining operational and was not requesting severance pay.
The evaluation contained a recommendation to fund the closeout proposal.
HCFA Ex. R-2, p. 3.  HCFA conducted a closeout site visit in November
1984 to confirm that the Grantee had complied "with program directives
in this area."  The report generated by that visit specifically
indicated that the Grantee had "not paid severance to any employee due
to the termination of its grant."  HCFA Ex. R-3.

Almost three years later, in February 1987, the Grantee requested that
HCFA provide $55,512.03 for severance pay costs for 12 individuals who
had been employed by the Grantee during its tenure as a federally-funded
PSRO.  These individuals had remained in the Grantee's employment after
the withdrawal of federal grant funding and were being terminated due to
expiration of the Grantee's contracts with New York State.  See Bronx
Ex. B; and the Notice of Appeal (October 22, 1987).  The issue in this
case is to what extent the Agency was obligated, under its grant
agreement, circumstances surrounding the grant, or general cost
principles, to participate in costs of severance payments owed to
employees who at one time worked on the grant but were not terminated
until long after the grant was over.

Analysis

Based on our examination of the applicable federal law, the Grantee's
claim is unsupportable.  There are essentially two approaches to
recovery suggested by the Grantee's arguments in this case:  to treat
the severance payments as a current cost somehow related to the prior
federal grant, or as an expenditure disbursed now but which was an
accrued cost of the grant project period.  Below, we discuss each of
these possibilities, as they arise in the facts of this case, and
explain why neither is persuasive.

1.    There was no termination of employment during the grant project
      period or due to the withdrawal of federal funding.  Consequently,
      the claim for severance pay is neither a reasonable nor allocable
      charge to federal grant funds.

The federal cost principles applicable to grants for nonprofit
organizations are contained in Office of Management and Budget (OMB)
Circular A-122. 2/  Attachment B to that Circular sets out examples of
selected items of cost which may be charged to federal grant funds.
Generally, severance pay is an allowable charge to federal funds.
Paragraph 44 of Attachment B provides - -

      a.  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.
          . . .

However, this does not make severance pay allowable per se.  OMB
Circular A-122 also provides that, in order to be allowable, a cost must
be reasonable, and allocable to the performance of the award.  OMB
Circular A-122, Attachment A, A.2a.  In pertinent part, a cost is
reasonable if it is the type generally recognized as ordinary and
necessary for the operation of the organization or performance of the
award.  Id. at A.3a.  A cost is allocable to a grant in accordance with
the relative benefits received. Id. at A.4.

The disallowance was based on HCFA's determination that the termination
of the employees was unrelated to the time period of the Grantee's
federal funding.  Therefore, the Grantee's claim of an entitlement to
severance pay could not be viewed as an allowable charge to federal
funds.  Based on the facts and applicable law, HCFA's determination was
reasonable.

It clearly is proper for HCFA to interpret the Circular to mean that an
obvious threshold requirement for any award of federal funds for
severance pay is that the obligation to provide severance pay occur as a
reasonable and necessary cost of PSRO operations during the performance
of a federal grant.  Here, the employees were not terminated in any way
due to the withdrawal of federal funds, nor was the severance pay a cost
incurred during the grant period.  Rather, the record is replete with
the Grantee's assertions that it would neither terminate any employees
nor request severance pay due to the withdrawal of federal funding.  In
fact, these individuals were employed by the Grantee for almost three
years after federal funding was withdrawn.  In this context, the Grantee
has not demonstrated that this cost may be considered as ordinary or
necessary to the performance of the grant award.  There is no basis upon
which to conclude that these costs can be charged on a current, cash
basis to a grant which ended three years earlier.

2.    There is no basis in law or fact to require reimbursement of
      severance pay as an accrued entitlement.

The Grantee asserted that its claim is allowable under a cost accrual
accounting methodology.  The Grantee argued that --

       Under the accrual method, the employee's annual entitlement to
       severance benefits . . . is charged as a cost of doing business
       for that year, and distributed to all final cost objectives . . .
       of that accounting period.  Thus, under the accrual method, the
       federal government pays only for severance benefits relating to
       the specific years when government contracts were being
       performed.

Bronx Br., p. 8.

Additionally, the Grantee referred to "new cost regulations, not in
effect during the years in which the referenced grant was performed"
which provide that accruals of mass severance pay should be considered
on a case by case basis.  The Grantee asserted that "in view of the
actual severance of all employees .  . . effective April 30, 1987" as
well as the precarious funding upon which it had relied "the accrual and
payment of severance benefits should . . . be permissible under the
regulations in effect at the time the grant was entered into . . . [and]
is also fully consistent with the revised cost principle. . . ."  Bronx
Br., pp. 8-9.

Throughout this dispute, HCFA maintained that its policy was to provide
federal funds only for the actual cost of severance pay, and that the
cost principles could not support a claim for accrued severance pay
arising three years after termination of a grant.  See Notice of
Disallowance (September 24, 1987); and HCFA Br., p. 4.

The Grantee's argument is an after-the-fact attempt to find an
accounting methodology to support its claim, rather than a demonstration
that its claim is allowable under the methodology employed during the
grant's performance.  Presumably, the Grantee's allusion to "new cost
regulations" is a reference to OMB Circular A-122, which was effective
during the grant period (June 1981).  The prior cost principle
provisions at 45 C.F.R.  Part 74, Appendix F, G-40(b)(2), provided for
accruals for severance pay under limited circumstances.  Specifically,

       . . . where the institution provides for accrual of pay for
       normal severances, such method will be acceptable if the amount
       of the accrual is reasonable in light of payments actually made
       for normal severances over a representative past period. . . .
       (emphasis added)

The later Circular itself indicates that --

       . . . where the organization provides for a reserve for normal
       severances such method will be acceptable if the charge to
       current operations is reasonable in light of payments actually
       made for normal severances over a representative past period . .
       . .  (emphasis added)

While recognizing the Government's general obligation to participate to
the extent of its fair share in terms of any specific payment, the
Circular clearly prohibits accruals of federal funds for mass severance
pay.  See OMB Circular A-122, Attachment B, 44b.(1) and (2).

However, merely because the Grantee has asserted that the employees'
right to severance pay "accrued" during the grant period does not mean
that accrual accounting principles somehow apply to render these costs
properly claimed and retroactively allowable.  Rather, it is incumbent
upon the Grantee to justify the allowability of these costs under the
accounting methodology applicable to its grant.  There is no evidence to
show that the Grantee's funding agreement with HCFA included a federal
contribution to a severance pay plan based on an accrual accounting
theory, such as the description of a "reserve" set out in Attachment B,
44b.(1) to the Circular.  Further, there is no evidence that the Grantee
charged HCFA, on an accrual basis, in order to fund a severance plan for
its employees.  If the Grantee had been claiming federal funds for a
severance pay plan under an accrual method during the course of its
grant, then it would have received federal contributions to fund its
plan during the grant years.  Subsequently, at the point of termination,
the Grantee would have had some money for the severance payments.

Here, while framing its argument in terms of accrual accounting, the
Grantee's claim for federal funds is actually presented in terms of a
traditional cash basis accounting system, i.e., the request for funds
coincides with the time the payment is made. The Grantee's argument is
based on a misinterpretation of the term "accrued."  While it is true
that the years the employees worked under the federal grant are counted
in calculating the amount of severance pay to which they are entitled,
there is no support for the conclusion that the annual severance pay
increments were allowable charges to grant funds that could be claimed
then, on a current basis, or now retroactively.  The cost principles
require that mass severance pay debts be discharged against current
funding sources since accrued charges for this purpose are specifically
precluded.  See OMB Circular A-122, Attachment B, Para. 44b.(2).  There
is simply no basis in the cost principles to find that the Grantee can
revive the prior grant agreements in order to cover costs incurred later
in time.  3/

3.  The equitable defense of estoppel is inapplicable.

The Grantee placed great weight on the fact that in its April 1984
Closeout Plan it informed HCFA that --

       Should we be notified at a later date that the New York State
       contracts will not be renewed and/or terminated, we would at that
       time submit a second phasedown plan including requested severance
       pay.

Bronx Ex. A, p. 5.

The Grantee argued that this language explicitly reserved its right to
receive a severance pay contribution from HCFA.  The Grantee also argued
that HCFA assented to its request for severance pay by failing to
respond to the language in the Closeout Plan.  Bronx. Br., pp. 5-6.  In
its reply brief the Grantee indicated, for the first time, that it ". .
. deleted from our original close-out plan, a request for severance pay
for the employees who would have been eligible."  The Grantee alleged
that the Regional Project Officer had indicated that the Closeout Plan
could not be approved if it included a request for severance pay, but a
request for severance pay could be submitted at a later date.  Bronx
Reply Br., p. 1.

Overall, the Grantee's foregoing arguments effectively raise the
equitable defense of estoppel.  Estoppel means that a party is prevented
by its own acts from claiming a right to the detriment of another party
who was entitled to rely on the former's conduct and acted accordingly.
See Black's Law Dictionary (5th ed.  1979).  In essence, the Grantee is
arguing that HCFA's failure to respond to the Closeout Plan, as well as
the assertions by the Project Officer, now preclude HCFA from denying
the Grantee's claim for severance pay.

The doctrine of estoppel does not apply here for a variety of reasons.
As HCFA noted --

       The Supreme Court has consistently held that the Federal
       Government cannot be estopped on the same basis as a private
       litigant.  See Heckler v. Community Services of Crawford County,
       467 U.S. 51, 60 (1984) . . .  Indeed, the Court has never held
       that the representations of its agents can give rise to an
       estoppel, and has declined to decide whether even affirmative
       misconduct will estop the government.  See Schweiker v. Hansen,
       450 U.S. 785 (1981) (per curiam); Montana v. Kennedy, 366 U.S.
       308, 314-315 (1961).  The Board itself has taken a less
       restrictive view, but has ruled that at a minimum "the federal
       government cannot be estopped in the absence of affirmative
       misconduct."  New York Department of Social Services, Decision
       No. 788 at 12 (September 19, 1986).

HCFA Br., p. 13

HCFA's failure to respond to the language in the Closeout Plan cannot be
interpreted as affirmative misconduct.  Further, the Grantee's argument
that its failure to submit a definitive severance pay request was in
direct response to a Regional Official's advice is unsubstantiated in
the record.  Moreover, under the rationale of Schweiker v. Hansen,
supra, it is doubtful that such a statement, even if documented, could
estop HCFA. 4/

Moreover, given the context, the only reasonable interpretation
applicable to the language in the Closeout Plan is that in the event
that the Grantee also lost its state contracts at the same time as the
ultimate withdrawal of federal funding it would dissolve its
organization and submit a second phasedown plan. The parties' grant
relationship ceased, at the latest, in March 1985 when HCFA approved the
Grantee's final financial status report--two years before the Grantee
lost its state contracts and ceased operations.  HCFA Ex., R-4.  As HCFA
noted, by definition a grant closeout envisions a termination of the
grantee-grantor relationship at which point the parties have completed
"all applicable administrative actions."  See 45 C.F.R. 74.110. Further,
the regulations also mandate that a closeout occur as promptly as
feasible after expiration of the grant and that a grantee timely submit
all appropriate financial reports.  See 45 C.F.R. 74.111(a) and (b)(3).

Essentially, the Grantee is arguing that it should be allowed to submit
a second Phasedown Plan almost three years after its first was submitted
and funded.  To accept that argument would mean that HCFA could be held
indefinitely liable for federal funding after the end of a grant.  Such
a proposition is clearly unreasonable on its face and without support in
the regulations. The regulations clearly envision a point in time when
the grant- related obligations of both parties are terminated.  Such an
interpretation clearly benefits both parties in the grant relationship.
The parties' grant relationship ended without termination of these
employees.  Thus, the cost of any severance pay obligation which the
Grantee may have cannot be charged to this grant.

Conclusion

Based on the preceding analysis, we sustain the entire disallowance of
$55,512.03.

 

 

                            ________________________________ Cecilia
                            Sparks Ford


                            ________________________________ Alexander
                            G. Teitz


                            ________________________________ Norval D.
                            (John) Settle Presiding Board Member

 


1.     In its initial brief, the Grantee indicated that this appeal
involved severance pay for "twelve individuals employed . . . during the
period from 1974 to 1984."  Bronx Brief (Br.), p. 1.  HCFA's brief and
accompanying documentation indicated that the grant project period at
issue is December 31, 1979 through September 30, 1984.  See HCFA Br. p.
2; HCFA Exhibits (Exs.), R-1 and R-4.  The Grantee did not address this
time discrepancy in its reply brief.  However, it appears that the
Grantee was also a federal contractor, which possibly explains its
status prior to 1979.  We note that the Board's jurisdiction in this
case does not cover any claim arising under a contract.

2.     OMB Circular A-122 was incorporated by reference in the
Department's general regulations on administration of grants, 45 C.F.R.
Part 74.  See 46 Fed. Reg. 30500 (June 9, 1981)  Prior to this, the
applicable cost principles were set forth in 45 C.F.R.  Part 74,
Appendix F, Section G-40.  The cost principles' treatment of severance
pay remained essentially the same during the time at issue.

3.     The Grantee also argued that "some combination" of state and
federal law mandate the payment of "severance benefits," and asserted
that disallowing its claim would adversely affect the seniority and
wages of the employees in question.  Bronx, Br., pp. 4-5; 9.  These
arguments are irrelevant to the issue before the Board which is whether
the Grantee's claim for severance pay may be charged to federal funds.
Further, we note that the Grantee's personnel policy explicitly states
that severance pay is ". . . subject to the availability of funds. . .
."  Bronx Ex. C.  Thus, the Grantee's "obligation" appears to be nothing
more than a conditional promise.

4.     See Shenandoah Professional Standards Review Foundation, DGAB No.
652 (1985), where the grantee PSRO wrote the federal agency stating how
it planned to distribute a refund of FICA taxes.  The agency did not
reply, and the grantee claimed an employee eventually give oral
approval.  We found that the agency was not estopped; mere inaction in
failing to reply was clearly