GAB Decision 022
June 25, 1976 Oregon State-wide Cost Allocation Plan; Docket No. 75-7
Malone, Thomas; DeGeorge, Francis Mason, Malcolm
Costs of support services provided to State grantee or contractor
agencies by other State agencies may be allowable as costs under federal
grants or contracts provided that a State-wide Cost Allocation Plan
(SWCAP) had been submitted and approved by the Department of Health,
Education, and Welfare which acts as the lead agency for this purpose
for all federal grant-making agencies pursuant to OMB Circular A-87 (now
FMC 74-4, 34 CFR Part 255).
Oregon's SWCAP for fiscal years 1970 - 1973 was approved by HEW. Its
proposed SWCAP for 1974 was questioned because of three principal
inclusions which had not been questioned in the earlier period. A
determination disapproving the SWCAP was upheld by the Regional
Director. Oregon appealed. The three items at issue are rental rates
for space in state-owned buildings, costs for data processing services
and costs for legal services.
We sustain the Regional Director because the requirements of A-87
have not been met.
Rental of State-Owned Buildings
The HEW audit found that approximately $2.3 million out of $6.5
million to be charged for rental of space in State-owned buildings would
not be acceptable under the provisions of A-87. These included costs of
construction, interest and space occupied by the State Legislature and
Supreme Court. Over $400,000 of costs reflecting the cost effect of
correcting the rental base are concerned by the State, so that
approximately $1.9 million is at issue.
The State's statutory method of computing rental rates seeks to
produce sufficient funds to pay for additional sites and buildings and
to recover the interest on indebtedness incurred for such purposes. The
audit challenged the rates as including in those respects unallowable
costs. We reach the same result on different grounds. The State does
not appear to have claimed these items as costs except perhaps by
inference in argument. It has instead adopted an approach of setting
rates so as to generate funds for future activities. In effect, it
looks to the future rather than to the past and provides for replacement
at current cost rather than historical cost.
It claims that the rates so set are consistently lower than
comparable market rates, and this appears to be accepted as true.
It asserts that its treatment is reasonable, logical, prudent,
consistent with other prior plans which had been approved, satisifies
the overall purpose of A-87, and provides a fair allocation between
federally assisted programs and others. All this may be accpted as true
and may warrant either reexamination of A-87 or consideration of a
deviation from A-87.
It asserts that a rental rate accounting rate nearly identical with
its own has been established for Federal use under 40 U.S.C. 490 and is
not considered to involve any increment above cost. The asserted
parallelism does not appear to be challenged, although an important
distinction may be noted. The federal system is wholly internal and is
a reasonable and effective system for planning and making adjustments
within the federal government. The State system may be equally
effective as an internal device, but it also affects substantial
payments to be made to the State by the federal government. For that
purpose it is unacceptable.
It appears to be undisputed that the State's computation does not
establish those costs defined as allowable by A-87 and the Regional
Director acted within his authority in rejecting the State plan on that
ground.
It appears possible that properly computed the State may be entitled
to more than the Audit Report recommended, and that a proper computation
would come close to the rates the State reached by its own method. For
example, this may be the result if the State claimed depreciation. If
it lacks adequate depreciation records, it may be permitted under A-87
B.11.b. to substitute reasonable estimates. Some compromise with the
Regional Office might well have been worked out. The State has however
apparently elected not to seek accommodation.
Computer Rates
The audit also questioned billing rates for data processing services
provided by the Executive Department. Of $3.4 million to be recovered
through these billing rates, about $1.6 million were questioned as
representing cost of new equipment and interest. The HEW auditors
agreed that the State was entitled to a use allowance of over $300,000,
leaving about $1.3 million at issue. More generally however, the
auditors also questioned the entire amount for lack of documentation to
show how the rates were computed. Because of the lack of documentation,
which the State has not challenged, we find against the State on the
computer rate issue. The State may of course resubmit to the Regional
Office its plan and properly document it. To avoid misunderstanding we
comment on certain other issues but do not decide them.
The State asserts without contradiction that purchase rather than
lease has resulted in savings of over 25% in costs. It contends that
the rejection of its costing system amounts to a penalty for saving the
federal taxpayers money. This contention has substantial merit. The
rule against allowing interest (A-87 D.7) as it is often interpreted
operates to encourage rental of equipment where leasing-with-option to
purchase or installment purchase is more economical. The United States
finds purchase, installment purchase or lease-with-option basis more
beneficial than straight rental basis for its own acquisitions of
computer equipment but pushes grantees into the less beneficial system
of straight rental. It is neither possible nor necessary, however, on
this state of the record that we pass on the question whether the
computer rates in this case may be allowed under a proper construction
of A-87. The State has conceded that the requirements of A-87 have not
been met and has not challenged the auditors' finding that documentation
showing how the rates were computed was lacking.Only if the plan is
properly documented and submitted to the Regional Office can the issue
be properly determind by the Regional Director. (See University of
California at San Diego, Docket No. 23, Decision No. 13, esp. at pp.
3-4, on the cost principles applicable to computer acquisitions).
The Regional Office also took issue with the spreading of costs over
the payment period rather than the useful life of the equipment. The
payment period (in this case, 5 years), however, is substantially the
useful life of the equipment (usually taken at 5 to 8 years; the Audit
Report in this case refers to IRS recognition of an amortization period
of 5 to 7 years; GAO Report B-115369 (July 24, 1975) p. 18 cited in San
Diego above at p. 4 refers to a useful life of at least 5 years).
The State is also adversely affected by th employment of a use
allowance instead of a depreciation. It asserts that it lacks
depreciation records and that that lack is attributable in part to
reliance on prior HEW approvals which did not require maintaining
depreciation records. The Regional Director responds that the State had
been warned that earlier approvals were provisional and should now be
keeping appropriate records.
It may well be that a rate closer to the State's claim could have
been achieved if the State had responded to invitations to negotiate,
but again, it has apparently declined to seek adjustment by negotiation.
The Board does not wish to be utilized as a recourse for avoiding the
normal processes of negotiation which are available, encouraged by the
Board and generally more productive for all parties than confrontation.
Legal Services
The State claimed inclusion of costs for the services of its Attorney
General's Office. Some of these costs are properly allowable as the
Regional Office reocgnizes. Others are excluded by A-87. Section B-16
of A-87 Attachment B excludes legal services furnished by the chief
legal officer solely in discharge of his general responsibilities as
legal officer. Legal expenses for the prosecution of claims against the
Federal Government are also excluded.
To the extent that there is a disagreement about specific dollar
amounts involved, the State was advised that the amount of this item was
negotiable, but apparently specifically refused to negotiate.
General Policy Considerations
In an Order directed to the State, the record was summarized as
showing no denial by the State that its plan does not conform, in the
requests identified by the Audit Report, to specific requirements of
such plans set forth in A-87, OASC-6 and Chapter 1-77 (now 6-10) of the
HEW Grants Administration Manual. The Order called on the State to
correct any inaccuracy in our summary. In its response, the State did
not challenge this view of the record.
In its thoughtful and persuasive briefing, the State urges that the
specific provisions of A-87 operate, on the facts involved, to penalize
reasonable and beneficial procedures. This may well warrant
reconsideration of some aspects of A-87. In particular, the issuance of
the Cost Accounting Standards Board's No. 414 (4 CFR Part 414; 41 FR
22241, June 2, 1976) reflects a reexamination of the concepts of cost
and profit and a reorientation of approach to capital acquisition costs
which may be appropriately taken into account in any reconsideration of
A-87, A-21 and similar sets of cost principles.
All of these considerations might well have influenced the discretion
the Regional Director could exercise. We need not determine whether we
would have made the same discretionary judgments. It is possible that
the Regional Director had more room for discretion than he recognized.
Nevertheless, since his decision is reasonable and in accordance with
the rules explicitly applicable, and since the State has declined
opportunities to negotiate adjustments with the Regional Office, we
sustain the Regional Director's decision.
The State has repeatedly requested a formal hearing with record and
examination and cross-examination of witnesses. It has not, however,
after specific invitation to do so, identified any material issue of
fact the resolution of which would be materially assisted by such
hearing. (45 CFR Sec. 16.8 (b)(2) and 16.60(c).
The State may resubmit to the Regional Office a cost allocation plan
in accordance with A-87 and will have an opportunity there to support
the plan under A-87 standards and to negotiate negotiable items.
The State has not complied with the requirements of A-87.The appeal
is denied.
OCTOBER 04, 1983