DAB Decision 40
October 13, 1977 University of California Indirect Cost Rate; Docket
No. 76-6; Decision No. 40 Hastings, Wilmot R.; DeGeorge, Francis D.
Yourman, Edwin
DECISION
This case involves an appeal by the Regents of the University of
California (the "Grantee") from a decision of the Regional Director,
Region IX (the "Regional Director"), of the Department of Health,
Education, and welfare ("DHEW") upholding a determination by the
Assistant Regional Director for Financial Management, Region IX (the
"ARD/FM") of indirect cost rates applicable to the Grantee for the
fiscal years ending June 30, 1976, and June 30, 1977.
After submission by the Grantee and by DHEW of their initial
documentation relating to this appeal, the Board, making an initial
determination that no material issue of fact appeared to be in dispute,
ordered on its own motion that an informal conference be held with the
parties to assist in the clarification of the complex and difficult
questions presented. That informal conference was held on March 22 and
23, 1977, attended by the full panel of the Board, representatives of
the parties and representatives of the National Association of College
and University Business Officers ("NACUBO"), as an amicus curiae.
Subsequent to that informal hearing, the parties and NACUBO submitted
additional briefs.
1. The Subject of the Appeal. The Grantee receives numerous Federal
grants and contracts providing financial assistance for its activities,
one major category of which is for basic or "organized" research.
Eligible for reimbursement under those grants and contracts are not only
costs directly associated with the organized research activity, such as
salaries of research staff, but also a share of certain of the
"indirect" costs of supporting the Grantee's operations generally.
In
other contexts, these indirect costs are often characterized as
"overhead." Rather than computing reimbursable indirect costs on a
grant-by-grant basis, the Federal government has established
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procedures for determining overall indirect cost rates for each
multiple-grant grantee applicable to defined categories of grants,
relying principally on negotiations between the grantee and the
designated lead Federal agency for that purpose. For educational
institutions, that agency is DHEW.
The single indirect cost rate involved in this appeal is the Grantee's
"on campus organized research" rate. The Grantee commenced the
negotiation process with DREW for fiscal years 1976 and 1977 by
submitting a formal detailed proposal on August 15, 1974, based on
fiscal year 1973 data. Among the proposed indirect cost rates was a
35.25% rate for on campus organized research. That is, the grantee
proposed that for each $100 of total direct costs (modified in a manner
not here relevant) of Federally-supported organized research, the
Grantee would be entitled to receive an additional $35.25 as an indirect
cost reimbursement.
The indirect cost rate for any given cost objective, such as non campus
organized research," is itself comprised of numerous component parts,
such as maintenance and operations allowances, building and equipment
use allowances, general and administrative expenses and the like. Each
component part is the product of a complex analysis of expense
categories, cost pools, allocation procedures and cost objectives in
accordance with general cost accounting principles. In this case, the
Grantee's initial calculations resulted in the 35.25% rate for the on
campus organized research cost objective.
This appeal involves disputes as to certain of the component parts of
this proposed rate, as discussed in detail below.
After the Grantee's original proposal was submitted to DHEW, the ARD/
FM. requested the DHEW Audit Agency to review and report on certain
aspects of that proposal, and informal negotiations commenced. Four
reports of the Audit Agency resulted: No. 57025-09 dated April 15,
1975, No. 67032-09 dated July 1, 1975, No. 67045-09 dated August 21,
1975, and No. 67042-09 dated October 9, 1975. Negotiations between the
Grantee and the ARD/FM produced agreement as to some but not all of the
issues then remaining in dispute. On December 23, 1975, the ARD/FM made
a "determination" that the applicable on campus organized research
indirect cost rate for fiscal years 1976 and 1977 would be 28.22%.
Pursuant to the informal appeal procedures of 45 C.F.R., Part 75, the
Grantee appealed this determination
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to the Regional Director, then proposing a revised rate of 34.56%.
After an informal hearing before the Regional Director, on April 7,
1976, the Regional Director sustained the ARD/FM on all material points,
but adjusted the rate to 29.02%. This appeal followed. Further
adjustments proposed by the Grantee have modified its currently proposed
rate to 33.8%. The DREW determined rate remains 29.02%.
2. The Scope and Nature of Review by the Board. During the informal
conference on this matter, the Board requested that the parties and the
amicus address themselves to a preliminary question: What is the proper
scope and nature of the review by the Board of a DHEW indirect cost rate
determination? The issue has been the subject of a variety of
formulations by the parties and the amicus, sometimes cast in terms of
which action the Board is reviewing (i.e., the Grantee's final proposal
or the DREW determination) and what is the standard for such review, and
at other times cast in terms of whether there is any "presumption"
of
validity to the Regional Director's decision or in terms of who has the
"burden of proof."
We do not believe that formulations cast in terms of "presumptions"
or
"burdens" are particularly helpful, since such terms merely serve
as
labels for results. Rather the answer must be found in the general
framework of the function of the Board within DREW, the general
responsibilities of DREW with respect to indirect cost rate
determinations, the nature of the problem involved and the procedural
posture in which the case reaches us.
(a) Function of the Board. The Board was established in 1973 (38
F.u. 9906) for the purpose of reviewing designated classes of
post-award disputes arising in the administration of grants by
constituent agencies of DHEW. It was designed as a vehicle for the
administrative resolution of grantee disputes by persons having a
considerable measure of independence (see 45 C.F.R. Sec. 16.11)
from the agencies directly involved in those disputes, and thus as
adding an additional element of due process to DHEW grant
administration.
(b) DREW Responsibilities with Respect to Indirect Cost
Determinations. DHEW has been
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delegated responsibility by the Congress for the administration of
many of the myriad categorical grant programs here involved.
Within the Federal government, and whether by reason of the terms
of Reorganization Plan No. 1 of 1953 creating DHEW or by the terms
of the statutes authorizing its various grant programs, no one
disputes the general responsibility of DHEW for the efficient
administration of those programs, a responsibility which clearly
includes the duty to assure that appropriated Federal funds are
spent only for authorized purposes and in an authorized manner.
DHEW's own regulations make clear that it "will apply" the cost
principles of Appendix D to 45 C.F.R., Part 74, Subpart Q /1/ "in
determining" the costs incurred "under any type of research and
development agreement." Appendix D, paragraph A.3. Its procedural
regulations are consistent with the concept of departmental
"determinations". See 45 C.F.R. Sec. 16.5(a) (5) and 45 C.F.R.
Sec. 75.4 and Sec. 75.6(c). See also the DHEW publication OASC-1,
"A Guide for Colleges and Universities" (September 1974), p.5
(hereinafter cited simply as "Guide"), the provisions of which
were known to the Grantee. In addition, the Office of Management
and Budget has specifically delegated to DHEW the responsibility
to negotiate and audit indirect cost rates for educational
institution grantees in respect of all Federal programs, whether
or not administered by DHEW. Thus the regulatory framework
requires DREW to make a "determination" of indirect cost rates if
the negotiation process reaches an impasse.
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(c) The Nature of the Problem.
(i) The Issue of Judgment. For this purpose we accept DHEW's
position that the application of cost accounting principles to
particular situations requires the exercise of judgment. The
provisions of Appendix D are replete to such terms as
"reasonable", "allocable", "consistent", "equitable
relationship",
"relative benefits" and the like. Indeed, it is general knowledge
that the application of "generally accepted accounting principles"
to particular sets of facts, whether those principles involve the
accrual or the cash method of accounting for financial
presentation purposes or involve cost accounting for reimbursement
purposes, requires the exercise of professional judgment as to
which reasonable persons may differ. Even where, as in this case,
no material underlying fact is in dispute, the notions of what is
"reasonable" or "equitable" or "consistent" in
particular
situations may be reasonably disputed. As noted infra, part of
the problem in this case is that standards set forth in the
applicable Federal regulatory structure designed for the guidance
of the parties during their negotiations may not be adequate for a
reasoned and consistent resolution of disputes once those
negotiations have reached an impasse.
(ii) The Issue of Autonomy. Another variable in the review
process, working at times contrary to other variables, is the
express degree of individual institutional autonomy granted by
Appendix D. As paragraphs A.2 and C.3 of Appendix D make clear,
it is DREW policy not to disregard the academic philosophies,
institutional objectives and otherwise applicable accounting
practices of individual grantees. Put another way, Appendix D
appears to contemplate the minimum degree of Federal interference
with grantee operations and practices consistent with the general
notions of equity and consistency which are the overriding guides
to standards of Federal indirect cost reimbursement.
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(d) Procedural Posture. It is clear that the Board's jurisdiction
under 45 C.F.R., Part 16, derives, in the context of this case,
from an appeal by the Grantee from the adverse determination by
the Regional Director on April 7, 1976, as to the Grantee's on
campus organized research indirect cost rate. In that limited
procedural sense, we are reviewing only the Regional Director's
decision not the propriety of any proposal for indirect cost rates
submitted by the Grantee.
From the above considerations, we conclude that the Board should review
DHEW indirect cost determinations appealed to it on the following basis:
/2/
(i) The Board, as a component part of DHEW, must implement such
Federal law and policy as may have been definitively promulgated
by the Congress and the cognizant Federal agencies; (ii) The Board
will not provide a de novo review of the DHEW cognizant agency
official's decision. The Board is not an adequate forum for
making independent ad hoc determinations as to the application of
cost accounting principles without regard to prior DHEW
determinations in the particular case. (iii) On the other hand,
the Board will not regard any DHEW determination appealed to
the Board as the beneficiary of an abstract presumption of
validity, or dispose of its cases in terms of failures to meet
preassigned burdens of proof. (iv) The standard of review will be
one of reasonableness of the previous DHEW determination,
viewed in the context of entire record and the provisions of
Appendix D, including
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those provisions of Appendix D according to individual grantees
'aide latitude in adhering to their own institutional objectives
and accounting practices. See Oregon Statewide Cost Allocation,
Docket No.75-7, Decision No. 22, June 25, 1976, at p.5. (v) In
reviewing the reasonableness of any particular DHEW decision as
to indirect cost rates, the Board will take into account, among
other things, (A) the history of prior DREW determinations or
agreements with respect to the particular grantee involved, (B)
the extent of changes in past practice involved in the current
DHEW position, (C) the apparent reasonableness and evenhandedness
of the grantee's own proposals and ID) the consistency and
uniformity of the current DREW position in respect of the
particular grantee when viewed in the context of DREW positions
vis-a-vis other grantees similarly situated and the practical
availability of rule-making procedures for the articulation of
such positions. (vi) If the Board reverses a prior DHEW
determination, it will remand the matter to the appropriate
official for further proceedings consistent with the Board's
decision.
3. The Specific Issues.
(a) Operation and Maintenance Allowances; Building Use Allowance;
Equipment Use Allowance. Paragraphs E.1. and E.2. of Appendix D provide
general guidance for the establishment of appropriate "cost groupings"
and for the distribution of those cost groupings among cost objectives,
a process necessary for indirect costs "incurred for common or joint
objectives" which "cannot be identified specifically with a particular
research project, an instructional activity or any other institutional
activity." Subparagraph 2 .d. (3) provides:
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"The essential consideration in selection of the distribution base
in each instance is that it be the one best suited for assigning
the pool of costs to appertaining cost objectives in accord with
the relative benefits derived, the traceable cause and effect
relationship; or logic and reason, where neither benefit nor
cause and effect relationship is determinable."
The provisions of paragraph C. (2), clause (c) of Appendix D require
that costs, to be allowable, "must be accorded consistent treatment
through application of those generally accepted accounting principles
appropriate to the circumstances."
For operation and maintenance expenses and building and equipment use
allowances, paragraph F.3. of Appendix D provides for an allocation to
the various cost objectives on a basis "that gives primary emphases to
space utilization." Where actual space and related cost records are
available, they should be used, but if those records are not adequate
for these purposes, "a reasonable estimate of the proportion of total
space assigned to the various cost objectives normally will suffice . .
."
The Grantee's information systems provide detailed data on space by room
type (e .g, laboratory, library, etc.) and on equipment cost by
functional custodian, but do not provide data fully identifying the
various classes of possible users of the space and equipment. The
absence of that data resulted in a series of proposals and
counterproposals by the Grantee and DHEW which continued until
submission of the Grantee's appeal to the Board. Each of those
proposals and counterproposals was believed by its proponent better to
carry out the general guidance of Appendix referred to above than the
proposal to which it responded. In essence, DHEW representatives
objected to the Grantee's various proposals either on the ground that
they treated certain like types of costs inconsistently or that they
ignored the use for instructional or other purposes of certain space
associated with units classified by the Grantee's room-type analysis as
"organized research units." Without repeating here
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the somewhat tortured history of all of these proposals, the ARD/FM and
the Regional Director concluded that the most equitable allocation of
these cost pools would be derived from applying the room-type
relationships developed for the FY 1973 indirect cost rates of the
Grantee (which relationships DREW believed were consistently developed)
to the actual FY 1973 expense and allowance figures supplied by the
Grantee.
The Grantee refused to agree to this allocation formula, arguing that
its own proposals were reasonable and within the latitude allowed under
Appendix D, that the FY 1970 relationships did not reflect current
utilization relationships and ignored the more sophisticated FY 1973
data. A considerable portion of the informal conference on March 22,
1977, was devoted to this issue. See Transcript, pp. 45-115.
In the meantime, the Grantee had refined its own proposal to take
account of several of the criticisms made by DHEW representatives, but
none of these refinements was ultimately acceptable to those
representatives. At the informal conference, DHEW maintained that the
Grantee's proposal still suffered from a basic inconsistency, i.e., the
allocation of all portions of the organized research space "units"
identified by the Grantee's data system, including so-called "service"
or "support" or "common" areas associated with basic research
laboratories, to the organized research objective, while not treating
the other academic space in an equivalent manner. In other words, the
Grantee's data system and methodology allocated none of the general
category of "other academic space," which included "service"
or
"support" or "common" areas of the same type (in DHEW's
opinion) as that
associated with organized research space solely to the instructional
cost objective, while it allocated all of these areas associated with
the organized research objective solely to that objective.
The Grantee attempted in its final proposals to respond to the DHEW
comment that "departmental research," not "federally-sponsored,"
was or
could be performed in the space identified by the Grantee's room codes
as research-type space,' by proposing a 30-70 allocation, based on an
academic personnel survey of effort, for a portion of that space. That
is, the Grantee proposed to take a portion of the space previously
identified as organized research space and allocate 70% of that space to
Federally-sponsored organized research and 30% to departmental
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research allocable to the instructional cost objective, because the
effort survey found that 70% of the relevant staff time was spent on
organized research projects.
DHEW in effect responded that that allocation may be helpful as far as
it goes, but that that allocation ought to be applied to the whole of
the space identified as research type space (including the space
identified as organized research space), on the ground that
Federally-sponsored research is not the sole activity carried on in the
space identified by the Grantee as organized research space. Put
another way, DHEW argued that if some of the organized research space
was to be allocated solely to organized research, some of the "other
academic space" must be allocated solely to the instructional cost
objective.
The parties agreed that given the inadequacies of the Grantee's FY 1973
data base, any allocation of these cost pools, giving "primary emphasis
to space utilization" would lack precision. What DHEW termed an
"inconsistency", the Grantee called an "ambiguity", and
pointed to the
enormous problems of achieving precise allocation bases in a university
as large and complex as the Grantee. The Grantee also noted that it had
experienced difficulty in responding to DHEW's request for new cost
studies and analyses, in effect that DHEW's position in negotiations was
a constantly moving target.
While we have considerable sympathy with the Grantee's data collection
and analysis problems, we are inclined to agree with the ARD/FM and
Regional Director that the Grantee's proposals in this area appear to
suffer from a basic inconsistency in approach. If the 30-70 split is
valid, based on the Grantee's effort study, it would seem equally
applicable to all research space (determined by room-type codes), not
merely a portion thereof. Alternatively, some of the "service" or
"support" or "common" space included within "'other
academic space"
should have been allocated solely to the instructional cost objective.
In a sense, the parties appeared to avoid coming to agreement as to the
precise issue in this area to be resolved by the Board. Each argued
that its own final proposal was reasonable and for this reason alone
ought to be accepted. In addition, the Grantee argued that Appendix D
provides broad latitude to educational institutions in the indirect cost
area and that DHEW could not substitute its own judgment
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for that of the institution, so long as the institution stayed within
the bounds of reasonableness.
The broad guidance provided by Appendix D is inadequate for the purposes
of a precise redetermination of this component part of the Grantee's
indirect cost rate, on this record, by the Board. In this context, and
recognizing that for later fiscal years the parties seem likely to
resolve this issue on a different factual and conceptual basis, we are
not inclined to substitute our judgment for that of the Regional
Director, where, as here, that judgment appears to be reasonable and
addressed to the issue of comparability or consistency of cost
groupings, and the Grantee's own claim of reasonableness is impaired by
its apparent inconsistency of approach. Therefore, as to the components
in the on-campus organized research indirect cost rate represented by
operations and maintenance expenses and building and equipment use
allowances, we sustain the Regional Director's decision.
(b) Departmental Administrative Staff Expenses; The Use of a
"Non-Federal Direct Charge Equivalent". Consistent with the accounting
guidelines established by the American Council of Education, according
to the Grantee, the Grantee's data collection system identifies with
Federally-sponsored research projects most of the salary costs of
departmental administrative personnel directly supporting those projects
(permitting a direct charge to those projects) but does not similarly
identify as direct costs the salaries of personnel providing direct
departmental administrative support for non-Federally-sponsored
projects.
Departmental administration salary costs are recognized as an element in
reimbursable indirect costs-by Appendix D, paragraph F.5., to the extent
they cannot be directly identified with a specific research project,
with an instructional activity or with any other institutional
activity." Since some of those costs were identified with organized
research projects, but with no other cost objective, the Grantee
recognized the need to reduce this indirect cost pool (i.e., all
relevant staff salaries less those directly charged to Federal projects)
in some manner, in order to achieve comparability and consistency. See
Appendix D, paragraph E.2.(c)(2). Beginning in 1966, the Grantee did
this by use of a "non-Federal direct charge equivalent" ("NFDCE"),
based
on twin assumptions that grant expenditures net of equipment costs is a
proper base for measuring necessary administrative staff
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support and that the administrative staff support necessary for a given
level of grant expenditures is roughly the same for organized research
as for the Grantee's other cost objectives.
The Grantee developed its NFDCE by applying to non-Federally supported
expenditures net of equipment and administrative support costs a
percentage figure equal to the percentage of total Federally-supported
expenditures, similarly net of equipment and administrative support
costs, represented by support staff expenses directly charged to the
Federal projects. The dollar figure represented by this calculation was
then deducted from the total of the uncharged staff salary costs. The
remainder of that indirect cost pool was then allocated as an indirect
cost among the Grantee's various cost objectives.
Prior to the Grantee's proposal for FY 1976 and FY 1977, it had
"averaged" these departmental administrative costs by using a single
expense pool for the entire University for this purpose and making an
aggregate NFDCE calculation. In 1971, DHEW representatives asked the
Grantee to undertake an analysis of these indirect costs on a
department-by-department basis. The Grantee agreed to do so and secured
the approval of representatives of the DHEW Audit Agency for its
proposed computational methodology. The DHEW representatives did not
challenge the basic concept of using a NFDCE at that time.
Based on FY 1973 data, the Grantee incurred, on a University-wide basis,
approximately $38.5 million in administrative staff salaries, of which
approximately $8.6 million were charged directly to Federal projects.
The Grantee's calculations showed that after applying its NFDCE
technique to the remaining staff salary expense pool for each relevant
department (with adjustments not here relevant), a total of
approximately $13.3 million would be deemed the NFDCE deduction from all
of the indirect cost pools. That $13.3 million figure represents the
aggregate of the separate NFDCE calculations for the various individual
departments.
The Grantee did not, however, propose a NFDCE deduction of $13.3
million, but rather one of approximately $7.7 million. The $5.6 million
difference resulted from two limitations applied by the University.
First, if the total of the staff salaries not directly charged to
Federal projects for any department (i.e., the remainder of the pool to
be allocated) was less
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than the NFDCE figure for that Department, the lesser amount was used.
Second, in departments with Federal projects which had no staff salaries
directly charged thereto (usually departments with a relatively small
degree of Federally-supported activity) no NFDCE figure was used and all
staff salaries went into the indirect cost pool.
The results of these limitations prompted DHEW representatives to
challenge the Grantee's application of the NFDCE in two respects, both
of which attacked the assumptions on which the NFDCE was based. For
those departments with uncharged staff salaries less than the NFDCE for
that department, DHEW argued that the basic comparability assumption
underlying the NFDCE appeared invalid. For those departments with no
NFDCE, they argued that the effect of the obviously relatively high
non-Federal activity rate would be understated. While the DHEW Audit
Agency recommended disallowance of the entire staff salary pools on the
basis of total unreliability, the ARD/FM and Regional Director concluded
that such disallowance would be inequitable to the Grantee. As a
practical compromise, they in effect averaged the application of the
separately-calculated departmental NFDCE's on a University-wide basis
and allowed the staff salary indirect cost pools, after deduction of an
aggregate $13.3 billion NFDCE.
The Grantee has argued that the determinations by the ARD/FM and the
Regional Director were self-contradictory and inconsistent in applying
an NFDCE developed on a department-by-department basis to the University
as a whole as though the departmental structure on which the
computations were based were irrelevant. The Grantee concluded that the
only logical basis for those DHEW determinations was the naked result,
i.e., a lower Federal reimbursement rate. As to the limitations used by
the Grantee to reduce the ACE offset from $13.3 million to $7.7 million,
the Grantee contended that each is perfectly logical. It makes no sense
to charge to non-Federal projects "equivalent" salaries in excess
of
those actually expended and, if there is no direct charge of Federal
salaries to Federal projects in a given department, then by definition
there ought not be an equivalent charge to non-Federal projects.
Finally, the Grantee has complained that it has been using the NFDCE
concept since FY 1966 and that it developed the department-by-department
approach at DHEW's request, only to
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have DHEW reject the results of that approach. If it returned to the
exact basis it used in prior years, wherein a single University-wide
cost pool was used (instead of separate departmental cost pools), the
Grantee contends that the resulting NFDCE deduction from indirect costs
would have been slightly smaller than the $7.7 figure it used in its
proposal.
We agree with the ARD/FM and the Regional Director that the NFDCE, as
applied to the Grantee, has been demonstrated to be seriously flawed as
a comparability measure or technique. Both DHEW and the Grantee (at
least if the limitations which it applied are accepted) appear to agree
that a department-by-department analysis of these indirect cost pools
tends to be a more accurate basic approach, since the costs involved are
in fact incurred on a departmental level. On a departmental basis,
however, the assumptions upon which the NFDCE concept are based do not
appear to be valid. The resulting ratios in the Grantee's departments
in fact appear to bear no consistent relation to the relative degree or
level of Federal or non-Federal activity in those departments. While
the limitations applied by the Grantee to reduce its $13.3 million NFDCE
to $7.7 million appear to be perfectly logical and appropriate,
considered separately, the result of those limitations is the
undermining of the entire conceptual basis for use of the NFDCE by the
Grantee. In this context, the DHEW representatives concluded that there
was no real basis, given the Grantee's data system, for identifying
reasonably accurate administrative staff salary pools for an indirect
cost rate. We agree with that conclusion.
The resulting determinations of the ARD/FM and Regional Director, to
aggregate the separate departmental NFDCE figures and then apply that
aggregate to the University as a single unit was admittedly an ad hoc
compromise In the absence of more accurate data (i.e., the absence of a
basis of reasonableness for the Grantee's own proposal), we conclude
that such an ad hoc determination was reasonable, and sustain the
Regional Director on this issue.
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(c) Downweighting of Departmental Administration Expenses Charged to
Organized Research. After determination of the appropriate and
allowable indirect cost pools for departmental administration expenses,
the Grantee allocated those expense pools to the various cost objectives
for each department on the' basis of unweighted expenditure
relationships within that department (or in the case of deans' offices,
within an entire school or college). In other words, comparable
expenditure figures were established for each cost objective on the
basis of modified total direct costs, and the departmental
administration indirect costs were then allocated to those cost
objectives in related percentages.
During the Audit Agency's review of these cost pools and their
allocation to Federally-supported organized research, it noticed that
some departments having relatively high levels of organized research
activity appeared in general to have low departmental administration
costs, according to the Grantee's data system. Paragraph G.1.b. of
Appendix D, for example, recognizes that "different environmental
factors may require different indirect cost rates applicable to specific
kinds of organized research activity. This observation prompted the
auditors to wonder about the comparability of these indirect cost pools,
i.e., whether costs accounted for as indirect costs in departments
having relatively low levels of Federally-sponsored research would
typically be accounted for as direct costs in those with relatively high
levels of Federally-sponsored activity
To test this hypothesis, the auditors conducted a statistical regression
analysis for two variables at the departmental level: level of
organized research and level of departmental administration expense,
each as reflected by the Grantee's data. After receiving the Grantee's
critique of the Audit Agency's initial analysis, the auditors conducted
a second regression analysis including a factor of departmental size.
Based on the resulting "coefficient of correlation" of .304, the
auditors recommended and the ARD/FM and Regional Director determined
that the allocation of the departmental administration cost pools to the
organized research cost objective ought to be downweighted by including
only 85.58% of those costs as Federally reimbursable. Expressed
differently, DHEW concluded that direct organized research costs
typically
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generated approximately 15% less in departmental administration costs
than the direct costs associated with other cost objectives. In this
context we should note that this conclusion did not imply that
Federally-sponsored projects cost less to administer, but only that the
costs classified by the Grantee's data system as indirect costs tended
to be approximately 15% less as a factor of the level of organized
research activity.
The Grantee challenged this down-weighting on a number of grounds.
First, it argued that it is a universal impression, although not
quantifiable, that the administrative burdens associated with
Federally-supported activity are much higher than those for state or
privately supported programs, citing such requirements as equal
opportunity hiring, cost-sharing, audit and review programs and the
like. As noted above, to the extent that such administrative burdens are
direct charges to organized research programs, the argument is not
entirely responsive to the DHEW analysis.
Second, the Grantee and NACUBO both challenged the basic validity of the
regression analysis technique used by the Audit Agency, in that it
failed to isolate other errant variables which would tend to force a
correlation such as that found by the auditors.
We need not stray too far into statistical theory in this case, since we
believe that in the context of accepted prior practice of the Grantee,
questions raised about the validity of the analysis and the relevant
provisions of Appendix D, the record before us does not support this
down-weighting determination.
Paragraph E.2(d) (2) of Appendix D /3/ while permitting use of cost
analysis studies in establishing
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distribution methods, places significant limitations on their
acceptability. In general terms, we believe DHEW as well as grantees
are subject to the same general restraints under Appendix D in proposing
modifications of distribution bases supported by special analyses such
as the one here involved. We are not ruling that the Audit Agency study
was not a valid approach to this problem or could not be supported under
the provisions of paragraph E.2. (d) (2). We hold only that DHEW has
not demonstrated to our satisfaction, on this record, that its analysis
was fully justified. On this issue, we reverse the decision of the
Regional Director and direct that the Grantee's unweighted expenditure
relationships be accepted for the purpose of this issue.
(d) Allocation of Administrative Stipends. The Grantee pays to certain
of its academic personnel "administrative stipends," as a supplement
to
salary, during the periods of time those personnel perform predominantly
administrative functions, such as that of dean, departmental chairman or
the like. The stipend is a particular regard for serving in the
administrative position and lapses when and if that position is
relinquished.
The Grantee has historically treated these administrative stipends as a
cost sub-pool separate from the basic salary paid to the academic
personnel serving in those administrative positions. The cost subpool
of basic salaries is allocated, pursuant to the Grantee's survey of
relative staff effort, to the various cost objectives benefited,
including organized research, instruction and the like. The remaining
unallocated portion then becomes part of the indirect departmental or
college-level administration pool, allocated to all cost objectives.
The administrative stipends, however, are initially allocated entirely
to administration, in three parts: indirect administration,
nondepartmental committee work and student administration.
The Audit Agency recommended, and the ARD/FM and Regional Director
determined, that the stipends should be aggregated with basic salaries
and then allocated to the benefiting functions at the appropriate level
as a single cost pool.
The basis for DHEW's action was inconsistency of treatment (see Appendix
D, paragraph C.2(c)),
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because the Grantee did not offset against the basic salary charge to
departmental (or other level) administration, based on its survey of
relative staff effort, any portion of the stipend. That is, if 50% of a
given group of basic salaries was charged to departmental
administration, because 50% of the effort of those personnel included in
the study of relative staff effort was devoted to departmental
administration, it was inconsistent, in DHEW's view, to charge the
entire stipend pool to departmental administration in respect of that
same effort, without an offset or netting calculation.
We believe the ARD/FM's and Regional Director's determinations on this
issue were correct, in that the inconsistent treatment of these costs
was clearly evident, and sustain the Regional Director's decision in
respect thereto.
(e) "Total Student Hours". Paragraph J.41 of Appendix D provides
as
follows:
"Student services costs. Costs of the deans of students,
administration of student affairs, registrar, placement offices,
student advisers, student health and infirmary services, and such
other activities as are identifiable with student services apply
only to instruction and therefore are not allocable to research
agreements, either as direct costs or indirect costs. However, in
the case of students actually engaged in work under research
agreements, a proportion of student services costs measured by the
relationship between hours of work by students on such research
work and total student hours including all research time may be
allowed as a part of research administration expenses."
The Grantee has consistently interpreted the words "total student hours"
to mean the sum of classroom hours and hours worked as a University
employee.
During the 1971 negotiations for the previous indirect cost rate for the
Grantee, DHEW representatives argued that "total student hours" should
include student study hours and proposed to include two study hours for
every hour of classroom time. In the interest of concluding those
negotiations, DHEW and the Grantee agreed to include one study hour for
each classroom hour, pending an authoritative interpretation of the
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phrase "total student hours" from the Office of Management and Budget.
Despite apparent efforts by the Grantee and NACUBO since 1971 for such
an interpretation, none has been forthcoming.
According to DHEW representatives, the Department's current policy is
that "total student hours" does include study time. That policy,
however, has never been reduced to writing internally, or quantified, or
made the subject of any formal DHEW notice to grantees. Nonetheless, in
the Guide, at page 61, DHEW has provided to the grantee community a
sample format for use under paragraph J.41. of Appendix D, in which
hours other than work and classroom hours are described as "(h)ours
spent registering, hours spent in job placement interviews, and hours
spent in all other related student activities."
If this description was intended to clarify the DHEW position as to the
ambiguities inherent in the curious phrase "total student hours,"
it
surely failed to do so. Indeed, it is somewhat difficult, in the
context of that description in the Guide, to include study time as
"related student activities." One would have supposed that studying
was
a primary student objective.
While we think that as a matter of logic and sound policy there is
considerable justification for including study time in the student hours
base for purposes of paragraph J.41., we believe that in the context of
a well-known and publicized issue relating to an interpretation of
Appendix D in general terms, and not as applied to a particular set of
facts, DHEW cannot insist on its own position on that issue in the
individual audit process. Elemental evenhandedness requires, in this
context, a clarifying amendment to paragraph J.41. Where the issue is
one of general interpretation of the governing Federal standards, it is
inequitable for DHEW to rely on individual audits and varying regional
applications of the Department's unarticulated policy position. For
this reason, we reverse the decision of the Regional Director on this
issue and rule that until paragraph J.41 is amended, study hours are not
to be included in the base of "total student hours."
(f) Treatment of Student Application Fees. Paragraph C.5.a. of Appendix
D provides:
"The term applicable credits refers to
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those receipt or negative expenditure types of transactions which
operate to offset or reduce expense items that are allocable to
research agreements as direct or indirect costs. Typical examples
of such transactions are: purchase discounts, rebates, or
allowances; recoveries or indemnities on losses; sales of scrap
or incidental services; and adjustments of overpayments or
erroneous charges."
In the course of audit, the DHEW Audit Agency noticed that there were
expenses relating to the student admissions offices which were not
congruent with the allocation base of "total student hours." These
were
the expenses of processing applications which were rejected, i.e., of
those persons who contributed no student hours. In an attempt to
compensate for this noncongruence, DRY determined that it should credit
the admissions office expense pool with the application fees paid by all
applicants, based on paragraph C.5.a. quoted above. This was done on
the basis of materials in the Grantee's catalogues indicating that the
purpose of the fees was to defray the cost of processing applications.
As in the case of the immediately prior issue relating to "total student
hours," the applicable provisions of Appendix D do not provide sure
footing for a definitive resolution of this issue. Nor do the elusive
concepts of generally accepted accounting principles as applied to cost
accounting by universities.
For the reasons noted below, until and unless paragraph C.5.a. of
Appendix D is appropriately clarified and whatever the validity of
making some adjustment to the admissions office expense pool in respect
of rejected applicants, we believe that the Grantee's treatment of these
fees was reasonable, was within the range of accounting acceptability
and was not intended to take inequitable advantage of existing Federal
reimbursement guidelines.
Unlike parking lots, in which fees are credited to expenses, or computed
or reproduction centers which are supported in part by user charges, it
is not the admissions offices own activities which are generating these
fees. The student is not applying for admission to that office, but
rather to the University, or to a specific school or college within it.
Thus the unit generating those fees is not the admissions office
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but rather the entire Grantee, or relevant component institution. This
view of these fees is consistent with (although not controlled by) the
Grantee's crediting of them to its general funds accounts.
In addition, the cost of processing applications has not been identified
by the Grantee in any way which would make the credit meaningful. The
aggregate of those fees may exceed or be less than those costs.
Finally, we think that reliance on the stated catalogue explanation for
these fees may place too much weight on the alleged "purpose" for
charging the fee. For it may be that, as the Grantee has argued,
another, and perhaps dominant "purpose" of these fees is the simple
discouragement of frivolous applications. The revenue, in this view, is
simply a byproduct of that purpose.
For these reasons, the Regional Director's decision as to the credit of
these fees under paragraph C.5.a. of Appendix D on this issue is
reversed. This reversal, however, is not intended either (a) to
preclude an equitable adjustment (if such can be established) to the
admissions office expense pool in respect of fees paid by rejected
applicants or (b) to indicate any view that an amendment to paragraph
C.5.a. of Appendix D having the effect of treating the fees in question
as credits would not be fair or appropriate. We hold only that the
credit technique does not appear appropriate, on this record and in view
of the present text of paragraph C.5.a.
4. Conclusion. This case is remanded to the Regional Director's
successor for recalculation of the FY 1976 and FY 1977 indirect cost
rates for the Grantee in a manner consistent with the decisions herein.
/1/ We note that although technical questions can be raised as to
which regulatory formulations of the applicable Federal cost principles
is here governing, no issue in this case appears affected by any
variation in such formulations. For convenience we will refer only to
the provisions of 45 C.F.R., Part 74, Subpart Q, and Appendix D thereto.
The text of Appendix D (hereinafter cited simply as "Appendix D")
is
derived from OMB (then BOB) Circular A-21, redesignated as FMC 73-8 and
published as 34 C.F.R., Part 254, by the General Services Administration
and subsequently withdrawn from 34 C.F.R. by the Office of Management
and Budget. See also 45 C.F.R. Part 100, Subpart G (Office of Education
grantees).
/2/ We note that this case involves no disputed material underlying
fact and no hearing in respect thereto. No conclusion herein
necessarily applies to any case involving such a dispute.
/3/ "(2) Results of cost analysis studies may be used when they
result in more accurate and equitable distribution of costs. Such cost
analysis studies may take into consideration weighting factors,
population, or space occupied if they produce equitable results. Cost
analysis studies, however, should (a) be appropriately documented in
sufficient detail for subsequent review by the cognizant Federal agency,
(b) distribute the indirect costs to the appertaining cost objectives in
accord with the relative benefits derived, (c) be conducted to fairly
reflect the true conditions of the activity and to cover representative
transactions for a reasonable period of time, (d) be performed
specifically at the institution at which the results are to be used, and
(e) be updated periodically and used consistently. Any assumptions made
in the study will be sufficiently supported. The use of cost analysis
studies and periodic changes in the method of cost distribution must be
fully justified."
May 7, 1992