Economic Opportunity Corporation of Greater St. Joseph, DAB No. 45
(1978)

GAB Decision 045

August 29, 1978 Economic Opportunity Corporation of Greater St. Joseph;
Docket No. 77-11 Bernstein, Bernice; Malone, Thomas Mason, Malcolm


This case arises because, in the period in question, CSA directly
funded administrative costs of community action agencies instead of
awarding indirect costs to cover such expenses. HEW, on the other hand,
follows the practice of covering such costs, where they are allowable,
by an award of indirect costs determined by the application of an
indirect cost rate. Since grantee is not entitled to be paid twice for
the same costs, it is necessary that in determining the indirect cost
rate, HEW take account of any portion of administrative costs that has
already been paid by CSA.

The Economic Opportunity Corporation of Greater St. Joseph (grantee)
is a Community Action Agency funded by the Office of Economic
Opportunity and later by its successor the Community Services
Administration (CSA) under Section 221 of the Economic Opportunity Act.
It has, in addition, received grants from HEW.

Grantee's indirect cost rate proposal dated April 28, 1977, sought a
14 percent rate. This request was for a provisional rate retroactive to
March 1, 1977 (Appeal letter, August 11, 1977). The Deputy Assistant
Regional Director for Finance of Region VII established a 3.8 percent
rate. Grantee pursued an appeal to the Acting Regional Director as
provided in 45 CFR 75, and when the Acting Regional Director confirmed
the 3.8 percent on July 26, 1977, grantee appealed to this Board, August
11, 1977.

Under CSA's funding practice, program account 01 was used for the
funding of administrative costs, and $44,552 was paid by CSA to grantee
for the 01 account. CSA also paid additional funds under program
account 05 for program purposes, and of this amount, $13,478 was also
used by grantee for administrative costs. The sum of these two amounts
is $58,030.

The 3.8 percent indirect cost rate established by the Region was
obtained by subtracting the $58,030 of CSA funds which were applied for
administrative costs from grantee's total indirect costs of $74,194
before dividing its indirect costs by the direct cost base of $530,281.
When no adjustment is made for the CSA payments, however, the 14 percent
rate proposed by grantee results. If grantee were now to get a 14
percent rate from HEW and other agencies for which HEW is the lead
agency, it would recover $74,194 in indirect costs in addition to the
$58,030 paid directly by CSA for administrative costs, thus exceeding
its actual administrative costs by $58,030. Thus, the 14 percent rate
is not sustainable because it allows grantee to be paid twice for a part
of its administrative costs.

Grantee has asserted that in adjusting the indirect cost rate for the
administrative costs paid by CSA, HEW violates Section 517(c) of the
Economic Opportunity, Headstart, and Community Partnership Act of 1974,
Pub. L. 93-644, which provides that "(policies) and procedures shall be
established to insure that indirect costs attributable to the common or
joint use of facilities and services by programs assisted under this
part and other programs shall be fairly allocated among the various
programs which utilize such facilities and services." The adjustment
made by the Region, however, in fact carriers out this provision by
assuring that funding agencies do not pay more than the share of
indirect costs allocable to their grants and contracts.

We invited the parties to address the question of whether funds
supplied to grantee under CSA's 05 program account, but used for
administrative cost purposes, should be treated differently from funds
supplied to it under CSA's 01 account. The Region's view appeared to be
that the fact that funds were originally budgeted for program purposes
is irrelevant as the purpose of the adjustment is to prevent a windfall
to grantee. Grantee argued that the deduction of neither the 05 account
funds nor the 01 account funds was justified, but that OASC-5 (at p.49)
in any event required only the deduction of the latter. We think that
the Region's position has merit. OASC-5 indicates that 01 funds are to
be deducted from total indirect costs because this is the only program
account specifically designated by CSA for administrative costs.
However, the principle against double payment which requires the
deduction is also applicable to any other CSA funds actually used for
administrative costs.

Grantee has also contended that the adjustment made by the Region is
not required by statute or published regulation. However, we believe
that neither statute nor regulation is necessary to authorize a policy
which assures that no funding agency must pay more than the amount of
indirect costs allocable to its grants and contracts. Grantee, in any
event, apparently had notice of the policy since it is stated in the
so-called "Kirschenmann memorandum" (from Henry G. Kirschenmann, Jr.,
Director, Division of Financial Management Standards and Procedures, of
the then Office of Assistant Secretary/Comptroller, to the Assistant
Regional Directors for Financial Management) in accordance with which
grantee prepared its indirect cost proposal.

We believe that it is important to point out, in ruling against
grantee, that its appeal may reflect not so much a disagreement with the
policy of preventing double recovery as a misunderstanding of the
indirect cost process. Grantee complained on the one hand that the 3.8
percent rate offered by the government is based on outdated cost
figures, yet when asked if it has available more recent figures, it
contented that its "argument is one of basic principle" and that "other
cost figures would confuse the issue at this point." (Letter from
Roebuck to Reynolds, Executive Secretary of Board, dated 4-27-78, p.4.)
However, it appears that the fact that grantee used outdated figures is
the source of its problem.

Grantee was seeking to establish a provisional rate effective March
1, 1977, the beginning of its program year. However, its indirect cost
proposal was based on cost figures obtained from an audit of its
operations for the year ended February 29, 1976. This was the year in
which grantee used the $58,030 of CSA funds in question for
administrative costs. Grantee did not have an indirect cost rate in
that year and, hence, CSA was its major source of funding for
administrative costs. (A few small items which might more appropriately
have been treated as indirect costs, such as the cost of a bookkeeper,
were apparently included as direct costs in the approved budget for its
headstart grant. See grantee's Notice of Grant Award for the budget
period 3-1-77 - 3-28-78, Attachment.)

Grantee has contended that if it had had an indirect cost rate which
was honored by all funding agencies, it would have been free to budget
all of the money available to it under Section 221 of the EOA for
program rather than administrative purposes, with the exception of CSA's
share of indirect costs. (It asserts that CSA has indicated that it is
willing to pay indirect costs.) (Letter from Roebuck to Mason dated
7-12-78, pp.3, 5.) Grantee's argument thus appears to be that it should
not now be penalized because it was, in effect, forced to use the
Section 221 funds for administrative costs. What grantee apparently
does not understand is that if, in fact, the actual cost figures for the
program year beginning March 1, 1977, and subsequent years show that
grantee has not received direct funding for administrative costs from
CSA, the provisional indirect cost rate may be adjusted accordingly, and
grantee will receive the additional indirect costs to which it is
entitled. In the meantime, however, since grantee has supplied only
program year 1976 figures to the cost negotiators, indirect cost awards
must be made on that basis. This approach may cause grantee to
experience temporary shortages of funds; however, we do not believe that
grantee has cause for complaint since the Region has stated that grantee
may reopen negotiations "should it anticipate a significantly different
level of operations for future periods." (Letter from Burnett to
Reynolds dated 10-7-77, p.3.)

CONCLUSION

In determining grantee's indirect cost rate, HEW may take account of
the administrative costs already paid by CSA so that grantee will not be
paid twice for the same costs. The appeal is rejected.

OCTOBER 04, 1983