DAB Decision 63
July 31, 1979 Jamestown College; Docket No. 76-14; Decision No. 63
DeGeorge, Francis D.; Malone, Thomas Miles, Theodore A.
SUMMARY
(The following summary is prepared on the responsibility of the
Executive Secretary of the Board as a convenience to the interested
public. It is not an official part of the decision and has not been
reviewed by the panel. Similar official summaries of earlier cases
appear in 45 CFR Part 16 - Appendix.)
Grantee appealed disallowances totalling $38,384 made pursuant to grants
under Titles II-A, III, and IV-D of the Higher Education Act and Title
VI of the National Defense Education Act.
A clause designed to maintain the level of institutional spending was
held to be a "maintenance of effort" requirement calling for strict
accounting, rather than a "no-supplant" requirement calling merely
for a
good faith effort. The Board found that the failure to meet the
requirement resulted in a dollar for dollar reduction in the grant
rather that the disallowance of the whole grant, as maintained by the
agency.
The Board found that it could not consider alleged allowable but
unclaimed expenditures as an offset against funds validly disallowed.
It sustained the disallowances without prejudice to submission of these
previously unclaimed expenditures to the agency.
Provision of an allowance for fringe benefits expressed as a percentage
of salaries was held to preclude the recovery of specific charges under
that category.
Expenses connected to lectures related to the program were found to be
allowable, although grantee had conceded not following proper
procedures. The Board noted that it starts from the premise that in
general the views of recipients about the educational relevance and
merit of particular activities and the individuals who conduct them
should not be set aside lightly, unless there is some glaring deficiency
in one or both respects. The grantee's judgment was supported by direct
documentation that such an activity was contemplated as a direct part of
the project. The Board found that the Agency's later questioning,
without factual basis, of the lecturer's credentials was entitled to no
weight.
DECISION
This case is concerned with an appeal by Jamestown College (Grantee)
from the disallowance by the Office of Education (OE) of certain items
identified by the HEW audit agency in an audit of Grantee's
administration of grants under various statutes between fiscal 1965 and
fiscal 1974, inclusive.
The appeal was filed on May Il, 1976, and since that time the grantee
and OE have provided the Board with information and briefing in response
to a request for documentation, dated April 14, 1977, and an Order for
Clarification of the Record dated March 6, 1978. The time for further
submissions having expired, this panel was designated on January 4,
1979, to take such further action as might be necessary to dispose of
the appeal.
During proceedings before the Board, both parties have had occasion to
review earlier positions, and a number of items are no longer in
dispute, as indicated below.
The following constitutes the decision of the panel in the case, based
on the record in the case. The parties have had ample opportunity to
brief the questions raised by the Board, and have in the main taken full
advantage of the opportunity. The Board's task is made easier because
of the candor and thoroughness of Grantee's latest submissions.
TITLE II-A - Library
The auditors disallowed the entire amount of the grants for the fiscal
years 1968, 1969, 1970 and 1973 on the grounds that the funds were not
separately accounted for as required, and the institution appeared to be
expending funds at the same level as before the grant, so that either
the grant funds were not being used for the purchase of library
materials, or they were supplanting the institutional funds.
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In the Order for Clarification of the Record, the Board presented an
analysis of the grantee's expenditures and the required commitment of
institutional funds based on the following assumptions, inter alia:
1) That the figures from the grantee's certified audit were
most reliable. 2) That the statute required institutional funding
for library materials to be not less than the average of such
expenditures for the two prior years or for (pre-1973 years) the
base years 1964-1965, plus a "match" of the federal grant. 3)
That grants awarded in one fiscal year would be expended in the
next fiscal year.
Parties were invited to comment on the above assumptions and also to
brief the following questions:
The parties should brief the question of whether it is
necessary for a grantee to meet maintenance and matching
requirements by actual audited expenditures or whether it is
sufficient that expenditures were projected in good faith and
appear sufficient and are followed by a good faith effort on the
part of the grantee to meet the projection. If projection and
good faith effort are sufficient, are they present in this case?
The parties should brief the issues raised above regarding the
matching requirement under the statute as amended in 1972 and the
computation of the grant under the same statute. The parties
should also brief the questions of whether a disallowance may
be made when a grantee meets required expenditure levels in one
category but not in another (i.e., in total library resources but
not in library materials or vice versa), and, if a disallowance is
to be made, whether it should be of the whole grant or just the
amount of the deficiency. In this regard, the parties should
discuss the effect of the 1972 statutory amendment including a
discussion of the amended statute' s limitation of the grant to
the excess of expenditures for library resources, and should
provide any instructions or other material issued prior to 1972
which contain language bearing on this determination.
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The grantee's response acknowledged the reliability of the audited
figures, but argued, with respect to the basic import of the statute,
that if the statute called for a comparison of projected with actual
expenditures, the remedy would be a reduction in the grant, rather than
revocation.
With respect to the other questions presented, there was no disagreement
with the Order to Clarify the Record in either response. Grantee, by
its counsel, presented argument on the question of whether the
applicable statutory provision should be interpreted as imposing a
"maintenance of effort" requirement-calling for strict accounting
or a
"no supplant" requirement--calling for good faith. The panel reads
the
provisions in this case as requiring strict accounting: The very
wording of the provision "not less than" combined with a dollar for
dollar matching Requirement, with respect to expenditures for overall
library purposes is meaningless unless there is full compliance with the
level of effort component.
On the other hand, in the absence of any response from OE to the
invitation to brief contained in the Order for Clarification, the Panel
is not prepared to hold that the requirement operates as a condition
subsequent, requiring Disallowance of the entire grant if the provisions
are not fully complied with. Rather, the panel believes that the
disallowances should be limited to the amount by which the institution
failed to make the required expenditures. The statutory language does
not require forfeiture, and the match provision supports an equivalent
dollar approach. (As that provision operates, total institutional
expenditures for library purposes in fact l exceed prior levels, in most
instances, but the match may not be complete.)
In applying the statute to the history of expenditures presented here,
two other questions are presented. Whether deficiencies in overall
expenditures and in library materials expenditures should be cumulated,
and how supplemental grants should be treated.
Neither party briefed the first question and the second was not
addressed because the grantee appeared to have complied with the
requirements. (Order for Clarification at 6.)
The Order for Clarification took the position, which we adopt, that the
failure to keep the funds in a separate account is not fatal if the
financial records of the grantee permit a reconstruction, and it is
assumed that the federal funds, which went into the common account, were
used for library purposes since cash is fungible.
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Consistent with the basic principles set forth above, there follows the
panel's disposition of the appeal from the Title II-A disallowance, with
each year discussed separately. Reexamination of the audited financial
statements, which we relied on, called for some modification of the
figures contained in Appendix A to the Order for Clarification.
(A) Fiscal 1968 (Year ending August 31, 1968).
The two year average for institutional expenditures for library
materials for 1964 and 1965 was $13,222. (While the audited financial
statement was for a 14 month period, from July 1, 1965 to August 31,
1966, the level of expenditure was in line with the prior and successive
12 month periods, so we have used the 14 month figure.) The two year
average for all library expenditures was $29,152. Grantee's actual
expenditures in Fiscal 1968, exclusive of federal funds, were $12,513
for library materials, and $28,603 for all library purposes. Thus for
the basic grant, the deficiency was $709 in expenditure for library
materials ($13,222 minus $12,513), and $5,549 for all library purposes
(the sum of the matching requirement of $5,000 and the deficit in
expenditure level). For the supplemental grant, the deficiency was the
same as for the basic grant in the library materials category, and was
$549 in the all expenses category (the matching requirement did not
apply). Accordingly, we affirm the disallowance of both grants for that
year.
(B) FY 1969 (Year ending August 31, 1969.)
Institutional expenditures for library materials amounted to $15,570,
and for all library purposes, $32,634. There was accordingly, only one
deficit: $1,518 in the all expenditures category (Average of base period
1964-65: $29,152, plus federal grant of $5,000=$34,152 minus actual
expenditures of 32,634.) The panel assumed that $5,000 of the $37,634
reported expenditures was federal grant funds from the prior year.
Accordingly, the disallowance for 1969 is reduced to $1518.
(C) 1970 The expenditures for 1970 were above minimum requirements in
all respects, and the entire disallowance is reversed.
1964-65 average Actual 1970 Excess Library
materials $13,222 $16,505 $3,283 All Library
$29,152 $34,862 $ 710
(D) 1973 For 1973 the match requirement was eliminated by the Education
Amendments of 1972, and the base period provision was changed by
eliminating the optional use of the 1964-1965 period, and requiring the
use of the two fiscal years immediately preceding the grant year.
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Library Materials Total Library 1971
$17,034 $35,902 1972 28,890
54,608 Year Average 22,962 45,255
1973 Actual 19,370 54,708 Excess
(deficit) (3,390) 9,453
Accordingly, the disallowance is reduced to $3390 for FY 1973.
The disallowance of Title II-A grant funds for the years in question is
accordingly reduced from $18,648 to $10,149.
Title III
The auditors disallowed $2315 in unexpended funds. Grantee originally
argued that it had returned $1,000 to North Plains Consortium for
Education. Grantee was the nominal recipient of the grant and
coordinating institution of the six member cooperative body. In its most
recent submission in response to the Order to Clarify, Grantee has
disavowed its "transfer of funds" argument (which was not persuasive
in
light of Jamestown's role as coordinating institution and nominal
grantee), but argues that it had made allowable expenditures of $2,037
which were not on the books at the time of the audit. With respect to
the claimed allowable expenditures, since they have not been passed on
by OE, the Board is not in position to consider them. /1/ Grantee is, of
course, free to request OE to address them since they have been in the
record for some time.
Accordingly, for purposes of this appeal the disallowance of the $2315
is affirmed.
Title IV-D
Neither Grantee nor OE have questioned the analysis of the Order to
Clarify the Record (attachment 1 to this opinion) with respect to the
items in this program. The Board adopts the reasoning of that order,
with the exception of $44 and the $70 expenditures charged to fringe
benefits.
Fringe benefits are provided for as being 11.2% of the salary expense in
both the Application for the grant (Exhibit 16) and the Plan of
Operation and Budget (Exhibit 18). There is no provision for the
recovery of specific charges for fringe benefits because the allowance
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of a percentage of salary costs is in lieu of itemizing specific charges
for fringe benefits. In fact, the expression of fringe benefit recovery
as a percentage allowance of the allowable salary costs excludes
recovery of specific items. (There is no indication that the 11.2%
allowance was intended to represent only certain stated benefits, e.g.
health insurance).
To the extent that the total claim for fringe benefits exceeds 11.2%, of
the allowable salary costs involved in the grant, they should be
disallowed. We reserve decision on whether the $70 and $44 charges would
otherwise be allowable as fringe benefits under applicable cost
principles.
Accordingly, the appeal on Title IV is disposed of as follows:
Item OE Action Board's Disposition
1) Salaries a) Director $948 disallowed $ 948 disallowed b)
Coordinator $2,623 disallowed $2,623 disallowed c)
Secretaries $250 disallowed $ 250 disallowed d)
Salaries $1,986 disallowed $ 993 disallowed (50%) e)
$ 750 No action $ 375 disallowed (50%) f) Fringes
1) $1,404 credited $1,468 credited (11.2% of $13,108)
2) $70 disallowed $ 70 disallowed 3) $44
disallowed $ 44 disallowed
2) Travel $679 disallowed $679 disallowed
3) Indirect Cost: at 8% $1,454 allowed $1,504 allowed Salaries
$13,108 Fringes 1,468 Cons. 360 Travel
3,135 Office exp. 670 Printing fund 60 $18,807
Title VI, National Defense Education Act (Language
Development and Area Centers Program.)
The first area to be discussed is personal services. Much of the
discrepancy in the initial audit report can be attributed to the
grantee's practice of including the allowance of fringe benefits in the
reports of direct salary expenditure; the remainder grows out of
grantee's use of a base salary figure for the instructional staff in FY
1973 which exceeded the budgeted amount. In its most recent submission,
grantee conceded the
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latter point, so there is no remaining dispute in this area. The Board
accordingly affirms the OE disposition of the claimed personal services
expenditures. By our calculations, the net disallowance should be $918,
arrived at as follows: disallowances of $518 (director's salary excess)
plus $1,738 (excess of instructional salaries), totalling $2,256, minus
a credit of 11.2% of salaries for fringe benefits, amounting to $1,338
(the last two figures were apparently transposed in the auditor's
report).
The second area to be reviewed was that of library costs. Here OE
disallowed as undocumented $1,820 of the $5,620 'claimed for book
purchases in the year ending 1973; $1,400 as handling changes for that
year, and $2,000 as ''other costs'' for the year ending June 30, 1974.
A related item, discussed in the auditors report under the heading
"grant related income", was $635 for books purchased with funds from
another federal program in the year ending June 30, 1973.
With respect to the $1,820 in undocumented expenditures, grantee's
present position is that it concedes the validity of the auditors'
finding, but asserts that $3,310 in allowable documented expenditures
not previously passed on by 0E should be allowed as a credit. For the
reasons set forth in our discussion of the Title III grant, -a at p. 5
we affirm the disallowance of the $1,820 and note that grantee is free
to urge OE to consider allowance of the $3,310.
The $1,400 for handling costs and $2,000 for "other costs" are
apparently being regarded by grantee as referring to the same cost
category: expenses directly related to the acquisition of the books.
For the reasons set forth in the Order for Clarification, we hold first,
that those are direct costs. They are expenses directly connected to
the implementation of the grant, as opposed to the impact on general
administrative overhead which the 8% figure represents. The fact that
they are arrived at by a formula does not depend on their being "direct"
or "indirect" but on problems of documentation. /2/ With regard to
the
use of 20%, rather than $2.75 per volume, we note first that while we do
not have an actual volume count, the average cost of a book purchase for
college use in 1973, according to the figures provided in the grantee's
latest submission, was about $12.00, so a 20% handling charge appears
reasonable. (See attachment (2) to the Title VI section of Grantee's
Response to the Order to Clarify the Record.) The ALA standard, which
grantee provided, calls for the purchase price of the book to be the
base of the computation. In addition, since we are not bound by 45 CFR
131.2, and since the acquisition cost is an appropriate base for
projecting the cost of processing of acquisitions, the Board holds that
20% of the allowable expenditures for the years ending June 30, 1973 and
June 30, 1974 for books should be allowed for handling costs. Since the
$635 should be deducted from the cost of books purchased during the year
ending June 30, 1973, leaving a total of $3,145 for that year, and
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the figure for books purchased with grant funds in 1973-74 was $3,981,
according to the auditors, grantee is entitled to a handling allowance
of $1,425, for the two years, and the disallowance of the other $1,975
is affirmed.
Operational materials
The $513 disallowed for undocumented expenditures for operational
materials has been conceded by grantee.
Other Charges: Honorarium
The grantee appealed from the disallowance of an allocation of $500 to
cover a portion of the expenses connected with bringing Dr. Avard
Fairbanks to the campus for lectures related to the Interpretive Man
portion of the program. The disallowance was originally based upon, I)
The failure of the grantee to have the project director's concurrence in
the expenditure, and 2) the relevance of the lectures to the project.
Grantee conceded that it had not followed proper procedures, but argued
that the lectures were, in fact, an integral part of the International
Fair which was described in the application for funding. (Exhibit 22a
to Grantee's letter of June 9, 1977, at 8.)
OE's latest response does not meet the substance of grantee's position;
it does take an oblique cut at Dr. Fairbanks' personal qualifications.
The Board starts from the premise that in general, the views of
recipients about the educational relevance and merit of particular
activities and the individuals who conduct them should not be set aside
lightly, unless there is some glaring deficiency in one or both
respects. Here, grantee's judgment is supported by direct documentation
that such an activity was contemplated as a direct part of the project.
The substantive basis of the audit exception was the questioned
relevance of Dr. Fairbanks' participation, and that relevance has been
demonstrated. OE's later questioning, with no factual basis, of Dr.
Fairbanks' credentials, is entitled to no weight.
Accordingly, the disallowance by OE of the $500 allocation to cost of
obtaining Dr. Fairbanks' services is reversed.
Grant-related income
There were three items originally included under this heading:
a) $414 from the International Festival held in fiscal 1973; b)
$15 from the International Center in the same year; c) $635 as
an adjusting entry for books bought with funds from another
federal program.
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Grantee has conceded that the auditors' treatment of the first two items
as grant-related income is appropriate. (Summary sheet of Title VI
section of Grantee's Response to Order to Clarify the Record.) The $635
should be handled by deducting it from project costs altogether.
Indirect Costs
The attached chart (Attachment 1) presents the amounts claimed by the
grantee, the auditor's recommendations (which were adopted by OE) and
the Board's disposition.
Summary and Conclusion
In accordance with the above discussion, the Board hereby Orders that
the appeal of Jamestown College be disposed of as follows. With respect
to Title II-A, the OE disallowance is reduced from $18,658 to $10,149.
With respect to Title III, the disallowance of $2,315 is affirmed,
without prejudice to whatever rights Grantee may have to submit claims
for additional allowable expenditures. With respect to Title IV-P the
disallowance of direct costs claimed is reduced by $618, from $6,600 to
$5,982; the allowance for fringe benefits is increased from $1,404 to
$1,468, and the allowance for indirect costs is increased from $1,454 to
$1,504. Accordingly, the net disallowance is reduced by $732, to $4,645
(exclusive of outlay of $171 over grant ceiling). With respect to Title
VI, the disallowance of $11,401 (including $2,391 in unexpended funds)
is reduced by $4,198, to $4,812. Overall, the disallowance of $38,384
is reduced to $24,945.
0E Adjustment Board Adjustment
Title II-A $18,658 $10,149 Title III
2,315 2,315 Title IV-P 5,377
4,645 Title VI-A 633 633 Title VI
11,401 7,203 Total $38,384
$24,945
Attachment 1 to Decision of HEW Grant Appeals Board in No.
76-14 (Jamestown College)
Charged cost per Recommended Board Allowed on
Cost Category by College audit Adjustment Adjustments Appeal
Personal $28,613 $27,740 $( 873) $( 918) $27,695
services Library Costs 13,484 8,264 ( 5,220) (2,455) /1/
11,029 Travel 2,418 2,418 -O- -0-
2,418 Operational 1,332 819 ( 513) ( 513)
819 Materials Other 5,528 5,028 ( 500) -0-
5,528
Total direct $51,375 $44,269 $( 7,106) $(3,886) $47,489
costs indirect 4,297 3,457 /2/ ( 840) ( 497)
3,800 /3/ costs $55,672 $47,726 $( 7,946) $(4,383)
$51,289 Grant related income (-0-) $(1,064) $(
1,064) ( 429) $( 429) $55,672 $46,662 $( 9,010) $(4,812)
$50,860 FOOTNOTES
/1/ Also, it appears that the grant as a whole may have been used up.
See Exhibit 11 to Grantee's submission of June 9, 1977.
/2/ Order to Clarify the Record at 13-14. Compare the widespread use
of a percentage in lieu of itemized fringe benefits, which are still
direct costs.
'Footnotes To The Attachment'
/1/ includes $635 adjustment to reflect items purchased with funds
from another grant.
/2/ 8 percent of $43,205 ($44,269 less grant related income of
$1,064)
/3/ 8 percent of $47,489, with no adjustment for grant-related
income. D11 May 15, 1992