DAB Decision 75
January 31, 1980 Oregon State Wide Allocation Plan; Docket No. 79-57;
Decision No. 75 DeGeorge, Francis D.; Malone, Thomas E. Mason, Malcolm
S.
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.)
A state-wide cost allocation plan that included interest charges
involved in the purchase of computers was disapproved by the Division of
Cost Allocation, Region X, and the Principal Regional Official. The
Principal Regional Official expressly noted his personal view that the
federal policy disallowing interest costs for acquisition of large
capital items should be dropped but considered himself bound by the
policy until changed by the Office of Management and Budget. The Board
following its own previous decisions in this area, notably Oregon
State-wide Cost allocation Plan, Docket No. 75-7, Decision No. 22, June
25, 1976, sustained the disapproval although, it noted the contention
that the purchase of computers, rather than renting them, resulted in
significant cost savings to federal programs.
DECISION
This case involves the January 10, 1979 decision of Mr. Richard D.
Hughes, Acting Director, Division of Cost Allocation, Region X,
disapproving the State of Oregon's proposed statewide cost allocation
plans for the fiscal years ending June 30, 1978 and June 30, 1979. The
state requested review of Mr. Hughes' decision by the Principal Regional
Official by letter dated January 30, 1979. By letter dated February 22,
1979, Mr. Bernard E. Kelly, Principal Regional Official, Region X,
notified the State that he affirmed Mr. Hughes' decision, although, "I
am personally persuaded that the Federal policy on disallowing
reimbursement of interest costs for acquisition of large capital items
should be changed. However, until that change is made by OMB, I have
concluded that the Division of Cost Allocation has correctly applied the
cost principles in this case."
By requesting review by the Principal Regional Official, apparently
acting as successor to the Regional Director for purposes of 45 CFR Part
75, the State has complied with 45 CFR 16.5(b) and 45 CFR Part 75
requiring that disputes arising in the negotiation of cost allocation
plans be submitted to informal procedures established by regulation
before being brought to the Departmental Grant Appeals Board.
By letter dated March 23, 1979, Michael D. Reynolds, Assistant Attorney
General, State of Oregon, sought review by the Board of the Principal
Regional Official's determination.
An Order To Show Cause was issued on June 27, 1979 and was addressed to
both parties to the appeal. The State of Oregon was directed to respond
to the Order within thirty days of the date of the Order. The Principal
Regional Official was invited, but not required, to respond to the
Order. He was informed that, in any event, he would be afforded an
opportunity to respond in the future if substantial issues were to be
raised by the State of Oregon's response. The State of Oregon's
response to the Order was dated August 1, 1979; the Principal Regional
Official has not responded to the Order.
The State of Oregon has had before this Board another case involving the
disapproval, by regional officials, of Oregon's state-wide cost
allocation plan.
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The State maintained with some plausibility that its policy of
purchasing computers, rather than renting them, resulted in significant
cost savings to all programs using these computers.
On June 25, 1976, the Board issued a decision (Oregon State-wide Cost
Allocation Plan, Docket No. 75-7, Decision No. 22), denying the appeal
and sustaining the decision of the Regional Director on the grounds that
OMB Circular A-87 prohibited the inclusion of interest charges in costs
charged to federal grants funded by the Department of Health, Education,
and Welfare. (The denial was also based upon additional grounds not
relevant to the case at hand). Assistant Attorney General Reynolds
stated, in the present application for review before this Board, that by
letter, dated November 8, 1978, 'the State of Oregon requested of the
Director, Division of Financial Management Standards and Procedures, in
accordance with the provisions of 45 CFR 74.6 permission to deviate from
the provisions of 45 CFR Part 74 Subpart Q (which includes the provision
prohibiting the recovery of interest payments). The Assistant Attorney
General pointed out that, as of the date of the request for review to
this Board, no response had been received to Oregon's request for
permission to deviate. There seems to be no authority, however,
requiring that a response be made to a request for deviation under the
provisions of 45 CFR 74.6. We do not know whether the deviation request
has simply been rejected or is being held pending possible further
consideration.
The case now before the Board involves the same issue of the
allowability of interest charges, as was involved in the installment
purchase of computers, decided by the Board in June 1976. The Board's
Decision N.o. 22, which stands as the final administrative decision of
the Department (45 CFR 16.10(c)), appears to control in the present
case. Interest on borrowing for the purchase of computers by State and
local governments is unallowable except when authorized by Federal
legislation (45 CFR Part 74 Appendix C Part II, D.7, September 1973) or
perhaps upon specific prior approval by the Federal grantor agency. (45
CFR Part 74 Appendix C Part II C.l).
The Order to Show Cause in this appeal directed the State of Oregon to
show why the appeal should not be denied on the ground that Decision No.
22 is controlling. The State of Oregon, in its response to the Order,
agreed that the issue involved in this appeal is identical to the one
raised by the State in Decision No. 22. It further stated that if the
Board did not wish to reexamine the holding in Decision No. 22 there
would be no useful purpose in the State's submitting additional
material.
The Office of Management and Budget has given no present indication of
an intention to change its policy on this issue. In a notice of
proposed rulemaking, dated June 28, 1979, 44 FR 37707, OMB expressed an
intention
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to revise the provisions of Federal Management Circular 74-4 "Cost
Principles applicable to grants and contracts with State and local
governments." The purpose of the proposed revision of the Circular is to
allow rental charges, including interest, in determining costs related
to the use of publicly owned buildings where "rental rate" systems
are
utilized and based on actual costs. OMB did not propose at that time to
change its prohibition-of-interest rule for computer acquisitions
although it proposed liberalizing the rule for space acquisition.
The policy and regulation are clear, Oregon, Decision No. 22 supra;
State of Wyoming, Docket No. 76-16, Decision No. 53, December 1, 1978.
The Principal Regional Official acted within his authority in affirming
the decision' of the Division of Cost -location to refuse approval of a
state-wide cost allocation plan including interest incurred in
purchasing computer equipment in determining the billing rates for
computer services. The appeal is denied. D11 May 15, 1992