DAB Decision 84
February 26, 1980 Vermont State-Wide Cost Allocation Plan; Board Docket
No. 79-198; Decision No. 84 Kelly, Bernard E.; Malone, Thomas 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.)
The grantee, State of Vermont, appealed the decision of the Principal
Regional Official, Region I, to eliminate interest expenses connected
with the purchase of computer equipment from the central data processing
rates in Vermont's State-Wide Cost Allocation plan. The Board denied
the appeal on the basis of the provision in 45 CFR Part 74, Appendix C,
D. 7., which states that "Interest on borrowings...are unallowable
except when authorized by Federal legislation."
The Board noted that grantee persuasively argued against the policy of
denying Federal financial participation for interest costs in those
cases where purchase was more economical than leasing, but given a clear
violation and in the absence of Federal legislation or prior Agency
approval, the Board held that it will enforce the cost principle that
interest costs are unallowable.
DECISION
This case involves a June 28, 1979 decision of the Director, Division of
Cost Allocation, Region I, to eliminate interest expenses from the
central data processing (CDP) rates in Vermont's State-Wide Cost
Allocation Plan for the fiscal year ended June 30, 1978. In a letter
dated July 26, 1979, the State requested that the Principal Regional
Official review that decision. By letter dated August 31, 1979, the
Principal Regional Official, Region I, apparently acting as successor to
the Regional Director for the purposes of 45 CFR Part 75, notified the
State that he affirmed the determination of the Division of Cost
Allocation.
By letter dated September 28, 1979, the Commissioner of the Vermont
Department of Management and Budget filed with the Board an application
for review of the Principal Regional Official's decision.
In an Order dated December 17, 1979, the State was directed to show
cause why the appeal in this case should not be denied on the ground
that interest expenses connected with the purchase of computer equipment
are unallowable under 45 CFR Part 74, Appendix C, D. 7. The State, in
its January 15, 1980, letter acknowledging that the Order to Show Cause
"accurately reports the facts," provided no additional information.
Statement of the Case
To achieve its stated purpose of "good management and economy," the
State of Vermont chose to purchase rather than lease computer equipment
to provide data processing services to all state government agencies.
The State included the interest expenses for such purchase as part of
its central data processing rates in its State-Wide Cost Allocation
Plan. The Agency based its decision to eliminate those interest charges
from the CDP rates on OASC- 10, "A Guide for State and Local Government
Agencies," and Attachment B, OMB Circular 74-4, D.7. (made binding on
the states by 45 CFR Part 74, Appendix C, D.7). Section D.7. provides:
Interest on borrowings...are unallowable excePt when authorized by
Federal legislation.
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The State in its appeal contends that the Agency's determination is
contrary to the fundamental policy of OMB Circular 74-4 which requires
Federal programs to bear their fair share of the costs of operation.
The State argues that the decision to eliminate the interest costs is
unfair, asserting that if the computer services were purchased from a
commercial provider, or provided by a public provider on leased
equipment, the total cost would be paid by Federal projects even though
the cost would be much higher.
The State calculates that in a four year period, the purchase of
equipment, including interest charges, represents a saving of $1,080,228
over the cost of leasing. In addition, the State argues that it would
create administrative havoc to attempt to isolate the exact source of
funds for a particular computer service in order to eliminate the
Federal share of costs. In support of its application for review, the
State also makes reference to a proposed revision of OMB Circular 74-4.
Discussion
Grantee makes a persuasive argument against the policy of denying
Federal financial participation for interest expenses in the purchase of
computer equipment when such purchase is more economical than leasing.
There is also substantial merit to the contention that the regulation
should be changed to reflect the advantages of purchasing computer
equipment. Cf. Board decision, University of California at San Diego,
Docket No. 23, Decision No. 13, January 27, 1976, pp.3-4.
The Office of Management and Budget did not, however, elect to make such
a recommendation in its proposed revision of Circular 74-4, D.7. (44 FR
3707, June 28, 1979). The proposal would allow interest costs as part
of the rental charges of publicly owned buildings but pointedly makes no
changes in other aspects of the interest rule. No change has been made
in the relevant portions of 45 CFR Part 74 respecting the interest rule.
Given a clear violation, and in the absence of Federal legislation or
prior Agency approval under 45 CFR Part 74, Appendix C, C.l., the Board
will enforce the cost principle which states that interest costs are
unallowable. (See Board Decisions: Oregon State-Wide Cost Allocation
Plan, Docket No. 75-7, Decision No. 22, June 25, 1976; State of Wyoming,
Docket No. 76-16, Decision No. 53, December 1, 1978; Oregon State-Wide
Allocation Plan, Docket No. 79-57, Decision No. 75, January 31, 1980.)
'(Page 03 - 84 - 02/26/80)'
The Principal Regional Official acted within his authority in affirming
the decision of the Division of Cost Allocation to eliminate interest
expenses from the central data processing rates in Vermont's State-wide
Cost Allocation Plan. The appeal is denied. D11 June 5, 1992