GAB Decision 094
April 30, 1980 Knox County Economic Opportunity Council, Inc.,
Barbourville, Kentucky; Docket No. 79-26 Coster, Clarence; DeGeorge,
Francis Dell'Acqua, Frank
Knox County Economic Opportunity Council, Inc. (Grantee) appealed by
letter dated February 22, 1979 from the January 22, 1979 determination
of the Acting Director, Grants Administration Division, Office of Human
Development Services (OHDS), Region IV, disallowing $5,074 charged to
Grantee's program year J Head Start grant for the year ended September
30, 1977. OHDS identified the disallowed costs as follows: (1) $300
charged for unapproved equipment; (2) $252 in overpayments to doctors
for medical and dental expenses of children; and (3) $4,522 expended in
excess of the amount budgeted for construction. In its response to the
appeal, OHDS indicated that it was withdrawing its disallowance of the
medical and dental costs since the money had been recovered by Grantee
from the doctors. An Order to Show Cause issued by the Board Chairman
on December 4, 1979 called for briefing by the parties regarding the two
remaining items.
Equipment Costs.
The audit report on which the disallowance was based indicated that
the equipment in question consisted of additional accessories on vans
acquired in the prior program period, and stated that Grantee had not
obtained approval for the purchase. It appeared from the file that the
cost of the accessories had been disallowed by OHDS in an earlier
determination previously appealed by Grantee and docketed by the Board
as No. 78-14. The Board's decision in that case found that Grantee
could reasonably have understood OHDS to have approved the expenditures,
and granted the appeal in full.(Knox County Economic Opportunity
Council, Inc., Decision No. 68, October 29, 1979.) The Order to Show
Cause therefore stated that if the $300 was in fact a part of the costs
which OHDS disallowed in Docket No. 78-14, further consideration of the
matter by the Board might be unwarranted. In its response to the Order,
OHDS stated that it agreed that the appeal should be granted on the
issue of equipment costs.
Construction Costs.
The construction costs were disallowed on the ground that Grantee had
exceeded the amount budgeted for that line item without prior approval.
OHDS stated in its response to the appeal that the basis of the
disallowance was 45 CFR Part 74, Subparts L and Q, (no specific
provisions cited,) as well as a provision in the OHD Grants
Administration Manual requiring grantees to request prior written
approval for budget revisions whenever revisions would cause the
expenditure of funds for alterations and renovations.
The Order to Show Cause tentatively stated, however, that neither the
OHD Grants Administration Manual nor Subpart L of 45 CFR Part 74 on
budget revision procedures appeared to be binding on grantee. The
version of 45 CFR Part 74 which governed at the time in question
provided that Subpart L was applicable only to State and local
government grantees. 45 CFR 74.1(a) (38 FR 26274 (September 19, 1973)).
The OHD Grants Administration Manual is dated 1/1/77, after the grant
was awarded. It was, moreover, not published in accordance with 42
U.S.C. 2928f(d), which requires that all rules, regulations, guidelines,
and instructions applicable to the Head Start program be published in
the Federal Register 30 days prior to their effective date.
The Order nevertheless noted that there were several requirements in
Appendix F of Subpart Q of 45 CFR Part 74 (by which Grantee was clearly
bound) which might be applicable in this case: Paragraph G. 21
pertaining to "maintenance and repair costs," Paragraph G.35 pertaining
to "rearrangement and alteration costs," and Paragraph G.7 pertaining
to
"capital expenditures." Capital expenditures are defined as the costs
of
equipment, buildings, and repairs which materially increase the value or
useful life of buildings or equipment, and are unallowable except as
provided for in the grant. Rearrangement and alteration costs are
allowable, but advance written approval is required if the costs are
incurred specifically for the project. Maintenance and repair costs,
defined as those costs necessary for the upkeep of property which
neither add to the permanent value of the property nor appreciably
prolong its intended life, but which keep it in an efficient operating
condition, are allowable with no requirement for prior approval. The
Order asked Grantee to provide information regarding the nature of the
construction costs in order to permit a determination as to which of
these provisions was applicable and asked the parties to brief the issue
after this information had been submitted. The Order also requested the
parties to brief the question whether the appeal should be granted on
the ground that any failure by Grantee to obtain prior approval was a
technicality which should be excused since OHDS had not questioned the
necessity or reasonableness of the costs in question.
In response, grantee submitted a list of about 85 items, ranging from
furnace filters to plywood, purchased with the funds in question. It
asserted that "(t)he material used in renovating the centers did not
increase the value of the centers nor represent capital improvement."
The Agency in its response to the Order merely stated its opinion that
the appeal should be denied on the issue of construction costs on the
ground that Grantee failied to obtain prior approval required for such
expenditures without indicating which of the requirements for prior
approval it believed was applicable and why.
(3) In the absence of a breakdown of the costs allocable to each item
on Grantee's list or a description of the manner in which the items were
used, it is difficult to make a clear determination as to whether prior
approval was required for the questioned expenditures. OHDS, which
presumably based its disallowance on some knowledge of the nature of the
costs, did not provide any information which would assist the Board's
determination. The Board has commented in a prior decision involving
the same grantee or the lack of responsiveness on the part of the same
office in OHDS in briefing to this Board. (Knox County Economic
Opportunity Council, Inc., DGAB Docket No. 78-14, Decision No. 68,
October 29, 1979, pp. 2, 4.)
Grantee's position, nevertheless, is clearly that the costs were
maintenance and repair costs for which no prior approval was required.
Its attempt to support that position with documentation, although
inadequate, was clearly made in good faith. We note further that,
although given an opportunity by the Order to do so, OHDS in its
response did not assert that the costs were unnecessary or unreasonable,
or that Grantee's failure, if their was one, to obtain prior approval
should not be excused under the circumstances of this case. In view of
the fact that OHDS has not contradicted in any but the most general
terms Grantee's assertion that no prior approval was required, we
conclude that the disallowance of this item was improper.
DECISION
The appeal is granted in full and the disallowance of the Office of
Human Development Services is set aside.
SEPTEMBER 22, 1983