DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: HOPES, Inc.
DATE: December 5, 1989
Docket No. 89-88
Decision No. 1117
DECISION
The Hoboken Organization Against Poverty and Economic Stress (HOPES,
Grantee) appealed a determination by the Office of Human Development
Services (Agency) disallowing $102,560 of the Grantee's Head Start grant
award for the budget period April 1, 1987 through March 31, 1988. The
disallowance was based on the Agency's finding that the Grantee had
expended the full amount of the federal funds awarded while maintaining
an average enrollment of only 112 children, even though 144 enrollment
slots had been funded. The Agency disallowed a per capita amount for
each unfilled slot.
For the reasons stated below, we conclude that (1) the Agency's
disallowance is inconsistent with its own published policy establishing
the primary appropriate remedy for underenrollment; (2) under the
particular circumstances here, the Grantee could reasonably conclude
that its underenrollment did not amount to a change in the scope or
objectives of its project requiring prior Agency approval; and (3) the
Grantee's underenrollment is not sufficient, by itself, to establish
that the Grantee incurred unreasonable costs in the amount disallowed in
serving the children who were enrolled. Accordingly, we reverse the
disallowance.
We do not by our decision undercut either the importance of the policy
calling for full enrollment or the seriousness of the Agency's concern
about this. We find only that this particular disallowance action is
clearly unfounded. Our conclusion does not, therefore, preclude the
Agency from further examining the Grantee's expenditures, in light of
the actual circumstances during the 1987-1988 budget period, to
determine more exactly and reasonably the appropriate amount, if any, of
a disallowance related to underenrollment.
General requirements on which the Agency relied
The Head Start program was authorized by the Head Start Act (Act), 42
U.S.C. 9831 et seq., to provide comprehensive health, educational,
nutritional, and social services to economically disadvantaged children.
Section 9839 of 42 U.S.C. provides that the Secretary of the Department
of Health and Human Services (HHS) shall prescribe rules and regulations
to implement the Act. Regulations at 45 C.F.R. 1301 et seq. (1986) set
forth specific program requirements. Part 74 of 45 C.F.R. contains
general principles for the administration of HHS grants. Below, we
describe the particular regulations and policies cited by the Agency as
support for the disallowance.
Section 74.103(b) of 45 C.F.R. requires that grantees obtain prior
approval for changes to the scope or objectives of their projects. In
accordance with 45 C.F.R. 74.170, grant funds may be used only for
allowable costs as determined by the applicable cost principles. The
cost principles for awards to non-profit organizations are stated in
Office of Management and Budget Circular A-122 and incorporated by
reference in 45 C.F.R. 74.174. Attachment A to OMB Circular A-122
provides that in order to be allowable, grant-related costs must be
reasonable.
The Office of Human Development Services (OHDS), which administers the
Head Start program, issued a policy on full enrollment of Head Start
students in Chapter S-30-317-1 of the Head Start Policy Manual (HSPM).
44 Fed. Reg. 63478 (November 2, 1979). HOPES did not dispute that the
enrollment policy was referenced in the notice of grant award as a term
of the HOPES grant for the budget period in question.
The Head Start policy requires that--
The Head Start program must maintain an enrollment level equal to
its funded slots.
HSPM, Chapter S-30-317-1-40-A.2.a. The policy also provides that the
Agency will check compliance with the enrollment requirements through
on-site assessments during the operating year and from a grantee's
Program Information Reports (PIRs). The policy provides that, when
actual enrollment drops below the funded enrollment level, the Agency
"shall offer the necessary technical assistance . . . to increase
enrollment" and will set a thirty to sixty day compliance period for the
grantee to increase its enrollment to or above 100% of its funded slots.
The policy states that the Agency will take "appropriate remedial
action" if, within the compliance period and taking into consideration
the technical assistance requested and provided, the funded enrollment
level is not reached. HSPM, Chapter S-30-317-1-20.
The "appropriate remedial action" for underenrollment is set forth
as
follows:
Grant funds may be reduced in approximate relationship to the
number of unfilled slots, i.e., the difference between actual and
funded enrollment at the end of the thirty-sixty day compliance
period. This would occur at the time of the refunding grant award
immediately following the end of the compliance period or the
subsequent grant award, whichever is reasonable considering the
results of the grantee's apparent effort to achieve funded
enrollment and the time relationship between the end of the
compliance period and the grantee's next budget year.
HSPM, Chapter S-30-317-1-20.1.
Chapter 1, pages 1-11 through 1-14, of the OHDS Discretionary Grants
Administration Manual (OHDS GAM) requires grantees to obtain prior
approval for any change to the scope or objectives of their projects,
and provides that such a change may result from, among other things, a
change in the number of beneficiaries to be served.
HOPES' enrollment history
HOPES has been a Head Start grantee for more than ten years. It
received funding for its 1985-1986 budget period to serve 108 children,
and in March 1985, applied for an expansion grant to increase its
enrollment from 108 to 142 children. The Agency later requested an
increase in the Grantee's funded enrollment to 144, to enable the
Grantee to provide eight classes of 18 children each. The highest
enrollment level reported by the Grantee after 1985 was an average of
118 children during the 1985-1986 school year. Agency's Ex. A, p. 3.
The Grantee applied for and received funding to serve 144 children for
its 1987-1988 budget period. The Grantee's 1987-1988 grant award
totaled $461,541, including a supplemental award ($64,548) primarily for
building renovations and two vehicles. Agency's Ex. A, Atts. 2 and 6.
The Grantee submitted PIRs to the Agency which reflected the following
enrollment levels for the 1987-88 budget period:
April 1987 - 112 November 1987 - 111 February
1988 - 113
Agency's Ex. A, p. 4, and Att. 5.
The Grantee subsequently requested and received $332,400 for 103
enrollment slots for the 1989-1990 budget period. This represented a
reduction from six teachers and six assistants to five teachers and five
assistants, and from two classroom sites to one site. Agency's Ex. A,
Atts. 2 and 8.
The Agency's disallowance
In connection with its review of the audit for the 1987-1988 budget
period, the Agency disallowed $102,560, which it attributed to the
unfilled enrollment slots. The Agency found that the Grantee had
expended the full amount of its grant award, although its PIRs indicated
an enrollment of only 77.7% of its funded level (approximately 32 fewer
children than funded). This action, the Agency concluded, was a
violation of the terms and conditions of the grant requiring that the
Grantee carry out its project according to its grant application. The
Agency based its disallowance on the Head Start policy on full
enrollment, on the requirements in the regulations and Agency policies
for prior approval of changes to the scope or objectives of a project,
and on the general authorities restricting grantee charges to reasonable
and allowable costs. Grantee's Att. A-1.
The Agency computed the disallowance amount by dividing the total
expended grant award of $461,541 by the funded enrollment of 144 to
determine a cost per child of $3,205. The Agency then multiplied the
difference between the funded enrollment of 144 and the actual
enrollment of 112 children by the cost per child, to obtain the
disallowance amount of $102,560.
The disallowance letter does not reference any technical assistance
provided to the Grantee or any thirty to sixty-day compliance period for
meeting the funded enrollment level.
HOPES' response to the disallowance
HOPES asserted that it had charged to its grant legitimate and
reasonable expenses for eligible children, and that in relying solely on
the reported enrollment figures--
The Respondent seems to be missing the point. If we were talking
about furniture then their point would be well taken in that if
they ordered 144 chairs and only 112 were delivered they should
only pay for 112. But we are talking about human beings free to
come and go, beset by numerous problems of health, housing
displacement, economics, family instability, lack of motivation,
physical abuse and plain despair. This requires a different form
of measurement.
Grantee's September 17, 1989 submission, p. 2.
To explain its level of expenditure, the Grantee relied on the general
circumstances that it faced in Hoboken, New Jersey. The Grantee argued
that the City of Hoboken was "going through an intensive period of
gentrification resulting in the displacement of whole neighborhoods."
Grantee's July 3, 1989 submission. The Grantee asserted that it
enrolled or served in some form or other 242 children during the
1987-1988 budget period. The Grantee stated that it had experienced a
high turnover of its enrolled children during the 1987-1988 budget
period and presented evidence that attendance problems in Head Start
programs were widespread in New Jersey as well. Grantee's Att. A-2.
The Grantee described the enrollment pattern in two of its classes,
stating that for "Class 1," although the rollbook showed an enrollment
level of 16 or 17 children for September 1987 through March 1988,
taking the turnover into account, 25 different children actually took
part in the program. For "Class 2" the enrollment figures showed 14
or
15 children, but 31 different children had actually participated. The
Grantee indicated that the pattern in Classes 1 and 2 was similar to all
of its other classes. Grantee's September 17, 1989 submission. The
Grantee's assertions regarding displacement and its high turnover rate
were not disputed by the Agency.
As further justification for its expenditures, the Grantee relied on its
obligation to provide certain types of medical, dental, screening, and
follow-up services to each child who enrolled, regardless of how long
that child was in the program. Grantee's September 1, 1989 submission.
HOPES also stated that it experienced costly and disruptive structural
problems with a classroom building during the budget period.
Analysis
There is no question that the Grantee did not maintain or even reach its
full funded enrollment level for the 1987-1988 budget period. The
issue, then, is whether a per capita based disallowance is an
appropriate remedy.
As we explain below, neither the full enrollment policy nor the other
requirements cited by the Agency support a determination that, simply by
virtue of the Grantee's underenrollment, a per capita based portion of
the expenditures during the 1987-1988 budget period was unreasonable and
thereby unallowable.
I. The full enrollment policy
The HSPM states that when actual enrollment drops below funded
enrollment, the Agency is to provide technical assistance and a
compliance period, after which funding may be reduced for future budget
periods in an "approximate relationship" to the number of unfilled
slots.
We can infer the Agency's awareness of the Grantee's underenrollment
during the three budget periods following its expansion grant from the
PIRs submitted by the Grantee for each school year, and the Agency's
acknowledgment of state-wide attendance problems, which were also
reflected in the disruption and transiency of the Hoboken population.
Grantee's Att. 2. Furthermore, Chapter S-30-317-1-20 of the HSPM states
that the Agency will check the Grantee's compliance with the enrollment
policies, from on-site pre-reviews, validation, and the Grantee's PIRs.
Although the Agency relied on the full enrollment policy, the Agency did
not allege that it had provided any technical assistance or set a
compliance period.
Despite the HSPM provisions, which contemplate a prospective reduction
in funding with an "approximate relationship" to the number of unfilled
slots, the Agency took a retroactive disallowance based on a straight
per capita calculation. This disallowance is inconsistent with the
Agency's policy in two respects.
The term "approximate" calls for the application of some informed
judgment as to the costs associated with unfilled slots that may be
reflected in a reduced award. That term is not synonymous with the term
"per capita." In determining the "approximate" amount, the
Agency could
properly consider those costs reasonably and actually necessary to
provide the required level of program services to the children actually
expected to enroll.
Moreover, the Agency implemented its enrollment requirement through a
written policy issuance which specified what remedial action the Agency
would take. Therefore, this policy provides no support for a different,
more extreme, remedial action. In light of the policy adopted by the
Agency, the Grantee could reasonably conclude that the Agency would not
take this type of retrospective disallowance, regardless of the
Grantee's actual circumstances, based solely on underenrollment.
Because the HSPM does not provide a sufficient basis for the Agency's
action, we conclude that it was unreasonable under the instant
circumstances. This, however, in no way limits the Agency's authority
to disallow costs on other, adequate grounds.
II. Prior approval for a change in scope or objectives
The Agency also argued that the Grantee's underenrollment constituted a
violation of the terms and conditions of its grant, and of regulations
at 45 C.F.R. 74.103(b), which require prior approval for changes in the
scope and objectives of a project. However, we conclude that the
Grantee's inability to achieve its funded enrollment does not by itself
constitute a change in the scope or objectives of the project.
The objectives of a Head Start program are established by regulation,
and do not directly relate to maintenance of the funded enrollment
level. The regulations define objective as "the ultimate purpose or
interest toward which Head Start program components are directed." 45
C.F.R. 1304.1-2. The regulations set forth the specific program
objectives for education services, health services, social services, and
parent involvement. 45 C.F.R. Part 1304, Subparts B, C, D, and E. The
social services objectives do include outreach and enrollment procedures
directed toward full enrollment. 45 C.F.R. 1304.4-1. The Agency
provided no basis, however, to support a conclusion that the actual
objectives of the Grantee's Head Start program had changed during the
1987-1988 budget period. We cannot conclude that the grant's
objectives, to provide comprehensive health, educational, nutritional,
and social services to economically disadvantaged children, were altered
simply by the failure to reach an average enrollment equal to the funded
enrollment.
The regulations do not define program scope. The OHDS GAM states that a
change in scope may result from "a significant alteration . . . of the
number of beneficiaries to be served." There is no indication in the
record, however, that the Grantee sought to serve fewer children than
funded, or that the intended scope of the Grantee's project was changed
in a significant way. Enrollment was not something over which the
Grantee had complete control, especially given the circumstances in the
community which it served and the fact that enrollment applications can
be made at any time during the program year. 45 C.F.R. 1305.6. As the
Board concluded in San Carlos Apache Tribe of Arizona, DAB No. 369
(1982), "the scope of the grant does not relate to the particular
children enrolled since no program at the time of its grant application
would know how many children would actually be enrolled."
While we do not mean to imply that underenrollment would never
constitute a change to the scope of a funded project, this is a question
of degree that must be answered in light of the facts. The Agency
asserted that the Grantee prevented it from awarding a reduced amount by
not requesting prior approval to serve fewer children. The Agency's
argument, however, assumes a somewhat unrealistic view of a grantee's
ability to anticipate and request approval for a "change" it may not
even have sought to make. Here, the Agency continued to award grants
for several years that reflected higher enrollment levels than those
actually reached. Presumably, the Agency awarded these grants in light
of the community needs assessment in each application and determined
that the funding level was warranted under the circumstances. See
Agency's Ex. A, Att. 1. To fault the Grantee, several years after the
fact, for a failure to anticipate circumstances affecting its ability to
reach its funded enrollment, over which it did not have complete
control, is clearly unreasonable.
III. Other considerations
Although the Agency argued that the cost principle provisions requiring
that costs be reasonable and allowable supported its disallowance
action, the Agency did not examine discrete costs, in light of the
circumstances the Grantee faced, and determine that costs incurred were
in fact unreasonable or unnecessary. The Agency's conclusion that a
portion of the funds expended were per se unreasonable, by virtue of the
underenrollment, is unfounded. The question which the Agency's
determination left unanswered is whether the expenditures actually made
were reasonable in light of the total number of children served and the
Grantee's efforts to increase enrollment and provide community outreach.
The Agency offered several Board decisions in support of its argument
that federal funds may be expended only for the purposes for which they
have been appropriated, a principle which the Agency argued supported
its disallowance. All three of the decisions cited, however, can be
distinguished from the instant case. In Economic Opportunity Council of
Suffolk, DAB No. 679 (1985), the grantee transferred Head Start funds to
other programs to satisfy payroll and financial obligations. The
disallowance in Somerset County Head Start, DAB No. 758 (1986),
consisted of two apparent debts owed to the grantee and an unallowable
fund balance adjustment. Finally, in Community Action Agency of
Chambers-Tallapoosa-Coosa, Inc., DAB No. 1066 (1989), disallowed grant
funds were garnished to satisfy a court order in a race discrimination
lawsuit. These cases all involved the use of grant funds for discrete
and clearly unallowable costs and for purposes obviously unrelated to
the objectives of the respective grants. As noted above, in this case
the Agency did not look at and identify any particular costs that were
unallowable.
The Agency's argument that the Grantee's underenrollment contravened the
purposes of the July 1985 grant to increase enrollment is also without
merit. Such grant awards are separate and distinct agreements,
applicable to different time periods and circumstances, so that
performance under each award must be measured separately. The instant
case can also be distinguished from the Board decisions cited by the
Agency as general support for a per capita disallowance calculation.
Both Gila River Indian Community, DAB No. 264 (1982), and Fort Belknap
Community Council, DAB No. 1045 (1989), involved the provision of
services to ineligible children. Such action constitutes a clear
violation of the applicable regulations and directly contravenes the
purpose of the grant to provide services to low-income children.
Providing services to ineligibles beyond what is permitted by regulation
can be regarded as operating a program with federal funds that is beyond
the scope of the program specifically authorized by Congress. We have
upheld a per capita calculation of the disallowance amount in that
circumstance as a reasonable calculation of the expenditures associated
with ineligibles.
Conclusion
For the reasons discussed above, we conclude that the facts and policies
applicable in this case do not support the disallowance in question,
because the Agency did not show that its per capita calculation was
sufficient as a measure of the costs the Grantee may reasonably have
incurred for the children who were appropriately served. Stated another
way, the per capita measure is too rough a tool to determine the amount,
if any, of a disallowance appropriate to the Grantee's underenrollment.
It may be appropriate, however, to question whether the Grantee's
expenditure of the full amount awarded was reasonable, especially in
light of the reduced award for the 1989-1990 budget period. Our
conclusion does not, therefore, preclude the Agency from further review
of the Grantee's particular expenditures to determine more precisely the
amount of a disallowance, if any, which would be appropriate in light of
the underenrollment.
For the foregoing reasons, we reverse the disallowance of $102,560.
Judith A. Ballard
Norval D. (John) Settle
Cecilia Sparks Ford Presiding Board