Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Youth Network Council
DATE: May 3, 1990
of Chicago, Inc. Docket No. 89-137
Decision No. 1150
DECISION
The Youth Network Council of Chicago, Inc. (Council, YNC, or Grantee)
appealed the denial of a noncompeting continuation award by the Office
of Human Development Services (OHDS or Agency). OHDS denied funding
under the Runaway and Homeless Youth (RHY) Program for the period July
1, 1989 to June 30, 1990, the second budget period of an approved
three-year project period. OHDS found that the Council had materially
failed to comply with the terms and conditions of prior grant awards and
failed to make satisfactory progress toward the resolution of its
deficiencies.
With one narrow exception, this Board has no power to review pre-award
disputes such as this. This is because pre-award determinations
generally are matters committed to Agency discretion. The narrow
exception is that the Board will review "a denial of a noncompeting
continuation award under the project period system of funding where the
denial is for failure to comply with the terms of a previous award." 45
C.F.R. Part 16, Appendix A, Para. C.(a)(3).
In essence, this grantee functioned as a conduit of funds in that its
primary purpose as a grantee was to provide funds to community-based
direct service organizations. The record shows that YNC had failed
substantially in its obligation to provide funding to its subcontractors
and that YNC failed to eliminate its debts to its subcontrac- tors when
it was told that this circumstance placed its continuation funding in
jeopardy. Moreover, YNC itself was so unstable financially at the time
OHDS had to make its determination on this award that YNC's continued
existence was questionable. See, Agency Brief, pp. 3-5 (citing Grantee
Exhibit (Ex.) J). As explained further below, we conclude that the
record provides strong support for OHDS's determinations that the
Council had materially failed to comply with the terms and conditions of
its prior grant awards and had failed to make satisfactory progress to
resolve its financial problems. We, therefore, affirm the Agency's
decision to deny continuation funding.
Applicable Authority
The RHY Program was established pursuant to the Juvenile Justice and
Delinquency Prevention Act of 1974. See 42 U.S.C. 5601-5778. The
program's implementing regulations are found at 45 C.F.R. Part 1351
(1987). The purpose of a grant awarded under the RHY Program is to
establish or strengthen existing or proposed community- based runaway
youth projects to provide temporary shelter and care to runaway or
otherwise homeless youth who are in need of temporary shelter,
counseling, and aftercare services. 45 C.F.R. 1351.10. Project periods
for the grant awards can vary, and a grantee is notified in the initial
notice of grant award of the length of time the Agency intends to
support the project without requiring the project to recompete for
funds. In any case, the project period may not exceed three years. 45
C.F.R. 1351.14(a). Generally, a grant will initially be awarded for a
one-year budget period. A grantee must then submit a separate
application to have the support continued for each subsequent year of
the approved project period.
While the grantee does not compete with other grantees for continuation
awards during the project period, the Agency is not obligated to make
such awards. The idea of the system is to allow the grantee some
certainty regarding how much money will probably be available for the
grant while allowing the Agency some opportunity to discontinue funding
if necessary. Continuation awards will be made "provided the grantee
has made satisfactory progress, funds are available, and [the Agency]
determines that continued funding is in the best interest of the
Government." 45 C.F.R. 1351.14(b).
OHDS is the agency responsible for administering the RHY Program. OHDS
is federally mandated to manage and monitor all its grantees to protect
the interests of the Federal Government.
Noncompeting Continuation Award Denial
By letter dated June 1, 1989, OHDS denied the continuation award at
issue here. The Agency cited these factors as the basis for its
determination:
(1) The audit for YNC's fiscal year ending June 30, 1988 revealed
serious financial deficiencies and showed a net loss of
$128,586 and total liabilities in excess of total assets by
$247,328.
(2) YNC made interfund loans in violation of 45 C.F.R. 74.170.
(3) YNC failed to maintain proper accounting records in violation
of 45 C.F.R. 74.61, so that OHDS was unable to determine
whether YNC had ceased making interfund loans or to identify
the source and application of funds for RHY activities.
(4) YNC failed to submit the required monthly reports detailing
the reduction of its subcontractor debt.
Agency Brief, p. 2; see Agency Ex. 1.
Factual Background
The Council had been a grantee under the RHY Program since 1974. The
RHY Program grants provided funding for the Council's Temporary Housing
Project, which is composed of a decentralized network of seven
community- based agencies offering crisis intervention and support
services to runaway and homeless youth in Chicago, Illinois, and its
north and northwest suburbs. The grant is administered by the Council
and implemented by the subcontractors at the community sites. 1/ The
Grantee's annual budget for its Temporary Housing Project for the
period July 1, 1988 through June 30, 1989, was $180,000, which is
typical of previous budget periods. Agency Brief, p. 3; Agency Ex. 2,
p. 1. The Council's overall budget from all sources is approximately
one million dollars. Id.
During the first year of the expected three-year project period, OHDS
scheduled a January 1989 meeting with the Council's representatives to
discuss the Grantee's apparent financial difficulties. Agency Brief, p.
6. In preparation for this meeting, OHDS prepared a profile of the
Grantee. Id. The OHDS profile stated, in part:
Based on our investigations . . . it appears that [the Council] has
a deficit of approximately $200,000. Because of the agency's
fiscal problems, it is seriously [in] arrears in paying contractors
under the RHYA grant. In fact, the contractors have not been paid
fully for the immediate past budget period and have received no
funds for the current budget period.
Agency Ex. 2, p. 2. 2/
OHDS held the scheduled meeting with the Grantee on January 27, 1989.
During the meeting, the Agency raised concerns about the Council's
ability to operate effectively as a grantee. 3/ The Agency also
informed the Council that its practice of interfund loans was a
violation of federal regulations. 4/ At that time, in addition to
admitting that it had made interfund loans, the Council also did not
dispute the findings concerning its financial problems. 5/
By letter dated February 1, 1989, the Agency notified the Council that
it had been designated as a high risk grantee, and stated the cost
reimbursement procedures that would be used to monitor the Grantee's
program. Agency Ex. 7.
The Council, by letter dated February 24, 1989, responded to the Agency.
The Council's letter discussed the Grantee's general plan to improve its
financial situation. In the letter, the Council stated that its
"long-term funding commitments from diverse sources and increasing
membership support" would generate the funds that would allow it to
"re-establish a current [payment] schedule" with its subcontractors.
Further, the Council stated that it intended to institute changes that
would decrease its expenses, including a reduction in force, a decrease
in occupancy costs, and "other controls of unrestricted income and
expenditures."
The Grantee's letter prompted a second letter from the Agency. The
letter, dated March 16, 1989, stated, in part:
. . . . As your documents show, YNC has been using funds provided
through the basic center grant to finance activities other than
those of the basic center grant. This is a clear violation of 45
CFR Part 74, Section 74.170.
Further, YNC has an obligation to maintain current operations in
accordance with the terms and conditions of the basic center grant.
At the same time, however, YNC must also resolve the issue of the
debt owed to the seven subgrantees prior to refunding of the basic
center grant for the budget period beginning July 1, 1989. We
expect YNC to implement a more aggressive plan to pay the debts
owed to the subgrantees than the one presented in the February 24
letter. In addition, YNC must report monthly on its progress in
reducing the debt to subgrantees, submitting this report along with
the monthly reports required as part of the high risk designation.
* * * *
YNC will remain in high risk status until OHDS determines that
adequate progress has occurred in the elimination of the entire
corporate debt. We recognize that the high risk designation
becomes a factor in considering YNC for any additional grants.
Therefore, it is in your agency's best interest to take the
appropriate actions to remove you from this status.
* * * *
YNC's situation is extremely serious . . . .
* * * *
Agency's July 25, 1989 submission, attachment.
Soon after receiving the Agency's second letter, the Council applied, on
March 31, 1989, for continuation funding for the second budget year of
its three-year project period. Agency Brief, p. 8.
On May 17, 1989, Agency representatives conducted a site visit,
according to the Agency, to--
verify/substantiate the total dollar amount of the corporate debt,
the amount of payables to subgrantees, unliquidated obligations,
Federal share of outlays, [and] other agency expenditures incurred,
charged and paid against OHDS grant funds.
Agency Brief, p. 8. The site visit lasted only a few hours. One of the
Agency's representatives on the site visit stated that the reason for
the visit's termination was a determi- nation that it would have been
too time-consuming to accomplish their mission, because the task
required that they "look at every transaction in [the Council's]
accounting records to determine whether or not the expenditures charged
to [the OHDS] grant [were] proper and chargeable." Board Telephone
Conference Transcript (Tr.), p. 44. 6/ In short, the Agency found the
Council's records unacceptable because they did not have any type of
ledger or other summary system which indicated receipt or expenditure of
OHDS funds, and, without reviewing each transaction, including those of
other grants, the Agency could not identify OHDS funds or determine
whether they were spent properly.
The Agency did, however, issue a report of the site visit. The report
concluded that the Agency had sufficient grounds to suspend the grant,
in accordance with 45 C.F.R. 74.114, on the grounds that the Grantee
materially failed to comply with the terms and conditions of the grant
because the Grantee drew down funds and failed to advance the funds to
its subgrantees. Further, the report indicated that the Agency could
terminate the grant, in accordance with 45 C.F.R. 74.115, because the
Grantee failed to pay subgrantees, made interfund loans, in violation of
45 C.F.R. 74.170, and failed to meet the accounting records requirement
of 45 C.F.R. 74.61. 7/ Rather than suspending or terminating the grant,
which was due to expire by its own terms on June 30, 1989, the Agency
notified the Grantee, by letter dated June 1, 1989, of its decision to
deny the continuation award. See 45 C.F.R. 74.113. The Grantee then
instituted this appeal before the Board.
Analysis
The issue before the Board is whether there was a material failure by
the Council to comply with the terms and conditions of its current and
immediate prior grant awards and, as part of that, whether the Council
failed to make satisfactory progress toward the resolution of its
financial problems.
The Grantee's financial practices in two areas are relevant here.
First, there is no dispute that the Council made interfund loans in
violation of 45 C.F.R. 74.170. 8/ See Agency Ex. 7, p. 2. Indeed, the
Council's failure to properly use RHY grant funds was one factor in its
high risk designation in early 1989. The Agency found that the Council
had been using funds from its RHY grant to fund other activities so that
it was unable to make the required payments to its subcontractors.
Moreover, the Council was informed months before the decision to deny
the continuation award that its situation was extremely serious and
that it must resolve the subgrantee debt if it wished to receive further
funding. Agency March 16, 1989 Letter. The Grantee's practice of using
OHDS funds for making interfund loans is particularly egregious in light
of the Council's role simply to receive the grants funds and distribute
them to the subcontractors.
Second, the Grantee's general financial difficulties were of great
concern to the Agency. Specifically, the Council's audit for its fiscal
year ending June 30, 1988 stated, in part:
As shown in the financial statements, the organization incurred a
net loss of $128,586 during the year ended June 30, 1988, and as of
that date, the organization's total liabilities exceeded its total
assets by $247,328.
The Council's auditors specifically questioned whether it could continue
to operate given its financial difficulties. 9/ See Grantee Ex. J.
OHDS had directed the Grantee to resolve the issue of the debt owed to
the subcontractors prior to the refunding of the basic center grant and
to submit monthly reports to the Agency on the progress made in reducing
the debt. Clearly, the Agency properly determined that the Council's
interfund loans practices were a material violation of the terms and
conditions of its grant awards. OHDS notified the Council that its
continuation award was in jeopardy unless it resolved its subcontractor
debt. As noted above, while the Grantee, on June 5, 1989, submitted a
letter to OHDS detailing a reduction in the subcontractor debt, it had
not submitted any previous reports as directed in the Agency's March 16,
1989 letter. See Tr., pp. 35-36.
In any event, the Grantee's letter was sent after the Agency's
determination as of June 1, 1989 not to fund a continuation award.
Since the Council had been informed that its situation was extremely
serious, we cannot conclude that the Council's failure to submit the
required reports was merely an oversight or otherwise excusable as a
technical violation, as the Council argued. Although we have decided
that we do not need to reach the question of whether the Council's
accounting system met the requirements of 45 C.F.R. 74.61, we find that
it was certainly incumbent on the Council to provide the Agency with
concrete evidence (either during the Agency's May site visit or
otherwise) concerning the extent to which the Council had reduced its
subcontractor debt and addressed its financial difficulties in general.
Both the applicable regulations and grants administration policies
recognize that organizations whose management practices create risks of
poor programmatic use or poor financial stewardship of grants funds are
to be identified and eliminated from program participation. See, 45
C.F.R. 74.113-115 and Chapter 1-05, Grants Administration Manual.
Contrary to the Grantee's assertions, the Agency had provided the
Council with ample opportunity to correct its financial difficulties and
comply with the applicable federal guidelines. As the Agency noted, the
Board has found that "[t]he relationship of a sanction to policy is a
matter of agency competence, not to be overturned unless warranted in
law or without justification in fact." UCLA School of Medicine, DAB No.
340 (1982), p. 8.
Nevertheless, the Grantee asserted that the Agency had insufficient
grounds to deny continuation funding given the Council's significant
progress in rectifying its financial situation. We reject the Council's
position and find that while the record shows that the Grantee reduced
its subcontractor debt from February 1989 to June 1989, this factor
alone does not compel the Agency to make the continuation award. By
letter of February 24, 1989, the Council presented its plan for
resolution of its general financial difficulties to OHDS. Agency Ex.
11. This plan was apparently updated and is set forth in the record
here. Grantee Ex. P. The Council's updated plan called for the
resolution of its negative fund balance over a three-year period and the
eradication of its subcontractor debt under the RHY program over 18
months. The Council's February 1989 plan called for development of
other funding sources and a more streamlined administrative operation.
What is missing, however, is any concrete assurance to OHDS that the
Council could achieve the goals in its plan. Moreover, OHDS reasonably
determined that the Council's plan did not constitute satisfactory
progress toward resolution of its overall financial difficulties. Even
if the Council actually accomplished what it planned, it would not fully
resolve its financial difficulties until well after the end of this
grant's project period.
In this case, the Grantee failed to materially comply with the terms and
conditions of the grant award by making interfund loans. The Grantee's
failure to timely report to the Agency its progress of reduction of
subcontractors debt prior to the time the continuation funding period
arrived compounded the seriousness of this violation. Furthermore, the
Council's continuing financial difficulties were properly taken into
account by OHDS in determining not to make a further award. Without
adequate assurance that grant funds would be properly used and support
the services intended, OHDS could not responsibly award further funds.
We thus conclude that there was strong support for OHDS' decision to
deny funding of the continuation award.
Conclusion
Based on the foregoing, we uphold the Agency's decision.
____________________________ Judith A.
Ballard
____________________________ Norval D.
(John) Settle
____________________________ Cecilia Sparks
Ford Presiding Board Member
1. In response to the Board's inquiry, the parties stated that the
correct designation for the sub- organizations is "subcontractors."
However, the Board occasionally uses the term "subgrantees," since
this
term was sometimes used by the parties.
2. Additionally, the OHDS profile listed the Agency's four options in
regard to the continued funding of the Grantee's program. The options
available to the Agency were to: (1) place the Grantee on high risk
status; (2) suspend the grantee; (3) terminate the grantee; or (4) deny
refunding to the Grantee. The profile noted that option 3 or 4 would be
used only if it was clear that the Grantee's problems could not be
resolved by using option 1 or 2.
3. The Agency also noted that the Council's own audit reports showed
consistent losses from the fiscal year ending June 30, 1982 to the
present. Agency Brief, pp. 3-4; Grantee Ex. J. The Agency maintained
that the Council's past financial problems indicated a troubled future.
4. An interfund loan occurs when money from the grant program is
"loaned" to another program, and, thus, the "loaned" grant
funds are not
used for expenditures benefitting the grant.
5. Indeed, in its February 24, 1989 letter to OHDS, the Council
included a schedule of its accounts payable showing that it owed its
seven subcontractors a total amount of $108,916.64 for fiscal year 1988
and $7,500 for fiscal year 1989. Grantee Ex. U, p. 6. By letter dated
June 5, 1989 to OHDS, the Council informed the Agency that the amount
owed to the subcontractors had been reduced to $83,416.64, all
outstanding from fiscal year 1988. Grantee Ex. U, p. 2.
6. The Grantee maintained that part of the difficulty in providing
information to the Agency at the time of the site visit was the fact
that another Agency review was ongoing during this time. However, the
Agency indicated that this was not a determinative factor. Tr., pp. 41-
42.
7. The parties disagreed in their interpretation of the accounting
records requirement of 45 C.F.R. 74.61(b). That regulation requires
records to be maintained "which identify adequately the source and
application of funds for grant-or subgrant-supported activities." The
Agency maintained that, based on the site visit, the Grantee's records
did not comply with the accounting records requirement because "the
records were not kept in an order in which a person looking at the
records could trace the source of the application of funds." Tr., p.
46. The Agency concluded that the Grantee's records had no audit trail
in violation of the regulation. The Grantee asserted that while they
"were running behind in terms of computerized printout information,"
the
"information was in fact available on the manual ledger at the time."
Tr., p. 63.
In finding for the Agency, we do not reach the issue of whether the
Grantee violated the accounting records requirement of 45 C.F.R.
74.61(b). We note, however, that regardless of whether the Grantee's
overall accounting system was adequate, the Grantee did not provide
evidence or information to the Agency to substantiate its financial
status and any reduction in its subcontractor debt.
8. Section 74.170 of 45 C.F.R. states, in relevant part:
Grant funds may be used only for allowable costs of the activities
for which the grant was awarded.
9. The Agency also noted that the Council's audit reports from the
fiscal years ending June 30, 1982 to the present showed, in steadily
increasing amounts, losses and total liabilities in excess of total
assets. Agency Brief, pp. 3-4; Grantee Ex.