Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Sumter County Opportunity, Inc.
Docket No. 90-96
Audit Control No. A-04-89-06959
Decision No. 1200
DATE: October 15, 1990
DECISION
Sumter County Opportunity, Inc. (Grantee) appealed a decision by
the
Office of Human Development Services (OHDS, Agency) to disallow
costs
totaling $58,834 claimed under a Head Start grant for the program
year
ended April 30, 1989. Pursuant to an independent audit of the
Grantee's
Head Start program, the Agency disallowed $2,525 identified as
penalty
and interest charges incurred by the Grantee as a result of
the
Grantee's lateness both in paying unemployment compensation taxes and
in
filing an Internal Revenue Service (IRS) Form 5500. Further, the
Agency
disallowed $56,309 for the Grantee's failure to meet its 12
percent
non-federal share matching requirement.
By notice of appeal dated April 30, 1990, and received by the Board on
May
10, 1990, the Grantee appealed the disallowance and stated the
reasons why it
believed the disallowance to be wrong. By acknowledgment
dated May 15,
1990, the Board acknowledged the Grantee's appeal and
explained that the
Grantee had 30 days from receipt of the
acknowledgment to submit its brief
and appeal file. Board
acknowledgment, p. 1. By a telephone
conversation on June 28, 1990, and
confirmed by the Board on July 5, 1990,
the Grantee notified the Board
and the Agency that it had nothing further to
add to its April 30, 1990
notice of appeal. Additionally, the Grantee
declined to respond to the
Agency's response brief and appeal file.
For the reasons discussed below, we uphold the disallowance in full.
Analysis
Late penalties are unallowable because they are interest
charges and
are unreasonable costs.
The Agency, in its disallowance letter, notified the Grantee that
the
above-noted audit report had revealed unallowable penalty
costs.
Specifically, OHDS, at page 1, stated:
Unemployment compensation tax payments were not made on a
timely
basis resulting in penalty and interest payments of
$200. Failure
to file IRS Form 5500 for the
[Grantee's] flexible benefit plan
resulted in a penalty
assessment of $2,325. These penalties and
interest
totaling $2,525 are unallowable costs in accordance with
OMB Circular A-122.
In its notice of appeal, the Grantee stated its position on why the
Board
should not uphold this part of the disallowance. In regard to the
late
payment of the unemployment compensation tax, the Grantee
maintained that it
did not have a "Fiscal Officer/Administrative
Assistant," whose
responsibility it would have been to handle the
payment, and that it had
difficulty in finding a qualified person to
fill the position. Further,
the Grantee asserted that it was not aware,
until the deadline had passed,
that an IRS Form 5500 should have been
filed for its Flexible Benefit
Plan. The Grantee explained that it used
another organization to file
the forms required for its plan, and that
the organization chosen did not
file the form in a timely manner. The
Grantee stated that it had
changed to another organization and has
discontinued the flexible benefit
plan.
The Grantee is a nonprofit organization and, pursuant to 45
C.F.R.
74.174(a) (1987), is subject to the cost principles of Office
of
Management and Budget (OMB) Circular A-122, applicable to grants
to
nonprofit organizations. OMB Circular A-122, Attachment B,
Section
19a., provides that: "Costs incurred for interest . . .
are
unallowable."
The Board, in prior decisions, has found that late payment
charges
constitute unallowable interest charges. Specifically, in
Marshalls
Community Action Agency, DAB No. 328 (1982), we held that the
Agency's
argument that the payment of a late charge "constituted a
constructive
borrowing" was a "reasonable construction of the term 'interest
on
borrowed capital . . . however represented'". (p. 3) Then we
concluded
"that the late payment charge . . . was interest on borrowed
capital, an
unallowable cost." Id; see also Economic Opportunity
Council of
Suffolk, Inc., DAB No. 714 (1985). 1/
We find no reason to treat the late payment penalties in this
appeal
differently. The Grantee's explanations do not change the nature
of
these charges. A long-standing Board principle is that a grantee has
an
obligation to document the allowability of its costs.
Neighborhood
Services Dept., DAB No. 110 (1980); New York State Dept.
of Social
Services, DAB No. 204 (1981). In this instance, the Grantee
did not
document that these costs are allowable.
Moreover, the Grantee's late payment charges are unreasonable.
OMB
Circular A-122, Attachment A, Paragraph A.2.a. provides that, for a
cost
to be allowable, it must be reasonable for the performance of the
grant.
Reasonable costs are defined in Paragraph A.3 which provides:
Reasonable costs. A cost is reasonable if, in its
nature or amount,
it does not exceed that which would be
incurred by a prudent person
under the circumstances
prevailing at the time the decision was made
to incur the
cost.
Paragraph A.3.a. provides that in determining the reasonableness of
a
given cost, consideration shall be given to:
Whether the cost is a type generally recognized as
ordinary and
necessary for the operation of the
organization or the performance
of the award.
In prior decisions, the Board has upheld the Agency's determination
that
any late payment charge arising from the failure to pay a bill on
time
was not a cost that would be incurred by a prudent person or
be
considered to be "ordinary and necessary" for the performance of
a
grant. See Economic Opportunity Council of Suffolk, Inc., supra, at
p.
7; Marshalls Community Action Agency, supra, at p. 4.
Based on the above, we find that the Agency correctly disallowed
the
costs.
The Grantee's request to reduce its non-federal share
matching
requirement is beyond the Board's
jurisdiction.
In regard to the Grantee's non-federal share matching requirement,
the
disallowance letter, in relevant part, stated:
Federal financial assistance granted under the Head Start
Act cannot
exceed the Federal matching requirement
specified in the grant . . .
. Your agency is hereby
required to make up this shortage in
Program Year 24 (PYE
4/30/91).
Section 1301.20 of 45 C.F.R. (1987) provides, in part:
(a) Federal financial assistance granted under the
act for a Head
Start program shall not exceed 80 percent
of the total costs of the
program unless: (1) An amount in
excess of that percentage is
approved under section
1301.21 . . . .
Section 1301.21 provides, in relevant part:
The responsible HHS official, on the basis of a written
application
and any supporting evidence he or she may
require, will approve
financial assistance in excess of 80
percent if he or she concludes
that the Head Start agency
has made a reasonable effort to meet its
required
non-Federal share but is unable to do so . . .
It is undisputed that the Grantee's federal financial assistance is
88
percent. Agency's appeal file, ex. B. Therefore, the Grantee's
federal
assistance is currently above the amount normally allowed for
such
grants. Moreover, the Regional Administrator, in the
disallowance
letter, provided the Grantee with the opportunity to make up
the
shortage in the program year ending April 30, 1991. The
Grantee
apparently believes, however, that, due to the unavailability
of
sufficient contributors of in-kind volunteer services, it will be
unable
to meet its 12 percent non-federal share matching requirement.
Thus,
while the Grantee did not contest the amount of this part of
the
disallowance in its notice of appeal, the Grantee requested that
the
Board reduce its non-federal share matching requirement so as
to
eliminate the disallowance amount. 2/
The Board, in its acknowledgment, advised both parties that it was
not
clear whether the Board had jurisdiction to grant this request,
and
asked that the Agency comment on this issue.
Pursuant to 45 C.F.R. 1301.20 and 1301.21, the Agency maintained that
the
Board does not have the authority to grant the requested relief.
In
addition, the Agency stated that the responsible HHS official to
whom
written application must be made, for a reduction of the non-
federal
share matching requirement, is the OHDS Regional Administrator
for
Region IV. We agree. The Board is bound by all applicable
laws and
regulations, which include the requirements of 45 C.F.R.
1301.21. 45
C.F.R. 16.14. See also Inter-Tribal Council of
California, Inc., DAB
No. 265 (1982). Finally, we note that while the
Grantee's request is
beyond the Board's jurisdiction, the Grantee may still
make such a
request to the OHDS Regional Administrator. Thus, since the
Grantee
does not contest this part of the disallowance, we therefore uphold
it.
Conclusion
Based on the foregoing, we uphold the disallowance in full.
_________________________________ Judith A. Ballard
_________________________________ Cecilia Sparks Ford
_________________________________ Norval D.
(John)
Settle
1. We note, in addition, that OMB Circular A-122,
Attachment B,
Section 14, specifically provides that penalties, such as the
ones at
issue here, are unallowable costs.
2. Specifically, the Grantee stated that "it has been
difficult to
secure sufficient volunteer hours . . . . We need our
volunteer
requirement to be at a lower rate." While the Grantee stated
the
non-federal share matching requirement as a "volunteer requirement,"
we
note that the Grantee's 12 percent non-federal share may be derived
from
non-federal sources other than "volunteer hours," such as
private