El Grito Head Start Agency, DAB No. 1309 (1992)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT:        El Grito Head Start Agency

DATE:  March 5, 1992
Docket No. 91-120
Decision No. 1309

DECISION

El Grito Head Start Agency (El Grito) appealed a decision by the Office
of Human Development Services (OHDS) disallowing $6,759 in federal
funding for El Grito's Head Start program for the program year June 1,
1988 through May 31, 1989.  OHDS disallowed this amount on the grounds
that it constituted overexpenditures in several budget areas of the
grant.  The overexpenditures were found to have been paid out of the
subsequent program year's federal Head Start funds in violation of
applicable regulations.  We sustain in full the disallowance.


         Background


The United States Department of Health and Human Services (DHHS),
through OHDS, implements the program known as Head Start.  The purpose
of Head Start is to provide comprehensive health, educational,
nutritional, social and other services to economically disadvantaged
pre-school children and their families.  42 U.S.C. . 9831.  To carry out
the program, OHDS provides federal funding to qualified public and
private agencies (grantees).  42 U.S.C. . 9833.  OHDS generally provides
80% of the budgeted funding for each Head Start program and requires
that each grantee provide 20% of the funding from non-federal sources.
42 U.S.C. . 9835(b); 45 C.F.R. . 1301.20.

Each year, Congress appropriates a certain amount of funds for Head
Start within an authorized limit.  In some years, the funds may be
greater than the previous year and in other years, due to budget
constraints, the funds.may be less.  In either case, there is a finite
amount of money available for Head Start programs at any given time.

Current Head Start grantees are refunded annually on a noncompeting
basis.  See OHDS Grants Administration Manual (OHDS/GAM) Ch. 1, ..
(A)(2)(c), (E)(3)(b) and (I)(1).  In their initial Head Start
applications, grantees must obligate themselves to providing certain
services to a specified number of beneficiaries for a set amount of
money.  If the grantee wishes to change the number of people served, the
approved activities, or the scope or direction of the project, it must
obtain prior approval from OHDS.  OHDS/GAM Ch. 1, . (L)(4)(a).  Grantees
must also obtain prior approval for any budget revisions which will
result in the need for additional federal funds; otherwise, OHDS assumes
no obligation for the excessive expenditures and the funds may be
disallowed.  OHDS/GAM Ch. 1, .. (I)(2), (L)(1) and (L)(3)(b).

Under the implementing regulations of Head Start, federal funds may be
used only for certain expenditures.  45 C.F.R. . 1301.10(a); 45 C.F.R. .
74.170.  In order to ensure that all expenditures are in compliance with
applicable regulations and project requirements, each grantee must be
audited annually by an independent auditor.  The independent auditor
must determine whether the grantee's financial statements are accurate,
whether the grantee is complying with the terms and conditions of the
grant, and whether appropriate financial and administrative procedures
and controls have been installed and are operating effectively.  45
C.F.R. . 1301.12.

El Grito Head Start agency has been a grantee under the Head Start
program since the late 1960s.  On July 7, 1989 an independent auditor
issued the required annual independent audit report covering El Grito's
Head Start program for the year beginning June 1, 1988 and ending May
31, 1989 (PY20).  See generally El Grito, Inc. Head Start Program,
Financial Statements, Year Ended May 31, 1989 (hereinafter cited as
"PY20 audit").  Among other things, the PY20 audit found that El Grito
had a deficit of $20,118 at the close of the year.  Id. at 6.  This
deficit consisted of overexpenditures for PY20 in the areas of
personnel, travel, equipment, supplies, contractual services, and other
expenses, as well as of carry-over debts from the previous year.  Id. at
5. 1/

On June 4, 1990, OHDS issued an audit review letter indicating that
$13,359 of additional funding was being provided by OHDS to cover part
of the deficit.  The letter also notified El Grito that it was to repay
the remaining $6,759 from non-federal sources.  OHDS Ex. B at 3-4.  On
June 14, 1990, El Grito responded to the audit review letter, admitting
to some $9,846.80 of overexpenditures and indicating in which budget
categories they occurred.  El Grito stated that the overexpenditures
were due to the continued demand for services outstripping the available
cash resources.  OHDS Ex. C at 1.  El Grito did not address from what
funding sources the overexpenditures had been paid.

On June 25, 1991, OHDS issued a final disallowance of the $6,759.  OHDS
Ex. D.  The final disallowance stated:

     After considering your letter dated June 14, 1990 which further
     confirmed that over-expenditures were committed in several budget
     cost categories, and the fact that the referenced audit report did
     not include a CPA certification that the overexpended funds had
     been repaid to the Head Start account from non-Federal sources, we
     have concluded that these excess expenditures were paid from the
     subsequent year's Federal Head Start funds.

Id. at 1.

El Grito brought this appeal and submitted its appeal file in several
stages.  In a letter dated July 24, 1991, El Grito noted its appeal and
responded to both the PY20 disallowance and PY21 questioned costs
contained in the June 25 disallowance letter. 2/  El Grito identified
$6,566 of the PY20 expenditures as follows:  $3,844 in bus maintenance
and fuel costs, $175 in electricity costs, $270 in gas heating costs,
$774 in insurance costs, and $1,503 in building maintenance costs.  On
October 8, 1991, El Grito submitted a substantially identical letter,
but which dropped the discussion of the PY21 overexpenditures and
provided monthly ledgers for and explanations of some of the PY20
overexpenditures.  On October 16, 1991, Peter A. Keys, Attorney at Law,
submitted a letter which further addressed the PY20 overexpenditures. 3/

None of these documents either expressly stated or denied that the PY20
overexpenditures came from federal funds designated for the subsequent
year's program.  However, the October 16, 1991 letter from Mr. Keys
stated:

     [The disallowances from 1978 and 1979], coupled with what appear to
     me to be arbitrary and unrealistic expectations about non-federal
     funding created a momentum of carrying obligations into the
     succeeding fiscal year's budget.

The letter then identified overexpenditures from 1984 through 1987 which
were carried forward and concluded:

     Whether the foregoing budgeting strategies were proper or not, they
     probably were necessary in order to keep El Grito open.

OHDS filed its responsive brief dated December 17, 1991 and El Grito
submitted its reply dated January 16, 1992.


   Analysis


I.      The disallowance of funding for PY20 was appropriate because the
overexpenditures came from PY21 funds without a corresponding benefit to
the PY21 program.


The general regulations governing the operation of Head Start programs
are codified at 45 C.F.R. . 1301 et seq.  Section 1301.10(a)
specifically incorporates the general grants administration principles
applicable to most DHHS grants into Head Start programs.  These
principles are found at 45 C.F.R. Part 74.

Section 74.170 states the general principle of allowable costs:

     Grant funds may be used only for allowable costs of the activities
     for which the grant was awarded.

The principles used in determining allowable costs for non-profit
organization grantees are contained in OMB Circular A-122.  45 C.F.R. .
74.174.  Some examples of allowable costs for grantees under OHDS
discretionary grants are founds in OHDS/GAM at Ch. 3, . (D).  Office of
Management and Budget (OMB) Circular A-122 provides that to be allowable
under an award, costs must "be reasonable for the performance of the
award and be allocable thereto under these principles."  Id. at .
(A)(2).  A cost is allocable to a particular grant in accordance with
the relative benefits received.  A cost is allocable to a Government
award if it is treated consistently with other costs incurred for the
same purpose in like circumstances and if it is incurred specifically
for the award.  Id. at . (A)(4)(a).

Prior decisions of the Board have addressed the concepts of allowability
and allocability in the use of federal grant funds awarded for one year
but used to pay program costs of a previous year.  In Community Action
Agency of Memphis and Shelby County, DAB No. 103 (1980), the Board held
that a Head Start grantee was precluded from using its unexpended
program year funds to pay for excess costs incurred in the previous
program year.  As in the present case, the expenditures above budget
were used to pay for operating expenses such as personnel, travel, rent
and consumable supplies for the previous year.  The Board found that the
spending of project funds budgeted for one year to pay for cost overruns
in a previous year was not allowable absent a showing that the funds
benefitted the year for which they were allocated.  Id. at 3.

These cost principles and the cited Board decision clearly indicate that
a grantee cannot spend funds from a current program year to pay for cost
overruns from a previous year unless the expenditures benefit the
current year.  In the June 25 disallowance letter, OHDS asserts that it
is assuming that El Grito paid the cost overruns for PY20 with the
subsequent year's federal funds.  El Grito has not expressly denied
this.  In fact, El Grito seems to concur with this assumption by stating
that it had "a momentum of carrying obligations into the succeeding
fiscal year's budget."  El Grito has never established, as it was
required to do, that the cost overruns were paid for with non-federal
funds.  Moreover, El Grito stated in its January 16, 1992 reply that its
appeal "did not question whether the excess expenditures were properly
disallowed."  We therefore find that the cost overruns in El Grito's
PY20 budget were paid for with federal Head Start grant funds designated
for the subsequent year.  Since El Grito did not argue (much less
establish) that these funds benefitted the subsequent program year, 4/
the funds are disallowed in full.


II.     The disallowance of funding for PY20 was appropriate because
OHDS has a system for obtaining prior approval of budget increases but
El Grito did not comply with that system.


We are not unsympathetic to the difficulties caused by unexpected but
necessary program costs.  However, we note, as OHDS did, that the DHHS
principles for the administration of grants (Part 74) provide a
mechanism by which a grantee can and must gain prior approval of any
budget revision which will result in the need for the award of
additional funds.  45 C.F.R. . 74.105.  This provision is also published
in the OHDS/GAM at chapter 1, paragraph (L)(3)(b).  The OHDS/GAM
provides that all requests for prior approval must be in writing and
that grantees who do not obtain prior approval when they are required to
do so act at their own risk in that the costs may be subsequently
disallowed.  OHDS/GAM Ch. 1, . (L)(1).  These provisions give grantees
such as El Grito sufficient notice that the option to apply for
additional federal funding exists.

El Grito argued that it was unaware of the option to apply for approval
of budget increases to meet additional program needs. 5/  OHDS argued
that El Grito cannot gain retroactive approval of excessive expenditures
by means of filing this appeal.  We agree with OHDS since there is no
indication that El Grito has ever specifically requested retroactive
approval from OHDS or that OHDS has specifically considered and decided
such request.  We have no authority to retroactively approve budget
increases which were incurred in a manner which circumvented the DHHS
process for prior approval. 6/  When grantees overspend their budgets
and request that the federal Head Start program cover the costs without
prior approval, they effectively overlook the limited nature of the
available funds and the fact that other Head Start programs are then
deprived of those funds.


         Conclusion


For the foregoing reasons, we sustain in full the disallowance.

 

 

 Judith A. Ballard

 

 

 Norval D. (John) Settle

 

 

 Donald F. Garrett Presiding Board Member


1.  There seems to be some uncertainty in the record as to what portion
of the deficit was a result of unexpected costs which exceeded the
budget in PY20 and what portion was due to debts carried over from PY19
caused in part by prior program mismanagement.  According to submissions
made by El Grito to the Board dated July 24, October 8, and October 16,
1991, $13,359 was disallowed in PY19 and was carried forward.  However,
the PY20 audit and June 4, 1990 disallowance letter from OHDS refer to
part of the deficit totalling $13,728 (as compared to $13,359) as
"[r]enovation program revenues previously recognized as earned
erroneously."  See PY20 audit at 6; OHDS Ex. B at 3.  The June 4
disallowance letter also refers to $13,359 in additional income as
"additional funding provided by OHDS to cover the grantee's
over-expenditure" and not as funding to cover the previous year's debt.
OHDS Ex. B at 3.

The matter is confused further by the fact that El Grito alternatively
seeks to justify $6,566 (see July 24 and October 8, 1991 letters) and
$9,846.80 (see OHDS Ex. C) as overexpenditures for PY20.  Neither of
these figures is consistent with the $6,759 in disallowed funds.
However, since OHDS provided $13,359 in additional funding for PY20, we
assume for purposes of this decision that the $6,759 disallowed by OHDS
is the amount attributable to PY20 overexpenditures and that $13,359 is
the amount attributable to PY19 expenditures which was previously but
erroneously disallowed.

2.  The disallowance letter refers to overexpenditures in PY21 (June 1,
1989 through May 31, 1990) of $7,351 in addition to the overexpenditures
in PY20.  However, the PY21 overexpenditures have not been finally
disallowed pursuant to the requirements of 45 C.F.R. . 74.304 and are
therefore not addressed in this decision.

3.  Mr. Keys was asked by El Grito to assist it in responding to the
disallowance, and his October 16, 1991 letter has therefore been
incorporated into the record.  Mr. Keys is not representing El Grito in
this matter.

4.  We observe that while El Grito did not argue or establish that the
overexpenditures benefitted multiple years, many of them are of such a
nature that they could not have benefitted more than the single year in
which they were incurred.  For example, of the costs identified in El
Grito's appeal letters to the Board, we note that electricity, gas
heating, and bus fuel costs could only benefit the year in which they
were incurred.  Of the remaining identified overexpenditures (insurance,
bus maintenance, and building maintenance), El Grito would have to show
not only that they benefitted more than one year but that payments for
such items were customarily and consistently split between the years
they benefitted.  See OMB Circular A-122, . (A)(2)(d).

5.  El Grito also argued that it should be treated leniently with regard
to the disallowed funds since they are the result of poor management by
previous directors and not by current management.  It argued that the
disallowance penalizes the current Head Start beneficiaries and their
families in that they were not associated with the program when the
problems began.  Nevertheless, the recipient of the funds was El Grito
Head Start Agency and not the previous manager in his individual
capacity.  Therefore, the grantee agency is ultimately responsible for
the management of the funds.  Moreover, the cost principles in Part 74
do not allow forgiveness of cost overruns based on poor management by
prior directors.

6.  OHDS also argued that retroactive approval, even if obtainable,
would be inappropriate in this instance because El Grito has failed to
demonstrate that the funds in question were spent for program activities
that were conducted in an effective and efficient manner consistent with
the purposes of Head Start.  See 42 U.S.C. . 9839(a); 45 C.F.R. .
1301.30.  OHDS did not specifically identify any expenditures it found
questionable, and we need not consider this issue for purposes of this