Evangeline Community Action Agency, Inc., DAB No. 1379 (1993)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT:   Evangeline Community Action Agency, Inc. 

DATE:  January 11, 1993
Docket No. A-92-185
Decision No. 1379

DECISION

Evangeline Community Action Agency, Inc. (Evangeline) appealed a
disallowance by the Administration for Children and Families (ACF) of
$59,411.  ACF disallowed interfund transfers of advanced Head Start
funds reported in an independent audit of Evangeline's grant programs
covering the period February 1, 1987 through January 31, 1989 ("the
first audit").  Following a review of an audit of Evangeline's programs
for the subsequent year, February 1, 1989 through January 31, 1990 ("the
second audit"), ACF reduced the disallowance to $43,680, the amount of
interfund receivables due to Head Start as of January 31, 1990.  For the
reasons stated below, we uphold in full the disallowance of $43,680.

         Background

Evangeline is a non-profit corporation, organized in 1965, which
receives grants from the federal and state governments to conduct
various community service programs.  ACF Ex. A at 6, Ex. B at 7.  Among
other federal programs, Evangeline participates in Head Start.

Based on the first audit of Evangeline's grant programs, ACF disallowed
$388 in funds owed to the Head Start account from the general payroll
account of the organization and $59,023 in funds owed from other grant
programs.  These interfund transfers, or "accounts receivable," totalled
$59,411.  See ACF Ex. A at 20; ACF's May 15, 1992 Disallowance Letter.
Evangeline was notified that these interfund transfers were being
questioned as early as February 13, 1992, on which date ACF sent a
letter to Evangeline demanding payment on another matter and stating
that the interfund transfers were not allowable costs. 1/  The second
audit of Evangeline's grant programs showed that the accounts receivable
for Head Start had been reduced to $43,680 from the $59,411 found in the
first audit.  See ACF Ex. B at 19.

During Board proceedings, Evangeline provided only a two-page letter
dated October 14, 1992 with an attachment from Evangeline's independent
auditor. 2/  Evangeline alleged in the letter that interfund receivables
of $15,576 and $2,960 were used by the Food Service program and the
Handicap program, respectively, to pay Head Start related expenses.
Evangeline argued that the disallowance should thus be reduced by
$18,536, leaving a balance of $25,144 in disallowed funds.  Id.
Evangeline did not provide supporting documentation.  Rather, Evangeline
attached only a statement from its auditor, which stated in pertinent
part:

 As per your request, I have gone through the Head Start account
 and analyzed the transfer of funds.     between the various
 accounts.  As of January 31, 1991, the following funds were
 receivable from the following accounts:

  Handicap                        $        2,960 Food
  Service                    15,576 CSBG
  15,877 Day Care                                15,343
  State Fund                       6,182 Total
   55,938

ACF Ex. C at 3.  In arguing for the reduced disallowance of $25,144,
Evangeline deducted the $18,536 from the second audit's accounts
receivable of $43,680 even though the accountant's statement showed that
the $18,536 was part of an interfund transfer amount totalling $55,938
for the year ending January 31, 1991.  Evangeline did not argue that any
portion of the accounts receivable in either the first or second audits
represented non-federal funds which were loaned to other programs or
that it had accounted for these federal funds by allowable Head Start
expenditures actually paid.


   Analysis

Federal grant funds may be spent only for allowable costs of activities
for which a grant was awarded.  45 C.F.R. . 74.170.  The grantee has the
burden to document the allowability of costs claimed under the grant
program.  45 C.F.R. . 74.61(b); Office of Management and Budget Circular
A-122, Attachment A, . A.2(g).  The documenta-tion must consist of
records adequately identifying information pertaining to grant awards,
authorizations, obligations, unobligated balances, assets, outlays and
income.  45 C.F.R. . 74.61(b).  The records must be supported by source
documentation such as cancelled checks, paid bills, and payrolls.  45
C.F.R. . 74.61(g).  A grantee must ultimately account for all grant
funds received by documenting that it incurred and actually paid
program-related expenditures.  45 C.F.R. . 74.112.  Additionally, a
grantee is required to minimize the amount of time between a draw down
of federal funds and the disbursement of those funds for program
purposes.  45 C.F.R. . 74.92(a).

The record shows that Evangeline took advanced Head Start funds and
loaned them to other programs, accounting for them as accounts
receivable entries in its Head Start records.  See ACF Exs. A and B.
The second audit report shows an interfund receivable of $43,680 due to
Head Start from other "special revenue funds."  Evangeline did not
dispute that these receivables represent "loans" to other programs of
federal Head Start funds which had been advanced to Evangeline.  Because
Head Start funds can be used to pay only for allowable costs of the Head
Start program, there is no question that the transfer of funds to pay
the costs of other programs was improper under applicable regulations
and cost principles.

Nevertheless, the current disallowance could still have been reduced if
Evangeline had shown that it had restored funds to its Head Start
account, and that the funds were subsequently spent on
properly-documented allowable Head Start expenditures which were
incurred and paid or that the funds are currently being held by Head
Start in available cash resources.  However, despite many opportunities
to do so granted to Evangeline by both ACF and the Board, Evangeline
failed to present any documentation indicating that the disallowed funds
represent allowable costs to Head Start or that it has otherwise
accounted for these advanced Head Start monies. 3/


The Board previously addressed the issue of whether interfund transfers
can properly be disallowed in Economic Opportunity Council of Suffolk,
Inc., DAB No. 679 (1985).  The grantee in Suffolk, like Evangeline,
engaged in interfund transfers of Head Start funds.  The grantee did not
report these transfers as allowable costs to its Head Start program, but
rather reported the loaned amounts as assets under the heading "accounts
receivable."  These interfund transfers were ultimately disallowed by
the federal agency.  The Board concluded that the federal agency could
require the grantee to account in cash for accounts receivable amounts
found in its ledger to the extent that grant funds had been received and
not accounted for through allowable program costs.  Suffolk at 1.  The
Board found that the grantee had received federal cash which it had not
shown was accounted for either through program expenditures actually
paid or through cash on hand.  The Board upheld the disallowance in
full, subject to a reduction if the grantee could show that it had
already accounted for some of the accounts receivable funds through
incurring and paying allowable Head Start costs.  Id. at 8.  The Board
relied on a fundamental principle:  "grantees are not permitted to
retain federal grant funds in excess of what is authorized for, and
actually expended for, program purposes."  Id. at 6.

The facts in Suffolk are indistinguishable from those in this matter.
Thus, the same principles apply, and we conclude that the disallowance
of Evangeline's accounts receivable was proper.  Moreover, we do not
agree with Evangeline that the disallowance should be reduced from
$43,680 to $25,144 to take into consideration amounts owed to Head Start
by the Food Service and Handicap programs, as discussed in Evangeline's
October 14, 1992 letter.  First, while Evangeline argued that these were
"sister programs" to Head Start and that the funds were used to pay Head
Start related expenses, we find that there was absolutely no
documentation offered which would show that these funds were, in fact,
spent for allowable Head Start costs. 4/  Evangeline's Food Service and
Handicap programs are separate from its Head Start program.  The
description of the Head Start program revenue fund in both audit reports
states that it is "[t]o account for the receipt and expenditure of funds
received from the U.S. Department of Health & Human Services for Head
Start, which provides educational, psychological, nutritional, medical,
dental and social services to needy pre-school children in the area."
The description of the Food Services program revenue fund in both audit
reports states that it is "[t]o account for the receipt and expenditure
of federal grant funds passed through the Louisiana Department of
Education for meals for needy children at Head Start locations and in
private homes."  The description of the Handicap program revenue fund in
both audits states that it is "[t]o account for grant funds received
from St. Landry Parish Police Jury, following their receipt from the
U.S. Department of Health & Human Services, to be used for the benefit
of handicapped persons in the area."  See ACF Ex. A at 17; Ex. B at 17.
These are three of a number of "special revenue funds" operated by
Evangeline.  The audits describe these funds as "used to account for the
proceeds of specific revenue sources that are legally restricted to
expenditures for specific purposes."  ACF Ex. A at 6; Ex. B at 7.  Thus,
while the Food Service and Handicap programs are similar to Head Start
in that they are designed to address the needs of less fortunate persons
in the community and may even assist some of the same children as are
enrolled in Head Start, there is no basis to conclude that expenditures
under these programs are allowable expenditures under Head Start.

Moreover, the figures used by Evangeline were taken from an audit year
ending January 31, 1991, one year after the close of the second audit
period at issue in this disallowance.  See ACF Ex. C at 3.  Therefore,
we cannot determine whether these receivables represent amounts due to
Head Start as of January 31, 1990.

Accordingly, we conclude that ACF can require Evangeline to account for
federal funds advanced to Head Start but transferred to other Evangeline
programs.  Evangeline treated these amounts as accounts receivable due
to Head Start from other program funds.  As such, these amounts
represent amounts misspent by Evangeline.  See Suffolk at 4.  Evangeline
has wholly failed to document that it has accounted for these funds by
incurred and paid Head Start expenditures.  Accordingly, ACF reasonably
determined to disallow the $43,680 accounts receivable balance. 5/

         Conclusion

For the reasons stated above, the disallowance of $43,680 is upheld in
full.

 


       Judith A.
       Ballard

 


       M. Terry Johnson

 


       Cecilia Sparks
       Ford Presiding
       Board Member

1.  The other matter, which involved $2,303 in interest and penalties,
was settled by the parties and was closed on the Board's docket on July
27, 1992.  See Docket No. A-92-106.

2.  Evangeline's letter stated that the total accounts receivable had
changed from "$55,938" to $43,680 "since January 31, 1991."  See ACF Ex.
C at 1.  Evangeline's statement is inaccurate, however.  While ACF
reduced the disallowance to $43,680 after January 31, 1991, this
reduction reflected the receivables balance as of January 31, 1990.  The
first audit report (covering the two-year period ending January 31,
1989) shows accounts receivable of $59,411, and the second audit report
(covering the year ending January 31, 1990) shows accounts receivable of
$43,680.  The attachment from the auditor shows that the accounts
receivable may have gone up to $55,938 from $43,680 during the year
ending January 31, 1991, a period of time not covered by this
disallowance.  See ACF Ex. A at 20; Ex. B at 19.

3.  ACF's disallowance letter stated that ACF had tried to resolve the
matter with Evangeline, that Evangeline told ACF that it would have to
conduct time-consuming research of its records in order to resolve the
disallowance, and that such research would not be completed in the
immediate future.  See May 15, 1992 Disallowance Letter at 1.

In Evangeline's June 22, 1992 appeal to the Board, Evangeline requested
90 days to research its records in order to resolve the disallowance.
The Board, in its July 10, 1992 Acknowledgment of Notice of Appeal,
instead granted Evangeline 45 days, stating that 90 days was not
warranted since Evangeline had notice of the questioned costs as early
as February 13, 1992.  Evangeline missed its 45-day deadline and then
belatedly asked for an additional 45 days to complete the research of
its records.  See Letter to the Board from Evangeline, dated September
18, 1992.  The Board granted Evangeline the additional 45 days to file
its brief.  See Notice of Extension, dated September 24, 1992.  Despite
the 90 days which Evangeline was ultimately given to gather its
documentation (in addition to the previous three months between the
first notification of the questioned costs and the final disallowance),
Evangeline submitted only a two-page letter, dated October 14, 1992,
requesting a reduction of the disallowance, and a one-page letter from
its independent auditor which did not even address the time period in
question.  See ACF Ex. C.

After ACF filed its response to Evangeline's two-page letter, Evangeline
then failed to timely file its reply brief, which the Board calculated
was due on December 12, 1992.  Evangeline, again belatedly, asked for a
30-day extension until January 11, 1992 in order to further research its
records for proper documentation of the questioned costs.  See Letter to
the Board from Evangeline, dated December 15, 1992.  This extension
request was denied in accordance with 45 C.F.R. . 16.15(a) and (b), and
the record closed.  See Notice of Denial of Extension, dated December
23, 1992.  Despite ample opportunity, Evangeline presented no
contemporaneous documentation to resolve these questioned receivables.
In retrospect, we view Evangeline's many extension requests and delays
as merely an effort to postpone having to account for misspent federal
funds.

4.  While Head Start funds can properly be used to supplement U.S.
Department of Agriculture (USDA) food assistance funds for Head Start
participants, there is no basis for concluding that the accounts
receivable in this matter represent supplemental expenditures of this
type. See Camden County Council on Economic Opportunity, DAB No. 881 at
2 (1987).  Evangeline did not allege that the USDA funds were
insufficient to cover the food service costs of Head Start participants
and caused Evangeline to have to rely on Head Start funds to supplement
them.

5.  In light of Evangeline's arguments before the Board, no further
opportunity to document that these receivables have been accounted for
is warranted, unlike in Suffolk.  We note, however, that ACF may have to
return some of these funds to Evangeline at a future date if these funds
were included in any reprogrammed fund balance amounts for which
Evangeline incurred and paid allowable Head Start expenses.  See
generally