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