SUBJECT: New Opportunities for Waterbury, Inc.,

Petitioner,

FINAL DECISION ON REVIEW OF

ADMINISTRATIVE LAW JUDGE DECISION

New Opportunities for Waterbury, Inc. (NOW), a private, non-profit community action agency in Connecticut, appealed a September 13, 1994 determination by the Office of Community Services (OCS) disallowing $364,200 in Community Services Block Grant funds awarded for NOW's North Square Plaza Project (Project). The disallowance was based on NOW's failure to obtain the required additional financial commitment to ensure overall funding for, and its failure to begin construction on, the Project. NOW essentially contended that it had made significant progress and that OCS should be obliged to grant NOW's request for a no-cost extension to complete the Project, rather than requiring NOW to return the funds.

As explained more fully below, we sustain the disallowance in its entirety. NOW did not document that it expended the disallowed funds in a manner consistent with the terms and conditions of its grant. Further, we find that OCS had a reasonable basis for denying the no-cost extension. Since OCS was unable at the time of the disallowance letter to specify the precise amount of interest it was seeking in connection with the improper drawdown of these funds, we are remanding that part of the disallowance for calculation and an opportunity for NOW to appeal on that issue only.

Background

In a February 9, 1987 Program Announcement (52 Fed. Reg. 4,090), OCS announced the availability of discretionary grant funding for programs sponsoring "enterprises providing employment and business development opportunities for low-income residents of the community." NOW requested $500,000 for a one-year grant to finance part of the Project. As originally designed, the Project was to include (1) a child development center for federal Head Start and Connecticut Child Day Care programs; (2) a shopping center for minority-owned businesses; and (3) low-income housing. See NOW Brief Exhibit⁽¹⁾ (Br. Ex.) 3 (the audit report underlying the disallowance) and OCS Ex. M (the Executive Summary accompanying NOW's grant application). NOW anticipated that the Project would provide direct and indirect community benefits. Specifically, NOW projected the initial creation of permanent jobs for 125 low-income residents, with 200 jobs created after three years, as well as job training opportunities in construction, the central kitchen and the child development center. NOW also indicated that minority-owned businesses would benefit from the initial construction and ultimate operation of the Project. OCS Ex. M.

In the Budget Explanation (OCS Ex. A-2) which accompanied its grant application, NOW indicated that it would expend the $500,000 in grant funds it was requesting in the following manner:

o Construction -- $455,250. Of this amount, $379,375 was earmarked for minority business development. The remaining $75,875 would go to the Child Development Center.

o Contractual -- $44,750. Of this amount, $38,250 was earmarked for architectural and engineering (mechanical, electrical and structural) costs associated with minority business development. The remaining $6,500 would be directed to the "partial cost" of consultant planning and programming development expense related to minority business development.

On September 24, 1987, OCS awarded NOW a $400,000 grant consisting of $35,800 for contractual costs and $364,200 for "other" (construction) costs. The grant budget and project periods ran concurrently from October 1, 1987 through September 30, 1988. The Notice of Grant Award and accompanying cover letter alerted NOW that departure from the work plan submitted with its grant application would require prior approval under 45 C.F.R. Part 74. Further, the Notice of Grant Award included several "Special Terms and Conditions" (Special Conditions). Special Condition 2.(c) required that, within 90 days of the date of the award, NOW provide "documentation confirming the unqualified commitment of funds required for total project financing in the amount of $3.2 million." Both the Notice of Grant Award and Special Conditions stated that "[f]ailure to comply with any term or condition shall, in accordance with Title 45 CFR Part 74, Subpart M, be considered grounds for suspension and/or termination of this grant." See OCS Reply Br. at 4-5; OCS Exs. A and A-1.

In December 1987, NOW provided OCS with documentation intended to satisfy the Special Conditions. By letter dated February 23, 1988, OCS notified NOW that it had satisfied all the Special Conditions except 2.(c). OCS stated its understanding, based on additional communications, that NOW would be submitting "the required unqualified letters of commitment to OCS by March 1, 1988." OCS Ex. B. In a March 4, 1988 letter to OCS, NOW indicated that it was "unable, at this time to secure unconditional letters of commitment." NOW requested an extension until June 30, 1988 to meet that condition. OCS Ex. C. On April 12, 1988, OCS granted the extension and informed NOW that it could begin to draw grant funds in accordance with the instructions provided with the grant. OCS also indicated that NOW's failure to obtain the required financial commitments and complete the activity for which the grant was awarded could result in a disallowance. OCS Ex. D.

NOW did not meet the June 30 deadline. Rather, on November 16, 1988, NOW requested a no-cost extension of the grant. OCS responded on January 25, 1989, recounting NOW's inability to document the financial commitment in a timely fashion. OCS reserved decision on the no-cost extension pending receipt of the commitment letters, setting March 31, 1989 as the new deadline for NOW's submission. OCS also noted that NOW had drawn down the entire $400,000 award. OCS indicated that it had conducted an internal review of the drawdown and concluded that NOW's actions were unauthorized. OCS reminded NOW that it should have no more federal funds on hand than would be expended within a 30 day period. Based on the funding allotments in NOW's grant application and subsequent representations as to NOW's schedule of Project activities, OCS reasoned that a drawdown of "the bulk" of the award (which was earmarked for construction) would not be appropriate until August 1989. OCS noted that drawdown of the entire amount violated Department of Health and Human Services procedures. Consequently, OCS indicated that "interest on those funds must be returned in full." OCS Ex. E; OCS Reply Br. at 5, n.3.

NOW did not meet the March 31 deadline. On May 12, 1989, OCS denied the no-cost extension request. OCS stated that it would reconsider the request if NOW could provide the commitment letters by May 31st. However, if NOW did not meet the May 31 deadline, NOW would be required to return the drawn down funds with interest. OCS also noted that NOW had yet to provide an acceptable plan for full-time permanent employment of low-income individuals by the construction contractors and the Project's commercial tenants. OCS Ex. F.

On May 30, 1989, NOW informed OCS that it did not have an agreement with construction contractors concerning employment of low-income individuals. NOW indicated that those agreements were still in the "preliminary/draft stage." NOW also outlined the difficulties it had encountered in obtaining the unconditional letters of commitment needed to finance the Project. OCS Ex. G.

OCS responded on July 10, 1989, indicating that NOW's May 30 letter had not resolved the previously identified grant problems. Specifically, OCS stated that, although almost two years had passed since the award of the grant, NOW had (1) not acquired the property for the project site, (2) not arranged and documented project financing and (3) neither received the instruments necessary to assure low-income employment nor created jobs for low-income individuals. OCS therefore again demanded repayment of the drawn down funds, along with accumulated interest. OCS Ex. H. On September 13, 1990, OCS repeated its demand for repayment of the grant (including $66,625 in accumulated interest). OCS Ex. I.

On February 13, 1991, NOW responded to another OCS demand (November 16, 1990) for repayment of the grant and interest.⁽²⁾ NOW updated OCS on the Project's status and indicated that the entire grant award had been applied to Project-related development costs. NOW indicated that it was currently unable to repay the grant funds, but stated its intention to repay the award upon receipt of bank financing. NOW Reply Br. Ex. 1.

The disallowance underlying this appeal followed. OCS charged NOW with material noncompliance with the grant terms. Specifically, OCS focused on its May 12, 1989 denial of the no-cost extension request and demand for return of the drawn down funds (OCS Ex. F). OCS indicated that as of that date, NOW had neither constructed the child care center nor complied with the Special Condition requiring documentation of the unqualified commitment of $3.2 million in non-federal funds for the total project financing. Since OCS had never approved a no-cost extension of the grant period, the grant period ended on September 30, 1988, as stated in the Notice of Grant Award. OCS asserted that, although 45 C.F.R. � 74.111(b)(2) required grantees to refund immediately an unobligated fund balance upon grant close out, more than four and one-half years had passed since its initial demand and NOW had still not returned the funds. OCS Notice of Disallowance, September 13, 1994.

OCS revealed that its audit resolution specialist had requested and received further financial information from NOW in the form of --

audited financial statements for the fiscal years ending October 31, 1988 and . . . 1989 which identify expenditures made in pursuit of grant objectives prior to . . . OCS' May 12 1989 demand letter and during the grant period which ended September 30, 1988. . . the audited the statements for the fiscal year . . . ended October 31, 1988, identifies $88,350 as costs expended for construction-in-progress for the child development center.

Id. at 2.

OCS found that these financial statements conflicted with NOW's Federal financial status report for the period October 1, 1987 through September 30, 1988 (which OCS had received on February 22, 1989) which identified only $33,800 in expenditures during this period. Since this was the last financial status report received from NOW, OCS considered the $33,800 as the actual amount expended during the grant period. However, OCS held out the possibility that more funding would be allowable based on NOW's ability to document additional expenditures up to the $88,350. Id. at 2-3. Following the disallowance, OCS corrected a calculation error and revised the amount of allowable expenditures to $35,800. OCS Br. at 4, n.2. NOW never submitted the documentation required by OCS to substantiate its claim of $88,350. Thus, the amount at issue here is $364,200 ($400,000 minus $35,800).

A. NOW did not document that its expenditure of $364,200 complied with the grant conditions.

Grantees have the obligation to document that their expenditures of grant funds were made in support of grant objectives and in compliance with terms and conditions of the grant. See Office of Management and Budget (OMB) Circular A-122, Attachment A, Par. A.1.g.⁽³⁾ NOW has failed to fulfill this obligation.

Grants awarded under the Program Announcement in this case were intended to promote full-time permanent jobs as well as income and ownership opportunities for low-income community members. OCS Ex. J. The Program Announcement stated the following grant timeline --

For most projects, the OCS will grant funds for one year. However, depending on the characteristics of any individual project and the justification provided by the applicant in its proposal, a grant may be made for a longer period of time, i.e., up to two years. Regardless of the time provided in a grant, it must be clearly demonstrated that the project work plan will achieve measurable results and can be successfully completed within the funding period provided in the particular grant.

52 Fed. Reg. 4,090 (February 9, 1987) (OCS Ex. J).

NOW's grant award was predicated on a plainly worded Special Condition requiring NOW to provide, within 90 days of the Award (approximately December 23, 1987), "documentation confirming the unqualified commitment of funds required for total project financing in the amount of $3.2 million." OCS Ex. A.

NOW crafted its grant application to reflect these goals and this timeline. OCS Exs. M and A-2. However, in the more than seven years since the grant award and in spite of considerable flexibility by OCS, NOW has not --obtained the unqualified commitment of funds required by Special Condition 2.(c); started construction on the Project; or provided the full-time permanent jobs or income/ownership opportunities for low-income community members envisioned by the Project. Furthermore, NOW has significantly revised the Project's design so that the minority business development phase, for which the majority of the grant was to be expended, has been eliminated.

The record is replete with evidence of Project-related inactivity, delay, and change. NOW missed the original deadline, but OCS provided NOW numerous additional opportunities to meet the Special Condition. These opportunities extended well after the expiration of the project period (September 30, 1988). As late as February 1991, more than two and one-half years after the end of the Project period, NOW admitted that it had failed to obtain the unqualified funding commitment. See NOW Reply Br. Ex. 1. The Audit Report underlying this disallowance was issued in November 1994. As of that time, NOW still had not demonstrated that it had obtained the unqualified funding commitment. OCS Br. at 9-10.

The mere fact that NOW may have incurred costs does not make those costs chargeable to the grant in question. Grant funds may only be used for costs which are allowable and allocable to the activities for which the grant was awarded. See Bedford Stuyvesant Community Restoration Corporation, DAB No. 1404 (1993); Action, Inc., DAB No. 1400 (1993); Ironbound Educational and Cultural Center, Inc., DAB No. 1302 (1992). This was not an open-ended grant award intended to provide NOW with an additional $400,000 to be used as it saw fit. Federal funding was awarded for certain aspects of a project designed to provide employment opportunities for low-income individuals. The award was subject to Special Conditions which NOW did not satisfy and the Project itself has never gotten off the ground. Thus, NOW has failed to meet the grant objectives, and it must return the funds that were not expended for allowable grant purposes.

NOW's basic position on appeal is that the disallowance is not warranted because the Project is making progress. However, we reject NOW's contention that Special Condition 2.(c) was satisfied by discussions between NOW and various architects and State or City officials. Rather, NOW was required to secure actual financing for the Project so that jobs and other economic opportunities for low-income residents could be realized. Once the financing commitment was in place, work could have begun on the Project and the economic benefits envisioned in the Program Announcement would have followed. The grant amount was intended to be but a relatively small part of the Project's overall financial structure. Currently, seven and one-half years have passed since the initial award and it is not evident from the record either that financing is in place, or that construction has begun.⁽⁴⁾ NOW Br. Ex. 2 at 2-3 (unnumbered). Moreover, the shopping plaza "has been completely eliminated." NOW Reply Br. Ex. 10. Consequently, we conclude that NOW has failed to document that its expenditure of $364,200 complied with the grant conditions.

B. NOW's drawdown of grant funds was improper.

NOW was awarded $400,000 under the grant in question. More than 90% ($364,200) of the award was earmarked for construction. Based on NOW's grant application, more than 83% of the construction funding was to be used on the minority business phase of the Project. The remainder of the award, $35,800, was to be used on contractual costs associated with the minority business aspect. See OCS Exs. A and A-2. Yet, in spite of the lack of substantive grant activity, by January 1989, NOW had drawn down the entire grant award.⁽⁵⁾ See OCS Ex. E. This drawdown of the entire award contravened the Special Condition which was still unsatisfied as well as applicable grant management regulations.

The vast majority of the awarded funding was intended for construction. Not only had NOW failed even to begin construction at the time of the drawdown, but the object of the bulk of the construction funding -- the minority business aspect of the Project -- was ultimately eliminated from the Project. Thus, NOW was able to enjoy the benefits of at least $364,200 in federal funds for almost six years without engaging in the grant activity for which those funds were awarded.

A grantee must minimize the time between the drawdown and disbursement of federal funds. See 45 C.F.R. � 74.92(a). The record contains no evidence of any construction, so the federal funds awarded for construction could not have been applied to allowable costs at any time following the drawdown by NOW. Further, drawn down funds are to be kept in interest bearing accounts pending disbursement and the interest earned returned to the federal grantor agency. See 45 C.F.R. � 74.92(b). NOW's arguments on appeal ignored its drawdown of funds in the absence of any construction costs. Further, the record contains no evidence which could remotely justify the drawdown. Consequently, we uphold in principle OCS's disallowance of any interest earned on the improperly drawn down funds.

At the time it issued its disallowance letter, OCS did not calculate the amount of interest owed by NOW (probably because OCS afforded NOW a final opportunity to document any allowable costs). We are remanding this part of the disallowance to OCS to issue a determination of the amount of interest owed by NOW on improperly drawn down funds. NOW may file an appeal of OCS's determination within 30 days of NOW's receipt of that determination. Since NOW failed to contest the applicability of 45 C.F.R. � 74.92(b), any appeal should be limited to OCS's calculation of the interest owed.

C. NOW's audit report does not provide a basis for overturning the disallowance.

As part of its appeal file, NOW provided an audit report entitled, "North Square Plaza Project Statement of Revenues and Expenses October 1, 1987 through October 31, 1993" (NOW Br. Ex. 3), which reported expenses and commitments as of September 30, 1988 totalling $463,736. This included the $88,350 that NOW had claimed as allowable expenditures for architectural services. No construction costs were reported.

NOW asserted that this report showed that it incurred total costs far in excess of the grant award. NOW contended --

[t]he most pervasive argument supporting NOW's claim of proper expenditure of funds under the grant relates to . . . [the OCS Director's] May 9, 1991, letter to . . . [NOW's Executive Director]. Paragraph 4 states "A final audit of all expenditures made under this grant during the grant period . . . ." which . . . [NOW] took to mean that if an independent audit . . . supported the proper expenditure of funds under the grant, then compliance with the provisions of the award would have been met.

NOW Reply Br. at 2 (unnumbered).

NOW's expectation that acknowledgment of its expenditures in an audit report would render them allowable is baseless. The fact that a cost is identified in an audit report does not, by itself, support a finding that an expenditure is a proper charge to a grant. An audit report merely identifies the manner in which funds were expended in order to assist the grantor agency in determining their allowability. As OCS indicated, the audit report submitted by NOW does not document specific expenditures attributable to this, or any, grant. It merely sets out general categories of commitments and expenditures. OCS asserted that a commitment is not a charge to federal funds. Rather, it is an internal reservation of funds -- no money changes hands. Further, to the extent that expenses are discussed in the audit report, they are generally categorized and not attributed to any identifiable grant or payor. This is highly significant because while 90% of the OCS grant was earmarked for construction, there were no construction costs reported. Finally, the audit report does not show the required unqualified commitment of $3.2 million. While it does show that the State of Connecticut approved some financing in 1990, that action was for funding below the $3.2 million required and occurred well after OCS demanded return of the grant funds (May 1989). See OCS Br. at 8-10.

NOW also maintained that the audit report and accompanying financial statement "reflected total costs incurred of $718,153, far in excess of the grant award of $400,000." NOW Reply Br. at 2. Additionally, NOW insisted that its 1988 contract with an architect implicitly supports the argument that $418,400 was encumbered relative to the Project in 1988. Id. at 3; NOW Reply Br. Ex. 6.

Once again, NOW's argument is unpersuasive. NOW was awarded only $35,800 for various contractual costs. When NOW applied for the grant it indicated that this entire cost category would be applied to minority business development. Minority business development is no longer part of the Project, yet NOW claims contractual costs far in excess of the entire grant award.⁽⁶⁾

As we stated above, NOW was only allowed to use the grant funds for the purposes for which the grant was awarded. Rather than supporting its claim to the entire grant amount, NOW's audit report establishes that no funds were expended for construction prior to the end of the grant period. Consequently, NOW must return the funds that were not spent in accordance with the grant terms and conditions.

D. OCS's denial of the no-cost extension was reasonable.

Given the facts of this case, we conclude that OCS acted reasonably in refusing NOW's November 16, 1988 request for a no-cost extension and instead seeking return of the bulk of the grant funds. The Department's policy on no-cost extensions is contained in its Grants Administration Manual (GAM) and is specifically applicable to all discretionary grants. See Chapter 1-85; section 1-85-10. Under the GAM, OCS has the discretion to award a no-cost extension of a project. Specifically, section 1-85-80 provides:

If support for a project is ending, the grants officer may noncompetitively extend the project for a limited time, usually a few months to provide for an orderly phase-out of Federal support. The grants officer may also extend any budget period for a few months for administrative reasons . . . .

In prior decisions, the Board has examined extensively the discretionary authority of agencies within this Department to rule on requests for no-cost extensions. See Bedford Stuyvesant; Oakwood Child Development Center, Inc., DAB No. 1092 (1989); see also Ironbound. The Board held that the no-cost extensions at issue in Oakwood and Ironbound were properly denied where the agency's action was not arbitrary. In Oakwood, our analysis was premised, in part, on the general principle of administrative law that a presumption of regularity attaches to the actions of government officials. See Citizens to Preserve Overton Park v. Volpe, 401 U.S. 402, 415 (1971). In order to be found arbitrary or capricious an agency's actions must have been unwarranted in law and without justification in fact.⁽⁷⁾ As the Board recognized in Oakwood, the standard to be applied is whether the decision was reasonable, not was it the only decision, or even the best decision, or even the decision that others might have made. Oakwood at 8-9. Applying this standard here, we conclude that OCS's denial of the no-cost extension to NOW was clearly reasonable.

In spite of the positive picture NOW attempted to portray to the Board regarding the Project's development, realistically, this endeavor is only minimally closer to achieving the objectives set out in the grant application almost eight years ago. It is unclear what, if any, practical progress has been made regarding the actual construction of the Project. Meanwhile, the grant's entire construction budget was expended while the central object of that funding was eliminated from the project.

Given the lack of progress, OCS was justified in denying the no-cost extension and seeking return of the grant funds. This was not a grant for an indefinite period. NOW was bound to develop this Project and provide jobs for targeted low-income residents. Even if some of the delays might be considered reasonable, the grant period has long since expired and there is nothing to show for the Project. When it accepted the grant award, NOW took on the general responsibilities incumbent upon any grantee, which are to expend awarded funds for the stated program objectives in accordance with applicable laws, regulations, and guidelines. Except for the $35,800 identified by OCS, NOW has not demonstrated that these funds were properly spent.

Conclusion

Based on the preceding analysis, we sustain OCS's determination disallowing the $364,200 in grant funds expended by NOW. We also determine that OCS's decision denying the no-cost extension requested by NOW was reasonable. We remand to OCS for calculation of the interest NOW must remit due to its improper drawdown of grant funds. NOW may appeal any OCS determination on the amount of interest owed (only) within 30 days of its receipt of OCS's decision on that issue.

Cecilia Sparks Ford

Donald F. Garret

M. Terry Johnson
Presiding Board Member

1. NOW's opening brief contained exhibits numbered 1-7 (there was a Tab 8, but no exhibit). NOW's reply brief contained additional exhibits numbered 1-9. Citation to exhibits accompanying the opening brief will be NOW Br. Ex. [no.]. Citation to exhibits accompanying the reply brief will be NOW Reply Br. Ex. [no.]. In view of the additional new arguments and exhibits contained in NOW's reply brief, OCS was given an opportunity to reply. OCS submitted a reply brief and two additional exhibits (OCS Exs. A-1 and A-2). Although it had an opportunity to submit a final response, NOW offered no further argument.

2. NOW referenced a written request from OCS dated November 16, 1990. However, neither party placed a copy of that letter, or any NOW response to the September 13, 1990 letter in the record.

3. The cost principles set out in OMB Circular A-122 are made applicable to this grant by 45 C.F.R. � 74.174. See also OCS Ex. A (Notice of Grant Award).

4. NOW's auditors anticipated Project construction beginning "during the year ended October 31, 1995." NOW Reply Br. Ex. 3 at 3. Thus, at best the Project would appear to be approximately eight years behind schedule.

5. NOW has only recently (October 1994) repaid part ($311,650) of the $364,200 disallowed. See OCS Br. at 4, n.2, and NOW Br. Ex. 3 at 4. Although neither party indicated as much, the amount repaid clearly represents the grant award ($400,000) less the amount which NOW claimed as allowable costs ($88,350). See Notice of Disallowance at 2.

6. NOW was on notice that it would need prior approval to change the work plan for which funds were awarded. See OCS Exs. A and A-1. Clearly, NOW did not receive prior approval to eliminate the minority business phase of the Project and to divert the money intended for that phase to other uses, even if those uses may have been Project-related.

7. The standard of judicial review under the Administrative Procedure Act, when ruling on a challenge to informal agency action, is whether the agency action was "arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law." 5 U.S.C. � 706. The "arbitrary and capricious" standard of review has been stated to be a highly deferential one, which presumes the agency action to be valid. The standard is also a narrow one, which forbids a court from substituting its judgment for that of the agency; it mandates judicial affirmance if a rational basis for the agency's decision is presented, even though the court might otherwise disagree. Environmental Defense Fund v. Costle, 657 F.2d 275, 283 (D.C. Cir. 1981). The burden of overcoming the presumption of the validity of agency action is upon the party challenging it. Id. at n.28.