Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Enterprise for Progress in the Community, Inc.
DATE: January 29, 1996
Docket Nos. A-94-121
A-94-136
Decision No. 1558
DECISION
Enterprise for Progress in the Community, Inc. (EPIC)
appealed two disallowances by the Administration for
Children and Families (ACF). ACF disallowed a total of
$523,100 claimed by EPIC for its Migrant Head Start
(Migrant) and Head Start (Head Start) programs for the
period January 1, 1991 through December 31, 1992.
Docket No. A-94-121 originally involved a $416,950
disallowance in connection with EPIC's Migrant Program.
ACF alleged that EPIC had improperly expended grant funds
on less-than-arms-length leases; improperly allocated
repair costs; failed to properly account for program
income; failed to obtain prior approval for the purchase
of computer equipment; and improperly carried over, and
then expended, grant funds from one fiscal year to
another. As noted below, since the onset of this appeal,
ACF has accepted some of EPIC's documentation and reduced
the Migrant disallowance accordingly.
Docket No. A-94-136 involved EPIC's Head Start Program.
ACF alleged that EPIC had improperly expended $106,150 on
less-than-arms-length leases. 1/
EPIC challenged each aspect of the disallowance.
Additionally, EPIC asserted that ACF did not pursue
informal resolution of these issues, as required by 45
C.F.R. 74.304, prior to issuing the disallowance. 2/
The record in this case consists of the parties' briefs
and evidentiary submissions as well as the transcript of
a hearing held in Yakima, Washington on August 28-29,
1995. As explained more fully below, we --
o sustain the disallowance of lease costs
charged to Migrant ($90,648) and Head Start
($106,150) based on our conclusion that the
leases were less-than-arms-length transactions.
However, we remand this issue so that ACF can
recompute allowable rental costs based on the
methodology applicable to less-than-arms-length
leases;
o sustain the disallowance of repair costs at
the Castlevale facility charged to the Migrant
grant ($46,839);
o reverse the disallowance of what ACF
incorrectly characterized as program income
earned in connection with the Migrant grant
($24,750);
o remand the issue of equipment costs charged
to the Migrant grant ($26,740) so that ACF may
consider whether it could grant retroactive
approval for these costs;
o from a disallowance of $36,522 (involving
improperly carried-over funds) sustain
disallowed costs actually charged to the
Migrant grant in connection with the purchase
of a school bus ($28,191), but reverse the
remaining amount ($8,331) without prejudice to
ACF to further examine EPIC's 1990 expenditures
to assure itself of the allowability of these
funds.
Analysis
Below, we address each issue separately.
I. LESS-THAN-ARMS-LENGTH-LEASES
The cost principles applicable to nonprofit organizations
such as EPIC are found in Office of Management and Budget
(OMB) Circular A-122. The Circular provides that --
Rental costs under less-than-arms-length leases
are allowable only up to the amount that would
be allowable had title to the property vested
in the organization. For this purpose a less-
than-arms-length lease is one under which one
party to the lease agreement is able to control
or substantially influence the actions of the
other. Such leases include, but are not
limited to those between (i) divisions of an
organization; (ii) organizations under common
control through common officers, directors, or
members; and (iii) an organization and a
director, trustee, officer or key employee of
the organization or his immediate family either
directly or through corporations, trusts or
similar arrangements in which they hold a
controlling interest.
OMB Circular A-122, Attachment (Att.) B., 42.c.
ACF originally disallowed $282,099 in Migrant and
$106,150 in Head Start lease costs. However, after
further review of EPIC's documentation, ACF reduced the
Migrant disallowance to $90,648. See Respondent's Notice
Concerning Documentation of Lease Costs and Objection to
Witnesses (July 28, 1995) and ACF Exhibit (Ex.) 33.
EPIC has a long history of operating Migrant and Head
Start programs in central Washington. Hearing Transcript
(Tr.) at 30. In the mid-1980s EPIC sought to address
difficulties it was experiencing in obtaining and holding
facilities to house those programs. EPIC found itself in
a cycle where it would make improvements or modifications
to a rental facility to accommodate program needs only to
lose the improved facility at the end of its lease. This
situation was financially draining and programmatically
disruptive. Id. at 36-39. In 1987 EPIC conceived the
idea of leasing facilities from a private foundation.
EPIC raised this idea with the Regional Head Start Office
in Seattle (Region X). Region X sought an opinion from
the Regional Office of the General Counsel (OGC). One of
the questions Region X posed was --
Whether a Head Start grantee that leases its
buildings at a fair market value from a
nonprofit foundation that was assisted in its
formation by employees of the Head Start
grantee may claim the lease payments as an
allowable cost under the grant.
OGC answered --
If the lease agreement is the product of an
arms-length transaction and the grantee does
not acquire a material equity in the leased
property, fair market value rental costs are
allowed, but only to the extent that they are
reasonable.
EPIC Ex. 6 (OGC Opinion, June 16, 1987); EPIC Br. at 1-2.
Region X informed EPIC, by letter, that the idea was
feasible so long as EPIC maintained an arms-length
leasing arrangement with the new foundation. A copy of
the OGC opinion was provided to EPIC for guidance. See
EPIC Br. at 2; EPIC Ex. 7.
In August 1987, the EPIC Foundation (Foundation) was
incorporated under the laws of the State of Washington.
From 1987 through 1991, the Foundation purchased four
properties (three with existing buildings and one
requiring construction) and leased them to EPIC for use
in connection with the Migrant and Head Start programs.
These housed the Parker Heights, Castlevale, Bridgeport
and Sunnyside facilities.
ACF asserted that, from the Foundation's inception to the
end of the disallowance, EPIC and its Executive Director
substantially influenced the Foundation's actions. ACF
noted that this influence manifested itself in a variety
of ways, e.g., the principal reason for the Foundation's
existence was to serve EPIC; EPIC was virtually the sole
source of income for the Foundation; EPIC's Executive
Director and/or other EPIC employees attended all
meetings of the Foundation's Board of Directors; and the
Executive Director and other EPIC employees performed
many functions on behalf of the Foundation. Thus, ACF
argued, the relationship between EPIC and the Foundation
was less-than-arms-length.
ACF acknowledged the communications between Region X and
OGC upon which EPIC based its claim for lease costs.
However, ACF asserted that the Region's seeming approval
of EPIC's arrangement with the Foundation was premised on
the existence of an arms-length relationship. Such a
relationship, ACF insisted, was missing in this case.
Migrant Disallowance at 5. ACF maintained that both OMB
Circular A-122 and the OGC opinion clearly discussed only
limited examples of what would constitute a less-than-
arms-length transaction. ACF identified the "real
question" as whether one organization can control or
substantially influence the other. ACF then cited
language in the OGC opinion which provided that "[t]he
broad definition of a controlling or substantially-
influencing organization may leave little room for the
grantee to establish an arms-length transaction." ACF
maintained that, rather than approving EPIC's proposal,
the OGC opinion provided a clear outline of the pitfalls
facing EPIC in its attempt to set up the Foundation. ACF
Br. at 4-7.
ACF conceded that, in setting up the Foundation, EPIC
"observed certain formalities," such as maintaining
separate Boards of Directors. ACF admitted that such
formalities were relevant. However, ACF contended they
were not dispositive of the arms-length issue. Rather,
it was necessary to examine the "reality of a given
situation." ACF Br. at 3-4.
ACF asserted that the reality of the relationship between
EPIC and the Foundation compelled a finding that the
leases were less-than-arms-length. ACF relied upon the
selected Minutes of meetings of the Foundation's Board of
Directors (Minutes) to show that EPIC's Executive
Director was "intimately involved" in the Foundation's
business, including the management of facilities occupied
by EPIC under leases with the Foundation. See ACF
Exs. 16-18; EPIC Ex. 69. 3/ ACF contended that OMB
Circular A-122, Att. B, 42.c., supported a conclusion
that it is necessary to examine the entire context of the
lease transactions. ACF asserted that the relationship
between EPIC's Executive Director and the Foundation
vastly overshadowed EPIC's efforts to avoid the obvious
examples of undue influence, exceeding the guidance
provided both by OGC and OMB Circular A-122. ACF Br.
at 4-8.
ACF urged that the Board examine this issue as it had in
the past, i.e., by looking at the actual practices of the
entities involved. See, e.g., Salt Lake Community Action
Program, DAB No. 1261 (1991); aff'd, Salt Lake Community
Action Program v. Sullivan, 785 F.Supp. 1013 (D.D.C.
1992); rev'd on other grounds, No. 92-5171 (D.C. Cir.
1993); Maternal and Family Health Services, Inc., DAB
No. 839 (1987). Here, ACF alleged, not only was the
Foundation created solely for EPIC's economic benefit,
but also the record was replete with examples of EPIC's
substantial influence over the Foundation. In
particular, ACF cited the Foundation's August 1987
Minutes which, it noted, showed EPIC's Executive Director
and its Attorney (also an incorporator of the Foundation)
suggesting a specific transaction involving Parker
Heights, for the Foundation to engage in. ACF argued
that whether such influence was benign or consistent with
average business practice was irrelevant. The mere fact
of its existence compelled a finding that the leases were
less-than-arms-length transactions. ACF Br. at 7-10.
EPIC denied, or dismissed as inconclusive, ACF's
assertions that the Executive Director was in a position
to substantially influence the Foundation. EPIC asserted
that, in spite of the Executive Director's attendance at
Foundation Board meetings, the Foundation's actions were
driven by an independent Board. EPIC stated that the
leases met the regulatory criteria for an arms-length
transaction. 4/ Further, EPIC asserted that these leases
withstood the scrutiny of less-than-arms-length
transactions identified as necessary by the Board in past
cases. See, e.g., Salt Lake, Maternal and Family Health,
and Social Science Education Consortium, Inc., DAB
No. 163 (1981); EPIC Br. at 5-8.
EPIC also cited an April 12, 1993, letter from a Region X
Grants Management Officer to the Chairman of the EPIC
Board of Directors. This letter resulted from a review
of EPIC's Head Start Program and stated, "We believe that
there was sufficient distance between EPIC and the . . .
Foundation to cause the transaction to be at arms
length." EPIC Ex. 57. EPIC argued that Region X's
interpretation of the leases in this letter along with
the OGC opinion (EPIC Ex. 21), compelled a finding in its
favor. EPIC Br. at 9.
Finally, EPIC argued that ACF should be estopped from
taking this disallowance because it was cognizant of the
nature and purpose of the leases from the outset and had
tacitly approved them. EPIC Br. at 10-12.
We agree with ACF that the examples of less-than-arms-
length leases in OMB Circular A-122 are not exclusive.
Indeed, 42.c plainly states that "[s]uch leases include,
but are not limited to" the three examples set out there.
(Emphasis added.) ACF conceded that the three examples
did not literally apply here. However, ACF argued, and
we agree, that a finding of substantial influence is
nonetheless appropriate. As we discuss in detail below,
the relationship between EPIC's Executive Director and
the Foundation closely approximates the example in the
OMB Circular A-122 where the two leasing parties have
shared board members or executive directors. Moreover,
the totality of the overall relationship between EPIC and
the Foundation supports a finding of substantial
influence.
At the hearing, EPIC offered a good deal of testimony
regarding the independent status of the Foundation's
Board of Directors. However, the record as a whole
provides a clearer picture of the relationship between
EPIC and the Foundation.
o Substantial influence over the Foundation:
The Minutes, so far as they reflect the routine
business activities of the Foundation, support
a conclusion that the Executive Director was in
a position to, and often times did, exert
substantial influence over the Foundation's
actions. This factor alone supports a
conclusion that the organizations' relationship
was less-than-arms-length.
o Lack of Independent Organizational Purpose:
It is undisputed that the Foundation's
principal reason for existence was to acquire
facilities to house EPIC's Migrant and Head
Start programs. Minutes (Special Planning
Session) January 9, 1990. EPIC offered
testimony that the Foundation engaged in a
variety of community oriented activities other
than servicing EPIC. However, the Minutes,
from the Foundation's inception to the end of
the disallowance period (December 1992), reveal
no evidence of any other significant business
conducted by the Foundation other than serving
EPIC. 5/
o Coordination of Activities: EPIC and the
Foundation coordinated the activities
associated with the purchase of properties in a
manner uncharacteristic of arms-length business
dealings. The evidence shows that, as a rule,
the acquisition of properties, the development
of lease terms, and related activities such as
financing for purchases were instigated by
EPIC. More often than not, the Foundation,
although the owner/lessor of the properties,
followed EPIC's lead in areas where, in an
arms-length business setting, it would have
taken a more active role.
o Economic Control: There is no evidence in
the record to show that, without EPIC, the
Foundation had any independent economic
viability. Save for a minimal amount of money
raised by other means, EPIC was the
Foundation's sole source of income. Thus, EPIC
was in a position to exert substantial
influence over the Foundation.
o Use of EPIC Personnel: The Minutes are
replete with instances of EPIC personnel (the
Executive Director and others) performing for
the Foundation, under either the direct or
indirect authority of the Foundation, functions
one would commonly expect an organization's own
personnel to perform. These functions include:
negotiating for the purchase of real estate;
preliminary inquiries into the avenues of
financing for property purchases; bidding on
the purchase of a food concession; selling real
estate on behalf of the Foundation; and
preparation of the Foundation's annual
financial report. The manner in which these
individuals presented themselves to the public
blurred any practical distinction between the
organizations. 6/ Moreover, the fact that the
Foundation had no employees at all during the
period in issue made it all the more dependent
on personnel provided by EPIC.
EPIC provided testimony for the proposition that the
Foundation was an independent-minded body, not averse to
rejecting ideas put forth by EPIC's Executive Director.
However, the Minutes contradict this idea. The
relationship between the Executive Director and the
Foundation as evidenced in the Minutes from August 1987
through 1992 reflects little conflict or rejection of
ideas put forward by the Executive Director. Generally,
the Executive Director would make a recommendation and
the Foundation would implement it. The Minutes reflect
almost a paternalistic attitude on the part of EPIC
towards the Foundation. Thus, while it might be
incorrect to say that the Executive Director led the
Foundation, it is clear that the Foundation took its lead
from the Executive Director as well as other EPIC
employees. The Minutes from a meeting almost two and
one-half years into the Foundation's existence underscore
this relationship:
There was consensus that the entire board needs
to be informed of . . . [EPIC's] needs from the
beginning conception stage in order . . . to
make responsible, timely decisions. [EPIC's
Executive Director] . . . agreed that he can
help us with that aspect and we agreed
that . . . [his] job will be made easier by our
participation in the earlier decision-making
process, and by forming a long-range plan.
* * *
[EPIC's Executive Director] . . . said he would
feel better if we had a process so he isn't in
a position of making recommendations to us, but
is a resource to us. Our own board members
have to be informed enough to do the
presenting, reporting and proposal-making to
our own group.
Special Planning Session Minutes (January 9, 1990).
Clearly, an adversarial relationship is not a
prerequisite to finding an arms-length relationship.
However, the role of EPIC's Executive Director relative
to the Foundation was such that he functioned as an ex
officio member of the Foundation's Board. Even assuming
that the single goal of serving EPIC was consistent with
an arms-length relationship, one would expect a truly
independent Foundation to have a working knowledge of
EPIC's needs, to have a process by which it was able to
locate buildings or alternatives for those needs, to be
familiar with financing sources and alternatives, and to
be capable of establishing lease terms. However, the
Minutes simply do not evidence that the Foundation
routinely possessed these characteristics.
EPIC nevertheless argued that we should find its
relationship with the Foundation to be at arms-length
because the rental costs on the leased facilities were
reasonable and indeed were often well below fair market
value in the case of the older facilities. Although we
agree with EPIC that there is no evidence of abuse in
terms of lease costs, that factor alone is not
determinative under the cost principles. The cost
principles are designed not merely to cover situations
where there has been abuse, but also situations where
there would be the potential for abuse. While there is
no evidence that EPIC used its relationship with the
Foundation in an abusive way, other grantees, in a
position to exert "substantial influence" over a lessor
of grant facilities in similar circumstances, might do
so. The cost principles were designed to avoid case-by-
case analysis of the existence of abuse whenever a
relationship was such that the potential for abuse might
exist.
Finally, EPIC has not established that ACF should be
estopped from applying the less-than-arms-length rules in
this case.
As we have stated in earlier decisions --
There can be no estoppel absent the traditional
requirement of a misrepresentation of fact,
reasonable reliance, and detriment to the opposing
party. Heckler v. Community Health Services of
Crawford County, Inc., 467 U.S. 51, 59 (1984); see
also Tennessee Dept. of Human Services, DAB No. 1054
(1989). Moreover, estoppel against the federal
government, if available at all, is presumably not
available absent affirmative misconduct by the
federal government. Schweiker v. Hansen, 450 U.S.
785 (1981).
Texas Dept. of Human Services, DAB No. 1344 at 9 (1992)
(and cases cited therein). Even where government agents
have given private individuals advice directly contrary
to controlling federal regulations, the Supreme Court has
not permitted estoppel. Federal Crop Ins. Corp. v.
Merrill, 332 U.S. 380 (1947); Hansen.
The Supreme Court has said that estoppel will not
ordinarily lie against the federal government, especially
in cases involving claims for federal funds based on
misrepresentations of federal officials. Office of
Personnel Management v. Richmond, 496 U.S. 414, 423-34
(1990). Undoubtedly, such a claim, at a minimum,
requires more than proof of the traditional elements
defined above. The Supreme Court has rejected estoppel
claims against the government absent a showing of
"affirmative misconduct" on the part of the government
officials. Hansen, at 788. Error in oral advice by a
government agent has been held insufficient to estop the
government. Heckler, at 64. Government agents cannot
"by their unauthorized oral or written statements" be
held to "obligate the Treasury for payment of funds,"
without the anomalous effect of giving their erroneous
advice "the practical force of law" overriding
Congressional intent. OPM v. Richmond at 428.
Even assuming that estoppel against the federal
government is possible (which is extremely doubtful based
on the cases cited above), there is no basis for estoppel
here. Estoppel could not possibly lie against ACF under
the circumstances of this case because no ACF official
ever misled EPIC concerning the cost principle rules
pertaining to rental costs. Indeed, the July 1987 letter
from Region X to EPIC, and the accompanying OGC opinion,
reiterated the need for EPIC to maintain an arms-length
relationship at all times with any foundation that might
be established. Further, the OGC opinion emphasized how
difficult it might be to maintain such a relationship
under the hypothetical posed. See EPIC Exs. 5-7.
Moreover, the conclusion in the OGC opinion plainly
stated: "The grantee's options are (1) to ensure that it
does not control or substantially influence the nonprofit
foundation to be created and . . . (2) to request an
exception from the provisions of Circular A-122." EPIC
Ex. 6 at 4. The conclusion supports ACF's interpretation
of the opinion as "clearly . . . [letting EPIC] know of
the pitfalls of what it was contemplating." ACF Br.
at 4. Further, the conclusion makes it readily apparent
that the utmost scrutiny would be given to the concepts
of control or substantial influence.
EPIC also asserted that ACF should be estopped because
EPIC's Executive Director provided ACF with a detailed
description of the relationship between EPIC and the
Foundation on August 13, 1991 (EPIC Ex. 41), yet ACF
allowed 10 months to pass before beginning the
investigation (in June 1992) leading to the March 1994
Migrant disallowance. 7/ Tr. at 440-443. Although ACF
may not have handled this matter with the preferred
degree of urgency at the time, the inaction occurred at
the end of the disallowance period and certainly did not
cause EPIC to enter into its relationship with the
Foundation. Moreover, ACF's inaction alone could not
possibly be viewed as affirmatively misleading EPIC about
the nature of the cost principle rules.
Finally, the April 12, 1993 letter from the Head Start
Grants Management Officer (EPIC Ex. 57) could not give
rise to estoppel for the period at issue because it was
written after the disallowance period and was, in any
event, prepared by an official without authority to bind
ACF on issues relating to the allowability of grant
funding.
Based on the preceding analysis, we find that the leases
between EPIC and the Foundation were less-than-arms-
length. We therefore remand this aspect of the
disallowance to ACF so that it can recompute allowable
rental costs based on the methodology applicable to less-
than-arms-length leases. This method allows a grantee to
claim up to the amount that would have been allowed under
the cost principles if title to the property had vested
in the grantee. That amount would include, for example,
depreciation or use allowances, maintenance, taxes, and
insurance, while excluding unallowable costs. See OMB
Circular A-122, Att. B, 42.c. and d. There is nothing
in the record that would enable us to compute those costs
here.
During the remand ACF should provide EPIC with
appropriate guidance regarding the applicable methodology
and a reasonable opportunity to substantiate its costs.
If EPIC disagrees with ACF's recomputation, it may appeal
that limited issue to the Board within 30 days of
receiving ACF's written decision.
II. REPAIRS AT CASTLEVALE
EPIC's Castlevale facility housed administrative offices
for the Migrant, Head Start and other programs run by
EPIC. During 1991, EPIC charged $73,504.53 in repair
costs at Castlevale to the Migrant grant. ACF
disallowed $46,839 of this charge based on EPIC's failure
to properly allocate this cost between the Migrant and
other benefiting programs. Disallowance (March 31, 1994)
at 5-6.
EPIC conceded that it had charged the disallowed costs to
Migrant. EPIC Br. at 12. EPIC indicated that these
costs resulted from the discovery of serious health and
safety problems (e.g., lead paint, asbestos and PCB
emissions) identified during an environmental audit
undertaken concurrent with other repairs at Castlevale.
8/ EPIC noted that its 1991 Migrant grant was
underexpended and thus money was available for one-time
expenditures, such as these repairs. EPIC alleged that,
given the under-expenditure of program funds and the
emergency nature of these repairs, its former Migrant
Director requested and received verbal approval from an
ACF Migrant official to charge these expenses to the
Migrant grant. EPIC admitted that when the former
Migrant Director left EPIC, in early 1992, it discovered
that ACF's "authorization" of this expenditure was not
documented. Given the general allowability of these
costs (if found to be allocable) and the circumstances
under which they were incurred, EPIC requested that ACF
provide retroactive approval for these costs. Id.
at 12-14.
At the hearing EPIC asserted that it charged the
Castlevale repairs to Migrant as part of a four-year
averaging process. EPIC noted that, while it had charged
this entire repair bill to Migrant, in other years
Migrant received the benefit of repairs for which EPIC
had made little or no charge to Migrant funds.
OMB Circular A-122 requires that costs must be allocable
to the performance of the grant award in order to be
allowable. OMB Circular A-122, Att. A, Basic
Considerations, Paragraph A.2.a. In other words, a
grantee may only charge an expenditure to its grant to
the extent that the expenditure benefits performance of
the grant. Here, it is undisputed that the repair costs
benefited programs in addition to Migrant. Thus, EPIC
was only entitled to charge to the Migrant Program that
portion of the repair costs that benefited the Migrant
Program. Moreover, as ACF argued, this requirement
applies to the performance of a particular grant award in
a particular program year. Head Start agencies do not
have the option of averaging out their allocations
between various programs in any way they choose over a
multiple year period. The funds in question here were
granted for a particular program year to cover only
expenses incurred by Migrant.
Further, the cost principles do not authorize waiver of
the allocation requirements by agency officials. Nor is
compliance with the allocation requirement excused where
a grantee has excess funding from a program in that
particular year. In any event, ACF provided testimony
from the Migrant Head Start Branch Chief that he could
not recall providing approval for allocating all of the
costs to Migrant, and that the ACF records contain no
evidence of any such approval. See Tr. at 453; ACF
Ex. 32.
Finally, ACF provided persuasive testimony at the hearing
about the reasonableness of its allocation of these
repair costs between the Migrant and other benefiting
programs and EPIC provided no evidence to dispute the
reasonableness of this allocation based on a single
program year.
Accordingly, we uphold ACF's disallowance of these costs.
III. BRIDGEPORT SUBLEASE PAYMENTS
During the period in issue, EPIC subleased space in its
Bridgeport facility (which EPIC leased from the
Foundation) to three separate organizations and received
$24,750 in sublease payments. ACF asserted generally
that EPIC had not properly accounted for these payments
and, in particular, had not followed the requirements of
45 C.F.R. 74.42 governing the use of "program income."
ACF asserted that EPIC had failed to provide
contemporaneous documentation that the sublease payments
were used in a manner consistent with the alternative
requirements for treatment of "program income" of
section 74.42(c) or 74.42(e), or that they were properly
credited to the Migrant Program. ACF also asserted that
EPIC failed to report the sublease payments as "program
income" on its Financial Status Reports (SF-269's) for
the years in question.
EPIC argued that it properly accounted for the funds it
received from its subleases at its Bridgeport site. It
asserted that it recorded the receipt of these funds as a
"credit expense" in the same general ledger account where
its charges (or debits) for lease payments for the
Migrant Program were posted. EPIC argued that this
treatment of the sublease receipts had the effect of
charging the program only for the lease expenses that
remained for this site after the sublease receipts had
been credited. EPIC argued that even though it never
treated the sublease receipts as rental "income," the
method it followed properly accounted for the sublease
receipts and had the same effect as an accounting method
that treated the receipts as "income." EPIC provided
exhibits that re-created its ledger accounts for the
Migrant Program for the years at issue. EPIC Exs. 16,
49, and 53. EPIC's Director of Finance provided detailed
testimony at the hearing concerning these exhibits and
why these and other related exhibits substantiated that
the sublease payments had been credited against total
lease expenses charged to the program during these years.
Tr. at 468-472.
For the reasons discussed below, we conclude that EPIC
has properly accounted for its sublease receipts. While
section 74.41 plainly contemplates that rental income
(e.g., rent from property acquired by federally funded
grants) may qualify as "program income," the sublease
receipts here are clearly not rental payments from a
property owned by EPIC and do not otherwise fit within
the definition of "program income" in section 74.41.
Section 74.41(a) defines "program income" as --
gross income earned by a recipient from activities
part or all of the cost of which is either borne as
a direct cost by a grant or counted as a direct cost
towards meeting a cost sharing or matching
requirement of a grant.
The sublease receipts at issue do not fit within this
definition because the portion of the leased facility
attributable to the subleases was neither funded by
Migrant nor counted as a direct cost towards meeting a
cost sharing or matching requirement by that program.
Moreover, the sublease expenses would not even be
allocable to Migrant because the expenses did not benefit
that program.
Further, we find that the documentation provided by EPIC
was sufficient to document this treatment of the sublease
payments. EPIC re-created the entire Migrant ledger
account for the years in question and explained where in
those accounts it had credited the Migrant Program for
sublease payments. EPIC further substantiated that these
credits reduced the total lease expenses charged the
program by the amount of the subleases. Although ACF
questioned whether EPIC had properly accounted for the
sublease payments as "program income," it did not point
to any reason why EPIC's documentation or explanation was
inadequate to substantiate that the sublease payments
were credited against program expenses. EPIC used
Migrant funding only to pay for the portion of the leased
facility used by it; it used the sublessees' payments to
pay for the sublessees' portion.
Accordingly, we conclude that EPIC properly accounted for
the sublease payments. Although the sublease payments
did not qualify as "program income" under the definition
of 42 C.F.R. 74.41, and EPIC did not have to treat them
in accordance with the requirements of 42 C.F.R. 74.42,
EPIC nevertheless was obliged to document that it did not
charge the entire lease expense for the Bridgeport
facility to the Migrant Program without giving
appropriate credits to the program for the sublease
payments received from the three sublessee organizations.
We conclude that EPIC adequately documented these
credits.
On the basis of the foregoing, we reverse this item of
the disallowance.
IV. EQUIPMENT PURCHASES
ACF determined that, in fiscal 1991, EPIC purchased
office equipment totalling $26,740. The equipment
included an offset printer, copiers, and FAX machines.
See EPIC Exs. 47 and 48. ACF noted that EPIC's grant
application contained no provision for purchase of this
equipment. Moreover, ACF noted that OMB Circular A-122,
Att. B, 13.b., requires prior approval for equipment
purchases in excess of $500. ACF asserted EPIC failed to
obtain prior approval for these purchases. ACF further
argued that retroactive approval is "an exception to be
used in exceptional circumstances . . . akin to equitable
relief." ACF Br. at 19. ACF argued moreover that it
would not be inclined to grant retroactive approval
because:
o EPIC had consistently failed to abide by
requirements for obtaining timely, prior
approvals;
o there was no reason why EPIC could not have
requested prior approval here; and
o it is not feasible at this date to go back
in time and determine if there were better
alternatives for these funds.
ACF Ex. 32, Par. 7.
For the reasons discussed below, we remand this item of
the disallowance to ACF for further consideration of
whether retroactive approval of the equipment purchases
would be possible.
It is well-established that retroactive approval may be
granted for transactions that would have been approved
had the grantee requested approval in advance. HHS-GAM,
Ch. 1-105-60, Par. B.1; Arizona Affiliated Tribes, Inc.,
DAB No. 1500 at 7 (1994); New York State Dept. of Social
Services, DAB No. 1394 at 33 (1993). The Board has held
that in making its determination on a request for
retroactive approval, the federal agency has
considerable, but not completely unbounded, discretion.
The federal agency may consider all relevant factors in
deciding whether ultimately to grant retroactive approval
where prior approval was required but not obtained.
Although the Board will not interfere when the agency
appropriately exercises its discretion, the agency must
state the basis for its decision and may not deny
retroactive approval based on unsubstantiated conclusions
or on bases so insubstantial that the decision fairly can
be described as capricious. Economic Opportunity
Atlanta, Inc., DAB No. 313 (1982).
Although ACF argued that it would not be inclined to
grant retroactive approval of these costs, we conclude
that ACF's reasons were deficient and that EPIC is at
least entitled to proper consideration of the issue of
retroactive approval of the equipment purchases as
outlined below.
ACF argued that it would not be inclined to grant
retroactive approval of these costs because it was not
now in a position to evaluate the factors that it
considered relevant for approval. However, EPIC
requested retroactive approval for the purchase of the
equipment in October of 1992 when EPIC responded to the
financial review that gave rise to this disallowance.
ACF never responded to that request prior to issuing this
disallowance in March 1994 nor did ACF, at any time,
advise EPIC of the factors it would consider in granting
approval so that EPIC could provide whatever
documentation or information ACF deemed relevant in a
timely fashion. Thus, it is simply unreasonable for ACF
to argue at this date that it would not be in a position
to evaluate whether retroactive approval may be granted.
Moreover, one of the factors ACF identified as bearing on
approval was whether there existed better alternatives
for expenditure of limited program funds. We question
whether it would be appropriate to apply that factor
under the particular circumstances of this case. EPIC
provided undisputed testimony that it received a
tremendous influx of additional Migrant funding in the
program year in question ending December 31, 1991 and
that it received over $400,000 in additional funds as
late as October 25. Tr. at 91. EPIC also provided
undisputed testimony that there was a lack of clear
direction from ACF as to what this additional funding
could be used for, and that ultimately $200,000 of those
funds remained unspent. Id. at 91-92.
We also question the validity of the remaining factors
bearing on retroactive approval identified by ACF, since
the record does not support the position that EPIC had
altogether disregarded the prior approval requirement in
this instance or that EPIC consistently disregarded prior
approval requirements in other instances. 9/
Accordingly, we remand this item of the disallowance to
ACF so that it can give further consideration to whether
it can retroactively approve the equipment purchases.
ACF should first notify EPIC of what additional
information or documentation it needs concerning these
costs (e.g. what it would have expected to see in a
request for prior approval for these purchases and what
it would need concerning any factors bearing particularly
on retroactive approval). 10/ EPIC would then have a
reasonable amount of time to respond, as specified by
ACF. If ACF ultimately disapproved the request, EPIC may
return to the Board on this issue by appealing within 30
days of receiving ACF's decision.
V. BUS PURCHASE
EPIC purchased a bus for $36,522 on December 30, 1990.
This purchase, however, was voided on February 5, 1991.
Thus, according to ACF, EPIC had $36,522 in unspent and
unaccounted for Federal funds in fiscal 1990. ACF also
noted that in order for unspent Head Start funds from one
year to be used in a subsequent year, a grantee must
request authorization to have the funds carried over.
EPIC did not request carryover authorization. EPIC
testified at the hearing that it considered requesting
carryover authority but that it needed a school bus for
the summer months and did not expect to receive a
response on a carryover request in time for use during
the summer. 11/ Tr. at 92-93. EPIC purchased a
different bus for $28,191 ($8,331 less than the original
bus) on March 29, 1991. EPIC alleged that it charged
cost of the ($28,191) to 1990 funds. EPIC contended that
these funds were properly accounted for as a "detail" in
its audit report for the 1990 fiscal year. See EPIC
Ex. 15. EPIC indicated that its Exhibits 15 and 62, read
together, show that the new bus was properly charged to
1990 funds, although not ordered and purchased until
March 1991. See EPIC Br. at 16-17; see also EPIC
Exs. 24-26, 29, 36A-G, 37, 38 and 63. EPIC argued,
moreover, that it was appropriate to charge the $28,191
bus to the 1990 program year because it had been
authorized to purchase a school bus with funds from that
year and because it had originally obligated $36,522 in
funds to purchase a bus in that year. EPIC's Executive
Director testified that an amount equalling the
difference between the $36,522 obligated for the original
bus on December 30, 1990 and the $28,191 actually spent
on the new bus in March 1991 was spent on allowable 1990
program year expenses. Tr. at 90-92. EPIC's Executive
Director testified that even though the full $36,522 in
Migrant funding remained obligated until the original
order was voided on February 5, 1991, EPIC had used funds
from other sources during 1990 to cover allowable Migrant
expenses for the difference ($8,331). Id.
There are specific rules governing how a Head Start
grantee is to treat an unobligated balance in the
Discretionary Grants Administration Manual (DGAM). 12/
The DGAM indicates that an unobligated balance remaining
at the end of a budget period may be "processed" as a
carryover from one budget period to the next. (However,
an unobligated balance from a prior period does not
authorize a grantee to obligate grant funds in excess of
the total Federal approved budget reflected in the Notice
of Financial Assistance Awarded for the current budget
period.) If an unobligated balance is to be carried over
as an additional authority and is not reflected in the
application for refunding, the grantee must submit a
request for the additional funds which will include
justification for the use of the unobligated balance.
DGAM Ch. 1, Par. J.
The school bus purchase at issue here raises three
separate issues concerning the accountability of Head
Start grant funding.
The first issue is whether EPIC is entitled to charge the
$28,191 spent on the new bus to its 1990 program funds.
The original bus purchase was properly obligated on
December 30, 1990. However, that purchase was voided on
February 5, 1991, and a new bus was not obligated or
purchased outright until March. EPIC has pointed to no
legal authority that would allow it to extend the
original obligation beyond the point at which it was
voided. Therefore, we must conclude that when EPIC
purchased the new bus in March, it could only have
properly done so with 1991 funds, and that to the extent
that EPIC charged $28,191 in 1990 funds for the purchase
of a school bus, EPIC has not properly accounted for
$28,191 of 1990 Migrant funds.
The second issue is whether EPIC may properly carry
over $28,191 in 1990 funds to the 1991 program year and
charge to those funds the March, 1991 purchase of the new
school bus for $28,191. EPIC could have requested prior
approval from ACF to do this but testified that it chose
not to because it would not have received an answer soon
enough to purchase the new bus within the time frame
required by its program. Tr. at 92-93. Nevertheless,
EPIC is not precluded from requesting retroactive
carryover of these funds at this point. ACF has
indicated that it would not be inclined to grant
retroactive approval based on EPIC's record of poor grant
administration in this disallowance. ACF Br. at 21-22.
The question of whether ACF properly disapproves a
carryover request is outside the scope of this Board's
authority, which does not extend to the "disposition of
unobligated balances." 45 C.F.R. Part 16, Appendix A,
Par. (C)(a)(1). Nevertheless, ACF may wish to at least
consider the approvability of a carryover further in
light of our findings on other issues in this
disallowance, which do not uniformly substantiate poor
grant administration by this grantee. Moreover, the
record suggests that if EPIC had gone ahead with the
original purchase, it would likely have been fully
allowable even though the original bus would have cost
$8,000 more than the bus subsequently purchased. There
is no dispute that the bus purchase had been approved
for 1990 and that EPIC needed a bus. Thus, EPIC's
actions saved the Migrant Program $8,331.
The third issue raised by the bus purchase is the
allowability of the $8,331, representing the difference
between the original voided purchase of $36,522 and the
March, 1991 purchase of $28,191. EPIC's Executive
Director testified that EPIC's audited financial report
demonstrates that it spent all of its Migrant funding for
the 1990 program year. Tr. at 90-92. Further, EPIC's
Director of Finance testified that EPIC's reconstructed
ledger accounts (EPIC Ex. 15) demonstrate that EPIC
credited Migrant for the original bus purchase amount
($36,522) and only charged Migrant $28,191 for the later
(March 1991) purchase. Tr. at 474-475. Therefore, EPIC
argued, even though it had originally obligated $36,522
in grant funding for a school bus and that obligation
remained in effect until the purchase was voided on
February 5, it had properly incurred other allowable
Migrant costs during the 1990 program year to cover the
charge of this $8,331 amount to the Migrant Program for
the 1990 program year. Tr. at 494-495.
We conclude that there is no basis in the record before
us to uphold the disallowance of the $8,331 saved by
EPIC. Consequently, we reverse that aspect of the
disallowance. However, ACF is not precluded from
reviewing EPIC's 1990 expenditures to assure itself that
these funds were expended on allowable costs.
Consequently, ACF may issue a new disallowance regarding
them.
Accordingly, after considering all of the issues
surrounding the disallowance of the funding for the
purchase of the school bus, we uphold the amount of
$28,191 and reverse the amount of $8,331.
ACF, however, is not precluded from giving further
consideration to the issue of whether it would
retroactively approve the carryover of $28,191 in 1990
funding to the 1991 program year to cover the cost of the
bus actually purchased by EPIC in that year, in view of
the clear savings to the program of EPIC's having voided
the original purchase for the higher amount obligated on
December 30, 1990. If EPIC wishes to seek further action
from ACF on a carryover, it should notify ACF within 30
days of receiving this decision.
VI. THE APPLICABILITY OF 45 C.F.R. 74.304
In addition to the issues raised by the five items of the
disallowance, EPIC asserted that this disallowance should
be reversed because ACF failed to follow the requirements
of 45 C.F.R. 74.304(a). That regulation provides:
Granting agencies . . . attempt to promptly
issue final decisions in disputes and in other
matters affecting the interests of grantees.
However, they do not issue a final decision
adverse to the grantee until it is clear that
the matter cannot be resolved informally
through further exchange of information and
views.
EPIC argued that ACF failed to follow this regulation
prior to taking this disallowance. EPIC indicated that
ACF issued an initial site visit report relative to the
Migrant Program on September 24, 1992 and that EPIC
responded to "each issue raised" on October 28, 1992.
EPIC asserted that it heard nothing further from ACF
until the disallowance on March 31, 1994. EPIC also
noted that Region X examined the lease transaction from
the Head Start perspective, found it to be arms-length,
but was "instructed" to take a disallowance (May 16,
1994) on the same basis as that taken in the Migrant
Program. EPIC contended that these actions were taken
without the exchange of information and views envisioned
in 45 C.F.R. 74.304.
ACF argued that based on discussions between its
officials and EPIC's, it determined that these matters
could not be resolved by further discussion or exchange
of information. ACF Br. at 22-26.
The Board has previously considered and rejected
arguments similar to EPIC's. In Vanderbilt University,
DAB No. 903 (1987), we stated:
Vanderbilt in our view has not demonstrated
that any of these regulations [including
74.304(a)] would ever require this Board to
reverse the Agency's determination. A reading
of these regulations indicates that they are
not intended to provide sanctions for Agency
noncompliance and they certainly do not offer
the remedy of reversing an Agency
determination. They are clearly intended
instead as general guidelines to inform
grantees of how the Department's appeal
processes operate.
Id. at 86; see also Oakwood Child Development Center,
Inc., DAB No. 1092 at 11-12 (1989).
EPIC has presented no argument which would cause us to
reconsider our previous analysis of this issue.
Conclusion
On the basis of the preceding analysis, we --
o sustain the disallowance of lease costs
charged to Migrant ($90,648) and Head Start
($106,150) based on our conclusion that the
leases were less-than-arms-length transactions.
However, we remand this issue so that ACF can
recompute allowable rental costs based on the
methodology applicable to less-than-arms-length
leases;
o sustain the disallowance of repair costs at
the Castlevale facility charged to the Migrant
grant ($46,839);
o reverse the disallowance of what ACF
incorrectly characterized as program income
earned in connection with the Migrant grant
($24,750);
o remand the issue of equipment costs charged
to the Migrant grant ($26,740) so that ACF may
consider whether it could grant retroactive
approval for these costs;
o from a disallowance of $36,522 (involving
improperly carried-over funds) sustain
disallowed costs actually charged to the
Migrant grant in connection with the purchase
of a school bus ($28,191), but reverse the
remaining amount ($8,331) without prejudice to
ACF to further examine EPIC's 1990 expenditures
to assure itself of the allowability of these
funds.
As explained above, in the event that EPIC disagrees with
ACF's recalculation of allowable rental costs in
connection with the less-than-arms-length-leases (Docket
Nos. A-94-121 & A-94-136), or ACF's determination
regarding the allowability of equipment costs ($26,740),
EPIC may return to the Board, within 30 days of receipt
of ACF's written determination, for further consideration
of those limited issues.
_________________________
Cecilia Sparks Ford
_________________________
M. Terry Johnson
_________________________
Donald F. Garrett
Presiding Board Member
1. The parties agreed that these disallowances should
be considered jointly since they involved common issues
of law and fact. Except where necessary, we refer to the
disallowances as a single event. After further review by
ACF, the total amount in dispute is $331,649 ($225,499 in
Docket No. A-94-121 and $106,150 in Docket No. A-94-136).
2. Since this disallowance, this regulation was
amended and relocated at 45 C.F.R. 74.90(a). 59 Fed.
Reg. 43754, 43775 (August 25, 1994). We cite the earlier
version of the regulation in effect at the time of the
disallowance.
3. At the hearing EPIC put into evidence a complete
set of the Foundation's Minutes from its inception in
August 1987 through December 1994.
4. Specifically, EPIC asserted that the leases fit
within the definition of "arms-length" found in the
Grants Administration Manual (GAM) 6-10-20F. The GAM
definition is identical to OMB Circular A-122, Att. B,
42.c.
5. However, the record does reveal that some
significant business involving other programs may have
occurred after the disallowance period.
6. For example, in a newspaper photograph
accompanying a story on the dedication of the Sunnyside
facility, EPIC's Executive Director was identified as a
member of the Foundation. See Attachment to June 27,
1991 Minutes.
7. The parties are in agreement that EPIC's Executive
Director attended a conference in Washington, D.C. at
which he, in a general manner, informed the Commissioner
of the Administration for Children, Youth and Families,
the organization within ACF responsible for the Migrant
Program, of the relationship between EPIC and the
Foundation. The Commissioner expressed concern regarding
the relationship and directed the Branch Chief for the
Migrant Head Start Program to find out what was
happening. The Branch Chief asked EPIC's Executive
Director to submit a written report and, upon receipt of
the report, filed it without taking any immediate action.
Tr. at 440-441.
8. EPIC also asserted that the Castlevale asbestos
problem was an emergency. However, EPIC and the
Foundation were aware of the existence of asbestos at
Castlevale at least as early as May 1988. In fact, at
that time, there was some discussion regarding the most
cost effective time to remove the asbestos. See EPIC
Ex. 69, Negotiation Minutes (May 12 & 16, 1988) and
Regular Meeting Minutes (May 18, 1988).
9. EPIC's Executive Director testified that he
believed that the then Director of Migrant Head Start had
received approval for the equipment costs in a timely
fashion. However, he was unable to substantiate that
approval had been requested and received. Tr. 100-102.
10. EPIC has already provided evidence at the hearing
that may bear on the approvability of the costs. EPIC
provided testimony that the offset printers were
purchased to enable the program to send newsletters out
to the families and to do high volume printing that could
not be handled well on a regular copy machine. Tr.
at 453. The former Director of Migrant Head Start
testified that she researched the "best deals" for EPIC
on the copy equipment. Id. at 277. Finally, there is
testimony that this equipment was needed and intended for
use in the Migrant Program. Id. at 102, 465.
11. EPIC indicated that, by nature, a bus purchase
was a somewhat complicated process and that one could not
simply drive a bus off the lot as with an ordinary
automobile purchase. Tr. at 88.
12. The DGAM was issued by the Office of Human
Development Services, one of the DHHS agencies combined
in 1991 to form ACF.