Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Lake County Economic Opportunity Council, Inc.
Docket No. A-95-66
Decision No. 1580
DATE: June 12, 1996
DECISION
Lake County Economic Opportunity Council, Inc. (LCEOC)
appealed a January 13, 1995 determination by the
Administration for Children and Families (ACF) denying
refunding for LCEOC's Head Start Program. This action
was taken pursuant to 45 C.F.R. 1303.15(c), which
provides that refunding may be denied for "any or all of
the reasons . . . set forth in [45 C.F.R.] 1303.14(b)."
ACF set out four general grounds for its determination --
1. LCEOC's failure to submit timely annual
audit reports that meet Office of Management
and Budget (OMB) Circular A-133 requirements
for 1989, 1990, 1991, 1992, and 1993;
2. LCEOC's failure to document making cost of
living adjustments or salary increases
specifically funded in grant awards in 1990,
1991, 1992, and 1993;
3. LCEOC's failure to enter into written,
approved delegate agreements for its nine
delegates;
4. LCEOC's failure to demonstrate full
compliance with program requirements, as
documented in April 1993 and May 1994 on-site
reviews.
ACF Exhibit (Ex.) 1 at 2-11. 1/
LCEOC contested each basis of ACF's determination and
requested a hearing pursuant to the Head Start Act, 42
U.S.C. 9841. A four-week hearing was held during the
months of June and September 1995.
We have carefully considered the record in this case.
Although we found LCEOC's witnesses credible and its
counsel able, the overwhelming weight of the evidence
established that LCEOC has been out of control fiscally
for several years. During this time, LCEOC was receiving
millions of dollars of federal money, yet it did not
provide timely audited statements meeting OMB
requirements and showing how the basic Head Start funds
it received were spent or whether supplemental funds
provided for cost of living adjustments or salary
increases during the period 1990-1993 were spent as
promised and required. When LCEOC finally produced a
long-overdue audited statement at the end of this
proceeding, that statement showed that during 1993 and
1994, LCEOC had overspent its budget by over two million
dollars. For several years LCEOC ran a program involving
nine delegates using, instead of written, approved
delegate agreements, one-page letters effectively
freezing funding at outdated levels and failing to
establish any of the required parameters of the grantee-
delegate relationship. In addition, LCEOC failed to
demonstrate compliance with many other significant
program requirements, despite being given notice and
ample opportunity to correct those deficiencies.
For the reasons discussed below, we conclude that LCEOC
has materially failed to --
o comply with the required fiscal or program reporting
requirements;
o meet the performance standards for operation of its
Head Start program;
o comply with Head Start grants administration
requirements;
o comply with the requirements of the Head Start Act;
and
o abide by other terms and conditions of its grant and
applicable laws or regulations.
Accordingly, we find that denial of refunding is
warranted pursuant to 45 C.F.R. 1303.14(b)(3), (4),
(6), (7) and (9). 2/
I. BACKGROUND
A. Overview of the applicable law and regulations
The Head Start program is designed to deliver
comprehensive health, educational, nutritional, social
and other services to economically disadvantaged children
and their families. See 42 U.S.C. 9831 and 45 C.F.R.
1304.1-3. ACF provides funds to grantees to serve as
Head Start agencies within designated communities. See
generally 42 U.S.C. 9836. The Head Start Act requires
grantees to keep records that will "fully disclose the
amount and disposition" of federal funds and "facilitate
an effective audit." 42 U.S.C. 9842(a). Head Start
agencies may operate part of their funded programs
through delegate agencies. 42 U.S.C. 9837. The law
requires that a Head Start agency utilize --
organization, management, and administration which
will assure, so far as reasonably possible, that all
program activities are conducted in a manner
consistent with the purposes of this
subchapter. . . . Each such agency shall establish
or adopt rules to carry out this section, which
shall include rules to assure full staff
accountability in matters governed by law,
regulations, or agency policy . . . .
42 U.S.C. 9839(a); see also 45 C.F.R. 1301.30.
In the mid-70s, the Secretary promulgated program
performance standards covering the education, health
(including medical, dental, mental health and nutrition),
social services, and parent involvement component areas
of Head Start. See 45 C.F.R. Part 1304. When the
regulations were first promulgated, the preamble to the
final rule explained that the standards had been
developed based on seven years experience with the
program, had been field tested, and were considered
reasonable and attainable. 40 Fed. Reg. 27,562 (June 30,
1975). The program performance standards covering
services for children with disabilities were later
published as 45 C.F.R. Part 1308.
Generally, each grantee is required to develop, with the
advice and concurrence of its Policy Council, a written
plan to implement the performance standards for each
component area, and to review it at least annually and
revise and update it as necessary. 45 C.F.R. 1304.1-4.
Congress has provided that Head Start projects must be
operated consistent with the performance standards, and
that the "extent to which such standards have been met
shall be considered in deciding whether to renew"
funding. 42 U.S.C. 9846(b).
ACF is required to conduct a full review of each Head
Start agency at least once during each three-year period.
42 U.S.C. 9836a(c)(1)(A). The performance standard
regulations require a 90-day opportunity for corrective
action on deficiencies in meeting performance standards.
See 45 C.F.R. 1304.1-5(b); see also Campesinos Unidos,
Inc., DAB No. 1518 at 14 (1995).
Head Start regulations list nine grounds for which a Head
Start grantee agency may be terminated or have its
refunding denied. As applicable here, refunding may be
denied when a grantee has failed to comply with the
required fiscal or program reporting requirements; failed
to meet the performance standards for operation of its
Head Start program; failed to comply with grants
administration requirements; failed to comply with the
requirements of the Head Start Act; or failed to abide by
any other terms and conditions of its grant or applicable
laws or regulations. 45 C.F.R. 1303.14(b)(3), (4),
(6), (7) and (9), made applicable by 45 C.F.R.
1303.15(c).
The Head Start Act at 42 U.S.C. 9841(a)(3) and
corresponding regulations at 45 C.F.R. 1303.15 provide
that a grantee denied refunding shall have an
"opportunity for a full and fair hearing" on whether
refunding should be denied. Procedures for the conduct
of a hearing are set forth at 45 C.F.R. 1303.16. The
Board is authorized to act on behalf of the Secretary to
provide this opportunity for hearing. 57 Fed.
Reg. 59,260 (December 14, 1992). The Board's procedural
regulations at 45 C.F.R. Part 16 apply to these
proceedings insofar as they are not inconsistent with
Part 1303. 45 C.F.R. 1303.15(b)(1).
B. Burden of Proof and Materiality
As we have held earlier in these proceedings, the
provisions of 45 C.F.R. 1303.14 require ACF to make a
prima facie case that there exists sufficient evidence to
satisfy the regulatory standards for termination or
denial of refunding. See Rulings on Burden of Proof,
Materiality, and Jurisdiction Under 45 C.F.R. Part 1303
(May 19, 1995) (Rulings). See also Richmond Community
Action Programs, Inc., DAB No. 1571 at 6 (1996). Once
ACF has set forth legally adequate reasons to support a
denial of refunding or termination, and has provided
sufficient specificity for the grantee to respond to the
substance of individual findings, the regulations require
the appellant to respond.
This process has practical underpinnings. A grantee
always bears the burden to demonstrate that it has
operated its federally funded program in compliance with
the terms and conditions of its grant and the applicable
regulations. See, e.g., Meriden Community Action Agency,
Inc., DAB No. 1501 at 41 (1994); Rural Day Care
Association of Northeastern North Carolina, DAB No. 1489
at 8; 16 (1994), aff'd No. 2:94-CV-40-BO (E.D.N.C.,
Dec. 19, 1995); see also 45 C.F.R. 74.53(b) and (g).
Moreover, a grantee is clearly in a better position to
establish that it did comply with applicable requirements
than ACF is to establish that it did not. Therefore,
once presented with a prima facie case, a grantee must
present evidence sufficient to challenge ACF's case or
risk summary disposition.
Regarding the question of how the Board should analyze
the record developed under Part 1303 in conjunction with
Part 16, the appropriate standard to be applied to
competing evidence is preponderance of the evidence.
That standard requires "evidence which is of greater
weight or more convincing than the evidence which is
offered in opposition to it; that is, evidence which as a
whole shows that the fact sought to be proved is more
probable than not." Black's Law Dictionary 1182 (6th ed.
1990). This is the commonly accepted standard for
administrative proceedings. See Rulings at 3.
Further, the concept of "materiality" found in 45 C.F.R.
Part 74 is read into 45 C.F.R. Part 1303 because the
Department-wide grants administration regulations in
Part 74 apply to the extent that they are consistent. 3/
Given the general statutory preference for continuing
funding to existing grantees (42 U.S.C. 9836(c)(1))
and, where appropriate, permitting a grantee the
opportunity to correct deficiencies (42 U.S.C.
9836a(d)(1)(B)), it is consistent to read materiality
into 45 C.F.R. 1303.14(b), which lists the bases for
termination or denial of refunding actions. Certainly,
ACF should not seek to end a grantee's Head Start
participation on a mere technicality.
C. Factual Background
LCEOC is a community service corporation operating a
variety of Federal, State and locally funded social
service programs throughout a six-county area in
Northwest Indiana. LCEOC has been a Head Start grantee
since 1965. LCEOC's Head Start Program is administered
through nine delegate agencies serving approximately
1,200 children. 4/ The service area covers just over
1,330 square miles and consists of industrialized urban
and sparsely populated rural areas. See LCEOC Motion to
Dismiss, Attachment (Att.) A (LCEOC Head Start Grant
Application, November 1, 1994); ACF Ex. 10 (February 1,
1994 - January 31, 1995 Grant Award).
In April 1993, LCEOC's Head Start Program was subject to
a federal On-Site Program Review (OSPRI). The 1993 OSPRI
revealed a number of deficiencies in the following
program component areas: Education, Nutrition, Social
Services, Parent Involvement, Disabilities and
Administration. See ACF Ex. 15. The OSPRI also found
that LCEOC's fiscal management system was in such
disarray that the program component involving Accounting
Standards could not be meaningfully reviewed. Moreover,
the reviewers also received indications that various
supplemental funding awards (meant to increase salary and
fringe benefits for LCEOC personnel) which LCEOC had
received in the years immediately preceding the OSPRI had
not been paid as directed. Having been alerted to these
problems, LCEOC was given an opportunity to take
corrective action.
On February 16, 1994, ACF notified LCEOC that LCEOC's
audit reports for the periods ending January 31, 1990,
1991 and 1992, as well as its audited financial status
reports (SF-269s) were overdue. See ACF Ex. 28.
In May 1994, federal reviewers conducted a follow-up to
the 1993 OSPRI. Again, they found numerous instances of
noncompliance, both repeat and new, with various program
components. See ACF Ex. 16. The reviewers also examined
LCEOC's performance under the accounting standards and
found many instances of noncompliance. Further, the
reviewers determined that the supplemental grant funding
earmarked for salary increases had not been properly
disbursed.
On May 10, 1994, ACF placed LCEOC on "High-Risk" status
based on its determination that LCEOC was an organization
"whose management practices raise serious concerns about
its ability to assure proper programmatic use and
financial stewardship of grant funds." ACF Ex. 2. ACF
recounted that it had, on numerous occasions, expressed
concern to LCEOC regarding the management and functioning
of LCEOC's Head Start grant. ACF based its concern on
LCEOC's failure to correct programmatic and
administrative noncompliance; LCEOC's failure to provide
requested and required information; the frequent lateness
of LCEOC's applications and other submissions as well as
the recurrent inadequacy of those documents. ACF Ex. 2
at 3.
LCEOC sought reconsideration of its High-Risk status.
See ACF Ex. 3. On June 24, 1994, ACF denied LCEOC's
request that its High-Risk designation be withdrawn. ACF
did leave open the possibility that LCEOC could cure its
problems with the appropriate corrective action. See ACF
Ex. 4. ACF concluded that corrective action was not
forthcoming, and issued its Denial of Refunding on
January 13, 1995.
II. ANALYSIS
Our analysis of the grounds for denial of refunding is
set out below. Part A examines the various issues
underlying LCEOC's fiscal mismanagement. Part B contains
an analysis of the salary enhancement and cost of living
adjustment issues. Part C examines the OSPRI issues.
Part D contains an analysis of the delegate agreement
issues.
A. LCEOC's Fiscal Mismanagement
During the three-year period prior to ACF's denial of
refunding determination, LCEOC received total federal
awards of about $13.6 to $14.6 million, with Head Start
grants comprising $3.1, $4.2, and $3.8 million in 1992,
1993, and 1994 respectively. In assessing LCEOC's fiscal
management of these funds the central instruments
examined by ACF were -- a combined audit report for the
fiscal years ending December 31, 1989-1991 (CA-1) (LCEOC
Ex. 83) and OSPRIs for 1993 and 1994 (LCEOC Exs. 155
(1993) and 129 (1994)). During the course of this
appeal, LCEOC finally produced a long-overdue audit for
the fiscal years ending December 31, 1992-1994 (CA-2). 5/
In this proceeding, ACF maintained that LCEOC was so
disorganized for so many years that ACF was unable to
assess LCEOC's fiscal stewardship of the millions of
dollars awarded it each year for its Head Start program.
A key element was that LCEOC was consistently delinquent
in conducting and filing audits by periods ranging from
almost two to four years. Further, LCEOC was not filing
its semiannual SF-269s. LCEOC conceded its untimeliness
on both counts. See LCEOC Ex. 83 at 26 (Response to
Finding No. 11); LCEOC Ex. 159, Part 3 at 23 (Response to
Finding No. 4); LCEOC Post-Hearing Brief (PHBr.) at
Appendix (App.) 3 (Failure to file timely SF-269s).
Thus, LCEOC was unable to provide ACF with timely or
contemporaneous assurances that Head Start funding was
being properly spent. Moreover, since LCEOC remained
delinquent in providing annual audits even after CA-1 was
submitted, ACF had no assurance that the numerous
deficiencies identified by the auditors in CA-1 had been
addressed. In addition, ACF's on-site reviewer in April
1993 found LCEOC's financial records in such disarray
that she was unable to perform a review. The situation
was only marginally better when an ACF reviewer followed
up in May 1994. Below we discuss each of these
indicators of LCEOC's fiscal disarray.
1. Timeliness of Required Financial Reports
The Head Start Act requires grantees to keep records that
will "fully disclose the amount and disposition" of
federal funds and "facilitate an effective audit." 42
U.S.C. 9842(a). More specific requirements are set out
in 45 C.F.R. Part 74 and the ACF Grants Administration
Manual (ACF/GAM) 6/, both of which were incorporated
specifically in LCEOC's annual Notices of Grant Award.
See, e.g., ACF Ex. 9 (Award for 1993-94) at 5-6
(unnumbered).
Two key elements to ACF's ongoing oversight of Head Start
grantees' fiscal management are: the SF-269, which is an
unaudited statement required to be filed semiannually to
report the status of funds for all nonconstruction
grants; and the annual independent audit required by the
Single Audit Act of 1984, 31 U.S.C. 7501-7507, and 45
C.F.R. 1301.12. SF-269s report on several elements
essential to federal oversight of a grantee's
expenditures, including the grantee's total federal and
non-federal outlays, unliquidated obligations, and
unobligated balance of federal funds. The final report
for a grantee's Head Start grant year is due 90 days
after the end of each budget period. The HDS/GAM warns
grantees that failure to file an overdue report can
result in suspension or termination of a grant,
withholding of additional awards, or other more severe
action. HDS/GAM Chapter (Ch.) 6, C. This warning was
also incorporated into the terms and conditions of
LCEOC's grant award. See, e.g., ACF Ex. 9 (Award for
1993-94) at 7 (unnumbered).
The annual independent audit of Head Start grantees is
governed by Office of Management and Budget Circular
A-133 (OMB A-133). Independent auditors are required to
determine whether:
(1) The financial statements of the grantee present
fairly its financial position and the results of its
operations in accordance with generally accepted
accounting principles;
(2) The grantee has an internal control structure
to provide reasonable assurance that the grantee is
managing federal awards in compliance with
applicable laws and regulations, and controls that
ensure compliance with the laws and regulations that
could have a material impact on the financial
statements; and
(3) The grantee has complied with laws and
regulations that may have a direct and material
effect on its financial statement amounts and on
each major federal program.
OMB A-133, 12.b. OMB A-133 is codified at 45 C.F.R.
Part 74, Appendix I, which was incorporated as a term and
condition of LCEOC's grant awards for the relevant
period.
OMB A-133 requires grantees to provide for audits to be
submitted no later than thirteen months after the end of
the audited fiscal year. OMB A-133, 14.h. In early
1994, LCEOC informed ACF that the overdue audit reports
for fiscal years (FYs) ending 12/31/89, 12/31/90,
12/31/91 and 12/31/92 would be filed by April 30, 1994.
They were not. ACF cited the absence of these reports as
a critical concern in its May 10, 1994 high risk
designation letter to LCEOC, warning that LCEOC's
management practices raised serious concerns about its
ability to assure proper programmatic use and financial
stewardship of grant funds. ACF Ex. 2 at 1. LCEOC
responded with an assurance that the audits for FYs 89-91
would be ready for submission by July 15, 1994. ACF
Ex. 3 at 3.
On December 16, 1994, LCEOC finally submitted CA-1, the
combined audit for fiscal years 1989-1991. See LCEOC
Ex. 83. The individual audits for those three years
were 47, 35 and 23 months late, respectively. 7/
Moreover, CA-1 found 26 reportable conditions, the
majority of which were related to Head Start. Among
those findings was a finding that LCEOC had not submitted
timely SF-269s during those three years, a finding that
was repeated in the audit covering the following three
fiscal years and in the April 1994 follow-up on-site
review.
LCEOC offered numerous arguments regarding the
untimeliness of CA-1. LCEOC asserted that it was only
required to submit audits every two years. LCEOC Notice
of Appeal (Appeal) at 7. LCEOC's arguments supporting
this assertion are unpersuasive, as neither the
regulation or OMB A-133 can reasonably be read to permit
audits every two years. The Head Start regulation
entitled "Annual audit of Head Start programs" provides:
"An audit of the Head Start program covering the prior
budget period of each Head Start agency and its delegate
agencies, if any, shall be made by an independent
auditor . . . ." 45 C.F.R. 1301.12(a). Additionally,
OMB A-133 provides: "Audits shall usually be performed
annually but not less frequently than every two years."
OMB A-133, 7. LCEOC's reliance on this sentence as
permitting an audit every two years is misplaced. In
context, the two-year period is clearly an outside
parameter, a worst case scenario, rather than a routine
option. Finally, we note that the record contains the
Notices of Grant Award for LCEOC's program years 1990
through 1994. See ACF Exs. 6-10. Each award document
includes an "Attachment 3," which specifically calls for
an audit of the 12-month period for which funding is
awarded. See, e.g., ACF Ex. 6 (1990 Award) at 6
(unnumbered).
In its response to CA-1, LCEOC also blamed CA-1's
untimeliness on the absence of a "designated state
cognitive agency." Further, LCEOC contended that
Indiana's prescribed auditor selection process also
delayed completion of its audits. See LCEOC Ex. 83
at 26. However, LCEOC did not develop these arguments to
show that they somehow excused its failure to comply with
the regulatory audit requirements.
LCEOC did extensively develop its contention that CA-1's
and the SF-269s' untimeliness were attributable to
various uncontrollable computer problems. Computer
changeover, incompatible/inadequate systems, and "head
crashes" were recurring themes throughout LCEOC's
discussion of this issue. During this period, however,
LCEOC claimed that it maintained a manual set of records.
Hearing Transcript (Tr.) at 3880-81. LCEOC never
explained why, if it indeed had an alternative method of
keeping its accounts current, it failed to file SF-269s
or annual audits for several years. Moreover, Charlotte
Pitts, the ACF financial specialist for this grant who
was responsible for the financial part of the 1993 OSPRI,
testified that she was concerned when she visited LCEOC
that there were no manual books kept concurrently (Tr.
at 1641), and was told by LCEOC staff that LCEOC had not
kept concurrent books. Id. at 1642. Consequently, she
found herself totally unable to review LCEOC's fiscal
performance in April 1993 and informed LCEOC management
of this conclusion. Id. at 1648. Accepting LCEOC's
assertions that its problems were chiefly due to its
computerization project, she gave LCEOC the benefit of
the doubt, resolving to return six months later. Id.
at 1647. Circumstances intervened so that LCEOC actually
had a full year to resolve its problems before the next
ACF visit. However, as we discuss below, LCEOC's
accounting system was still not functional by the May
1994 follow-up review or, indeed, by December 31, 1994,
the end of the period covered by CA-2. Thus, the
evidence here confirms that, computer problems aside,
LCEOC was fiscally mismanaged.
The consistent delinquency of LCEOC's audits was a
disservice to the program participants, ACF and itself.
Had the audits been submitted timely, both ACF and LCEOC
would have had a more current objective assessment of
LCEOC's fiscal condition. Neither ACF nor LCEOC's
management had any assurance from an independent examiner
during that time that the numerous problems identified in
earlier audits were being properly addressed and
corrected. As a practical example, had LCEOC submitted a
timely audit for FY 12/31/92 (i.e., by March 1994), ACF
could have determined, at the time of the May 1994 OSPRI,
what steps, if any, LCEOC had taken to address the
numerous reportable conditions cited in CA-1. We note
that CA-2 found that many of the reportable conditions
stated in CA-1 were addressed by December 31, 1994.
However, since CA-2 was once again an audit covering
multiple years, there is no indication as to when many of
the corrections were finally made, i.e., for how many
more years after CA-1 was issued LCEOC's internal
controls remained deficient.
At the time ACF finally decided to deny refunding
(January 1995), ACF had been placed in a position of
consistently having to review financial management
documentation almost two years, at a minimum, after it
was due. Although ACF did not have the benefit of CA-2
at the time it made its decision, that document confirms
that ACF's concerns about LCEOC's fiscal management were
indeed well-founded. According to CA-2, LCEOC ended 1994
with an overall deficit of approximately $2,175,000.
Specifically, the independent auditor reported in the
combined financial statements that LCEOC experienced
significant operating losses in 1993 and 1994, when
funding available for needed programs and services was
insufficient to support the level of expenditures LCEOC
incurred. LCEOC Ex. 159, Part 2, at 10-11. See also Tr.
at 1701-02 (LCEOC would be unable to perform budget
comparisons without a current general ledger); Tr.
at 1684 (general ledger necessary to maintain control
over current operations).
Based on LCEOC's persistent, unexcused failure over many
years to provide timely financial reports and independent
audits we conclude that: LCEOC failed to comply with
fiscal reporting requirements applicable to grantees in
the Head Start program; failed to comply with the Head
Start grants administration requirements set forth in 45
C.F.R. Part 1301; and materially breached the express
terms and conditions of its Head Start awards of
financial assistance. Thus, we conclude that denial of
refunding is warranted under 45 C.F.R. 1303.14(b)(3),
(6), and (9).
2. Independent Audit Findings
ACF also based its January 1995 denial of refunding on
LCEOC's failure to establish that it had addressed 26
findings of deficiencies in LCEOC's fiscal management
identified in CA-1, 17 of which were allegedly related to
Head Start, according to ACF. 8/ LCEOC challenged these
findings both in number, asserting only 16 related to
Head Start, and materiality, contending only four were
material.
Both by direct testimony and in its Post-Hearing Brief,
ACF contended that LCEOC still had not addressed the
findings of deficiencies. As noted above, the
untimeliness of this first audit and LCEOC's continued
failure to provide timely audits for the next two fiscal
years frustrated ACF's attempts to determine if LCEOC was
using federal funds for their intended purpose. Had the
subsequent audits been timely, there might have been some
solid evidence in the record to determine the corrective
actions taken to remedy problems arising in 1991, at the
earliest. Rather, due to a combination of the lack of
documentary evidence as well as the passage of time,
LCEOC's case before the Board consisted of generally
self-serving testimony. Moreover, even the majority of
the corrective actions cited in the testimony of LCEOC's
Chief Financial Officer were alleged to have occurred in
1994 (or early 1995) and were based on LCEOC's assertion
that its problem-ridden computer program was finally
producing a timely, accurate general ledger. Tr.
at 3963-65. However, CA-2 found that LCEOC still did not
have a currently posted general ledger as late as
December 1994. LCEOC Ex. 159, Part 1, Att. at 17.
The audit which we have identified as CA-2 reexamined
the 26 findings cited in CA-1 and was finally submitted
to ACF in January 1996. CA-2 revealed that although some
earlier problems had been corrected, numerous problems
still existed. Obviously, ACF did not have the benefit
of this independent analysis of LCEOC's fiscal management
at the time it made its denial of refunding decision.
However, this absence of information regarding LCEOC's
corrective action has no bearing on the validity of ACF's
determination to deny refunding. The Board has ruled
irrelevant evidence of efforts to improve program
operations after the follow up to the initial on-site
review, here the 1994 OSPRI. See Springfield Action
Commission, Inc., DAB No. 1547 at 13 (1995); Meriden
at 6-7. This is because ACF is entitled to take such an
action whenever it determines that the regulatory
criteria still have not been met. Although the Head
Start Act permits the Secretary to give grantees an
opportunity to correct deficiencies in meeting program
standards, 42 U.S.C. 9836a(d)(1)(B), it also directs
the Secretary to terminate refunding to programs that are
unable to correct. 42 U.S.C. 9836a(d)(1)(C). Thus,
the Board has ruled that it will not in effect give a
grantee an open-ended period of correction by accepting
evidence attempting to show that correction has occurred
after ACF made its findings. To do otherwise would
hamstring ACF in its program oversight and encourage
grantees to seek protracted delays in appeal proceedings.
See Springfield at 13.
In this case, it is clear that ACF was eminently
reasonable in basing its denial of refunding decision in
part on LCEOC's failure to provide convincing evidence
that it had corrected the serious financial management
deficiencies identified by CA-1 by January 1995. In
fact, in addition to LCEOC's missing audits, ACF also had
the follow-up OSPRI findings that as of May 1994, LCEOC
still did not have a fully functional accounting system.
However, rather than engaging in an exhaustive discourse
on all 17 of CA-1's Head Start-related findings, we have
decided to focus on the five that still remain, in the
opinion of CA-2's auditors, and only briefly outline the
other findings.
a. Uncorrected Reportable Conditions
11 -- Untimely Submission of Required Reports
As noted earlier, CA-1 found that LCEOC did not submit
its audits in a timely fashion. The continuation of this
trend was noted in CA-2, which reported that audits for
fiscal years ending 12/31/92 and 12/31/93 were 22 and 10
months late, respectively. Only the audit for fiscal
year ending 12/31/94 was timely. LCEOC also conceded, in
connection with the OSPRI findings relative to
accounting, that it did not submit timely SF-269s (LCEOC
PHBr. at App. 3.); in fact, the ACF financial reviewer
found specifically that the SF-269s for 1993 were
missing. ACF Ex. 70 at 3. 9/ In view of our previous
discussion of the gravity of that situation, we need not
address it further here.
14 -- General Ledger Account Reconciliation
In CA-1, the auditors found that LCEOC's general ledger
accounts were not reconciled on a timely basis. They
recommended that LCEOC reconcile all general ledger
accounts monthly and that all reconciliations be prepared
on a timely basis. The CA-2 auditors made a similar
finding for the period through December 31, 1994.
Accurate and current general ledgers are essential to a
determination that a grantee is accurately accounting for
federal funds. The May 1994 OSPRI found that the most
current available general ledger was from May 1992. In
September 1995, LCEOC's Vice-President of Finance
testified to the existence of general ledger accounts up
to March 1994 (printed on June 27, 1994). Tr. at 3754.
A long-time LCEOC consultant testified that LCEOC's
system was set up so "that you have to close a month to
open the next month and you can't close a month . . . and
print your financials until everything is there . . . ."
Tr. at 3444-45. The Vice-President of Finance indicated
that LCEOC's reconciliation process includes reviewing
the reasonableness of a transaction at the end of the
accounting period and ensuring that it is properly
recorded. Id. at 3980; see also LCEOC PHBr. at 55. He
testified that LCEOC had been reconciling general ledger
accounts (e.g., cash accounts, accounts receivable, fixed
assets, intercompany accounts, et al.) since "fall of
1994." Tr. at 3980-81. LCEOC's consultant also stated
that LCEOC was up to date printing reports in September
1994. Tr. at 3450.
LCEOC's testimony is unsupported by evidence in the
record and does not ameliorate the overall findings
regarding the general ledgers. Moreover, this testimony
is contradicted by CA-2, which was included in the record
for this case at LCEOC's request. See LCEOC Ex. 159,
Part 1, Att. at 17. The testimony as well as LCEOC's
arguments on this point are generally reflective of the
fiscal disarray described by ACF. There is a great deal
of confusion regarding when ledgers were current or how
close to current they might have been at any given time.
(See discussion of financial OSPRI findings below.)
However, at the time of the May 1994 OSPRI and the
subsequent period covered by CA-2 (ending 12-31-94),
LCEOC did not have current reconciled general ledgers.
17 -- Cash Reconciling Items
CA-1 found that LCEOC was not reconciling cash accounts
on a timely basis. The auditors recommended that all
cash accounts be reconciled and reviewed by a supervisor
on a timely basis and that management implement
procedures to ensure that all reconciling items are
disposed of in the proper accounting period. CA-2 found
that this problem still existed.
LCEOC relied on the previously cited testimony of its
Vice-President of Finance regarding the reconciliation of
general ledger accounts as proof that this situation had
been corrected. As with the general ledger account, this
logic fails. First, the only evidence of correction is
LCEOC's self-serving testimony. The most recent
independent audit, CA-2, presents an opposite conclusion.
Moreover, even if LCEOC had been reconciling these items
as of September 1994, that would not be a mitigating
factor showing sound fiscal management. This problem had
gone unresolved for the previous five years, up to and
including the May 1994 OSPRI upon which, in part, the
denial of refunding was based.
18 -- Unrecorded Cash Accounts
CA-1 found that LCEOC maintained in excess of one hundred
general ledger cash accounts, many of which had little or
no activity. LCEOC Ex. 83 at 30. The auditors found
that several of these accounts were "not maintained on
the general ledger." The auditors recommended closing
inactive bank accounts, consolidating (where possible)
others, and implementing procedures to ensure that the
accounts were properly recorded. While noting that LCEOC
had implemented procedures requiring that these accounts
be reported, the CA-2 auditors repeated the CA-1 findings
relative to excessive accounts.
In its direct response to this finding, LCEOC indicated
that each of its entities (presumably delegate agencies)
had their own procedures which had to be addressed before
closing or consolidating accounts. LCEOC Ex. 83 at 31.
LCEOC contended that each delegate required a general
fund account and "functional accounts, such as receiving
accounts at one or two locations which would either be a
checking or cash account." Tr. at 4000-02.
Additionally, there were about 30 to 40 nutrition
depository accounts that LCEOC contended were required by
applicable regulations. Id. Thus, LCEOC argued, a
minimum of 80 cash bank accounts are needed at any one
time. LCEOC PHBr. at 56.
LCEOC's responses are evasive. Admittedly, LCEOC does
cover a rather divergent geographical area, such that
centralized "one-stop" banking might not be a viable
alternative. However, LCEOC has done nothing more than
flatly state that it has 30 to 40 nutrition depository
accounts. LCEOC never stated explicitly what program
regulations required this proliferation of accounts.
Moreover, LCEOC's earlier response (issued shortly after
CA-1) that consolidation or closing of accounts would be
dictated by each entities' procedural process begs the
question. Both audits consistently cited this situation
as a poor business practice. LCEOC cannot shift the
blame for this situation to its delegates.
20 -- Fixed Asset Policies and Procedures
CA-1 determined that LCEOC did not have adequate fixed
asset policies and procedures in place. The auditors
recommended that LCEOC review its fixed asset policies,
procedures and records in detail, including, at a
minimum, updating a physical inventory of assets (last
taken in 1990) and maintaining detailed property records.
The auditors also recommended that LCEOC adopt and
consistently apply capitalization, depreciation and
disposal policies. LCEOC Ex. 83 at 31-32. CA-2 noted an
improvement in fixed asset policies and procedures for
all major transportation equipment and equipment acquired
with Federal or State funds. However, CA-2 also found
that LCEOC did not maintain a subsidiary ledger which
detailed fixed assets balances (i.e., cost and
accumulated depreciation) and activity (e.g., additions,
disposals, transfers, and depreciation) by individual
item for all other fixed assets.
The CA-2 auditors noted, as did ACF's financial
specialist, that such records are extremely important for
providing effective control over such assets, and are
also helpful for insurance, tax, and other accounting
purposes. 10/ See LCEOC Ex. 159, Att. 1 at 9; Tr.
at 1761-62. It is demonstrative of LCEOC's continued
fiscal malfeasance that, two years after CA-1 identified
the problem, there was still no detailed fixed asset
ledger.
b. Other CA-1 Findings
The CA-2 auditors determined that the other CA-1 findings
had been corrected by the end of the audited period,
December 31, 1994. For the most part, the auditors did
not state when, during the three-year period covered by
CA-2, the corrections were made. Moreover, ACF's
financial specialist testified that a number of these
corrections would be dependent upon the timeliness and
accuracy of the general ledger (which, as previously
discussed, CA-2 found was not reconciled on a timely
basis). In any event, as there are ample other grounds
supporting this denial of refunding, we have decided to
simply summarize CA-1's findings so that the reader may
see the additional, apparently uncorrected, internal
control problems that ACF considered in deciding to deny
refunding.
4 -- Head Start - Incorrect Grant Period
CA-1 revealed that LCEOC charged three 1988 Head Start
expenditures (totaling $2,650) to the incorrect grant
period (1989). LCEOC Ex. 83 at 22.
5 -- Head Start - Unallowable Costs
CA-1 revealed that LCEOC charged unallowable costs ($291)
to the Head Start grant. LCEOC Ex. 83 at 22-23.
10 -- Cost Allocation Plan
CA-1 revealed that LCEOC did not properly allocate costs
to appropriate programs because LCEOC did not have a cost
allocation plan. LCEOC Ex. 83 at 25.
12 -- Grant Close-Out Forms
CA-1 revealed that grant close-out forms were not
accurate. LCEOC Ex. 83 at 26.
16 -- Accounting Policies and Procedures Manual
and Staff Training
CA-1 revealed that LCEOC did not have a formalized
policies and procedures manual nor did it have a
formalized training program for the accounting staff.
LCEOC Ex. 83 at 29.
19 -- Control of Cash Receipts
CA-1 reported that LCEOC did not restrictively endorse
cash receipts immediately upon receipt and that the
review of deposit slips or validated deposit tickets was
undocumented. LCEOC Ex. 83 at 31.
21 -- Intercompany Receivables and Payables
The CA-1 auditors found that LCEOC did not maintain a
detailed listing of significant intercompany receivable
and payable accounts which reconciled to the general
ledger. LCEOC Ex. 83 at 33.
22 -- Accounts Payable Cut-Off Procedures
CA-1 reported that LCEOC did not have adequate procedures
in place to ensure that all liabilities are recorded at
the end of the year. LCEOC Ex. 83 at 33.
23 -- Cash Disbursement Controls
CA-1 reported that paid invoices were not consistently
marked "Paid." LCEOC Ex. 83 at 33-34.
24 -- Payroll Policies and Procedures
CA-1 reported that payroll policies were not consistently
followed. LCEOC Ex. 83 at 34.
25 -- Review of Consulting Contracts
CA-1 reported that two LCEOC consultants were married.
The auditors recommended that LCEOC's Board of Directors
review this situation and get approval from ACF. LCEOC
Ex. 83 at 34-35.
26 -- Improving the Audit Process
CA-1 reported that LCEOC did not provide items requested
during the audit on a timely basis. Consequently, LCEOC
incurred increased audit fees and the audits took
almost 18 months to complete. LCEOC Ex. 83 at 35.
3. OSPRI Findings Related to Financial Management
Charlotte Pitts, ACF's financial specialist assigned to
LCEOC's grant, was responsible for reviewing LCEOC's
accounting practices during the 1993 OSPRI. Ms. Pitts
testified that LCEOC's financial records were too
disorganized to review meaningfully. Tr. at 1645-47. In
order to give LCEOC time to complete its computerization
project, she planned to return to LCEOC to complete her
review in six months. However, no one from ACF revisited
this issue until the follow-up OSPRI in May 1994. Tr.
at 1651-53; ACF PHBr at 204-5. 11/
Maria Michalski, an experienced Certified Public
Accountant, was the peer reviewer responsible for
reviewing this component in the 1994 OSPRI. She
testified that while she was aware of the 1993 OSPRI, she
did not review it prior to conducting her review. Tr.
at 3838. Ms. Michalski found LCEOC in compliance with
several of the OSPRI items in dispute here. Ms. Pitts
was responsible for reviewing Ms. Michalski's findings
and making the final determinations for ACF as to whether
each item was in compliance. Ms. Pitts examined Ms.
Michalski's findings in conjunction with her own
understanding of LCEOC's condition in 1993 and
consequently reversed some of Ms. Michalski's findings of
compliance and noncompliance. ACF concluded in the 1994
OSPRI that LCEOC was out of compliance with eight
accounting requirements.
a. Undisputed OSPRI Findings
LCEOC conceded noncompliance with two OSPRI findings and
contested the remainder. The two items LCEOC conceded
are discussed separately below.
OSPRI 225 Financial data and records were used in
preparing the SF-269's for the budget period.
This was a repeat finding from the 1993, as well as a
1988, OSPRI. Tr. at 1681. We have already outlined
above the regulatory and grant award requirements
underlying this review item. Both Ms. Pitts and Ms.
Michalski found LCEOC out of compliance. Ms. Michalski
noted that "forms 269 are not available for two current
two [sic] required periods 7-31-93 & 1-31-94 & general
ledger is not available." ACF Ex. 70, OSPRI at 114. ACF
maintained that because LCEOC's financial records were
neither accurate nor current, it would be impossible for
LCEOC to show that its SF-269s corresponded with its
accounting records. ACF PHBr. at 211. LCEOC conceded
this finding of noncompliance. See LCEOC PHBr. at
App. 3. We have already stated above that this
noncompliance is a material failure to comply with
program requirements, and will not belabor the point
here.
OSPRI 245 The grantee has a system in place to return
interest earnings to the Federal Government.
Grantees are required by 45 C.F.R. 74.47 to remit to
the federal government any interest income earned on
advances of Department of Health and Human Services
(DHHS) funds. See also HDS/GAM Ch. 4, D.1; and 45
C.F.R. 74.24. Both the 1993 and 1994 OSPRIs found
LCEOC out of compliance with this Item. Ms. Michalski
wrote that she was "not able to verify return of interest
to fed govt," (LCEOC Ex. 70, OSPRI at 119) and wrote the
following on the cover sheet for the overall
Administration/Financial/Property Management component
summary page (Component Summary) --
Although the funds are sometimes drawn after
expenditures are made, DHHS funds remain in the
interest bearing money market account for a period
of time. A standard procedure should be developed
to calculate the amount of interest to be returned
to DHHS.
Id. at 1 (unnumbered).
Ms. Michalski's statement makes it clear that this
noncompliance had an actual monetary impact. LCEOC was
evidently keeping money that it should have returned to
the federal government, even though it had received
notice of this deficiency as part of the 1993 OSPRI
findings. This deficiency provides convincing support
for ACF's determination that LCEOC's lax financial
management put federal funds at risk. LCEOC conceded
this finding of noncompliance. LCEOC PHBr. at App. 3.
b. Disputed OSPRI Findings
We now turn to the 1994 OSPRI findings of noncompliance
which LCEOC contested. Many of LCEOC's arguments are
based on its contention that Ms. Pitts erroneously
reversed Ms. Michalski's findings. Many of Ms. Pitts'
reversals were based on her conclusion that LCEOC still
did not have a general ledger at the time of Ms.
Michalski's on-site visit. LCEOC focused on what it
characterized as Ms. Pitts' misinterpretation of Ms.
Michalski's notes, and attempted to elicit testimony from
Ms. Michalski to support its contention that LCEOC's
computerized accounting system was producing a general
ledger at the time Ms. Michalski was on-site. Since the
parties focused so much of their arguments on this issue,
and since it was pivotal for many of Ms. Pitts' findings
of noncompliance, we next examine the evidence concerning
it.
In her testimony, Ms. Michalski stated that she did not
see a current, printed general ledger during her on-site
review. Nevertheless, she concluded that LCEOC had a
currently posted general ledger because: (1) it was
meeting its payroll; (2) it was paying its bills; and (3)
a coreviewer was able to retrieve from the LCEOC computer
system any of the transactions Ms. Michalski wished to
examine. Tr. at 3791-92. She testified that when she
noted (ACF Ex. 70 at 70-1) that "General ledgers and
operating statements should be printed monthly," she
believed that the general ledger existed but could not be
printed due to computer problems. Tr. at 3791.
At no time during these proceedings did LCEOC produce
general ledgers that Ms. Michalski could have seen at the
time of her review. The most recent one available to her
was for August 1993 and was printed October 31, 1993. It
is clear that Ms. Michalski's assumption as to the
existence of general ledgers was erroneous because --
o Paying employees does not necessarily mean
that general ledgers were currently posted.
While it is true that the general ledger could
not be currently posted if a subsidiary ledger
such as payroll was not current, there was no
evidence that the payroll ledger was even
current. In fact, as we note above, the CA-2
auditors found that during this period LCEOC
was incurring expenditure obligations in excess
of available funds. LCEOC Ex. 159, Part 1,
Att. at 1.
o ACF provided testimony which indicated that,
during this period, LCEOC was not paying its
bills timely. LCEOC was seriously in arrears
in reimbursing at least two of its delegate
agencies, Lake Ridge and Hammond. Tr. at 976-
83; 1039-41. Since Ms. Michalski testified
that she did not review accounts payable to
delegate agencies (Tr. at 3823), she was
unaware of this situation.
o The fact that some transactions were in the
computer system does not mean that the entire
general ledger was current. While Ms.
Michalski asserted that her coreviewer was able
to locate records for all of the transactions
Ms. Michalski reviewed, she never looked at the
computer screen herself. Tr. at 3818. Thus,
she never actually reviewed the general ledger
system in operation. Since, for example, she
conceded that she did not examine accounts
payable to delegate agencies, she could not
know if those accounts payable were properly
posted to the general ledger. Additionally,
she testified that bank reconciliations were
not reconciled to the general ledger, but to
internal records. Tr. at 3833.
Ms. Michalski's hand-written comment (that general ledger
should be printed monthly) was the source of considerable
controversy in this proceeding. Ms. Pitts read Ms.
Michalski's comment as stating that general ledgers
should be "posted." This buttressed her conclusion that
LCEOC did not have a currently posted general ledger.
Our examination of the record, confirmed by Ms.
Michalski's testimony, indicates that the word was
"printed," not "posted." Regardless, the other evidence
examined by Ms. Pitts supported her conclusion that LCEOC
still did not actually have current general ledgers.
Among other Michalski comments that Ms. Pitts had for
review were --
o We recommend that the general ledger & budget
comparison statements should get priority treatment
in bringing the new computer system on line. ACF
Ex. 70 at 1 (unnumbered) (Component Summary).
o Forms SF-269 for 7-31-93 & 1-31-94 were not
available for review & the general ledger was
not available for comparison. Id. at 3 (Data
Sheet).
We find that Ms. Pitts' conclusion that LCEOC did not
have a currently posted general ledger in May 1994 was
correct. LCEOC's witnesses testified that LCEOC's
general ledgers were not current until Fall or September
1994, four months after the OSPRI. See Tr. at 3981;
3450. The second independent auditors' report (CA-2)
found that the general ledger was still inadequate as of
December 31, 1994. While we found Ms. Michalski overall
to be a competent, professional reviewer, she was unaware
of Ms. Pitts' 1993 findings and therefore inappropriately
excused LCEOC's failures as being due to a new computer
system. Ms. Pitts knew the history of LCEOC's problems,
however, and appropriately concluded that leniency was no
longer due.
Having concluded that Ms. Pitts correctly determined
that LCEOC still did not have an accurate, current
general ledger in May 1994, we next consider whether the
evidence supports her conclusions concerning the
financial requirements measured by the six OSPRI items
that she found out of compliance.
We quote each OSPRI Item before discussing it.
OSPRI 218 There is a financial management system that
ensures budget management, maintains control over current
operations and provides timely, accurate, current and
complete disclosure of financial matters.
OSPRI 220 There is a method so that budgeted costs are
compared to actual costs.
These two OSPRI items test a grantee's compliance with
the financial management systems and audits requirements
of 45 C.F.R. Part 74, Subpart H, which is incorporated by
reference in the Notice of Grant Award. Item 218
contains a series of indicators which are assessed by the
reviewer to help determine a grantee's compliance. Ms.
Michalski examined an array of documents in her
evaluation of these indicators. Tr. 3784-88. Based on
that review, she determined that LCEOC was in compliance
with Item 218.
Ms. Michalski testified that she examined LCEOC's budget
expenditure comparison statements before determining that
LCEOC was in compliance with Item 220. Tr. at 3801. Ms.
Pitts reversed both findings because an essential
component for compliance with these Items would be a
"current and accurate" general ledger. Tr. at 1644-47;
1681-85.
Regarding Item 218, the most "current" general ledger
available to Ms. Michalski was for August 1993. Without
a current, accurate general ledger, LCEOC did not have a
financial management system that ensures budget
management, maintains control over current operations,
and provides timely, accurate, current, and complete
disclosure of financial matters. For example, as ACF
noted, while Ms. Michalski might have looked at operating
statements, those statements were inherently
untrustworthy given the absence of a general ledger.
LCEOC's continued reliance on a faulty computer system
made it impossible for LCEOC to maintain a timely and
accurate general ledger which, in turn, tainted the
accuracy of the fiscal reconciliations necessary to
LCEOC's position that it had adequate fiscal management.
In terms of her review of Item 220, Ms. Michalski
indicated that a reviewer need only determine if there is
"a method" for comparison of budgeted costs and actual
costs, not whether the cost comparisons were accurate.
Tr. at 3802. Ms. Michalski's interpretation of the
requirements of Item 220 is incorrect.
The underlying regulation for this item provides that
"the actual and budgeted amounts for each grant or
subgrant shall be compared." 45 C.F.R. 74.61(d) (1993)
(emphasis added). This regulation compels a reviewer to
perform a specific cost comparison. Moreover, general
ledgers are essential to the type of fiscal
reconciliations in issue here. LCEOC did not have up-to-
date general ledgers in time for either the 1993 or 1994
OSPRI. Thus, even had Ms. Michalski interpreted the
regulation as requiring her to perform the cost
comparisons, she would not have had an up-to-date general
ledger to draw upon. Ms. Michalski clearly did not
contemplate, nor conduct, such a review. Thus, her
findings did not accurately reflect the regulatory
requirement.
We therefore conclude that Ms. Pitts' conclusions as to
both these items are accurate. The importance of the
regulatory requirements measured by these items is
underscored by CA-2's finding that LCEOC seriously
overspent its budget in 1993 and 1994, a problem that
these regulatory requirements were designed to prevent.
LCEOC's failure to have a proper fiscal management system
for several years constituted a material breach of its
grant conditions and regulatory requirements.
OSPRI 223 Interfund loans have not been made.
Grant funds may be used only for the allowable costs for
which the grant was awarded. 45 C.F.R. 74.170; see
also OMB Circular A-122, Att. A, A.3.a. and A.4.a.(1).
This item directs the reviewer to examine whether Head
Start funds have been misapplied to other programs
operated by the grantee. Ms. Michalski based her finding
of compliance with this item on her review of LCEOC's
accounting system design and cost allocation plan (CAP).
Tr. at 3803; 3809. Ms. Michalski testified that it was
her belief that a proper CAP would preclude interfund
loans. Id. at 3811.
Ms. Pitts based her reversal of this finding upon the
absence of a general ledger and LCEOC's history. As with
previous items, she surmised that a reviewer could not
reasonably examine the data necessary to reach the
conclusion that no interfund loans had been made. Given
LCEOC's ongoing problem organizing its fiscal affairs and
the CA-1 finding on this same subject, she concluded that
Ms. Michalski's review did not support her conclusion.
Tr. at 1703-04.
The finding of noncompliance with the regulatory
requirements measured by Item 223 was correct. While Ms.
Pitts may have been mistaken in her belief that CA-1
cited a problem with interfund loans (the record shows
that the problem was with intercompany receivables and
payables), the fact remains that LCEOC's essential
financial records were in disarray. Ms. Michalski's
reliance on the existence of a cost allocation plan as
the determinative factor on this question shows that she
did not understand the nature of the potential problem.
Ordinarily, interfund transfers involve a grantee
willfully "borrowing" funds from one grant to pay
expenses of another grant. See, e.g., Arizona Affiliated
Tribes, Inc., DAB No. 1500 at 22 (1994). In order to
obtain assurance that interfund loans had not taken
place, one would have to examine the existence of a
rather large funding pool (Head Start) and other programs
with deficits. Given the finding in CA-2 that LCEOC
accumulated a large operating deficit in 1993 and 1994,
due in large part to its problems in maintaining a
current general ledger, the likelihood of such fund
shifting appears high. Consequently, we conclude that
the record supports Ms. Pitts' conclusion that LCEOC was
incapable of showing that interfund loans had not been
made, i.e., that grant funds had been expended only in
compliance with the terms and conditions of LCEOC's Head
Start grants.
OSPRI 226 Previous audit deficiencies have been
addressed and corrective actions have been implemented.
Ms. Michalski determined that LCEOC had complied with
this Item. She indicated that she looked at problems
cited in the previous audit and LCEOC's activity for 1992
and 1993. Tr. at 3812; 3815.
Ms. Pitts reversed this finding. She noted that the most
recent audit available to Ms. Michalski was for 1988.
Tr. at 1706. This was in fact the audit Ms. Michalski
reviewed. Id. at 3812. ACF asserted that reliance on
such a dated instrument is not trustworthy especially in
view of the regulatory requirements for annual audits.
Ms. Michalski's testimony in this area was vague. She
gave no clear indication as to what "previous year's
activity" she examined in reaching her conclusion.
Moreover, given the delinquency of the various audits at
the time of the 1994 OSPRI, it is implausible to have
reasonably concluded that previous audit deficiencies had
been corrected. Consequently, LCEOC was out of
compliance with this grants administration requirement.
OSPRI 227 Administrative costs are necessary and benefit
Head Start.
OSPRI 228 The grantee is complying with the 15%
Administrative/Development cost requirement.
These Items are designed to determine compliance with the
Head Start statute and regulations limiting
administrative costs. Specifically, 45 C.F.R.
1301.32(a) provides --
(1) Allowable costs for developing and
administering a Head Start program may not exceed 15
percent of the total approved costs of the program,
unless the responsible HHS official grants a
waiver . . .
(2) The limit of 15 percent for development and
administrative costs is a maximum. In cases where
the costs for development and administration are at
or below 15 percent, but are judged by the
responsible HHS official to be excessive, the
grantee must eliminate excessive development and
administrative costs.
This limitation is based on an express statutory
provision. 42 U.S.C. 9839(b).
Ms. Michalski marked LCEOC in compliance with these
Items. She based her determination on a comparison of
LCEOC's grant application and its budget expenditure
printouts. In doing so, she concluded that LCEOC was
complying with the 15% administrative/development cost
requirement. Tr. at 3819-22.
Ms. Pitts reversed these findings because LCEOC did not
have a current general ledger or the data necessary to
prepare SF-269s and was not preparing monthly statements
for budget comparison purposes. Tr. at 1706. Again the
absence of an accurate, current general ledger is
critical. Even though LCEOC may have written a budget
that kept administrative expenses within the stated
limit, it did not know how closely its actual
expenditures matched its budget. Moreover, as Ms. Pitts
noted, administrative costs represent overhead which
would accumulate in various general ledger accounts and
must be allocated to various programs. Tr. at 1707.
While Ms. Michalski also testified that she reviewed a
grant application that apparently covered administrative
costs (Tr. at 3819), she would have needed to review a
current general ledger in order to assess whether that
plan had been followed (assuming it limited
administrative costs to 15 percent). Such a review was
impossible given the state of LCEOC's accounting system.
Accordingly, LCEOC was unable to demonstrate compliance
with the statutory and regulatory limits on
administrative costs.
4. Conclusion
For several years, LCEOC has consistently failed all of
the tests established for monitoring whether a Head Start
grantee is using federal funds for grant purposes. It
admits that it has not filed timely fiscal monitoring
reports and independent audits. It has not shown that it
corrected serious internal control deficiencies
identified by its independent auditor in a timely
fashion. Its fiscal management was found to be severely
deficient in an on-site review by an ACF official who had
given LCEOC a year to get its fiscal house in order. We
therefore conclude that the preponderance of the evidence
on these issues establishes that LCEOC materially failed
to comply with required fiscal and program requirements
applicable to grantees in the Head Start program;
materially failed to comply with the Head Start grants
administration requirements set forth in 45 C.F.R.
Part 1301; materially failed to comply with the
requirements of the Head Start Act; and materially failed
to abide by other terms and conditions of its award of
financial assistance. Consequently, we find that the
record supports denial of refunding based on 45 C.F.R.
1303.14(b)(3), (6), (7), and (9).
B. LCEOC's Failure to Pay Salary Enhancements and Cost
of Living Adjustments
Section 9835 of 42 United States Code governs the
allotment of funds under the Head Start program and was
applicable during the 1990-1993 period of time cited in
ACF's denial of refunding. Specifically, section 9835(a)
addresses the distribution of appropriations and
priorities. In part, that section provides that quality
improvement funds shall be used for a variety of goals
including --
Ensuring that salary levels and benefits are
adequate to attract and retain qualified
staff. . . .
42 U.S.C. 9835(a)(3)(B)(iii).
The statute also provides that quality improvement funds
shall be used for the following activities --
(I) Not less than one-half the amount reserved
under this subparagraph, to improve the
compensation (including benefits) of staff of
Head Start agencies and thereby enhance
recruitment and retention of such staff. The
expenditure of funds under this clause shall be
subject to section 9848 of this title. 12/
(II) If a Head Start agency certifies to the
Secretary for such fiscal year that part of the
funds set aside under subclause (I) to improve
wages cannot be expended by such agency to
improve wages because of the operation of
section 9848 of this title, then such agency
may expend such part for any of the uses
specified in the subparagraph (other than
wages).
42 U.S.C. 9835(a)(3)(C)(i).
For fiscal years 1990-1993, ACF made a variety of
supplemental grant funding available to grantees for cost
of living adjustments (COLAs) and/or other salary
enhancements to Head Start staff. 13/
LCEOC's disbursement of the following supplemental
funding received over those years is in dispute --
o 1990 -- $40,368 for fringe benefits and
$13,078 for differential salary increases;
o 1991 -- $116,438 for salary increases and
$32,700 for fringe benefits;
o 1992 -- $98,354 for COLAs, $31,136 for salary
increases and $6,287 for fringe benefits;
o 1993 -- $99,327 for COLAs, $67,104 for salary
increases and $31,164 for fringe benefits.
Federal reviewers conducting the 1993 OSPRI heard
complaints that LCEOC staff had not received salary
increases in the previous three years. Following its
investigation of those complaints, ACF determined that,
from 1990 through 1993, LCEOC had not paid salary
increases, COLAs and fringe benefits to its Head Start
staff in accordance with applicable law and program
instructions. Denial of Refunding at 2-4.
We discuss these findings below.
1. 1990 and 1991 Salary Enhancements
In a February 1990 program announcement, ACF informed
Head Start grantees and delegate agencies of a
programmatic funding increase of just more than 151
million dollars. Almost one-third of that increase
($49,335,000) was to be used to provide salary increases
to Head Start staff. ACF Ex. 11 at 1. All grantees were
eligible for this funding, which was intended to provide
a minimum increase of 2.5% in salaries and benefits.
Grantees and delegates were instructed that they should
use --
their own personnel policies, wage scales and
wage comparability studies to assess and
determine the most equitable way of
distributing wage increases among staff . . . .
ACF Ex. 11 at 2.
In late August 1990, LCEOC received a supplemental grant
award which provided, in part, --
an increase in funds in the amount of $40,368
for the purpose of increasing salaries and/or
fringe benefits. . . [The award also included]
a Differential Salary Increase in the amount of
$13,078 that . . . [could] only be expended
during the period from September 1, 1990
through the end of this award's budget period
[1/31/91].
ACF Ex. 6, Supplemental Financial Assistance Award
No. 05CH4000/25, Att. 2.
In March 1991, ACF issued a similar announcement
notifying grantees and delegate agencies of an increase
in Head Start's funding level of just under $400 million.
See ACF Ex. 12. Of that amount, $195,180,000 was
earmarked as quality improvement funds. Grantees were
instructed that "[a]t least one-half of all quality
improvement funds . . . must be used for . . . increasing
salaries and fringe benefits of staff." ACF Ex. 12, Att.
at 1 (unnumbered). The instructions explicitly
provided --
These funds must be used to increase the hourly
rate of pay and/or improve fringe benefits for
current staff positions. These funds may not
be used for any other purposes.
Id. at 2 (emphasis added).
As with the 1990 supplemental award, grantees were
instructed to use their own personnel policies, wage
scales and wage comparability studies to determine the
most equitable distribution of funds. Grantees were also
charged with determining what portion of the increase
would be used for fringe benefits. Id.
On August 1, 1991, LCEOC received a supplemental award
which, in part, provided $116,438 for salary increases
and $32,700 for fringe benefit increases to current
staff. See ACF Ex. 7, Supplemental Financial Assistance
Award No. 05CH4000/26.
LCEOC's primary arguments concerning the 1990 and 1991
salary enhancements were contained in its Appeal. LCEOC
argued that, contrary to ACF's assertions, from 1990
through 1993 it had provided salary and fringe benefit
increases in amounts exceeding the corresponding COLA and
salary increases provided for by ACF's supplemental
funding. Appeal at 2. LCEOC did provide some charts and
tables purporting to show that the 1990 and 1991
increases had been paid. See, e.g., Appeal at 3; and
Appeal Atts. B and C. Additionally, LCEOC contended that
"[a]ll salary and fringe information is further
documented in LCEOC and delegate personnel files and
payroll records . . . ." Appeal at 4. However,
following this stage of the appeal, other than making
general references to all manner of increases from 1990-
1993 having been paid, LCEOC remained silent on the
specific issue of payment of the 1990 and 1991 salary
increases.
LCEOC's arguments and evidence have not demonstrated that
these salary increases were paid. The most persuasive
evidence in support of LCEOC's position would be records
showing that a specific employee was paid "x" per hour as
a salary in a given year and "x plus the appropriate
increase" the next. LCEOC has not produced anything
close to this quality of evidence. Rather, LCEOC offered
its Appeal Attachments B and C as proof that the
increases were paid. These Attachments are titled
"Schedule of . . . Head Start Employee Salaries" for the
years 1990 and 1991 respectively. It is impossible to
determine anything of value from them. The Attachments
purport to show comparative employee salaries for 1989-
1990 and 1990-1991. However, it is not clear that they
identify all employees entitled to salary increases, nor
do they identify the employees' hourly rates of pay or
the number of hours worked. At best, they evidence an
unidentifiable change in the rate of pay for certain
employees. To the extent that both Attachments identify
the same positions from 1989 through 1991, they show
salaries increasing by varying increments which bear no
relationship to the across-the-board pay rate increases
envisioned in the program announcements.
For example, a teacher (No. 200064) is shown to have made
$2,480.40 in 1989, $9,245.56 in 1990 and $12,105.81 in
1991; a Head Start Director (No. 500005) $12,647.32
(1989), $18,745.62 (1990), and $20,368.86 (1991); a
parent coordinator (No. 300007) $12,526.15 (1989),
$12,530.70 (1990) and $12,652.12 (1991). Appeal Atts. B
and C.
On May 10, 1994, ACF placed LCEOC on high risk status
pending the resolution of a variety of issues. See ACF
Ex. 2. As a condition for ending the high risk status,
ACF sought evidence from LCEOC's independent audit that
funds awarded for salary increases, as well as COLAs, had
been used for their intended purposes. However, that
audit (CA-1), submitted seven months later, contained no
such evidence. See ACF PHBr. at 53; LCEOC Ex. 83.
On the whole, LCEOC has submitted no evidence that these
funds were applied to increase the salary and fringe
benefits of Head Start employees. The use of these funds
was strictly limited to these purposes.
LCEOC's failure to show that it used these funds to
increase salary and fringe benefits is critical for three
reasons:
o it is a violation of the terms and
conditions of the supplemental funding awards
for both years;
o it is a violation of LCEOC's obligation
under the regulations to document that it
expended Federal funds only for allowable
purposes; and
o it provides further evidence of LCEOC's
fiscal mismanagement.
2. 1992 and 1993 COLAs
In February 1992, ACF announced a FY 1992 Head Start
funding increase of one-quarter of a billion dollars.
Slightly more than $62.5 million of that increase was to
be used to offset increases in the cost-of-living. Each
grantee was given the opportunity to apply for a funding
increase equivalent to 3.4 percent of its base FY 1992
funding. 14/ The increased funding was offered to
"offset increased operating costs." ACF Ex. 13, Att. at
1. The instructions provided --
Grantees with delegate agencies are expected to
allocate to each delegate agency the same 3.4
percent cost-of-living increase given the
grantee, or justify why such an approach is not
appropriate. We expect that all staff . . .
will receive a cost-of-living increase of at
least 3.4 percent, . . . Grantees proposing to
award salary increases of less than 3.4 percent
or proposing to award differential cost-of-
living increases to staff must explain their
rationale for this approach in their funding
application.
Id.
The program announcement also notified grantees that just
under $46 million was available for program quality (PQ)
improvement funding. The instructions provided --
Each grantee must use at least one half of its
quality improvement allocation to increase the
hourly rate of pay and/or improve fringe
benefits for current staff positions. (The
salary increases awarded through the use of the
COLA funds are separate and apart from this
requirement.)
ACF Ex. 13, Att. at 2.
LCEOC applied for and received funding pursuant to this
announcement in August 1992. See ACF Ex. 8 at 10-11
(unnumbered).
A similar program announcement was issued for 1993. See
ACF Ex. 14. As pertinent here, the 1993 announcement was
identical to the 1992 announcement. LCEOC applied for
and received funding pursuant to that announcement in
September 1993. The 1993 Supplemental Award came with a
Special Condition, which provided, in part --
The FY 1993 supplemental application does not
provide sufficient detail to allow release of
all funds allocated for . . . [the COLA, PQ]
and Expansion. By October 13, 1993,
LCEOC . . . must submit: . . . a statement
certifying that those positions not receiving a
COLA increase are currently at wage
comparability for the area. . . . a proposed
salary increase breakout of COLA and program
quality for Central Operations similar to the
charts depicting the delegate increases in
Attachment A. . . . COLA and program quality
funds . . . cannot be drawed [sic] upon until
the above conditions are met and you receive
written notification from . . . [ACF]
ACF Ex. 9, Att. 1 at 1-2 (emphasis in original).
There is no documentation showing whether or how LCEOC
responded to these special conditions in the record
before us, but it is undisputed that LCEOC drew down the
full amount awarded. Although the supplemental award was
dated September 29, 1993 (ACF Exhibit 9), LCEOC did not
distribute the 1993 COLA to its employees until May 6,
1994, effective as of March 1, 1994. Grantee's Motion
for Reconsideration and Response to ACF's Motion for
Summary Disposition at 3 (May 26, 1995) (LCEOC Motion).
As noted above, the 1993 OSPRI alerted ACF to the fact
that supplemental funds received up to that point may not
have been properly expended, and ACF gave LCEOC notice
that this was a serious problem. LCEOC Ex. 155 at 35.
Despite this notice and the May 1994 notice, reiterating
this concern, by the time ACF issued its Denial of
Refunding (January 1995), LCEOC had submitted no evidence
to convince ACF that the funds were properly spent.
Generally, LCEOC maintained that it had paid the COLAs
and that any instance where they might not have been paid
was attributable to a lack of clarity in the
instructions. LCEOC contended that the program
instructions did not state explicitly that COLAs were
required to be used exclusively for salary increases.
LCEOC PHBr. at 61 (citing ACF Exhibits 11-14). LCEOC
seized upon the word "expect" in the instructions,
attacking it as vague and asserting that had ACF intended
the funding be used entirely for salary increases, it
should have simply stated that clearly. LCEOC noted that
in its 1992 application for COLA funding, it proposed
using almost 94% of COLA funds to offset increases in
operating costs. The remaining 6% was allocated for
budget categories titled "supplies" and "other." See
LCEOC Ex. 122, Budget Information at 1. LCEOC reasoned
that ACF's approval of this supplemental grant
application underscored the validity of LCEOC's
interpretation of the instructions, i.e., that operating
costs covered by the instructions accompanying the COLAs
were not confined to salaries. LCEOC PHBr. at 62-63.
ACF asserted that the instructions were clear about the
use of these funds as being primarily for across-the-
board salary increases. In addition, ACF contended that
the underlying purpose of the COLA was to increase the
salary for positions rather than individuals. 15/ Based
on those instructions and LCEOC's application, ACF
contended that it was disingenuous of LCEOC to argue that
distribution of the COLA only to individuals working in
the year for which the COLA was awarded and at the time
it was actually distributed was proper.
In context, ACF's use of the word "expect" does not
render the 1992 instructions vague. The language in
question is found in a three-sentence paragraph in the
instructions. The first sentence explains to grantees
with delegates, such as LCEOC, that ACF expects that the
delegates will receive the same 3.4 percent COLA given to
the grantee. The second sentence explains that all Head
Start staff are expected to receive the COLA. The final
sentence explains that any grantee awarding increases of
less than 3.4 percent was required to explain the
rationale for that approach in its funding application.
See ACF Ex. 13, Att. at 1. Thus, ACF recognized that
there might have existed legitimate circumstances
precluding a 3.4 percent award to staff. ACF asked that
grantees explain such circumstances in the funding
application. However, that language spoke to an award of
less than 3.4 percent, not the failure to make an award
altogether. 16/
In its application for the 1992 supplemental funding,
LCEOC anticipated using the COLA funds for the following:
$92,208 for personnel, $3,642 for supplies and $2,504 for
"other" expenses. LCEOC Ex. 122, Budget Information,
Lines 6(a), (e) and (h). Later in the application, LCEOC
indicated that "[t]he 1992 cost-of-living increase will
be distributed to all nine Head Start delegate agencies
and to LCEOC central administration at the required rate
of 3.4 percent . . . ." Id. at 7 (unnumbered). This
statement was accompanied by a chart showing the
anticipated dollar amount of COLA increases for LCEOC and
its delegates. Id.
Based on the 1992 program instructions, LCEOC applied for
slightly more than $98,000 in COLA funds. LCEOC
earmarked approximately 94% of those funds for pay raises
throughout its organization. In view of the language in
the instructions and the specificity of LCEOC's grant
application, we are hard-pressed to see how LCEOC can now
credibly argue that the instructions were unclear or that
it was not obligated to spend that money in accordance
with the terms of its application. LCEOC's supplemental
grant application was approved as requested. See ACF
Ex. 8; see also Tr. at 2333.
The parties put forth a variety of arguments regarding
the COLA issue. For example --
o whether ACF sufficiently understood LCEOC's
accrual accounting system to realize that the
COLAs were paid;
o whether LCEOC could have reasonably paid the
COLAs in years following those in which they
were awarded;
o whether employees were due COLAs if they
worked during 1992 or 1993, but were not
employed when the adjustments were finally
paid;
o whether employer contributions to fringe
benefits constitute COLAs;
o whether there was sufficient supplemental
funding to pay COLAs.
Under the best of circumstances, these issues would be
difficult to resolve. In this instance, that task would
be further complicated by LCEOC's fiscal disarray and its
contradictory arguments throughout this process.
However, we do not need to specifically resolve these
questions. The key issue is whether the COLAs were paid
to all eligible employees, as required by the terms and
conditions of the supplemental grant award. While the
parties are not in agreement as to the precise definition
of an eligible employee, by either party's standard, the
COLAs were not paid to all eligible employees.
LCEOC took the position that an eligible employee was one
employed as a Head Start staff person during the time
period for which COLAs were applicable and employed as a
Head Start staff person when the COLA was distributed.
LCEOC PHBr. at 65. LCEOC argued that, with the 1992
award, it provided COLA increases to 43 of the 63
eligible employees. 17/ LCEOC PHBr. at 63; Tr. at 4011.
It further argued that, with the 1993 award, it provided
COLA increases to 82 of the 86 employees eligible for
those increases. LCEOC PHBr. at 65; Tr. at 4011. LCEOC
indicated that "pay increases effective March 1, 1994 and
paid May 6, 1994 . . . were paid using 1993 COLA funds."
LCEOC Motion at 3. Pointing to the unclear nature of the
instructions and its good faith efforts to pay the COLAs,
LCEOC asserted that its alleged failure to pay COLAs was
not a sufficient basis for a denial of refunding. At
worst, LCEOC reasoned, it should be subject to a
disallowance for the unpaid funds. LCEOC PHBr. at 65-66.
ACF asserted that far more employees were eligible for
COLAs in 1992 than appeared in LCEOC's calculations.
LCEOC's Exhibits 10-19 consist of its paycheck records
for 1992. Based on its examination of those exhibits,
ACF determined that 153 employees were eligible for
COLAs. ACF noted that LCEOC had offered a schedule
purporting to show the individual 1992 (and 1993) COLA
increases. See LCEOC Ex. 157. This document revealed
that 39 people received COLAs in 1992. 18/ Thus, ACF
asserted, rather than paying COLAs to 67% of eligible
employees as it had alleged, LCEOC had in fact paid COLAs
to something closer to 25% of its employees.
ACF made similar findings relative to the 1993 COLAs.
Again relying on LCEOC's paycheck registers for this
period (LCEOC Exhibits 10-19), ACF determined that LCEOC
had 197 employees eligible for the 1993 COLAs.
Consequently, only 42% of eligible LCEOC employees
received 1993 COLAs. ACF PHBr. at 24.
Admittedly, the program announcements did not define an
"eligible" employee. The absence of a definition aside,
the announcements clearly required all grantees to
provide written documentation of their rationale for
paying COLAs to less than 100 percent of all employees.
See ACF Exs. 13 and 14. ACF's definition of eligible
employee as one who was employed during the budget period
covered by the supplemental award provides a more
sensible interpretation of that term. However, LCEOC
readily admitted that it did not pay COLAs to all
eligible employees even under its own, more restrictive,
definition of that term. 19/ See LCEOC PHBr. at 65.
LCEOC offered no credible explanation for its failure to
pay these COLAs.
The intent of the program announcements was clear.
Simply put, they were designed to provide funding in
order to improve the compensation (including benefits) of
staff of Head Start agencies and thereby enhance
recruitment and retention of such staff. See 42 U.S.C.
9835(a)(3)(C)(i). This was consistent with the
statutory goal of ensuring that salary levels and
benefits are adequate to attract and retain qualified
staff. See 42 U.S.C. 9835(a)(3)(B)(iii).
LCEOC offered no substantive evidence to show that it
satisfied either the statutory programmatic goals or the
specific requirements set out in the announcements
regarding the disposition of these funds. LCEOC applied
for and accepted this supplemental funding specifically
designated for COLAs without questioning who constituted
eligible employees. LCEOC's applications for this
supplemental funding did not alert ACF to the fact that
LCEOC had another interpretation of the term eligible
employees. See, e.g., LCEOC Ex. 122.
LCEOC's financial disarray permeates its arguments on the
various salary enhancement issues. Over a four-year
period, LCEOC received supplemental funding for specific
purposes generally categorized as salary enhancements.
LCEOC cannot say with certainty that it satisfied the
requirements for any of the supplemental funding awards.
This should not be an overly difficult task. LCEOC
should be able to point to easily identifiable payroll
records that show that supplemental funding for each
year's salary enhancements was disbursed to 100% of all
eligible employees, however defined, in a timely fashion.
Instead, LCEOC has here admitted that it did not fulfill
the terms and conditions of the supplemental funding
awards. Thus, the evidence demonstrates that there exist
sufficient grounds for denial of refunding as enumerated
in 45 C.F.R. 1303.14(b); specifically, LCEOC has
materially failed to meet terms and conditions of its
grant awards.
C. LCEOC's Repeated Failure to Meet Head Start Program
Requirements
The 1994 OSPRI revealed a number of violations of
performance standards and other regulatory requirements
at LCEOC and its delegate agencies. Many of these were
repeat findings from the 1993 OSPRI. In the denial of
refunding letter, ACF stated that these failures to
comply with program standards showed:
1) inadequate administrative oversight and
coordination of delegate agencies;
2) inadequate parent participation in the planning
and operation of Head Start programs;
3) inadequate delineation of roles and inadequate
training for staff, members of the Board of
Directors and parents;
4) inadequate financial management; 20/ and
5) non-compliance with various program standards at
the delegate level that were attributable largely to
the lack of grantee oversight and coordination.
ACF Ex. 1 at 7.
Our prehearing Revised Notice of Issues identified the
1994 OSPRI Items that were apparently at issue and were
therefore appropriate subjects for testimony. At the
hearing, an ACF witness testified that the Report of
Findings (ROF) following an on-site review, not the
markings on the OSPRI document itself, is the official
position of ACF on whether a grantee was in compliance
with program requirements. Tr. at 51. Our subsequent
examination of the ROF (LCEOC Ex. 129) revealed three
items listed in the revised notice that were not listed
as out of compliance in the ROF: Nos. 161, 185, 188.
Consequently, we do not consider them here.
1. Uncontested OSPRI Findings
LCEOC did not contest 13 of the OSPRI findings that LCEOC
failed to meet Head Start program requirements. We list
by component the uncontested OSPRI items with the
pertinent regulation, and the site or sites in bold
print, below:
Education
001 There is a written education plan that is annually
updated and/or revised. 45 C.F.R. 1304.1-4 - Hammond
School City.
015 Parents are involved in curriculum development and
serve as resource persons. 45 C.F.R. 1304.2-2(c)(3) -
No location specified.
020 Parent participation in planning the education
program and in classroom and home program activities.
45 C.F.R. 1304.2-2(e)(1) - Hammond School City.
029 Safety and health report of Facilities Supplement.
45 C.F.R. 1304.2-3 - Hammond School City.
Health
041 Each child enrolled in the Head Start program has a
complete up-to-date medical, dental and developmental
history. 45 C.F.R. 1304.3-3(a) - Porter County.
042 Effective with the beginning of the 1993-1994
program year, all Head Start children receive health and
developmental screening by 45 calendar days after the
start of program services in the fall, or, for children
who enroll after program services have begun, by 45 days
after the child enters the program. This does not
preclude starting screening in the spring before program
services begin in the fall. 45 C.F.R. 1308.6(b)(1) -
Porter County & Hammond School City.
Nutrition
092 Information about major community nutrition problems
[is collected as part of community needs assessment]. 45
C.F.R. 1304.3-10(a)(3) - Porter County.
096 The quantities of food served conform to recommended
amounts indicated in the Head Start guidance materials.
45 C.F.R. 1304.3-10(b)(5) - Hammond School City.
098 The nutrition services contribute to the development
and socialization of the children by providing that
children and staff, including volunteers, eat together
sharing the same menu and a socializing experience in a
relaxed atmosphere. 45 C.F.R. 1304.3-10(c)(6) -
Hammond School City.
Disabilities
154 An annually updated disabilities service plan
guides the program's efforts to meet the special needs of
children with disabilities and to include them and their
families in the full range of Head Start activities and
services. 45 C.F.R. 1308.4 - Hobart Township & Porter
County.
Administration
195 There is evidence that personnel policies are
implemented as written and approved. 45 C.F.R. 1301.31
and 1301.31, Appendix A - LCEOC, Metro Corps, East
Chicago & Southlake County.
Staffing Requirements & Program Options
202 The Grantee has employed adequate staff for the
program option(s) operated: 45 C.F.R. 1306.20(b) -
Metro Corps.
208 Grantees operating center-based and combination
program options comply with class size requirements
listed in the chart . . . [provided in the regulation]:
45 C.F.R. 1306.32(12) - LCEOC & Metro Corps.
With respect to OSPRI items it admitted were "arguably
out of compliance," including those in the financial
component, LCEOC contended that, given that there
were 256 items examined at ten locations, these were only
a small percentage of a possible 2,560 noncompliances.
LCEOC PHBr. at 52. This is disingenuous at best. The
items LCEOC did not dispute concern substantial
regulatory requirements and include items that support
ACF's findings in the denial of refunding letter that
LCEOC had problems in several aspects of its program. We
have already discussed the serious consequences of
LCEOC's admitted failure to comply with fiscal reporting
requirements. Other significant requirements that LCEOC
attempts to minimize with this argument are the
requirement for timely health and developmental
screening, which LCEOC failed to meet at two delegates,
Porter and Hammond, serving 102 and 190 children
respectively (Tr. at 3333 and 1027), and implementing
personnel policies as written and approved for the 109
employees on LCEOC's staff.
Moreover, while LCEOC attempted to depict the OSPRI
process as subjective, many of the items listed above
measure objective standards, such as whether specified
class size requirements have been met. Rather than
trivializing the requirements it failed to meet, a better
response would have been for LCEOC to acknowledge their
importance and provide evidence showing that it had made
timely efforts prior to the follow-up OSPRI to correct
the deficiencies and had thereby significantly improved
its performance.
2. Contested OSPRI Findings
LCEOC disputed 15 of the OSPRI findings of program non-
compliance. We find sufficient evidence to conclude that
LCEOC was not in compliance with the regulatory
requirements measured by OSPRI Items 18, 90, 163, 190,
191, and 196. 21/ Below, we list each item and the
regulation underlying that item, with the relevant
location or locations in bold print.
We find that there was insufficient evidence to conclude
that LCEOC was out of compliance with the regulatory
requirements measured by OSPRI Items 25, 39, 89, 137,
148, 181, 182, 184, and 194.
Education
018 The educational aspects of other Head Start
components are integrated into the daily education
services program. 45 C.F.R. 1304.2-2(d) - Southlake,
East Chicago, Hammond School City.
LCEOC asserted that the 1994 ROF cited only the Southlake
delegate as out of compliance with this OSPRI Item.
Further, LCEOC noted, ACF presented no evidence on this
issue. LCEOC PHBr. at 20. In response to this Finding,
LCEOC cited the testimony of Southlake's Director for the
proposition that "other component areas were integrated
into the education program and that such integration is
integrated in the lesson plan." Id.; Tr. at 2169.
Contrary to LCEOC's assertion, the ROF indicated that the
East Chicago, Southlake and Hammond School City delegates
were out of compliance with Item 018. Generally, the
comments accompanying the ROF indicated that the
reviewers found no evidence of component integration
within these delegates, nor evidence of adequate training
or monitoring. LCEOC Ex. 129 at Delegate 000 (EDU-2),
Delegate 003 (EDU-2), Delegate 005 (EDU-1) and
Delegate 006 (EDU-3). The Head Start Program Specialist
involved with LCEOC at that time testified that the
rationale underlying this finding was LCEOC's inadequate
monitoring in the training of its staff as well as
inadequate monitoring of the delegates themselves. Tr.
at 149; ACF PHBr. at 83.
We find that ACF's evidence on this Item was sufficient
to require LCEOC to provide evidence to the contrary, and
that LCEOC did not provide persuasive rebuttal evidence.
The cited regulation refers to a grantee's education
services plan. LCEOC's witness testified that
Southlake's lesson plan incorporated component
integration, but LCEOC did not produce the lesson plan
for the relevant time period or documentation on this
topic for any other delegate agency despite the ROF
specifically noting that evidence of component
integration was missing. Consequently, we find that
LCEOC was out of compliance with 45 C.F.R. 1304.2-2(d).
025 Evidence that the center meets or exceeds state or
local licensing requirements for facilities for fire,
health and safety shall be accepted as compliance with
fire, health and safety requirements. 45 C.F.R.
1304.2-3(a) - Southlake County.
LCEOC provided testimony that the Southlake delegate
agency had contacted a fire inspector in February 1994 to
perform this inspection. However, this individual did
not conduct an inspection until late May or June,
admittedly after the 1994 OSPRI, at which time Southlake
passed the inspection. Tr. at 2160-61. LCEOC asserted
that ACF offered no evidence on this issue. Further,
LCEOC intimated that the fact that Southlake had a
volunteer fire department caused the delay in inspection.
LCEOC PHBr. at 20-21.
The ROF indicated that Southlake's fire and sanitation
permits expired more than one year prior to the 1994
OSPRI. LCEOC Ex. 129 at Delegate 005 (EDU-2). However,
on direct examination, ACF's Program Specialist testified
as follows:
Q And Standard 25 . . . [w]as this marked out
of compliance?
A No, This was a comment to a recommendation
to kind of let the grantee know that this could
be a potential problem and to address things
accordingly.
* * *
A Indiana does not necessarily require that
day care centers be licensed, at least they
didn't at that time.
Tr. at 149-50.
We would not recommend that grantees routinely allow
permits and licenses of this type to expire. However,
given the testimony by ACF's witness and the fact that
Southlake passed the inspection when it finally occurred,
we conclude that there was insufficient factual basis to
find LCEOC out of compliance.
Health
039 There shall be a functional Health Services Advisory
Committee advising in the planning, operation and
evaluation of the health services program. 45 C.F.R.
1304.3-2.
The ROF indicated that both the Southlake and Jasper
County delegates were out of compliance with this Item.
See LCEOC Ex. 129 at Delegate 000 (HEA-1). However, the
individual report for Southlake contained no finding that
it was out of compliance. Id. at Delegate 005. The
individual report for Jasper County indicated that there
was no Health Services Advisory Committee for that
delegate. Id. at Delegate 010 (HEA-1).
ACF's Program Specialist testified that her finding in
regard to this Item reflected inadequate training or
technical assistance provided by LCEOC. Tr. at 151.
Jasper County's Head Start Director testified that its
Health Services Advisory Committee was fully staffed and
functional at the time in issue. Tr. at 2851-52. ACF
did not refute this testimony. We conclude that there is
insufficient evidence in the record to support this
finding of noncompliance.
Nutrition
089 There is a written nutrition plan, annually revised
and/or updated. 45 C.F.R. 1304.1-4 - Porter County.
090 The nutrition assessment data (height, weight,
hemoglobin/hematocrit) is obtained for each child.
45 C.F.R. 1304.3-10(a)(1) - Porter County.
The ROF cited the Porter County delegate as being out of
compliance. LCEOC Ex. 129 at Delegate 008 (NUT 1-2).
ACF attributed both noncompliances to inadequate delegate
training and monitoring. Tr. at 152.
Regarding Item 89, the Director of the Porter County
delegate testified that the Porter nutrition plan was
updated annually, sometime between March and May, for the
upcoming school year. She indicated that Porter's Health
Services Advisory Committee reviewed these plans for
the '92 -'93 and '93 -'94 school years. Moreover,
changes were made in spring 1994 for the '94 -'95 year
and approved by the Parent Policy Committee. Tr.
at 3370-71. See also LCEOC PHBr. at 22 and App. 6.
On cross-examination, ACF elicited testimony from the
Porter Director who indicated that she was "unsure" if
there was a nutritionist on this committee in '92 -'93
and '93 -'94. She knew the "current nutritionist," but
was not sure if she was there in the earlier years. Tr.
at 3411-12. Although it raised this uncertainty, ACF did
not follow-up and conclusively demonstrate that there was
no nutritionist on this committee. The Porter Director
was a credible witness. Based on her testimony and
LCEOC's evidence, neither of which was rebutted, we
conclude that there is insufficient evidence in the
record to support this finding of noncompliance.
Regarding Item 90, the ROF indicated that nutrition
assessment data (height, weight, hemoglobin/hematocrit)
was not obtained for each child. Heights and weights
were not plotted on graphs. Several children had
received hemoglobin and hematocrit screenings as late as
April 1994. LCEOC Ex. 129 at Delegate 008 (NUT-2).
LCEOC indicated that the only evidence of noncompliance
with this Item was this statement in the ROF. LCEOC
cited Appendix 7 to its Post-Hearing Brief, which
contained "[c]hild health records" as support for the
argument that it should be found in compliance with this
Item. LCEOC argued that the regulation upon which this
Item is based (45 C.F.R. 1304.3-10(a)), does not
require that heights and weights be graphed, nor does it
place time constraints on hemoglobin and hematocrit
screenings. LCEOC PHBr. at 22-23.
We have examined the child health records contained in
LCEOC's Appendix 7. The records uniformly contain height
and weight for the children. ACF has not demonstrated
that program regulations require that this data be
plotted on a graph. The information is clearly available
for use by program staff.
The hemoglobin and hematocrit screenings present another
issue. Again, there is no evidence of specific
regulatory requirements in terms of timing imposed on
grantees in this area. However, these tests must be
completed so that the Head Start program may address any
health or nutrition problems identified by these
indicators. Thus, it would be appropriate to examine
this provision with that purpose in mind.
LCEOC's Appendix 7 contains health records for 79
children in the Porter County program. Thirty-eight of
those children were screened at the beginning of the
1993-94 school year or at least prior to the end of the
1993 calendar year. (Two others had screenings well
before the start of the school year.) Thirty-nine
children had screenings well after the start of 1994,
generally closer to the end of the school year. The
hemoglobin and hematocrit screenings provide a necessary
and helpful medical service to participating children,
especially here where there may well be a greater chance
of encountering related medical problems. While there
may not be a specific regulatory requirement as to the
timing of the screenings, ACF may reasonably expect that
a grantee will make every effort to complete the
screenings as early as possible so that potential medical
and nutritional problems would be identified and
addressed promptly. LCEOC provided no explanation for
Porter County's half-hearted approach to these tests.
Consequently, we conclude that there is sufficient
evidence in the record to support this finding of
noncompliance.
Parental Involvement
137 The process of making decisions about the nature and
operation of the Head Start program [as evidenced in the
Policy Council minutes for the last 12 months, provides
for involvement of parents from all program options to
participate in -- training, budget input,
approval/disapproval of hiring/firing decisions, annual
review of component and other plans, annual self-
assessment]. 45 C.F.R. 1304.5-2(a) (Part 1304, App. B,
I-30-2B) - LCEOC, Metro Corps, East Chicago, Hammond
School City, Southlake County & Porter County.
The ROF indicated that there was no evidence that parent
policy groups at the grantee and delegate levels had
input or were even aware of the issues in Head Start
prior to LCEOC seeking approval of documents or actions.
The Parent Policy Committee received information after
LCEOC had made decisions. Policy Council members were
not making decisions, according to the Policy Council
Chair. There were two sets of by-laws, one at the center
level and a draft rules of order which came from LCEOC.
The rules of order were not reflective of HHS guidelines
nor was there documentation showing parent involvement in
their development. LCEOC Ex. 129 at Delegate 000 (PAR-
1). In its Post-Hearing Brief, ACF contended that Policy
Council minutes (Appeal Attachment Z) and certain ACF
witnesses' testimony supported these findings. See
generally ACF PHBr. at 125-165. In addition, ACF
asserted that the draft rules of order that LCEOC sought
to have adopted by the Policy Council were in many
respects intrinsically contrary to the parental
involvement requirements embodied in Policy Transmittal
Notice 70.2 "Head Start Policy Manual: The
Parents" (70.2), which is included in the Head Start
regulations at Part 1304, Appendix B.
LCEOC maintained that ACF had taken items from the
minutes out of context. LCEOC contended that, read as a
whole, the minutes demonstrated that the Policy Council
was given adequate training, information, and authority
to carry out its 70.2 responsibilities. In addition,
LCEOC contended that its witnesses' testimony showed that
parents played an active role in program planning, and
that the parent witnesses called to testify by ACF were
so concerned with whether their interpretation of 70.2
was being followed that they made it difficult for the
Policy Council to fulfill its program policy and
oversight responsibilities.
Both parties devoted considerable effort on this topic.
We found that all the parent witnesses were sincere and
credible, although, not surprisingly, attendees at Policy
Council meetings had different views of events there. In
reviewing the minutes of Policy Council meetings for
the 12 months prior to the 1994 OSPRI, we found that --
o the Policy Council was provided a copy of the 1994-95
grant application in October 1993;
o LCEOC's corporate leadership clearly misunderstood the
appropriate place for the Policy Council vis a vis
LCEOC's corporate structure; 22/
o LCEOC's Chief Executive Officer (CEO) specifically
ordered staff to provide all parents at an April 1994
Policy Council meeting with copies of 70.2;
o LCEOC's CEO was quoted as seeking broader parent
participation in Policy Council meetings;
o parents were asked to train for and participate in the
annual self-assessment.
o training for the Policy Council was discussed and
scheduled.
See generally Appeal Att. Z.
LCEOC's parent witnesses testified that they received
copies of and training on 70.2 and that all parents were
encouraged by staff to volunteer and participate in the
Head Start program. They also uniformly indicated that
the Policy Council chairpersons during the relevant
period, not LCEOC staff, were in charge of Policy Council
meetings that the witnesses personally observed.
We therefore conclude from our review of the minutes and
the testimony of parent-witnesses that, while LCEOC's
performance in this area could be improved, it was
essentially in compliance with the Head Start program
requirements measured by this OSPRI Item.
148 There is a system for the regular provision of
information to members of policy groups. The purpose of
such communication is to enable the policy groups to make
informed decisions in a timely and effective manner, to
share professional expertise, and generally to be
provided with staff support. At a minimum, information
provided will include: [timetable for planning,
development, and submission of proposals; communications
from ACF; financial reports; work plans; grant
applications; and personnel policies for Head Start]. 45
C.F.R. 1304.5-4(b)(1-4) - LCEOC, Metro Corps, East
Chicago, Hammond School City, Southlake County & Porter
County.
The ROF indicated that there was no system in place for
the regular provision of information to members of policy
groups. 23/ Although the delegate policy committees
received limited information from the delegates, the
Policy Council was not receiving adequate information
which would enable them to make decisions reflective
of 70.2. LCEOC Ex. 129 at Delegate 000 (PAR-2).
LCEOC provided copies of its corporate planning
procedures for 1992-93 and 1993-94 in order to show that
it had a timetable for planning, development, and
submission of proposals. See LCEOC Exs. 27 and 28.
LCEOC detailed parent committee communication systems for
Porter, Southlake, and Metro Corps, and provided
testimony from a parent and staff member from Hammond
School City that budget information was provided to the
policy committee. LCEOC did not attempt to refute the
ROF for East Chicago.
Having considered the testimony and the relevant (i.e.,
prior to May 1994) Parent Policy Council Minutes (Appeal
Attachment Z), we conclude that LCEOC was routinely
providing information to members of policy groups.
Although the ROF questioned the existence of a "system,"
LCEOC provided documents reflecting a corporate
commitment to dissemination of information to policy
groups. The standard also requires an examination of
whether the system was functioning. Our review of the
minutes and testimony confirms that information on
relevant topics was disseminated to the various policy
committees and the Policy Council. For example, the
October 19, 1993 Minutes include a report by the LCEOC
CEO on topics to be discussed at the next Policy Council
meeting including -- supplemental grants, the Letter of
Understanding stemming from the 1993 OSPRI, the 1994-95
refunding application and the results of a meeting
between ACF and LCEOC officials. See Appeal Att. Z.
LCEOC did not offer testimony specifically relevant to
East Chicago; neither did ACF. Given that the record
showed that LCEOC generally provided this information to
parent policy committees, we find no reason to conclude
that it did not do so with respect to the East Chicago
delegate. We therefore conclude that there is sufficient
evidence in the record to support a finding of compliance
with the regulatory requirement measured by Item 148.
Disabilities
163 Head Start IEP's are developed by a multi-
disciplinary team. 45 C.F.R. 1308.19(f)-(i) - LCEOC,
Metro Corps, East Chicago & Southlake County.
An IEP (Individual Education Plan) addresses both the
short and long term needs of disabled children
participating in Head Start. See generally 45 C.F.R.
1308.19. The ROF indicated that LCEOC had inadequate
policies, processes and procedures regarding the delivery
of disability services. It cited inadequate staffing,
staff training and monitoring as underlying causes of
noncompliance. LCEOC Ex. 129 at Delegate 000 (DIS-1).
LCEOC asserted that, since it provides Head Start
services through delegates, it was erroneous to find its
central office out of compliance with this Item. LCEOC
PHBr. at 33. However, it is LCEOC's responsibility to
ensure that its delegates are administering the Head
Start program correctly. As evidenced by the delegate-
specific ROFs, several delegates did not comply with this
Item. See LCEOC Ex. 129 at Delegate 001 (DIS-1),
Delegate 003 (DIS-2), Delegate 005 (DIS-2). LCEOC
offered general testimony on this issue. Essentially,
LCEOC's delegate witnesses testified that their IEPs had
been properly developed. 24/ However, LCEOC pointed to
no documentary evidence supporting such a conclusion.
Consequently, we conclude that there is sufficient
evidence in the record to support this finding of
noncompliance.
Administration
181 The Grantee has conducted a community needs
assessment (CNA) within its service area at least once
every three years and updated it in each of the two
intervening years by considering whether there have been
significant changes in the information contained in the
CNA. The CNA includes the following information about
the Grantee's service area: demographic/social make-up
of eligible children and families; other developmental
and child care programs serving eligible children;
estimated number of children with disabilities under four
years old; data on the health, nutrition, education and
social services needs of eligible children; those same
needs as defined by the families of eligible children and
community institutions serving young children; and
available community resources for eligible children and
their families. 45 C.F.R. 1305.3(b)(1)-(6) - LCEOC,
Porter County & Jasper County.
182 Information from the community needs assessment has
been used to: determine program objectives, determine
necessary component services and program options, define
recruitment areas, determine locations of centers and
home-based programs, and set profiles of children and
families given priority for recruitment. 45 C.F.R.
1305.3(c)(1)-(6) - LCEOC, Porter County & Jasper
County.
184 The program option chosen meets the needs of the
children and families as indicated by the grantee's
community needs assessment. 45 C.F.R. 1306.31(b) -
LCEOC & Jasper County. 25/
ACF determined that LCEOC had an outdated CNA at the time
of the 1994 OSPRI. Specifically, ACF's Program
Specialist testified that she concluded that LCEOC's CNA
had not been updated since 1988. Tr. at 58; 62-63.
Thus, ACF found LCEOC out of compliance with OSPRI
Item 181. The perceived lack of a current CNA led the
Program Specialist to conclude that LCEOC was also out of
compliance with Items 182 and 184. Id. at 71-72; 213.
LCEOC identified its Appeal Attachment X as the 1994 CNA.
A consultant to LCEOC testified that he prepared this CNA
in the fall of 1993 and presented it at the 1994 OSPRI
entrance interview. Tr. at 2279. ACF's Program
Specialist and other members of the review team were
present at that meeting. Id. at 2278-79. LCEOC's Head
Start Director testified that she presented the CNA to
two OSPRI reviewers during the 1994 review and that one
of those reviewers gave the impression that she had seen
already seen it. Id. at 2516-18.
We found the ACF Program Specialist to be a generally
credible witness. However, her testimony in this area
was vague; on cross-examination she stated that it was
possible that the LCEOC consultant had held up a document
during his initial presentation. However, she simply
could not recall and could not say what document he might
have held up. Tr. at 388-89. ACF also called one of the
two reviewers identified by the LCEOC Head Start
Director. She testified that she used this CNA during
her review. 26/ Id. at 311.
We conclude that there is insufficient evidence in the
record to support findings of noncompliance with the
regulatory requirements measured by Items 181, 182
and 184.
190 Where programs are delegated, there shall be a
written agreement that specifies: the delegate agency
will adhere to all Head Start regulations; services to be
provided (including specific performance standards
delegated); number of children served and program design
information by program option; terms and conditions;
dollar amount of the award; and termination process for
the agreement. 45 C.F.R. 1301.33 - LCEOC, Metro Corps,
East Chicago, Hammond School City & Southlake County.
One of the reasons cited in ACF's decision to deny
refunding was the alleged absence of written delegate
agreements in the LCEOC program. OSPRI Item 190 is
related to that issue, which we address below in a
separate section. There we conclude that LCEOC did not
have delegate agreements and was, therefore, in violation
of section 1301.33.
191 Grantee has an internal monitoring procedure for
delegate program operations which: A. Assures compliance
with all contract and program requirements; B. Provides
requirements for correction of deficiencies found; and C.
Includes provision of technical assistance for areas
requested by delegate agencies. 45 C.F.R. 1301.33;
HDS/GAM - LCEOC & Hammond School City.
The ROF stated that the grantee had not implemented
monitoring procedures, or a written contract, to assure
compliance with program requirements. LCEOC Ex. 129 at
Delegate 000 (ADM-3). ACF's reviewer stated that the
indicators she reviewed in order to determine compliance
were the delegate contracts, written monitoring
procedures, and coordinator staffing levels. Tr. at 217-
20. She testified that there were no contracts or
written monitoring procedures and that several critical
component coordinator positions remained unfilled despite
representations to ACF that full staffing was imminent.
LCEOC contended that this Item could only apply to the
grantee itself. Thus, reference to Hammond School City
was erroneous. However, LCEOC also provided some
documents purporting to be completed monitoring
instruments for the five sites overseen by Hammond.
LCEOC PHBr, App. 13; LCEOC Ex. 46. LCEOC provided
testimony and documentation regarding a computerized
monitoring system that, it maintained, was sufficient to
provide adequate monitoring without frequent site visits.
LCEOC PHBr. at 43-44. LCEOC also contended that the
applicable regulations did not specifically require site
visits. LCEOC also offered testimony that it made
efforts to fill the vacant coordinator positions. Tr.
at 2468-70.
As indicated in the next section of our analysis, we have
determined that one basis for this finding of
noncompliance -- lack of delegate agreements -- is firmly
established by the record. Neither party attempted to
reconcile the ACF reviewer's finding that no monitoring
system existed with the documents provided by LCEOC
showing that there was at least a computerized system in
1993. Those documents apparently provide a comprehensive
system for self-reporting by delegates of all criteria
that can be objectively reported, such as number of
children in attendance, number of home visits, etc. The
other documents provided for Hammond are less objective;
not surprisingly, out of 20 reports reviewing 18 items
concerning staff attitudes and overall classroom
atmosphere, only one "no" was checked by a self-reporter.
The record clearly shows that LCEOC was chronically
understaffed at the coordinator level, such that on-site
visits were rare. Tr. at 1243 (Lake Ridge); 3515-16
(Hobart); 2975 (Hammond); 3651 (Metro Corps). ACF
consistently provided funding for coordinators and
repeatedly warned LCEOC that it must fill those
positions. See ACF Exs. 15, 41, and 42. Consequently,
LCEOC was on notice of ACF's interpretation of the
monitoring requirement as necessitating personnel
sufficient to perform site visits to monitor compliance
and provide technical assistance. However, LCEOC failed
to fill the vacancies and used these funds for other,
unspecified purposes. Tr. at 2612-13.
As a practical matter, LCEOC's near total reliance on
self-reporting seems naive at best or a rationalization
for understaffing at worst. In addition, the lack of
delegate agreements meant that LCEOC had no contractual
mechanism for enforcing program requirements if it should
discover a delegate to be out of compliance. On balance,
therefore, we conclude that LCEOC was out of compliance
with this program requirement.
194 Head Start agencies shall establish personnel
policies and procedures. 45 C.F.R. 1301.31 - LCEOC,
Hammond School City, Hobart Township, Southlake County,
Jasper County & Pulaski County. 27/
The ROF for LCEOC indicated that personnel policies and
procedures had not been updated since 1983. Policies on
travel, promotion plan, training, drug-free work place,
and Americans with Disabilities Act were not included.
Further, the ROF for LCEOC referenced allegations of
nepotism at Metro Corps which remained unresolved from
the 1993 OSPRI. 28/ LCEOC Ex. 129 at Delegate 000 (ADM-
4). To varying degrees, the same general findings were
made in the specific ROFs for Hobart, Southlake, Hammond,
Jasper and Pulaski. Id. at Delegate 004 (ADM-1);
Delegate 005 (ADM-2); Delegate 006 (ADM-2); Delegate 009
(ADM-1); Delegate 010 (ADM-3).
LCEOC asserted that there was no specific requirement in
the program regulations or other program requirements
mandating periodic updating of personnel policies.
Moreover, LCEOC asserted that its personnel policy was
adopted in 1988 (LCEOC Exhibit 26) and includes
provisions for travel and promotion. LCEOC also argued
that neither the OSPRI nor the underlying regulations
require provisions for drug-free work place or the
Americans with Disabilities Act. LCEOC noted that it
did, however, include these provisions in its employee
handbook (LCEOC Exhibit 25) issued in February 1995.
LCEOC PHBr. at 44-46.
Section 1301.31, the regulation underlying this OSPRI
Item, requires that personnel policies must govern, at a
minimum, the following: staff qualifications,
recruitment and selection, classification of positions,
salaries, employee benefits (including leave, holidays,
overtime and fringe benefits), conflicts of interest,
official travel, career development, performance
evaluations, and employee management relations (including
employee grievances and adverse actions). Prospective
employees must sign a declaration prior to employment
listing pending and prior criminal arrest and charges
related to child abuse and their disposition; convictions
related to other forms of child abuse and/or neglect; and
all convictions of violent felonies. This is the only
regulation cited for this Item. While it is true that
one method of complying with other requirements, such as
the Americans with Disabilities Act and the Drug-Free
Workplace Act of 1988, could be to include provisions in
the personnel policy, ACF has cited no regulation
requiring this. The OSPRI checklist is not a regulation.
LCEOC's arguments evidence a generally haphazard approach
toward compliance with this OSPRI Item, given that the
1993 ROF had found the absence of updated personnel
policies to be evidence of inadequate management
practices regarding administrative requirements. LCEOC
Ex. 155 at 38 (Item 172). However, there is insufficient
evidence here to find that LCEOC was out of compliance
with the regulation cited by this OSPRI Item.
196 A file and records system shall be maintained to
include official documents for each staff member, related
to: qualifications for appointment or promotion;
periodic pay increases; records of continued training or
education; official recognition; performance evaluation
and adverse action. The system must protect the
confidentiality of personnel records. 45 C.F.R.
1301.31 and 1301.31, Appendix A - LCEOC & Hammond
School City.
The ROF indicated that personnel files were incomplete,
missing reference checks and other pertinent information.
See LCEOC Ex. 129 at Delegate 000 (ADM 4-5) and
Delegate 006 (ADM-3). ACF reviewers testified that the
sample personnel files they examined were generally
incomplete and internally inconsistent. Tr. at 132-33;
291-93.
LCEOC's Vice-President testified that the employee
information referred to in this Item is kept in locked
fireproof filing cabinets in his office. Tr. at 3067-72.
LCEOC Exhibit 135 contains an OSPRI document used as a
work sheet by a reviewer. For Item 196, the reviewer
noted that the personnel files are in a locked room
segregated from the central files. LCEOC Ex. 135 at 179
(LCEOC's pagination). However, the location of the files
is not the issue here. Rather, it is the content of the
examined files, which the reviewers found wanting. LCEOC
has offered no documentation to refute the reviewers'
findings.
We conclude that there is sufficient evidence in the
record to support a finding of noncompliance with the
regulation measured by this Item.
3. Conclusion
Our analysis of the OSPRI items pertaining to fiscal
management aside, the record supports ACF's findings with
respect to the 19 contested and uncontested OSPRI Items
discussed above. These Items measure compliance with
requirements in nearly all areas of the Head Start
program -- Education, Health, Nutrition, Disabilities,
Administration, Staffing Requirements and Program
Options. Many of these program deficiencies were
previously identified to LCEOC, and it was given at least
six months to correct them. Compliance with ACF
regulations is made an express term of each award of
financial assistance. See, e.g., ACF Ex. 8, Att. 1 (1992
Notice of Grant Award). LCEOC's failure to demonstrate
full compliance with Head Start requirements means that
the 1,200 children served by LCEOC were not receiving the
full value of the funding provided for their benefit.
These OSPRI findings, along with the OSPRI findings
concerning fiscal management, establish that denial of
refunding is appropriate pursuant to 45 C.F.R.
1303.14(b)(3), (4), (6), and (9).
D. LCEOC's Lack of Delegate Agreements
For the 1994-95 program year, LCEOC's application for
refunding provided for operation of its Head Start
program by contracting out the required services to
children and families to nine delegate agencies. The
applicable regulations provide that "Federal financial
assistance is not available for program operations where
such operations have been delegated to a delegate
agency . . . unless the delegation . . . is made by a
written agreement and has been approved by the
responsible HHS official before the delegation is made."
45 C.F.R. 1301.33. 29/ The purpose of delegate
agreements is to establish the terms and conditions for
the relationship between the grantee and its delegate,
including: the number of children to be served; the
program design; the amount and method for payment of
program funds; the applicability of Head Start
performance standards and the method by which the grantee
will monitor delegate performance; the applicable
personnel policies; the manner in which disputes between
grantee and delegate may be resolved; etc. HDS/GAM,
Ch. 1, K.1; Tr. at 2041. LCEOC was cited in the April
1993 OSPRI (Item 166) for failure to have any delegate
agreements whatsoever, and again in May 1994, for the
same deficiency (Item 190). LCEOC submitted a delegate
agreement with its December 1994 application for
refunding. Appeal Att. AA. 30/
ACF's Denial of Refunding identified four specific
substantial defects with the delegate agreement submitted
with LCEOC's application for refunding. 31/ ACF
contended that, while this issue standing alone would not
warrant defunding, LCEOC's failure to address its
delegate agreement problems for several years was
indicative of its continued failure to operate a program
within the required terms and conditions of the grant.
In this proceeding, LCEOC did not address the alleged
defects by showing that the delegate agreement submitted
with its application for refunding did indeed fulfill the
requirements specified in the Denial of Refunding.
Instead, it addressed the required components identified
in OSPRI Item 190, and it attempted to portray ACF as
hypercritical and inconsistent in its correspondence
explaining other requirements. LCEOC claimed that it had
never before had trouble with its delegate agreements and
that the delegate agreement found insufficient by ACF was
one authored by a former ACF official.
We agree with ACF that LCEOC's failure to correct this
situation is indicative of its continued failure to
operate a program within the required terms and
conditions of the grant. It is absolutely untrue that
LCEOC had never had any trouble with its delegate
agreements prior to this dispute. LCEOC was first
notified of the problem in a special condition attached
to its 1990-91 grant. ACF Ex. 6, Att. 5. The problem
was again brought to LCEOC's management's attention in
the April 1993 OSPRI. ACF Ex. 34. At the 1994 OSPRI,
the reviewers found that LCEOC still did not have a
single signed delegate agreement with any of its nine
delegates. ACF Ex. 16 (Head Start Program Review Report
accompanying the 1994 Report of Findings) at 2 1.B
(Program Weaknesses).
Despite these constant reminders of the requirement for
delegate agreements, the evidence shows that LCEOC failed
to execute any signed delegate agreements for both the
1991-92 and 1992-93 program years and did not execute the
delegate agreements for 1993-94 until the final quarter
of that program year. Instead, LCEOC issued its delegate
agencies "continuation letters" which stated (for 1993-
94):
Pending upcoming budget conferences and contract
negotiations, this letter is your official
authorization to continue to incur expenses related
to the provision of Head Start services to your
currently enrolled children and their families for
Head Start Funding Year #28 (2/1/93-1/31/94) under
the terms and conditions of your Budget Allocation
for FY #27 (2/1/92-1/31/93). Upon receipt of the
approved Head Start grant award for FY 1993-94 from
LCEOC, Inc., we will finalize your delegate contract
for issuance and signature based upon the
availability of funds for this fiscal year.
LCEOC Ex. 30 (identical language in all eight letters to
delegates). See also ACF Ex. 59 at 1 (similar letter to
Lake Ridge delegate for 1992-93 program year). Although
it promised future communications, LCEOC gave no further
notice to its delegates until they were presented with a
delegate agreement for signature in December 1994 (two
months before the end of program year 1994-95).
This lack of delegate agreements was not a mere technical
failing, but had the following significant and serious
impacts on several aspects of LCEOC's Head Start program:
o Several witnesses who operated delegated programs
testified that the lack of a signed delegate agreement
containing a definite annual funding figure caused
serious problems in program planning and execution. For
example, the Assistant Director for Component
Coordinators for the Hammond delegate testified that, due
to the uncertainty as to what funds would be available in
1993-94, she was unable to budget for transportation or
the purchase of a vehicle to transport children and could
not contract to pay for training. Tr. at 1038-39.
Similarly, the Head Start Director for the Lake Ridge
delegate testified that she was required to budget for
liability insurance even though the school system could
have covered the Head Start passengers if the bus were
leased (Tr. at 1234), and that she was unable to contract
for attention deficit disorder training that she felt was
needed. Tr. at 1236-37.
o The continuation letters did not recognize the
expansion of Head Start services over previous years.
Tr. at 86. For example, Porter County had significantly
expanded program participation from 34 children in 1990-
91 to 102 in 1992-93, but the continuation letters did
not provide for any increase in funding levels. ACF
Ex. 40. See also ACF Ex. 7, Att. 5 (increasing number of
children to be served during 1991-92 at Gary, Hammond,
Pulaski, and Newton by 140).
o By stating that the budget continued at previous
levels, LCEOC did not provide funds for the permanent
increase in salaries that was supposed to be in place
after COLAs were awarded each year. Tr. at 78-80; 1232.
o When LCEOC finally submitted delegate agreements, it
included delegate agreements it had signed with new
delegate agencies that had never been approved by ACF.
In fact, ACF had previously notified LCEOC that two
delegates, LAFEP and ELKA, which were identified as
reporting to delegate Metro Corps, could not properly be
delegate agencies under that arrangement. ACF Ex. 16
at 4. LCEOC did not dispute ACF's assertions that both
LAFEP and ELKA have separate boards of directors from
Gary Metro Corps and that they are independent
organizations that should contract directly with LCEOC.
See ACF Ex. 20 at 4. Moreover, the Head Start
regulations do not provide for subdelegation.
o Since there was no deadline for reimbursement of
program costs, one of the delegates which continually
suffered from LCEOC's late payments had no contractual
recourse, and ultimately turned to ACF for assistance in
obtaining payment. ACF Ex. 58 (Lake Ridge).
ACF cited LCEOC's long-term failure to address the
delegate agreement requirement as "indicative of the
continued failure of LCEOC to operate a program within
the required terms and conditions under which Federal
funds were awarded to LCEOC." ACF Ex. 1 at 11. We
concur with ACF that the history of this issue as
established by the record here indeed provides additional
support for the denial of refunding to this grantee
pursuant to 45 C.F.R. 1304.13(b)(6) and (9).
III. CONCLUSION
For the reasons discussed above, we conclude that LCEOC
has materially failed to --
o comply with the required fiscal or program reporting
requirements;
o meet the performance standards for operation of its
Head Start program;
o comply with Head Start grants administration
requirements;
o comply with the requirements of the Head Start Act;
and
o abide by other terms and conditions of its grant and
applicable laws or regulations.
Accordingly, we find that denial of refunding is
warranted pursuant to 45 C.F.R. 1303.14(b)(3), (4),
(6), (7) and (9).
_________________________
Donald F. Garrett
_________________________
Norval D. (John) Settle
_________________________
M. Terry Johnson
Presiding Board Member
1. Our analysis of the grounds for denial of
refunding is set out in a manner convenient to the
general development of the issues, rather than the order
presented by ACF in its denial of refunding.
2. These are the five regulatory grounds underlying
the four grounds listed in ACF's determination. The
disparity in number is due to standard grant language
requiring compliance with the Head Start Act and
applicable regulations. Thus, violation of a specific
regulatory requirement is also a violation of the terms
and conditions of the grant. In reaching our conclusion,
we have considered the entire record consisting of
approximately 15,000 pages including the hearing
transcript, exhibits, briefing, and oral argument. In
this decision, we have addressed the major grounds for
denial of refunding cited by ACF. Since we found that
there was convincing evidence substantiating these
grounds, it was unnecessary to resolve every disputed
issue presented by the parties. (For example, we chose
not to discuss the parties' differing views concerning a
March 14-15, 1994 technical assistance visit by an ACF
contractor.)
3. The concept of materiality applicable to these
proceedings is found in 45 C.F.R. 74.113. That
regulation has been amended and redesignated as 45 C.F.R.
74.62, but continues to require materiality. See 59
Fed. Reg. 43,760 (August 25, 1994).
4. The delegates are: Gary Metro Corps (Metro
Corps), East Chicago, Hammond School City, Southlake
County, Jasper County, Pulaski County, Newton County,
Porter County and Hobart Township/Lake Ridge (Lake
Ridge).
5. CA-2 was submitted into the record (as LCEOC
Exhibit 159) after the evidentiary hearing was completed,
and ACF was given the opportunity to comment, in writing,
on its significance and weight. See Ruling (February 20,
1996). Subsequently, the Board permitted ACF to
supplement the record with the Office of Inspector
General's desk review of CA-2. See ACF Ex. 72. CA-2
consists of four parts, which we will cite as "LCEOC
Ex. 159, Part #." Part 1 is the auditor's report of
findings and recommendations, consisting of a 12/8/95
letter to LCEOC's audit committee with a 21-page exhibit.
Part 2 is the combined financial statements for years
ending December 31, 1992, 1993, and 1994. Part 3 is the
auditor's OMB Circular A-133 audit reports for those same
years. Part 4 is an undated letter from the auditors to
the LCEOC Board of Directors concerning LCEOC's cost of
living adjustment payments.
6. We understand this to be the same as the Office of
Human Development Services Grants Administration Manual
(HDS/GAM) cited in the OSPRI. Therefore, we have cited
HDS/GAM in this decision.
7. ACF asserted that LCEOC's fiscal years ended on
January 31. ACF PHBr. at 191. LCEOC indicated that its
fiscal years ended on December 31. Even using the more
favorable dates suggested by ACF, LCEOC's audits were
extremely late.
8. The audit findings discussed in this section are
based on information provided by ACF, at the Board's
request. See Hard Copy of E-Mail from ACF to Board
titled "Audit Numbered Items Re: ACYF" (June 7, 1995).
In its Post-Hearing Brief, ACF asserted that 18 audit
findings were in issue, even though the Board had
identified only 17 prior to the hearing. See Revised
Regulatory Notice of Hearing on Lake County Economic
Opportunity Council, Inc. (June 7, 1995). Given that our
Revised Notice was based, in part, on specific
information provided by ACF and that ACF had ample time
to further question its accuracy, we will not here
consider the audit finding not set out in the Revised
Notice.
9. ACF Exhibit 70 consisted of -- notes by OSPRI
reviewers on a 1994 OSPRI document for Items 216-256
(pagination for this document appears in its upper right
hand corner); the cover sheet to that section along with
two pages identified as the Data Sheet (these three pages
are unnumbered) and eleven pages of handwritten reviewers
notes on plain paper (paginated as 70-1 to 70-11).
10. ACF's OSPRI reviewer actually noted the lack of a
fixed asset inventory in OSPRI Item 256 in May 1994, and
marked it out of compliance. Ironically, ACF's financial
specialist gave LCEOC the benefit of the doubt, and
changed the final determination on that item, which
contained several subparts that were both in and out of
compliance, to a compliance. Tr. at 1761.
11. At this time the Head Start regulations required
an opportunity to correct program standard deficiencies.
45 C.F.R. 1304.1-5(b). However, there was no such
requirement for fiscal and management deficiencies.
Moreover, Ms. Pitts met with LCEOC management at the end
of the OSPRI visit and notified LCEOC that its fiscal
system was so substandard that it was in danger of being
designated "High Risk." Tr. at 1648.
12. 42 U.S.C. 9848 titled "Comparability of Wages,"
enables the Secretary to take "such action as . . .
necessary" to assure that Head Start employees are not
paid wages in excess of the average rate of compensation
for the area in which the program is operating.
13. The program announcements for this supplemental
funding were ACYF-IM-90-06 (FY 1990), ACYF-PI-91-03 (FY
1991), ACYF-PI-92-02 (FY 1992), ACYF-PI-92-14 (FY 1993).
See ACF Exs. 11-14.
14. This percentage was equivalent to the FY 1991
increase in the Consumer Price Index. ACF Ex. 13,
Attachment at 1.
15. For example, if the COLA raised the base salary
for a certain position to $5/hour and the individual in
that position quit, a new employee in that position would
be entitled to $5/hour.
16. Since the 1993 instructions were identical in
language except that the applicable rate was 3 percent,
the same analysis applies. See ACF Ex. 14, Att. at 1.
17. Elsewhere in its post-hearing brief, LCEOC
asserts that it paid COLAs to 38 of an eligible 63
employees. LCEOC PHBr. at 65 and Appendix 18. See also
Tr. at 4011. LCEOC never revealed when it paid the 1992
COLA.
18. LCEOC's Vice-President of Finance testified that
there were minor differences in the figures presented in
this schedule and those contained in a Table submitted
with his May 26, 1995 affidavit on the subject of COLAs.
Tr. at 4157-58. ACF's examination of the schedule
(LCEOC Exhibit 157) revealed 39 COLAs paid as opposed to
the initial figure of 43. ACF PHBr. at 16, n.8.
19. LCEOC asserted that it paid 100% of all COLAs
in 1994. To the extent that this assertion was offered
as a sign of good faith, there is no evidence that these
COLAs were actually paid or of the criteria by which
LCEOC defined eligible employees in 1994. Further, our
concern here is with COLAs due in 1992 and 1993, as it
was those years that were cited in ACF's Denial of
Refunding.
20. In our analysis of LCEOC's financial management,
we examined the eight OSPRI Items (Nos. 218, 220, 223,
225-228 and 245) found by ACF to be out of compliance in
the "Administration/Financial/Property Management"
category. Consequently, we will not address those OSPRI
Items here.
21. While both parties referred to whether LCEOC or
its delegates were in compliance with certain OSPRI
Items, the OSPRI itself is not a regulation. The purpose
of the OSPRI is to measure a grantee's compliance with
Head Start and general grant regulations; it lists by
item or section the pertinent regulation or regulations
measured by that item or section. The language of each
item most often parallels or paraphrases the applicable
regulation, and sometimes elaborates on the regulation by
listing possible documents that would evidence
compliance. For brevity's sake, unless a party argued
that an OSPRI Item was different from the corresponding
regulation (see, e.g., Item 90), we do not repeat the
regulation verbatim.
22. The proposed Rules of Order (ACF Exhibit 65)
definitely contained provisions that were inconsistent
with basic tenets of 70.2.
23. There are several policy groups involved in the
Head Start program. These include: (1) advisory
committees at both the delegate and grantee levels, such
as the Health Services Advisory Committee, made up of
parents and health professionals from the community; (2)
a policy committee at each delegate, comprised of parents
and community representatives from that delegate; (3) the
Policy Council at the grantee level, made up of parent
representatives from the delegate agencies and area-wide
community representatives.
24. The Metro Corps Head Start Director testified
that IEPs were done for the '92 -'93 school year, but did
not indicate they were done for the following year. Tr.
at 3615-18. The Head Start Director for Hobart Township
Lake Ridge (Lake Ridge) also testified that IEPs were
done at that delegate. Tr. at 3496-99. However, Lake
Ridge was not cited as out of compliance. See LCEOC
Ex. 129 at Delegate 000 (DIS-1); Revised Issues Statement
at 11.
25. The 1994 Report of Findings also found Porter
County to be out of compliance with this Item. However,
since Porter was not listed in the prehearing Revised
Notice of Issues, we do not include it here.
26. This reviewer also examined this component in the
1993 OSPRI. Tr. at 202-203.
27. The ROF included noncompliance for Porter County
as well, but since that delegate was not included in the
Revised Notice of Issues, we do not include it here.
28. Specifically, these allegations involved Metro
Corps subdelegates, ELKA and LAFEP. See also LCEOC
Ex. 155, Delegate 000 at 38.
29. Inexplicably, LCEOC argued that this regulation
did not require that delegate agreements have prior
approval. LCEOC PHBr. at 41.
30. Appeal Attachment AA is titled -- Revised LCEOC
Delegate Contract and Addenda Submitted on December 1,
1994. It purports to be effective February 1, 1994 and
is signed by grantee and delegate officials between
December 7-15, 1994. Although the signed version
obviously could not have been submitted on December 1,
1994, this delegate agreement was apparently the one to
which the Denial of Refunding referred.
31. The defects were: (1) the pay scales included in
the application for refunding did not reflect cost of
living increases that had been approved for 1994; (2)
contract language concerning personnel policy
requirements uniformly referred to community service
corporations despite the fact that at least two delegate
agencies were school districts, not community service
corporations; (3) inconsistencies between program design
and staffing patterns, so that some staff with more
responsibility (e.g., Head Start Director) was earning
considerably less than staff with lesser responsibilities
(e.g., teaching staff); (4) execution of agreements with
totally new delegate agencies without prior ACF approval.