The Community Improvement Council, Inc. (Appellant) appealed a determination by the Administration for Children and Families (ACF) disallowing $44,509 in federal funds claimed by the Appellant for its Head Start program for three budget periods.⁽¹⁾ ACF asserted that the disallowance represented federal funds for bonus payments made to Appellant's employees which were unallowable under the applicable cost principles. See Office of Management and Budget Circular A-122 (OMB A-122), Attachment (Att.) B, 6.⁽²⁾ Based on the following analysis, we sustain the disallowance in its entirety.

Background

The material facts are undisputed. An on-site review of the Appellant's program was performed by ACF regional staff on November 18-22, 1996. ACF disallowance letter at 1. The reviewers determined that, although the Appellant did not have any written policies and procedures regarding incentive compensation, the Appellant's Board of Directors awarded incentive compensation to its employees in 1993, 1994, and 1996. Based on the minutes of Board of Directors meetings, the review found that

-- on April 5, 1993, the Appellant's Board of Directors agreed to distribute $4,000 in unexpended personnel funds by dividing the amount by 3.55% for staff salaries;

-- on April 19, 1994, the Appellant's Board of Directors agreed to distribute $18,508.58 in unexpended personnel funds by giving $1,500 to one employee and distributing the remaining amount to staff based on their annual salary and whether they had been employed for one year or more; and

-- on April 16, 1996, the Appellant's Board of Directors agreed to distribute $22,000 to staff by utilizing a formula based on job category (by tiers).⁽³⁾ The Board of Directors also voted to disburse future unexpended funds by using the same formula.

Minutes of Board of Director meetings, Appellant's notice of appeal at unnumbered pages 5-7. ACF determined that the minutes of the Board of Directors meetings clearly documented that unobligated funds were used by the Appellant for bonus payments to its employees in a manner that did not comply with the requirements of OMB A-122. ACF concluded that the distributions were bonus payments that the Appellant made simply because it had money left over at the end of the grant years, and that the payments were unrelated to employee performance or suggestions.

OMB A-122, Att. B, provides, in relevant part:

6. Compensation for personal services

h. Incentive compensation. Incentive compensation to employees based on cost reduction, or efficient performance, suggestion awards, safety awards, etc., are allowable to the extent that the overall compensation is determined to be reasonable and such costs are paid or accrued pursuant to an agreement entered into in good faith between the organization and the employees before the services were rendered, or pursuant to an established plan followed by the organization so consistently as to imply, in effect, an agreement to make such payment.

Analysis

The Appellant argued that it complied with the requirements of OMB A-122, Att. B, 6.h. The Appellant asserted that in each of the relevant years, based on the availability of funds, it had a practice of providing a one-time incentive compensation to its staff. Therefore, its payments were based on "an established plan followed ... so consistently as to imply, in effect, an agreement to make such payment[s]." Appellant's brief (Br.) at 2.

Contrary to the Appellant's somewhat circular argument, simply because the Appellant made payments to its employees when money was available at the end of a budget period, the payments themselves are not evidence that the Appellant had an "established plan" or "agreement to make such payment[s]." In Licking County Economic Action Development Study, DAB No. 1159 (1990), the Board upheld a similar disallowance.⁽⁴⁾ In Licking, supra, at 4, the Board said:

The Grantee's description of the circumstances surrounding these payments clearly demonstrates that they were outside the scope of allowable incentive compensation. The cost principles require that such compensation be reasonable and paid (or accrued) pursuant to a good faith agreement entered into before services were rendered or an established plan followed by the organization so consistently as to imply an agreement to make such payment. ... [T]he Grantee, in effect, acknowledged that the payments were not made pursuant to an agreement entered into before services were performed, or pursuant to an established organizational plan.

Similarly in this case, the Appellant, in effect, acknowledged that these payments were not made pursuant to an agreement or established organizational plan. Without an established plan, the Appellant cannot show that employee performance was enhanced due to these payments. In addition, the Appellant failed to establish that the payments were to reward employee performance or other achievements as allowed by the OMB provision. Instead, the Appellant simply asserted that, while the minutes of the Board of Director meetings do not reflect the basis for the compensation, when the minutes are read in the context "of a Board trying to comply with the myriad of principles concerning non-profits, the minutes ... reflect a Board trying to adhere to the spirit of the incentive compensation provision." Appellant's Br. at 3.

Even if the Appellant intended by its assertion to state that the payments were made on one of the bases indicated in the OMB provision, there is nothing in the record which supports this conclusion. If a grantee accepts federal funds, the grantee is required to comply with all the requirements for stewardship over those funds. This Board has long held that a grantee bears the burden of documenting the allowability of costs charged to federal funds. See, e.g., Rio Bravo Association, DAB No. 1161 (1990); Columbus County Services Management, Inc., DAB No. 1567 (1996). In this case, the Appellant cannot meet this burden by asserting generally that it was "trying to comply with the myriad of principles concerning non-profits" or with the "spirit" of a particular provision.

We therefore find that the Appellant did not provide any evidence to show that the payments were based on an established plan or an agreement to make such payments or that the payments were based on performance or other achievements. These payments are therefore unallowable pursuant to OMB A-122, Att. B,; 6.h.

Conclusion

Based on the foregoing analysis, we find that the payments made to the Appellant's employees were unallowable bonus payments that did not satisfy the cost principle standards for allowable incentive compensation. Accordingly, we sustain the entire disallowance of $44,509.

M. Terry Johnson

Norval D. (John) Settle

Donald F. Garrett

Presiding Board Member

4. In the Board's July 7, 1997 acknowledgment of notice of appeal, the Board sent the Appellant this decision along with several others. The Board informed both parties that they should consider the standards discussed in those decisions when making their arguments.