New City Health Center

The New City Health Center (New City/Grantee) appealed a November 28, 1997 decision by the Health Resources and Services Administration (HRSA) Ad Hoc Grant Appeals Review Committee (Review Committee) to uphold HRSA's termination of New City's grant award under the Health Centers Consolidation Act of 1996.

The HRSA Review Committee upheld the termination based on its findings during a November 1997 site visit that New City failed to meet special conditions requiring improvements in its management and fiscal operations which were placed on its grant award in 1997.

Uniform requirements for the administration of HHS grants are contained in 45 C.F.R. Part 74. Section 74.61(a)(1) of 45 C.F.R. provides that a grant award may be terminated in whole or in part, without the consent of the grant recipient, if a recipient materially fails to comply with the terms and conditions of the award. New City acknowledged serious problems in its past and admitted that at the time of the site visit it continued to be out of compliance with several important terms and conditions of the grant. New City argued that it nevertheless had improved substantially and was continuing to improve, and its grant termination should therefore not be upheld. However, the applicable regulations did not provide New City an indefinite period of time for it to correct deficiencies and comply with critical terms and conditions designed to safeguard federal funds and ensure that such funds are used efficiently and only for grant purposes. For the reasons stated below, we conclude that the record substantiates HRSA's findings of serious deficiencies in New City's management and fiscal operations that amount to a material failure to comply with the terms and conditions of its grant award. Consequently, we sustain the termination.

Background

New City was opened in 1986 to provide health care to the medically underserved and uninsured residents of the Englewood, West Englewood, and New City areas of Chicago, Illinois. On January 25, 1996, New City received a renewal notice for a one-year budget period effective February 1, 1996. HRSA Appeal File (App. F.), Tab 7.

By letter dated August 9, 1996, HRSA notified New City that four critical problems were identified in a limited site visit of the Grantee's program conducted on July 24-25, 1996 (July 1996 site visit report). HRSA App. F., Tab 12. HRSA required that New City address all four of these problems by September 3, 1996; since we find below that the termination is warranted due to New City's unremedied fiscal and management problems, we limit our discussion to those two items.

In relevant part, the July 1996 site visit report found that New City's financial viability showed net losses from operations for each of its two prior fiscal years exceeding $150,000. The report also found that New City's cashflow projection for the end of fiscal year 1997, unless changed drastically in terms of increased revenues and/or reduced expenses, was expected to show net losses exceeding $200,000. (The grant for that year totalled $563,051.) Id. at 1. In addition, New City had drawn down 79% of its grant funds in the first six months of its grant year, which the report termed "excessive."

The report also noted that New City's management had been highly unstable, which contributed to the Grantee's operational problems. Specifically, there was apparent Board involvement in the day to day activities of the health center and continuous leadership turnover in the top levels of New City's management. Id. at 2. Based on these findings, HRSA required New City to submit a revised and verifiable revenue/expense projection for the balance of the year and monthly financial statements. Id. In addition, HRSA told New City that its Board should "visit existing policies and practices with a view of reducing/eliminating the causes of potential conflict between the Board and management staff." Id. at 3. HRSA gave New City a deadline of September 3, 1996 to correct these and other problems.

In a letter dated August 29, 1996, New City responded to HRSA, admitting the existence of the fiscal and management problems identified in the review. HRSA App. F., Tab 15. New City admitted that it was presently operating at a loss, stating that it had had problems ever since a 1993 cut in its grant at a time when its physician productivity was poor, but noting that its productivity had steadily improved. New City maintained that all its current drawdowns of federal dollars were necessary. Further, New City responded that it had recently fired its Executive Director, who had worked there for only six months, but that there had been no improper Board involvement in management. New City also stated that its Financial Director had just resigned and it was therefore unable to provide the monthly financial information sought by HRSA at that time. It stated that it hoped to fill both positions with qualified applicants soon and implied that the financial reports would be forthcoming then. The record shows that neither the Executive Director nor the Financial Director positions were filled by the deadline indicated, and there are no financial reports responsive to the July 1996 site visit report in the record.

On September 12-13, 1996, HRSA conducted a diagnostic review of New City's grant program to assess if the problems identified in the July 1996 review had been addressed. HRSA App. F., Tab 16. The September 1996 review found that New City had not remedied the previously identified problems in its grant program. As a result, HRSA incorporated six special conditions into the terms of New City's January 28, 1997 grant award, five of which are relevant to fiscal and management issues. These special conditions were required to be addressed by certain specified dates. In relevant part, the conditions provided:

2. By March 1, 1997 you must submit a plan and update on the status of hiring an Executive Director and Fiscal Director. . . . By May 1, 1997 you must submit evidence that both . . . positions have been filled.

3. Within 30 days following the monthly board meetings, you must submit board minutes, committee minutes, revenue and expense statements and productivity reports of actual versus budgeted goals.

4. By April 1, 1997 you must submit a time-phased economic recovery plan to improve cashflow, set up a cash reserve, improve marketing of services and increase productivity of providers. You must also address the following:

a. cost containment, cost reduction, and revenue maximization activities.

b. options considered for organizational structuring, (i.e., reorganization, merger, incorporation into an integrated delivery system) that will enable the health center to establish a stable presence and address the issues that threaten the long term viability of the center.

5. By April 1, 1997 you must submit revised Board approved policies and procedures related to:

- Financial statements/reports

- Accounts receivable/billing/collections

- Ordering/purchases/payable/check signing

- Fixed assets/inventory

6. By April 1, 1997 you must develop and submit a plan to improve board functioning related to:

- Approval of policies/procedures

- Documentation of self evaluation

- Review and presentation of the annual audit report to the Board.

HRSA App. F., Tab 22, at 2. In addition, special remarks included in the grant award stated, in relevant part:

This Notice of Grant Award in the amount of $296,342 reflects a decision to defer action on your FY 97 continuation application for six months. This will provide the Bureau of Primary Health Care time to resolve issues that were identified during the review process.

Id. at 3. This special condition meant that, rather than approving the usual full year's funding, HRSA was extending New City's funding by only six months.

HRSA conducted a further review of New City's grant program on July 8-10, 1997 and found that the Grantee had not met most of the conditions placed on the January 28, 1997 notice of grant award. Two reports were issued: "PCER (Primary Care Effective Review) Fiscal and MIS Site Visit Report" (PCER fiscal report) and "BPHC (Bureau of Primary Health Care, a division of HRSA) Administration and Governance PCER Report" (PCER governance report).⁽¹⁾ See HRSA App. F., Tab 26.

The PCER fiscal report stated, in relevant part:

They [New City] have had no financial statements, no profit and loss statements since January 31, 1996. They do have cash flow reports that indicate that on a cash basis they are breaking even but these reports have not been tied into the actual bank accounts, contain errors and count collections of old receivables as current income. ....

Tab 26, PCER fiscal report at 1. Further, the PCER fiscal report noted, in its section on financial status, "The problems are numerous and include the following: . . . Faulty Reporting; Inadequate Financial Policies and Procedures; Duplicate MIS [Management Information Systems] Not Being Used to Capacity; Charges are Inadequate and are Not Being Booked; . . . ." Id. at 5-9. (Emphasis deleted.) The PCER governance report stated, in relevant part:

Since the diagnostic review in September 1996, the center hired executive and finance directors, stopped the deficit in operations, and brought the board into near compliance. Little progress was made with the policy development, financial, and other operations issues identified during the last review largely because the management team has been in place for little more than one month. The center's weak financial position, the poor condition of its operating systems, low physician productivity, and the lack of readiness for managed care make its prospects for the future uncertain.

HRSA App. F., Tab 26, PCER governance report at 1.⁽²⁾

Since New City's grant had been extended for only six months in January 1997, HRSA was required to make a further determination about New City's status immediately after receiving the PCER reviews. HRSA issued New City another notice of grant award on August 15, 1997 which retained the special conditions contained in the January 1997 award, designated New City an exceptional "high risk" organization, and added three additional special conditions. HRSA App. F., Tab 28. Specifically, New City was given a new deadline of September 15, 1997 to submit its time-framed economic recovery plan (originally due April 1, 1997); a new deadline of September 1, 1997 to submit the monthly board meeting minutes and other critical documents for each month for February through July 1997; and a new deadline of October 1, 1997 for filling the Fiscal Director position (since the newly hired Fiscal Director had quit in August 1997). In relevant part, the additional special conditions added by HRSA at this juncture required:

By October 1, 1997 you must develop and submit a plan that is acceptable to [BPHC] to improve board functioning . . . .

By October 1, 1997 you must submit documentation that corrective action has been taken to address the deficiencies identified in the July 8-10, 1997 Primary Care Effectiveness Review, particularly related to: . . . MIS and financial management and accounting issues. Improvements must be made in MIS record keeping, the accuracy of financial reporting, and the reliability of the accounting system.

HRSA App. F., Tab 28, at 3.

Finally, a drawdown restriction was placed on New City's Payment Management Account on the final three months of funds for this budget period. HRSA expressly stated that if the Grantee did not comply with the special grant conditions, the drawdown restriction would ensure that the final three months of this budget period extension would be for the orderly phaseout of grant activities. Id.; see also HRSA App. F., Tab 29 (August 19, 1997 letter from HRSA to New City reiterating special conditions and drawdown restriction).

HRSA conducted a site visit on November 5-7, 1997 (November 1997 site visit report) to verify whether New City had met the special conditions. HRSA App. F., Tab 32. HRSA determined that the special conditions, as well as the corrective actions required by the PCER reports, had not been met, and New City was notified on November 28, 1997 that the grant would be terminated effective January 31, 1998 for failure to meet the special conditions by the dates specified in the August 1997 notice of grant award. HRSA App. F, Tab 33.

HRSA put New City on notice as early as August 1996 that its financial and management operations were seriously deficient, and HRSA detailed several steps that were needed to bring New City back into compliance with the terms and conditions of its grant. HRSA followed up with further site visits and notified New City that its marginal improvements were unsatisfactory. The record before us shows that by November 1997, although New City had taken some actions to improve its situation, it had not complied with conditions placed on the grant that were designed to assure that the half-million dollars in federal funds it received were being spent efficiently and only for grant purposes. Consequently, we conclude that New City's failure to comply with these financial and management conditions was so material to the overall grant that termination is warranted.

Below we discuss the specific regulations underlying the conditions HRSA imposed on New City's grant, and the evidence supporting our conclusion that New City so materially failed to meet grant conditions that termination of its grant was warranted. We note that although the parties provided extensive documentation in support of their respective positions about the numerous conditions encompassed in the award documents and PCER reports, we have chosen to limit our discussion to New City's deficient fiscal and management operations. These deficiencies are so material that, even if we assume that New City indeed complied in all other respects with conditions imposed by HRSA, termination was still warranted.

1. Financial operations

The Health Centers Consolidation Act of 1996, Public Law No.

104-299, (the Act) enacted October 11, 1996, provides requirements for health centers that receive grant funds. See HRSA App. F, Tab 1. Section 330(j)(3)(D) of the Act provides that the Secretary may not approve an application unless the health center demonstrates its financial responsibility by the use of such accounting procedures and other requirements as may be prescribed by the Secretary. In addition, section 330(q)(1) provides, in relevant part:

Each entity which receives a grant under this section shall provide for an independent annual financial audit of any books, accounts, financial records, files, and other papers and property which relate to the . . . use of the funds received under such grant . . . . For purposes of assuring accurate, current, and complete disclosure of the . . . use of the funds received, each such audit shall be conducted in accordance with generally accepted accounting principles.

Section 74.26(a)(1) of 45 C.F.R. provides, among other things, that nonprofit organizations shall be subject to the audit requirements contained in Office of Management and Budget Circular A-133 (OMB A-133) (55 Fed. Reg. 10019, March 16, 1990). See also 42 C.F.R. 51c.303(d) (1996). OMB A-133 provides, in relevant part:

12. Scope of Audit and Audit Objectives.

a. The audit shall be made by an independent auditor in accordance with Government Auditing Standards . . . . An audit under this Circular should be an organization-wide audit of the institution.

Further, OMB A-133, � 13 a. provides, in relevant part:

The independent auditor shall determine and report on whether the recipient has an internal control structure to provide reasonable assurance that it is managing Federal awards in compliance with applicable laws, regulations, and contract terms, and that it safeguards Federal funds.

HRSA first questioned the financial viability of New City's grant program in the July 1996 site visit report. HRSA App. F, Tab 12, att. 1. Thereafter, the November 1997 site visit report concluded that New City had not complied with the terms and conditions of the grant with regard to financial matters. HRSA App. F., Tab 32. In relevant part, the report noted that New City's fiscal year 1996 audit had not yet been submitted, although it was due on May 31, 1997 as specified by the regulations, and that it was evident from the reviewers' discussions with New City's auditor that the audit, when submitted, would fail to satisfy grant conditions in several serious ways:

Unqualified audit. Non-compliance. The condition calls for the submission of an unqualified audit. Because of the computer crash which destroyed certain records, there is no possible way for the audit to be unqualified.

No material weaknesses. Non-compliance. The condition called for an audit which listed no material weaknesses. This will not occur, and several material weaknesses will be listed. These weaknesses will cite loss of the data with a concomitant failure to have a backup system in place; the lack of a fiscal officer for much of the prior year; the use of a partial general ledger in the prior year; the lack of a schedule of fixed assets; and the apparent misclassification of certain accounts in the trial balance.

HRSA App. F., Tab 32, at 3-4 (emphases in original).⁽³⁾ While these conditions were specifically addressed to the lifting of "Exceptional Grantee" status, these findings demonstrated untimeliness of audit submission, lack of generally acceptable accounting practices, and a general disregard for federally instituted grant requirements. HRSA supplemental brief (Supp. Br.) At 7. HRSA concluded that New City "demonstrated in 1997, after many opportunities for change, that it did not have effective control or accountability of its financial matters." HRSA's Supp. Br. at 4. As we discuss below, HRSA's conclusion was based not only on New City's failure to meet the audit requirement but also on its management's continued failure to address its fiscal problems by adopting responsible financial control policies.

New City maintained that it had partially complied with HRSA's financial status condition. New City argued that "the August 15, 1997 notice of grant award sets an impossible standard in requiring an 'unqualified audit' because two computer crashes destroyed certain records." New City Supp. Br. at 1. New City did not challenge the account of this situation provided in the July 1997 PCER fiscal report:

In early 1996 [New City] switched to new accounting software which was given to them by the Board Treasurer. During the year it crashed three different times (losing all data) before they realized it was only a demonstration software disk and not real software. They then spent several months trying unsuccessfully to get the real software for free. They apparently have no general ledger for the year ended January 31, 1997.

HRSA App. F. Tab 26, PCER fiscal report at 2.

In addition, despite HRSA's finding to the contrary, New City asserted that its audit met the balance of the grant award standard in that the audit reflected no material or significant weaknesses. New City Supp. Br. at 1. Consequently, New City argued that, but for the impossible requirement of an unqualified audit, it met the grant award conditions.

We find that New City's audit certainly did not comply with the terms and conditions of its grant award. We do not agree that the requirement for an unqualified audit can be termed "an impossible standard" for a grantee who agreed in its application for over half a million dollars in federal funds to satisfy that standard. New City's explanation that two computer crashes destroyed certain records needed for its audit does not excuse it from the requirement that it maintain proper documentation to support its use of federal funds. See 45 C.F.R. � 74.21(b)(2), (7). New City did not explain why critical source documentation, such as vouchers, invoices, etc., for information that would have been entered into the ill-fated computer system was not preserved as a back-up. Under generally applicable grant administration regulations, New City was required to maintain documentation for three years from the date of its final expenditure report. 45 C.F.R. � 74.53(b)(1). Moreover, New City did not explain why, when it was already on notice that its fiscal management was not meeting grant requirements, it wasted further time trying to get the real software for free. We find this particularly astonishing given that minutes for New City's Board for January 1996 indicate that the Finance Director reported that a $25,000 grant had been awarded to the Grantee for software for the accounting department. HRSA App. F., Tab 21, att. 2, at 3 (1/22/97 letter from New City to HRSA responding to 9/96 review).

The obligation to provide and maintain documentation showing that costs charged to a grant were actually incurred and were reasonable, allocable, and allowable is fundamental. 45 C.F.R. � 74.21. As this Board has repeatedly held, the burden to document the existence and allowability of costs claimed in grant programs rests with the grantee. Oklahoma Office of State Finance, DAB No. 1669 (1998) at 4-5; Nebraska Health and Human Services System, DAB No. 1660 (1998) at 8; Greater Philadelphia Health Action, Inc., DAB No. 1605 (1995).

New City was provided ample opportunity to comply with the applicable guidelines. Its failure to do so in this instance means that there is no assurance that the funds it drew down in 1997 were actually spent on grant objectives and in accordance with its own policies. Consequently, we find New City's failure to comply with this audit condition to be material.

In addition, we are unable to credit New City's assertion that it met the condition for having an audit that revealed no material weaknesses. While New City focussed on the data lost in the computer crash, there were several other material weaknesses identified by its auditor: the lack of a fiscal officer for much of the prior year; the use of a partial general ledger in the prior year; the lack of a schedule of fixed assets; and the apparent misclassification of certain accounts in the trial balance. HRSA App. F., Tab 32 at 3-4. Despite the extensive documentation it provided, and its contention that its operations had been upgraded, New City did not establish that these weaknesses did not exist. Moreover, several of these weaknesses were problems that New City was required to address by special conditions on its January 1997 grant. Specifically, it was required to take action on filling its Finance Director position and to submit evidence by May 1, 1997 that it had been filled. However, the record shows that New City did not fill that position until June 2, and the Grantee subsequently terminated that employee immediately after the July 1997 PCER review. Despite the obvious importance of this position, and the subsequent HRSA condition that New City fill it by October 1, New City was still without a Financial Director on October 1, 1997. In addition, by April 1, 1997, New City was supposed to submit revised Board approved policies and procedures related to financial statements/reports (which would presumably include its general ledger) and its fixed assets/inventory. As we discuss below in connection with New City's failure to meet grant conditions relating to management, there is no evidence that such policies and procedures were formulated and adopted by New City's Board of Directors by April 1 or even by October 1. Without such policies that are necessary for sound fiscal management, New City could not meet the condition for having an audit that revealed no material weaknesses.

As noted above, New City's grant award for its 1997 program year was $563,051, and it was given repeated warnings by HRSA that its fiscal management of this large sum of federal funds needed substantial improvements to meet grant requirements. By August 1997, HRSA explicitly informed New City that if it did not make the improvements specified in the July PCER fiscal report by October 1, 1997, the last three months of grant money would be restricted to close-out of the grant. The record shows that although New City made some improvements, by November 1997 it still was not in compliance because it still did not have adequate policies and systems in place to track and safeguard its federal and other funds. Moreover, as we discuss below, New City still had not fulfilled other conditions placed on the grant that were designed to obtain management changes needed for the Grantee to get control over its fiscal problems. HRSA was not required to give New City unlimited time to correct its deficiencies while the risk to federal funds remained unabated. We therefore conclude that the record shows that termination of the grant for failure to satisfy fiscal management conditions was warranted.

2. Management failures

Section 330 (j)(3)(H) of the Act provides, in relevant part, that a center will establish a governing board which:

(i) is composed of individuals, a majority of whom are being served by the center and who, as a group, represent the individuals being served by the center;

(ii) meets at least once a month, selects the services to be provided by the center, schedules the hours during which such services will be provided, approves the center's annual budget, approves the selection of a director for the center, and . . . establishes general policies for the center.

Section 51c.304 of 42 C.F.R. provides, in relevant part:

A governing board for the center shall be established by an applicant as follows:

(d) Functions and responsibilities. (1) The governing board for the center shall have authority for the establishment of policy in the conduct of the center.

(2) The governing board shall hold regularly scheduled meetings, at least once each month, for which minutes shall be kept.

(3) The governing board shall have specific responsibility for: (i) Approval for the selection and dismissal of a project director or chief executive officer of the center;

(ii) Establishing personnel policies and procedures, including selection and dismissal procedures, salary and benefit scales, employee grievance procedures, and equal opportunity practices;

(iii) Adopting policy for financial management practices, including a system to assure accountability for center resources, approval of the annual project budget, center priorities, eligibility for services including criteria for partial payment schedules, and long-range financial planning;

(v) Assuring that the center is operated in compliance with applicable Federal, State, and local laws and regulations . . .

In addition, OMB A-133 requires a grantee to have an internal control structure to provide reasonable assurance that it is managing its federal awards in compliance with applicable laws, regulations, and grant terms, and that it safeguards federal funds. OMB A-133, � 13(a).

As noted above, as a result of the July 1996 and September 1996 reviews that found New City seriously deficient in several aspects of its management, HRSA established the following conditions in the January 1997 notice of grant award:

5. By April 1, 1997 you must submit revised Board approved policies and procedures related to:

- Financial statements/reports

- Accounts receivable/billing/collections

- Ordering/purchases/payable/check signing

- Fixed assets/inventory

6. By April 1, 1997 you must develop and submit a plan to improve board functioning related to:

- Approval of policies/procedures

-Documentation of self evaluation

-Review and presentation of the annual audit report to the Board.

HRSA App. F., Tab 22, at 2. In the August 1997 supplemental grant award, these conditions were restated, with a new deadline of October 1, 1997 for compliance (a requirement for review and presentation of monthly financial statements was added). HRSA App. F., Tab 28, at 3. However, the November 1997 site visit report concluded that the policies and procedures required to be submitted to HRSA by October 1, 1997 were neither created nor submitted. In addition, the report noted that no time line existed for the future submission of these items in light of the probable decision to turn over all financial management to another entity.⁽⁴⁾

New City denied that it was only partially compliant with these grant conditions. While New City stated that its project officer was out of the office during the week most documents were to be submitted, New City maintained that all the policies at issue were submitted on October 1, 1997.⁽⁵⁾ See New City App. F. at 124-164. Finally, New City asserted that the required policies were approved and executed by the new Board of Directors on December 8, 1997.

Contrary to New City's argument, our review of New City's documentation shows that New City did not comply with all the requirements of the grant award related to management. First, while the documentation submitted by New City shows the policies for some items, the documentation does not contain policies for all the items identified by the site visit report. For example, while New City's submission contained policies for credit and collection (collection was a required item, but credit was not), there are not any policies for billing and accounts receivable. See New City App. F. at 136. In addition, there were no policies submitted concerning financial statements/reports or fixed assets. Moreover, the policies submitted were not signed as approved until November 20, 1997, and the signature is that of the Board Chair who was not elected to that position until December 8, 1997. Id. at 135; see id. at Ex. D (minutes of 12/8/97 Board meeting). Although New City claimed that it had submitted minutes showing Board consideration of the required policies, the documents following that claim were the signed policies, not minutes of Board meetings showing the policies' presentation and adoption. New City did not identify any other minutes in the record and we found no mention of these policies in our review of those minutes that were in the record, not even in the minutes of the Board meeting at which the signer of the policies was elected.

Further, New City's appeal file does not contain any documentation with regard to procedures used to implement New City's program policies as required by the grant award condition. Contrary to New City's argument, although an October 6, 1997 letter from the Acting Director of HRSA's field office to New City's executive director, submitted as New City's supplemental brief exhibit C, acknowledges receipt of policies from New City, the letter does not confirm that policies for all of the required items were submitted. Nor does the letter address the procedures requirement of the grant award condition. Instead, the letter addresses the items that were submitted by New City, noting that the policies submitted were not signed as Board approved and did not indicate an effective date. New City Supp. Br., Ex. C at 2. We cannot conclude, as New City argued, that the response from the Acting Director indicated that, but for the signed Board approval, the policies and procedures condition was met for all the policies required. As noted above, by statute a grantee's governing board is the entity responsible for establishing the policies regulating the conduct of grant activities. Moreover, the lack of signed Board approval cannot be dismissed as a mere administrative oversight, as there is no evidence in the record, such as Board minutes or affidavits from Board members, that any such policies were presented to and approved by the Board.

The continued absence of these policies was symptomatic of New City's failure to address satisfactorily serious management deficiencies that had repeatedly been brought to its attention starting in August 1996. These deficiencies meant that for an extensive period of time, the Grantee's Board was not performing the duties required by the applicable statutes, regulations, and other applicable law incorporated into the grant to oversee the expenditure of grant funds as New City had promised to do. New City did not dispute HRSA's finding that New City was unlikely ever to comply with the condition for Board-approved fiscal policies. We therefore conclude that the record shows that termination of the grant for failure to satisfy management conditions was warranted.

1. - ' '

2. For this part of the report, the reviewers apparently accepted as accurate the financial statements that the fiscal report found highly questionable, in finding that the deficit had been stopped.

3. These preliminary findings of the auditor were confirmed in his final report: "We could not rely on the financial statements because of lack of general ledger, ineffective controls and inadequate supporting documentation on fixed assets, receivables and revenue. We were unable to verify the opening balances." New City App. F. At 281.