Statutory and Regulatory Background

OCS makes discretionary grant awards under its Community Services program to help alleviate the causes of poverty in distressed communities. These awards are intended to promote full-time permanent jobs for poverty-level individuals, and income and/or ownership opportunities for low-income individuals. Those eligible to apply for economic development projects include private, locally initiated, non-profit community development corporations governed by a board of directors consisting of community residents and business and civic leaders.

The four grants at issue were awarded to Delta pursuant to section 681(a) of the Community Services Block Grant (CSBG) Act, 42 U.S.C. � 991(a). Specifically, the 1991, 1993 and 1994 grants were issued pursuant to then section 681(a)(2)(A) of the CSBG Act which provided:

42 U.S.C. � 991(a)(2)(A) (1993). Following amendment of the CSBG Act in 1994, the 1995 grant was issued pursuant to then section 681(a)(1) and (b), 42 U.S.C. � 9910(a)(1) and (b), which provided:

42 U.S.C. � 991(a)(1) and (b) (1995).

All of the grants at issue contained specific provisions concerning the period of time and the particular objectives for which funding was being made available. In addition, all the grants required compliance by Delta with the provisions of 45 C.F.R. Part 74. The regulations in Part 74 provide uniform administrative requirements for grants made to various types of entities, including non-profit organizations such as Delta. Non-profit organizations are also required by 45 C.F.R. � 74.27(a) to comply with cost principles set forth in Office of Management and Budget (OMB) Circular A-122.¹ OMB Circular A-122 provides a uniform set of cost principles for determining costs of grants, contracts, and other agreements and is designed to promote efficiency and understanding between non-profit grantees and the federal government. It provides guidance on allowable direct costs and allocable indirect costs, as well as guidance on specific cost items.

By accepting these grant awards, Delta agreed to comply with all of the above-cited provisions for ensuring that grant monies were spent only for the purposes for which they were provided. Among other things, these provisions require properly documenting expenditures for goods and services. 45 C.F.R. � 74.61(g). They also require prior approval, in writing, for any changes in the scope or objectives of the project. 45 C.F.R. � 74.103(b). Delta did not dispute that, as the entity which sought and obtained these grant funds, it was responsible for ensuring its own and its subsidiaries. compliance with these provisions.

Factual Background

Delta is a private, non-profit, tax-exempt corporation located in Greenville, Mississippi. Delta was established in 1969 to promote and develop employment opportunities through direct economic development activities. Delta's economic development activities were carried out through two for-profit subsidiaries, Delta Enterprises, Inc., and Delta Capital Corporation, with the stock of the two subsidiaries being wholly owned by Delta.

In 1991, 1993, 1994, and 1995, Delta received grants from OCS. In 1996 OIG auditors examined Delta's performance in four areas relating to the grants Delta received from OCS: whether permanent, full-time jobs were created for low-income individuals; whether grant funds were properly distributed and expended; whether private cash and in-kind services were provided; and whether required fiscal and programmatic reports were accurately completed and submitted timely. Delta Ex. 5, at 2.² The following sections A-D summarize the OIG's findings with respect to the award and implementation of these grants.

A. The 1991 Grant

In response to a June 4, 1991 Grant Announcement published at 56 Fed. Reg. 25,492, Delta submitted an application for a grant in the amount of $220,000 for the purpose of expanding Great River Spike, an existing railroad spike manufacturing business. Delta Ex. 1. The application sought funding under Priority Area 1.1 of the Announcement. Id. Under Priority Area 1.1, "Urban and Rural Community Economic Development (operational)," funding was to be provided "for specific projects and will require the submission of business plans or developmental proposals that meet the test of economic feasibility." 56 Fed. Reg. 25,492, 25,493, ACF Ex. L. Applications for such projects were required to show that the proposed project:

(1) Creates full-time permanent jobs. Seventy-five percent (75%) of those jobs created must be filled by low-income residents of the community and must also provide for career development opportunities . . . . While projected employment in future years may be included in the application, it is essential that the focus of employment projects concentrate on those jobs created during the duration of the OCS project period; . . .

Id. Projects funded under this priority area were to "be operational by the end of the project period, i.e., businesses must be in place, and low-income individuals actually employed in those businesses." Id. at 25,494. Moreover, the application was to have demonstrated that the Business Plan "is both sound and feasible" and that "[c]ritical issues or potential problems that might impact negatively on the project are defined." Id. at 25,498. The proposed project was required to "produce permanent and measurable results that will reduce the incidence of poverty in the community." Id. at 25,499. Favorable consideration was to be given "to applicants who document public/private partnerships which mobilize cash and/or third-party in-kind contributions." Id. at 25,497. Applicants documenting that the value of such cash and/or third-party in-kind contributions "will be at least equal to the OCS funds requested will receive the maximum number of points" in the review process. Id. at 25,499.

In its application, dated August 2, 1991, Delta described its proposed project as an "[e]xpansion of Great River Spike, an existing railroad spike manufacturing business, by activating a 2nd production line thereby creating 25 new jobs." Delta Ex. 1, at 1. In its cover letter, Delta stated that $204,000 of the grant funds would be invested in Great River Spike Company and $16,000 would be used by Delta "for administration." Delta Ex. 1. The specifics were described as follows:

The $204,000 portion of the grant, if approved, would be transferred to Delta Enterprises, Inc., a for-profit subsidiary of Delta Foundation, Inc., which would make an equity investment in its wholly owned subsidiary, Rail Products, Inc. Rail Products, Inc. would transfer the $204,000 to Great River Spike.

Great River Spike will use the money to expand its existing business by activating a 2nd production line. 25 new jobs will be created of which at least 22 would qualify as low income persons. Access to $220,000 of committed private leverage capital would be achieved.

Id.; see also Delta Ex. 1, at 22. Delta represented that the $220,000 grant would "enable Great River Spike to significantly expand business and create 25 new jobs," as well as "stabilize the existing business and the current 32 employers [sic]." Id. at 23. The total number of employees after the expansion was represented to be "57." Id. General management of the Great River operation was to be the responsibility of Delta's "Venture Partner, Jim Smith, of Spike Industries, Inc." Delta Ex. 1, at 35. Under "Critical Risks and Assumptions," Delta noted:

Great River is confident of its future in the spike business. Our financial projections are a realistic forecast of the company's potential. The supply/demand relationship, the railroad's tendency to second and third source their spike purchases, the high capital cost of a spike operation, plus increasing minority supplier development programs are compelling indications that Great River's projected marketing targets can easily be met.

Id. at 38.

Although Great River Spike was in default on a $495,000 loan from the Arkansas Industrial Development Commission at the time of the application, and Rail Products, Inc. had been administratively dissolved by the State of Mississippi on February 16, 1990, neither of these facts was disclosed by Delta in its application. Delta Ex. 5, at 7 - 8; ACF Ex. M.

Based on the representations made in Delta's grant proposal, OCS awarded Delta a grant in the amount of $220,000 with a budget and project period from "10/01/91" through "09/30/92." ACF Ex. N. Standard Terms and Conditions applicable to the grant award confirmed the applicability of Federal regulations at 45 C.F.R. Part 74 to the grant project and provided details for reports required of the grantee. Id. at 3 - 13.

A Quarterly Financial and Programmatic Report submitted by Delta on February 20, 1992, and covering the period "ending December 31, 1991" restated Delta's objective "to create 25 new jobs by starting up a second spike machine" and noted that "[w]e have not created any new jobs as of this date primarily because of operational problems which we have incurred on our first spike machine." ACF Ex. O. Despite the problems, Delta indicated that it expected "to begin hiring by the latter part of April, and fully intend on meeting our original job creation goals of 25 new jobs - no later than September, as per our original schedule." Id.

By letter dated August 13, 1992, Delta requested a nine-month no- cost extension of the grant period, noting that Delta was running "approximately 6-9 months behind on this project, as a result of the need to refurbish the die and other equipment associated with our oldest (the #1) spike machine. OCS funds were used to build the second machine (#2). This machine is currently operating and has provided us with the means to stabilize the existing jobs." ACF Ex. P. Delta stated that it should be able to achieve its goal of 25 new jobs within the requested extension period. Id. By letter dated November 25, 1992, Delta was granted an extended closeout period through June 30, 1993. ACF Ex. Q. Subsequent Financial and Programmatic Reports submitted by Delta on February 2, 1993 and April 19, 1993 revealed that Great River was "continuing ... efforts to rebuild [the] older . first machine,. " and that the second machine, purchased with grant funds, was operational and supported "an employment level of 25" or "29" people. ACF Ex. R.

Even with the extended grant period, Delta never supplied documentation about the in-kind services it had represented it would invest in the project, and never expanded operations to two production lines as promised. OIG auditors determined that Great River Spike was not successful in creating the 25 full-time permanent jobs proposed in Delta's grant application. Delta Ex. 5, at 7. Moreover, Delta did not provide OIG auditors with employment files demonstrating that the few people hired during the project period were low-income, as required by the grant award. Delta Ex. 5, at 7. At the end of the grant close-out period on June 30, 1993, only eight of the new jobs remained. Id. Great River Spike discontinued operations entirely in January 1994 because of significant operating losses and an inability to meet obligations to creditors. Id.

OIG recommended disallowing the full amount of the grant award. Delta Ex. 5.

B. The 1993 Grant

On December 31, 1992, OCS published an Announcement seeking to award CSBG discretionary grant funds to applicants proposing to conduct projects "intended to provide employment and business development opportunities for low-income people through business, physical or commercial development." 57 Fed. Reg. 62,860, at 62,861; ACF Ex. T. As with the 1991 Announcement, applicants were required to show that proposed projects would create "full-time permanent jobs" of which 75% were required to be filled by low-income residents of the community. Id. Funded projects were required to be "operational by the end of the project period, i.e., businesses must be in place, and low-income individuals actually employed in those businesses." Id. at 62,282. Applicants were required to document that "the applicant will mobilize from public and/or private sources cash and/or in-kind contributions valued at an amount equal to half of the OCS funds requested." Id. at 62,868.

In response to the Grant Announcement, on March 26, 1993, Delta submitted a proposal seeking $460,000 in grant funds. Delta Ex. 2. In its cover letter, Delta described the proposed project as follows:

Id.³

On its application, SF-424, Delta described the project as "Start New Threads, Inc., a second jeans manufacturing business in Greenville, MS and create 62 new private sector jobs." Id. at 1. A detailed description of the project provided:

Id. at 11. Included in the proposal was an agreement between Delta and Delta Enterprises, Inc., expressing the intent of Delta "to purchase $420,000 of stock in Delta Enterprises, Inc., its for profit subsidiary, in conjunction with the $460,000 OCS grant, to Delta Foundation, if approved." Delta Ex. 2, at 9. Delta Enterprises, Inc., in turn, agreed to "purchase $420,000 of stock in New Threads, Inc., a new wholly owned subsidiary." Id. The "market demand" for jeans manufacturing was represented to be "very strong," and it was noted that "Fine Vines is currently hiring additional operators to increase production just to meet the increasing demand from our current customers." Id. at 11. The application further stated that "[i]t is neither practical or economical to increase the floor space of the Fine Vines facility." Id. New Threads was proposed to be a "subsidiary of Delta Enterprises and not a division of Fine Vines, or simply an expansion of Fine Vines," although it would "rely heavily on Fine Vines management and production services." Id. at 28. Delta acknowledged that the impending passage of the North Atlantic Free Trade Treaty was a risk factor for the project, but stated that the risk was minimal. Id. at 40 - 41.

Delta was thereafter awarded a grant in the amount of $460,000 with a budget and project period extending from "09/30/93" through "02/28/95." ACF Ex. U.

In its semi-annual Financial and Programmatic Report for the period ending March 31, 1994, Delta acknowledged, once again, its objective of creating "62 new and permanent employment opportunities for low income individuals," and described its progress as follows:

ACF Ex. V. Six months later, a subsequent Financial and Programmatic Report for the period ending September 30, 1994 provided:

ACF Ex. W at 3 - 4.

By letter dated February 21, 1995, Delta requested a nine-month no-cost extension of the grant project noting that to date, 20 persons had been employed, and it was expected that its "first phase goal" of employing 30 people would be met "by late June." ACF Ex. X. Delays in fully implementing the project were attributed to delays in receiving necessary equipment and a failure by the JOBS program to provide an adequate number of qualified candidates. Id. By letter dated July 13, 1995, Delta was granted a nine-month no-cost extension through November 30, 1995. ACF Ex. Y.

On February 28, 1996, Delta submitted its final report for the grant stating that:

ACF Ex. Z.

OIG auditors determined that, although Delta had proposed Greenville Apparel as a stand-alone, separate enterprise located two miles from Fine Vines, ultimately it was created as a sub-contractor of Fine Vines, and was co-located at the Fine Vines. facility. Delta Ex. 5, at 6. Of 22 pieces of equipment purchased with grant funds, 18 pieces were either never installed, or not normal1y used by Greenville employees. Id. at 16 and Exhibit IV to Audit Report - App. Ex. 5; see ACF Ex. AA (Providing a listing of the subject equipment) and Ex. BB (Notes of auditor Emmitt Barnett). At the time of the OIG audit, none of the equipment purchased with grant funds was being used. Delta Ex. 5, at 16.

Moreover, during the course of the grant period, and without the knowledge or consent of OCS, Greenville used grant funds to provide loans to Fine Vines, $30,081 of which remained outstanding at the close of the audit. Delta Ex. 5, at 16. The represented stock purchases to be made with grant funds also never materialized. Id. at 18. Indeed, as stated in Delta's comments on the draft Audit Report, stock purchases could not be made because Delta "Enterprises and Capital had issued all the authorized stock of each corporation previously." Delta Ex. 6, at 11.

Consequently, it was not surprising that OIG auditors found that Greenville Apparel never attained the employment objectives proposed; at its peak employment level as of September 30, 1995, Greenville had only 37 employees, and by the November 30, 1995 end of the grant, the employment level had dropped to 30. Delta Ex. 5, at 6. Moreover, the jobs which were created were of short duration, some 61% of those hired during the grant period were not employed at grant's end, and 74% were employed less than 60 days. Id. By November 8, 1996, Greenville was operating with only ten employees. Id.

OIG again recommended that the full amount of the grant award be disallowed. Delta Ex. 5.

C. The 1994 Grant

As with the 1991 and 1993 grants, the fiscal year (FY) 1994 Announcement for the CSBG discretionary grants program solicited proposals for "projects intended to provide employment and business development opportunities for low-income people." 59 Fed. Reg. 23,932, at 23,933 (May 9, 1994), ACF Ex. CC. Specifically, under Sub-Priority Area 1.1, the Announcement provided:

Id. Projects funded under the Announcement were required to "be operational by the end of the project period; i.e., businesses must be in place, and low-income individuals actually employed in those businesses." Id. at 23,934. Funded projects "must be designed to produce permanent and measurable results that will reduce the incidence of poverty in the areas targeted." Id. Applicants were required to document "that the applicant will mobilize from public and/or private sources cash and/or in-kind contributions valued at an amount equal to the OCS funds requested." Id. at 23,939.

On June 22, 1994, Delta submitted an application for grant funds in the amount of $430,000. Delta Ex. 3. Of the $430,000, Delta proposed to invest $390,000 "in Metcalfe Manufacturing, Inc. of Metcalfe, MS in Washington County, and $40,000 for administration." Id. (cover letter). It was further represented that:

Id. The grant application described the project as "Start Metcalfe Manufacturing, Inc. A Metal Working Business primarily in Metal Box Assembly work and in Metal Stampings in Metcalfe, MS and create 43 private sector jobs." Id. at 1. A detailed narrative description of the project provided:

Id. at 14. Included in the proposal was a "Purchase of Stock Agreement" between Delta and Delta Enterprises, Inc., whereby Delta was to "purchase $390,000 of stock in Delta Enterprises, Inc., its for-profit subsidiary, in conjunction with the $430,000 OCS grant to Delta Foundation." Id. at 12. Delta Enterprises, Inc. in turn agreed to "purchase $390,000 of stock in Metcalfe Manufacturing, Inc., a new wholly owned subsidiary." Id. The $430,000 grant would "enable Metcalfe Manufacturing to create 43 new jobs." Id. at 24. As part of its Manufacturing and Operations Plan, Delta stated:

Id. at 34. With respect to the "Management Team," Delta submitted that:

Id. The only "risk" noted by Delta to conducting the project was its initial reliance on only one customer, Reliance/CommTech. Id. at 39. However, it was noted that:

Id.

Based on the representations made in Delta's grant proposal, OCS awarded Delta a grant in the amount of $430,000, with a project and budget period extending from "09/30/94" through "02/28/96." ACF Ex. DD.

In a semi-annual Financial and Programmatic Report submitted on May 5, 1995, and supplemented on May 8, 1995, Delta informed OCS that:

ACF Ex. EE. An unexpended balance of $276,000 in Federal grant funds was reflected on Delta's SF 269. Id. Subsequent Financial and Programmatic Reports for the periods ending September 30, 1995 and February 29, 1996 stated that "Metcalfe has accomplished its goal of creating 43 new private sector jobs." ACF Ex. FF. All grant funds were represented as having been expended. Id.

OIG auditors determined that, contrary to the representations in its grant proposal, Metcalfe Manufacturing was never incorporated as a subsidiary of Delta Enterprises, rather it was designated as a division of Electro National, a corporate subsidiary of Delta Enterprises. Delta Ex. 5, at 5. Delta was to channel $390,000 through Delta Enterprises to Metcalfe in return for stock; Delta Enterprises actually received $400,000, but only provided $235,000 to Metcalfe. Id. at 13. The remaining $165,000 was loaned, without the knowledge or permission of OCS, to Fine Vines and Electro National. Id. at 13 - 14. A portion of the grant funds, $10,240, was used by Metcalfe to retire a credit line secured in anticipation of receiving the grant, and some $7,978 was improperly taken by or paid to employees of Metcalfe. Id. at 14. As with the earlier grants, the stock purchases proposed in the grant application were not made. Id. at 18 - 19. Finally, as with the earlier grants, Delta did not inform OCS at the time of application, or thereafter, that several of its subsidiaries, including Electro and Fine Vines, had been administratively dissolved by the State of Mississippi, and therefore during the grant period were prohibited by State law from engaging in business transactions unrelated to liquidation of the business. ACF Ex. GG. Finally, as with the other grants, the "committed" private cash contributions to the grant project were never provided. Delta Ex. 5, at 20 - 21.

Moreover, Metcalfe at most created 30 jobs, not the 43-plus represented in Delta's status reports, none of which were full-time or permanent in nature. Id. at 5. Some 67% of those hired were employed less than 90 days. Id. "By November 30, 1995, there were fewer employees than the 14 already employed at the beginning of the grant period. Just 1 month later (2 months prior to the end of the grant period), no jobs remained because Metcalfe terminated operations." Id.

The OIG again recommended disallowing the full amount of the grant award. Id.

D. The 1995 Grant

On January 6, 1995, OCS published an Announcement again soliciting applications under the CSBG discretionary grants program. 60 Fed. Reg. 2103 (1995); ACF Ex. HH. As with the previous grant announcements, funds were to be competitively awarded "to a limited number of private non-profit community development corporations for business development at the local level." Id. at 2105. Proposed projects were required to create "full-time permanent jobs" for low-income residents of the community served, and projects were required to be "operational by the end of the project period, i.e., businesses must be in place, and low-income individuals actually employed in those businesses." Id. at 2105 and 2106. As with previous grant announcements, applicants for funding "must have a substantive role in the implementation of the project for which funding is requested." Id. at 2109. Mobilization of resources through "public/private partnerships which can mobilize cash and/or third-party in-kind contributions" was encouraged and applicants documenting that the value of such contributions would be at least equal to the OCS funds requested would receive the maximum number of points for that criterion in the review process. Id. at 2108 and 2111.

In response to the Grant Announcement, Delta submitted a proposal seeking $320,000 in grant funds to be used as follows:

Delta Ex. 4. On its application form, SF 424, Delta described the proposed project as "Start Delta Eagle Fuel Cell, Inc., an Aircraft and Helicopter Neoprene Rubber Fuel and Flotation Bladder Repair businesses in the Mid-Delta Empowerment Zone and create 30 new jobs." Id. at 1. Additional detail in the Executive Summary described the project as follows:

Id. at 12. A Purchase of Stock Agreement and Loan Agreement between Simmie Brown, President, Delta Eagle Fuel Cell, Inc., Harry Bowie, Chairman and CEO of Delta Capital Corporation, and Willie Goliday, President and CEO of Action Communications, Inc. and Moeller Manufacturing, Inc. was included in the application package and provided:

Id. at 10. Delta Eagle Fuel Cell, Inc. was to be a "joint venture corporation" with Moeller Manufacturing, Inc. owning a 51% share of the joint venture, and Simmie Brown owning 49%. Id. at 28. Delta acknowledged a "risk" that a new, improved product could make Delta Eagle Fuel Cell's products obsolete, but downplayed this risk as "very small" and noted that "if it occurred, our business would probably be immune to it for a least a few years." Id. at 39. It further noted that:

Id.

Based on the representations in Delta's grant application, OCS awarded Delta a grant in the amount of $320,000 with a project and budget period extending from "09/29/95" through "02/28/97." ACF Ex. II.

By letter dated May 31, 1996, Delta provided a detailed update of the status of its joint venture project, indicating that while the objective of the grant project was to create 30 jobs by forming a joint venture, the relationship with Mr. Simmie Brown, the joint venture partner, had deteriorated. ACF Ex. JJ. Specifically, the update stated:

Id. In a subsequent semi-annual Financial and Programmatic Report for the period ending September 30, 1996, Delta indicated on its SF-269 that all $320,000 in grant funds had been expended. ACF Ex. KK. Under Performance against Program Objectives, Delta acknowledged that "[w]e have created no new jobs as of September 30, 1996," and that "to assure that the program objectives are achieved, we will carry out this project at Moeller Rubber Products." Id.

Approximately seven months later, Delta submitted another semi-annual Financial and Programmatic Report in which it indicated:

ACF Ex. LL.

Thereafter, by letter dated February 10, 1997, Delta requested a twelve-month no-cost extension "because of our inability to carry out the programmatic objectives of the grant with the original partner." Delta Ex. 18. In response, OCS, by letter dated April 7, 1997, notified Delta that OCS did "not have sufficient documentation to consider" Delta's request for approval. ACF Ex. MM. In order for the request to be considered, Delta was requested to provide various documentation on the status of the grant project. Id. Delta was also advised that "[a]ny grant funds which you have drawn down but have not yet disbursed, should have been returned to the Payment Management System." Id. at 2. By letter dated May 8, 1997, Delta submitted its response in which it proposed several significant changes to the grant project. ACF Ex. NN. For example, the "extended" project would be conducted through Moeller Rubber Products instead of Delta Eagle Fuel Cell as originally proposed, and instead of manufacturing and servicing aircraft fuel and flotation bladders, grant funds would be used, essentially, to expand Moeller and manufacture an unspecified "variety of rubber products." Id. Delta further requested "that funds projected to be used for equipment - be amended to be used as working capital." Id. None of the unexpended funds were returned to OCS as required by the April 7, 1997 letter. Although Delta submitted a copy of a check in the amount of $295,750 presumably for the purchase of stock, and a stock certificate for one share of stock, Delta did not inform OCS that at the time the stock certificate was issued, all "authorized shares had previously been issued," and therefore no stock was available to be issued. Id. at 4 - 5; see Delta Ex. 5, at 19; Delta Ex. 6, at 11.

While the request for an extension was pending, OIG commenced its audit of Delta's four grant projects. Delta Ex. 5, at 3. The auditors found that Delta had failed to meet its objective to create 30 full-time permanent jobs as proposed in its application for the 1995 grant because Delta had "discontinued the Eagle project after the grant was awarded." Id. at 4. While Delta asserted before the OIG auditors that job creation should not have been "discussed because the Foundation applied for a no-cost extension to the grant period," the OIG noted that a "request for an extension does not preclude the OIG from reporting on the Foundation's progress in accomplishing grant objectives." Id. at 8. The auditors found:

Id. at 22. Finally, as with the other grants, at the time of grant application, Action, the wholly owned subsidiary of Delta Capital was administratively dissolved for failure to file an annual report and pay State taxes, and Moeller, the wholly-owned subsidiary of Action, was administratively dissolved for failure to pay State taxes. Delta Ex. 5, Exhibit V to Audit Report. OIG recommended disallowing the full $320,000 amount of the grant award. Delta Ex. 5.

In summary, OIG recommended that Delta be required to refund all $1,430,000 it received under the four grants. Id. at 25.

After reviewing the OIG report and recommendations, ACF disallowed $1,225,291. A reduction of $172,885 to the OIG's recommended disallowance was related to ACF's calculation concerning actual jobs created under the 1993 and 1994 grant awards.⁴ Additionally, ACF allowed $31,824 for four items of equipment purchased by Delta for the 1993 grant. Delta Ex. 9, at 5. ACF adopted all of the other OIG findings and recommendations.

Discussion

In its disallowance notification, ACF divided the disallowance into six separate findings: (1) lack of documentation ($187,447); (2) safeguarding assets ($204,000); (3) expenditures outside the grant period ($14,240); (4) unallowable costs ($438,020); (5) subsidizing subsidiary organizations ($224,270); and (6) funds remaining in the grant ($157,314).⁵ Delta challenged the basis for each of these findings.

Before addressing the individual components of the disallowance, however, we must address Delta's general arguments about: a) the OIG audit process and b) the methodology used by ACF to determine the amount of the disallowance.

a) In its attack on the OIG audit as an improper basis for the disallowance, Delta alleged that OIG failed to comply with its published audit principles throughout its review of Delta in that OIG: "1) established unsupported criteria and standards for grants awarded to Delta by characterizing grant objectives as absolute guarantees; 2) overstated problems associated with the grants and failed to recognize the benefits Delta brought to grant programs; 3) determined the cause of grant problems by substituting its own business judgment for that of Delta's and failed to recognize the risks involved in each grant project as explained in each grant application; 4) overstated the effect of problems associated with each of the grants and, in some instances, included immaterial and prejudicial information in the audit; and 5) made a recommendation of repayment that was arbitrary and not supported by the facts or law." Delta Br. at 6.⁶

Delta also asserted that during the initial exit review OIG auditors informed Delta's executive director that the audit supported a finding that Delta would be required to repay approximately $637,000 in grant funds, and that it was only during a second exit interview that OIG added other unsubstantiated findings to its audit report and stated that it would recommend repayment of all the grant funds. Delta argued that the varying amounts of OIG's repayment recommendations demonstrate that the findings in the audit report upon which ACF based its determination were unreliable, so that Delta should not be required to repay any of the grant funds. Delta further asserted that the delay ACF took in finalizing its determination after receiving the OIG recommendations demonstrated ACF's lack of confidence in the audit report, as ACF found errors in the audit report that led ACF to reduce the disallowance to $1,225,291.

Delta's arguments concerning the OIG audit process are not persuasive because Delta has misinterpreted the thrust of the OIG audit report. Delta's utter failure to follow the business plans set forth in its grant applications and its misuse of and inability to account for the grant funds were the focus of the OIG report and ACF's disallowance, rather than Delta's failure to create the jobs promised in the grant applications. Thus, contrary to Delta's assertions, this was not a case of OIG mischaracterizing the grant objectives, or failing to acknowledge any benefits brought about by Delta through the grant programs, or substituting its business judgment for that of Delta's in how best to create jobs, or misevaluating the risks involved in the grant projects. Instead, the bases for this disallowance are OIG findings, ratified by ACF, that Delta, for the most part, did not comply with the terms of its grant awards and either failed to account for grant funds as required by the regulations or misused the grant funds by assisting already existing Delta subsidiaries, thereby not using the grant funds for the purposes for which they were awarded.

Furthermore, we reject Delta's assertion that the variability of the OIG's findings during the course of the review process somehow calls into question the final report. Delta did not directly dispute the findings in the audit report that indicate that Delta often made claims about the disposition of grant funds that later proved to be unsubstantiated when thoroughly investigated by OIG. Consequently, it is unsurprising that the OIG findings changed over time. Moreover, Delta's suggestion that ACF's delay in issuing the disallowance and its reduction of $172,885 in the amount finally disallowed showed a lack of confidence by ACF in the OIG report is without merit. Clearly the delay was caused by ACF's independent review of the audit's findings as the agency in charge of the grants. As we discuss below, ACF's determination not to disallow all of the grant funds was based on its discretionary authority, not on a conclusion that the OIG findings were unreliable or incorrect.

Delta also asserted that OIG auditors failed to give ACF Delta's complete response to the audit, thereby calling into question the fairness of ACF's review of the audit. Although ACF did not address this contention, even if it were true, any such failure would not be grounds for overturning the disallowance. We note that the Board's process is a de novo review. As such, the Board considers all material offered by the parties. Here, Delta's response to the draft OIG review is included in the record (Delta Ex. 6). In making its decision, the Board has reviewed this exhibit, as well as all the other exhibits in the record. Consequently, Delta has not incurred any prejudice if, in fact, its complete response to the draft audit was not made available to ACF.

b) Delta also questioned the methodology used by ACF to determine the number of FTE jobs created under the grants that led to the reduction of the disallowance from the full amount recommended by the OIG audit. Delta maintained that the formula imposed by ACF "understated and undervalued" the number of jobs created by Delta, in effect penalizing Delta by turning job objectives for each grant into job guarantees. Delta Br. at 7. Delta asserted that there was no statutory or regulatory authority for ACF's holding Delta to a standard based on the creation of full-time permanent jobs. Additionally, Delta stated that calculations of the jobs created were unreliable because ACF failed to provide specific details regarding the job history of each employee hired as a result of the grants. Delta asserted that ACF failed to meet its burden to include enough detail about its computations so as to enable Delta to understand and contest them.

ACF's response was that, in the face of the OIG recommendation that the full amount of the grant awards be disallowed, it exercised its discretion in reducing the amount of the disallowance by providing Delta the benefit of the doubt with respect to job creation in two of the grants. ACF asserted that it was "very generous" in its decision to allow any of the expenditures claimed by Delta under the grants. ACF Br. at 28.

As to Delta's arguments that ACF's use of a formula to determine the number of FTE jobs created under the grants was unauthorized by law or regulation, we note that ACF stated that it did this in its discretion as the awarding agency. We find that ACF, as the awarding agency, had the authority to recognize that Delta did use some small part of the grant funds for job creation and that some jobs were created under the grants, so that an adjustment of the disallowance was justifiable under the applicable legal standards. This should not be seen as arbitrariness on ACF's part, as alleged by Delta, but, if anything, lenience in light of Delta's disregard for the most part of its responsibilities as a grantee, as discussed further in this decision.

As to Delta's assertion that ACF "understated and undervalued" the jobs created by the projects, we find Delta's position unsubstantiated by the record. For example, Delta alleged in regard to the 1991 grant for Great River Spike that grant funds were used to create 20 new jobs, or 80%, of the grant objective of 25 new jobs. Delta therefore reasoned that it should be entitled to 80% of the 1991 grants funds under ACF's formula. Delta's position is undercut by several factors. First, Delta has failed to provide any documentation to support the number of jobs it says were created. Delta's mere assertions cannot refute ACF's Exhibit OO, which provides the names of the individuals employed and the length of their employment. Second, the 1991 grant announcement called for the creation of "full-time permanent jobs" for low-income individuals. Delta apparently contends that an estimate of the number of individuals employed on any one day at Great River Spike during the grant project would meet the criterion of full-time permanent jobs. The purpose of the grant was to create new jobs at a new second production line at Great River Spike, not to maintain the jobs at the already existing production line. Moreover, in order to accept Delta's position and hold that 80% of the 1991 grant funds were allowable, we would have to ignore Delta's many failures to comply with the terms and conditions of the grant, which we discuss below. This reasoning also applies to the remaining grant projects. We therefore find that ACF's method of determining the number of FTE jobs created under the grant projects was reasonable under the circumstances of this case.

We also find that Delta had adequate information to contest how the formula was applied. In its disallowance determination, ACF explained generally the application of its formula. Delta Ex. 9, at 3. The precise method by which ACF arrived at the number of FTE jobs created was explained in detail in ACF's Exhibit OO. ACF's Exhibit OO listed, by grant, the names of the employees hired and the length of their employment. Delta had the opportunity in its reply brief to point out any inaccuracies in Exhibit OO, but failed to produce any evidence that would contradict Exhibit OO. Thus, Delta cannot reasonably claim that it was in any way prevented from presenting its case because of a lack of detail about the computations.

We now proceed to discuss each of the six findings in the notification of disallowance.

I. Lack of documentation.

ACF found that Delta lacked documentation to support the following claimed expenditures, by grant year:

• $110,750 in administrative costs. Delta expended $16,000 (1991), $40,000 (1993), $30,000 (1994), and $24,750 (1995) for administration, but did not prepare or maintain personnel activity reports, and thus had no documentation to support the amount of time employees spent on each grant or the salaries and fringe benefits charged to each grant for administrative costs.
• $25,697 in miscellaneous expenditures (1994), for which Delta had only canceled checks, but no invoices or other documentation to support the allowability of the
• $51,000 in management fees (1993) for services that Fine Vines allegedly provided Greenville Apparel, with no time records provided by Delta to support the fees.

ACF therefore disallowed $187,447 because Delta failed to provide adequate source documentation to support grant expenditures as required by 45 C.F.R. � 74.21(b)(7).⁷

On appeal Delta advanced the general argument that it had provided volumes of documents that reflected the administrative activities of Delta officials for each of the grant years and the miscellaneous expenditures for the 1994 grant, and that support the management fees paid to Fine Vines. Delta charged that ACF failed to consider this documentation and erroneously concluded that the costs were not adequately supported.

Delta also challenged the disallowance of $110,750 in administrative costs on the ground that ACF had not adequately explained the basis for disallowing this item. Delta asserted that the OIG auditors determined that only $76,875 of the administrative costs were not supported by documentation, thus showing the unreliability of ACF's findings with respect to the entire amount disallowed for administrative costs. Delta stated that in response to the draft OIG audit, it supplied records which showed the administrative services provided under the Great River and Metcalfe grants (Delta Exs. 10 and 11), time sheets for employees who made contributions to the Greenville Apparel grant (Delta Ex. 12), and travel and expense reports related to administrative services provided for the Eagle grant (Delta Ex. 13). Delta asserted that, while these records do not reflect all of the time spent for administrative services, they are adequate to demonstrate that each grant benefitted from the administrative services provided.

Delta further asserted that it provided a check register and accompanying canceled checks that supported the $25,697 in miscellaneous fees paid in connection with the 1994 grant. Delta Ex. 14. Delta contended that the checks reflect costs and expenses paid directly in furtherance of the 1994 grant to establish Metcalfe Manufacturing, covering such items as labor costs, supplies, utilities, and payroll expenses. Delta argued that the Board has consistently identified checks as sufficient support documentation, citing Campesinos Unidos, Inc., DAB No. 1546 (1995), Home Education Livelihood Program, Inc., DAB No. 1598 (1996), and Meriden Community Action Agency, DAB No. 1501 (1994).

Delta asserted that the management fees paid to Fine Vines with 1993 grant funds were reasonable in that such management fees were contemplated in the grant application. According to Delta, Greenville Apparel paid Fine Vines for management services rather than hiring a separate management staff. Delta asserted that it provided time records of five individuals who provided extensive professional support to Greenville Apparel. Delta Ex. 12. Delta questioned whether ACF had ever examined these time records, which Delta asserted had been provided to the OIG auditors.

We address first Delta's assertion that ACF's findings were unreliable because they allegedly differed from those of the auditors concerning the amount of disallowed administrative costs. As noted above, ACF disallowed $110,750 in administrative costs for the four grants. The OIG auditors stated that $76,875 in administrative costs were not supported by adequate documentation. Delta Ex. 5, at 11. ACF explained, however, that the difference in these figures is due to the fact the OIG figure referred only to administrative costs attributable to wages and fringe benefits as represented by Delta in each of its grant applications, while the larger ACF figure included other administrative costs detailed in Delta's grant applications, for which supporting documentation also was not provided. ACF Br. at 28, n.14. Delta did not respond with any reason why this did not satisfactorily account for the difference between OIG's and ACF's figures. Thus, the $110,750 in disallowed administrative costs included not only wages and fringe benefits for Delta employees, but also travel, supplies, and other miscellaneous expenses listed in Delta's grant applications.

As to the specifics of the questioned disallowed costs, we note at the outset that Delta bears the burden to show how the questioned costs were related to the grants. The requirement to document costs is a fundamental principle of grants management, and the burden to demonstrate the allowability and allocability of costs claimed in a grant program rests with the grantee. Lac Courte Oreilles Tribe, DAB No. 1132, at 5, n.4 (1990). Furthermore, the cost principles set forth in OMB Circular A-122 require that costs must "be adequately documented." Att. A, � 2.g.

The greatest portion of the disallowance under this item consists of wages, accompanying fringe benefits, and management fees. OMB Circular A-122 sets out specific guidelines for the allowability and allocability of salaries and related expenses:

Att. B, � 6.l.⁸

Thus, it is not adequate for a grantee to merely present the payroll records for its employees. The five individuals at issue were employed by entities other than Greenville Apparel. Delta is clearly required to produce records showing how much time each employee devoted to activities associated with the grant project. As ACF pointed out, Delta acknowledged that it did not maintain such time reports. Delta Ex. 6, at 9; Delta Ex. 7, at 2. The only documentation Delta presented concerned the management fees under the 1993 grant. In its brief Delta argued that five individuals for whom it supplied "substantial" time records (Delta Ex. 12) provided "extensive" professional support to the Greenville Apparel project, and that therefore the $51,000 in disallowed management fees should be allowable. Delta Br. at 11. As Delta declared that these individuals provided "extensive" time, and not "exclusive" time to the Greenville Apparel project, the implication is that these individuals were also involved in non-grant activities. For example, Delta submitted time records for Harold Hall, purportedly in his capacity as the chief executive in charge of management of Greenville Apparel. However, Mr. Hall was primarily an employee of Delta as the Chief Operating Officer of Delta Enterprises, Inc., and was also the project manager for at least three of the four grants at issue in this appeal. The other individuals had Fine Vines as their primary employer. In its grant application, Delta estimated that the advisory team from Fine Vines would devote only "approximately 1/4" of their time to Greenville Apparel. Delta Ex. 2, at 36. There is nothing on the time records supplied by Delta to indicate whether or to what extent these individuals were doing work for Delta or Fine Vines or the grant-funded Greenville Apparel.

Under the provisions of OMB Circular A-122, Delta was required to supply time records which reflect "the distribution of activity of each employee" and "account for the total activity for which employees are compensated." Costs must not only be allowable but also allocable to the grant project. Here Delta has failed to produce any documentation that conclusively establishes that any of the wages and management fees disallowed were tied to grant activities.

Other administrative costs disallowed by ACF for lack of supporting documentation included miscellaneous items such as travel, supplies, meals, and telephone charges. Delta supplied approximately one hundred pages of documentation in support of these items. Delta Exs. 10, 11, and 13. Some of the travel documentation was unreadable, but Delta did supply phone records, hotel and restaurant receipts, rental car receipts, etc. However, Delta failed to provide any explanation whatsoever as to how these expenditures provided any benefit to the grant projects. For example, Delta Exhibit 11 contains receipts for "misc. supplies," food and beverage at the Las Vegas Casino in Greenville, and dinner and cocktails at the annual meeting of the Greenville area Chamber of Commerce. While it is possible that these and similar items for which Delta has offered receipts might be related to the grant projects, Delta has not met its burden in establishing that relationship. As such, there is no basis for allowing these undocumented costs under the grants.

As to the $25,697 in miscellaneous fees paid under the 1994 grant and Delta's assertion that Board cases have upheld the position that canceled checks are adequate documentation to support questioned costs, we find that Delta has misunderstood these decisions. In the cases cited, the Board did not hold that checks alone are adequate documentation for a cost claimed under a grant. Generally, additional documentation in the form of an invoice or itemized bill or something similar is needed to establish that the check was issued for activities related to the grant project. A mere canceled check fails to establish a relationship to a grant project.⁹ To mention examples cited by ACF, checks made out by Metcalfe Manufacturing for $55 to Kentucky Fried Chicken or $4,600 to Fine Vines on their face show no relationship to a grant project. Delta's inability to provide any supporting documentation for the checks means that these expenditures were properly held to be unallowable.

We therefore the sustain the disallowance of $187,447 because of Delta's failure to supply any documentation showing that these costs were related to the grants.

II. Safeguarding assets.

ACF determined that Delta channeled $204,000 of the 1991 grant funds through Delta Enterprises and Rail Products to Great River Spike Works. ACF found that Delta did not safeguard assets Great River purchased with these grant funds, as those assets were later taken in an October 31, 1994 foreclosure. ACF stated that the assets purchased with the 1991 grant funds were taken even though the debt foreclosed upon was unrelated to the grant and incurred prior to the grant award. ACF found that Great River had defaulted on payments due on or after January 1, 1991, on a $495,000 loan obtained in 1985 from the Arkansas Industrial Development Commission (AIDC), but that Delta failed to disclose the loan's default status in the 1991 grant application. ACF stated that $204,000 was being disallowed because Delta failed to adequately safeguard assets as required by 45 C.F.R. � 74.21(b)(3) (1994).¹⁰

Delta disputed ACF's finding that it had failed to disclose the loan on its grant application for the 1991 grant (Delta Ex. 1). Delta further insisted that had OCS requested copies of the loan documents, Delta would have provided them. Delta asserted that it had advised OCS of the risks involved in the rail spike manufacturing business and that it could not separate the equipment purchased with the grant funds from the other Great River equipment that was taken in the foreclosure. Delta acknowledged that the Board in Community Action Agency of Chambers-Tallapoosa-Coosa, Inc., DAB No. 1066 (1989), had sustained the disallowance of the cost of assets lost when funds were not used for program purposes and when the act leading to the loss of assets was clearly within the control of the grantee. However, Delta argued here that the 1991 grant funds were used in the manner contemplated in the grant application, and that any loss of assets was due to commercially reasonable circumstances beyond Delta's control. Delta contended that since the equipment loss was due to a lawful foreclosure and Delta did not receive any proceeds from the sale of the assets, ACF was not entitled to any recovery of the assets foreclosed. Delta further insisted that, under 45 C.F.R. � 74.34, equipment acquired by a recipient with DHHS funds shall vest in the recipient, not DHHS.

Delta's assertion that it disclosed the AIDC loan to OCS in the grant application is disingenuous at best. Our careful review of the grant application revealed no affirmative disclosure of the status of the AIDC loan. Rather, in the 53 pages of the application, there are two obscure references to the loan buried in pages of other data. In a six-page listing of what appears to be a balance sheet of Great River Spike's assets and liabilities, there is a reference under the heading "Loan Amortizations" to "aidc, 6% $5757/mon." Delta Ex. 1, at 46. Also, on a page entitled, "Balance Sheet and Cash Flow Assumptions," there is a statement that "GRS pays all loan interest, SIS pay none, at the following interest rate: AIDC 6%. . ." Id. at 48. There are no other references in the grant application to the AIDC loan. This omission of information on the status of the loan is significant in that applicants for the grant were required to disclose "[c]ritical issues or potential problems that might impact negatively on the project. . . ." 56 Fed. Reg. 25,492, at 25,499 (ACF Ex. L). An outstanding loan balance in excess of $441,000 that had been in deferred status since the end of 1990, as shown in Delta Exhibit 15, was a critical issue that should have been forthrightly disclosed to OCS and not obfuscated in tables of data in the final pages of a lengthy grant application. Furthermore, there was no mention in the application that Great River Spike had stopped making payments on the loan in 1990 and that the lender held a lien on all property acquired by Great River Spike (Delta Ex. 15). It is not unreasonable to presume that had these facts been disclosed by Delta in its grant application, OCS would have rejected the application or ensured that there were some means of safeguarding grant assets.

We further find that Delta did not lose the equipment due to commercially reasonable circumstances beyond Great River Spike's control, the inability of Great River Spike to compete effectively in the market for railroad spikes. Rather, the loss was due to circumstances that were foreseeable by Delta, the failure to pay an outstanding loan which had been obtained six years before the awarding of the grant and on which Great River Spike had stopped making payments in 1990. Clearly, if there had not been an outstanding loan, the equipment purchased with the grant funds would have remained with Great River Spike irrespective of the vagaries of the market for railroad spikes. Further, the loss was preventable if Delta had taken steps to protect the federal property interest in the equipment.

Recipients of federal grant funds are required to protect assets purchased with federal funds and assure they are used solely for authorized purposes. Regulations in effect at the time of the 1991 grant required grantees to have a "control system . . . in effect to insure adequate safeguards to prevent loss, damage, or theft of the equipment [purchased with grant funds]."

45 C.F.R. � 74.140(c).¹¹

Clearly there was no approval by OCS here of the encumbrance placed on the equipment purchased with the grant funds. To the contrary, Delta not only did not seek any such approval, but continued to conceal from OCS the status of the equipment even after the foreclosure. ACF Ex. S ("Property Inventory and Disposition Statement" dated March 12, 1995, in which Delta states that a hot forging die purchased for $206,054 has been "retained by Great River Spike Works.")

Furthermore, Delta's reading of 45 C.F.R. � 74.34 as vesting absolute title of equipment purchased with grant funds in the grantee ignores the numerous conditions set forth in that regulation. Briefly stated, the regulation does vest title of equipment in a grantee, provided that the grantee "use the equipment in the project or program for which it was acquired as long as needed . . . and shall not encumber the property without approval of the HHS awarding agency. . . ." � 74.34(c).

Certainly ACF cannot be said to have approved of this lien because, as discussed above, the status of Great River Spike's loan as being in default was not disclosed by Delta in its grant application. Delta essentially gambled that the influx of capital provided by the grant would enable Great River Spike to generate sufficient income to repay its overdue loans, but this was not among the risks ACF agreed to in approving the grant. Consequently, while the foreclosure of Great River Spike might have been lawful as asserted by Delta, Delta's responsibility for the equipment purchased with grant funds was not excused by the foreclosure. Moreover, Delta's proclamation that the loss of the equipment through the foreclosure was an event beyond its control is further called into suspicion by the ultimate disposition of the equipment purchased with grant funds. Delta has not contested the fact put forth by OIG auditors that the manager of the Great River Spike operation, Jim Smith, Delta's Venture Partner, acquired the assets of Great River Spike, including the equipment purchased with the 1991 grant funds, at the foreclosure for $85,000. In other words, one arm of Delta, Great River Spike, went out of business, but its assets were bought by another arm of Delta at a considerable discount. In other words, the $204,000 charged to the 1991 grant ended up being used by Delta to satisfy the debt obligations incurred by one of its subsidiaries and to purchase the grant-funded equipment at a bargain rate for another subsidiary.

We find that Delta's failure to safeguard the assets purchased with the 1991 grant funds has been clearly established and that under the regulations Delta must accept responsibility for the loss of the equipment purchased with grant funds. We therefore sustain the disallowance of $204,000 for this item.

III. Expenditures outside the grant period.

ACF found that Delta expended $10,240 for Metcalfe prior to the start of the 1994 grant. Additionally, ACF determined in regard to the 1993 grant that Greenville Apparel had paid Fine Vines $4,000 for renting a building, at a rate of $500 per month for eight months, after the end of the grant period for the 1993 grant.¹² As authority for disallowing these expenses, ACF cited 45 C.F.R. � 74.28, which provides:

Where a funding period is specified, a recipient may charge to the award only allowable costs resulting from obligations incurred during the funding period and any pre-award costs authorized by the HHS awarding agency . . .

ACF found that, as Delta did not receive prior approval for pre-award costs for the 1994 grant and incurred costs after the specified period of the 1993 grant, a disallowance of $14,420 was mandated.

Delta argued that as these expenditures benefitted the grants, the costs should be allowed as valid expenditures. Delta explained that Metcalfe incurred $10,240 in expenditures prior to the 1994 grant period to repay a line of credit secured in anticipation of the grant. Delta claimed that 45 C.F.R. � 74.25(d) allows ACF to waive prior written approval of pre-award costs. Delta contended that since neither OIG nor ACF challenged the expenditure as unrelated to grant purposes and, since the expenditure benefitted the grant, ACF should waive the need for prior approval, with the costs allowed as valid pre-award expenditures. As for the $4,000 charged to the 1993 grant after the end of the extended grant period, Delta argued that it had informed OCS of the necessity for renting a facility after the end of the grant period. Delta maintained that ACF failed to recognize the benefit of the rental agreement to the continued existence of Greenville Apparel, with the result that ACF erroneously and arbitrarily concluded that these costs should be disallowed. Delta requested that the Board consider that any concerns about the timing of the challenged expenditures were far outweighed by the resulting benefits to the respective grant programs.

Delta has admitted that the funds in question were used to pay expenses incurred outside the respective grant periods. Delta Ex. 7, at 5. Grant funds may be used only for costs which are allocable, i.e., of benefit, to the activities for which the grant was awarded. OMB Circular A-122, Att. A, � 1; Action, Inc., DAB No. 1400, at 3 (1993). The term "benefit," as used in connection with the concept of allocability, derives from accounting principles that the costs must relate not only to cost objectives, but to funding periods as well. The fact that these expenditures were incurred outside their respective grant periods necessarily means that these expenditures were not allocable to the grants and is a sufficient basis in itself for a disallowance. Bedford Stuyvesant Restoration Corporation, DAB No. 1404, at 15 (1993).

Moreover, as set forth above, 45 C.F.R. � 74.28 explicitly limits allowable costs to obligations incurred during the grant funding period, with the exception that pre-award costs may be allowable provided that the granting agency has given its approval. Here there is no evidence in the record that Delta ever sought such prior approval from OCS for pre-award costs for the 1994 grant, nor that OCS ever gave such approval. Likewise, the applicable regulations specifically preclude reimbursement of expenses incurred after the expiration of a grant. Delta's grant application did not request, nor the grant award provide, funds for supporting the project beyond the specified grant period.

Accordingly, we sustain the disallowance of $14,240 for expenditures made by Delta outside the grant period.

IV. Unallowable costs.

Under this heading, ACF listed seven separate expenditures totaling $438,020 which ACF asserted were unrelated to the operation of the grants. Specifically, ACF found that the following expenditures were unrelated to the operation of the grants:

• $97,929 in unneeded equipment purchased under the 1993 grant.
• $30,081 in loans Greenville Apparel made to Fine Vines.
• $7,979 in miscellaneous expenditures under the 1994 grant.
• $165,000 in loans Delta made to its subsidiaries under the 1994 grant.
• $50,000 in repayment of a loan from the 1995 grant.
• $81,100 in internal transfers unrelated to the 1995 grant.
• $5,931 in garnishments unrelated to the 1995 grant.

ACF found that these expenditures were not reasonable for the performance of the grant award and not allocable to the grant as required by OMB Circular A-122, Attachment A, � 2.a, which provides that in order for a cost to be allowable under a grant award the cost must be "reasonable for the performance of the award and be allocable thereto."

Below, we discuss each of the disallowed costs separately.

a. In its 1993 grant project, Delta through its subsidiary Greenville Apparel used $129,753 in grant funds to purchase equipment. The OIG auditors reviewed 22 pieces of equipment purchased with the grant funds and found that only four of the pieces had been used by Greenville Apparel. The auditors determined that the other 18 pieces of equipment were either used by another Delta subsidiary, Fine Vines, or had never been installed. While the OIG audit recommended that the full cost of the equipment be disallowed, ACF determined that Delta was entitled to costs for the four pieces of equipment that had been used for grant purposes. ACF determined that the other 18 pieces of equipment did not benefit the grant project and therefore disallowed $97,929 for the costs of that equipment.

Delta argued that the purchase of the equipment was made following the business plan for Greenville Apparel put forth in Delta's application for grant funds. Delta asserted that ACF's position shows its lack of understanding of business operations and the risks Delta encountered in a market economy. Delta explained that after purchasing the equipment, it was unable to acquire the additional working capital needed to make Greenville Apparel a success. According to Delta, the unavailability of working capital and increased foreign competition was the reason some Greenville equipment was never used. Delta argued that at the time of purchase of the equipment the expenditure was reasonable and made in furtherance of grant objectives.

Delta further contended that the auditors. conclusions on the use of the equipment were based on statements from a low-level employee at Greenville Apparel who was unaware of the rationale for the purchase of the equipment, the basis for the expansion of the sewing operations, and the economic difficulties faced by Greenville Apparel. Additionally, Delta maintained that Fine Vines. use of Greenville's equipment was contemplated under the grant application, as it was explained in the grant application that Fine Vines and Greenville Apparel would be related and dependent operations.

The issue before us is whether the purchase of the equipment was reasonable for the performance of the award and allocable thereto, as required by the Circular.

Under the Circular, a cost item is "reasonable" if "in its nature or amount, it does not exceed that which would be incurred by a prudent business person under the circumstances prevailing at the time the decision was made to incur the costs." Att. A, A.3. In evaluating reasonableness, consideration must be given to various factors, including sound business practices and the terms and conditions of the awards. Id. A cost is "allocable" to a particular cost objective to the extent of the benefits received.

Here, the question is not whether cost of the items is reasonable in amount. apparently, the equipment was purchased at a discount. ACF Ex. BB at 5. Rather, the circumstances call into question the consistency with the terms of the award, the prudence of the purchase at the time, and, ultimately, whether the purchase was intended to benefit the grant project or other cost objectives of Delta's related organizations.

In response to ACF's determination that Delta had failed to demonstrate that these costs were reasonable or in any way provided a benefit to the grant project, Delta asserted the equipment was purchased in accordance with its business plan. Delta also questioned ACF's adoption of the OIG audit's reliance on an employee's word about use of the equipment. However, a comparison of the 48 items of equipment listed in Delta's business plan for the grant application as needed for the performance of the project with the 22 items of equipment at Greenville Apparel inventoried by the OIG auditors shows no correlation. Compare Delta Ex. 2, at 34 with ACF Ex. AA. Thus, there is no support for Delta's assertion that the equipment was purchased in accordance with the business plan. Delta also did not provide testimony of any employee or expert to explain how this equipment furthered the purposes of the grant; it merely criticized ACF's reliance on the statements of a low-level employee. Consequently, apart from Delta's unsupported assertion that this equipment would have been useful for the project, had it been successful, and the OIG finding that four items were ultimately used by Greenville Apparel, there is no evidence in this record that shows that the equipment purchase was a prudent business expenditure intended to benefit the Greenville Apparel project.

Delta also did not directly deny the accuracy of the employee's statements about which firm, Greenville Apparel or Fine Vines, used the equipment. This calls into question whether the equipment was needed for use in the Greenville Apparel project, as opposed to other Delta projects. While the ultimate use of the equipment is not determinative of reasonableness at the time of purchase, ACF properly considered how the equipment was used as having some bearing on the prudence of the purchase, as well as its allocability to the grant project. In light of the ultimate use of the equipment (except for the four items allowed), Delta needed to provide a better explanation, supported by evidence, to show that the purchase was nonetheless prudent and consistent with sound business practices.

Delta's assertion that Greenville Apparel's failure to secure the working capital from other sources promised in the grant application was a leading cause for Greenville Apparel's failure to use the equipment may be correct, but does little to persuade us of the reasonableness of the equipment purchase. Delta's attributing the failure to a lack of additional capital is questionable in light of the fact that Greenville Apparel made a series of loans to Fine Vines that totaled over $500,000.¹³ If Greenville Apparel needed capital in order to install and use the equipment as outlined in the grant proposal, it should not have loaned the grant funds to Fine Vines instead.

Delta's contention that foreign competition contributed to the failure of this project also calls into question whether it was prudent to purchase the equipment in 1994. Delta acknowledged in its grant application that the possible passage of NAFTA could lead to the closure of domestic apparel plants in favor of plants in foreign countries with lower labor costs. Yet, Delta decided to purchase the equipment in 1994 after Congress had approved NAFTA in December 1993. Pub.L. 103-182 (Dec. 8, 1993).

With respect to these equipment purchases, as with many other items at issue in this appeal, Delta appears to have adopted the position that as long as the grant funds may have benefitted Delta's general objective of bringing jobs to low-income individuals in its geographic area, the expenditure of those grant funds should be considered allowable.¹⁴ The purpose of the grant was to provide full-time jobs for low-income individuals at a new company, Greenville Apparel. The purpose of the grant was not to maintain existing jobs at an existing company, Fine Vines. While the 1993 grant application does indicate that Greenville Apparel and Fine Vines would be related operations, the grant application stated that Greenville Apparel would be a "stand alone" company and would have a separate physical plant from Fine Vines since it was "neither practical nor feasible to increase the floor space of the Fine Vines facility." Delta Ex. 2, at 11, 33. The shifting of grant funds from one subsidiary to another subsidiary is not permitted under principles of grants management, as the costs charged under a grant must be allocable to activities for which the grant was awarded. OMB Circular A-122, Att. A, � 2.a. Purchase of equipment for Fine Vines with grant funds awarded for the Greenville Apparel project is a prime example of a cost not allocable to the grant objectives.

Delta failed to demonstrate that the purchase of this equipment was reasonable under the circumstances and benefitted the grant project. Accordingly, we sustain the disallowance of the equipment costs.

b. ACF found that Delta transferred 1993 grant funds intended for developing Greenville Apparel to Fine Vines, an already existing subsidiary of Delta, in the form of loans, in direct violation of the terms and conditions applicable to the 1993 grant award. At the end of the grant period, $30,081 in loans remained outstanding.

Delta contended that ACF's disallowance action failed to recognize the well-documented relationship between Greenville Apparel and Fine Vines. Delta argued that without the loans to Fine Vines, Greenville Apparel would not have been able to provide jobs to the low-income people it employed. Thus, according to Delta, the grant project benefitted from the loans. Delta further asserted that after the grant period Fine Vines fully repaid the loans that Greenville Apparel had made to Fine Vines. Delta Ex. 16. Delta did not offer any explanation as to what it did with the funds returned after the grant period.

Delta's suggestion that the loans were justified in light of the relationship between Greenville Apparel that was described in the grant application is not well-founded. That application indicated only that Greenville Apparel would contract with Fine Vines for production and management services. Delta Ex. 2. Moreover, the grant award expressly provided that "[n]o transfer of funds to third parties (subgrants and other pass through awards) other than for the purpose identified in the approved grant application shall be made without prior written approval of ACF." ACF Ex. U at 14. Delta did not claim that it had such approval.

It is also troublesome that Delta has asserted that one of the problems Greenville Apparel faced was the unavailability of working capital (see Delta Brief at 15 in regard to the equipment issue discussed immediately above), but somehow Greenville Apparel managed to transfer a significant part of its grant funds to Fine Vines. The OIG report noted that Greenville Apparel had made 15 loans to Fine Vines totaling $596,000, with the $30,081 remaining outstanding at the end of the grant. Delta Ex. 5 at Ex. IV. Once again, we view Delta's action here as "raiding" the grant received by one of its subsidiaries to assist another of its subsidiaries. The regulations and the OMB cost principles do not allow grant funds to be used for purposes other than those authorized in the grant award.

As to Delta's assertion that Fine Vines has repaid the amount of the loans to Greenville Apparel, we note that the documentation offered by Delta to support its position that the loans had been repaid consists solely of canceled checks (Delta Ex. 16), with no record that the funds had been restored to the grant account. We have no indication of what Greenville Apparel may have done with these funds, some of which were not paid until the summer of 1997, some 18 months after the end of the grant period. As noted above, expenditures of grant funds after the end of the grant period are not allowable; consequently, if the funds were indeed returned to Greenville, they should have been available for return to OCS. If the funds were indeed returned prior to the end of the grant period, Delta was obliged to document that they were expended for grant purposes; however, Delta has not even alleged such expenditures.

Accordingly, we sustain the disallowance for this item.

c. ACF adopted the OIG auditors. finding that $7,979 in 1994 grant funds were improperly spent by Delta for purposes unrelated to the grant project. ACF stated that this consisted of:

Delta Ex. 9, at 2.

Delta did not deny that the above expenditures were made. Instead, Delta questioned how ACF determined that Delta was responsible for any illegal schemes perpetrated by dishonest Metcalfe employees. Delta argued that ACF failed to show that Delta itself engaged in acts of dishonesty or that Delta failed to provide reasonable controls to avoid such illegal acts. Delta maintained that it took reasonable, appropriate methods to safeguard funds and that it should not be required to repay grant funds that were misappropriated by Metcalfe managerial employees who should not have required close supervision.

We find Delta's position on this point totally unacceptable. Under Delta's theory, a grantee has no accountability for the proper administration of a grant program and, if some employees steal grant funds, the grantee has no liability and the federal program bears the burden of the loss. That position was specifically rejected by the Board in Chambers-Tallapoosa-Coosa, supra, wherein the Board stated:

At 8. Similarly, in Hualapai Tribal Council, DAB No. 597 (1984), the Board stated that a "Grantee can not avoid liability by claiming that the disallowance was somehow due to the embezzlement of funds. The legal relationship created by a grant award is between the Agency and the Grantee." At 5. Delta contended that it took "reasonable measures" to prevent such losses (although it did not specify what those measures were), but did not explain why the federal government should pay when those measures failed. Among the measures Delta could have taken were bonding and insurance for such losses. As ACF pointed out, Delta may seek legal recourse against the individuals who misappropriated the 1994 grant funds, but Delta alone is responsible to the federal government to ensure that the grant funds were properly used. Accordingly, we sustain the disallowance for these items.

d. ACF found that Delta made unauthorized loans unrelated to the grant project with 1994 grant funds. These loans included $115,000 to Fine Vines and $50,000 to Electro National, both Delta subsidiaries.

Delta argued that as the parent company for a number of subsidiaries, Delta Enterprises used grant funds to further its objectives of alleviating poverty by providing jobs through its various manufacturing interests. Delta maintained that the loans were repaid and the OIG characterization of the loans as imprudent business decisions amounted to substituting its business judgment for that of Delta. s. Delta argued that ACF failed to demonstrate that the loans were not reasonable and allowable for purposes of OMB Circular A-122.

Delta did not explain how these loans furthered the grant objectives, much less constituted prudent business decisions. As we discussed above in section b., the regulations and the OMB cost principles require that grant funds be used only for authorized purposes. It is Delta's responsibility to show that the loans were reasonable and allowable, especially in light of grant provisions expressly prohibiting transfer of grant funds without OCS permission. Moreover, as to Delta's assertion that the loans have now been repaid, Delta has offered no explanation, much less documentation, as to what it then did with the repaid amounts, i.e., whether they were subsequently used for grant purposes. The funds represented by the loans should therefore be available for return to ACF. Accordingly, we sustain this disallowance.

e. ACF found that, without obtaining written approval from OCS and in violation of the terms and conditions of the grant award, Delta used $50,000 in 1995 grant funds for the repayment of loans made to Moeller by Delta Enterprises prior to the grant period.

Delta maintained that neither ACF in its disallowance determination nor OIG in its audit provided sufficient details for the basis of this disallowance. Delta further contended that any analysis of the 1995 grant project is premature because of Delta's pending request for a no-cost extension of the grant and restructuring of the project. According to Delta, any review of the challenged loan transactions should therefore be made from the perspective of the restructured grant project and the loan transactions should be deemed allowable since they ultimately benefitted the grant project.

Delta did not deny that it used grant funds to repay the loans. Thus, any concern on Delta's part about a lack of details about the loans is irrelevant in light of the fact that the repayment of these loans is per se unallowable in that the loans are not allocable to the grant objectives. Thus, ACF's analysis and determination are not premature. Furthermore, it is obvious that ACF's decision to disallow the full amount of the 1995 grant funds is equivalent to a denial by ACF of Delta's request for an extension of the grant. See ACF Br. at 51. Accordingly, we sustain the disallowance for this item.

f. The OIG audit of Delta's accounting records revealed that Delta transferred $81,100 in 1995 grant funds to Moeller rather than committing the funds to Eagle Fuel Cell as proposed in the grant application. Delta Ex. 5 at Exhibit II. In the accounting records, $60,000 was described as "project implementation," with the remaining $21,100 listed as "loans" from Moeller to itself. Id. The audit stated, "According to a Moeller official, the entire $81,100 was used for the general operations of Moeller and did not relate to the grant project." Id.

Delta asserted that it had kept OCS advised of the problems with the fuel cell project and that to salvage the project it was necessary to restructure the project through Moeller. Delta insisted that ACF chose to misconstrue Delta's motives by focusing on the form of accounting entries rather than the substantive uses to which Delta applied the grant funds.

The burden was on Delta to demonstrate that these funds were used for grant purposes. We find that Delta did not meet that burden here, since it did even identify specifically, much less document, how the funds were used. Simply stating that the funds were supplied for "working capital" is a totally inadequate explanation for the disposition of $81,1000. The transfer of funds to another subsidiary of Delta was a violation of the grant terms and conditions. We therefore sustain the disallowance for this item.

g. ACF adopted the OIG auditors. finding that $5,931 in 1995 grant funds were taken in a garnishment action unrelated to the grant project. As detailed by Delta's President in response to the OIG audit, this garnishment action --

Delta Ex. 7, at 7.

Delta did not specifically deny the circumstances surrounding the garnishment, but argued that for this item ACF is once again holding Delta responsible for the "clandestine activities" of an individual who took advantage of Delta. Delta Br. at 19. Delta asserted that ACF failed to present a prima facie case that Delta took any action that led to the garnishment action, with Delta again being the victim of dishonesty. Delta explained that Moeller hired the former plant manager of Metcalfe after Metcalfe's closing. Delta further explained that the former plant manager, without anyone else's knowledge, transferred a lease on a fax machine and a copier to Moeller; when Moeller never made any lease payments, the vendor took legal action. Delta maintained that the circumstances of the leasing of the equipment were out of Delta's control and that it should not be held liable for the garnished funds.

As we stated in above in section c., Delta cannot avoid responsibility for its stewardship over the 1995 grant by assigning blame for the garnishment to a dishonest employee. In Chambers-Tallapoosa-Coosa, supra, the Board examined a grantee's responsibilities where federal funds had been lost as a result of a garnishment and concluded that the grantee "is responsible for the funds even if they were removed from the Appellant's Head Start bank account as a result of a court-ordered garnishment." At 9. Therefore, for the same reasons we gave above in regard to the $7,979 disallowance, we sustain the disallowance for this item.

V. Subsidizing subsidiary organizations.

In its disallowance notification ACF found that Delta never purchased stock in Delta Capital and Delta Enterprises as it had proposed in the four grant applications. ACF stated that the financial statements of Delta Capital and Delta Enterprises did not reflect any stock transfers, but rather that grant funds in the amount of $1,320,000 were recorded in the accounting records and reported in the financial statements of Delta Capital and Delta Enterprises as "paid-in capital." ACF asserted that the recording of federal funds in the financial statements as additional paid-in capital since such funds were not utilized for the purchase of stock was a violation of the standards for financial management systems set forth at 45 C.F.R. � 74.21. ACF specifically referred to section 74.21(b)(3), which requires that a grantee's financial management system have --

ACF further found that Delta subsidiaries involved with the four grants had all been administratively dissolved as corporations by the State of Mississippi for failure to file required annual reports and pay state taxes. ACF disallowed a total of $224,700, with this amount "arrived at by taking the full amount of the grant less the amount allowed for creating some jobs and less amounts disallowed elsewhere in [the disallowance notification]." Delta Ex. 9, at 7 - 8. This amount included $130,692 for the 1993 grant; $92,673 for the 1994 grant; and $905 for the 1995 grant.

In its brief in this appeal proceeding, ACF clarified that Delta's failure to comply with the terms of its grant awards requiring it to purchase stock in Delta Capital and Delta Enterprises amounted to a material breach of each award and grounds for the disallowance. ACF Br. at 47. ACF stated that it was evident that Delta treated the grant funds as unrestricted support for its operation as its whole. ACF stressed that if it had known of the dissolutions of the subsidiary organizations and their consequent legal inability to engage in business activities, it would not have awarded the grants.

Delta argued that it had attempted to purchase stock in Delta Enterprises and Delta Capital as proposed in each grant application, but both corporations had already issued all authorized stock. Delta explained that the corporations recorded the receipt of grant funds as paid-in capital, which represented Delta's investment in each of the subsidiaries as proposed in the grant applications. According to Delta, ACF failed to show that Delta's accounting treatment of the grant funds amounted to anything more than an inconsequential reclassification of the funds. Delta asserted that regardless of the accounting treatment of the funds, the grant funds were invested in Delta Enterprises and Delta Capital as contemplated in the grant applications. Delta further maintained that all of the subsidiaries in question had been reinstated by the State of Mississippi and that under Mississippi law any acts taken by a corporation during a period of dissolution are legal and effective once the corporation is reinstated. Delta further questioned the method used to calculate the disallowed costs relating to the subsidiaries, arguing that there was no statutory or regulatory authority for the approach taken by ACF.

It is clear that Delta failed to abide by the terms of the grant awards. Each of the three grant awards in question contained specific wording under a section labeled "REMARKS" that the grant was for the purchase of stock (1993 grant: "grant and budget for purchase of stock issued to Delta Enterprises, Inc.", ACF Ex. U at 1; 1994 grant: "grant and budget for stock purchase with Delta Enterprises, Inc.", ACF Ex. DD at 3; and 1995 grant: "grant funds approved for stock purchase with Delta Capital Corporation", ACF Ex. II at 3). In each of the grant applications underlying these grants, stock ownership was portrayed as a means of giving Delta control over the issuing company's operations to insure that the capital would be used consistently with the grant. s purposes. Delta has admitted that no such stock was purchased with the grant funds. The terms and conditions of each grant specifically provided that 45 C.F.R. � 74.62(a) was to apply to the grant. See, e.g., ACF Ex. DD at 5. This regulation provides that "if a recipient materially fails to comply with the terms and conditions of an award, whether stated in a Federal statute or regulation, an assurance, an application, or a notice of award, the HHS awarding agency may . . . (2) Disallow . . . all or part of the cost of the activity or action not in compliance." Thus, ACF properly disallowed the costs in question based on the wholesale violation of this provision of the grant award.

We also question Delta's assertion that its accounting treatment of the grant funds, recording the receipt of the grant funds as paid-in capital rather than issuing stock, was inconsequential. If the accounting treatment were inconsequential, it is suspicious that Delta attempted to cover up its treatment of the grant funds during the OIG investigation. In its application for the 1995 grant, Delta asserted that $295,000 of the grant of $320,000 would be used to purchase stock in Delta Capital. Delta has admitted in this appeal that no such purchase was made because of the alleged unavailability of stock. Yet, when this matter was being reviewed by OIG auditors, Harold Hall, Delta's project director for the grant, in a May 8, 1997 letter to the OCS Director, Division of Discretionary Grants, again stated that Delta purchased $295,000 in Delta Capital, and supplied as proof a copy of the stock certificate. ACF Ex. NN. Delta offered no explanation for the sudden appearance before the OIG auditors of this stock certificate, which Delta assured the Board in its briefs was never issued. Furthermore, although Delta implied that the difference between recording the transfer of funds as "paid-in capital" rather than as a stock issuance was merely a matter of terminology, Delta did not provide any support for its argument or documentation showing that it acquired the same rights as a shareholder with the paid-in capital. Cf. Delta Ex. 7, at 8. Accordingly, we reject Delta's contention that there was no consequential difference between treatment of the grant funds as stock purchases or paid-in capital.

As we said earlier in regard to loans made to Delta subsidiaries, it is evident that Delta viewed the grant funds it received from OCS as assets it could use for any of its subsidiary organizations. Delta did not abide by the terms of its grant awards. Rather than pursuing the objectives for which the grants were awarded, Delta used the grants primarily as a source for subsidizing its many subsidiary organizations. We therefore sustain the disallowance for this item.

VI. Funds remaining in grant.

ACF found that, as of March 31, 1997, $157,314 of the $295,750 in 1995 grant funds were unexpended, even though the grant period ended February 28, 1997. This amount included: $82,715 not used by Moeller; $3,741 in interest earned by Moeller; and $70,858 returned to Moeller by Eagle. The $157,314 was on deposit in two interest-bearing bank accounts held by Delta. ACF determined that, although Delta had claimed in its Final Financial Report for the 1995 grant, dated May 8, 1997, that it had expended the full $320,000 in grant funds, $157,314 remained in the bank accounts at the time of the disallowance determination and therefore was not used for the stated purposes of the grant.

Delta never denied that it still had $157,314 in unexpended funds awarded under the 1995 grant. Instead, Delta argued that it took affirmative steps to prevent the misuse of the funds and that ACF should resolve its request for a no-cost extension of the grant before it is required to return the funds. Delta maintained that its actions in terminating its relationship with Simmie Brown and in restructuring the project through Moeller prevented the misuse of grant funds. Delta claimed that it had shown its commitment to the continuation of the project started with the 1995 grant funds by directing the investment of some $155,000 of its own funds into the project since its request for the no-cost extension. Delta argued that ACF misrepresented that Delta had been instructed to return all the unexpended grant funds. Delta maintained that it had explained all of its problems with the 1995 grant to OCS and that it was now disingenuous on ACF's part to assert that ACF's rejection of the request for a no-cost extension resolved this matter.

This Department's policy on no-cost extensions is contained in its Grants Administration Manual (GAM) and is specifically applicable to all discretionary grants. See GAM Chapter 1-85. Under the GAM, OCS has the discretion to award a no-cost extension of a project:

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

GAM, section 1-85-10. The Board has examined this discretionary authority in a number of cases and concluded that as long as the awarding agency can show that its denial of a no-cost extension was reasonable under the circumstances, the Board will not find that decision arbitrary. See, e.g., Oakwood Child Development Center, Inc., DAB No. 1092, at 8 - 9 (1989), and Bedford Stuyvesant, supra, at 8 - 9.

Here Delta's attempt to characterize its request for a no-cost extension as still pending is unrealistic, given that ACF has already made its determination that the full amount of the 1995 grant should be returned. Delta's assertion that it was not told to return the funds is contradicted by ACF's April 7, 1997 letter to Delta's project manager, which stated, "Any grant funds which you have drawn down but have not yet disbursed, should have been returned to the Payment Management System." ACF Ex. MM at 2. Moreover, the grant period for the 1995 grant ended on February 28, 1997; as the GAM refers to extensions in terms of "limited time" and "a few months," it is far-fetched on Delta's part to expect that OCS would now grant a no-cost extension. Finally, given Delta's performance on the earlier grants as discussed in the prior pages of this decision, we find ACF's refusal to grant Delta an extension to be reasonable.

The fact remains that Delta has retained a significant portion of the 1995 grant funds in interest-bearing accounts despite assurances it has made to ACF that the grant funds were expended. A grantee is required to return any unexpended grant funds "promptly" following the end of the grant period. 45 C.F.R. � 74.71(d). The Board has held:

Mexican American Unity Council, DAB No. 1341, at 14 (1992), aff. d No. SA-95-CA-0520 (W.D.Tex. June 25, 1996).

As the grant period has ended over two and a half years ago and no extensions have been granted, Delta has no basis to retain these funds. We therefore sustain the disallowance for this item.

Judith A. Ballard

Donald F. Garrett

M. Terry Johnson
Presiding Board Member

¹ Prior to 1995 the cost principles of OMB Circular A-122 were made applicable to grants to non-profit organizations by 45 C.F.R. � 74.174(a). While some of the costs here were incurred by for-profit subsidiaries of Delta, Delta did not contest application of OMB Circular A-122 to those costs.

² OIG Audit Report No. A-04-96-00105. The audit report was made part of the record in this appeal by Delta as its Exhibit (Ex.) 5.

³ Delta later changed the name of the proposed company from New Threads to Greenville Apparel.

⁴ The disallowance notification explained that, for each grant award, the number of "job-months" (one-person employed for one-month) was totaled and then divided by the number of months of the grant. Delta Ex. 9, at 3. The job-months were then converted to a full-time equivalency (FTE), with the FTE then divided by the number of full-time permanent jobs promised under each grant award. Id. This percentage was then applied to the federal share of each grant. Id. As a result, ACF determined that $74,474 was allowable under the 1993 grant, and $98,212 was allowable under the 1994 grant. Id. (ACF allowed an additional $199 for the 1994 grant that was not related to job creation.) For greater detail on how these calculations were made, see ACF Ex. OO.

⁵ The amount disallowed for each grant was: $220,000 for the 1991 grant; $353,702 for the 1993 grant; $331,589 for the 1994 grant; and $320,000 for the 1995 grant.

⁶ Delta further contended that OIG failed to forward complete responses to the draft audit to ACF, with the result that ACF failed to conduct an independent and unbiased review of Delta's grant activities. However, that assertion is contradicted by the statement in the copy of the OIG audit report furnished by Delta as its Exhibit 5 that Delta's complete response was attached to the audit. Delta Ex. 5, at iii. Moreover, even if Delta's assertion were true, review and analysis of Delta's complete response were conducted by the Board during this appeal proceeding.

⁷ This regulation requires recipients of grant awards to have financial management systems that include accounting records "supported by source documentation." This regulation did not become effective until August 25, 1994. Prior to that date, however, non-profit organizations such as Delta that were the recipients of federal grant funds were required to maintain source documentation by 45 C.F.R. Part 74, Subpart H.

⁸ OMB Circular A-122 was recently revised. 63 FR 29,794 (June 1, 1998). The paragraphs quoted in the text above now appear at Att. B, 7.m

⁹ In all the cases cited by Delta, there were other documents that tied the checks to expenditures authorized under the grant.

¹⁰ The financial management systems of a recipient of federal grant funds must have: "Effective control over and accountability for all funds, property and other assets. Recipients shall adequately safeguard all such assets and assure they are used solely for authorized purposes." At the time of the grant, regulations covering the status of equipment obtained with grant funds were set forth at 45 C.F.R. Part 74, Subpart O (1991).

¹¹ Revision of the regulations in 1994, prior to the foreclosure of Great River Spike's assets, made a grantee's responsibility regarding equipment purchased with grant funds even more explicit:

¹² The budget and project period for Delta's 1993 grant was September 30, 1993 through February 28, 1995. Delta received a nine-month extension of the grant to November 30, 1995. Delta rented the facility from October 1995 through July 1996. The rent for the first two months was not disallowed because of the extension of the grant period.

¹³ While this wholesale transfer of grant funds from Greenville Apparel to Fine Vines was going on, Greenville Apparel used only four pieces of the equipment in its operations, with most of the remaining equipment being used by Fine Vines in its operations. This was tantamount to an additional gift or loan of the grant funds in the form of the equipment from Greenville Apparel to Fine Vines.

¹⁴ We assume for the sake of argument that Delta was alleging that the Fine Vines' employees were low-income individuals. However, there is nothing in the record indicating that Fine Vines had in its charter, as did Greenville Apparel, a requirement that a certain percentage of jobs should go to such individuals.

¹⁵ As noted above, ACF referred to 45 C.F.R. � 74.21(b)(3), which did not become effective until August 25, 1994. However, prior to that date, a similar regulation was set forth at 45 C.F.R. � 74.61(c) (1991).