SUBJECT: Council of the Southern Mountains

DECISION

The Council of the Southern Mountains (COSM) appealed the November 27, 2001 determination of the Administration for Children and Families (ACF) disallowing $11,635 charged to federal Head Start funds for costs associated with the distribution of surplus items and supplies obtained from the National Association for the Exchange of Industrial Resources (NAEIR).

Factual Background

The Head Start program provides federal funding for grantee agencies to deliver comprehensive health, educational, nutritional, social and other services to economically disadvantaged children and their families. See generally 42 U.S.C. � 9831 and 45 C.F.R. � 1304.1-3. ACF administers the program and monitors the grantees' performance in meeting program and fiscal requirements. See 42 U.S.C. � 9836.

COSM receives funding from ACF to provide Head Start services to children in McDowell County, West Virginia. The Office of Inspector General (I.G.) conducted an audit review of financial management at COSM in spring 2001, resulting in an audit report. ACF Attachment (Att.) 1. The only finding in the report which is at issue here relates to COSM's membership in NAEIR, a non-profit organization which provides catalogues to subscribers of items available to them for no charge except shipping and handling costs.

It is not disputed that COSM paid $500 per year for membership in NAEIR for three years from January 1998 to December 2000. It is also undisputed that COSM ordered items, mainly clothing and toiletries, over that period for which it paid the shipping and handling costs entirely out of Head Start office supply funds amounting to the balance of the $11,635 at issue.

Applicable Legal Standards

The allowability of charges to federal funds by non-profit organizations is governed by cost principles set out in Office of Management and Budget (OMB) Circular A-122 (rev. 1998), made applicable to HHS grants by federal regulations at 45 C.F.R. � 74.27(a) (2002). OMB Circular A-122 provides generally that, to be allowable, costs must "be reasonable for the performance of the award and be allocable thereto," must "conform to any limitations or exclusions set forth in these principles or in the award as to types or amount of cost items," and must "be consistent with policies and procedures that apply uniformly to both federally-financed and other activities of the organization." Att. A, � A .2. The explanation of how to evaluate "reasonable costs" includes (in relevant part) the following guidance:

o a cost is reasonable if, in its nature or amount, it does not exceed that which would be incurred by a prudent person under the circumstances;

o the question of reasonableness of specific costs must be scrutinized with particular care in connection with the particular organization receiving the preponderance of its support from federal awards;

o reasonable costs must be recognized as ordinary and necessary for the operation of the organization or performance of the award; and

o reasonable costs must comply with generally accepted sound business practices, Federal and State laws and regulations, and any terms and conditions of the award.

Att. A, � A.3. OMB Circular A-122 also specifies that a cost may be allocated to a particular program or grant only "in accordance with the relative benefits received." Att. A, � A.4.a.

Furthermore, HHS grantees generally are required to maintain a system for keeping records of financial management and program performance and to retain these records and the underlying documentation for three years from the submission of an annual expenditure report. See 45 C.F.R. �� 74.50 - 74.53.

1. Issues presented and general framework for analysis

Although the parties did not consistently make clear distinctions in their arguments, the disallowance in fact rests on three distinct, though related, questions:

(1) Were these costs allowable as expenditures under the Head Start program?

(2) Were these costs properly allocable in full to the Head Start program?

(3) Have these costs been adequately documented?

We find that, if the costs fail any of these tests, then the disallowance must be sustained under the regulations cited above. This is so because, as a fundamental principle of grants management, a grantee has the responsibility and burden to demonstrate the allowability and allocability of costs for which funding was received under a grant. See, e.g., Ute Indian Tribe, DAB No. 1739, at 4 (2000); Child Opportunity Program, Inc., DAB No. 1700, at 1 (1999); see, also, 45 C.F.R. �� 74.50 - 74.53 (1994). The Board has explained the application of this principle in the context of the Head Start program in Texas Migrant Council, Inc., DAB No. 1743 (2000); see also Home Education Livelihood Program, Inc., DAB No. 1598 (1996).

Turning to the specifics of the present case, most of COSM's arguments went to the first two questions with little explanation of how it could document its compliance with those criteria. ACF, by contrast, denied that the costs were either allowable in kind or allocable to Head Start, but essentially stressed the absence of documentation. We next review the evidence and contentions of the parties and then provide our reasoning for our conclusion that COSM failed to provide satisfactory answers to any of the three questions.

2. Audit findings and the basis of the disallowance

The audit report did not determine that none of the NAEIR costs were allowable. The auditors rather advised ACF to review those costs because at least some of the items appeared to have gone to individuals with no tie to Head Start and it was not clear what benefit, if any, the Head Start program received from the items. ACF Att. 1, at 2. Upon its review, ACF found none of the costs in fact to be allowable, to have benefitted Head Start, or to have been adequately documented.

The specific audit report's findings on this issue were as follows:

The NAEIR items were distributed by the Head Start caseworkers to the program's participating children, parents, and families according to their needs. Distributed items included clothing, soap, perfume and other toiletry articles. These items were distributed to encourage attendance at Head Start community meetings, and packages containing NAEIR items were given to families with a new baby or who suffered a loss of personal property resulting, for example, from a house fire. On occasions, all individuals from the community at large were invited to select items they needed from NAEIR shipments, and a caseworker occasionally took NAEIR items to the home of a family being visited.

Head Start received the full allocation for the NAEIR charge although the community at large benefitted. Furthermore, some of the items distributed to adults did not show a direct program benefit to Head Start.

ACF Att. 1, at 8.

ACF also attached to its brief some audit workpapers, including a record of contact from a meeting with the COSM Head Start Office Manager. ACF Att. 2. ⁽¹⁾ The record is in the form of questions and answers and is not signed. In response to a series of questions about how the items are distributed once received by COSM, the answers record that the goods are received at the main administration building where a receptionist signs for them and the delivery person "puts them in the side hallway." Id. at 3. The packages are then divided into bundles for the various centers by the Head Start director and office manager, and delivered to or picked up by caseworkers or supervisors from each center. Id. Center staff then "unpack the goods and divide them up equally," and caseworkers then "distribute them to the families" of Head Start children. Id. The report describes the system for distribution as follows:

If there are not enough items to give to all of the parents, the caseworker keeps the items and distributes them according to the families needs. At times, the parents come to the Headstart centers, go through the items and pick out what they want.

* * *

The items are also given out as door prizes to the parents. For example, prizes are given to parents in the program who have new babies, or who have had their houses destroyed in a fire.

Id. The report also contains the assertion that "on one occasion a very large order was placed at the Big Sandy Headstart center. They received a large shipment of clothing, toiletries and soap. Many members of the community came in to pick out items they needed." Id. The last two questions address the issue of documentation and control and are reproduced in full:

8. Is there a log or inventory list controlling the items distributed?

The caseworkers do not keep inventory logs of the items received or the items they distributed to the families. Occasionally, it is noted on the caseworkers referral forms that items were brought to the family's home when they make visits, but this is not a consistent requirement.

9. What process is in place to show that the families are truly receiving the items?

There is currently no process in place to ensure this. Additionally, the items are not stored in locked cabinets for safekeeping. At the Elkhorn Center, the goods are stored in an unlocked cupboard that does not close all the way. Prior to storing them in this cupboard, the items were kept in a central unlocked meeting room.

Id. at 4.

COSM had an opportunity to respond to the audit findings before ACF reached a final determination about whether and to what extent to disallow these costs. The determination letter resolved this finding by disallowing the full amount for the following reasons:

COSM contends that the community at large did not have access to the NAEIR products, and that it receives various items and supplies from sources other than NAEIR, which are then available to the community. However, the grantee did not provide adequate justification that these costs were allowable, reasonable, or necessary in the performance of the award. In addition, there is no evidence that the charges were adequately documented.

November 27, 2001 Determination Letter at 2.

3. COSM arguments and evidence in support of the NAEIR costs

COSM contended that the acquisition and distribution of the NAEIR items served legitimate and necessary program purposes and the related costs should therefore be allowed. The purposes cited including fostering outreach and promoting positive relations with the families of enrolled children, sustaining high levels of parent and family involvement in the program, and enhancing parental self-esteem and increasing parental participation. March 20, 2002 COSM Letter at 1. COSM also argued that the NAEIR products went only to children enrolled in Head Start and their families, while items distributed to the wider community came from other sources. December 17, 2001 COSM Letter at 1-2. Hence, COSM contended the costs were properly allocated to Head Start. COSM also provided some additional documentation with its December 17, 2001 letter to ACF ⁽²⁾ and with its brief.

Regarding allowability, COSM noted that donations to the program which are used to provide "gifts" to parents can be counted as matching funds only "if the program would otherwise have had to purchase the items to implement program objectives." COSM Br. at 3. Asserting that the NAEIR items "were, in fact, donated," COSM concluded that the disallowance should be overturned. Further, COSM argued that the items were used in a manner consistent with guidance on the Head Start program website that grantees may "[o]ffer an inexpensive gift to parents and children who refer other parents and children to your program." Id.

The premise of the first argument is in error since COSM expended program funds to acquire the items, even though NAEIR did not charge for the value of the items themselves. More importantly, the logic does not follow. That donations may not be used as matching funds unless the program would otherwise have spent that amount to implement its objectives implies, if anything, that program funds may not be used for purposes that do not advance legitimate program objectives. It certainly does not imply that spending funds to acquire "donated" items to use as gifts is therefore allowable without a demonstration that that use serves program objectives.

ACF disputed COSM's reliance on language from the Head Start website, contending that the advice specifies a limited use of such gifts for a limited and specific purpose, i.e., rewarding recruitment, not a routine distribution of personal products to parents. ACF Br. at 10. ACF argued that the requirement that expenditures be necessary, as well as reasonable, is particularly apt in the Head Start context given the "many indisputably necessary costs a Head Start grantee must incur to ensure that the children are adequately served," such as teacher salaries, classroom space, and teaching materials, and given the limited federal funds for Head Start programs. ACF Br. at 9.

Finally, ACF stressed that COSM had not documented a "single instance in which a NAEIR gift was given to a parent or child who made a referral to the program," nor shown any mention of the use of gifts in its recruitment plans. ACF Br. at 10-11; ACF Att. 5 (COSM's written recruitment plan).

Even accepting COSM's representations in its submissions, the gifts were distributed at times to all Head Start parents, to families in special need, or by caseworkers on visits. These gifts may have been welcome to recipients, but that is not enough to establish that the gift items were handled in a manner directed at providing some benefit, such as increased referrals or greater parent participation in program activities.

ACF pointed to no rule precluding the distribution of small gifts or prizes in the nature of these personal care items. At the same time, it cannot be doubted that distribution of such personal care items to families, however welcome or helpful, is not within the primary objectives of a Head Start program. Hence, the grantee had to show that it employed these items in a manner providing a direct benefit to the Head Start program and not merely a speculative good effect on the recipients. COSM did not submit any policies that it had for the use of these items, any material to demonstrate the program purposes they allegedly served, nor any evidence or statements showing how the items in practice produced positive results for the program, other than bald generalizations in its argumentation. We find that COSM failed to make a specific or persuasive case for the necessity, reasonableness, or prudence of its use of these items. We thus sustain the disallowance for this reason and others explained below.

In the area of allocability, COSM disputed the allegations that NAEIR items were distributed to members of the community unconnected to the Head Start program. ACF Att. 2, at 3. In particular, COSM challenged the authenticity of statements recorded in the audit workpapers to the effect that members of the general community were invited on occasion to select NAEIR items. The office manager named in the audit workpapers submitted a declaration that she never made the statement. Declaration of Marlene Valentine, dated October 17, 2002. She stated that she "was not the individual who made that statement" about members of the community picking out items from the Big Sandy Head Start Center and that she was "never aware of any members of the community coming to the Big Sandy Center to receive items." Id. Even if we accept the denial as undercutting any weight that might be given to the summary of the auditor's interview with her, however, the declaration falls short of affirming that items went exclusively to Head Start families or that the items were secured in any manner calculated to control or monitor distribution. COSM asserted in its argument that NAEIR items went "exclusively" to Head Start families, but offered no explanation of how it tracked the personal care items it received from various sources or earmarked NAEIR items to restrict them to Head Start or of what other basis it had for the assertion. Nor did it produce any evidence (either contemporaneous documentation or even affidavits or declarations of staff or specific recipients) ⁽³⁾ to show that NAEIR items actually went to, much less went only to, Head Start families.

In support of its position that items that were distributed to non-Head Start community members came from other sources, COSM offered evidence that COSM received similar items from other sources of donations which it claimed were the ones given to non-Head Start recipients. The documentation attached to COSM's December 17, 2002 letter consisted of receipts for in-kind contributions of large numbers of enumerated items of the same nature as those at issue from donors other than NAEIR (including Avon, a health clinic and an individual donor). Some of the receipts indicate that the donations were directed to COSM's Foster Grandparent program and for specific purposes such as volunteer recognition awards. This material suffices to establish only that the personal care items received from COSM by non-Head Start individuals could potentially have come from donors other than NAEIR, but not that NAEIR items were not also among those received by such individuals.

We conclude that, even assuming the use of NAEIR items was allowable, reasonable, and necessary for Head Start purposes, COSM failed to establish that the costs of those items could be allocated wholly to Head Start. Absent evidence to determine what percentage of the items benefitted Head Start (despite many opportunities for COSM to produce such evidence), we could not determine what percentage of the costs were properly allocated. Hence, we uphold the disallowance on this ground as well as for the other reasons explained herein.

The overriding difficulty presented here is that, no matter how reasonable the possible value of a cost incurred nor how direct its benefits might be to objectives in the Head Start program, it is critical that the costs have in fact been incurred for the purposes asserted. This demonstration can be accomplished only by documentation. On this score, COSM is virtually silent. As noted, COSM submitted to the Board documentation establishing that NAEIR was not COSM's only source for items that were distributed by its programs, and that items of like nature were intended for non-Head Start programs, but no documentation addressing the core issues. We find that COSM failed to provide documentation of any sort that any particular items actually went to Head Start families, that any items that did go to a Head Start family resulted in the alleged benefits to the program beyond simple personal use by the recipient, that it had any policy or practice of using the items in a manner designed to impact enrollment, referrals, parent participation, or other clear program objectives, or even that the items reached any intended recipients at all, given the absence of any logs, inventories, control measures, caseworker notes, and so on.

Grantees have sometimes sought in the past, as COSM essentially does here, to emphasize the equitable claim that they should be reimbursed because they used funds to further program goals, regardless of how imperfectly they were able to trace those expenditures after the fact. See, e.g., Developmental Disabilities Advocacy Network, Inc., DAB No. 766 (1986). The essential flaw in this asserted ground for appeal is its disregard for how central it is to any responsible handling of federal funds that their ultimate use be demonstrably in the service of the ends for which those funds were appropriated. Hence, the requirement to document costs is a fundamental principle of grants management, not a mere technicality, 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).

We conclude that, however well-intentioned COSM may have been in its participation in the NAEIR program, it failed in its responsibility to ensure that the funds spent on participation (dues and shipping costs) were reasonable in amount, tied directly to program objectives, or adequately documented.

Conclusion

For the reasons explained above, we uphold the disallowance in full.

Cecilia Sparks Ford

Marc R. Hillson

Judith A. Ballard
Presiding Board Member

1. Counsel for ACF explained in a May 23, 2002 letter to the Board that the I.G.'s office lost some workpapers when transitioning from paper to electronic format, but that the record of contact forms provided by ACF explains what the I.G. "reviewed and why it questioned payments" to COSM.

2. COSM's representative indicated that a copy of this letter was directed to the Board as well but it was not received.

3. COSM did submit an undated note from an individual (apparently a Head Start parent at one of the centers) saying that she thought that the NAEIR products "helped parents feel good about their appearance" and that they "like trying it for the first time." Attachment to COSM letter dated March 20, 2002. The extrapolation that COSM suggested in its letter from such a "feel good" attitude to appreciable increases in involvement in Head Start is simply not supported by anything but speculation.