GAB Decision 264
March 4, 1982 Gila River Indian Community; Docket No. 81-48 Ford,
Cecilia; Settle, Norval Garrett, Donald
Gila River Indian Community (Grantee) appealed a determination by the
Office or Human Development Services (Agency) disallowing $166,075 with
respect to Grantee's Headstart program for the year ended August 31,
1978. During the course of proceedings before the Board, the Agency
stated that it was withdrawing $41,462 of the disallowance, leaving in
dispute $124,613 determined to be allocable to children served by
Grantee who were ineligible for the program. /1/ (Agency's response to
appeal, dated September 8, 1981, p. 2) For the reasons discussed below,
we sustain the remaining disallowance, subject to a possible setoff for
indirect costs. This decision is based on the written record before the
Board. We have determined that an informal conference, requested by the
Agency's designated attorney, is not necessary in view of our
disposition of the case.
The disallowance in this case was based on an audit finding that only
48% of the children enrolled in Grantee's Headstart program were from
low-income families. Relying on a regulation (45 CFR 1305.4) requiring
that at least 90% of enrollees be from low-income families, the Agency
calculated the disallowance by multiplying the difference between 90%
and 48% by total allowable Federal costs. (Agency's response to appeal,
dated September 8, 1981, p. 3) During the proceedings in this case,
however, the Board observed that 45 CFR 1305.4 did not become effective
until after the beginning of Grantee's program year. The Agency
maintained, nevertheless, that the disallowance was proper since, under
the statute authorizing the Headstart program, only children from
low-income families could participate in the absence of a regulation
permitting participation by other children. The Agency stated, however,
that, even under this reading of the statute, it would not increase the
disallowance in view of the subsequently published regulation at (2) 45
CFR 1305.4. /2/ Grantee disputed the Agency's interpretation of the
statute. Grantee also argued that the disallowance was not appropriate
even under the Agency's interpretation, since Grantee was not put on
notice that costs could be disallowed based on the participation of
other than low-income children. Grantee argued further that the
disallowance should not be based on total allowable federal costs, and
that in-kind contributions as well as indirect costs not previously
claimed by Grantee should be set off against the amount of any
disallowance. These arguments are discussed below.
Participation under the Authorizing Statute
The Agency maintained that the statute authorizing the Headstart
program allows but does not require the Secretary to permit the
participation of other than low-income children, and that therefore no
such participation was permitted in the absence of a regulation
establishing an acceptable level of participation. (Agency's
supplemental response to appeal, dated October 14, 1981, p. 2; Agency's
response to Order, dated December 7, 1981, pp. 3, 7) Grantee took the
contrary position that the statute requires the Secretary to permit the
participation of children from other than low-income families, arguing
further that it should not be penalized for the Secretary's failure to
carry out this mandate. (Grantee's response to Order, dated December
18, 1981, pp. 2-4) The statutory provision relied on by the parties, 42
U.S.C. 2928g(a)(1), is captioned "Participation in Headstart Programs,"
and provides as follows:
(3) The Secretary shall by regulation prescribe eligibility for the
participation of persons in Headstart programs assisted under this
part.... (Such) criteria may provide (A) that children from low-income
families shall be eligible for participation in programs assisted under
this part if their families are below the poverty line, or if their
families are eligible or in the absence of child care would potentially
be eligible for public assistance, and (B) pursuant to such regulations
as the Secretary shall prescribe that programs assisted under this part
may include, to a reasonable extent, participation of children in the
area served who would benefit from such programs but whose families do
not meet the low-income criteria prescribed pursuant to clause (A).
Section 2928g(a)(2) of 42 U.S.C. further provides that a grantee may
under certain circumstances set its own criteria for participation in
Headstart. Two related provisions which complete the statutory scheme
with respect to the issue of participation are 42 U.S.C. 2928 and 42 U.
S.C. 2928n. The former states that the Secretary may provide for
financial assistance to an eligible agency "for... a Headstart program
focused primarily upon children from low-income families...." The latter
requires that "the official poverty line (as defined by the Office of
Management and Budget)" be revised annually by the Secretary to reflect
the change in the Consumer Price Index, and further states that "except
as provided in section 2928g of this title, (this poverty line) shall be
used as a criterion of eligibility for participation in Headstart
programs."
We agree with the Agency that the statute does not allow the
participation of children from other than low-income families in the
absence of a regulation permitting such participation. Section 2928n
provides that the OMB poverty line shall be "a criterion of eligibility"
for participation in Headstart "except as provided in Section 2928g...."
Thus, only children from low-income families may participate unless
other participation is permitted pursuant to Section 2928g.
Section 2928g(a)(1) requires that the Secretary issue regulations
prescribing "eligibility" for participation in Headstart. The section
does not itself prescribe any criteria for eligibility, however, but
merely suggests possible criteria, set forth in clauses (A) and (B).
The non-mandatory nature of the criteria in clauses (A) and (B) is
evident from the phrase "such criteria may provide" that immediately
precedes clause (A).
(4) The phrase "such criteria may provide" is clearly applicable
to
clause (B) as well as to clause (A) under accepted rules of grammar.
Since this phrase unambiguously indicates that the criterion in clause
(B) is non-mandatory, the question arises as to the significance of the
phrase at the beginning of clause (B), "pursuant to such regulations as
the Secretary shall prescribe." The Agency suggested that this phrase
merely means that, if the Secretary decides to permit the participation
of other than low-income children, he must do so by regulation.
Although the phrase reads somewhat awkwardly, we believe it is
reasonably clear that this is its intended meaning. Thus, taken
together, Sections 2928g(a)(1) and 2928n require that all children
served be from low-income families unless the Secretary, by regulation,
permits the participation of other children.
Grantee also argued, however, that the participation of other than
low-income children was permitted since it met the test of Section 2928,
requiring that a Headstart program be "focused primarily upon children
from low-income families." (Grantee's response to Order, dated December
18, 1981, p. 5) We note first that there is considerable doubt whether a
program in which less than half the children are from low-income
families is focused "primarily" on such children. Even assuming that
Grantee's program was focused primarily on low-income children, however,
this section must be read together with Sections 2928g(a)(1) and 2928n
and cannot be viewed as independently authorizing the participation of
other than low-income children.
Grantee also argued that, under 42 U.S.C. 2928g(a)(2), it was
entitled to establish its own criteria for participation in its
Headstart program. (Grantee's response to Order, dated December 18,
1981, pp. 15-16) By its own admission, however, Grantee failed to meet
one of the criteria for the application of this section--that the
Headstart program be operated in a community which is located in a
health manpower shortage area as designated by the Secretary. Grantee
asserted that the Secretary should have made this designation. It is
beyond the scope of the Board's authority to consider that question,
however.
Appropriateness of Disallowance as a Sanction
Having concluded that the statute does not permit the participation
of children from other than low-income families unless the Secretary
provides for such participation by regulation, we turn next to the
question whether the disallowance of costs is an appropriate sanction
for unauthorized participation. Grantee argued that it did not receive
adequate notice of the consequences of allowing such participation,
stating that "(notice) is especially important when costs which were
thought by... (Grantee) to be allowable now are subject to
repayment...." (Grantee's response (5) to Order, dated December 18,
1981, p. 7) We find, however, that the statute gives adequate notice
that costs which are allocable to children from other than low-income
families are unallowable. In authorizing "financial assistance...
for... a Headstart program focused primarily upon children from
low-income families...," Section 2928 makes funding contingent on use of
the funds for such a program. Furthermore, when this provision is read
in light of the limitation in Sections 2928g(a)(1) and 2928n, it is
clear that a program "focused primarily upon children from low-income
families" may include only children from low-income families unless the
Secretary, by regulation, authorizes the participation of other
children. Thus, Grantee should have known that funds spent for other
purposes might be subject to recovery.
Costs Allocable to "Ineligible" Children
As noted previously, the Agency calculated the disallowance by
multiplying total allowable Federal costs by the percentage of children
from other than low-income families who participated in Grantee's
Headstart program (minus 10%). This calculation was based on the
assumption that all of the children served by Grantee benefitted from
the program in the same degree, so that each child could be allocated an
equal share of the total program costs.
Grantee argued, however, that most of its costs were fixed costs not
dependent on the number of children who participated. It argued that
the only costs which were properly disallowed were the allocable
portions of the following actual costs identified in the audit report:
/3/
Vehicle Expense $5,396 Food (Federal share) $5,257
Other - Program supplies $10,911 (Teaching tools and Kitchen
supplies)
(6) (Grantee's response to Order, dated December 18, 1981, p. 10)
Even assuming that all costs other than those listed were fixed costs,
however, the fact that the same cost would have been incurred regardless
of the number of children does not mean that all children did not
benefit from that cost.
Grantee argued further that it could not be assumed that the
"educational, health, psychological, and cultural benefits for each
participant" were the same. (Grantee's response to Order, dated
December 18, 1981, p. 12) The issue in this case, however, is whether
the children "benefitted" equally in an accounting sense of the word
from the expenses incurred for the program in which they participated.
We find no evidence that all of the children, including those not from
low-income families, did not so benefit.
Setoff for in-Kind Contributions and Indirect Costs
Grantee argued that the amount disallowed should, in any event, be
offset by in-kind contributions which it valued at $108,862 and by
indirect costs of $20,446 to which it claimed it was entitled at the
rate approved for the period in question. (Letter to Agency's
designated attorney, dated August 17, 1981, pp. 1-3) It submitted in
this regard documentation purporting to establish in-kind contributions
in that amount as well as two Negotiation Agreements, dated October 17,
1978 and December 30, 1980, establishing a 7.3% final indirect cost rate
for the periods October 1, 1976 to September 30, 1977, and October 1,
1977 to September 30, 1978, respectively, applicable to all programs.
We agree with the Agency, which declined to consider the
documentation relating to the in-kind contributions, that such
contributions cannot properly be used to offset the disallowance in this
case. Any such contributions simply increased the resources available
for Grantee's Headstart program. They did not thereby reduce the amount
of Federal funds used by Grantee. Thus, the amount of Federal funds
allocable to the children from other than low-income families was not
changed by the in-kind contributions.
The Agency also argued that a setoff for indirect costs not
previously claimed by Grantee should not be permitted. It contended
that, since the grant was awarded before the indirect cost rate was
approved, the award might have included as direct costs certain costs
which were later treated as indirect costs in developing the rate. The
Agency asserted that allowing the setoff sought by Grantee might
therefore result in duplicate payment of some costs. (Agency's response
to Order, dated December 7, 1981, p. 10) The Agency also argued against
(7) the setoff on the ground that, since the approved budget for the
grant did not include indirect costs, allowing the setoff would "render
the process of approving specific budgets meaningless." (Agency's
response to Order, dated December 7, 1981, p. 9) The Notice of Grant
Awarded shows indirect costs of "0" percent.
With respect to the Agency's last point, we find that since indirect
costs were not included in the grant award, this Board has no authority
to allow any indirect costs (by way of setoff or otherwise) because that
would constitute the making of an additional award. However, although
the Agency specified indirect costs of "0," it may not have intended
to
preclude Grantee from receiving indirect costs if a rate applicable to
the term of the grant was subsequently negotiated. Accordingly, the
Agency may decide to allow a setoff for those indirect costs which
Grantee deronstrates do not duplicate costs included in the grant award
as direct costs.
Conclusion
For the reasons discussed above, we uphold the disallowance of
$124,613, subject to any setoff for indirect costs, as well as to the
possible recomputation indicated in footnote 1. /1/ The Agency's
withdrawal of $41,462 of the disallowance effectively added that
amount to allowable federal costs. Since the disallowance for
ineligible children was based on allowable federal costs, the Agency may
have to recompute the amount of the disallowance. /2/ The Agency noted
that a requirement that at least 90% of the children be from
low-income families was also found in Head Start Policy Manual 6108-1,
dated September 1967. The Agency did not specifically argue that the
provision in the Manual constituted a regulation, however. There is,
moreover, a serious question whether the Manual could have been a
legally binding regulation since it was not published in the Federal
Register. Section 2928f(d) of 42 U.S.C. requires that all rules,
regulations, guidelines and instructions for the Headstart program be
published in the Federal Register at least 30 days prior to their
effective date. (Cf. Pinellas Opportunity Council, Inc., DGAB Decision
No. 80, February 6, 1980, at p. 3, and decisions cited therein.) We need
not reach the question of whether the Manual was a legally binding
regulation, however, in view of the Agency's willingness to allow the
10% leeway in any event, and in view of our conclusion, discussed below,
that, under the Headstart program legislation, the Agency is not
required to allow the participation of children from other than
low-income families. /3/ The source of the amount shown for
"Other" is unclear. The document in the audit report captioned
"Statement of Revenues, Expenses, and Changes in Fund Balance for the
Year Ended August 31, 1978" shows $25,788 as the actual expenses for
"Other." The same document does not break down "Other" into
the
categories shown by Grantee.
SEPTEMBER 22, 1983