GAB Decision 447
Docket No. 83-32
June 30, 1983
South Carolina Department of Social Services;
Ford, Cecilia; Settle, Norval Garrett, Donald
The South Carolina Department of Social Services (State) appealed
from a determination by the Regional Administrator, Office of Human
Development Services (Agency) that $873,251 of federal financial
participation (FFP) was unallowable. The disallowance was based on an
audit report which found that the State made payments to a Title XX
contractor for indirect costs in excess of amounts allowable under
applicable indirect cost negotiation agreements.
The State's major argument was essentially that the method of
computing indirect costs for its contractor for the period in question
was inequitable and, therefore, an adjustment should be made to more
accurately reflect the actual amount of indirect costs incurred. For
reasons stated below, we conclude that the prescribed procedures for
adjusting the negotiated indirect cost agreements were not followed and
that the State failed to show that there is any other basis for
adjusting the rates. Therefore, we sustain the disallowance.
The State also appealed to the Board one issue that was not included
in the disallowance. The issue involved indirect costs that the State's
contractor did not claim for the three fiscal years following the audit
period. As discussed below, we find that the Board does not have
jurisdiction over this question.
This decision is based on the written record /1,/, including the
summary of a telephone conference call conducted by the Board. The
State requested that a hearing be held in this (2) case; however, we
determine that a hearing is not necessary in the resolution of this
matter given the nature of the case (see, discussion on p. 10 below).
I. Case Background
The Agency based its disallowance on an audit report prepared by the
Department of Health and Human Services Audit Agency. /2/ The stated
objective of the federal audit was to evaluate the "adequacy of (State)
management procedures and the allowability of costs incurred for the
period October 1, 1975 through June 30, 1978." State Tab L, p. 1.
The State was the recipient of a grant under Title XX of the Social
Security Act. The State subsequently entered into a contract with
another state agency, the South Carolina Department of Mental
Retardation (DMR), for the provision of certain Title XX services.
During the period in question the Department of Health and Human
Services (HHS) negotiated indirect cost rates with DMR. /3/ The rates
ranged from 12.9% to 19.0% to be applied to a base consisting of the
direct salaries and wages of DMR employees. See, Agreements at State
Tab A.
The audit report found, however, that the State under its contract
with DMR reimbursed DMR for indirect costs based not on direct salaries
and wages of DMR employees, but on total direct costs. The audit report
determined that this misapplication of the rate resulted in an
overpayment of $873,251 in Title XX funds.
The State did not contest the technical correctness of the
disallowance. See, State Brief, p. 7. The State argued instead that
the method used to compute the indirect costs (3) for the period was
inappropriate and, therefore, the State proposed several methods of
"re-estimating" the correct amount of indirect costs incurred by DMR.
The Agency contended that the indirect cost agreements in effect
between HHS and DMR are no longer subject to any adjustments and, even
if the agreements were subject to further adjustments, the State has not
demonstrated the need for any such adjustments.
In approaching this issue, we first examine below whether the
indirect cost rate agreements are subject to some future adjustment, and
then whether there is any other basis for adjustment.
II. Discussion
A. Whether the agreements are subject to adjustment.
The parties agreed that the type of indirect cost agreements in
effect between HHS and DMR was a fixed rate agreement with a carry
forward provision. See, e.g., 45 CFR Part 74, App. C., Part I, F.2.
(1979).The agreements contain the following language with respect to the
"fixed" nature of the rates established therein:
THE FIXED RATE(S) contained in this agreement is based on an estimate
of the costs which will be incurred during the period for which the rate
applies. When the actual costs for such period have been determined, an
adjustment will be made in a subsequent negotiation to compensate for
the difference between that cost used to establish the fixed rate and
that which would have been used were the actual costs known before the
time. (Emphasis added)
State Tab A.
The Agency contended that while this provision provided for
"subsequent negotiated adjustments to reflect actual experience,"
DMR
did not avail itself of that opportunity. The Agency stated that DMR
did not adjust any of the negotiation agreements for the years in
question to reflect actual experience for the previous years. Agency
Supplemental Memorandum, p. 4. The Agency stated further that for the
three years subsequent to the period in question the State did not
propose an indirect cost plan or attempt to adjust subsequent grants to
compensate for actual experience. Id.
(4) The Agency argued that the State had the opportunity "to carry
forward any underestimate" but failed to do so. Id. at p. 5.
The State agreed with the characterization of the agreements as
"fixed rate with carry-forward provision" and agreed that under the
provision quoted above future indirect cost recoveries were to be
adjusted to compensate for any over- or under-recovery of indirect
costs. State Response to Interrogatories, p. 1. The State noted that
the time frame dictated by OASC-10, "A Guide for State and Local
Government Agencies," is that the adjustment "generally will be carried
forward to the second and third fiscal period following the period being
adjusted." OASC-10, p. 81. The State asserted that it complied with
this provision. /4/
The State noted that for the first year of the contract with DMR (FY
1975-76), DMR had an indirect cost rate of 18.5 percent, and for the two
subsequent years 10 percent and 7.5 percent respectively. The State
agreed with the Agency's contention that DMR claimed zero indirect costs
for the three years subsequent to the audit period but argued that DMR's
claiming of zero indirect costs for the subsequent period resulted in
"DMR clearly (over-compensating) for any over-recoveries during the
audit period." State Response to Interrogatories, p. 2.
We are not persuaded by the State's argument. The adjustment called
for in the agreements was specifically to be made in response to the
negotiated rate therein. If what the State alleged is true, that the
negotiated rates for DMR were inequitably low, DMR in a subsequent
proposal should have adjusted for this under-recovery. DMR instead did
not make an adjustment in any of the agreements in effect for the years
in question and filed no indirect cost proposals for the three
subsequent years and as a result received no indirect costs for those
years. Therefore, DMR did not take advantage of the opportunity
contained in the negotiated agreements to collect what the State alleged
are appropriate amounts of indirect costs.
(5) The State was essentially arguing that any overpayment the State
may have made to DMR for indirect costs was offset by DMR's not claiming
any indirect costs for the subsequent three years. This argument may be
superficially attractive, but upon scrutiny in light of the adjustment
provision contained in the negotiated agreements it must fail.
The adjustment provision clearly states that any adjustment will be
made in a "subsequent negotiation." The State did not allege that
DMR's
decision to forego claiming indirect costs for the three years
subsequent to the audit period was based on a negotiated decision
between DMR and the Agency. The State's argument ignores the fact that
DMR and not the State was a party to the indirect cost rate agreements.
See, State Tab A. Here, the State is unilaterally determining that DMR
is entitled to an adjustment and the amount of the adjustment. Such a
unilateral determination is clearly outside the scope of DMR's agreement
with the Agency.
B. Whether there is some other authority for adjusting DMR's indirect
cost award.
The State contended that it is entitled under at least two separate
authorities to receive additional indirect costs. We discuss those
alternate methods below.
1. OMB Circular A-87, F.2.b.
The State argued that it is permitted to negotiate a lump sum
settlement for what the State alleged was the appropriate amount of
indirect costs incurred for the period in question. The State relied on
OMB Circular A-87, F.2.b. which provides, in part:
Negotiated lump sum for overhead.
A negotiated fixed amount in lieu of indirect costs may be
appropriate... (Emphasis added)
The State contended that there is no time limitation contained in
this provision and, therefore, a lump sum settlement would be consistent
with this provision.
We disagree. The plain wording of the regulation is that in certain
situations the Agency will pay a grantee a lump sum to cover the costs
of overhead. However, this lump sum is (6) "in lieu of determining the
actual amount of grantee departmental indirect cost allocable to a grant
program." OMB Circular A-87, F.2. In this case, negotiated indirect
cost agreements were in effect. To uphold the State's position would
circumvent the means provided in the agreements for adjusting for actual
experience and would ignore the clear wording of OMB Circular A-87. The
negotiated lump sum for overhead is intended to be a separate method of
collecting for overhead, not a supplement. Therefore, the State is not
entitled to an adjustment under this provision.
2. HHS Grants Administration Manual (GAM), Chapter 1-105-60, C.2.c.
The State contended that the GAM allows the State to develop a
revised estimate of the indirect costs incurred by DMR. The State cited
GAM Chapter 1-105-60, C.2.c. which provides that:
If the organization disagrees with the use of an estimate or
disagrees with the procedures used by the auditor to develop the
estimate it should be offered the option of performing an alternative
analysis within a reasonable period of time to develop more precise
results....
In response to a Board question concerning the applicability of this
section, since it appears to refer to the use of estimates in
calculating the amount of the disallowance, the State responded simply
that this section is applicable since "indirect costs are, by nature,
estimates." (State's emphasis) State's Response to Interrgatories, p.
4.
We find the State's argument to be without merit. GAM Chapter
1-105-60, C.2.a., entitled "Use of Estimates", states that, where
it is
not possible to determine in an audit report the precise amount of
unallowable costs, an estimate may be used. Section C.2.c., quoted
above, gives the grantee an opportunity to dispute the auditors'
estimate and to develop an alternative estimate.
The amount of unallowable costs in this case was not based on an
estimate. The auditors calculated the amount of unallowable costs by
taking the difference between the amount of indirect costs claimed by
DMR and the amount DMR was entitled to during the period under the
negotiated (7) agreements ($1,009,561 - 136,310 = $873,251 of
unallowable costs). See, State Tab L, pp. 4-7. Even if the amount of
unallowable costs were based on an estimate, the State did not contest
the technical correctness of the disallowance. See, e.g., State Appeal
Brief, p. 7. Therefore, this provision of the GAM has no applicability
to the facts of this case.
In addition, we find that the State's argument that indirect costs
are estimates and, therefore, subject to revision under this provision
is specious. The estimates of indirect costs embodied in the
negotiation agreements result from the process of awarding indirect
costs on a prospective basis. As previously stated (see, p. 4 above),
those estimates are subject to adjustment for any over- or
under-recovery as a result of the estimate in accordance with the
agreements when the actual amount of indirect costs is known. On the
other hand, the estimates referred to in GAM Chapter 1-105-60, C.2.a.
apply to determining the amount of unallowable costs. There is nothing
in the negotiation agreements or in this section itself that suggests
that this section has any application to the adjustment process for
prospective indirect cost awards. Therefore, we find that the State is
misreading and misapplying this provision and it cannot be used as a
basis for adjustment.
C. Other Arguments
1. Whether DMR's current indirect cost methodology should be applied
to the period in question.
The State contended that DMR's current method of computing indirect
costs results in a more reasonable estimate of the amount of indirect
costs DMR incurs. The State contended further that the Agency
recognizes that DMR's current method is more appropriate since the
Agency approved the method for DMR. Apparently, the State was arguing
that since the Agency allegedly recognized DMR's current method as a
more accurate method of computing indirect costs, the State should be
entitled to apply that current method to the earlier period to compute
an adjustment for that period.
We are not persuaded by the State's argument. The awarding of
indirect costs on a prospective basis is by its very nature inexact.
The Agency recognizes this and provides, as it did in this case, for a
method of adjustment to reflect actual experience. The State's argument
that a more precise method of calculating DMR's indirect costs for the
(8) period in question is available may be correct; however, this
argument ignores the fact that the Agency and DMR agreed on a method of
calculating indirect costs and on a method of subsequently adjusting
DMR's indirect cost award to reflect DMR's actual experience. If that
method of adjustment had been followed, DMR likely would have been
awarded the full amount of indirect costs to which it was entitled,
which is no less than DMR optimally would be entitled to under the
State's proposed method. Therefore, it was DMR's failure to avail
itself of the agreed upon adjustment procedures, not the agreed upon
method of recovering indirect costs, that resulted in DMR's not
collecting the full amount of indirect costs to which it was entitled.
2.Whether DMR's staff received adequate Agency assistance in
developing DMR's Cost Allocation Plan
The State argued generally that DMR's staff was inexperienced and
ill-prepared for the complex task of constructing a cost allocation plan
(CAP) which adequately reflected the indirect costs experienced by DMR.
The State asserted that the Agency should have provided the necessary
expertise to DMR officials and that the Agency failed to provide this
assistance. The State cited the instructions in OASC-10, "A Guide for
State and Local Government Agencies", as a confusing and inadequate aid
to preparing its CAP. The State asserted that it was not until the
State appointed a full-time indirect cost negotiator in 1980 that DMR
was able to prepare the multiple rate plan that the Agency suggested
that DMR use. The State argued, therefore, that "the audit exception
should have been a management exception, that DMR's indirect cost system
was inappropriate and inadequate, and that (the Agency) did not provide
the assistance required to permit proper development of a plan." State
Brief, pp. 15-16.
We are not persuaded by the State's argument. As the Agency asserted
in its brief, it is the ultimate responsibility of the grantee to
prepare and submit an indirect cost proposal where indirect cost
reimbursement is sought. See, e.g., OASC-10, p. 10. The State
contended that the Agency did not provide adequate assistance but it did
not provide any examples of State requests for assistance and the
Agency's failure to provide such assistance. In addition, the State's
argument is belied by the fact that the State and DMR (9) were able to
prepare a satisfactory cost allocation plan after the State took the
initiative to hire a qualified indirect cost negotiator. It would
appear that inexperienced personnel, not the lack of instructions,
precipitated DMR's problems.
D. Whether the Board has jurisdiction over the question of unclaimed
indirect costs.
The State contended that because of the audit findings DMR refrained
from claiming indirect costs for the three fiscal years subsequent to
the audit period (FY 1978-79, 1979-80 and 1980-81). The State did not
develop this argument in its briefs except to state that DMR staff knew
of problems involving its cost allocation system from DMR's audit
efforts and federal auditors and that DMR was "attempting to solve the
problem regarding indirect costs at that time." State Reply Brief, p.
5.
The State requested that the Board consider these lost indirect costs
(which it estimated at 1 million dollars) in calculating any need for
repayment of indirect costs for the audit period.
The Agency objected to the Board's jurisdiction over this matter,
stating that there was no disallowance from which the State could appeal
as required by 45 CFR 16.3 of the Board's regulations. Agency Brief, p.
8.
The State conceded that there was no formal denial of these costs,
but argued that section 16.13 of the Board's regulations gives the Board
the flexibility to consider these costs.
Section 16.13 delineates some of the powers of the Board members and,
in addition, contains a general "catch-all" phrase which states:
and to take any other action necessary to resolve disputes in
accordance with the objectives of these procedures.
The State would have us give this provision a much broader
interpretation than is warranted. The powers enumerated in this section
involve the handling of disputes properly (10) before the Board. There
is no indication that these additional powers are meant to expand the
Board's jurisdiction. Since there has been no disallowance of these
costs as defined in section 16.3 and since the State is, in essence,
requesting the Board to award additional funds, which the Board is not
empowered to do (see, City of Dayton, Ohio, Decision No. 325, June 30,
1982), we find that the Board does not have jurisdiction over this
issue.
E. State's request for a hearing
The State requested that a hearing be held in this case. The State
contended that a hearing would "facilitate a better understanding of
this case by the Board." State Response to Interrogatories, p. 5. The
issues the State wished to develop at a hearing dealt with the amount of
indirect costs that DMR allegedly should have been awarded, how the
agreements were negotiated and whether there is some basis for adjusting
those agreements. Id.
The Agency objected to the State's request for a hearing. The Agency
contended that there were no material facts in dispute which at this
time required resolution by the Board and that it was only necessary for
the Board to decide questions of law. Agency Supplemental Memorandum,
p. 7.
The Board's regulations at section 16.11 provide that the Board will
approve a party's request for a hearing where the Board determines
"there are complex issues or material facts in dispute the resolution of
which would be significantly aided by a hearing", or if the Board
believes its decision-making process would be otherwise aided by a
hearing.
We decide that a hearing is unnecessary in this case. The
development of the record for this case consisted of two sets of
briefings, the submission of an appeal file, responses to Board
questions, and two telephone conference calls. The State has had ample
opportunity to develop the legal issues the Board considered in
rendering its decision. We do not believe that a formal hearing would
serve to illuminate further these issues. As discussed above, we found
that the State was unable to show any basis for adjusting DMR's
negotiated indirect cost awards in effect for the audit period and that
there was no basis to the State's other arguments concerning the
development of the agreements. As a result of our findings on the legal
issues, the factual questions concerning how much indirect (11) costs
DMR actually incurred for those years need not be reached. Therefore,
we decide that a hearing is not necessary.
In addition, in a larger sense, it is clear that the State here has
already had a full "hearing" on its case; the immediate concern is
whether the State ought to be afforded the opportunity also to make an
in-person oral presentation. Although the Board more often than not
grants requests for hearings under its procedures (see, 45 CFR 16.11),
it does not do so in all cases, for we have held, as courts have, that
due administrative process does not require oral process in all cases.
See, Community Relations - Social Development Commission, Decision No.
323, June 30, 1982, pp. 14-17; citing Gray Panthers v. Schweiker, 652
F.2d 146 (D.C. Cir., 1980). Where, as here, an appellant has had a full
opportunity to present written evidence and argument in response to a
clear disallowance decision concerning what essentially is a legal
issue, and where the Board believes it has a full understanding of the
dispute, little purpose is served by the expenditure of time and
resources incident to an in-person presentation.
III. Conclusion
For the reasons stated above, we sustain the Agency's disallowance of
$873,251. /1/ Submissions by the parties with regard to the indirect
cost issue which are part of the record in Board Docket No.
82-46-SC-HD are incorporated with the parties' consent into the record
of this case. See, Board's March 11, 1983 Letter. /2/ "Review
of Management Controls and Selected Operating Practices, Title XX
Program, South Carolina Department of Social Services, Columbia, South
Carolina," Audit Control Number 04-00565. State Tab L. /3/ HHS
negotiated an indirect cost rate with DMR because DMR was the grantee
for other HHS programs. The rate was applicable to all HSS programs,
except some education grants. See, State Tab A. /4/ We note
that the State did not argue that, despite the passage of seven years
since the last year of the audit period, the time limits contained in
OASC-10 would not preclude DMR from complying with this provision by
adjusting for DMR's alleged under-recovery through a subsequent
negotiation.
JULY 07, 1984