GAB Decision 561
Docket No. 84-53
August 6, 1984
Anchorage Neighborhood Health Center;
Garrett, Donald; Settle, Norval Ballard, Judith
The Anchorage Neighborhood Health Center (Grantee) appealed $9,967 of
a $11,278 disallowance taken by the Public Health Service (PHS) against
Grantee's fiscal year (FY) 1981 Community Health Center grant. PHS's
initial determination was upheld by a PHS review committee, and
Grantee's appeal was initially accepted by the Board to be heard under
out special expedited procedures. See 45 CFR 16.12(d). However,
Grantee raised new issues before the Board and we requested additional
information from PHS in order to analyze these issues. Since the PHS
record was inadequate on these issues, our review here is not restricted
to whether the PHS determination was clearly erroneous.
Grantee raised several arguments as to whether mortgage interest
expenses paid on Grantee's new facility were allowable. For the reasons
stated below, we sustain the disallowance.
Interest Costs Are Unallowable
Paragraph G.18(a) of 45 CFR Part 74, Appendix F (1980) states that
"costs incurred for interest on borrowed capital . . . however
represented, are unallowable."
Grantee did not attempt to argue that the disallowed costs were not
interest payments. Rather, it argued that paying the mortgage on the
building represented a better business practice than renting a
comparable amount of space (the costs of which would be an allowable
expense under Appendix F, Paragraph G.38).
Even assuming the fact that purchase of the facility may have been
the most fiscally responsible arrangement that Grantee could have
entered into, that fact will not cause costs which are specifically
prohibited to become allowable. The Board has held in other decisions
where grantees have presented equitable arguments (for example, about
why interest expenses on the purchase of computer equipment should be
allowed) that the Board cannot disregard federal regulations prohibiting
federal reimbursement on these costs. See, e.g., Alameda County Cost
Plan, Decision No. 281, April 23, 1982.
(2) Disallowance Is Consistent with PHS Actions for FY 1982
a. Interest earned on federal funds
Grantee argued that the disallowance was inconsistent with PHS's
determination of allowability of a $311 charge to Grantee's FY 1982
grant.
The $311 was a totally different type of cost, however; it
represented interest earned on federal funds, not interest paid, and was
counted as interest income and part of Grantee's program revenue by the
auditors. See Exhibit 2 to Notice of Appeal; Audit Report ACN
10-35012, p. 8. That transaction is in no way analogous to Grantee's
using federal funds to pay interest expenses.
b. Interest payments
Grantee argued that the disallowance was also inconsistent with PHS's
decision not to disallow interest payments of $37,977, on the same
mortgage, claimed in FY 1982. PHS has pointed out, however, that
Grantee's financial situation in FY 1982 was significantly different
from the situation in FY 1981.
The regulation at 45 CFR 74.42(a) defines general program income as:
"all program income (defined at 45 CFR 74.41 to include all gross income
including fees for services) accuring to a grantee during the period of
grant support. . . ." Further, 45 CFR 74.42(b) provides that a grantee
may retain this income and use it in accordance with several
alternatives outlined at 45 CFR 74.42(c), (d) and (e). The alternative
set out at 45 CFR 74.42(e) provides that general program income may be
used for costs which are in addition to allowable costs, but
nevertheless further the objectives of the federal statute under which
the grant is made. Under this alternative, the costs which program
income pays need not necessarily be allowable as charges to federal
funds. This alternative is available, however, only if expressly
permitted by the terms of the grant. In FY 1981 and 1982, it appears
that Grantee applied program income to meet its non-federal share
requirement. The regulations provide, in general, that a non-federal
share requirement be met by allowable costs incurred by a grantee. See
45 CFR 74.52.
In FY 1982, Grantee had a budgeted non-federal share of $497,847,
while its realized program income for that period was $546,325.
Although not explicitly stated by PHS, we are assuming from its
explanation in its July 3, 1984 memorandum that PHS allowed Grantee to
count $497,847 of its 1982 program income under 45 CFR 74.42(d) towards
its non-federal share requirement. Thus, Grantee's application of
$37,977 in excess program income to interest payments (costs not
otherwise permissible (3) as charges to federal funds) clearly fell
within the cost alternative established at 45 CFR 74.47(e). However,
during FY 1981 Grantee had a budgeted non-federal share of $519,090 and
realized non-federal income of $310,434. Thus, for FY 81, Grantee did
not have excess program income that could be used for unallowable costs.
Given the different factual circumstances for FY 1981 and FY 1982,
Grantee's allegation that it has suffered inconsistent treatment at the
hands of PHS has no merit. In both FY 1981 and FY 1982 Grantee was
prohibited from charging the interest expenses to project funds (federal
or non-federal share). In FY 1982 Grantee had generated sufficient
general program income to enable it to pay the interest expenses which
had accrued. However, in FY 1981, not having generated excess program
income, project funds were applied to interest payments in violation of
45 CFR Part 74, Appendix F, G.18(a).The different treatment of the
interest payments did not result from any inconsistent regulatory
application; rather, the difference was the result of the correct
application of the appropriate regulations to different factual
situations in two successive fiscal years.
Disallowance Is Consistent with PHS Actions for FY 1984
Grantee also argued that the disallowance of FY 1981 funds used for
interest payments was inconsistent with PHS's approval of the same
expenses in FY 1984. Grantee has not shown that PHS approved the use of
project funds for interest payments no matter what Grantee's financial
situation was, however. The 1984 "approval" cited by Grantee was for
utilization of "up to $75,000 in program income for mortage payments
related to the financing of the clinic building as provided in 45 CFR
74.42(e)." (Attachment 2 to Grantee's April 18, 1984 letter) This
"approval" cannot be reasonably construed as blanket approval to apply
project funds (federal or non-federal share) to unallowable interest
payments.
The key factor in the PHS determination regarding the interest
payments in 1981 is that Grantee had charged the payments as project
costs, needed in order for Grantee to meet its non-federal share
requirement. The grant award documents for FY 1984, on the other hand,
indicate that the alternative at 45 CFR 74.42(c) would be used, with
program income generally to be applied to allowable costs not applied
toward the non-federal share requirement, except for up to $75,000 of
program income which could be used for interest payments in accordance
with 45 CFR 74.42(e).The reference in the FY 1984 documents to 45 CFR
74.42(e) indicates that PHS considered the interest payments to be costs
which merely "further the objectives of the grant program," (4) rather
than costs which are allowable under the cost principles. It is
reasonable for PHS to require that program income be applied solely to
allowable costs when used as nonfederal share, but to permit application
to unallowable, but project related, costs in other circumstances.
The Review Committee's Determination Was Not Untimely
Grantee stated that it had received a letter from PHS on November 28,
1983 indicating that Grantee could expect the review of its appeal to be
completed within 45 days. Grantee argued that the committee's decision
was not handed down until 91 days later and, therefore, was untimely.
PHS's letter merely indicated that a decision was "expected" within
45 days.Grantee has not argued that the committee was required by
statute or regulation to reach a decision within 45 days. In fact, the
regulation establishing the review committee's procedures does not
establish a timeframe in which a decision must be issued. See 42 CFR
50.406.
Grantee has not shown or even alleged that the Agency's
"untimeliness" was intentional or that it has suffered any prejudice
in
pursuing its appeal to this Board as a result of the delay. There is no
basis to overturn the disallowance on this ground.
Conclusion
Based on the reasons set out above, we sustain the disallowance of
$9,967.
JANUARY 08, 1985