GAB Decision 679
August 12, 1985
Economic Opportunity Council of Suffolk, Inc.;
Settle, Norval D. (John); Teitz, Alexander G. Ballard, Judith A.
Docket No. 84-185; ACN 02-45029
DECISION
Economic Opportunity Council of Suffolk, Inc. (Grantee) appealed a
decision by the Office of Human Development Services (OHDS) disallowing
$473,055 under Grantee's Head Start grant. Grantee's records identified
this amount as "accounts receivable," that is, sums owed Grantee's
Head
Start account from non-Head Start accounts, as of January 31, 1983.
Grantee acknowledged engaging in a practice of "inter-fund borrowings,"
transferring Head Start funds "to satisfy payroll and other time-related
financial obligations of other programs." Grantee's brief, p. 2.
There is no question that use of federal Head Start funds to pay costs
of other programs is improper, and that is not the issue here. This
dispute primarily concerns how Grantee must account for any sums that
were improperly transferred. Grantee presents two alternative
arguments: (1) that it should have to specificially repay only $22,102
of the $473,055 questioned because the remainder has either been
reprogrammed to Grantee's current budget period or accounted for in
allowable expenditures in earlier periods; or (2) that most of the
$473,055 has been transferred back to the Head Start account and the
remaining "accounts receivable" figures do not represent a debt owed
Head Start from other programs. OHDS seeks a return now of the entire
$473,055 in cash, which it says it would make available to disburse to
Grantee in reimbursement for allowable expenditures in the current
program year. Transcript of Conference (Tr.), p. 123.
Based on the analysis below, we conclude that OHDS has the authority to
require that Grantee account in cash to the Federal Government for
"accounts receivable" amounts, but only to the extent grant funds
have
been received and not accounted for through allowable costs actually
paid. Accordingly, we uphold the disallowance, subject to reduction if
the Grantee can show that it has already accounted for some of these
funds through incurring and paying allowable costs.
Grantee also asked us to rule as part of this appeal on OHDS
determinations disallowing $18,228 for Grantee's Program Year(2) ending
January 31, 1980, and $4,008 for the Program Year ending January 31,
1979. Grantee's appeals of these determinations had previously been
rejected by this Board as untimely. For the reasons stated below, we
decline to reconsider our rulings rejecting these appeals or to
recommend that the resulting debts be forgiven, as Grantee requests.
See discussion at pp. 8-9.
The facts.
The following facts are undisputed here:
* Grantee has operated a Head Start program since the early 1970's. At
various times, Grantee has also operated other grant programs, including
a Community Services Block Grant (CSBG) program and a program for the
County of Suffolk. Grantee maintains a separate Head Start account, but
this account reflects Head Start funds from both federal and non-federal
sources.
* Grantee received federal Head Start funds based on Head Start
expenditures, reported on an accrual basis. Grantee did not, however,
always apply Head Start funds solely to pay these accrued Head Start
expenditures. Rather, Grantee on numerous occasions loaned Head Start
funds to other programs. Grantee does not claim that this practice was
permissible (and, indeed, the record shows that OHDS informed the
Grantee numerous times that it was not).
* Grantee did not report amounts used to pay other programs as charges
to its Head Start grant. Instead, Grantee reported amounts loaned from
Head Start to other programs as assets, under the heading "accounts
receivable." As of January 31, 1983 (the end of Grantee's Program Year
-
17), the "accounts receivable" was reported as $473,055.
* At the end of various program years, Grantee also reported "fund
balances." The "fund balance" amounts were generally the difference
between the amounts awarded for each period and the amounts reported as
expenditures. /1/ Since Grantee did not report the "accounts receivable"
amounts as expenditures, the reported fund balances did not reflect the
fact(3) that Grantee had transferred funds from its Head Start account
and did not have a "cash balance" to correspond to the "fund
balance"
amount (minus any funds awarded but not received). OHDS periodically
reprogrammed fund balances from various program years to later program
years. (OHDS explained that, although it was concerned that Grantee did
not have the cash on hand to cover the full fund balance amounts,
Grantee had assured OHDS that the "accounts receivable" would be timely
liquidated. Tr., pp. 19-21.)
* Included in the $473,055 listed as "accounts receivable" as of January
31, 1983, was $135,381 which was reported on Grantee's general ledger as
due from other programs, but which Grantee's current auditors have said
are not supported by sufficient documentary evidence. Since January 31,
1983, Grantee has transferred some funds back to its Head Start account
from other program accounts, but has also transferred other funds out of
Head Start.
General considerations.
A fundamental principle of grants law is that federal funds may be
expended only for the purposes for which appropriated, and no others.
31 U.S.C. 628. Thus, Head Start funds may be spent only for Head Start
purposes (that is, allowable costs specifically of the Head Start
program).
In an ideal world, a grantee would receive federal cash only as needed
and immediately apply that cash to pay for allowable Head Start
expenditures which have accrued. Often, however, there is some delay in
receipt of federal funds and a grantee must use its own cash to pay
program costs. In recognition of this, accountability for grant funds
is framed generally in terms of allowable costs. If a grantee has used
its own funds to pay allowable costs, these costs may be used to
discharge the grantee's obligation for federal funds even though not
directly paid with federal cash (so long, of course, as the costs are
not needed to satisfy the required non-federal share of the grant).
This does not mean that accountability for grant funds arises solely in
terms of costs, however. If a grantee has received more grant funds
than it can account for in allowable costs, it must have cash on hand
which can then either be reprogrammed to be used in a subsequent period
or returned to the Federal Government. The primary regulation on which
OHDS relied here reflects this by providing:(4)
For each grant, the following sums shall constitute debt or debts
owed by the grantee to the Federal Government, and shall, if not paid on
demand, be recovered from the grantee . . .
(a) Any grant funds paid to the grantee by the Federal Government in
excess of the amount to which the grantee is finally determined to be
entitled under the terms of the grant; . . . .
45 CFR 74.112. /2/
If Grantee here had simply attempted to discharge its obligation for
federal funds through charging to Head Start costs attributable to other
programs, there is no question that disallowance of those costs would be
proper. Essentially, OHDS decided here that the mere fact that Grantee
treated the amounts as "accounts receivable" rather than costs should
not be permitted to obscure the fact that the sums represented amounts
misspent by Grantee. We agree with OHDS that it is the substance of the
transaction which matters, not the label it is given. /3/
None of the arguments raised by the Grantee (with the possible exception
of the argument that $135,381 of the "accounts receivable" is
questionable), go to the issue of whether Grantee had, in fact, misspent
$473,055 in federal funds as of January 31, 1983. Rather, Grantee's
arguments primarily go to the question of whether OHDS can require the
Grantee to repay the full amount now, given actions by OHDS and Grantee
subsequent to that time. Below, we explain why we think that these
subsequent actions do not support the result Grantee advocates. We
further discuss why we do not accept Grantee's argument concerning the
$135,381.(5)
The effect of the reprogramming.
Grantee argued that it should not have to restore $473,055 in Head Start
cash because it had already accounted for all but $323,703 of federal
revenues received and that $301,601 of this amount had been
reprogrammed. While conceding liability for the difference, $22,102,
Grantee argued that it did not have to account for the $301,601 until
the end of its current program year, which has been extended pending
outcome of an appeal by the Grantee of a terminatin actio by OHDS. In
support of this, Grantee pointed to language in 45 CFR 74.112 (quoted
above) referring to "the amount to which the grantee is finally
determined to be entitled to under the terms of the grant; . . . ."
Essentially, Grantee's position was that it has no debt to the Federal
Government until a determination is made at the end of the current
program year that Grantee has received more than it was entitled to.
Tr., pp. 14-15. Grantee submitted a schedule which Grantee said showed
that, as of November 30, 1983, the Grantee had total grant revenues of
$28,933,397 and had expended $28,609,694. /4/
If Grantee's schedule could, in fact, be accepted as showing that
Grantee could account for all but $323,601 in federal funds received as
of January 31, 1983, we might reduce the disallowance accordingly: the
necessary implication would be that the full $473,055 in "accounts
receivable" could not be considered to represent federal funds. But
this implication does not arise here for several reasons: the Grantee's
schedule shows the situation as of November 30, 1983, not January 31,
1983, and, also, since Grantee reported expenditures on an accrual
basis, the amount of expenditures listed does not necessarily mean that
federal cash has not, in fact, been applied elsewhere.
We agree with Grantee that the effect of the reprogramming is that
Grantee can ultimately discharge its obligation for the reprogrammed
funds through costs incurred in the program year to which the funds are
reprogrammed. OHDS acknowledged this as well. Tr., pp. 101-102. But
this does not really undermine OHDS' position that, as of January 31,
1983, Grantee had received federal cash of at least $473,055 which it
had not accounted for either through program expenditures actually paid
or through cash on hand. Moreover, an audit report submitted for the
period ending November 30, 1984 shows total fund balances of $388,476,
which indicates that, as of that time, Grantee had received a(6)
substantial amount of federal funds that had not been obligated for
grant purposes. Since these fund balances do not reflect federal funds
which may have been received for accrued expenditures but not actually
applied to pay the underlying obligations, it is possible that Grantee
may still owe the full $473,055.
Further, Grantee may be correct that the regulation at 45 CFR 74.112 is
not strictly speaking applicable here since it is included with a
section on grant closeout and speaks of the amount the grantee is
"finally" entitled to. But the principle embodied in that regulation
is
fundamental: grantees are not permitted to retain federal grant funds
in excess of what is authorized for, and actually expended for, program
purposes. See, e.g., 45 CFR 74.61(c) and (e); and 45 CFR Part 74,
subpart I. While a "debt" requiring a refund of federal funds may
arise
at the time of grant closeout, a grantor agency may also require refund
of federal funds in other circumstances. See 45 CFR 74.112(b)-( e);
see, also 47 Fed. Reg. 20028 (May 10, 1982).
OHDS explained that the reason it has proposed requiring the Grantee to
pay back the $473,055 in cash now, which will then be reimbursed to
Grantee to the extent justified by actual allowable costs, is that
Grantee's practices have put federal funds in jeopardy. By applying
federal cash to purposes other than paying for Head Start costs, Grantee
has accumulated substantial debts to those who have provided goods or
services to Head Start (listed on the Grantee's records as "accounts
payable"). OHDS' concern is that, at the end of the grant, Grantee will
not be able to pay these debts, nor repay any remaining fund balances to
the Federal Government.
This is a legitimate concern, which certainly justifies OHDS in acting
now to require cash accountability by Grantee, rather than waiting until
closeout. But the record here indicates that Grantee probably has
already reduced its cash liability to less than $473,055, through
incurring and paying Head Start costs properly charged to reprogrammed
funds. OHDS acknowledged that it might have to reimburse Grantee for
such costs out of the $473,055 it sought to recover. If Grantee has
readily available evidence that it is entitled to part of the funds,
Grantee should not have to repay the cash and wait for reimbursement.
Thus, we conclude that OHDS should provide Grantee a limited opportunity
to produce evidence of allowable Head Start costs actually paid which
might reduce its cash obligation to OHDS. See, footnote 6, below.
The effect of subsequent transfers.
Grantee argued alternatively that the disallowance was improper because
Grantee has now repaid to its Head Start account, or (7) otherwise
liquidated, a substantial part of the $473,055 "accounts receivable."
Grantee submitted a schedule prepared by its auditors showing a net
reduction of $295,053 in interprogram receivables between January 31,
1983 and March 27, 1985. With respect to $135,381 of the remaining
amount, Grantee argued that, notwithstanding the fact that its general
ledger included as "accounts receivable" amounts due from the County
of
Suffolk and from certain other sources, there was no basis for
concluding that, in fact, these programs owed these amounts to Head
Start. Grantee pointed to its current auditors' statement regarding
these amounts:
Sufficient documentary evidence is not available to determine the
propriety of the receivables.
Tr., p. 44 (quoting from 1980 audit report, p. 3).
The auditors further explained that these amounts were originally
reported as "accounts receivable" by a different audit firm, which
had
no schedules in its workpapers to support the figures. Tr., p. 48. The
current auditors also said that the amounts recorded on the other
programs' books did not agree with the Head Start figures. Tr., p. 49.
In view of this, Grantee argued, these figures could not be considered
to be debts owed to Head Start and, therefore, the fact that Grantee
could not collect from the other programs did not render them "bad
debts," as OHDS had alleged. /5/
OHDS did not dispute that some of the "accounts receivable" have been
liquidated through transfers back to the Head Start account or through
other programs paying Head Start obligations (although apparently an
audit recommendation verifying this has not yet been adopted by OHDS).
Tr., pp. 37-41. OHDS pointed out, however, that it considered the
re-transfers to be merely "paper transactions" since OHDS had no
guarantee that the funds would not subsequently be again transferred out
of the Head Start account, given the Grantee's past practices. Indeed,
Grantee's own submission showed that the CSBG program paid $42,857 in
Head Start costs, but this same amount was re-transferred to CSBG
shortly after this. Letter dated March 27, 1985 to Grantee from its
auditors.
OHDS also argued that one of the reasons that it had delayed taking any
action against the Grantee based on the interfund transfer problem was
that Grantee had said that it was engaged in negotiations to recover
funds from the County of Suffolk and, therefore, Grantee itself
considered the amounts to represent a debt owed to(8) Head Start.
Grantee responded that the fact that it would try to obtain funding from
other sources does not necessarily mean that it can establish that the
other source owes it money. Tr., p. 62.
With respect to the amounts allegedly restored to Grantee's Head Start
account, we agree with OHDS that it has a legitimate concern that these
amounts actually be applied to cover Head Start costs or be retained as
cash which can be readily refunded to the Federal Government if
necessary. The mere fact that these amounts may no longer be reflected
in the Grantee's books as "accounts receivable" is not sufficient.
With respect to Grantee's arguments that $135,381 should not be
considered a debt to Head Start, we conclude that this misses the point.
The mere fact that Grantee may not have documentation to support a
finding that the other programs owe Head Start that specific amount does
not call into question the conclusion that Grantee transferred that
amount out of Head Start and used it for other purposes. Indeed, there
is some evidence in the record that the reason that Grantee could not
collect from the County of Suffolk was primarily because Grantee was
unable to support the allowability of the costs it was attempting to
charge to that program. OHDS appeal file, Ex. E-14. This suggests that
Grantee's inability to establish a debt due from other programs arises
from its own inadequacies in the other programs, not because it is truly
questionable whether Grantee misapplied Head Start funds in the first
place.
At most, then, the subsequent actions of Grantee suggest the possibility
that Grantee may be able to account for part of the funds in question
here by allowable costs in the current period paid with funds in effect
transferred back to Head Start or with non-federal funds. Grantee
should be permitted an opportunity to show OHDS the amount of allowable
costs it has not only accrued but has actually paid. Grantee is
accountable for the difference between that amount and the amount of
grant cash Grantee has actually received, and it is within the authority
of OHDS to require Grantee to refund it in cash prior to closeout. /6/
(9)
The disallowance previously appealed.
Included in the amounts now considered "fund balances" under Grantee's
Head Start awards for various program years are $18,228 and $4,008,
relating to amounts previously disallowed by OHDS. Grantee ultimately
appealed these disallowances to the Board, but these appeals were
rejected as untimely. OHDS appeal file, Ex. I. Grantee did not argue
that the Board's rulings rejecting the appeals were in error, and we
decline to reconsider those rulings here.
Grantee argued, however, that, since the Board was considering in the
instant case the status of Grantee's fund balances, Grantee could
appropriately raise the question of the previous disallowances here.
Grantee alleged that, although the $18,228 was identified as an
overexpenditure in one of Grantee's program accounts, another account
was underexpended and a retroactive budget revision should be permitted.
Grantee also alleged that the $4,008, disallowed by OHDS because Grantee
had failed to meet its non-federal share requirement, would have been
avoided by Grantee if $39,840 in available non-federal share had not
been inadvertently missed because of a changeover in auditors. Grantee
said that it was asking the Board to apply its special expertise to make
findings about these amounts and, on the basis of those findings,
recommend that OHDS exercise its discretion to permit a retroactive
budget revision or that the Secretary exercise her discretion under 31
U.S.C. 3711(a)(2) to compromise each of these claims in the interest of
justice. /7/
We decline to make the recommendations requested for two reasons: (1)
the record before us is insufficient to provide a basis for finding
either that Grantee did, in fact, underexpend one program account in the
same year it overexpended in another or that Grantee had $39,840 in
excess non-federal share that was attributable to the year its
contributions were found to be insufficient; and (2) to recommend that
OHDS or the Secretary take the requested actions would be to intrude
into questions of grants administration and Departmental financial
matters beyond the purview of this Board.(10)
Conclusion
For the reasons stated above, we uphold the disallowance of $473,055,
subject to reduction if the Grantee can make the requisite showing to
OHDS that it has already accounted for some of these funds through
incurring and paying allowable costs, in accordance with the discussion
in footnote 6. We decline to reconsider our rulings rejecting the
appeals of the additional $18,228 and $4,008 or to recommend that OHDS
or the Secretary take any particular action regarding these amounts.
/1/ Generally, Grantee reported as "revenues" the full amount of
Head Start funds awarded. In several early program years, however,
Grantee reported as revenues only amounts actually received and applied.
/2/ Part 74 of 45 CFR establishes requirements for the administration of
HHS grants and principles for determining costs applicable to activities
assisted by HHS grants. 45 CFR 74.1; 1301.10. /3/ We adopt this
position with the following caveat, however. Since Grantee's
Head Start account represented non-federal funds as well as federal
funds, treatment of the "accounts receivable" as disallowed charges
to
federal funds would be inappropriate if Grantee could show that the
funds transferred were non-federal Head Start funds in excess of what
Grantee needed to meet its matching requirement. Here, however, the
Grantee did not allege this, and the record supports the conclusion that
federal funds were transferred. /4/ Grantee acknowledged that
these expenditures included amounts disallowed by OHDS on other grounds,
as well as other costs questioned on the basis of allowability, but
argued that for the purposes here the amounts should all be treated as
allowable expenditures. /5/ Cost principles in Office of
Management and Budget (OMB) Circular A-122 made applicable to Head Start
grants by 45 CFR 74.174, provide that "bad debts" are unallowable.
OMB
Circular A-122, B.2. /6/ Accordingly, we conclude that OHDS
should give Grantee 15 days (or such longer period as OHDS may deem
appropriate) to present written evidence to OHDS of specifically how
much in allowable costs Grantee has now incurred and paid. OHDS should
review this submission and either reduce the disallowance or give
Grantee a written determination as to why Grantee's evidence is
insufficient. Grantee may return to the Board within 15 days following
its receipt of that negative OHDS determination. Of course, in the
absence of a submission by Grantee as to any part of the amount in
question, OHDS may collect immediately. /7/ This section provides that
the head of an executive agency may compromise a claim of the
Government of not more than $20,000 (excluding interest) that has not
been referred to another agency for further collection action.
JANUARY 14, 1986