Indian Department of Public Welfare, DAB No. 772 (1986)

GAB Decision 772

August 7, 1986

Indian Department of Public Welfare; 

Docket Nos. 85-7; and 85-66;
Audit Control No. IN-82-AC

Ballard, Judith A.; Ford, Cecilia S. Teitz, Alexander G.

(1) The Indiana Department of Public Welfare (State) appealed two
determinations by the Office of Child Support Enforcement (OCSE, Agency)
to disallow $143,312 in federal financial participation (FFP) claimed by
the State for operation of its child support enforcement program under
Title IV-D of the Social Security Act for fiscal years 1980 through
1982. /1/ The parties have since reduced the amount in dispute to
$111,960 FFP. /2/

The remaining amount in dispute relates to costs billed to the State
IV-D agency by courts and prosecutors in four counties for IV-D
functions performed under cooperative agreements;  direct costs incurred
at the State IV-D Agency level;  and indirect costs related to State
IV-D operations claimed for two counties under County-wide cost
allocation plans.

For the reason explained below, we uphold the Agency's disallowance as
it relates to the cooperative agreement costs and direct costs of the
State IV-D Agency and uphold in part the Agency's disallowance
pertaining to indirect costs claimed under County-wide cost allocation
plans.  We reverse in part the disallowance of indirect costs.

(2) I.  Cooperative Agreement Costs ($13,715 FFP).

The Agency disallowed costs reimbursed by the State IV-D Agency to
county prosecutors and court clerks under the cooperative agreements for
personal services (salaries and fringe benefits) and operating expenses.
These costs were claimed by the State IV-D Agency on expenditure reports
submitted to OCSE.

Of the costs originally disallowed here, the State in its appeal brief
contested only the amount disallowed for office space in Marion County
($31,752 FFP).  As we indicated in note 2 above, the parties entered
into a stipulation agreement whereby the Agency agreed to accept $29,456
FFP of the disallowed costs and the State agreed to withdraw its appeal
of the remaining $2,296 FFP in disallowed costs.

For the amount remaining in dispute of $13,715 FFP, the State presented
no evidence or argument either in its briefs or at the hearing on these
costs.  Therefore, in the absence of any evidence or argument contesting
the disallowance of these costs, we uphold the Agency's disallowance in
the amount of $13,715 FFP.

II.  Direct Costs of State IV-D Agency ($18,127 FFP).

The Agency disallowed $18,127 in FFP claimed by the State as direct
salary and fringe benefit costs of six employees of the State IV-D
agency, on the basis that these costs were not allocable to the IV-D
program.  The State contested this disallowance by presenting argument
and evidence with respect to only one of the employees and did not
indicate that the six employees were in the same position.  While the
State indicated it was not conceding the disallowance for the five other
employees, it acknowledged during the hearing that it had not presented
any argument or evidence concerning those five employees.  Transcript
(Tr.), p. 9.  Consequently, in the absence of any argument or evidence
to rebut the auditors' finding with respect to five of the employees, we
sustain the disallowance with respect to the cost of those employees.

We now turn to the argument and evidence presented by the State
regarding Mr. Ashley, the one employee whose salary and fringe benefit
costs are still in dispute. /3/

(3) a.  Parties' Arguments.

The State argued that, while Mr. Ashley was not employed directly by the
State IV-D Agency, he was employed by the State Department of Public
Welfare, of which the State IV-D Agency is a part.  The State presented
an affidavit which stated that, during the period in question, Mr.
Ashley was assigned to the State Department of Public Welfare's Systems
Support Services for data processing where he handled exclusively child
support functions.  State Appeal File, Ex. O.  As a result, the State
contended that this employee's salary was properly charged to the State
IV-D Agency.

The Agency, on the other hand, asserted that the affidavit was
insufficient for several reasons to establish that Mr. Ashley performed
exclusively IV-D related work.  Specifically, the Agency contended that
this affidavit contained no substantive facts or details concerning the
specifics of Mr. Ashley's duties;  failed to relate facts showing that
the affiant, an official of the State Department of Public Welfare, was
personally knowledgeable about the specifics of Mr. Ashley's duties
during the relevant period;  was unsupported by any contemporaneous
documentation of the employee's duties and work effort such as
organizational charts, time distribution records, work activity reports,
actual evidence of work performed or other supportive materials;  and
was uncorroborated by affidavits of State IV-D Agency officials
establishing that Mr. Ashley performed work benefiting Title IV-D
operations or by an affidavit of the employee himself.  The Agency
asserted that under similar circumstances, the Board has held in prior
decisions that such affidavits are insufficient to establish the
allowability of personnel costs to a grant program. /4/

(4) b.  Discussion.

The Board has decided repeatedly that a grantee has the responsibility
of documenting the allowability of its claim for FFP.  See Welfare
Research Institute, Decision No. 432, May 31, 1983;  Ohio Department of
Public Welfare, Decision No. 384, January 31, 1983;  and New York
Department of Social Services, Decision No. 204, August 7, 1981.  The
Board has indicated that the best evidence in support of a claim is
documentation concerning the costs in question which originates from the
time the costs are incurred.  Of course, if that contemporaneous
documentation is lost and a reasonable explanation exists why the
documentation is not available, other documentation may be presented.
The sufficiency, however, of the non-contemporaneous documentation will
be carefully scrutinized.

For the following reasons, we agree with the Agency that under the facts
presented, the affidavit here, the only evidence submitted by the State,
is not sufficient in and of itself to establish that the claim for FFP
for this employee's compensation was proper:

   * While the employee's compensation was charged to the State IV-D
Agency, the employee was admittedly not "employed" by that Agency.

   * The affidavit does not show that the affiant was personally
knowledgeable about the employee's job duties.

   (5) * The affidavit contains after-the-fact statements which were
unsupported by any documentation from the time period in question, such
as a job description, organizational charts, or actual evidence of work
performed.

   * The State did not explain why any documentation contemporaneous
with when the costs were incurred was unavailable.

Therefore, for the reasons indicated, we sustain the Agency's
disallowance of $18,127 FFP for direct costs of the IV-D Agency. /5/

III.  Indirect Costs Related to State IV-D Operations Claimed Under
County-wide Cost Allocation Plans.

a.  Background.

The auditors disallowed $80,118 in FFP claimed for indirect costs of the
county prosecutors and county clerks for Marion and Lake Counties.  For
fiscal years 1980 through 1982, these counties claimed indirect costs
pursuant to approved County-wide cost allocation plans (CAPs) developed
by a private contractor.  These plans included the cost of central
service operations and departmental administration costs within the
provider agencies.  The claims for indirect costs pursuant to the plan
were submitted directly to the State Department of Public Welfare.

1.  Plan Methodology.

To arrive at the amount of indirect costs of the clerks' and
prosecutors' offices allocable to Title IV-D, the plans first allocated
salaries and other departmental expenditures such as supplies,
equipment, and other services (i.e., travel, postage, printing and
copying) among General Administration, Title IV-D, and General
Government.  This latter category encompassed all non-administrative
functions other than Title IV-D operations. Next, the plans assigned the
"central services" costs (e.g., fringe benefits, space, data processing,
county auditors, county treasurer) that had (6) been allocated to the
prosecutors or clerks under the approved county-wide CAPs.  The plan
allocated fringe benefits among the three cost categories within the
prosecutors' or clerks' offices according to each category's respective
percentage of salaries and wages.  Other central service costs generally
were assigned to the General Administration category.

The allocated costs in each category were then added, resulting in
cumulative costs for each category or function. The cumulative costs in
the General Administration function were then reallocated to Title IV-D
and General Government according to each function's percentage of
cumulative costs.  These reallocated amounts were then added to the
previous cumulative costs for Title IV-D and General Government,
resulting in total allocated program costs for each of these two
functions.  From the total allocated Title IV-D costs, the plan then
subtracted the amounts the county prosecutors or clerks had directly
billed the State IV-D Agency.  The resulting amount represented the
amount claimed by the providers as indirect costs of their Title IV-D
operations.

2.  Auditors' Disagreement with Plan Methodology.

The auditors disagreed with this methodology, alleging three specific
problems.  First, the auditors claimed that the allocation base for the
1980 CAP for the Marion County prosecutor did not include $491,716 in
salaries of attorneys funded under Law Enforcement Assistance
Administration (LEAA) grants.  The auditors contended that this resulted
in an overallocation to the Title IV-D program of departmental
administration costs and central services costs.  Second, the auditors
claimed that the amount of the departmental expenditures (salaries,
supplies, equipment, contractual services) assigned under the plan to
Title IV-D often did not reflect adjustments made by the State IV-D
Agency to the amounts originally billed by the county prosecutors or
clerks to the State IV-D agency.  Consequently, some of the amounts used
in the plan (the billed amounts) did not reflect the amount the county
department actually was reimbursed.  The auditors alleged that this
resulted in an overallocation of indirect costs to the Title IV-D
program.  Finally, the auditors disagreed with the methodology used
under the CAP because it included fringe benefits, space, and data
processing costs as indirect costs although portions of these costs had
been reimbursed through direct cost billings pursuant to a cooperative
agreement or were approved already for payment by the State IV-D Agency.
The auditors contended that the treatment of the balance of these costs
as indirect costs was inconsistent, contrary to(7) the provisions of OMB
Circular A-87, Attachment A,C.1.e., /6/ and also in conflict with the
requirement, 45 CFR 302. 14, that costs be submitted to the State IV-D
Agency for approval and payment.

The auditors believed costs were incorrectly allocated to the IV-D
program, so they recomputed the amount that they believed should have
been allocated for fiscal years 1980 through 1982.  The auditors also
adjusted the figure for LEAA salary costs mistakenly excluded from the
fiscal year 1980 CAP for Marion County.

We will discuss in turn below the three specific problems the auditors
alleged were wrong with the State's method for allocating indirect
costs.

b.  Exclusion of LEAA Costs From the Allocation Base.

The auditors found that the 1980 CAP for the Marion County prosecutor
mistakenly excluded from the salaries and wages allocation base $491,716
in salaries and wages funded under the LEAA grant.  The auditors claimed
that these salaries should have been included with the costs under the
category of General Government and allocated an appropriate share of
indirect costs.  The auditors determined that the exclusion of these
salary costs from the General Government category resulted in the
overstatement of the percentage of Title IV-D salaries and wages.

The State's witness during the hearing acknowledged that there was such
an error for the 1980 Marion County CAP and indicated that an adjustment
should be made.  Tr., pp. 54-56. The witness indicated that the State
never disputed this part of the disallowance but that the State was
never in a position to agree upon an amount because the Agency never
stated what portion of the disallowance related to this particular
finding. Tr., p. 55.

Since the State conceded that the 1980 CAP for the Marion County
prosecutor should be adjusted to include the LEAA salary costs in the
allocation base, we uphold that portion of the Agency's disallowance
relative to this particular finding.

(8) c.  The Use of Billed Amounts Rather Than Reimbursed Amounts in
Determining Departmental Costs.

The auditors claimed that the departmental expenditures (e.g., salaries,
supplies, equipment, travel, contractual services) of the county clerks'
and prosecutors' offices were assigned to the Title IV-D category on the
basis of the amounts billed to the IV-D Agency by the clerks or
prosecutors and did not reflect the amount that was actually approved
and reimbursed by the IV-D Agency.  The auditors claimed that the
contractor used the billed amounts to calculate the allocation base and
this resulted in an overallocation of indirect costs to the Title IV-D
program.  Consequently, in recalculating indirect costs, the auditors
used the actual amounts reimbursed for departmental costs.

The State acknowledged that the use of reimbursed costs rather than
billed costs were the appropriate amount of departmental direct costs.
The State, however, contended that rather than making a retroactive
adjustment and disallowance, the better approach would be to make an
adjustment to future plans.  The State argued that a disallowance here
was unwarranted where (1) the difference between the billed and
reimbursed costs were usually minor;  and (2) the auditors'
redetermination of indirect costs was inconsistent with the OCSE Audit
Guide. /7/

9

We agree with the Agency that, while the differences between the billed
and reimbursed amounts were not substantial, the fact remains that the
State's use of the billed amounts in the allocation base resulted in an
overallocation of indirect costs to the IV-D program.  The State did not
dispute this.

Moreover, we also agree with the Agency that the OCSE Audit Guide does
not preclude the Agency from taking a disallowance here.  As the Agency
noted, the OSCE Audit Guide is an internal guide for OCSE use. Further,
we agree with the Agency that in context, the language referred to
merely means that if an auditor questions the type of allocation base
(e.g., salaries, square footage, or total direct costs used to allocate
costs), the auditor should recommend that a different base be used in
the future rather(9) than recommend a disallowance of costs.  Here, the
auditors did not question the type of base used. Rather, the auditors
objected to the specific costs within that base. As a result, the OCSE
Audit Guide provision is inapposite.

For the reasons stated, we find that the State should have used the
reimbursed amounts in determining department costs which were used as
the allocation base in the plan.

d.  Allocation of Residual Central Services Costs.

The auditors disagreed with the methodology used by the State's
contractor in the CAP because the methodology included fringe benefits,
space, and data processing costs as indirect costs of the IV-D program,
although portions of these costs had been reimbursed through direct cost
billings from the clerks' or prosecutors' offices to the State IV-D
Agency.

Essentially, the State here disputed the methodology and assumptions
used by the auditors in contesting the State's determination of the
indirect costs of the county clerks' and prosecutors' offices
attributable to Title IV-D.  The State contended that the auditors'
method underallocated the share of indirect costs relative to the IV-D
program.

The State explained that, unlike departmental line item costs such as
salaries, supplies, equipment, and travel, which a clerk or prosecutor
may budget for and can control directly, central services costs (such as
space, data processing and, for the counties in Indiana, fringe
benefits) are paid for and controlled by other departments.  As a
result, these costs are not within the control of the prosecutor or
clerk.  Consequently, the State contended that when a prosecutor or
clerk direct bills the IV-D program for such costs, he is not billing
what the actual costs are;  rather, he is billing his best estimate of
what those costs are.  Consequently, those costs must be reconciled
later with the actual allocable costs.  The State explained that under
its indirect cost plans, in fact, this was what occurred -- actual costs
were allocated to IV-D and the amounts directly billed were subtracted
from the total allocated IV-D costs.  As a result, the indirect costs
claimed included only those amounts of actual allocable central services
costs that were in excess of the amounts previously directly billed to
the IV-D Agency, or what the State referred to as "residual" amounts.

The State indicated that the auditors' methodology, whereby only the
amount directly billed for a central services cost by a prosecutor or
clerk is recognized as allocable to (10) Title IV-D, means also that all
of IV-D's share of the residual is not recognized and indirect costs to
the IV-D program are underallocated.

The Agency claimed that the State's method allowed the counties to
recover as indirect costs the balance of the central services costs
already claimed as direct costs.  Consequently, in their methodology the
auditors allocated the balance of the central services costs between
General Administration and General Government.  Under the auditors'
method, Title IV-D is not allocated any of the remaining residual
central services costs.  It is only when the total costs of General
Administration are reallocated between Title IV-D and General
Government, that Title IV-D gets a part of the residual.  The State
contended that, under this method, IV-D is getting only a portion of the
General Administration residual, because in the previous step when the
auditors reallocated the balance of the costs between General
Administrative and General Government, the auditor also took a portion
of the IV-D residual and put it into General Government.  The State
explained that as a result some of the residuals which IV-D should have
shared in were immediately excluded.

Based on the arguments presented, we agree with the State's methodology
here.  In coming to this conclusion, we found several flaws in specific
arguments made by the Agency as follows:

   * Essentially the Agency argued that while these indirect costs may
have been allocated in conformity with OMB Circular A-87 and OASC-10,
/8/ those documents do not determine the extent of reimbursement.
Consequently, the Agency contended that if there is any statutory,
regulatory, or administrative limitation on the extent of reimbursement,
those limitations control.  The Agency, however, has not shown that
there is any statutory or regulatory limitation restricting the amount
of reimbursement(11) for indirect costs under the IV-D program.  The
Agency instead asserted that, at the least, the cooperative agreements
between the prosecutors and the State IV-D Agency limited the amount of
total costs or individual items of cost that can be reimbursed.  We
cannot agree.  As the State demonstrated, the only controls in evidence
here were the budgets of the prosecutors which are made a part of the
cooperative agreements.  The clerks' agreements, however, do not contain
any budgets.  The Agency has not shown that during the period in
question that the prosecutors' budgets for Marion and Lake counties set
forth a specified amount for fringe benefit, space, or data processing
costs which was exceeded by the amounts allocated to IV-D under the
plan.  In fact, the Agency has not even included a copy of these budgets
in the record.  Consequently, we cannot say that the amounts allocated
under the plan exceeded the amount specified in the budget.  Moreover,
the Agency acknowledged that cooperative agreements here do not limit,
or even deal with, indirect costs.

   * The Agency also argued that it was the intent of the cooperative
agreements to govern reimbursement of fringe benefits as direct costs in
all cases, and where the prosecutor or clerk charged for building space
or data processing, to govern reimbursement of those costs as well.  The
Agency contended that the amount of fringe benefits applicable to the
employees of the prosecutors' and clerks' offices should be determinable
so that these costs should be charged directly.  The State, however,
indicated at the hearing that what were considered fringe benefits under
the plan included costs that the Agency may not have classified as
fringe benefits in making its reallocation, and were in part costs which
could not be specifically identified with the prosecutors' or clerks'
offices until after application of the allocation methodology.  The
Agency presented no argument or evidence to rebut the State's
contentions.  Consequently, we do not think it appropriate here for the
Agency to now second guess whether these costs should be reimbursed as
indirect costs.  Moreover, the cooperative agreements do not specify
whether these costs should be reimbursed as direct or indirect costs.
The Agency here would have us interpret the fact that the prosecutor or
clerk may have billed the IV-D agency its estimate for such costs as
implying that this direct billing amounts to a limitation, preventing
reimbursement of the residual of such(12) costs under the cooperative
agreement.  The fact that actual space costs allocated to IV-D functions
and chargeable to the clerk or prosecutor may be higher than the amount
initially billed by the clerk or prosecutor does not mean that the
excess amounts are not allowable.  The Agency has not shown the
cooperative agreements limited reimbursement here to only the costs
"direct billed."

   * While the Agency argued that the amount directly billed is
equivalent to actual IV-D costs, the fact that these costs were "direct
billed" should not be relevant here.  Since we find no limitation under
the cooperative agreements, the question is whether the method used to
allocate the residual costs is acceptable and properly takes into
account the amounts previously billed.  While the Agency disagreed with
this methodology, we find that the plans here do nothing more than what
the Agency agreed the State could do without the plan -- namely,
approximate the actual costs attributable to IV-D.  Agency Post-hearing
Brief, pp. 25-26.  The Agency, however, rather than having the State
just use its cost allocation plan, would have the State first claim what
it thinks its costs might be for fringe benefits, space and data
processing for a given period, charge these costs directly, and then,
later, when it knows its actual costs, to submit another claim to adjust
for the residual costs.  However, this is precisely what the State's
cost allocation plan does.

   * The Agency argued that the contractor's plan resulted in
inconsistent treatment of costs contrary to the provisions of OMB
Circular A-87, Attachment A, C.1.e and OASC-10, Attachment A, C.1.e., p.
32.  The State, however, presented an expert witness, /9/ a former
employee of the HHS Division of Cost Allocation (DCA) who was one of the
authors of OASC-10.  The witness indicated that this phrase -- costs
must be treated consistently -- was not intended to preclude the
allocation methodology here, where the plan is reconciling the estimated
costs with the actual costs and a residual results.  In fact, the
witness indicated that OASC-10 permitted this type of allocation as long
as the allocation base was equitable and the residual was not material.
When(13) questioned specifically about whether the residuals here were
material, the expert indicated that the residuals were not.  In fact,
the witness, an expert in the cost allocation area, indicated he had
reviewed the plan methodology here, as well as the auditors' proposed
reallocation, and stated that it was his belief that the State's method
was more equitable and better reflected the total cost of the program,
in keeping with the provisions of A-87 and OASC-10.

   * The Agency contended that, while HHS DCA approved the allocation of
central services costs to the different operating departments, it did
not approve the specific methodology used by the State here to then
allocate the administrative costs and central services costs within the
prosecutors' and clerks' offices to the IV-D program.  The Agency
contended that the review and approval of allocated costs below the
department level are subject to review of the awarding federal agency
when costs are claimed.  The disclaimers contained in the negotiation
agreements for the County-wide cost allocation plans cited to by the
Agency do not indicate that DCA did not approve the methodology here.
Rather, they indicate, in somewhat ambiguous language, that whether the
allocable costs are allowable under a particular program is subject to
the acceptance of the program agency of such costs based on the
program's regulations.  Thus, there is no indication that DCA
disapproved of the State's methodology and the Agency has not shown any
programmatic limitation on these costs.

   * The Agency originally contended that the treatment of the residual
costs here as indirect costs was in conflict with the requirement that
costs be submitted to the State IV-D Agency for approval and payment.
We conclude that this was not a basis for taking a disallowance here.
During the hearing, the Agency indicated that the counties' practice of
submitting billings for indirect costs to the umbrella Agency, the
Department of Public Welfare, as opposed to the IV-D Agency, would not
result in a disallowance of costs.  Tr., p. 240.  Moreover, the Agency
indicated that the auditors' methodology allocated other central
services costs which had not been billed directly to the State IV-D
Agency on the same basis as the State's method. Consequently, we are not
persuaded that there is an approval requirement here that supports the
disallowance becuase the(14) auditors allowed other central services
costs, no part of which had been direct billed, and to which no such
approval requirement was applied.

Under the facts presented here and for the reasons previously indicated,
we overturn the Agency's disallowance as it pertains to the State's
methodology in allocating the residual indirect costs of central
services costs allocated to the Marion and Lake counties' prosecutors'
and clerks' offices pursuant to an approved County-wide cost allocation
plan.

Conclusion

For the foregoing reasons, we sustain that portion of the disallowance
pertaining to the cooperative agreement costs conceded by the State, the
direct costs of the State IV-D Agency, the exclusion of LEAA costs from
the allocation base, and the use in the allocation base of the amount
billed to the IV-D Agency rather than the amount reimbursed by the IV-D
Agency for certain costs.

We reverse the disallowance, however, as it pertains to the State's
method under its County-wide cost allocation plans for allocating
residual costs.  We are unable to determine what effect our
determinations have on the amount in dispute from the record before us.
Thus, the Agency should make the necessary adjustment.  If the State
does not agree with the amount of the adjustments, the State may return
to the Board on this issue alone.  /1/ Although the disallowance letter
        in Docket No. 85-7 stated that $138,417 in FFP was disallowed,
the Agency miscalculated the amount. The total amount disallowed was, in
fact, $137,817 FFP.  Consequently, this amount together with the $5,895
in FFP disallowed in Docket No. 85-66 totals $143,312 in FFP disallowed.
/2/ In a stipulated agreement filed with the Board, OCSE agreed to allow
$39,275 ($29,456 FFP) in office space costs for the Marion County
prosecutor, and the State agreed to withdraw its appeal of the remaining
disallowed office space costs of $3,061 ($2,296 FFP).         /3/
According to the Agency, the amount attributable to Mr. Ashley's salary
and fringe benefits roughly equals about 3/4 of the amount disallowed of
$18,127 FFP.         /4/ The Agency also argued that the affidavit was
insufficient in light of the nonspecific responses by the employee
himself to questions from the auditors concerning the employee's job
duties.  The State, in response, objected to the Agency's argument here
on the basis that the documentation on which the Agency's argument was
based lacked authenticity and contained hearsay.  The documentation was
the handwritten notes of the auditors' interviews with the employee
included as part of the audit workpapers.  Agency Exhibit 3.  At the
hearing, the Agency established authenticity of the documentation and
the documentation was determined admissible-the question of hearsay
being determinative only of what weight such documentation would be
given.  Since we find the affidavit was insufficient to establish the
allowability of the costs in question here, we do not need to consider
what weight this documentation should have.  We do note, however, that
auditors routinely interview grantee employees in the course of an audit
and these interviews are usually summarized in writing by the auditor
and included in the audit workpapers.  Where this is the customary and
usual practice, we cannot find that these documents are per se
inaccurate or unreliable.  (In any event, audit work-papers might be
"business entries" which are considered an exception to the hearsay
rule.) This is especially true here, where the State could have had the
employee himself testify at the hearing to rebut the statements
contained in the summary of the interview.  The State, however, chose
not to.         /5/ Although the Agency stated another basis in support
of its disallowance here -- inconsistent treatment of costs -- it is not
necessary to discuss this alternative basis further, given our finding
that the affidavit here is insufficient to establish that the claim for
the employee's salary was proper.         /6/ The cost principles for
state and local governments in Office of Management and Budget Circular
A-87 were set out in 45 CFR Part 74 as Appendix C until 1980, when as
FMC 74-4 they were incorporated by reference in 45 CFR 74.171, and made
applicable to HHS grants.  In January 1981 FMC 74-4 was redesignated as
OMB Circular A-87.         /7/ The State pointed to a provision of the
OCSE Audit Guide which indicated that where an auditor questioned the
basis for allocation, the auditor should recommend that the base be
changed, but should not make a retroactive disallowance.  State Appeal
File, Exhibit F, p. 25.         /8/ OASC-10, published in December 1986,
is a brochure entitled, "A GUIDE FOR STATE AND LOCAL GOVERNMENT
AGENCIES-COST PRINCIPLES AND PROCEDURES FOR EXTABLISHING COST ALLOCATION
FOR GRANTS AND CONTRACTS WITH THE FEDERAL GOVERNMENT.  This brochure
provides guidance on the procedures to be followed by state and local
governments on the preparation and submission of cost allocation
proposals;  contains OMB Circular A-87; and describes in general terms
the process of indirect cost determinations.  The procedures in the
brochure are applicable to all federal grants and contracts.         /9/
The State tendered the witness as an expert, and the Agency offered no
objection.  Tr., p.  126.

APRIL 25, 1987