GAB Decision 774
August 15, 1986
Indian University;
Docket No 86-86; Audit Control No. 05-51001
Ballard, Judith A.; Settle, Norval D. Teitz, Alexander, G.
(1) Indiana University (University) appealed a determination by the
Deputy Assistant Secretary, Finance (Agency), Department of Health and
Human Services (DHHS), that the University must repay $8,986 in interest
income earned on excess federal funds drawn down by the University under
a DHHS letter of credit (LOC). The determination was based on an audit
by the DHHS Office of the Inspector General that reviewed, among other
activities, the University's cash management practices during the period
July 1, 1982 through June 30, 1983.
The major issue presented is whether the surplus and deficit daily
cash
balances on the University's LOC should be averaged to determine if
any
interest earned by the University on its draw-down of federal
funds
should be returned to the federal government. For the reasons
stated
below, we find that federal regulations require that any interest
earned
on invested federal funds must be remitted to DHHS, regardless of
any
daily deficits that the University may incur on the LOC
account.
Accordingly, we sustain the disallowance.
This appeal was heard under the Board's expedited process at 45
CFR
16.12(c).
Background
The audit evaluated the adequacy of the University's cash
management
policies and procedures as they related to investment practices
and LOC
draw-downs under DHHS regulations and instructions. /1/ The
auditors'
review disclosed(2) that the University was not, in all
instances,
crediting the federal account with a proportionate share of the
interest
earned on invested federal funds. The auditors found that
the
University's cash management system needed to improve its procedures
for
maintaining cash balances within the limits specified in
Treasury
Department regulations. One of the auditors' specific findings
was that
"(the) University drew more cash than it needed to maintain a
balance of
zero unneeded cash or close to zero." Audit Report, p. 4.
The University's obligation to account for interest
DHHS regulations provide that, except to the extent the exemption
under
the Intergovernmental Cooperation Act of 1968 (Pub. L.
90-577,
originally codified at 42 U.S.C. 4213, but later recodified at 31
U.S.
C. 6501 et seq. by Pub. L. 97-258, Sept. 13, 1982), (Act),
for
grants-in-aid to states applies, "grantees shall remit to the
Federal
Government any interest or other investment income earned on advances
of
HHS grant funds." 45 CFR 74.47(a) (1982).
Section 74.47(b) of 45 CFR, in accordance with the Act, provides that
a
state /2/ is not accountable to the federal government for
interest
earned where the income is attributable to a "grant." The definition
of
the term "grant" specifically excludes:
. . . (VI) a payment under a research and development
(procurement)
contract or grant awarded directly and on similar terms to
all
qualifying organizations.
31 U.S.C. 6501(4)(C).
The parties agreed that the LOC at issue concerned research
and
development grant contracts so that the exemption for
"grants-in-aid"
under the Intergovernmental Cooperation Act of 1968 did not
apply.
Parties' arguments
The University did not dispute that it was obligated to return to
the
federal government any interest it earned on federal funds. What
the
University objected to was the method in which surplus and
deficit
balances were used to(3) determine the amount of interest owed
the
federal government. The University contended that it operated its
LOC
on an equitable and reasonable basis both for the University and
the
federal government. The University asserted that the Agency arrived
at
the $8,986 figure by looking at surplus balances only, ignoring the
fact
that on many days the University had large deficit balances in
its
account. The University stated that it was not asking the
federal
government to pay interest to the University on any net deficit,
but
reasoned that an equitable interpretation of 45 CFR 74.47 is that
the
surplus balance days and the deficit balance days for a specific
LOC
should be averaged together to determine the amount of interest to
be
returned. /3/
The Agency responded that there is no provision in DHHS regulations
or
policy that permits such averaging. According to the Agency, it was
the
University's drawing down of excessive funds from its LOC that
caused
the surplus balances. The Agency argued that 45 CFR 74.47 is
explicit
in requiring that any interest earned from such excessive
draw-downs
must be returned to the federal government.
Analysis
Although we have no basis to question the University's contention that
its
LOC account more often reflected a daily deficit than a surplus, we
are not
persuaded, in view of the applicable regulations, that the
Agency is required
to average any surpluses and deficits to determine if
interest is owed to the
federal government. As the Agency pointed out,
the ultimate
responsibility for the management of its LOC lies with the
University.
Federal regulations require LOC recipients to limit cash advances to
an
"actual, immediate" need level. Treasury regulations at 31 CFR
205.4(
a) state:
Cash advances to a recipient organization shall be limited to
the
minimum amounts needed and shall be timed to be in accord only with
the
actual, immediate cash requirements of the recipient organization
in
carrying out the purpose of the approved program or project.
(4) The regulation provides further that:
The timing and amount of cash advances shall be as close as
is
administratively feasible to the actual disbursements for direct
program
costs and the proportionate share of any allowable indirect
costs.
Similarly, 45 CFR 74.92 requires a grantee to minimize the time
elasping
between the transfer of funds and the grantee's disbursement of
the
funds.
These regulations unabiguously direct a LOC recipient to closely
monitor
its LOC and expenditures so that surpluses, or deficits, in the
LOC
account are kept to a minimum. While a zero daily balance may be
an
unattainable goal, it is nevertheless incumbent upon a grantee
to
closely monitor its account. Here, the University experienced
wide
variations in its LOC account over the audited year. In the course
of
this appeal the Agency stressed that it gives a grantee
considerable
discretion in the management of its LOC, but excessive
draw-downs are
not permissible. Here the University's excessive
draw-downs generated
interest income which, under explicit federal
regulations binding on
this Board, must be returned to the federal
government.
The University maintained that it operated its LOC account on a
"checks
issued" basis, i.e., it deducted funds from the account when it wrote
a
check. The Agency argued, however, that the University used a
"checks
paid" system, whereby the amount of a check was not deducted from
the
account until the check was actually cashed. The University
contended
that the use of a "checks issued" system was authorized by
Agency
publications. /4/
In a telephone conference, the University, in response to
Board
questions, admitted that, even while using a "checks issued" system,
it
nevertheless received interest on the funds until any checks
cleared.
Thus we find it immaterial(5) whether a "checks issued" or a
"checks
paid" system was in effect since, under either concept, the
University
received interest on federal funds and must remit the interest
earned to
the federal government under the specific provisions of 45 CFR
74.47(a).
The University could provide us with no citation of authority, or
any
argument (other than its equitable one) for its proposition
that
surpluses should be netted against deficits before generated interest
is
returned to the federal government. /5/ If we were to accept
this
proposition, there would be no incentive for a LOC recipient to keep
its
draw-downs to a minimum. The Treasury and DHHS regulations cited
above
would be rendered meaningless by the University's reasoning.
The
detailed monitoring of a LOC and grant expenditures, required under
the
regulations, could be circumvented if the University could
ultimately
avoid the payment of interest associated with excessive cash
advances on
a grant by later incurring deficits in its LOC account.
As the Agency stated, the ultimate responsibility for the management
of
the LOC rests with the University. Here the University managed the
LOC
in a method that resulted in wide disparities of surpluses and
deficits.
Federal regulations have no provision for deficits on a LOC, but
they
are explicit in requiring that any interest earned on a surplus must
be
remitted to the federal government. Accordingly, we uphold
the
disallowance.
Conclusion
For the reasons stated above, we sustain the disallowance of
$8,986.
/1/ The audit examined
also the University's management of
Department of Education LOCs. The
auditors determined that the
University owed $28,075 in interest earned on
these LOCs. The
University did not seek Board review of this finding,
but limited its
appeal to the DHHS LOC. The audit originally asked the
University to
return $14,363 to DHHS; this was subsequently
redetermined to be
$8,986, the amount of the disallowance before
us. /2/ "State" is
defined in
the Act to include any agency or instrumentality of a state,
and the
definition does not exclude an institution of higher education
which is such
an agency or instrumentality. 31 U.S.C. 6501( 8). The
parties did
not dispute that the University fell within this definition.
/3/ In the year
audited, the University had a daily cash surplus for its
LOC on 113 days,
totalling $39,423,780. The University had a daily cash
deficit on 252
days, totalling $89,721,475. Using an interest factor of
.0832/365, it
was calculated that the surplus generated $8,986 in
interest, while the
deficit amount would have generated $20,452 in
interest. Agency's Ex.
C, p. 3. /4/ The University
initially
referred to provisions of the DHHS Manual for Recipients Financed
under
the Payment Management System to support this contention. When
the
Board pointed out that this Manual was dated January 1984 and
therefore
inapplicable to the period at issue, the University supplied
1981
amendments to the Departmental Federal Assistance Financing
System's
"Policy and Procedures Manual for Recipients" (April 1979)
that
permitted the University to use a "checks issued"
system. /5/
Where there are
applicable regulatory provisions, the Board is bound by
them, despite any
general equitable arguments. 45 CFR 16.14. See Ohio
Developmental
Disabilities Planning Council, Decision No. 330, June 30,
1982, p. 8.
APRIL 25, 1987