DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Rapid City Indian Services
Council, Inc.
Docket No. 85-275
Audit Control No. 08-55361
Decision No. 835
DATE: February 6, 1987
DECISION
The Administration for Native Americans (Respondent or
ANA) disallowed $12,812 in expenditures
charged to grant funds by the Rapid
City Indian Services Council, Inc. (Appellant or Grantee) on grounds
that $12,195 in unauthorized expenditures had been made after the expiration
of the grant, and that $617
in unallowable expenditures had been made during
the term of the grant. For the reasons discussed
below, we uphold the
disallowance subject to a possible adjustment of the amount, as explained in the
Conclusion on page 7 below. 1/
Our decision is based on the
record developed during the course of this proceeding. The record included
tapes of telephone conference calls conducted on March 20, 1986 and July 30,
1986.
Facts
Due to internal management problems and
an erosion of support for its project within the community, on
February 6,
1985, Grantee's Board of Directors decided to close out its program and elected
a new
Executive Director solely for that purpose. (Appellant's
February 14, 1986 submission, Atts. 4, 5, 6, 9, 11,
and 16) The grant
expired on February 28, 1985. 2/ (Respondent's Appeal File (RAF), Ex. 2) By
letter of
March 1, 1985, the new Executive Director requested ANA's approval
for the use of the balance of the
funds left in the grant to pay for
specified close-out costs. (RAF, Ex. 6; Respondent's November 28, 1986
submission, Att. A, p. 3) ANA disapproved the use of grant funds for
close-out activities by telephone on
March 1, 1985 and by letter on March
22, 1985. (Respondent's August 5, 1986 submission, Att. 1;
Respondent's November 28, 1987 submission, Att. A, p. 3)
Nevertheless, Grantee proceeded to spend the remaining grant funds
on its close-out activities. Grantee's
expenditures included
1/ During the course of this proceeding Respondent acceded to two possible
adjustments, and the record
indicates that another may also be appropriate.
2/ The grant in question, No. 90NAC104/02, was a social and
economic development services grant with
a project period from October 1,
1982 to February 28, 1985 and a budget period of March 1, 1984 to
February
28, 1985. The amount of federal funds awarded for the last budget period
was $113,972. (RAF,
Ex. 2)
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the cost of an independent audit of grant funds. The
auditors performed the audit field work in late March
and early April,
1985. The auditors found that Grantee had spent and was continuing to
spend grant
funds after expiration of the grant. (RAF, Ex. 7, pp.
14-16) Subsequently, on July 30, 1985, ANA sent
Grantee another letter
specifically informing Grantee of its responsibilities with regard to filing
reports
and disposing of property for close-out of its ANA grant.
(Respondent's November 28, 1986 submission,
Att. B) Thereafter, on December
18, 1985, ANA issued this disallowance based on the audit findings.
(RAF, Ex. 9)
Discussion
In section one, we deal
with the amounts expended after expiration of the grant and disallowed for that
reason. In section two, we deal with amounts expended during the term
of the grant and disallowed for
various other reasons.
I. Amounts Expended After Expiration of the Grant
A. Whether Grantee had the authority to use grant
funds
for its close-out activities
ANA disallowed
the $12,195 in grant funds remaining as of February 28, 1985, on the basis that
it was
expended by the Grantee after the expiration of the grant. 3/
Respondent argued that the Grantee had no
3/ Respondent originally stated that $9,966 was expended without approval
after expiration of the grant,
and that $2,229 was an unaccounted for fund
balance. (Respondent's May 15, 1986 submission, p. 3)
Based on
statements in the audit report which indicated that the $2,229 may in fact have
been spent after
expiration of the grant for purposes of close-out,
Grantee's assertion that this amount was spent for grant
close-out, and
documentation in support of that assertion, the Board inquired further.
(RAF, Ex. 7, p. 16;
Appellant's March 25, 1986 submission, last attachment)
Respondent, thereafter, conceded that it was not
disputing that the
remaining funds had been spent, but questioned the propriety of the
expenditures.
(Respondent's November 28, 1986 submission, p. 8)
Accordingly, we here treat the $2,229 as an amount
spent after the
expiration of the grant rather than as an unobligated fund balance. In any
event, even if we
had treated the $2,229 as an unexpended fund balance, the
result in this case would be the same--the
disallowance would be
sustained. Section 74.111(b)(2) of 45 CFR specifically states that upon
expiration
of a grant the grantee "shall immediately refund or otherwise
dispose of, in accordance with instructions
from HHS, any unobligated
balance of cash advanced to the grantee." Since ANA gave no instructions to
otherwise dispose of any unobligated fund balance, it would have to be
returned anyway. The record also
indicates that Grantee had returned
$73.79 of the remaining funds to ANA. (Appellant's March 25, 1986
submission, last attachment, RAF, Ex. 8, p. 2)
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authority to expend grant funds after that date without
approval from ANA. Respondent contended that it
did not approve the
expenditure and, in fact, specifically advised Grantee by telephone and in
writing that
ANA would not approve Grantee's March 1, 1985 request to use
unobligated grant funds for close-out.
Respondent argued further that
the Grantee never established that any of the post-expiration close-out
costs were necessary and that many were excessive.
Grantee
argued that it never received a response from ANA to its March 1, 1985 letter
requesting
approval of a close-out budget and, thus, reasonably thought that
ANA had approved the proposed plan.
Grantee also argued that the
record shows that all its expenditures after expiration of the grant were for
legitimate close-out costs.
The Grantee did not dispute that
the expenditures in question were made after February 28, 1985 (but see
our
discussion at pages 7-8 below). (RAF, Ex. 2) The only issue is whether the
Grantee had the authority
to charge its close-out costs to grant funds
Under the applicable provisions for administration of the grant, a
grantee has the authority to incur close-
out costs after the expiration date
for the final budget period where:
the
Grants Officer has extended the project and budget periods for some specified
period for purposes
of orderly phase-out of federal support (GAM Chapter
1-85-80). 4/
It is undisputed that by letter dated March 1, 1985
Grantee requested approval of the use of the
unobligated balance of funds in
the grant for close-out. While the new Executive Director stated that she
had never received ANA's March 22, 1985 denial letter (or the "complete
close-out package" which the
letter said would follow), the Director of the
Eastern Division of ANA has filed a formal declaration
stating that she had
informed the new Executive Director during a telephone conversation on March 1,
1985 that ANA could not approve such a request and that no further grant
funds properly could be spent.
That occurred the same day that Grantee
mailed its close-out budget request and the day after the grant
expired. It is possible that there was some misunderstanding on the
part of the new Executive Director as
to whether with some modification of
its proposed close-out budget the unobligated balance could be spent
for
close-out. Nevertheless, the auditors found that even earlier, prior to
the expiration of
4/ This provision was incorporated by reference as a condition of the grant
by the grant award document,
sent to Grantee by letter dated May 7,
1984. (See RAF, Exs. 1, 2, 3)
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the grant, ANA had informed Grantee's "fiscal officer" by
telephone that no further grant funds should be
spent after February 28,
1985. (RAF, Ex. 7, p. 10) The ANA Director's statement corroborated this
and
shed some light on the circumstances. The ANA Director stated that
she had spoken with Grantee's
"bookkeeper" on February 18, 1985, and the
bookkeeper had informed her that she had "closed the books"
in anticipation
of the expiration of the grant. (Respondent's November 28, 1985
submission, Att. A, p. 3)
Grantee did not dispute the statements in the
declaration made by the ANA Director. (Grantee's
December 18, 1986
submission)
Given the direct oral instruction from ANA that no
further grant funds should be spent, it would not have
been reasonable for
Grantee to interpret a failure to receive a written response to its March 1,
1985 request
as approval. Furthermore, the reason Grantee may never
have received the written response could have
been because it had changed
the location of its office during February of 1985. Confusion attendant
with
the move may have caused disruption in mail service. (Appellant's
February 14, 1985 submission, Atts.
11 and 16; tape of July 30, 1986
conference call) Grantee should have realized that a failure to receive a
response from ANA could not reasonably be interpreted as approval. The
appropriate course of action
would have been to again contact ANA, not spend
all the grant funds.
There is no question that ANA did not extend
the term of the grant for close-out activities. We conclude
that it
was unreasonable for Grantee to spend any funds after February 28, 1985 without
affirmative
approval from ANA extending the project period and budget period
and approving a budget for close-out
activities.
B. Whether the funds were spent on "allowable"
costs
Close-out costs incurred by a grantee are reimbursable, even
when authorized, only to the extent that they
are allowable. 5/ In general,
allowable costs must be necessary and reasonable for the proper and efficient
administration of the grant program, and must be documented.
(Marshalls Community Action Agency,
Decision No. 206, August 28, 1981;
Yonkers Community Action Program, Inc., Decision No. 755, May
22, 1986; OMB
Circular A-122, Att.A, sections A2, A3, and A4.)
Respondent argued
that even if it had approved the expenditure of grant funds for close-out, the
costs at
issue, in general, were not allowable, reimbursable close-out
costs. Respondent relied on
5/ Section 74.110 of 45 CFR defines "Grant closeout" as:
The process by which a granting agency
determines that all applicable administrative actions and all
required work
of the grant have been completed by the grantee and the granting agency.
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the lack of supporting documentation or explanation for the
proposed close-out expenditures.
(Respondent's November 28, 1985
submission, pp. 3-4) Respondent also argued that the high level of
expenditures proposed for close-out (ten percent of the total grant) was
never justified by Grantee, and
that, in particular, the expenditures for
staff salaries and storage of documents were not considered
necessary or
reasonable for grant close-out. Thus, Respondent argued, it had
appropriately denied
Grantee's March 1, 1985 request for approval of the
close-out budget.
The record indicates that Grantee allotted from
90 to 120 days for close-out activities and spent all
unobligated funds
remaining in the grant (except for $73.79 apparently returned to ANA on August
20,
1985) on salaries, space rental for offices, storage of documents,
telephone service, postage, photocopying,
and an audit. (RAF, Ex. 7,
pp. 14-16; Appellant's March 25, 1985, submission, last page; Appellant's
February 14, 1986 submission, Atts. 4 and 21) Nowhere in the record has
Grantee explained why these
costs were necessary and reasonable for
close-out of the ANA grant. 6/ Most of the expenditures were
never justified
or documented at all beyond naming the individual or corporation to whom payment
was
made. (RAF, Ex. 7, pp. 15-16; Appellant's March 25, 1986
submission, last page.)
6/ The record indicates that Grantee's object was not solely the close-out
of the ANA grant at issue here,
but included the close-out of the Grantee
organization's own operations. The declaration of the ANA
Director,
who had been involved in the administration of the grant, stated:
. . . ANA is not responsible as a
general rule for core administration costs of a grant. This is true
with respect to Rapid City's grant at issue in this case. Core
administration refers to basic costs of
operating an organization that
exists apart from our grants. These organizations are supposed to be
independently existing entities, which was ANA's understanding with respect
to Rapid City. The fact that
the corporation was dissolved or
otherwise ceased operating did not entitle it to charge routine core costs,
such as maintaining an office after expiration of the grant, or retaining
grant records.
(Respondent's November 28, 1985 submission, Att. A,
p. 4.) Grantee never refuted the ANA official's
declaration concerning the
scope of proper close-out costs (these costs are stated below on page 6).
Moreover, the record shows a history of Grantee mismanagement and improper
expenditures which the
Respondent cited as further support for its decision
not to approve the proposed close-out budget.
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As Respondent explained in its brief, close-out costs
typically include such items as: (1) the costs of
preparing the necessary
program reports; (2) the costs of preparing fiscal reports; and (3) the costs of
a
final audit. (Respondent's November 28, 1986 submission, p. 2 and
Tab A) Clearly, this all could be
accomplished with minimal expense.
Moreover, with the exception of the audit, it could have been
accomplished
either prior to the actual expiration of the grant or shortly thereafter.
Clearly, the limited
types of costs properly associated with close-out of a
grant cannot reasonably be considered to warrant
spending the full ten
percent of the total budget spent here over a period of several months.
Accordingly,
we conclude that the Grantee has failed to demonstrate that the
costs were necessary, reasonable, or
properly documented, and thus
allowable.
II. Amounts Expended Prior to Expiration of
the Grant
The Agency disallowed three expenditures made during the
term of the grant.
The first was $62 for interest and penalty
expenses related to federal unemployment taxes. The
Respondent argued
that it disallowed this amount on grounds that the cost principles in OMB
Circular A-
122, Att. B, section 14 (45 Fed. Reg. 46022, July 8, 1980)
expressly designate such costs as unallowable
unless they are incurred in
accordance with specific instructions from the granting agency, and that ANA
gave no such instructions in this case. Appellant's sole response was
that it did not have any funds with
which to repay the amount.
We sustain the disallowance of this item. Appellant never
argued that ANA agreed to this expense. The
applicable provision
clearly requires approval for such a cost to be allowable. Further, the
Board cannot
overlook a clearly unallowable cost solely because Grantee
lacks funds with which to repay the federal
government. (Office of
Human Concern, Decision No. 590, October 31, 1984; American Foundation of
Negro Affairs, Decision No. 73, December 28, 1979)
The second
item was a $25 bank overdraft charge. The Respondent argued that it
disallowed the amount
because, under OMB Circular A-122, Att. A, sections A2
and A3, only reasonable costs are allowable and
a bank overdraft is not a
reasonable cost of doing business. The Appellant again argued that it did
not
have funds with which to repay the amount. Appellant also argued
by way of explanation that it did not
have qualified personnel in charge of
the grant.
We sustain the disallowance of this item. Grantee
has not stated any circumstances which would support
a finding that the bank
overdraft was a reasonable expense. Moreover, we have already stated that
lack of
funds with which to repay a disallowance is
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not a sufficient basis on which to reverse the
disallowance. Similarly, lack of qualified personnel is not a
basis
for reversal. A grantee is responsible for assuring that funds are
properly spent, and having
qualified personnel is an integral part of that
responsibility. (See Hualapai Tribal Council, Decision No.
597,
November 26, 1984; Chinle Arizona School District No. 24, Decision No. 64,
August 16, 1979)
The third item was a $530 expenditure for the
rental of office space. Grantee had leased this space while
it still
was renting other space. Respondent argued that the duplicate rental cost
could not be considered a
"reasonable cost" of the grant. (The
duplicate rental cost also covered a time period beyond the February
28,
1985 expiration of the grant.) Appellant's sole response was that there were
"circumstances beyond the
control" of the Executive Board which made it
"imperative" that Grantee move offices quickly. (RAF, Ex.
8, p. 2)
When we inquired further about this during the July 30, 1986 conference call,
the new Executive
Director explained that Grantee had been forced to move
because certain individuals with access to the
ANA office were creating
disturbances and removing items from the office.
We sustain the
disallowance of this item. Grantee's explanation does not justify a
reversal of the
disallowance. Grantee offered no explanation why it
could not have dealt with the disruptions in some
manner short of leasing
additional space. Certainly less costly alternatives could have been
attempted
first. Such alternative: might have included changing
the locks or calling the police. Accordingly, the
Board concludes that
the duplicate rental was not a reasonable cost.
Conclusion
Based on the foregoing, we uphold the disallowance, except to the
extent modified in accordance with the
following:
1. Respondent agreed to withdraw "up to $1,000
of the disallowance with respect to audit costs
to the extent the Grantee
provides documentation of the costs." (Grantee's proposed close-out budget had
included $1,000 for an audit.) (Appellant's November 28, 1985 submission, p.
7)
2. Respondent agreed to withdraw the
disallowance to the extent it included any amounts
already returned to
ANA. (See tape of July 30, 1986 conference call.) The record indicates
that Grantee
returned $73.79 on August 20, 1985. (Appellant's March
25, 1986 submission, last attachment; RAF, Ex.
8, p. 2)
3. Respondent should also withdraw the
disallowance to the extent it includes allowable costs
incurred during the
term of the grant but not actually paid
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until
after February 28, 1985. (See 45 CFR 74.111 (b)(l).) The record indicates
that such costs may
have been included in the disallowed amount. (For
example, see RAF, Ex. 8, p. 14, check nos. 2054,
2062, 2066 and 2067).
If Grantee chooses to pursue the reduction of the disallowed
amount in accordance with the above three
items, Grantee should submit
supporting documentation to Respondent's representative in this appeal
within 30 days of receipt of this decision. If no documentation is
submitted, the amount disallowed will
stand in full. If documentation
is submitted and the parties cannot agree on a reduction, Grantee may
return
to the Board on that limited question.
________________________________
Donald F. Garrett
________________________________
Judith A. Ballard
________________________________
Cecilia Sparks Ford
Presiding Board Member