DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: Nisqually Indian Tribe
Docket No. 88-22
Audit Control No. CIN A-10-87-05374
Decision No. 994
DATE: November 3, 1988
DECISION
The Nisqually Indian Tribe (Tribe/Grantee) appealed a determination by
the
Office of Human Development Services (OHDS/Agency) disallowing
$7,964 in
indirect costs recovered by the Tribe in its fiscal year (FY)
ending
September 30, 1985. The disallowance represents the difference
between
the Tribe's application of a 56.5% rate to claim indirect costs
for FY 85 for
ANA Grant No. 90NA0101, and the application of the rate
established for that
period, which was 29%.
The record in this appeal consists of the parties' briefs and
evidentiary
submissions as well as the tapes of several telephone
conferences.
Based on the following analysis, we sustain the
disallowance.
Background
Indirect costs are those costs necessary for the overall operation of
an
organization but which are not readily identifiable with a
particular
project. Costs typically charged indirectly include costs
for
buildings, equipment, and administrative salaries. Indirect costs
are
charged to a particular grant or contract by means of an indirect
cost
rate. An indirect cost rate is a percentage representing the ratio
of
an organization's allowable indirect costs to its allowable
direct
costs. This Grantee's indirect cost rates are established in
negotiated
agreements with the Department of Interior, Office of the
Inspector
General (DOI). The rates established by DOI for the Tribe
apply in
general to its grants and contracts awarded by federal
agencies. Thus,
there is no dispute that the rate established by DOI in
the negotiated
agreement for FY 85 is the proper rate for the grant in
question.
The type of indirect cost rate at issue here is a fixed rate
with
carryforward provisions. For this type of rate, the difference
between
the fixed rate and the actual rate for a given fiscal year
(determined
after examining the actual direct and indirect costs incurred)
results
in a carryforward amount that would be included in calculating a
future
period's fixed rate. A grantee and the cognizant federal agency
(here
DOI) negotiate to set the fixed rate for a particular fiscal year
based
on an indirect cost rate proposal using carryforward amounts from
prior
years and an estimate of the direct and indirect costs for the
rate
year. Once set, a fixed rate does not change. Since any over
or
underrecovery of indirect costs from a particular fixed rate as
compared
to that year's actual rate is carried forward, it affects only the
fixed
rate for a subsequent fiscal year. An indirect cost rate for a
given
year is based on financial data from the fiscal year two years
earlier.
Thus, the Tribe's indirect cost rate for FY 85 was based on
information
gathered from FY 83 and estimates of the direct and indirect
costs that
would be incurred during FY 85.
The Grantee admitted that, during the time at issue, it was
generally
unfamiliar with the indirect cost rate process. In 1985 the
Tribe had
contracted with a private accounting firm to provide financial
audits
for FY 83 and FY 84 and to prepare an indirect cost proposal for FY
85.
However, DOI found the audits conducted by the firm to be
deficient.
Faced with the need to have a rate by which it could claim
indirect
costs for FY 85, the Tribe relied on the assurances of that
accounting
firm that its indirect cost rate for FY 85 would be the same as it
had
been in FY 84, 56.5%. Thus, the Tribe used this rate to claim
indirect
costs for FY 85 for this ANA grant.
Subsequent to the close of FY 85, the Tribe retained a new accounting
firm
which (on November 11, 1985) established a 29% indirect cost rate
for FY
85. This fixed rate was set in the Grantee's Indirect Cost
Negotiation
Agreement with DOI on February 7, 1986. The new accounting
firm
completed its audit of the Grantee's FY 85 financial reports on
January 27,
1987. The audit revealed that the Tribe did in fact claim
indirect
costs for the ANA grant in question at a 56.5% rate for that
year. The
difference between these two rates resulted in the Tribe's
receiving $7,964
more on its OHDS grant than it should have. The Agency
disallowed this
amount.
The Grantee stated that, after completion of the FY 85 audit, DOI
found
that there had been errors in the Tribe's indirect cost
carryforward
calculations for certain fiscal years. DOI indicated that
these
calculation errors would have a substantial effect on the
overrecovery
carryforward used in setting the fixed rate for FY 85. The
Tribe's
accountants stated that, had they been aware of this fact during
the
audit, they would have found the FY 85 indirect cost rate to be
49.4%,
resulting in an excess indirect cost claim of only $2,056.
As a result of a telephone conference discussion, which included
the
Grantee's accountant, this matter was stayed to permit the Grantee
to
seek verification from DOI, the cognizant agency, that later action
by
DOI had in fact raised the indirect cost rate for FY 85 (in
essence
amending the negotiated agreement setting the rate). While
DOI
confirmed the Tribe's assertion that a large overrecovery
carryforward
had improperly been a factor in calculating the FY 85 rate at
29%, DOI
specifically declined to actually adjust the FY 85 rate. DOI
did state
that the past underrecoveries would be taken into account in
the
negotiation of the indirect cost rate for FY 88. DOI also increased
the
FY 88 temporary rate, apparently to account for these errors in
the
carryforward calculations. See Grantee's August 22 and October 12,
1988
Submissions. Notwithstanding the Grantee's recognition that the
29%
rate was set for FY 85, the Grantee asked that the Board issue
a
decision in this matter. The Tribe urged the Board to consider
the
hardship to the Tribe to repay the amount disallowed and the
Tribe's
view that the indirect cost rate process did not operate fairly
in
general to cover its costs to operate its federal programs.
September
23, 1988 Telephone Conference.
Analysis
The Tribe does not dispute that it entered into a binding agreement
to
claim FY 85 indirect costs at a 29% rate. Before the Board, the
Tribe
sought the waiver or reduction of the disallowance in light of
their
view that the 29% fixed rate was improperly set and was too low.
See
Grantee's April 15, 1988 Submission. The Tribe stated that
proper
treatment of the overrecovery carryforward reflected in the
rate
calculation would have resulted in the higher indirect cost rate
(49.4%)
and lower disallowance ($2,056). The Tribe also made a general
argument
that the indirect cost rate process is intrinsically unfair to
Indian
tribes. See Grantee's Attachment D.
Given the fact that the Tribe entered into a binding indirect cost
rate
agreement and has conceded that 29% was the proper rate, there is
no
relief available to the Grantee from this Board. This was the only
rate
at which the Tribe could properly claim indirect costs for FY
85.
Further, the Tribe's indirect cost rate is set by DOI, an agency
over
which the Board has no authority. For its part, however, DOI
indicated
that rather than readjust rates for past fiscal years, it "will
include
an adjustment for these past underrecoveries in the fiscal year
1988
indirect cost rate negotiations . . . ." See DOI Letter to
Tribe
(August 18, 1988). Thus, the funds the Grantee stated it failed
to
recover by means of the FY 85 rate would be recouped through
adjustments
in later years.
The Tribe's assertion that the indirect cost rate process treats
Indian
grantees unfairly is a general assertion which can have no direct
impact
on the narrow issue presented by this case. The Tribe's rate was
set by
DOI, not by OHDS. Therefore, any argument regarding the rate
setting
process should be brought to the attention of DOI. The Tribe
agreed
that they were bound by the 29% rate for FY 85. Moreover, DOI
has
agreed that, to the extent there was an error in the rate for FY 85,
it
will be corrected in later years. Application of the 29% rate to FY
85
resulted in an overrecovery of $7,964 which has been disallowed.
Under
the circumstances here, there is no question that the disallowance
was
proper. Moreover, this Board has no authority to grant the
Tribe's
request for a waiver or other reduction.
Conclusion
Based on the foregoing analysis we sustain the entire disallowance
of
$7,964.
________________________________ Norval D. (John) Settle
________________________________ Alexander G. Teitz
________________________________ Cecilia Sparks Ford
Presiding
Board