DAB Decision 74
January 11, 1980 Trenton Board of Education; Docket No. 78-2; Decision
No. 74 Malone, Thomas; Mason, Malcolm S. Yourman, Edwin
SUMMARY
(The following summary is prepared on the responsibility of the
Executive Secretary of the Board as a convenience to the interested
public. It is not an official part off the decision and has not been
reviewed by the Panel. Similar official summaries of earlier cases
appear in 45 CFR Part 16, Appendix.)
Grantee appealed the disallowance by the Acting Regional Commissioner of
Education of $419,119 expended for a Dropout Prevention program under
the Elementary and Secondary Education Act after the Assistant Regional
Commissioner, an apparently final determination disallowing $169,129,
advised grantee that it must accept the disallowance or be subject to
possible disallowance of $439,187. The Board rejected this in terrorem
condition and limited the disallowance to $169,179, which it then
considered on the merits. The Board found part of this amount validly
disallowed under a no-supplant provision in the grant regulations, and
other costs improperly disallowed under the same provision. The Board
also sustained the disallowance of costs claimed in excess of the amount
budgeted, but allowed certain costs for an Stem not included in the
budget, finding that the transfer of budgeted funds in the second case
but not the first was necessary to assure the effectiveness of the
project. The Board also found that grantee had not documented that
certain individuals worked on the grant project, and sustained the
disallowance of their salary costs. Finally, the Board sustained the
disallowance of a claim for costs which grantee conceded were not
allowable but contended were offset by other costs not charged to the
grant, finding that there was no showing that the other costs were
incurred in accordance with the terms and conditions of the grant.
In a procedural note, (pp. 1-2,, the Panel emphasized the need to
include in the application for review brief and discriminating
identification of the real matters in dispute and basic factual
background, and stated that it will usually be in the applicant's
interest to make a new statement of the position it wishes the Board to
consider rather than to rely on what it submitted in earlier stages of
the audit determination process.
DECISION
This is an appeal from a determination by the Acting Regional
Commissioner for Educational Programs, Region II, that the Trenton Board
of Education is required to refund $419,119 expended under grants for a
Dropout Prevention Program. The grants were made under section 807 of
the Elementary and Secondary Education Act of 1965, as amended, and
totaled $1,086,540 for the two fiscal years ending June 30, 1973. The
specific disallowances and the reasons for them are described in the
Panel Chairman's Order to Develop Record, dated December 28, 1978.
At the outset the panel wishes to note that its work would have been
much easier if the parties had made a greater effort to provide timely
and thoughtful presentations. There was too much reliance on submitting
documents consisting of the arguments made at earlier stages of the
audit process and a number of those documents were submitted for the
record several different times. Once a document is in the record it
normally serves no purpose to submit it again each time additional
comments are filed. Moreover, we remind those who present matters to
the Board that 45 CFR 16.6(a) (2) asks that the application for review
"clearly identify the question or questions in dispute and contain a
full statement of the grantee's position with respect to such question
or questions and the pertinent facts and reasons in support of such
position."
Usually it will be in the applicant's interest to make a new statement
of the position it wishes the Board to consider rather than to rely on
what it submitted in earlier stages of the audit determination process.
It is instructive to consider the preamble to 45 CFR Part 16 as
published on August 12, 1975 in 40 Federal Register 33936:
The attention of the grantees is called to the need for brief and
discriminating identification of the real matters in dispute and
of basic factual background which will normally include: the
terms of the grant award; a specification of the action taken by
the grantee now in dispute; the text of pertinent HEW policy
statements and regulations relied on by the grantee;
correspondence between the grantee and HEW relied on by the
grantee; the audit report, if relevant; the determination
appealed from; and a brief statement of the grantee's grounds for
'(Page 02 - 74 - 01/11/80)'
appeal. Agency responses should normally identify relevant
statements of fact that are considered incorrect or misleading and
should include such additional documents as are considered
necessary for an understanding of the agency position.
The Panel also notes with disappointment the inability of the parties to
enter into stipulation on any of the factual issues on which they were
asked to seek to reach agreement. Most of these should have been
susceptible to resolution at an intermediate level of administration.
instead, representatives at top echelons of each party met in
Washington, rather than where the grantee's records were located,
without any positive result.
We do not seek to assign fault and mention this matter only in the hope
it may cause parties in future matters to make greater efforts to reach
agreement on those matters as to which there should be no issue. If so,
the parties and the public will benefit.
Administrative Finality of Prior Regional Office Action
Page 11 of the Order to Develop Record asked the parties to comment on
the administrative finality of a notification in which the Assistant
Regional Commissioner informed the Grantee that the disallowances would
be reduced to $169,129. Having the benefit of their comments and
additional material, the Panel is now prepared to decide that question.
The audit report, which recommended disallowances of $419,119, and the
Grantee's responses to it were reviewed by officials in the Regional
Office. on October 21, 1976, Charles A. O'Connor, Jr., Assistant
Regional Commissioner, Occupational and Adult Education, wrote the
Grantee enclosing "preliminary determinations" to the effect that
the
disallowances should be reduced to $189,197. His letter stated that
those determinations would become final after 30 days unless "this
office is provided with supplemental information of such substance as to
cause us to amend one or more of our determinations." The Grantee then
submitted further information which caused Regional Office officials to
allow an additional $20,068 for indirect costs. Accordingly, in a
letter dated June 9, 1977, Mr. O'Connor informed the Grantee that the
balance of disallowed costs was $169,129 ($189,197 less the newly
allowed $20,068). The letter, however, added:
Dr. Tilroe (who had recommended the "preliminary determinations"
to reduce the disallowance to $189,1971 is no longer with this
office. Should this matter not be settled promptly and should
there be renegotiation, you should be aware that the $439,187 will
be the figure since there is not concurrence with the $249,990 of
cost disallowances reinstated by Dr. Tilroe at the earlier date.
'(Page 03 - 74 - 01/11/80)'
The last chance nature of the offer was repeated in a terse letter from
Mr. O'Connor to the Grantee, dated June 27, 1977, which stated in full:
Referring to my letter of 9 June 1977, if you wish to reopen
negotiation at this time, we will do so on the basis of the
$439,187. There can be no further extension of time. Please
advise promptly your intentions.
The Grantee refused to agree to refund the $169,129 and on December 30,
1977, John Sokol, Acting Regional Commissioner for Educational Programs,
informed the Grantee that the findings and recommendations of the audit
report were sustained, except for an allowance of indirect costs. It
stated:
Our final determination is that it will be necessary for the
Trenton Board of Education to refund $419,119 to the U.S. Office
of Education. Previously disallowed indirect costs in the amount
of $20,068 have been reinstated.
The Grantee asserts that the greater allowances proposed in the October
21, 1976 letter of the Assistant Regional Commissioner should not have
been affected because it sought further consideration of the remaining
disallowances. It views the recision of those allowances as an attempt
by regional officials to coerce it into a compromise. It, therefore,
argues that it should get the benefit of the allowances and this appeal
should concern only the $169,129 which was proposed for disallowance
under the October 21, 1976 letter.
The Office of Education, on the other hand, says that there was never a
decision by an authorized official to make the allowances. According to
it, the Acting Regional Commissioner was the only official who had
authority to make a final determination on an audit report. Mr.
O'Connor, an Assistant Regional Commissioner, made only the preliminary
determinations described in the October 21, 1976, letter and enclosure
on the basis of Dr. Tilroe's recommendations. When Dr. Tilroe left, the
matter was reviewed by others who disagreed with his recommendations.
The Agency explains the letters of June 9 and 27, 1977, by saying that
when disagreement with Dr. Tilroe's recommendations arose, Mr. O'Connor
decided that even though they did not provide a proper basis for
allowances, in order to avoid backing down on what already had been
presented to the Grantee as a basis for settling the audit, he would
honor the recommendations if the matter could be settled promptly. it
thus concludes that a binding decision was never made to allow any of
the audit report's recommended disallowances, except for the $20,068 in
indirect costs. in support of that position, Agency cites the rule that
the Government can be bound only through the actions of those authorized
to bind it.
'(Page 04 - 74 - 01/11/80)'
The Government's position is weakened by the evident fact that Mr.
O'Connor was acting in the course of an established office procedure for
arriving at a final determination on the audit. /1/ Perhaps under that
procedure the "preliminary determinations" in the letter of October
21,
1976, which were favorable to the Grantee could have been withdrawn if
the deciding officials believed that Dr. Tilroe's recommendations did
not evaluate the facts correctly or apply agency policy properly. The
letters of June 9 and 27, 1977, however, confirmed willingness to male
the allowances without any reservation that that was a "preliminary"
determination, subject only to the improper condition that the Grantee
not question the remaining disallowances.
We do not agree with the Grantee that this was done for the purpose of
depriving it of a right to further consideration of the disallowed
items. The record shows that the Agency gave the Grantee more than the
specified time for making submissions and there is no indication that it
attempted to deny the Grantee the benefit of the regular administrative
process. We accept the version that the Agency was taking what it
believed to be the easier course of avoiding the appearance of backing
down on its
'(Page 05 - 74 - 01/11/80)'
preliminary evaluation rather than following the more straightforward
and legally acceptable course of notifying the Grantee that the
preliminary determinations were withdrawn.
But regardless of if it was done, the preliminary determinations were
not withdrawn but confirmed in the June letters as final determinations
for the allowed items, coupled with an improper condition with respect
to the Grantee's waiver of its right to further consideration of the
disallowed items. We, therefore, accept the June determination but
reject the condition which precludes consideration of the remaining
disallowances. /2/ Accordingly, we shall proceed to consider the items
in the disallowances which make up the $169,129.
II.
1. Special Pregnancy Education Classes (SPEC)
The $5,787 remaining disallowance under this item was based on a finding
that $5,787 in salaries and related costs were paid for Deborah Perry
and Brenda Lanier, outreach counselors, who replaced two social workers
employed by the Grantee in prior years. This was determined to be a
supplanting of local funds. The Grantee states that it had an
educational program for unwed mothers prior to the commencement of the
section 807 project, but that program used no outreach counselors. In
addition, it asserts that in 1970-71, it spent some $50,270 for the
unwed mothers' program, of which $25,900 came from local sources and
$24,370 from Titles I and VI grants.
In the first project year involved here, ending in 1972, the Grantee
seems to have retrenched on SPEC, having claimed to have spent $26,000
in local funds and $313 of section 807 grant funds. It withdrew its
Title I and Title VI funds from this activity. In the second year of
the project, it claims to have spent another $26,000 in local funds and
$12,982 in section 807 grant funds, still a reduction in total
expenditures from the year ending in 1971.
'(Page 06 - 74 - 01/11/80)'
The reduced expenditures under the project conflict with the undertaking
described in the abstract of the grant application for "an expanded
Special Pregnancy Education Class (SEPC) program to meet more adequately
the educational, health, and social service needs of girls who would
leave school because of pregnancy." We find no explanation of the reason
for the reduction. We do not, however, regard that as a basis For
disallowance; rather it should have been a concern of the OE program
officials who were working with the Grantee during the life of the
project.
The Order to Develop Record suggested that the maintenance of local
funds complied with the no supplant provisions of 45 CFR 124.26, then
applicable, and that a reduction of use of Titles I and VI funds for
SPEC was not, in itself, cause for disallowance. Nothing in the
additional information submitted argues against that interpretation. We
hold, therefore, that the $5,787 disallowance should be restored.
2. Team Teaching
A $55,495 disallowance was made for the cost of personnel whom the
Assistant Regional Commissioner found did not work in the team teaching
effort or whose activities previously had been supported by local funds.
We do not regard this as a matter of tracing the salaries of particular
individuals to determine whether they were paid from local funds one
year and project grant funds the next. Rather, the burden is on the
Grantee to show that the local fiscal effort for the activity did not
diminish. It has not sustained that burden here. The facts are
undisputed that the teaching activity did not involve an expansion from
the year before the project commenced so local fiscal effort in the
teaching involved was replaced by the grant funds. The $55,495 should
be disallowed. It therefore, is not necessary' to resolve the factual
issue of whether salaries of individuals who did not work in the program
were charged to this account.
3. Early Warning System
The enclosure transmitted with the Assistant Regional Commissioner's
letter of October Il, 1976, proposed a disallowance of $35,758 as having
been in excess of amounts budgeted for the early warning system to
identify potential dropouts. No requests for budget changes were made.
While the terms and conditions of the grant permitted transfers to
assure effectiveness of the project, they provided that "no transfers
may be made which alter the approved project." The Regional Office's
acceptance of project activity reports was not tantamount to an approval
of the transfer.
'(Page 07 - 74 - 01/11/80)'
Here the Grantee claimed more than double the budgeted amount and still
failed to put any early warning system into effect. This cannot be
characterized as a transfer to "assure effectiveness of the project."
/3/ The 535,758 should be disallowed.
4. Salaries and Fringe Benefits of Employees Not Listed for Payment of
Grant Funds
A disallowance of $1,514 was made for payments with respect to two
employees not listed as being paid from grant funds. A mere statement
by the Grantee that the individuals were engaged in project work,
unsupported by records, does not permit recognition of the expenditures;
accordingly, the amount must be disallowed.
5. Unapproved Programs
A disallowance of $3,515 was made for rent for an alternative school
facility because it was not included in the project budget. The Order
to Develop Record recognized that 45 CFR 124.9 (January 28, 1969)
required approval for the rental of space as being necessary for the
success of the project, but stated that unless 0E asserts that the
rental charge was unnecessary, the Panel would consider that the
requirement was met.
The OE response of June 29, 1979, to questions in the Order to Develop
Record states that the rent was disallowed by the Assistant Regional
Commissioner because it was included in indirect costs. The enclosure
to that official's letter of October 11, 1976, however, stated that the
disallowance resulted from the fact that the amount was not in the
approved budget.
The item is identified solely with the project and would not
appropriately be an indirect cost (see item 7); the audit report
transferred this item from the indirect cost claim of the Grantee to a
direct cost item but then disallowed it as having been expended for an
unapproved activity. In light of the allowance by the Assistant
Regional Commissioner of $115,341 for the instructional program, the
further allowance of the $3,525 for rent is reasonable and it should be
allowed. The absence of a budget item for this purpose is not fatal
because, unlike the excess expenditures for the early warning system,
the nature and size of the transfer was not such as to "alter the
approved project" and it is reasonable to conclude that the amount of
rent claimed for an activity of the size involved here was necessary to
assure "effectiveness of the project."
'(Page 08 - 74 - 01/11/80)'
6. Unapproved Alterations
The enclosure to the Assistant Regional Commissioner's letter of October
Il, 1976, provided for a disallowance of $5,203 for alterations as
having been in excess of the $3,000 in the project budget for that
purpose. For the reasons stated under item 3 above this amount should
be disallowed.
7. Indirect Costs
The grantee originally charged $114,288 as indirect costs. The audit
action disallowed $32,643 of that amount as being chargeable to direct
costs which, however, were held not to be allowable under the rule
prohibiting the use of the grant for supplanting State and local funds.
An additional amount of $3,525, determined to be direct costs of rental
space, also was disallowed as being for an unapproved activity. Those
two items were thereafter considered further and disposed of in the
audit process under the direct cost allocations.
The remaining amount of $78,120 was disallowed as not having been
computed in accordance with the rule requiring use of an approved
percentage rate to ascertain indirect costs. During the period that
this matter was under consideration from the Regional Office, an
indirect cost rate was established for each of the two grant years and
that resulted in an indirect cost allowance of $20,068, assuming
recognition of direct costs as shown in the attachment to Assistant
Regional Commissioner O'Conner's letter of October 21, 1976.
The grantee now contends that it incurred other costs which should
offset the disallowed $78,120. It argues that the budgets had contained
$80,485 for overhead costs which, however, were not transferred to
reimburse such costs; and instead the funds were left in the project
accounts. It further asserts that because expenditures under the
project were in excess of budgeted amounts it transferred $66,095 of
local funds to the project. The grantee concludes that at least some of
the disallowances represent expenditures of local rather than Federal
funds. It, however, provides no further details.
The most that can be said for the grantee's contention is that the use
of the amounts available for the project, consisting of the Federal
grant plus a substantial amount of local funds, was in an amount
sufficient to provide expenditures equal to, or in excess of, the
Federal grant. That, however, falls short of accounting for expenditures
as actually having been made and as having been made in accordance with
the terms and conditions of the grant. The grantee has not established
that any expenditures other than those already allowed have been made in
accordance with the terms and conditions of the grant. As a result
there is no basis for making a further allowance to offset any part of
the $78,120. The appeal on that item must, therefore, be denied.
'(Page 09 - 74 - 01/11/80)'
Our conclusion does not, of course, affect the allowance of indirect
costs under the established rates. Because such costs are a percentage
of allowed direct costs, we assume a further computation will be made to
reflect the $9,312 of direct costs allowed here in excess of those
considered when the prior computation of indirect costs was made.
8. Fringe Benefits
A disallowance of $3,795 was made for expenditures for fringe benefits
which were not properly chargeable to the project. The Grantee does not
contest that disallowance unless to claim that the amount was offset by
application of the non-Federal funds described under item 7 above. For
the reasons stated under that item, such an offset is not proper. The
$3,795 should be disallowed.
CONCLUSION
The allowances proposed in the Assistant Regional Commissioner's letter
of October Il, 1976, plus the $70,068 of indirect costs allowed in his
letter of June 9, 1979, should be recognized. This leaves a balance of
$169,179 which, for the' reasons given above, should be treated as
follows:
Items Allowed Disallowed
1. Special Pregnancy Education Classes $ 5,787 2. Team Teaching
55,495 3. Early Warning System 35,758
4. Salaries and Fringe Benefits 1,514 5.
Unapproved Programs 3,525 6. Unapproved
Alterations 5,203 7. Indirect Costs
58,052 /*/ 8. Fringe Benefits ÿÿÿÿÿÿÿ
3,795
$9,312 $159,817 /*/
/*/ Subject to adjustment for additional allowances in this appeal.
FOOTNOTES
/1/ Page 2 of the Agency's memorandum of April 3, 1978 to the Board
states:
Prior to the issuance of the final audit report the Assistant
Regional Commissioner for Occupation and Adult Education (ARC/
OAE) was the Office of Education representative on the HEW Audit
Agency during the HEW release report procedures. When the final
(audit) report was issued, the ARC/OAE and a program officer on
his staff (Dr. Tilroe) were responsible for coordinating the
resolution of the audit. (Emphasis in original.) The ARC/OAE did
not have the authority to actually resolve audit 02-60100. By
July 1977, the ARC/OAE and the aforementioned program officer were
no longer employed by the Regional Office of Education.
There is no claim that the rejection of these officials' views was other
than an honest difference of judgment; nothing in the record suggests
that their employment was terminated as a result of wrongdoing in this
matter. The characterization of their function as "coordinating the
resolution of the audit" and not including "authority to actually
resolve" ignores the fact that as a part of "coordinating", the
Grantee
was informed that the preliminary determination would become final in
the absence of the submission of additional information. It is clear
that the ARC/OAE's proposal transmitted to the Grantee was intended to
become the final decision of the Agency by the passage of time and
nothing more. in effect, it showed what the Agency had decided, in the
absence of a further submission by the Grantee. We note also that in
its memorandum of June 29, 1979, the Agency states that the Acting
Regional Commissioner in an attempt to save face advised the Grantee "to
forward their remittance of $169,129 instead of exercising his authority
and perhaps better judgment to reopen the audit."
/2/ The allowances turn upon fact and policy judgments, if allowance
of the expenditures constituted a clear violation of the statute a
different case for review would be presented. See LEGIS 50/The Center
for Legislative Improvement, CGAB Docket No. 76-17, Decision No. 48,
September 26, 1978, p. 2.
/3/ We need not consider whether validity of the transfer provision
is in question because of a possible failure to publish properly. In the
absence of the provision there would be no authority to transfer
budgeted amounts; accordingly, a determination that it is invalid would
not benefit the Grantee. D11 May 15, 1992