GAB Decision 700
November 7, 1985
Mississippi Department of Public Welfare;
Settle, Norval D. (John); Teitz, Alexander G. Ford, Cecilia Sparks
Docket No. 84-42; Audit Control Nos. 04-30550 and 30551
DECISION
The Mississippi Department of Public Welfare (State, DPW) appealed
a
disallowance by the Office of Human Development Services (Agency,
OHDS)
of $468,216 in federal financial participation (FFP) claimed under
Title
XX of the Social Security Act. The disallowance was based on two
audit
reports reviewing contracts awarded by the State to private
corporations
for the provision of Title XX services; DPW had claimed
FFP in its
expenditures for the contracts. The audit reports concluded,
in
general, that the corporations had charged for services either
not
performed or at excessive rates so that there were unnecessary
and
unreasonable charges to federal funds. As explained below, we
uphold
the disallowance of $468,216.
Board Proceedings
The Board has already issued one decision in this appeal.
In
Mississippi Department of Public Welfare, Board Docket No.
83-52,
Decision No. 501, January 31, 1984, the Board rejected the
State's
threshold argument that legislation enacted by the 98th
Congress
effectively forgave the disallowance. That decision also
directed the
State, should it wish to proceed with its appeal on other
grounds, to
file a notice of appeal stating all grounds the State intended
to
appeal.
Accordingly, the State filed a notice of appeal which was assigned
Board
Docket No. 84-42. In the course of numerous conversations with
the
Board, both parties suggested that the Board issue another
preliminary
decision covering part or all of the legal issues raised by the
State
prior to having any type of in-person oral proceeding or
evidentiary
hearing. The Board then designated eight propositions
raised by the
State in its notice of appeal as raising legal issues to be
briefed by
the parties. On May 15, 1985, the Board issued a Preliminary
Analysis
of those legal issues to inform the parties about how the Board
would
decide this appeal based on the record at that time. Upon receipt
of
the Preliminary Analysis, the State was to support its request for
an
evidentiary hearing with a submission identifying both
disputed(2)
issues of material fact and its witnesses and their areas of
testimony.
May 15, 1985 Board Letter. The Board subsequently ruled that
the State
had willfully failed to identify disputed material facts and that
this
constituted (1) an admission that material facts could be found on
the
existing record as well as (2) a waiver of its request for
an
evidentiary hearing (with the exception of one possible witness whom
the
State later chose not to present). /1/ July 10, 1985 Board Ruling.
The
Board then held a proceeding in Jackson, Mississippi, on July 31,
1985,
to hear oral presentations on the Preliminary Analysis.
The State's oral argument concerned the facts underlying the
auditors'
conclusions that the contractors had charged for services either
not
performed or at excessive rates. As such, the oral argument
affected
only one of the State's propositions. In Part I of the
Analysis, below,
we adopt our preliminary analyses for the other seven of the
State's
propositions. In Part II of the Analysis we discuss the one
proposition
affected by the State's oral argument and explain why the State's
points
were unpersuasive; we also adopt our Preliminary Analysis of
this
proposition.
The following Case Background sets forth the facts; since we found
the
State's oral argument unpersuasive, we have not changed our statement
of
facts from the Preliminary Analysis.(3)
Case Background
The disallowance of $468,216 is based upon two audits performed by
the
Office of Audit of the Office of Inspector General (OAOIG),
Department
of Health and Human Services, entitled "Report on Special Request
to
Audit a Title XX Contract Between Developmental Learning
Associates,
Inc. (DLA) and the Mississippi Department of Public Welfare,
Jackson,
Mississippi for the period August 15, 1977 through August 14,
1978"
(Audit Control No. 04-30550) (Appeal File, /2/ Ex. R) and "Report
on
Special Request to Audit Two Title XX Contracts Between
Learning
Development Corporation (LDC) and the Mississippi Department of
Public
Welfare, Jackson, Mississippi for the period October 1, 1976
through
June 30, 1978" (Audit Control No. 04-30551) (A.F. Ex. S).
DLA and LDC were private, for-profit firms. DPW entered
into
fixed-price contracts with them to provide special services to
the
handicapped (Developmental Day Training) to Title XX eligible Head
Start
children in certain specified counties. A total of $1,067,829
was
eventually paid to the contractors under the contracts; of that
amount,
$880,892 was federal Title XX funds.
DPW contracted with DLA and LDC without seeking OHDS consultation
or
advice. In the course of its first contract with LDC, DPW
began
monitoring LDC's performance and found LDC deficient in several
areas.
(Memorandum of June 15, 1977 meeting, A.F. 368) DPW
nevertheless
executed a second contract with LDC and a similar contract with
DLA.
Monitoring of the contractors' performance continued, with DPW
finding
that LDC (March 13, 1978 memorandum, A.F. 372-373) and DLA (S.A.F.
8-9)
both were deficient in their contractual performance and
record-keeping.
DLA and LDC then submitted contract proposals for the next
program year.
On June 16, 1978 DPW sent the proposals to the OHDS Regional
Office for
review and comment. (S.A.F. 10) OHDS responded that the proposals
as
written failed to meet the procurement standards of 45 CFR 228.70
and
recommended that the proposals not be funded. (S.A.F. 11-14)
At this
time OHDS was unaware that DPW had been contracting with LDC for
two
years and with DLA for one year.
In July 1978 DPW replaced its Commissioner. The new
Commissioner
arranged for audits of the DLA and LDC contracts by Alexander
Grant and
Company. (A.F., Exs. F and G(4) respectively) As discussed in
greater
detail below, these audits disclosed significant deficiencies in
DLA's
and LDC's performance of their contracts. At about the same time
a
federal criminal investigation resulted in the indictment of
David
Lambert, Jr., a former Mississippi state senator, and William
Burgin,
Jr., then a Mississippi state senator and chairman of the
Senate
Appropriations Committee, for conspiracy in the procurement of the
LDC
contracts.
In November 1978 DPW and OHDS personnel met to review the Alexander
Grant
and Company audits. They agreed that DPW would disallow the
total
claims of the contractors and require them to submit documentation
of
services provided, while OHDS would allow DPW to defer any action
until
completion of the criminal trial of Burgin and Lambert.
In January 1979 the Mississippi Department of Audit issued its own
review
of the DLA contract and found the same deficiencies with regard
to record
keeping and performance of services. (A.F., Ex. H) The
auditors took
exception to $200,844.75 of the $336,176 paid to DLA.
Burgin and Lambert were subsequently convicted. United States
v.
Burgin, 621 F.2d 1352 (5th Cir. 1980), reh. denied, 639 F.2d 239,
cert.
denied, 449 U.S. 1015 (1980). OHDS requested DPW to initiate
efforts to
recoup the money improperly paid to DLA and LDC. After nine
months of
inaction on DPW's part, OHDS issued, on February 25, 1980,
a
disallowance of the full $800,872 federal share paid under
the
contracts.
DPW appealed that disallowance to this Board, which assigned it Docket
No.
80-45-MS-HD. In the course of proceedings before the Board, it
became
apparent that the Alexander Grant and Company Audits had not
quantified the
deficiencies in LDC's and DLA's performance and had
mistakenly analyzed
contract costs and calculated the disallowance on
cost reimbursement
principles. In July 1981 DPW suggested that DHHS
auditors conduct their
own audits on fixed price contract principles.
The Board then, with the
agreement of the parties, dismissed Docket No.
80-45-MS-HD without prejudice,
while the audits were performed.
The DLA Contract
DPW contracted with DLA to provide special services to the handicapped
at
39 Head Start centers in six counties. Under the terms of its
contract
DLA proposed to serve a total of 1,281 children. DLA's
services to be
performed under the contract were:
-- Basic services to be delivered in 196 group sessions of four
or
more children. Such sessions were to(5) receive one "unit of
service"
monthly during the nine month Head Start term. Each unit of
service was
to consist of four hours of professionals' time, made up of one
hour of
optometrist's time, one hour of psychologist's time, and two hours
of
perceptual/motor trainers' time. The total proposed cost for
basic
services was $289,296.
196 groups x 9 sessions = 1,764 group sessions
1,764 group sessions at $164 = $289,296
-- Testing services to measure the children's progress
for
perceptual/motor performance, such testing to be administered before
and
after the basic services.
The total proposed cost for testing services was $15,680.
196 groups x 2 tests = 392 tests
392 tests at $40 = $15,680
-- Orientation sessions explaining the program to the
childrens'
parents and staff of the Head Start centers. Two 2-hour
sessions were
to be held for the parents and two for the staff at each
center. The
total proposed cost for this service was $31,200.
39 x 2 sessions (parents) = 78 sessions
39 x 2 sessions (staff) = 78 sessions
156 sessions at $200 = $31,200
The Alexander Grant and Company audit, as noted above, reviewed
DLA's
contract on cost reimbursement principles. That audit
identified
$200,307 in questioned costs. A.F. 120. Among its
findings, it
concluded that excessive salaries were paid to DLA officers
(A.F. 127)
and unreasonable legal fees ($45,000) were paid to a Mississippi
State
senator (A.F. 131-132). That audit also noted that DLA's
inadequate
records prevented a complete and thorough examination of
DLA's
conformity with the contract terms.
The State audit of DLA's contract declared at the outset,
"Inadequate
accounting records and weaknesses in the system of internal
control
prevented us from obtaining sufficient competent evidential matter
to
satisfy ourselves that the financial statements are presented
fairly."
A.F. 389. In taking exception to $200,844.75 of the revenues
DLA
received under the contract, the State auditors determined that
a
significant portion of the promised services to handicapped(6)
children
were not performed and that "it was physically impossible for all of
the
services to have been performed during the time frame in which they
were
billed." Id. For example, the State auditors found that only 42 of
the
156 scheduled orientation sessions for parents and staff were
held.
A.F. 398.
The OAOIG audit concluded that of the $336,176 paid to DLA,
$200,845
represented claimed services which were not provided in accordance
with
contract terms. The federal share of that amount was
$150,663. That
audit added that it could not form an opinion on the
validity of the
remaining $135,331 of DLA's charges due to deficiencies in
the records
purported to support the charges. A.F. 553. The audit
noted that,
while Title XX was designed to allow the states great discretion
in
determining what services would be available and the manner in
which
those services would be delivered, each state had to comply with
the
provisions of 45 CFR part 74. Section C.1. of Appendix C to Part
74
states that in order for costs to be allowable they must be
"necessary
and reasonable." The audit found that the amounts claimed by DLA
and
paid by DPW were neither necessary nor reasonable and that DLA
provided
substantially less services than were included in the
contract. A.F.
554. As as example of the unreasonableness of
DLA's claims, the
auditors stated that DLA's psychologist claimed 503 hours
of services
during January 1978, when there was a maximum of 126 hours
available
(each Head Start center was open 6 hours each day for 21 days) for
each
DLA employee to deliver services to the children. A.F. 555.
Similarly,
an optometrist claimed 428 hours of services and three
developmental
trainers claimed services of 195 hours, 289 hours, and 252
hours
respectively. Id. The audit also found that 114 of the
scheduled
orientation sessions had not been held. A.F. 558. Based
primarily on
the OAOIG audit, the Agency disallowed $150,633 in FFP for the
DLA
contract.
The LDC Contracts
In 1976 DPW contracted with LDC to provide special services to
the
handicapped at 80 Head Start centers for an amount not to
exceed
$380,000 (federal share $285,000). Under the terms of the
contract LDC
proposed to serve a total of 1,600 (7) children and 1,000
parents,
guardians, or caretakers. LDC's services to be performed under
the
contract were:
-- 66,000 children and caretaker contacts. A contact was
defined /3/
as one-on-one, 15 minute encounter between a child/caretaker and
an LDC
staff member. The total proposed cost for this service was
$339,600.
66,000 contracts at $5.15 = $339,600
-- Coordination sessions at all 80 centers for center
directors,
teachers, and staff. The total proposed cost for this
service was
$40,000.
80 sessions at $500 = $40,000
LDC submitted vouchers to DPW throughout the period of the
contract
certifying that 80 coordination sessions and 69,018 contracts
were
delivered.
In 1977 DPW received a proposal for a second contract from LDC.
This
contract reduced the Head Start centers to be served to 71 and
the
number of children to 1,450. The proposed costs, however,
increased
from $379,900 to $413,793. LDC's services to be performed
under this
contract were:
-- Delivery of two sessions for teachers and staff and two
sessions
for caretakers at each of the 71 centers. The total proposed
cost of
this service was $56,800.
71 x 2 sessions (staff) = 142 sessions
71 x 2 sessions (caretakers) = 142 sessions
282 sessions at $200 = $56,800
-- Provision of 2,178 group units of special services to no more
than
1,450 children. A group unit of services was defined as one hour
of
services delivered to a group of four or more children. An average
of
nine hours per group was to be given over(8) a 9-month period.
The
total proposed cost for these services was $356,993.
2,178 x $164 = $356,993 /4/
DPW then executed a contract with LDC in the amount of $480,001
(federal
share $360,001). LDC submitted monthly vouchers throughout the
period
of this contract certifying that 337 staff/caretaker
coordination
sessions and 2,056 children group units were delivered.
LDC claimed
$404,734 and DPW paid $351,753.
The Alexander Grant and Company audit of LDC's contracts
identified
$480,044 in questioned costs for the period October 1, 1976
through June
30, 1978. Among the audits findings (A.F. 226) were:
-- LDC did not hold all of the sessions required by the
contract. A.
F. 338.
-- Services claimed to have been performed for the recipients
may not
have been performed.
-- Comments from County Welfare Departments were negative about
the
program's effectiveness. A.F. 340.
-- In some counties no significant work was performed.
-- There were numerous deficiencies in the delivery of services
by
LDC.
The audit noted further that, while some of the claimed
child/caretaker
contacts did occur, it was impossible to quantify the number
of
contracts actually provided due to insufficient and inadequate
records.
A.F. 360. The audit cited questioned costs in such areas as
officers'
salaries (A.F. 278), consultants' fees (A.F. 279), travel costs
(A.F.
281-282), and $385,593 in public relations fees paid to Bob Broome
and
Associates (A.F. 283 and 301).
In Burgin it was established that the $385,593 in public relationship
fees
were transferred to Burgin and Lambert for using their influence in
ensuring
that LDC obtained and retained its contracts with DPW. The
court termed
their activities "influence peddling of the rankest kind."
621 F.2d 1352,
1359.(9)
The OAOIG audit utilized the Alexander Grant and Company audit,
court
records, telephone interviews, and visits to Head Start centers
to
evaluate LDC's performance under its contracts. It was unable to
locate
and examine LDC's original records. The audit concluded that a
miminum
of $423,444 (federal share $317,583) paid under the contracts was
not
eligible for FFP. The audit based its figure on such items as:
-- in the first contract LDC claimed 55,770 more contracts than
could
have been provided while the Head Start centers were open.
A.F.
582-584.
-- in the second contract the effective rate of payment per
child
hour essentially doubled from the first contract, increasing from
$20.60
to $41.00, without any documentation to support the increased
rates.
A.F. 585.
As to the "finders fees," the audit found this expenditure
exhorbitant,
unreasonable, and unnecessary. The OAOIG audit
concluded:
(T)he finders fees were not appropriate costs to be considered
in
arriving at service cost rates under the contracts. In this respect,
we
are of the opinion the fees contributed to the excess and
inflated
service costs rates. After payment of the fees under the
first
contract, sufficient funds were not available to provide the
services
contemplated in the contract. The second contract amount was
likely
increased to assure sufficient funds for paying the fees and
for
providing services. A.F. 586.
Based primarily on the OAOIG audit, the Agency disallowed $317,583 in
FFP
claimed for the LDC contracts ($203,754 FFP for the first contract
and
$113,829 FFP for the second contract).
Analysis
Part I
In its Notice of Appeal the State advanced twelve propositions.
The
Board, with the agreement of the parties, designated eight of
the
propositions for briefing on their(10) legal significance. /5/ At
the
oral proceeding, the State's argument did not challenge the
Board's
Preliminary Analysis for seven of the propositions. For each of
these
propositions, we adopt our Preliminary Analysis in this Decision;
these
seven propositions are quoted directly from the State's Notice
of
Appeal.
A. "THE MIXED FINDINGS OF LAW AND FACT BY THE UNITED STATES COURT
OF
APPEALS FOR THE FIFTH CIRCUIT THAT 'THE EVIDENCE ESTABLISHED THAT
LDC
FULLY PERFORMED UNDER THE CONTRACTS AND WAS ENTITLED TO FULL
PAYMENT'
AND THAT THERE WAS 'NO PECUNIARY LOSS TO THE GOVERNMENT' ARE
STARE
DECISIS AND ALSO THE 'LAW OF THE CASE'." /6/
The State argued that a Board ruling in the State's favor on the
above
proposition would render moot that part of the disallowance dealing
with
the LDC contracts. The State based this proposition on two
quotations
from United States v. Burgin:
Although no pecuniary loss to the government has occurred,
the
government contends that the mere exertion of influence by a
public
official having a covert financial interest is a violation of
Sec.
371.(11)
Although a conflict of testimony shows a dispute arose as to
the
quality of LDC's performance, the evidence establishes that LDC
fully
performed under the contracts and was entitled to full payment.
In
fact, it is undisputed that the DPW-LDC contracts were completely
valid
in the strict legal sense.
621 F.2d 1352, at 1356-57. (emphasis supplied by the State)
According to the State, "this Board must now ex officio, without a de
novo
appraisal of the evidence or the wisdom or unwisdom of the United
States
Court of Appeals for the Fifth Circuit, abide by, or adhere to,
the holding
in this case focusing on the two LDC contracts." State's
Brief in Docket No.
83-52, p. 19. The State claimed that the court's
decision was based on
some 1,203 pages of transcript and 115 pages of
closing arguments in the
lower court proceedings. According to the
State, the court's mixed
findings of law and fact that LDC performed its
contractual obligations are
stare decisis and law of the case to which
the Board must give full faith and
credit.
The Agency responded that the doctrines of stare decisis and law of
the
case are inapplicable to the facts of this appeal. The Agency
termed
the cited quotations in Burgin as dicta and not an adjudication of
LDC's
performance. The Agency argued that stare decisis applies only
to
principles of law enunciated by a court and not a court's resolution
of
factual issues or dicta. Similarly, the Agency continued, the
doctrine
of law of the case does not apply to findings of fact, and,
furthermore,
controls only subsequent proceedings within the same case where
the
ruling was made and not subsequent cases.
An examination of Burgin supports the Agency's view. The court's
role
in Burgin was restricted to a review of the sufficiency of the
evidence
to support a jury verdict of guilty. The defendants alleged
that their
indictments were faulty because of the omission of the fact that
the
government had suffered a pecuniary loss. The court found
that
"pecuniary loss to the government" was not an element of the
offense
with which the defendants were charged. The question of
LDC's
performance under the contracts was not an issue before the
court. The
Board therefore concludes that those remarks were indeed
dicta and not
proper subjects for the application of the doctrine of stare
decisis.
Nor does the Board find the doctrine of the law of the case
relevant.
Burgin involved a criminal prosecution. It was not an earlier
stage of
this disallowance proceeding against the State.(12)$% The issue
before
the Board is whether OHDS properly took a disallowance against
DPW.
That question boils down to whether the contract costs were
reasonable
and necessary and whether the contract services were
performed. The
criminal indictment and conviction of Mississippi state
officials as
detailed in Burgin has no direct relevance other than the fact
that, of
the $860,000 paid to LDC, $385,000 was in turn repaid by LDC to
these
officials, thereby calling into question the reasonableness of
the
original contract terms. The court in Burgin was not concerned
with
issues of reasonable and necessary costs and its comments on
LDC's
performance are not binding upon this Board.
B. "THE FINDINGS BY THE UNITED STATES COURT OF APPEALS FOR THE
FIFTH
CIRCUIT THAT 'THE EVIDENCE ESTABLISHES THAT LDC FULLY PERFORMED
UNDER
THE CONTRACTS AND WAS ENTITLED TO FULL PAYMENT' AND THAT THERE WAS
'NO
PECUNIARY LOSS TO THE GOVERNMENT' ARE RES JUDICATA AND THE UNITED
STATES
IS COLLATERALLY ESTOPPED FROM A DE NOVO APPRAISAL OF THESE
FINDINGS."
The State did not address this proposition in its Brief, and declared
in
its Reply Brief that it "is in no way relying upon an
earlier
proposition focusing upon res judicata and collateral estoppel." p.
22.
Consequently, the Board now considers this proposition moot for
purposes
of this appeal.
C. "RESPONDENT IS BOTH ESTOPPED AND BARRED BY LACHES FROM NOW
MAKING
SUBSTANTIAL CHANGES IN ITS POSITION FOLLOWING A DISMISSAL OF THE
SAME
SUBJECT MATTER BEFORE THIS BOARD."
The State asserted that OHDS in its February 16, 1983 disallowance
letter
(A.F., Ex. W) has substantially altered its position on the
grounds for
disallowance from those expressed in the original February
25, 1980
disallowance letter (A.F., Ex. K). The State contended that
the
dismissal of the first disallowance without prejudice bars a
subsequent
disallowance based on any grounds other than those explicitly
asserted in the
first disallowance letter.
The Agency responded that a dismissal without prejudice of the appeal
of
the first disallowance (Board Docket No. 80-45-MS-HD), without
any
adjudication of the merits of that disallowance, in no way operates
to
bar or otherwise restrict the grounds for a subsequent
disallowance.
The Agency further asserted that estoppel is not applicable to
the facts
of this case because DPW did not rely to its detriment on any
conduct by
OHDS as all the facts relating to the disallowance had occurred
before
OHDS ever learned of the (13) contracts in July 1978. The Agency
added,
that in any event, the defenses of equitable estoppel and laches may
not
be asserted against the federal government.
An examination of the disallowance letters reveals:
-- The original disallowance letter disallowed $800,872 on the
basis
of "unallowable costs by . . . and on the provision of services
for
which FFP is not available, services for which there is
insufficient
documentation to show that they were actually delivered, and
incomplete
compliance with terms of the contract." A.F. 510.
-- The second disallowance letter disallowed $468,216 on the
basis
of: "payments made under this (DLA) contract were neither
necessary,
nor reasonable and the DLA provided substantially less services
than
were included in the contract with (DPW)"; "excess charges for
services
under the first year contract with LDC"; and "excessive and
unnecessary
increase in billing rates under the second year contract with
LDC." A.F.
636 (emphasis in original).
The essential elements of estoppel are:
(1) the party to be estopped must know the facts;
(2) he must intend that his conduct shall be acted on or must so
act
that the party asserting the estoppel has a right to believe it is
so
intended;
(3) the latter must be ignorant of the true facts; and
(4) he must reasonably rely on the former's conduct to his injury.
United States v. Georgia Pacific 421 F.2d 92, 96 (9th Cir. 1970)
The Supreme Court has never decided a civil case which stated
that
equitable estoppel could be enforced against the federal government.
As
the State pointed out (State's Reply Brief in Docket No. 83-52,
pp.
18-22), there have been federal district court and court of
appeals
decisions finding estoppel against the government in
particular
circumstances. The Supreme Court, however, has never found
estoppel as
such, although it has refused to say a situation could never
arise where
estoppel might be appropriate. Heckler v. Community Health
Services of
Crawford County, 467 U.S. 51, 104 S. Ct. 2218, 2224 (1984).
However,
the Supreme Court has indicated that there could not in any event
be
estoppel against the federal government without "affirmative
misconduct"
on the(14) government's part. See, INS v. Hibi, 414
U.S. 5, 8 (1973);
Schweiker v. Hansen, 405 U.S. 785, 788 (1981);
and INS v. Miranda, 459
U.S. 14, 17 (1982).
Based on the record and the cited court decisions on estoppel, the
State
has not demonstrated as a matter of law that the doctrine of
equitable
estoppel is at all relevant here. In any event, since we
agree with the
Agency that there was no detrimental reliance, there is no
basis for
estopping even a private party, let alone the federal
government.
Moreover, the grounds for the disallowance as stated in the
two
disallowance letters are not mutually exclusive. In fact, the
findings
of unallowable costs, undelivered services, and noncompliance
with
contract terms from the first disallowance letter bear a
logical
relationship to the unnecessary and unreasonable payments of FFP
found
in the second disallowance letter. Certainly since the grounds
for
disallowance are similar, there is no basis for concluding that
the
State could reasonably have been suprised by the second
disallowance.
Furthermore, the Board concludes that the State has not been
injured by
the issuance of the second letter disallowing $468,216, whereas
the
first letter disallowed $800,872.
When an appeal has been closed without prejudice and without
adjudication
of the merits, the disallowing agency is not prohibited
from reissuing a
disallowance on other grounds. Indeed, a paramount
obligation of both
the federal agency and a grantee agency is to ensure
the use of federal funds
for only legal, proper purposes. It is not
unexpected, under certain
circumstances, for the Agency to issue
successive disallowances on alternate
grounds. When, as here, a matter
is dismissed to permit the Agency to
review its disallowance further, we
are aware of no general legal
restrictions which would in any way limit
the Agency's ability to issue a
subsequent disallowance on grounds
either related or unrelated to those
stated in the first disallowance.
Several times in the course of this appeal the State has declared that
it
will demonstrate the presence of the traditional elements of estoppel
at an
evidentiary hearing. (e.g., State's Reply Brief, p. 27.)
However,
our review of the record discloses no facts which could support
the
State.
As to the State's assertion that the Agency's second disallowance
is
barred by laches, the Board notes that to establish laches a
defendant
must show a delay in asserting a right or a claim, that the delay
was
not excusable, and that the delay caused the defendant undue
prejudice.
Citibank, N.A. v. Citibanc Group, Inc., 724 F.2d 1540, 1546 (11th
Cir.
1984). To take just one point, it is clear from the record that
the
Agency did not delay in reissuing its disallowance. After the
first
disallowance was issued, DPW suggested that(15) DHHS auditors
conduct
their own audits of the contracts. Both parties agreed that
Docket No.
80-45-MS-HD should be dismissed while the audits were
performed. After
the audits were completed in December 1982, the second
disallowance was
issued in February 1983. The Board considers this time
sequence to be
reasonable. Furthermore, as the Board noted on the
question of
estoppel, the facts show no prejudice to the State by the
issuance of
the second disallowance.
We conclude as a matter of law that the Agency is neither estopped
nor
barred by laches from issuing the disallowance appealed here.
D. "THE DDHS-OIG OFFICE OF AUDIT, MISSISSIPPI STAFF,
PERSONAL
DISCLAIMER TO 'FINAL REPORTS - ACN'S 04-30550 AND 04-30551' AND
THE
IMPEACHMENT EFFORTS REGARDING SAME RENDERS SAID AUDIT REPORTS
CAPRICIOUS
AND INVALID."
The State contended that the unreliability of the audit reports on
which
the disallowance is based is shown by a February 10, 1983
memorandum
from the OAOIG Mississippi staff. A.F. 633-635. The
State referred to
the two following complaints by the staff which the staff
said impaired
their audit work:
-- We could not travel. Accordingly, we had to
discontinue
interviewing Headstart, LDC, and DLA employees and we were unable
to
validate audit work performed by Alexander Grant & Co., CPA's.
-- We were unable to review original records because both LDC
and DLA
had terminated operations and their records could not be
located.
Accordingly, our review was limited to incomplete and fragmented
copies
of billings and supporting documentation which were in DPW's
possession.
For the sake of completeness of the record, the Board notes the
third
complaint of the audit staff which the State omitted to cite:
-- DPW did not allow the free and total access to records and
staff
normally afforded us. We were required to make detailed written
request
for specific documents. DPW considered the request and
determined what
documents to provide for our review. We had no
assurance that all
pertinent documents were provided.
Our audit efforts were also impeded by restrictions placed on us
by a
representative of the Mississippi State Attorney General's office.
All
interviews of(16)$TDPW employees were to be scheduled with at least
2
weeks advance notice to the Attorney General's office and all
interviews
were to be conducted only with the Attorney General's
representative
present. The first DPW employee interview was requested
on January 8,
1982, and we were allowed to conduct the interview on February
22, 1982.
The interview was conducted in a courtroom type atmosphere;
the
attorney objected to questions that he did not want the DPW employee
to
answer. The entire interview was tape recorded and the attorney
refused
to provide us with a copy or to allow us to hear the tape.
A.F. 633.
The Agency responded with a memorandum from the Regional Audit
Director
addressing the concerns of the OAOIG Mississippi staff. S.F.A.
42. His
conclusion was that the Mississippi staff's comments were not
supported
by the facts and the audit workpapers and that there was no need
to
qualify the audit findings. S.F.A. 43-44.
On the basis of the record the Board finds no merit in this
proposition.
DPW's own monitoring of the contracts, the Alexander Grant and
Company
audits, and the Mississippi State Department of Audit's audits all
made
similar, if not identical, findings on the matters covered by the
OAOIG
audits. The State has furnished the Board with no other
unrefuted
evidence that the OAOIG audits were "capricious and invalid."
E. "GRANTOR BEING UNDER AN AFFIRMATIVE OBLIGATION TO APPELLANT
FAILED
IN ITS SUPERVISORY ROLE REGARDING THE FIXED PRICE CONTRACTS."
The State claimed that OHDS had approved its Title XX Comprehensive
Annual
Services Plan and the purchase of services by fixed price
contracts. In
its responses to the OAOIG audits of the DLA and LDC
contracts, DPW expressed
its disappointment with "the total mishandling
of this matter by OHDS and
OIG." A.F. 571, 602. For both DLA and LDC,
DPW maintained that the
fixed rates in the contract were reasonable and
necessary, that the services
were rendered, and that a timely and proper
performance audit would have
verified the extent to which services were
rendered. Id. DPW referred
to a 1980 Report to the Congress by the
Comptroller General which recommended
that the Secretary of DHHS
"(i)mprove state contracting by encouraging the
use of contracts based
on unit prices or specific levels of service, and give
the states
whatever technical assistance is needed to develop reasonable
units of
measurement for the various services." A.F. 602. Claiming that
OHDS did
not establish(17) review mechanisms or offer assistance
through
evaluations or monitoring, DPW argued:
This disregard of DPW's requests for assistance and apparent
failure
of HHS to comply with the GAO report to which they agreed, borders
upon
indifference, neglect and "crassa negligentia."
Id. (emphasis in original)
DPW summarized its position toward the audits by claiming that OHDS
was
negligent in fulfilling its supervisory role and discharging
its
responsibilities as a grantor. According to DPW, because OHDS
had
knowledge of problems in fixed rate contracts and records in
general,
and of DLA and LDC in particular, OHDS had the affirmative duty to
apply
only the 3% penalty provision provided for in 45 CFR 228.19(a) and
(b),
rather than the disallowance as issued. A.F. 571, 602. DPW
also
alleged that OHDS was negligent in basing its disallowance on
incomplete
records, as many of the DLA and LDC documents had been destroyed
by the
time OHDS initiated its audits in 1982.
An examination of the facts leads the Board to conclude that OHDS did
not
fail in its supervisory role. Rather, DPW was derelict in
its
supervision of the contracts and cannot shift this responsibility
to
OHDS, thus avoiding the disallowance.
-- Title XX was designed to give the states great flexibility
and
discretion in construction a program of social services.
-- Purchase of service contracts between state Title XX agencies
and
providers under former 45 CFR 228.70, such as the contracts at
issue
here, were not subject to prior OHDS approval or review.
-- The responsibility for monitoring such contracts rested with
the
State agency, not OHDS. 45 CFR 74.164(j).
-- The State has not pointed to anything in the record that
indicates
DPW requested advice from OHDS before executing the contracts.
-- DPW entered into the contract with LDC on October 1, 1976 and
with
DLA on August 15, 1977. OHDS did not become aware of these
contracts
until July 1978 at the earliest.
-- Despite DPW awareness of problems with the contracts as
evidenced
by the monitors' reports of June 15, 1977 (A.F. 368) and March 13,
1978
(A.F. 372) of LDC(18) and of DLA (S.F.A. 7), DPW renewed LDC's
contract
in 1977 and accepted proposals by LDC and DLA for renewal of
their
contracts in 1978.
-- OHDS, informed of these proposals, recommended that they not
be
funded. S.F.A. 13.
-- The contracts with DLA and LDC predate the cited 1980
Comptroller
General report.
-- Contrary to the State's claim that, on the basis of 45 CFR
74.21,
records did not have to be retained beyond a three-year period, 45
CFR
74.21(b) provides, "If any litigation, audit or other action
involving
the records has been started before the expiration of the 3-year
period
the records shall be retained until completion of the action . .
."
In short, the Board has found nothing in the record that demonstrates
that
OHDS failed in its supervisory duty toward DPW. From the record it
is
clear that OHDS bears no responsibility for what occurred.
Moreover,
the State has not even cited any authority for the proposition that
OHDS
had supervisory responsibility during the period in question, which
if
not exercised would preclude a disallowance.
F. "THE LEAK OF INFORMATION (PRESUMABLY BY HHS-OIG PERSONNEL TO
THE
ASSOCIATED PRESS IN WASHINGTON) WHICH CAUSED ADVERSE
WIDESPREAD
PUBLICITY PRIOR TO THE FINALIZATION OF THIS APPEAL WAS HIGHLY
IMPROPER
AND PREJUDICIAL."
When the Board was deciding which of the State's propositions raised
legal
issues, the Board was uncertain whether this proposition did, in
fact, raise
a legal question. The Board decided to include it in order
to give the
State the opportunity to demonstrate its legal significance.
In the course of this appeal the State has made several motions
requesting
the Board to order the Agency not to release information to
the press
regarding this appeal. In rejecting such a motion, the Board
has
informed the State that the Board had no authority to order or
request the
Agency not to issue any information concerning this appeal.
In addition, we
reminded the parties that this dispute concerns the
expenditure of public
funds and is truly the public's business, so that
we cannot properly restrict
the Agency from disclosing information in
this record. The Board notes
that the Agency has denied issuing any
press releases concerning this
appeal. Reply Brief in Docket No.
83-52, p. 5. The Agency also
explained that audits of the Office of the
Inspector General are public
documents. Id., p. 6. (19)
The State has not provided the Board with any authority to the effect
that
this proposition raises a legal issue. Consequently, the Board
now
considers it to be of no legal significance in determining the
outcome
of this appeal.
G. "THE STATE SHOULD NOT BEAR THE FULL BURDEN FOR UNRECOVERABLE
FFP
PAYMENTS MADE TO NOW 'OUT OF BUSINESS' PROVIDERS IN THE EVENT
THE
EVIDENCE SHOWS THAT CERTAIN SERVICES PURCHASED UNDER FEDERALLY
APPROVED
FIXED RATE CONTRACTS WERE NOT RENDERED DUE TO VIOLATIONS OF FEDERAL
OR
STATE CRIMINAL LAWS."
The State argued that it would be improper and unjust to place upon
the
State the full burden of returning the disallowed amount because DLA
and
LDC are now out of business and presumably incapable of refunding to
the
State the payments they received under their contracts. In support
of
this proposition the State cited Commonwealth of Massachusetts
v.
Heckler, 576 F. Supp. 1569 (D.C. Mass. 1984). That case reversed
a
Board decision holding Massachusetts liable for the full amount of
the
federal share of overpayments made to providers of Medicaid
services
under Title XIX of the Social Security Act. In examining
section
1903(d) of the Social Security Act, the district court found that,
under
subsection (d)(3), states are required to return to the
federal
government only a pro rata share of the overpayments actually
recovered
from the providers. In Massachusetts many of the providers
who had
received overpayments had subsequently been declared bankrupt
and
Massachusetts claimed that it was unable to recover any
overpayments
from those providers. The State argued that its situation
is analogous
to Massachusetts in that it is now effectively barred from
recouping the
contract payments.
The Board finds this proposition and line of reasoning totally
without
merit. First, the United States Court of Appeals for the First
Circuit
has reversed Massachusetts and upheld the Board's original
decision.
Massachusetts v. Secretary, 749 F.2d 89 (1984), cert. denied, 105
S.
Ct. 3478. The Court of Appeals' decision agreed with the
Board's
interpretation of section 1903(d), holding that "Congress could
scarcely
have meant to reimburse a state for excessive cost of services."
749
F.2d 89, at 94.
More significantly, as the Agency pointed out, Massachusetts dealt
with
the interpretation of the term "overpayment" in one section of
the
Medicaid provisions (Title XIX) of the Social Security Act.
The
controversy now before the Board concerns Title XX funds
allegedly
expended to purchase services for handicapped Head Start
children.
Massachusetts is simply irrelevant to the facts of this
case.(20)
The State's position that, since it cannot now recover the
contract
payments from DLA and LDC, it should not bear the full burden of
the
disallowance is weakened by the facts of this case. As pointed
out
previously, DPW's own employees informed DPW that LDC and DOA were
not
abiding by the terms of their contract. Yet DPW chose to ignore
these
warnings and continued the contract payments and even
considered
additional proposals by the contractors. Under these
circumstances the
Board cannot see how it is improper or unjust to place the
burden of the
disallowance solely upon the State, the party responsible for
award and
administration of the purchase of service contracts.
Part II
In this Part we deal with the arguments made by the State at
the
proceeding. /7/ We consider those arguments under the
following
proposition:
"'FINAL REPORTS - ACN'S 04-30550 AND 04-30551' WERE BASED
UPON
INSUFFICIENT AUDIT EVIDENCE MAKING THE FINDINGS UNSUPPORTED IN
VIOLATION
OF BOTH AUDITING STANDARDS AND THE SUBSTANTIAL EVIDENCE RULE."
In regard to this proposition, the Board in its Preliminary
Analysis
declared:
The State has not provided any legal arguments concerning
this
specific proposition, only the assertion that "the above
proposition
will be covered among the evidence presented to the Board at
the
upcoming evidentiary hearing." State's Appeal Brief, p. 28.
The Board notes, as stated in the previous section (now Part
I.D.),
that there are four other sources in the record besides the OAOIG
audits
detailing DLA's and LDC's lack of performance under the
contracts. The
Board also notes the finding of the court in Burgin that
nearly 50% of
the LDC funding was not spent on handicapped children, but paid
to then
current and former Mississippi state senators. The Board
further notes,
as discussed in greater detail in section VI below (now Part
I.E.), the
responsibility for the lack of adequate records lies with DPW and
not
OHDS.
p. 14.(21)
The State advanced three arguments at the oral proceeding to challenge
the
factual basis for the audit findings that services under the LDC and
DLA
contracts were provided at inflated costs or simply not provided.
Basically
the State alleged that the auditors' analysis of what
constituted a unit of
service to be provided at a particular price was
faulty. Also, citing
"Standards for Audit of Governmental
Organizations, Programs, Activities, and
Functions," a 1981 publication
by the Comptroller General of the United
States, the State maintained
that the Agency's auditors violated numerous
professional auditing
standards in their review of the contracts.
Although the State admitted
that some contracted services were not provided,
/8/ the State presented
an alternate analysis designed generally to show that
it was possible to
provide the services paid for within the time available,
i. e., that
payments were traceable to units of services actually
provided. The
State's arguments can be summarized as follows:
-- In their review the Agency's auditors erred in finding that
the
first LDC contract defined a contact costing $5.15 as a
"one-on-one,
15-minute encounter between child/caretaker and a LDC staff
member."
Since the contract nowhere defined "contract", argued the State,
LDC
personnel could render services to groups of children with an
individual
charge under the contract for each child. Therefore the
auditors'
conclusion that it was impossible for LDC personnel to have had
the
required 66,000 contacts with children was without foundation.
-- Since the Agency's auditors incorrectly applied a standard
of
individualized 15-minute contacts at a rate of $5.15 per contact to
the
first LDC contract, their conclusion that the rate of reimbursement
in
the second LDC contract ($41 per child hour) was unjustifiably
doubled
was likewise erroneous. Accordingly, the State argued, under
the second
contract LDC was entitled to charge $164 per hour for each group
of
children treated, with each group consisting of a maximum of
four
children and with any number of groups served by the same
service
professional during a one-hour period.
-- As to the DLA contract, the State contended that the
auditors
erred in finding that it was physically impossible for the DLA
personnel
to render the services charged to the contract because the
auditors
improperly assumed that each unit of services had to be administered
to
a group consisting of no more than four children, rather than in
groups
with payment made based on multiples of four children. The
auditors
also erred in assuming that separate orientation sessions were
required
to be held at each Head Start Center, rather than one large
group
orientation session. Thus the DLA personnel performed all the
services
charged to the contract.
We have examined the lengthy record in this appeal and determined that
the
State raised these factual challenges to the auditors' findings for
the first
time at the oral proceeding. Throughout this appeal the Board
has
repeatedly requested the State to identify those issues of material
fact
which it considered in dispute. The State never complied with
the
Board's requests. We regard the State's presentation at the
oral
proceeding as simply an analytical exercise to cast doubt on
the
accuracy of the audit reports. While we believe that we would
be
justified in summarily dismissing the arguments made at the
proceeding
because of the late hour at which they were raised and because
the
Agency had no opportunity to respond or present evidence on these
points
earlier in the appeal process, we have, nevertheless, examined
them.
The three arguments are essentially based on alleged factual mistakes
by
the Agency's auditors. The State argued that the first LDC
contract
permitted a contact to consist of simultaneous encounters with more
than
one child, and thus the Agency's reasoning that LDC claimed 55,770
more
contacts than could have been provided while the Head Start centers
were
open is based on a false premise. The State is correct that
neither the
LDC contract nor its accompanying proposal contains a written
definition
of a "contact." The State postulated that an LDC staff member
could go
into a classroom of children, perform some type of service, and
charge
$5.15 per child. At the proceeding the Agency explained that
the
definition of "contact" as a "one-on-one, 15-minute encounter" is
found
in an earlier version of the LDC proposal which was not itself a part
of
the contract.
In our examination of the appeal file, we found that the State for
the
first LDC contract also stated that "a contact was defined as
a
one-on-one, 15-minute encounter between child/caretaker and a LDC
staff
member." /9/ Furthermore, in response to the Agency's audit
report,
DPW's Commissioner wrote:
The unresolved issue in the second contract according to the
auditors
was not services rendered, but reimbursement rates for child
sessions
were about twice that under the first contract. We strongly
disagree
with equating and interpreting services under different contracts in
the
same manner. True, the first contract was based upon individual
child
contacts.
A.F. 539 (emphasis added)
The record before us, then, is at best ambiguous as to what the
first
LDC contract meant by a contact. The State would have us find
that any
contact, no matter how brief or how long, by a LDC employee with a
child
or children, no matter the setting, was reimbursable under the
contract
at $5.15 per child. The auditors determined a deficiency of
55,700
contacts. In order to account for such a large number of
deficiencies,
the LDC employees' encounters with the children, given the
limited time
the Head Start centers were open, would arguably have to have
been of
questionable quality. The State simply has not produced any
convincing
arguments or evidence that the Agency erred in developing the
factual
basis for its conclusion that services were paid for yet not
provided.
The auditors found that LDC's rate of compensation had doubled in
the
second contract and found no justification for this increase.
The
State's explanation for the payment rate is not persuasive. Even if
we
were to accept arguendo the State's premise about the first LDC
contract
as to what constituted a contact, LDC's rate increase under the
second
contract is still unsupportable. The State argued that LDC could
only
charge for one contact per child per day under the first contract at
a
rate of $5.15 per child. Yet under the State's analysis of the
second
contract LDC would have charged $164 per group of from four to
seven
children for an hour of services, or $41 to $24 per child, an
increase
of eight to four times over the first contract for an hour of
service.
The State has offered no reasonable explanation for this
increase.
Accordingly, we uphold the Agency's findings concerning the second
LDC
contract.
The State's position on the DLA contract is similarly unsupportable.
The
State insisted that this contract compensated DLA at a rate of $154
per group
of four children, with services rendered to eight children at
$308 per
session, to twelve children at $462 per session, etc. The
State argued
that the auditors' conclusion that it was physically
impossible for DLA
personnel to provide all the charged services
overlooked the fact that DLA
could have provided the (25) services
simultaneously to several groups of
children. Yet the DLA contract
specifically set a rate of $154 per group
session, with "a group
consist(ing) of 4 or more children." (A.F. 29,
emphasis added) We repeat
"4 or more children," not "4 children." Thus under
the express language
of the DLA contract services to a group of eight
children would be paid
at the same rate as services to a group of four
children, $154 per
session. We conclude, therefore, that either it was
physically
impossible for DLA to provide all the services or DLA, if it
provided
the services as postulated by the State, overcharged the State under
the
terms of its contract. The contract also specifically called
for
orientation sessions to be held "at each center." (A.F. 28,
emphasis
added) Thus, even if the State's assertion that a multiple
orientation
sessions was held at one large meeting was true (and we note that
the
State has offered no evidence in support of this claim), that
procedure
would have violated the terms of the contract. We accordingly
uphold the
Agency's findings on the DLA contract.
As detailed in the Preliminary Analysis, the State's own
internal
investigations, the State-retained Alexander Grant and Company
audit,
and the Agency's own audit disclosed a litany of deficiencies,
dubious
practices, and questionable costs associated with the performance by
LDC
and DLA. With the exception of the three arguments made at the
oral
proceeding, the State has not attacked these findings with
specificity,
but merely dismissed them as irrelevant. The State's
criticism of the
Agency's auditors as having violated professional auditing
standards is
unwarranted. The Agency's auditors were forced to phrase
some of their
conclusions in speculative language because, as noted in Part
I.D., the
State hindered the auditors in their performance of their
duties.
Requested documents were not made available. The auditors were
not
permitted to interview state personnel in an
intimidation-free
environment. The State's allegations of bias on the
part of the
Agency's auditors strikes us as peculiar when, once again, we
note that
the State's own auditors and the State-retained Alexander Grant
and
Company auditors reached essentially the same conclusions as
the
Agency's auditors.
We regard the State's arguments as a last ditch effort to discredit
the
auditors' findings. The State presented a contrived interpretation
of
the contract terms as the last step in the appeal process; as such
the
State's arguments have no persuasive value. The Agency
auditors'
findings are corroborated by the findings of the other
auditors. Also,
the points made by the State were by argument
only; during the lengthy
appeal process before the Board, the State
neither identified these as
specifically disputed facts nor(26) followed
through to provide
witnesses to address how the services were actually
provided and billed
under the contracts. At issue here is whether a portion
of the FFP used
by the State for payments under these contracts was
unallowable. A
collateral attack on the Agency's audit findings cannot
substitute for
direct evidence to support a finding that, in fact, the
State's FFP
claims were proper because the services claimed were actually
provided
at prices that were reasonable given the determinative market
factors.
The State cannot show here that the payments at issue are allowable
by
arguing that they are not unallowable.
The State also stressed that there should be only one issue considered
by
the Board, whether services were actually delivered under the
contracts, and
that the Board's attention should not be diverted to
alleged irrelevant
issues raised by the Agency. The State emphasized
that these contracts
were not cost reimbursement contracts, but rather
fixed-price
contracts. Accordingly, in the State's view, the Board
should be
concerned only with whether the rates were reasonable under
the contracts and
whether services were provided since, unlike cost
reimbursement contracts,
individual expenditures are not charged to
contract funds and thus need not
be examined for reasonableness or
necessity.
We are not disposed to take the narrow approach to this appeal
suggested
by the State. According to the State, such issues as the
necessity and
reasonableness of the payments claimed for FFP and the quality
and
amount of the services rendered should be beyond the scope of
the
Board's review, despite the fact that the Agency's
disallowance
determination specifically raised these issues. We do not
agree that
the federal government must proceed with blinders on just because
a
fixed-rate contract is involved when factors particular to a case
merit
close scrutiny.
A large percentage of the LDC contract proceeds were diverted
to
Mississippi state officials. It is an uncontested fact that a
then
current Mississippi state senator and a former Mississippi state
senator
received $385,593 from LDC for their role in procuring the contracts
at
issue for LDC. For their activities the two officials were
indicted,
found guilty, and sentenced to prison. Throughout this appeal
the State
has variously termed this $385,593 as "public relations fees"
or
"finders fees." The State maintained that there is no
prohibition
against the payment of such fees. The State's position is
that, once
DPW agreed in the contract to pay what it deemed a reasonable rate
for
LDC's services, it should be nobody's concern what LDC decided to
do
with its money, even if that included paying bribes to state
officials.
The State would have the Board totally ignore this
circumstance.(27)$%
The Agency, on the other hand, flatly termed the $385,593
a "bribe,"
unauthorized under any federal grant procedures. The state
senators
were convicted for their actions, the court terming their
activities
"influence peddling of the rankest kind." 621 F. 2d 1352,
1359. The LDC
contracts were not awarded through a competitive bidding
process, but
rather procured through the influence of the state
senators. What LDC
chose to do with its money is relevant because it
calls into the
question the reasonableness of the terms of the
contract. If we were to
accept the State's position on the $385,593,
that would mean the Board
would be sanctioning the use of FFP - federal funds
supplied by
taxpayers - to support the payment of activities which have
been
determined criminal in federal courts. The payment of bribes is
not a
legitimate grant-related expense. The award of even a
fixed-price
contract paid for from largely federal funds does not give
the
contractor carte blanche to engage in shady deals benefitting
state
officials who played major roles in procuring the contract.
Neither the
Agency nor the Board is obliged to ignore this situation.
The circumstances surrounding the award of these three contracts and
the
bribes paid from the LDC proceeds are significant in giving credence
to
the auditors' conclusions that some contracted services were
not
provided or were provided at too high a price. The record shows
that
the contractors simply could not afford to provide all the
contracted
services at lower prices due to the large illegal
expenditures.
In essence, the State would have the Board conclude that the Agency
should
treat these fixed-price contracts which the State awarded as if
the contracts
had been federal fixed-price contracts. Under federal
procurement
rules, were the Agency to award a fixed-price contract, it
would not examine
particular expenditures made from contract proceeds.
A market price and
appropriate procurement procedures to make an award
are considered sufficient
to protect the government's interest. On the
other hand, were the
Agency to award a cost reimbursement contract, the
contractor would have to
justify its costs based on applicable cost
principles and charge only
reasonable, necessary, allocable, and
allowable costs to the contract.
In general, then, an unallowable cost
incurred by a fixed-price contractor
does not result in the disallowance
of the price paid under a fixed-price
contract.
We do not agree that the expenditures made from the contract proceeds
may
not concern the Agency just because the(28) contracts themselves
were
fixed-price. /10/ The State has not shown why we should determine
that
federal procurement rules, which would, in general, insulate a
federal
fixed-price contractor's costs from federal review, are germane
here, where
there was no direct federal award. Also, since the award of
these
contracts was intertwined with an "influence peddling" and bribery
scheme,
the award process would not have been consistent with applicable
state
procedures -- so that these contracts would merit scrutiny in any
event.
/11/
(29)$% This situation here is not analogous to a federal
fixed-price
contractor's incurring costs that would be unallowable
under
cost-reimbursement principles. Here, large illegal payments
are
traceable to contract proceeds which were mostly paid from
federal
funds. Where the contract awards themselves are suspect and
there are
large illegal expenditures relating to those contracts, we
would
conclude that the federal Agency is obliged to review the matter
in
order to properly administer the grant program whose funds are
involved.
In this regard, the audit reports which were the basis for
the
disallowance here are a reasonable and somewhat conservative effort
to
determine what portion of the payments were not properly charged
to
federal funds.
Conclusion
For the reasons stated above, we uphold the disallowance in the
full
amount of $468,216. /1/ The Board repeatedly directed the State
to
identify disputed material
facts. March 27, 1985, April 29,
1985, and May 15, 1985 Board
Letters. The State continued to make only
vague references to disputed
facts. The Board issued the July 10, 1985
Ruling after an Agency motion
for sanctions against the State. June 25,
1985 Agency Motion. As
discussed in various Board Rulings, the State's
prosecution of its appeals
from this disallowance has been characterized
by voluminous or repetitive
submissions raising a profusion of largely
irrelevant matters. The
State was advised that these procedural
tactics, designed to obfuscate and
delay this matter, were antithetical
to the proper prosecution of an appeal
before this Board. Largely as a
result of such tactics by the State,
the record in this case is unwieldy
since substantive arguments made in
opposition to the disallowance are
inextricably intertwined with collateral,
irrelevant, or misstated
material. See January 31, 1984, October 25,
1984, November 2, 1984,
March 27, 1985, May 15, 1985, and July 10, 1985 Board
Rulings.
/2/ The State's Appeal File will be abbreviated A.F. The
Agency's
Supplement to the Appeal File will be abbreviated S.A.F. /3/
At the
proceeding, the State
correctly pointed out that the contract
did not actually contain a written
definition of the term "contract" and
contended that the Agency's auditors
thus improperly used this
definition. This point is discussed on pages
21-23. /4/ This figure is
quoted from LDC's proposal. The correct
amount would be $357,192.
/5/ Of the remaining four propositions, one had
already been decided by
Board Decision No. 501 (State's Proposition I), while
the other three
concerned procedural matters having no substantive bearing on
the
Board's decision, such as (1) the possibility of Mediation
(State's
Proposition II), (2) a request for a hearing (State's Proposition
VI),
and (3) the exhaustion of administrative remedies (State's
Proposition
XII). /6/ Upon
receipt of the Preliminary Analysis, the State
complained that the Board had
improperly used an obsolete version of
this proposition and not the "polished
and refined" version of the
proposition, divided into subsections, that the
State submitted at a
later point in the appeal. In its July 10, 1985
Ruling the Board
informed the State that it could pursue this point at the
proceeding.
At the proceeding the State briefly raised this issue. We
consider the
revised version of this proposition to be but an extended
rewording of
the original proposition. Although we are aware of the
State's wording
changes, we consider the revised version to be
substantively
indistinguishable from the proposition as stated in the Notice
of
Appeal. Consistent with our earlier request to the parties, we
are
using the original language. /7/ As discussed earlier, the Board
found
that the State waived its
request for an evidentiary hearing by
repeatedly failing to comply with Board
directives to identify disputed
material
facts. /8/ On the record at the
proceeding the State
tendered a settlement offer to the Agency. The
amount of the proposed
settlement was $185,147.72 ($66,892.56 for DLA,
$65,650.91 for LDC #1,
$52,604.25 for LDC #2). The State arrived at this
figure on the basis of
a survey done by Alexander Grant and Company as part
of its audit.
Alexander Grant conducted a sample survey by mail of the Head
Start
centers and parents of the children scheduled to receive services
under
the contracts. The survey inquired whether the recipients
were
satisfied with the rendered services. The settlement figure
reflected
the State's use of the percentage of replies which indicated
services
had not been given. At the oral proceeding, in rejecting the
settlement
proposal, the Agency criticized the State's analysis of the
survey
results, pointing out that the State was basing its offer on
the
percentage of the number of responses received and not on the
universe
of all the recipients surveyed. Taking the DLA contract as an
example,
of 207 surveys mailed, 95 were returned. Of these 95, 68 or
72% replied
that services were performed, 27 or 28% said services were not
provided.
A.F. 185. The State argued that the amount disallowed for the
DLA
contract should be the federal share of 28% of the payments made
under
the contract or $66,892.56. But noting the Agency's objection,
another
way to look at the survey results is as indirect opinion evidence
that
33% (68 of 207) of the recipients received contracted for
services.
Perhaps the State would have made more accurate use of the
survey
results had it offered to return the federal share of 67% of
the
payments made for the DLA contract, approximately $168,000, more
than
the amount actually disallowed ($150,663). Although we do not go
into
the calculations here, this also appears to be the case for the two
LDC
contracts if you look at the survey results in terms of
services
provided for the universe of all the recipients surveyed. As
was
explained to the State several times during the course of this
appeal,
the Agency was not required to enter a mediation process to
consider
settlement. /9/ Appellant's Brief, p. 9, in Docket No.
83-52. The
parties agreed that all the documents from Board Docket No.
83-52 would
be incorporated by reference into this appeal. The parties
also agreed
that one document, dated May 12, 1980, from Board Docket
No.
80-45-MS-HD, would be incorporated by reference into this appeal.
/10/
Regulations governing
purchase of service contracts under Title
XX are found at 45 CFR 228.70 (1976
& 1977) and 45 CFR 74, Subpart P
(1977). Since these regulations did not
figure into the parties'
arguments, we note them, but do not discuss whether
they apply or
whether the contract payments would have been allowable under
these
regulations. /11/ Just
prior to the oral proceeding, the Agency
submitted to the Board newly
discovered documents (Respondent's
Supplement to Appeal File, Vol. II, Parts
A and B) relating to the
ongoing case of State of Mississippi v. Burgin, et
al. In that action
the State of Mississippi is seeking to recover
damages from various
former state officials and their insurers for their
involvement with the
contracts at issue here. The Agency alleged that the
State's action, in
taking the position in that lawsuit that the contracts
between DPW and
LDC and DLA were void ab initio, constituted an admission by
the State
that the Agency's disallowance was properly taken since without
any
contracts there was no basis for the State's claim of FFP. Also,
the
State of Mississippi alleged in its Complaint that DLA and LDC
were
"mirror image corporations" which had divided Mississippi in half
for
contract service areas with the collusion of certain state
officials.
Complaint, pp. 9 and 11. At the hearing the State denied that
its
positions in the lawsuit were inconsistent with those taken
here,
contending the lawsuit's claims are mere allegations. Since we
have
already decided that the evidence in the record supports
the
disallowance, we do not consider it necessary to examine
the
ramifications of this lawsuit on the State's appeal. We are,
however,
troubled by the fact that the State never called this lawsuit,
initiated
in February 1984, to the Board's attention during the course of
this
appeal. Parties before the Board have the obligation to furnish
all
relevant documentation that could assist the Board in its resolution
of
an appeal. We note further that should the State recover all or
a
portion of the payment it made under these contracts, additional
FFP
over the amount disallowed here may be due to the Agency.
JANUARY 14, 1986