DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Bronx Professional Standards Review Organization
Docket No. 87-182
Decision No. 953
DATE: May 10, 1988
DECISION
The Bronx Professional Standards Review Organization
(Grantee/Bronx)
appealed a determination by the Health Care Financing
Administration
(HCFA) disallowing $55,512.03 in federal funds for the project
period
December 31, 1979 through September 30, 1984, 1/ during which
the
Grantee was a federally- funded Professional Standards
Review
Organization (PSRO). Based on its PSRO status, the Grantee
claimed an
entitlement to federal funding for payments under its severance
pay plan
to employees terminated in 1987. HCFA's principal reason for
denying
this claim was that the employees in question were not terminated
either
during the grant period or due to the withdrawal of federal funding,
so
that the Grantee's claim was not a reasonable charge to federal funds.
Based on the following analysis, we sustain this disallowance.
Background
The Grantee received a federal grant to operate as a PSRO from
December
31, 1979 through September 30, 1984. In April 1984, in
anticipation of
the grant's expiration, the Grantee submitted a Closeout
Budget and Plan
to HCFA. See HCFA Ex. R-2; and Bronx Ex. A, pp.
4-6. In its Closeout
Plan the Grantee asserted that, since a majority
of its contracts were
with New York State, it intended to remain open and
would not be
terminating employees, nor seeking federal funds for severance
pay. The
Grantee indicated that if its State contracts were terminated,
it "would
at that time submit a second phasedown plan including
requested
severance pay." Bronx Ex. A, pp. 4-5. HCFA's June 15,
1984, evaluation
of the Grantee's Closeout Plan, evidenced its understanding
that the
Grantee was remaining operational and was not requesting severance
pay.
The evaluation contained a recommendation to fund the closeout
proposal.
HCFA Ex. R-2, p. 3. HCFA conducted a closeout site visit in
November
1984 to confirm that the Grantee had complied "with program
directives
in this area." The report generated by that visit
specifically
indicated that the Grantee had "not paid severance to any
employee due
to the termination of its grant." HCFA Ex. R-3.
Almost three years later, in February 1987, the Grantee requested
that
HCFA provide $55,512.03 for severance pay costs for 12 individuals
who
had been employed by the Grantee during its tenure as a
federally-funded
PSRO. These individuals had remained in the Grantee's
employment after
the withdrawal of federal grant funding and were being
terminated due to
expiration of the Grantee's contracts with New York
State. See Bronx
Ex. B; and the Notice of Appeal (October 22,
1987). The issue in this
case is to what extent the Agency was
obligated, under its grant
agreement, circumstances surrounding the grant, or
general cost
principles, to participate in costs of severance payments owed
to
employees who at one time worked on the grant but were not
terminated
until long after the grant was over.
Analysis
Based on our examination of the applicable federal law, the
Grantee's
claim is unsupportable. There are essentially two approaches
to
recovery suggested by the Grantee's arguments in this case: to
treat
the severance payments as a current cost somehow related to the
prior
federal grant, or as an expenditure disbursed now but which was
an
accrued cost of the grant project period. Below, we discuss each
of
these possibilities, as they arise in the facts of this case,
and
explain why neither is persuasive.
1. There was no termination of employment during the grant
project
period or due to the withdrawal of
federal funding. Consequently,
the claim
for severance pay is neither a reasonable nor
allocable
charge to federal grant funds.
The federal cost principles applicable to grants for
nonprofit
organizations are contained in Office of Management and Budget
(OMB)
Circular A-122. 2/ Attachment B to that Circular sets out
examples of
selected items of cost which may be charged to federal grant
funds.
Generally, severance pay is an allowable charge to federal
funds.
Paragraph 44 of Attachment B provides - -
a. Severance pay, also commonly referred
to as dismissal wages,
is a payment in addition to regular salaries and wages,
by
organizations to
workers whose employment is being
terminated.
. . .
However, this does not make severance pay allowable per se.
OMB
Circular A-122 also provides that, in order to be allowable, a cost
must
be reasonable, and allocable to the performance of the award.
OMB
Circular A-122, Attachment A, A.2a. In pertinent part, a cost
is
reasonable if it is the type generally recognized as ordinary
and
necessary for the operation of the organization or performance of
the
award. Id. at A.3a. A cost is allocable to a grant in
accordance with
the relative benefits received. Id. at A.4.
The disallowance was based on HCFA's determination that the termination
of
the employees was unrelated to the time period of the Grantee's
federal
funding. Therefore, the Grantee's claim of an entitlement to
severance
pay could not be viewed as an allowable charge to federal
funds. Based
on the facts and applicable law, HCFA's determination was
reasonable.
It clearly is proper for HCFA to interpret the Circular to mean that
an
obvious threshold requirement for any award of federal funds
for
severance pay is that the obligation to provide severance pay occur as
a
reasonable and necessary cost of PSRO operations during the
performance
of a federal grant. Here, the employees were not terminated
in any way
due to the withdrawal of federal funds, nor was the severance pay
a cost
incurred during the grant period. Rather, the record is replete
with
the Grantee's assertions that it would neither terminate any
employees
nor request severance pay due to the withdrawal of federal
funding. In
fact, these individuals were employed by the Grantee for
almost three
years after federal funding was withdrawn. In this
context, the Grantee
has not demonstrated that this cost may be considered as
ordinary or
necessary to the performance of the grant award. There is
no basis upon
which to conclude that these costs can be charged on a current,
cash
basis to a grant which ended three years earlier.
2. There is no basis in law or fact to require
reimbursement of
severance pay as an accrued
entitlement.
The Grantee asserted that its claim is allowable under a cost
accrual
accounting methodology. The Grantee argued that --
Under the accrual method, the employee's
annual entitlement to
severance benefits
. . . is charged as a cost of doing
business
for that year, and distributed
to all final cost objectives . . .
of
that accounting period. Thus, under the accrual method,
the
federal government pays only for
severance benefits relating to
the
specific years when government contracts were
being
performed.
Bronx Br., p. 8.
Additionally, the Grantee referred to "new cost regulations, not in
effect
during the years in which the referenced grant was performed"
which provide
that accruals of mass severance pay should be considered
on a case by case
basis. The Grantee asserted that "in view of the
actual severance of
all employees . . . effective April 30, 1987" as
well as the precarious
funding upon which it had relied "the accrual and
payment of severance
benefits should . . . be permissible under the
regulations in effect at the
time the grant was entered into . . . [and]
is also fully consistent with the
revised cost principle. . . ." Bronx
Br., pp. 8-9.
Throughout this dispute, HCFA maintained that its policy was to
provide
federal funds only for the actual cost of severance pay, and that
the
cost principles could not support a claim for accrued severance
pay
arising three years after termination of a grant. See Notice
of
Disallowance (September 24, 1987); and HCFA Br., p. 4.
The Grantee's argument is an after-the-fact attempt to find an
accounting
methodology to support its claim, rather than a demonstration
that its claim
is allowable under the methodology employed during the
grant's
performance. Presumably, the Grantee's allusion to "new
cost
regulations" is a reference to OMB Circular A-122, which was
effective
during the grant period (June 1981). The prior cost
principle
provisions at 45 C.F.R. Part 74, Appendix F, G-40(b)(2),
provided for
accruals for severance pay under limited circumstances.
Specifically,
. . . where the institution provides for
accrual of pay for
normal severances,
such method will be acceptable if the
amount
of the accrual is reasonable in
light of payments actually made
for
normal severances over a representative past period. . .
.
(emphasis added)
The later Circular itself indicates that --
. . . where the organization provides
for a reserve for normal
severances such
method will be acceptable if the charge
to
current operations is reasonable in
light of payments actually
made for
normal severances over a representative past period .
.
. . (emphasis added)
While recognizing the Government's general obligation to participate
to
the extent of its fair share in terms of any specific payment,
the
Circular clearly prohibits accruals of federal funds for mass
severance
pay. See OMB Circular A-122, Attachment B, 44b.(1) and
(2).
However, merely because the Grantee has asserted that the employees'
right
to severance pay "accrued" during the grant period does not mean
that accrual
accounting principles somehow apply to render these costs
properly claimed
and retroactively allowable. Rather, it is incumbent
upon the Grantee
to justify the allowability of these costs under the
accounting methodology
applicable to its grant. There is no evidence to
show that the
Grantee's funding agreement with HCFA included a federal
contribution to a
severance pay plan based on an accrual accounting
theory, such as the
description of a "reserve" set out in Attachment B,
44b.(1) to the
Circular. Further, there is no evidence that the Grantee
charged HCFA,
on an accrual basis, in order to fund a severance plan for
its
employees. If the Grantee had been claiming federal funds for
a
severance pay plan under an accrual method during the course of
its
grant, then it would have received federal contributions to fund
its
plan during the grant years. Subsequently, at the point of
termination,
the Grantee would have had some money for the severance
payments.
Here, while framing its argument in terms of accrual accounting,
the
Grantee's claim for federal funds is actually presented in terms of
a
traditional cash basis accounting system, i.e., the request for
funds
coincides with the time the payment is made. The Grantee's argument
is
based on a misinterpretation of the term "accrued." While it is
true
that the years the employees worked under the federal grant are
counted
in calculating the amount of severance pay to which they are
entitled,
there is no support for the conclusion that the annual severance
pay
increments were allowable charges to grant funds that could be
claimed
then, on a current basis, or now retroactively. The cost
principles
require that mass severance pay debts be discharged against
current
funding sources since accrued charges for this purpose are
specifically
precluded. See OMB Circular A-122, Attachment B, Para.
44b.(2). There
is simply no basis in the cost principles to find that
the Grantee can
revive the prior grant agreements in order to cover costs
incurred later
in time. 3/
3. The equitable defense of estoppel is inapplicable.
The Grantee placed great weight on the fact that in its April
1984
Closeout Plan it informed HCFA that --
Should we be notified at a later date
that the New York State
contracts will
not be renewed and/or terminated, we would at
that
time submit a second phasedown plan
including requested severance
pay.
Bronx Ex. A, p. 5.
The Grantee argued that this language explicitly reserved its right
to
receive a severance pay contribution from HCFA. The Grantee also
argued
that HCFA assented to its request for severance pay by failing
to
respond to the language in the Closeout Plan. Bronx. Br., pp.
5-6. In
its reply brief the Grantee indicated, for the first time, that
it ". .
. deleted from our original close-out plan, a request for severance
pay
for the employees who would have been eligible." The Grantee
alleged
that the Regional Project Officer had indicated that the Closeout
Plan
could not be approved if it included a request for severance pay, but
a
request for severance pay could be submitted at a later date.
Bronx
Reply Br., p. 1.
Overall, the Grantee's foregoing arguments effectively raise the
equitable
defense of estoppel. Estoppel means that a party is prevented
by its
own acts from claiming a right to the detriment of another party
who was
entitled to rely on the former's conduct and acted accordingly.
See Black's
Law Dictionary (5th ed. 1979). In essence, the Grantee is
arguing
that HCFA's failure to respond to the Closeout Plan, as well as
the
assertions by the Project Officer, now preclude HCFA from denying
the
Grantee's claim for severance pay.
The doctrine of estoppel does not apply here for a variety of reasons.
As
HCFA noted --
The Supreme Court has consistently held
that the Federal
Government cannot be
estopped on the same basis as a private
litigant. See Heckler v. Community Services of Crawford
County,
467 U.S. 51, 60 (1984) . .
. Indeed, the Court has never held
that the representations of its agents can give rise to
an
estoppel, and has declined to decide
whether even affirmative
misconduct will
estop the government. See Schweiker v.
Hansen,
450 U.S. 785 (1981) (per
curiam); Montana v. Kennedy, 366 U.S.
308, 314-315 (1961). The Board itself has taken a
less
restrictive view, but has ruled
that at a minimum "the federal
government cannot be estopped in the absence of
affirmative
misconduct." New York
Department of Social Services, Decision
No. 788 at 12 (September 19, 1986).
HCFA Br., p. 13
HCFA's failure to respond to the language in the Closeout Plan cannot
be
interpreted as affirmative misconduct. Further, the Grantee's
argument
that its failure to submit a definitive severance pay request was
in
direct response to a Regional Official's advice is unsubstantiated
in
the record. Moreover, under the rationale of Schweiker v.
Hansen,
supra, it is doubtful that such a statement, even if documented,
could
estop HCFA. 4/
Moreover, given the context, the only reasonable interpretation
applicable
to the language in the Closeout Plan is that in the event
that the Grantee
also lost its state contracts at the same time as the
ultimate withdrawal of
federal funding it would dissolve its
organization and submit a second
phasedown plan. The parties' grant
relationship ceased, at the latest, in
March 1985 when HCFA approved the
Grantee's final financial status
report--two years before the Grantee
lost its state contracts and ceased
operations. HCFA Ex., R-4. As HCFA
noted, by definition a grant
closeout envisions a termination of the
grantee-grantor relationship at which
point the parties have completed
"all applicable administrative
actions." See 45 C.F.R. 74.110. Further,
the regulations also mandate
that a closeout occur as promptly as
feasible after expiration of the grant
and that a grantee timely submit
all appropriate financial reports. See
45 C.F.R. 74.111(a) and (b)(3).
Essentially, the Grantee is arguing that it should be allowed to submit
a
second Phasedown Plan almost three years after its first was submitted
and
funded. To accept that argument would mean that HCFA could be
held
indefinitely liable for federal funding after the end of a grant.
Such
a proposition is clearly unreasonable on its face and without support
in
the regulations. The regulations clearly envision a point in time
when
the grant- related obligations of both parties are terminated.
Such an
interpretation clearly benefits both parties in the grant
relationship.
The parties' grant relationship ended without termination of
these
employees. Thus, the cost of any severance pay obligation which
the
Grantee may have cannot be charged to this grant.
Conclusion
Based on the preceding analysis, we sustain the entire disallowance
of
$55,512.03.
________________________________
Cecilia
Sparks Ford
________________________________
Alexander
G. Teitz
________________________________ Norval
D.
(John) Settle Presiding Board Member
1. In its initial brief, the Grantee indicated
that this appeal
involved severance pay for "twelve individuals employed . .
. during the
period from 1974 to 1984." Bronx Brief (Br.), p. 1.
HCFA's brief and
accompanying documentation indicated that the grant project
period at
issue is December 31, 1979 through September 30, 1984. See
HCFA Br. p.
2; HCFA Exhibits (Exs.), R-1 and R-4. The Grantee did not
address this
time discrepancy in its reply brief. However, it appears
that the
Grantee was also a federal contractor, which possibly explains
its
status prior to 1979. We note that the Board's jurisdiction in
this
case does not cover any claim arising under a contract.
2. OMB Circular A-122 was incorporated by reference
in the
Department's general regulations on administration of grants, 45
C.F.R.
Part 74. See 46 Fed. Reg. 30500 (June 9, 1981) Prior to
this, the
applicable cost principles were set forth in 45 C.F.R. Part
74,
Appendix F, Section G-40. The cost principles' treatment of
severance
pay remained essentially the same during the time at issue.
3. The Grantee also argued that "some combination" of
state and
federal law mandate the payment of "severance benefits," and
asserted
that disallowing its claim would adversely affect the seniority
and
wages of the employees in question. Bronx, Br., pp. 4-5; 9.
These
arguments are irrelevant to the issue before the Board which is
whether
the Grantee's claim for severance pay may be charged to federal
funds.
Further, we note that the Grantee's personnel policy explicitly
states
that severance pay is ". . . subject to the availability of funds. .
.
." Bronx Ex. C. Thus, the Grantee's "obligation" appears to be
nothing
more than a conditional promise.
4. See Shenandoah Professional Standards Review
Foundation, DGAB No.
652 (1985), where the grantee PSRO wrote the federal
agency stating how
it planned to distribute a refund of FICA taxes. The
agency did not
reply, and the grantee claimed an employee eventually give
oral
approval. We found that the agency was not estopped; mere inaction
in
failing to reply was clearly