Chautauqua Opportunities, Inc., DAB No. 3011 (2020)

DECISION

Chautauqua Opportunities, Inc. (COI) appeals the December 27, 2018, decision of the Administration for Children and Families (ACF) disallowing $131,750 in Head Start program funding for the June 1, 2015 through May 31, 2016, period of performance.  ACF based its determination on an independent audit that found COI did not properly allocate allowable expenditures of federal funds in the proper year.  COI raises an additional issue about the timing of debt collection notices relating to the disallowance.  For the reasons discussed below, we uphold the disallowance and decline review of the debt collection notices.

Legal Background

The Head Start program, authorized under the Head Start Act, 42 U.S.C. § 9801 et seq., as amended, provides comprehensive early child education, nutrition, and health services to low-income children and their families.  The recipient of a Head Start grant must (with some exceptions not relevant here) comply with the uniform grant administrative requirements at 45 C.F.R. Part 75.  See 45 C.F.R. §§ 75.100, 75.101(b)(1), 75.300(b) 75.400.1

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The Part 75 regulations provide that a Head Start grantee will receive discrete annual “federal awards,” with each award corresponding to a specific “period of performance.”  See Loving Arms Learning Ctr., DAB No. 2921, at 2 (2019).  “‘Period of performance’ means the time during which the non-Federal entity [i.e., grantee] may incur new obligations to carry out the work authorized under the Federal award.”  45 C.F.R. § 75.2 (definitions) (italics omitted).  A notice of award “must include start and end dates of the period of performance.”  Id. (citing §§ 75.210(a)(5) and 75.352(a)(1)(v)).

The term “obligations” means “orders placed for property and services, contracts and subawards made, and similar transactions during a given period that require payment by the non-Federal entity during the same or a future period.”  Id. § 75.2.  An award recipient “may charge to the Federal award only allowable costs incurred during the period of performance” and any authorized pre-award costs.  Id. § 75.309(a).2

A Head Start grantee must undergo an annual audit by an independent auditor to determine if the grantee is operating in compliance with federal regulations and appropriate financial and administrative procedures and controls.  45 C.F.R. § 75.501.  The grantee must promptly follow up and take corrective action on audit findings.  Id. §§ 75.508(c); 75.511(a). 

If a grantee fails to comply with federal laws, regulations, or the terms and conditions of its award, the awarding agency may, as appropriate, disallow the cost of the activity or action not in compliance.  See 45 C.F.R. § 75.371(b); see also Loving Arms, DAB No. 2921, at 5 (upholding disallowance where grantee made charges to Head Start award for costs incurred outside of the specified period of performance).

Case Background

COI, a nonprofit corporation, operates Head Start and Early Head Start programs in New York.  The programs were funded, in part, with awards issued by ACF’s Office of Head Start on an annual basis.  In June 2014, ACF awarded federal funding to COI for the budget period (i.e., period of performance) July 1, 2014 through May 31, 2015 (Year 1).  See ACF Supp. Ex. 1, Notice of Award (No. 02CH3064-01-00).3  The Year 1 notice of award included a budget, itemizing each category of approved expenses for a total

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approved budget of $5,240,390.  Id. at 1.  The notice of award explained that the next budget period for this grant would be from June 1, 2015 through May 31, 2016.  Id. at 3.

In May 2015, ACF awarded federal funding to COI for the budget period (i.e., period of performance) June 1, 2015 through May 31, 2016 (Year 2).  See ACF Supp. Ex. 2, Notice of Award (No. 02CH3064-02-00).  The Year 2 notice of award also included a budget, itemizing each category of approved expenses for a total approved budget of $5,527,181.  Id. at 1.  The Year 2 notice of award specified that “[t]his grant is subject to the requirements as set forth in 45 CFR Part 75.”  Id. at 3.

Pursuant to the Single Audit Act, 31 U.S.C. §§ 7501-7506, an accounting firm conducted an independent audit of COI’s financial statements and supplementary information for the fiscal years ended October 31, 2015 and 2014.  ACF Ex. 1, Audit Report (Feb. 22, 2016).4  Regarding COI’s Head Start program, the auditors found the following condition:

Certain costs incurred and obligated in the prior year award budget period of 7/1/14 – 5/31/15 under Award No. 02CH3064/01 were transferred and reported as costs under 02CH3064-02-00 (budget period 6/1/15 – 5/31/16).  Such costs would have otherwise been allowable under 02CH3064/01 except that the costs were in excess of the funds awarded for the budget period of 7/1/14 – 5/31/15. 

ACF Ex. 1 at 33; COI Ex. A.5

The auditors reviewed seven journal entries showing that COI incurred $131,750 in costs during the Year 1 budget period in excess of the Year 1 approved budget.  Id.; see also ACF Ex. 2, Journal Entries.  The auditors found that COI “transferred” those excess costs in the amount of $131,750 to the Year 2 budget period.  ACF Ex. 1 at 33; COI Ex. A.  The auditors concluded, based on “[f]ederal regulations,” that the “transferred” amount may be “subject to disallowance.”  Id.

According to the audit report, COI officials had interpreted 2 C.F.R. § 200.405 as permitting the transfer of costs to the subsequent budget period.  Id.  The responsible COI officials reported that they had since “received further guidance regarding Section 200.405 of the costs we transferred and understand why their benefit went beyond one contract year and are thus ineligible for this interpretation.”  Id.

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By letter dated September 16, 2016, the Office of Inspector General (OIG) notified COI that it had completed its initial review of the audit report and found the audit satisfied federal requirements.  COI Ex. B at 1.  OIG further explained that a final determination with respect to corrective actions would be made by ACF.  Id.

By letter dated December 27, 2018, ACF notified COI that it was disallowing $131,750 based on the auditor’s findings.  See COI Ex. D.  The disallowance letter stated in pertinent part:

The auditors determined that [COI] did not properly allocate allowable expenditures of Federal funds in the proper year.  Certain costs were incurred and obligated in the previous budget period, June 1, 2014 [sic6] through May 31, 2015 (year 1), and then were transferred under seven journal entries and reported as costs in the following budget period, June 1, 2015 through May 31, 2016 (year 2).  The costs would have been allowable if charged to the year 1 budget period, except the costs exceeded the amount of funds awarded for year 1.

Id. at 1.  ACF disallowed the questioned costs as determined by the auditor because the “transfer of costs incurred under the year 1 grant award to the subsequent year 2 grant award violated” federal regulations and cost principles.  Id. at 2. 

ACF directed COI to repay the total disallowed amount within 30 days and advised COI of its appeal rights.  Id. at 2-3.  ACF further explained that if the disallowed amount was not paid in full, interest and penalties would be assessed on the amount unpaid from the date of the disallowance letter.  Id. at 4 (citing 45 C.F.R. § 30.18).

On January 29, 2019, COI appealed the disallowance.  Notice of Appeal (NA).  In its Notice of Appeal, COI conceded that it purchased the following items during the Year 1 budget period (i.e., period of performance) and later “moved” these expenses via journal entries to the Year 2 budget period:

$ 33,600.00   Smart Board Purchase/Installation
$ 24,209.00   Common Core Supplies
$ 40,137.00   Classroom Supplies
$ 29,803.02   CDA Trainings
$   2,254.64   Food & Snacks for Training Events
$   1,746.34   Diapers
$ 131,750.00 Total 

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NA at 2; see also COI Br. at 2-4; ACF Ex. 2, Journal Entries.  COI does not dispute the auditor’s finding that these purchases exceeded the approved budget in Year 1.7

COI acknowledges “that allowable costs resulting from obligations must be incurred during the funding period,” but asks the Board to consider “other factors.”  NA at 1.  First, COI explains that although the items in question were purchased during the Year 1 budget period, the items were not used until the Year 2 budget period and, therefore, the expenses were “correctly allocated to the budget year in which [COI] benefitted from their purchase.”  NA at 2.  Second, COI argues that its program was “underspent” in Year 2 even after it “moved” the excess costs to the Year 2 budget period.  Third, COI asserts that it has taken corrective action in response to the audit and “no further incidents” have occurred.  Id.; see also COI Ex. C.     

Analysis

1.  COI has not satisfied its burden of demonstrating that the disallowed amount of $131,750 is allowable.

In reviewing a disallowance, “the Board is ‘bound by all applicable laws and regulations.’”  Middletown Cmty. Health Ctr., Inc., DAB No. 2754, at 6 (2016) (quoting 45 C.F.R. § 16.14).  “The Board is empowered to resolve legal and factual disputes and has no authority to waive a disallowance.”  Id.  The Board must uphold a disallowance if “the disallowance ‘is authorized by law and the grantee has not disproved the factual basis for the disallowance.’”  Id. (citing S.A.G.E. Commc’ns Servs., DAB No. 2481, at 5-6 (2012)).  Indeed, “it is a fundamental principle of grants management that a grantee … bears the burden of demonstrating the allowability and allocability of costs for which it received federal funding.”  Bright Beginnings for Kittitas Cty., DAB No. 2623, at 5 (2015) (quoting Marie Detty Youth & Family Servs. Ctr., Inc., DAB No. 2024, at 3 (2006)). 

ACF based the disallowance on its determination that COI violated federal regulations and cost principles when it transferred costs incurred under the Year 1 award to the subsequent Year 2 award.  COI Ex. D at 2.8  The applicable regulations make clear that a

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grantee “may charge to the [f]ederal award only allowable costs incurred during the period of performance.”  45 C.F.R. § 75.309(a)  (emphasis added).  COI concedes that it incurred the obligations at issue during the Year 1 period of performance (sometimes called a “budget period” or “funding period”) that ran from July 1, 2014 – May 31, 2015.  ACF Supp. Ex. 1; COI Br. at 2-3.  COI further concedes that it subsequently charged those costs to the Year 2 award, which had a period of performance of June 1, 2015 – May 31, 2016.  ACF Supp. Ex. 2; COI Br. at 8.

“[T]he Board has long upheld disallowances based on the principle that ‘grant funds earmarked for one funding period may not be used to pay costs incurred outside that period.’”  Loving Arms, DAB No. 2921, at 4-5 (citing Teaching & Mentoring Communities, Inc., DAB No. 2790,at 10 (2017); Council for the Spanish Speaking, Inc., DAB No. 2718, at 6 (2016);andCent. Piedmont Action Council, Inc., DAB No. 1916, at 3 (2004)); see also Kids Central, Inc., DAB No. 2897, at 8 (2018) (disallowing funds spent “in one funding period to pay for costs incurred in the prior funding period”); William Smith, Sr. Tri-Cty. Child Dev. Council, Inc., DAB No. 2647, at 5-6 (2015) (same).

Notwithstanding the plain language of 45 C.F.R. § 75.309(a), 2 C.F.R. § 200.309(a), and Board precedent, COI claims it interpreted 2 C.F.R. § 200.405 (“Allocable Costs”) as permitting the transfer of expenses incurred during the Year 1 budget period because the “items purchased were for the sole purpose of benefitting” the children and staff in Year 2.  COI Br. at 7-8.9  COI focuses on the language providing that “[a] cost is allocable to a particular Federal award or other cost objective if the goods or services involved are chargeable or assignable to that Federal award or cost objective in accordance with relative benefits received.”  Id. at 6 (quoting 2 C.F.R. § 200.405(a)), 7-8; see also 45 C.F.R. § 75.405(a). 

COI’s interpretation of § 200.405(a) and the term “benefit” is without merit and contrary to Board precedent. 

The term “benefit,” as used in connection with the concept of allocability, derives from accounting principles that the costs must relate not only to cost objectives, but to funding periods as well.  The fact that expenditures are incurred outside their grant periods necessarily means that they are not allocable to the grants and is a sufficient basis in itself for a disallowance.

River East Econ. Revitalization Corp., DAB No. 2087, at 6 (2007) (citations and internal quotations omitted); see also Cent. Piedmont, DAB No. 1916, at 3 (“Grant expenditures incurred outside of the applicable budget periods are not allocable to awards for those

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budget periods, and this violation of the requirement of allocability is a basis for a disallowance.”).

Indeed, the same regulation relied upon by COI expressly prohibits the very conduct COI engaged in here: 

Any cost allocable to a particular Federal award under the principles provided for in this part may not be charged to other Federal awards to overcome fund deficiencies, to avoid restrictions imposed by Federal statutes, regulations, or terms and conditions of the Federal awards, or for other reasons.

45 C.F.R. § 75.405(c); 2 C.F.R. § 200.405(c).  In other words, the costs allocable to the Year 1 award may not be charged to the Year 2 award to overcome fund deficiencies in Year 1.  See Cent. Piedmont, DAB No. 1916, at 4 (“Costs arising in a particular program year are allocable to the award for that year, and not to the awards for other years.”).

Recognizing this prohibition, COI points out that § 200.405(c) contains the following exception:

[T]his prohibition would not preclude the non–Federal entity from shifting costs that are allowable under two or more Federal awards in accordance with existing Federal statutes, regulations, or the terms and conditions of the Federal awards.

45 C.F.R. § 75.405(c); 2 C.F.R. § 200.405(c); see COI Br. at 8.  The problem for COI is that the questioned costs were not “allowable under two or more Federal awards in accordance with existing Federal statutes, regulations, or the terms and conditions of the Federal awards.”  Id.  For a cost to be allowable, among other requirements, it must be allocable to the award.  See 45 C.F.R. § 75.403(a).  As we have explained, because the Year 2 award specified a period of performance of June 1, 2015 – May 31, 2016, the costs incurred by COI in Year 1 were not allocable to the Year 2 award.  Accordingly, the costs incurred by COI in Year 1 were not “allowable” under the Year 2 award and could not be shifted.  See also 45 C.F.R. § 75.309(a) (“A non-Federal entity may charge to the Federal award only allowable costs incurred during the period of performance . . . .”); 2

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C.F.R. § 200.309 (same).10

In a further attempt to justify the transfer of costs incurred in Year 1 to the Year 2 award, COI points to 2 C.F.R. § 200.405(d), which states as follows:

If a cost benefits two or more projects or activities in proportions that can be determined without undue effort or cost, the cost must be allocated to the projects based on the proportional benefit.

45 C.F.R. § 75.405(d); 2 C.F.R. § 200.405(d); see COI Br. at 8.  Relying on this language relating to “direct cost allocation principles,” COI claims that it allocated costs based on their “proportional benefit” when it allocated “a portion of the bulk purchase of consumable supplies” to Year 2.  COI Br. at 8. 

COI, however, presented no evidence of any allocation of costs based on their “proportional benefit” among two or more “projects.”  As specified in the notices of award, COI received federal funds for its “Head Start” and “Early Head Start” program.  ACF Supp. Exs. 1, 2.  Based on the evidence in the record, this was a single project with a five-year project period and the only project or program to which COI charged the costs at issue.  ACF Supp. Ex. 1 (specifying project period from 7/1/2014 – 6/30/2019); ACF Supp. Ex. 2 (same).  This simply is not a case involving the proportional allocation of shared costs between two or more projects.

COI’s argument appears to be based on an assumption that each “period of performance” for each award is a separate “project.”  There is, however, no support in the regulations or prior Board decisions for this assumption.  The language in 2 C.F.R. § 200.405(d) (applicable here under 45 C.F.R. § 75.405(d)) identifies principles for allocating shared direct costs between two or more projects.  See Child Care Assocs., DAB No. 2739 (2016) (noting, in case involving allocation of costs among Head Start and non-Head Start programs (i.e., different projects), that § 75.405(d) expresses basic allocation principles for shared costs).  Sections 200.405(d) and 75.405(d) reflect a basic principle of cost allocation—where a grantee “incurs costs that support or benefit more than one … program, the costs generally must be allocated to each program in proportion to the benefits that each derives from the activity that generated the costs.”  Ohio Dep’t of Job

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& Family Servs., DAB No. 2643, at 5 (2015).  Both this principle and sections 200.405(d) and 75.405(d) are inapplicable here, where COI purports to allocate costs, not among different programs or projects, but among discrete annual “federal awards” for the same program, where each award has a specific “period of performance.”  See Loving Arms at 2; see also Teaching & Mentoring at 9 (“To operate a Head Start program, a grantee receives discrete annual federal ‘awards,’ with each award corresponding to a specified ‘funding period,’ also known as ‘budget period.’”).  The Board declines to interpret each period of performance under each annual award as a separate “project” for purposes of 2 C.F.R. § 200.405(d) or 45 C.F.R. § 75.405(d).

COI acknowledges it may have misinterpreted the regulations, but argues that its “good faith” interpretation of 2 C.F.R. § 200.405, and “firm[] belie[f]” that expenses were correctly allocated, somehow excuse any violation of the regulations.  COI Br. at 7; NA at 1-2.  Even assuming COI’s violation was unintentional and based on a misunderstanding, this provides no basis for overturning the disallowance.  See Bright Beginnings for Kittitas Cty., DAB No. 2608 at 5-6 (2014) (rejecting argument that violation of 45 C.F.R. § 74.28 was unintentional and should be excused due to grantee’s misinterpretation of the term “obligations”).  Indeed, as a Head Start grantee, COI is “responsible for knowing the legal requirements governing its use of the federal grant funds it receives.”  Id. at 6. 

COI further argues that even after it “moved” $131,750 in costs to Year 2, its program “was still underspent” in Year 2.  NA at 2; COI Br. at 4, 8.  COI provided no evidence that its program was “underspent” in Year 2.  Even if it had provided such evidence, this is an equitable argument and not a basis for overturning a legally justified disallowance.  The Board is “bound by all applicable laws and regulations,” 45 C.F.R. § 16.14, and is not empowered to reverse a disallowance based on equitable arguments.  See Kids Central, Inc., DAB No. 2897, at 15 (collecting cases). 

COI further argues that it reviewed and revised its procedures after the audit and had “no further incidents.”  NA at 1, 2; COI Br. at 4, 8.  COI’s implementation of a corrective action plan in response to audit findings was not optional or voluntary, but required by federal regulations.  See 45 C.F.R. §§ 75.508(c), 75.511(a).  Moreover, the implementation of a corrective action plan to prevent future regulatory violations provides no basis to reverse the disallowance.  See Bright Beginnings, DAB No. 2608 at 7 (rejecting grantee’s equitable waiver argument based on its “proactive response to prevent future [audit] findings or deficiencies”). 

Finally, COI complains about the length of time that ACF took to determine and notify COI of the disallowance.  COI Br. at 6, 9.  The OIG completed its initial review of the audit report in September 2016.  COI Ex. B.  ACF issued the disallowance letter on December 27, 2018, including its written demand for payment in accordance with 45 C.F.R. § 30.11.  COI Ex. D.  COI failed to show the delay between the audit finding and

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disallowance letter violated any statute or regulation.  COI also made no showing that any delay resulted in any harm.  Indeed, no interest or penalty accrued before the date of the disallowance letter.  See 45 C.F.R. § 30.18(b)(1) (“Interest shall accrue from the date of delinquency…. For debts not paid by the date specified in the written demand for payment …, the date of delinquency is the date of mailing of the notice.”).11

To the extent COI contends ACF should be estopped from disallowing costs due to the passage of time, we reject that argument.  “There can be no estoppel absent the traditional requirements of a misrepresentation of fact, reasonable reliance, and detriment to the opposing party.”  Northstar Youth Servs., Inc., DAB No. 1788, at 9-10 n.4 (2001) (citing Heckler v. Cmty. Health Servs. of Crawford Cty., Inc., 467 U.S. 51, 59 (1984)).  “Moreover, estoppel against the federal government, if available at all, is presumably not available absent affirmative misconduct by the federal government.”  Id. (citing Schweiker v. Hansen, 450 U.S. 785 (1981)); see also Bright Beginnings, DAB No. 2623, at 8 (rejecting estoppel argument where grantee made no showing of affirmative misconduct by ACF or its employees).  Here, there is no evidence supporting the traditional elements of equitable estoppel, much less affirmative misconduct by ACF. 

In this case, there is no dispute that COI incurred obligations in the Year 1 performance period that it charged to the Year 2 award after exceeding the approved budget in Year 1.  This is not permitted under federal regulations.  We find no reason to disturb ACF’s disallowance.

2.  The Board declines review of the debt collection notices.

In its brief, COI reports that it only learned of the disallowance on January 15, 2019, “yet a debt collection letter … was received on February 15, 2019 with a payment due date of December 27, 2018,” and claims that “[n]o time was given to make a payment prior to being charged with interest and penalties.”  COI Br. at 9.  In a subsequent submission, COI explains that the disallowance letter, dated December 27, 2018, directed ACF to repay the debt within 30 days of the date of the letter or to request a repayment plan within 15 days.  COI Response to ACF Submission (July 14, 2020) at 2; see also COI Ex. D at 2-3.  COI complains that it did not have enough time to comply with either directive.  COI Response to ACF Submission at 2.  ACF presented evidence demonstrating that COI received the disallowance letter by mail on January 11, 2019.  See ACF Supp. Ex. 3, USPS Tracking.  COI denies receipt of the letter before January 15, 2019, and alleges that the envelope for the letter was internally date-stamped

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“received” on January 15, 2019.  COI Response to ACF Submission at 2.  COI did not submit evidence of this contention.  COI’s appeal was timely filed on January 29, 2019.12  COI submits two debt collection notices issued by the HHS Program Support Center (PSC), the first one being issued on January 30, 2019.  COI Ex. E, Notice dated Jan. 30, 2019; COI Ex. F, Notice dated Mar. 8, 2019.

“The Board has consistently ruled that matters relating to repayment of a valid debt arising from a disallowance … are outside its scope of review under 45 C.F.R. Part 16.”  Teaching & Mentoring at 8 (collecting cases).  The Board’s jurisdiction is limited and, in this case, extends only to the programs and types of “final written decisions” specified in 45 C.F.R. Part 16, Appendix A.  See 45 C.F.R. § 16.3(a) (providing for Board review in disputes arising under programs which use the Board for dispute resolution, as explained in Appendix A).  The types of reviewable final written decisions in “direct, discretionary project programs,” such as Head Start, are specified in Part 16, Appendix A ¶ C.  The debt collection notices issued by PSC do not fall within any of the types of final written decisions reviewable by the Board.  See 45 C.F.R. Part 16, App. A, ¶ C.  The Board, therefore, declines to review COI’s objection to the debt collection notices issued by PSC.  See, e.g., Tri-Cty. Child Dev. Council, Inc., DAB No. 2647, at 8‑9 (Board lacked authority to review ACF’s findings concerning accounting and financial management practices because they were not the type of final written decisions specified in Appendix A); see also White Mountain Apache Tribe, DAB No. 1787, at 5 (2001) (holding that 45 C.F.R. Part 30 establishes a “separate process” to resolve disputes about how a debt arising from a disallowance should be repaid and rejecting a request to waive interest on disallowed amount).

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Conclusion

For all of the foregoing reasons, we sustain ACF’s disallowance of $131,750 in its entirety and decline review of the debt collection notices.