Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Lorain County
DATE: September 19, 1990
Community Action Agency Docket No. 90-137
Decision No. 1196
DECISION
The Lorain County Community Action Agency (LCCAA) appealed a
disallowance by the Office of Human Development Services (OHDS) of
$16,977 in unallowable costs based on an audit report for the year ended
July 31, 1989. This amount represented the excess of rental costs
claimed over the allowable costs of ownership. LCCAA admitted in its
notice of appeal that the disallowance "was issued in accordance with
the prevailing regulations." Nevertheless, LCCAA requested that the
Board permit an exception under 45 C.F.R. 74.6. For the reasons
discussed below, we have determined that the Board does not have the
authority to grant the relief sought by LCCAA, and we uphold the
disallowance in full.
Background and Procedural History
LCCAA, a Head Start grantee, purchased a facility in which it had been
leasing space. LCCAA argued that this acquisition served program
objectives by allowing continuity and guaranteeing suitable facilities
and furthermore was more economical than any rental options. LCCAA
claimed "rental costs" for the facility at rates it considered
reasonable for the market. OHDS disallowed these costs to the extent
that they exceeded allowable acquisition costs, which do not include
mortgage interest, arguing that the regulations did not allow grantees
the option of recovering costs more quickly by structuring a
less-than-arm's-length rental. OHDS insisted that the merits of LCCAA's
decision to purchase were irrelevant.
In its acknowledgment of the appeal, the Board pointed out that it is
bound by all applicable regulations, citing 45 C.F.R. 16.14. We
directed LCCAA to show cause why a summary decision denying the appeal
should not be issued. LCCAA responded by letter that its request was
based "upon the premise that the cost principles were designed to cover
most situations," and that in this case an exception should be requested
by the federal agency because of the "highly unusual circumstances."
Letter from LCCAA to the Board, dated July 26, 1990, at 1.
The Board then issued an Order to Develop the Record, requesting OHDS to
indicate whether any alternative method would permit LCCAA to recover
its costs more quickly; if so, what showing LCCAA must make; and if not,
whether OHDS should seek an exception from the Office of Management and
Budget (OMB) on LCCAA's behalf. OHDS replied by letter that no
alternative existed permitting a faster recovery of LCCAA's costs and
that a request to OMB was highly unlikely as "national policy is one of
adherence to OMB Circular A-122." Counsel for LCCAA declined to respond
further to the OHDS submission. We find that no purpose would be served
by further proceedings and now proceed to a decision based on this
record.
Discussion
LCCAA conceded that OMB Circular A-122, "Cost Principles for Nonprofit
Organizations," applied to its grant. The principles are incorporated
in Subpart Q of Part 74 of 45 C.F.R., "to be used in determining
allowable costs of activities conducted by nonprofit organizations . .
." 45 C.F.R. 74.174(a). Two sections in OMB Circular A-122, Attachment
(Att.) B address how grantees may recover the costs of their facilities.
Section 9 provides two ways for grantees to recover costs of facilities
they acquire, by claiming depreciation or a use allowance to compensate
them for the use of their facility for the benefit of the program.
However, interest on capital borrowed to acquire the property is
expressly excluded from any cost recovery method, regardless of how it
is represented, by Section 19(a) of OMB Circular A-122, Att. B. Section
42 sets out guidelines for grantees renting facilities. It specifies
that, under any less-than-arm's-length arrangement, rental costs are
limited to the costs that would be recoverable by the grantee as owner,
which simply returns us to the constraints of Sections 9 and 19(a).
We considered these regulations in Texas Migrant Council, DAB No. 842
(1987). There, too, a nonprofit organization operating Head Start
centers purchased facilities and claimed rental charges below market
rates but above the allowable ownership costs. There, too, the purchase
option was alleged to benefit the program and save money over rental
alternatives. We held that "rental costs incurred in almost any
circumstance other than an arms- length transaction are not allowable to
the extent that those costs exceed the costs of depreciation or use . .
." Id. at 4. 1/ Furthermore, we have previously rejected the use of
"rental" arrangements to evade regulations prohibiting claims for
mortgage interest. Social Science Education Consortium, Inc., DAB No.
163 (1981). We are bound by unambiguous regulations prohibiting federal
payment of mortgage interest without regard to equitable arguments.
Anchorage Neighborhood Health Center, DAB No. 567 (1984).
LCCAA requested an exception to the cost principles under 45 C.F.R.
74.6(d), which provides that deviations from Subpart Q in individual
cases may be made only when authorized by the head of the granting
agency or officials designated by formal agency procedures, in this case
OHDS. "In order to maintain uniformity to the greatest extent feasible,
deviations shall be kept to a minimum." 45 C.F.R. 74.6(b). No
deviation may be permitted unless it is "necessary to meet programmatic
objectives, or to conserve grant funds, or when it is otherwise
essential in the public interest." Id. OHDS indicated that LCCAA's
situation does not meet these criteria, relying on its policy as stated
in Texas Migrant Council that:
rental charges in excess of the actual costs of ownership would be
"profit" and would be contrary to the underlying theory of the cost
principles . . . . HHS's policy is to avoid any possibility of
impropriety because of self-dealing in setting rent for
grantee-owned facilities, even if, in some cases, that resulted in
higher overall costs.
Texas Migrant Council at 6-7 (citation omitted). The circumstances on
which LCCAA relied in its submissions amount to the assertion that
purchase of the facilities was economical and benefitted the program.
Even if true, this showing does not sufficiently demonstrate that a
deviation would be necessary for the program or essential to the public
interest, rather than simply convenient or beneficial. OHDS's concern
about the risks of self- dealing is an adequate basis to reject the
possible economic savings. Since the decision of OHDS to deny the
requested deviation is reasonable and consistent with practice in prior
cases, we find that the denial is not arbitrary or capricious.
Even if OHDS had been amenable to granting a deviation, the provisions
from which LCCAA sought to be excused are part of OMB Circular A-122,
which provides that exceptions to its requirements must be sought
ultimately from OMB. Exceptions may be granted only "when permissible
under existing law . . . [and], in the interest of achieving maximum
uniformity . . . will be permitted only in highly unusual
circumstances." OMB Circular A-l22, Paragraph 8. We have held that
"these exceptions can only be granted if consistent with a deviation
under 45 CFR 74.6," since that regulation is part of the existing law to
which the Circular refers. Texas Migrant Council at 6. LCCAA has not
demonstrated any circumstances unusual enough to overcome the preference
for maximum uniformity, so there is no reason to believe that OMB would
grant an exception even if OHDS had not already indicated its refusal to
seek one from OMB on LCCAA's behalf.
Finally, regardless of how compelling a presentation LCCAA might make of
the merits of ownership and the hardships of complying with the cost
principles in recovering its cost, the Board still would be unable to
grant the remedy which LCCAA seeks. We are bound by all applicable
regulations and have no authority to grant deviations or exceptions or
to substitute our judgment for those designated by law to decide such
requests, i.e. officials of OHDS and OMB. 2/ Conclusion
For the reasons explained above, we uphold the disallowance in full.
_________________________ Judith A. Ballard
_________________________ Donald F. Garrett
_________________________ Norval D. (John)
Settle Presiding Board Member
1. We referred to the regulations in force at the time of the claims
involved but noted that they were "virtually identical in all relevant
parts" to OMB Circular A-122, Att. B. Id.
2. While OHDS argued that this case should be dismissed for lack of
jurisdiction, we find that we do have jurisdiction to hear this appeal
under 45 C.F.R. Part 16, Appendix A, (C)(a)(1). While we agree that it
is not within our discretion to grant the requested relief, we view this
issue "as a matter of remedy, not of jurisdiction." Sumter County
Opportunity, Inc., DAB No. 112 (1980) at