Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Bee Community Action Agency
DATE: July 31, 1997
Docket No. A-97-61
Control No. A-06-96-43075
Decision No. 1625
DECISION
Bee Community Action Agency (Bee) appealed a December 10, 1996
determination by the Administration for Children and Families
(ACF) disallowing $18,588 in Head Start funds claimed by Bee for
the program year ending July 31, 1995. Bee administers
individual Head Start programs in four counties in Texas. The
disallowed funding represents costs associated with the purchase
of property in Bee County. An independent audit and ACF's
investigation found both that Bee failed to obtain prior approval
for the purchase and that the property was not used for the
benefit of Bee's Head Start program. Although conceding that it
had not obtained written prior approval for the acquisition of
this land with grant funds, Bee argued that this property was
used in connection with its Head Start program.
The record in this case consists of the parties' briefs and
evidentiary submissions as well as their arguments made in a
June 26, 1997 telephone conference. 1/ Based on the record, we
sustain the disallowance in its entirety.
Background
All of Bee's grants for the period October 1, 1994 through
September 30, 1995 were the subject of an independent audit. See
Report on Audit All Grants (Audit Report) ACF Exhibit (Ex.) A.
As pertinent here, the Audit Report questioned $18,588 charged to
Head Start and identified as an expenditure for land. The Audit
Report noted that the applicable Cost Principles (Office of
Management and Budget (OMB) Circular A-122, Attachment (Att.) B,
Par. 13(c)), prohibited capital expenditures for land as a direct
cost without prior approval from the awarding agency.
Responding to this questioned cost, Bee indicated that its --
Board of Directors . . . approved the purchase
of land. . . . Bee County purchased the land
for . . . [Bee], and it was agreed that the
reimbursement would be made under the rent
category from . . . [Bee's] Head Start
Program. . . . [ACF's] field representative was
aware of the situation and saw no problems with
this . . . [transaction]; however, we did not
obtain written approval. Effective
immediately, . . . [Bee] shall ensure
compliance with . . . Circular A-122 and shall
obtain prior written approval for all capital
purchases.
ACF Ex. A at 5 (unnumbered).
ACF reviewed the Audit Report and ultimately determined that --
a capital expenditure did not occur by the Head
Start Program. The expenditure was actually
rent paid for the use of vacant property. The
Head Start Program is receiving no benefit from
the rental of this property and therefore the
costs . . . of $18,588 are disallowed.
Notice of Disallowance at 1.
However, based on its continuing investigation of this matter,
including discussions with Bee's Head Start Director and
Executive Director initiated after this appeal was filed, ACF
determined that Bee had, in fact, purchased this parcel of land
for $18,588. ACF Brief (Br.) at 2. During the telephone
conference, Bee conceded that Bee County had purchased the
property and that Bee, in turn, had purchased the property from
the County.
Parties' Arguments
In its brief as well as throughout the conference call, ACF
pointed out that Bee did not get prior approval for the purchase
of this land. ACF also pointed out that Bee had playground
equipment for the children on its original property and asserted
that the property in issue was not being used for any bona fide
purpose related to Head Start.
Speaking for Bee, the Bee County Chief Executive Officer (CEO)
2/ explained that Bee had been looking to expand its Head Start
program for some time in order to accommodate the children on its
waiting list. The property in question was adjacent to Bee's
facility and became available at a price too good to pass up.
Bee's Executive Director affirmed that Bee had been actively
looking to expand its Head Start and other programs even before
this transaction occurred. 3/ She asserted that this purchase
was properly charged to Head Start funds since all the programs
included in Bee's envisioned expansion served the same population
as Head Start. Both the Executive Director and the CEO indicated
that, while Bee had not obtained written approval for the
purchase, it had presented the idea to an ACF field
representative who approved both the purchase by Bee County on
behalf of Bee and the repayment of the purchase price by Bee from
Head Start funds.
Regarding the use of land since its acquisition, Bee noted that
the land was currently used for nature walks, picnics and fund
raising. The CEO challenged ACF to find that the playground
equipment at its current site was sufficient for an expanded Head
Start program.
In sum, Bee asserted that it was dedicated to community service
and that it could best serve the rapidly expanding county
population by expanding its programs. Bee contended that, while
it may have made procedural missteps in this instance, it had
acted in good faith and that its purchase was justified.
Analysis
Regardless of Bee's arguments, the applicable cost principles are
clear cut and require that we sustain this disallowance.
OMB Circular A-122 4/ provides:
Capital Expenditures for land or buildings are
unallowable as a direct cost except with the
prior approval of the awarding agency.
OMB Circular A-122, Att. B, Par. 13(c).
Prior approval is defined as --
securing the awarding agency's permission in
advance to incur cost for those items that are
designated as requiring prior approval by the
Circular. Generally, this permission will be
in writing. Where an item of cost requiring
prior approval is specified in the budget of an
award, approval of the budget constitutes
approval of the cost.
OMB Circular A-122, Par. 4b.
Bee conceded that it did not get written prior approval for this
cost. While Bee did allege that it had received approval from
its ACF field representative, it provided no written evidence of
this approval, nor any verification from the field representative
in question (who apparently no longer works in that position).
Moreover, as ACF noted, approval by a field representative would
not have constituted prior approval of the awarding agency as
specified in the applicable cost principle. Rather, that
approval would have had to come from the Regional Program Office.
Where prior approval is required, but not obtained, the Agency
can exercise its discretion to grant retroactive approval and
thus allow a cost to be charged to grant funds. Although Bee did
not expressly seek retroactive approval, the essential tenor of
its argument was that this purchase represented a reasonable and
allocable charge to the grant. ACF considered these arguments
and responded that it would not grant retroactive approval of
this purchase. 5/
Consistent with the cost principles found in OMB Circular A-122,
Att. A, Pars. 2-4, ACF indicated that Bee had failed to show that
the purchase of this land was either reasonable to the
performance of the award or allocable thereto. ACF Br. at 6-10.
Generally, in order to be an allowable charge to federal grant
funds, a cost must be reasonable for the performance of the grant
award and allocable thereto. OMB Circular A-122, Att. A, § A,
Par. 2a. Among other factors, 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 Par. 3a. Generally, a cost is allocable to a grant in
accordance with the relative benefits received. Id. at Par. 4a.
We agree with ACF that the expenditure at issue fails to meet
these criteria. As discussed below, this purchase simply did not
constitute a reasonable expense for the performance of Bee's Head
Start grant award in the program year in question. Specifically,
Bee took the position that it was reasonable to purchase the
property at a good price so that it would be available for the
eventual expansion of its programs. While it may be both
necessary that Bee expand and admirable that it had the foresight
to acquire what may be a "good deal" on a piece of property,
expansion, and consequently this purchase, was not part of Bee's
ongoing grant program at the time in question. As ACF noted, Bee
did not include expansion plans in its routine grant application
nor did it otherwise request such funding. See ACF Br. at 3; see
also ACF Att. 1. Moreover, even if ACF had approved the use of
Head Start funds for expansion, the cost of that acquisition
would have to be allocated to the various grant programs
benefitting from the purchase, even if, as Bee's Executive
Director asserted, the various programs were serving the same
constituency. See OMB Circular A-122, Att. A, § A, Par. 4.
Furthermore, there is no evidence that the grant benefitted from
the use of this land other than its availability for eventual
expansion. Although Bee has asserted that it currently uses the
land for picnics, nature walks and fund raising activities, those
activities hardly justify the purchase of what has been described
as an otherwise "unimproved tract of land." See Supplemental
Affidavit of Dorthy Ferguson (June 18, 1997) and accompanying
Exhibits. The type of current use of this property outlined by
Bee would appear to be the same as can be enjoyed at any
available public park land.
Bee suggested that at the time of this transaction, it had
funding available to cover this purchase. The mere availability
of grant funds does not validate any subsequent expenditure of
those funds. As discussed above, costs charged to a grant must
be reasonable for the performance of and allocable to the award.
This cost does not meet those criteria.
The fact that Bee purchased this parcel with good intentions and
that it may otherwise be an exemplary grantee is irrelevant to
the allowability of this cost as a charge to grant funds. The
facts of this case provide no justification for the expenditure
of Head Start funds for the program year ending July 31, 1995,
for acquisition of this property.
Conclusion
Based on the preceding analysis, we uphold this entire
disallowance of $18,588.
_________________________
Cecilia Sparks Ford
_________________________
M. Terry Johnson
_________________________
Donald F. Garrett
Presiding Board Member
* * * Footnotes * * *
1. This case was heard under the Board's expedited
procedures. See 45 C.F.R. § 16.12. Pursuant to those
procedures, the Presiding Board Member conducted a conference
call to hear the parties' final arguments. Id. at § 16.12(c)(2).
2. The CEO is a Judge in the County Commissioners'
Court. As Bee explained to the Board, that body is Bee's
controlling organization and approves actions taken by Bee's
Board of Directors.
3. The Executive Director identified not only Head Start
but Early Head Start and the Women, Infants and Children programs
as potential areas of expansion.
4. The cost principles set out in OMB Circular A-122 are
made applicable to Head Start grants by 45 C.F.R. § 74.174.
5. It is well-established that retroactive approval may
be granted for transactions that would have been approved had the
grantee requested approval in advance. HHS-GAM, Ch. 1-105-60,
Par. B.1; Arizona Affiliated Tribes, Inc., DAB No. 1500 at 7
(1994); New York State Dept. of Social Services, DAB No. 1394
at 33 (1993). The Board has held that in making its
determination on a request for retroactive approval, the federal
agency has considerable, although not completely unbounded,
discretion. The federal agency may consider all relevant factors
in deciding whether ultimately to grant retroactive approval
where prior approval was required but not obtained. Enterprise
for Progress in the Community, Inc., DAB No. 1558 at 17 (1996).