GAB Decision 720
January 30, 1986
New York City Human Resources Administration;
Ballard, Judith A.; Teitz, Alexander G. Garrett; Donald F.
Docket No. 84-206; Audit Control No. 02-35063
The New York City Human Resources Administration (the City, Grantee)
appealed the disallowance of the Regional Office of the Office of Human
Development Services (OHDS, Agency) of $620,622 under the City's Head
Start grant. This disallowed amount represented certain "accounts
receivable" held by the City's Head Start program on January 31, 1982.
The Agency characterized the accounts receivable as the excess of
cash
advances to delegate agencies over their reported expenditures and
took
the disallowance because it found that these accounts
receivable
represented federal grant funds exceeded the amount to which the
City
was entitled and that were uncollectible from the delegate agencies
and
properly characterized as bad debts.
The City appealed the disallowance primarily on the basis that under
the
City's financial system the accounts receivable were owed to the
City
not the Agency. For the reasons discussed below, we uphold
the
disallowance in full.
Background
The New York City Human Resources Administration is the Head Start
grantee
for the City of New York and receives grant funds from the
Federal
Government. For the year in question, the City contracted with
69
delegate agencies that provided Head Start services to
elligible
recipients. Each agency submitted monthly requests for funds
to pay its
operating expenses based on its estimated expenditures and
was
responsible for spending the funds for Head Start purposes.
When
delegate agencies had cash advances in excess of expenditures for
a
grant period, the excess advances became accounts receivable to
the
grant program subject to recovery by the City.(2)$% Several
audit
reports in the record indicated accounts receivable from the
City's
delegate agencies had increased from one year to the next for the
period
prior to the disallowance. The audit for the Head Start program
for the
year ended January 31, 1978 showed accounts receivable of
$181,023. The
audits for the years ended January 31, 1979 and 1980
showed that the
accounts receivable had increased to $250,983 and $303,166
respectively.
In conjuction with the process of finalizing the audit report for the
year
ended January 31, 1980, the Agency on October 19, 1982 (Agency's
exhibit D)
and March 23, 1983 (Agency's exhibit F) requested further
information
regarding the status of the accounts receivable and the
progress made towards
liquidating them. Although the City indicated
that it had been
intensifying its efforts to close these accounts,
(Agency's exhibit F) there
is nothing in the record showing that the
City provided the requested
information. On February 13, 1984, the
Agency informed the City that
(1) it was closing the audit for the year
ended January 31, 1980, but the
accounts receivable issue remained open,
and (2) it would continue to monitor
the City's progress in liquidating
the accounts receivable. Agency's
exhibit H.
The audit report for the year ended January 31, 1981 showed
accounts
receivable of $321,693. Agency's exhibit I. By letter
dated October
27, 1983, the Agency requested that the City advise it of the
status of
administrative actions to recoup these accounts receivable.
The City
stated, in a February 8, 1984 letter, that some accounts receivable
had
been recouped and that further actions would be taken to recoup
the
remainder. The City's July 3, 1984 letter stated that the
accounts
receivable balance was $127,961 as of January 31, 1984.
However, the
City did not provide evidence of any recovery of funds.
On August 1, 1984, the Agency informed the City that it would advise
the
City of its decision concerning the remaining uncollected
accounts
receivable as part of the Agency's review of the audit for the
year
ended January 31, 1982. City's exhibit 5. The audit report
for that
year showed $620,622 in accounts receivable /1/ and noted that (1)
many
receivables had (3) been outstanding for several years, raising
serious
doubts as to their collectibility, and (2) delegate agencies were
paid
funds due them for a current year, even though they owed funds from
a
prior year. The Agency then took a disallowance of $620, 622 for
the
reasons stated below.
Agency's authority to reclaim unexpended grant funds
In an earlier case involving a different Head Start grantee, the
Board
held that the Agency has the authority to require that a grantee
account
in cash for "accounts receivable" to the extent that grant funds
were
received and not accounted for through allowable costs actually
paid.
Economic Opportunity Council of Suffolk, Inc., Decision No. 679,
August
12, 1985. The grants administration regulation relied on in
Suffolk
also applies here. That regulation provides:
For each grant, the following sums shall constitute a debt or
debts
owed by the grantee to the Federal Government, and shall, if not paid
on
demand, be recovered from the grantee . . .
(a) Any grant funds paid to the grantee by the Federal
Government in
excess of the amount to which the grantee is finally determined
to be
entitled under the terms of the grant; . . . .
45 CFR 74.112. /2/
We noted in Suffolk that the principle embodied in the regulation
was
fundamental and applied to circumstances beyond grant closeout.
In
particular, we stated:
. . . grantees are not permitted to retain federal grant funds
in
excess of what is authorized for, and actually expended for,
program
purposes. See, e.g., 45 CFR 74.611(c) and (e); and 45 CFR
Part 74,
Subpart I. While a "debt" requiring a refund of federal funds
may arise
at the time of grant closeout, a grantor agency may also require
refund
of federal funds in other circumstances. See 45 CFR 74.112(b)-(
e);
see also 47 Fed. Reg. 20028 (May 10, 1982). (p. 6)
While the accounts receivable in Suffolk involved transfers to
agencies
administering programs other than Head Start, we see no reason why
the
same principle would not also apply to (4) accounts receivable owed
by
Head Start delegate agencies. As we discuss below, the City
is
accountable for funds provided to delegate agencies in the same way
the
City is accountable for funds that the City itself expends for
grant
purposes. Indeed, the City did not contest that the Agency may
reclaim
unexpended federal grant funds provided to the City under the Head
Start
program. Rather the City made two arguments on appeal which we
address
below. The two arguments were that (1) the City is not
accountable for
the accounts receivable because they are owed to the City not
the
Agency, and (2) the accounts receivable were eliminated by
delegate
agency expenditures, payments, and accounts payable.
Do the accounts receivable represent City funds or Agency funds?
The City's first argument was that the disallowance should be
reversed
because the moneys advanced to the delegate agencies were City funds
not
federal grant funds. Therefore, the accounts receivable were owed
to
the City and not the Agency.
The City explained its position by describing a two track system by
which
the Head Start program daily operation is funded. The City
asserted
that because federal grant funds are not available to the
delegate agencies
providing the services when the grant period starts,
the City advances City
funds to the delegate agencies based on their
anticipated expenses. The
City maintained that this was the first track
of its system for financing
Head Start.
The City maintained that, under the second track of the system,
the
federal grant funds are initially drawn down under the City's
federal
letter of credit and deposited in a special City bank account to
keep
them separate from City funds. The Head Start monies are
transferred to
the City treasury only when the delegate agencies submit
documentation
of actual expenditures. Thus, the City maintained that it did
not
actually receive grant monies until claims were made by the
delegate
agencies for grant expenditures. Consequently, the City took
the
position that the acounts receivable had to be owed to the City not
the
federal government, because no federal funds were ever advanced to
the
delegate agencies and because the City itself did not receive
funding
from its special account until actual expenditures had been incurred
by
delegate agencies.
In further support of its position, the City asserted that the
accounts
receivable had to be owed to the City because all grant years prior
to
the year ended January 31, 1980 had been designated "closed"
following
audit and excess funds reprogrammed to subsequent years or returned
to
the Agency. The City cited letters from the Agency that closed
out
grant(5) years ended January 31, 1980 and 1981 without referring to
the
existence of accounts receivable. City's exhibits 4 and 5.
For the
year ended January 31, 1982, the City claimed that the Agency
had
acknowledged that all grant funds had been accounted for (although
the
City did not indicate how that acknowledgment was
manifested).
Therefore, concluded the City, since the financial relationship
between
the Agency and the City has been closed for these grant years,
the
accounts receivable in existence must represent funds from the
City
treasury.
The City, in its reply brief, attempted to illustrate its position
using
the example of its year ended January 31, 1981 (program year 15).
The
authorized grant funds for that year were $25,795,504.
Final
expenditures were $22,341,420 leaving a fund balance of grant funds
of
$3,454,084. The City noted that the Agency found that the City had
a
balance of accounts receivable owed by delegate agencies, in the
amount
of $436,890 for program year 15.
The City stated that if the Agency had requested refund of all
unused
federal funds for program year 15, the City would have returned
the
entire unobligated balance of $3,454,084. The City then argued that
its
not having collected the $436,890 in program year 15 accounts
receivable
would not change the amount that the City had to return to the
federal
government. It is on this basis that the City maintained that
the
accounts receivable must be due the City and not the Agency. The
City
stated that, in fact, it was allowed to carry over the
unobligated
balance into subsequent years demonstrating that the City was
permitted
to retain the unobligated balance.
Analysis
The fundamental difficulty with the City's two track argument is that
it
misconstrues the nature of the City's accountability for federal
grant
funding. /3/ The Board has held (6) repeatedly that a grantee
is
accountable for the proper use and expenditure of grant funds
received
by delegate agencies (subgrantees). See, e.g.,
Community
Relations-Social Development Commission in Milwaukee County,
Decision
No. 134, November 28, 1980; Sacramento Area Economic
Opportunity
Council, Inc., Decision No. 640, April 17, 1985.
The grantee's accountability in effect is the same as if the
grantee
itself (rather than the delegate agency) had performed the
program
activities. This accountability begins as soon as federal grant
funding
is provided to the delegate agencies through the grantee and extends
to
all such funding provided. In the instant case, although the
City
advanced City funds to the delegate agencies for their Head
Start
program activities, the City subsequently drew down federal funds
to
cover the advances.
And in fact, the draw downs were authorized for this very
purpose--to
support the program activities of the delegate agencies, not to
support
special accounts retained by the City. The City, therefore,
became
accountable to the Agency for the delegate agencies' use of
advanced
funds as soon as the City drew down replacement funding from the
Federal
Government even if the City retained part or all of the actual cash
in a
special account rather than transferring it to the City treasury.
To
the extent that the City had cash advances to its delegate agencies
in
excess of the federal funds drawn down, the City might have been
correct
that the accounts receivable represented City funds. However,
the City
does not dispute and the record fully supports the conclusion that
the
City drew down funds equal to the advances and thus received an
amount
of federal funds sufficient to cover the amount of the
accounts
receivable owed by the delegate agencies. City reply brief, p.
3.
If the City had in fact returned the entire unobligated balance
of
$3,454,084 for program year 15 as it suggested in its example, it
would
not have to return the additional amount of $436,890 in
accounts
receivable. This is so, however, because the $436,890 in
uncollected
accounts receivable would have been part of the $3,454,084
unobligated
balance returned to the Agency, not because the accounts
recevable did
not represent federal funds.
Under the City's position in this appeal, the City would be able to
delay
indefinitely the accounting for substantial sums of funding
received by the
City to cover the advances to the delegate agencies
merely by delaying a
paper transaction transferring funds from a special
City account to the City
treasury. Any such delay in accountability,
however, would be
inconsistent with the City's fundamental
responsibility to account for all
federal funding. The financial (7)
relationship between the Agency and
the City can not be changed
arbitrarily depending on whether the City happens
to retain federal
funding in one account or another.
Moreover, we see no reason why the Agency should be any less
concerned
about instances involving accounts receivable owed by delegate
agencies
than about instances where the delegate agencies have expended funds
for
unallowable grant activities. It is undisputed that these
accounts
receivable represent the receipt by the delegate agencies of funding
to
be used for allowable program expenditures that in fact can not
be
documented as having been expended by the agencies for allowable
grant
activities. Indeed, the Agency asserted, and the City does not
deny,
that the amount of accounts receivable owed by delegate agencies
has
been increasing over a period of several years and that it is
reasonable
to assume that a substantial amount, if not all, of the accounts
at
issue here would not be readily collectible and would represent
bad
debts between the City and the delegate agencies.
We should also point out that the Agency's allowing the City to carry
over
an unobligated balance in any given year does not (1) make these
funds
Grantee's or (2) permit Grantee to use them for any non-grant
purpose or to
hold them indefinately. These funds must be expended for
grant
purposes, be reasonable and necessary for the purposes of the
grant, and
comply with all other applicable cost principles or
eventually be returned to
the federal government. There is no basis for
considering funds now
represented by accounts receivable owed by
delegate agencies as complying
with these requirements. /4/
Finally, the City's assertion that, because the grant years in
question
have been closed the accounts receivable must be owed to the City,
is
simply incorrect. For each of the grant years involved herein,
the
pertinent Agency correspondence actually stated that although the
grant
year was generally(8) considered closed, the Agency left open
the
resolution of these longstanding accounts receivable, which troubled
the
Agency. See the Background Section to this decision. In any
event, the
correspondence in no way can be viewed as an acknowledgment that
the
accounts receivable represented City funds only.
For the reasons discussed above, we find that these accounts
receivable
amounts represent federal grant funds for which the City may be
held
accountable. The effect of our decision is to ensure that
accounts
receivable will be owed to the City rather than the grant program,
and
that the City does not retain federal cash drawn on the basis
of
advances to the delegate agencies of amounts that have not
been
accounted for by allowable Head Start costs.
Were the accounts receivable reduced by delegate agency
expenditures,
payments, or accounts payable?
The City argued that, if the Board did not accept the assertion that
the
accounts receivable represent City funds only and not federal
grant
funds, the disallowance should nevertheless be overturned since
the
accounts receivable had been eliminated by three circumstances.
The
circumstances cited by the City were:
* expenditures by delegate agencies that had not been recognized
in
the amount of $502,580,
* payments from delegate agencies against accounts receivable in
the
amount of $118,639.88,
* accounts payable owed delegate agencies in the amount of
$786,752.
City's December 10, 1985, brief, pp. 7-8.
The City stated that during the year ended January 31, 1981 the
delegate
agencies did not spend all the funds allocated for renovations and
that
these unused funds were initially considered accounts receivable.
Id.,
p. 6. The City alleged that the funds were subsequently spent
during
the year ended January 31, 1982 which, the City argued, reduced
the
accounts receivable by $502,580. The City claimed that the
auditors
mistakenly failed to report the expenditures during that year.
In addition, the City submitted documentation that it said
substantiated
$118,639.88 in payments by delegate agencies against the
accounts
receivable involved in this appeal. See City's October 31,
1985 brief,
exhibit 2.
Finally, the City maintained that the accounts receivable owed by
the
delegate agencies were more than accounted for in the accounts
payable
owed to the delegate agencies. City's(9)$% December 10, 1985
brief, p.
8. It claimed that the accounts payable to the delegate
agencies should
be credited against the accounts receivable, leaving no net
accounts
receivable. Thus, the City argued, even if it was accountable
for
accounts receivable owed by delegate agencies, the accounts
receivable
had been reduced to zero.
For the reasons discussed below, we conclude that the City has not
shown
that these accounts receivable were eliminated because of any of
the
circumstances alleged.
As argued by the Agency, grant funds must be accounted for on the basis
of
audited financial statements produced by independent auditors.
The
documentation submitted by the City to substantiate its claims
were
internal memoranda or other statements written by City employees
without
any substantiating source documentation. The documents can not
be
accepted until they have been examined and verified by
independent
auditors.
Further doubt is cast on the City's documentation by the fact that
the
City had not submitted these alternative arguments until more than
three
years had passed since the closing of the grant year in question
and
more than one year after the start of this appeal.
In addition there was no mention of (1) the $502,580 in renovation
costs
the City claimed were mistakenly unreported, or (2) the $118,639.88
in
claimed collections from delegate agencies in any certified
audit
reports of Grantee's operation submitted since the apparent discovery
of
the unreported renovation costs and the alleged collection of
accounts
receivable. In fact, the audit report for the year ended
January 31,
1985 submitted by the City indicates that accounts receivable
owed by
contract agencies had actually increased from $620,622 to
$1,870,419.
Grantee's assertions, therefore, are contraticted by its own
audit
report.
The City's assertion that delegate agencies have accounts payable
in
greater amount than accounts receivable is also not availing to it.
As
long as the City allows accounts payable and accounts receivable
to
stand on the books at the same time, the City presumably could pay
off
the accounts payable while permitting the accounts receivable to
remain
unpaid indefinitely. The Agency's concern from the outset has
been the
City's unwillingness to liquidate the accounts receivable by any
means
available to it. Furthermore, there appear to be discrepancies in
the
substantiating source documentation for these accounts payable, and
the
documents have not been accepted and verified by independent
auditors.
We do not know, for example, whether the accounts payable in
fact
represent allowable expenditures by delegate agencies (10)
that
appropriately could be netted against accounts receivable even if
the
City and the delegate agencies were agreeable to such a netting
process.
Accordingly, for the reasons discussed above, we find that the city
has
not shown that the accounts receivable were eliminated by virtue of
any
of the three circumstances identified by the City.
The City's request that certain documents and related arguments not
be
considered
During the Board's conference of May 6, 1985, the parties agreed
to
exchange information that it was hoped would result in a resolution
of
this matter through agreement between the parties. Specifically,
the
City stated that it would ask the auditors then examining the year
ended
January 31, 1985 to show in their report, in a manner satisfactory
to
the Agency, that the accounts receivable represented City, not
federal,
funds. Transcript, p. 43.
By letter of September 26, 1985 the Agency informed the Board that
the
parties had been unable to resolve this appeal between themselves.
The
parties were given two additional opportunities to brief any issues
they
considered relevant.
The City objected to the introduction into the record of
unspecified
elements of the Agency's submissions made subsequent to
settlement
discussions. Its position was based on its assertion that
the Agency's
submissions were the fruit of settlement discussions, were off
the
record, outside the scope of the appeal and should not be considered
by
the Board. City's December 10, 1985 brief.
For the reasons discussed below, we find that there is no need to
exclude
any document or argument submitted by the Agency.
First, the City was not specific as to which documents and
arguments,
submitted by the Agency, it objected to. Nor did the City
cite any
legal authority in support of its objection. In the face of a
blanket
objection to the submission of the Agency, the Board is inclined
to
reject the objection on that basis alone. However, when looking at
what
has been submitted since the settlement discussions, we find
that
nothing submitted by the Agency should be excluded from the record.
The Agency submitted documents provided by the City during
settlement
discussions and documents from the audit report for the year
ended
January 31, 1985. Agency's November 8, 1985 brief, exhibits AA
and BB.
The two documents provided(11) during the settlement discussions
make
certain assurances about the availability of City funds to cover
the
disallowance. The Agency submitted these documents to demonstrate
why
it had not changed its position that the Head Start program still
had
not received an infusion of cash equal to the amount of the
accounts
receivable. We fail to see how documents relating the City's
ability to
pay the disallowance could in any way prejudice the City's
position
regarding the accounts receivable. If anything, these
documents could
have been beneficial to the City's case if in fact they
demonstrated an
infusion of cash. As a consequence, we see no reason to
exclude the
documents.
The Agency also submitted three pages of the audit report for the
year
ended January 31, 1985 that demonstrated that the balance of
accounts
receivable had increased since the year in question in this
appeal.
These documents are damaging to the City's position. The pages
of the
report were submitted in response to the City's claim that the
accounts
receivable had been eliminated and were clearly appropriate for
the
Agency to put in the record for that purpose. Regardless of whether
any
drafts of the reports may have been exchanged as part of the
settlement
negotiations, the audit report as a whole was submitted to the
Agency on
October 17, 1985 after settlement discussions had ended as part of
the
City's obligation to audit its program. As such, pages of the
report
can hardly be viewed as "privileged."
Clearly we do not have an instance where the Agency has attempted
to
reveal a privileged negotiation position taken by the City
during
settlement discussions. The documentation exchanged during
the
discussions was not prejudicial to the City's position as a whole
and
the audit report at issue was submitted by the City in fulfillment
of
its audit requirements. The City cited no legal principle that
would
bar consideration of any documents exchanged by the parties once
formal
administrative review proceedings had resumed.
For the reasons discussed above, we find that the City has not shown
why
any document or argument submitted by the Agency should be stricken
from
the record.
Conclusion
For the foregoing reasons, we uphold in full the disallowance of
$620,622
representing the accounts receivable owed by the City's
delegate agencies as
of the year ending January 31, 1982. As we
previously held in Decision
No. 679, the Agency has the authority to
require that a grantee account in
cash for accounts receivable to the
extent that grant funds were received and
not accounted(12) for through
allowable costs actually expended. In the
instant case the accounts
represent federal grant funds that have not been
demonstrated to have
been used for allowable program expenditures by the
delegate agencies
and that may no longer even be collectible from the
delegate agencies.
Furthermore, the City has not demonstrated that the
accounts receivable
have been eliminated or reduced by any of three
circumstances it
identified. Accordingly, the City must now account for
these funds in
cash as it would in any other instance of disallowed
funding. Although
the Agency indicated in its November 8, 1985 brief
(p. 5), that there
may be more than one method by which the City can satisfy
its obligation
resulting from the disallowance, the use of any method other
than the
return of the disallowed funds in cash would be solely at the
discretion
of the Agency. /1/ The accounts receivable were
incurred: (1) prior to
the
year ended January 31, 1980 $144,982), (2) during the year
ended January 31,
1980 ($38,750), and (3) during the year ended January
31, 1981 ($436,
890). /2/ Part 74 of 45 CFR
establishes
requirements for the administration of HHS grants and principles
for
determining costs applicable to activities assisted by HHS grants.
45
CFR 74.1. 45 CFR 1301.10 specifically makes Part 74 applicable to
Head
Start grants. /3/ An
equally fatal difficulty with the City's
argument is that the City has never
even demonstrated the existence of
its two track system. The City has never
demonstrated, for example, by
means of statements of independent auditors, 1)
that a special account
existed throughout the entire period during which
these accounts
receivable arose, 2) that the special account had been
consistently
managed to retain federal grant funds drawn down by the City
where the
delegate agencies had been unable to document allowable
program
expenditures based on City advances, and 3) that the special
account
contained at least an amount equal to the accumulated
accounts
receivable for years through the year ending January 31, 1982.
/4/
Thus, even if the City could demonstrate conclusively that a
special
account existed and contained all carried forward funds including
funds
representing the accounts receivable, the Agency may still require
that
an amount equal to the accounts receivable be returned in cash.
These
funds were provided to the City solely to be used for proper
grant
expenditures, not to be retained in a special account, and the City
has
not demonstrated that such expenditures have occurred for
funds
reflected by the accounts receivable. If, in fact, the funds have
been
retained in a special account as the City alleged, the City should
not
be under any hardship to return the funds to the Federal Government.