DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: City of Charleston, South Carolina
Docket No. 86-183
Audit No. 04-66571
Decision No. 866
DATE: May 7, 1987
DECISION
The City of Charleston, South Carolina (City or Appellant), appealed the disallowance
by the Office of
Community Services, Family Support Administration (OCS or Respondent), of $43,019
spent for the
rehabilitation of a home under a discretionary OCS grant. 1/ The issues
in dispute are whether OCS had
approved the expenditure in advance and, if not, whether OCS reasonably denied
retroactive approval.
While the City argued that it incurred the rehabilitation expense in good faith,
we find both that the
approved grant budget encompassed only the purchase of homes and that OCS's
determination not to
retroactively approve the rehabilitation expenditure was reasonable. Accordingly,
we uphold the
disallowance in full. Our decision is based on the written record.
BACKGROUND
OCS awarded a $391,155 grant to the City for the period September 30, 1984 through
September 29,
1985. One of the activities funded under the grant was the "Homeownership
Program," a program
designed to enhance opportunities for homeownership for poor residents of the
City's East Side
neighborhood (an economically depressed area). The budget summary for
this activity in the grant
application stated that $110,000 in OCS funds were to be used to "purchase five
houses." The narrative
description of the Homeownership Program indicated that "rehabilitation" of
houses was also envisioned.
For example, the narrative stated, in part:
Community Development Block Grant, Emergency Jobs Bill,
and other funding sources will be used by
the city to acquire and rehabilitate houses for resale under the Homeownership
Program. (Appeal File,
Ex. A. p. 56) (emphasis added)
1/ The grant was issued pursuant to the Secretary's discretionary authority
under the Community Services
Block Grant Act. (See Section 681 of Title VI of Public Law 97-35 and
49 Fed. Reg. 2194 (1984))
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As the preceding statement indicates, the program was funded by more than one
source. Also, the budget
page shows funds from more than one federal department. (Appeal File,
Ex. A, p. 61)
Appellant encountered problems after the grant was awarded and was able to purchase
only one house.
Appellant spent $7,858 for the purchase and $43,019 (total $50,877) for the
rehabilitation of the house.
Just before the expiration of the grant period, Appellant requested and OCS
subsequently approved the
transfer of $45,000 (of the original $110,000 designated for purchases) to the
"Jobs Through Energy"
program. Appellant did not submit a similar request with regard to the
$43,019 used for renovation.
Based on an audit recommendation, OCS disallowed the $43,019 and the City appealed.
During the
course of the appeal, Respondent stated the bases for the disallowance to be
that: (1) it had not approved
the expenditure in advance, as required under the applicable regulations; and,
(2) retroactive approval was
inappropriate.
APPLICABLE REGULATIONS
The grant award document incorporated 45 CFR Part 74 as a term of the grant.
The cost principles used
to determine allowable costs of activities conducted by governments are in OMB
Circular A-87,
incorporated into Part 74 by reference. (45 CFR 74.171) Section C.3. of
the cost principles provides, for
capital expenditures, that:
The cost of facilities, equipment, other capital assets,
and repairs which materially increase the value
or useful life of capital assets is allowable when such procurement is specifically
approved by the Federal
grantor agency. . . .
Section 74.177 of 45 CFR, Costs allowable with approval, provides:
(b)(l) When the costs [i.e., any costs requiring approval]
are treated as direct costs, they must be
approved in advance by the awarding party.
* * *
(3) If the costs are not specified in the budget .
. . the recipient shall obtain specific prior approval in
writing from the awarding party. . .
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DISCUSSION
A. PRIOR
APPROVAL
The renovation cost in question was a direct cost charged
to the grant. The approved budget did not
mention renovation.
Section 74.177(b)(3) of 45 CFR specifies that.for a direct cost not specified in
the
budget (such as this one) to be allowed, the grantee must obtain
specific prior approval in writing. The
Respondent based its
disallowance on this regulation, arguing that the City had not obtained prior
approval in writing.
The Appellant argued that it did not need
prior approval in writing since renovation was encompassed by
the
Homeownership Program and thus funded by the grant which OCS had already
approved. The
Appellant argued further that the omission of the word
"rehabilitation" from the budget was merely a
clerical error and that it was
obvious from the narrative portion of the grant application that Appellant
always intended to use the $110,000 for renovation as well as purchase.
We do not find the Appellant's argument persuasive. The fact
that the narrative described "rehabilitation"
as part of the Homeownership
Program does not mean that Appellant actually had intended to use any
portion of the $110,000 in OCS funds for renovation or that OCS had agreed
to this by approving a
budget which stated only that OCS funds would be used
to "purchase" five homes. The Homeownership
Program was much broader
than just an OCS program. The program involved several other sources of
funding, in addition to OCS, including other agencies of the federal
government and private sources.
(Appeal File, Ex A, pp. 56, 61)
Accordingly, it is reasonable to interpret the narrative references to
renovation as applying to the other sources. As Respondent argued, OCS
was concerned only with how
OCS funds were to be used, and the budget
clearly specified that OCS funds would be used for purchase.
2/
Appellant argued that this is an overly technical reading of the
budget. A simple example demonstrates
why it is not. A grant of
$110,000 to purchase five houses (average cost of $22,000)
2/ The reasonableness of Respondent's interpretation was further supported
by the fact that the budget
page showed $210,000 of other funds to be used
for "Acquisition/Rehabilitation of Moskos Building"
(emphasis added) and
$510,000 of other funds to be used for "East Side Housing Rehabilitation Program
HUD CDBG" (emphasis added). (Appeal File, Ex. A, p. 61) There was no
similar designation next to the
OCS funds in question.
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is far different from a grant to purchase and rehabilitate
only one house for $50,877 (of which
rehabilitation was 85% of the total
outlay). The difference between the two highlights the need for the
very precision in drafting and interpreting grant documents that the
Appellant seeks to avoid.
Moreover, the record indicates that the
use of OCS funds for rehabilitation was not, in fact, initially
anticipated
by Appellant. There is evidence in the record that Appellant had trouble
finding affordable
houses in the East Side due to a rapid increase in
neighborhood housing prices caused by real estate
speculation.
(Response Memorandum of Family Support Administration (FSA), Ex. 4, p. 13) The
City
understandably sought other ways to use the OCS funds. Prior to
the expiration of the grant period, the
City sought and subsequently
received approval to transfer $45,000 of the funds to the jobs program.
(Response Memorandum of FSA, Ex. 5, p. 27; and Supplemental Memorandum
of FSA, p. 3) The City
apparently thought such approval to be unnecessary
with regard to the renovation cost. We do not agree.
3/
B. RETROACTIVE APPROVAL
The Appellant's
position throughout the appeal has been that additional approval was not
necessary
because approval of the original grant included approval of
renovation costs. Nevertheless, in its last
submission to the Board
the Appellant requested retroactive approval, "if such a request is now deemed
necessary." (Appellant's Reply to Supplemental Memorandum of FSA, p. 2) The
Appellant argued that
OCS would have approved renovation costs as part of
the original grant if Appellant had simply asked for
it at the time of the
original award.
3/ The Respondent also cited 45 CFR 74.103(b) as another provision requiring
prior approval under the
circumstances of this case and, thus, another basis
for the disallowance. That regulation called for
advance approval of
any change in the scope of the approved project, and the Respondent argued that
renovation was a change in scope of the project.
The Appellant
argued that renovation was not a change in scope since: (1) the narrative
description of the
Homeownership Program generally specified that
rehabilitation work would be done; and (2) the goal of
the project was to
make it possible for low-income residents of the East Side to obtain affordable
homes in
the community and renovation furthered that goal.
Even if we were to agree that renovation was not a change in the
scope of the project and, thus, prior
approval was not required under 45 CFR
74.103(b), prior approval would still be necessary under 45 CFR
74.177(b)(3). Thus, we need not address whether the prior approval
requirement of 45 CFR 74.103(b)
applied as well.
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The Respondent denied retroactive approval on grounds that:
(1) the Respondent would not have approved
the renovation cost in question
if it had been included in the original budget since OCS believed the cost
was excessive and, thus, did not sufficiently help to "ameliorate the causes
of poverty in the community,"
as required for funding under the authorizing
legislation (Supplemental Memorandum of FSA,
Attachment, p. 1, item 4); and,
(2) retroactive approval would discourage grantees from following proper
procedures.
The Department of Health and Human Services Grants
Administration Manual (Manual) provides for
retroactive approval of costs
under certain circumstances.. As applicable here, the Manual in Chapter
1-
105-60, Sec. B, provides
1. If a
transaction requiring prior approval under provisions of an award is questioned
because
the approval was not requested, the transaction may be approved
retroactively. Retroactive approvals may
be granted, however, only
where:
a. The transaction would have been
approved had the organization requested approval
in advance [of the
expenditure]. . . .
The question before the Board with regard to
retroactive approval is not whether OCS would have funded
the grant in
August 1984 if the word "renovation," or even the specific renovation cost in
question, had
been included in the original budget. 4/ The question before
the Board is whether the Respondent is acting
unreasonably now in
withholding retroactive approval of the specific renovation expenditure of
$43,019,
considering the circumstances existing at the time that approval
should have been requested (before the
expenditure).
The
Respondent, as the administering Agency, has considerable discretion in
determining whether to
grant retroactive approval of expenditures such as
the one at issue here. (See Economic Opportunity
Atlanta, Inc.,
Decision No. 313, June 24, 1982, p. 3) Requiring prior approval for certain
expenditures
obviously enables the granting agency to exercise its judgment
concerning how grant funds should be
spent. The Board will not reverse
a determination denying retroactive approval where there is a
reasonable
basis to support it. (Id., p. 3)
4/ Even if it were, the Board could not reasonably formulate a
conclusion without reviewing all
other grant proposals originally submitted
and comparing them with the City's amended proposal. That is
not the
Board's function; the Board has no authority to award grants. (See, e.g.,
Pinellas Opportunity
Council, Inc., Decision No. 80, February 6, 1980)
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The Respondent stated two bases for its determination to
deny retroactive approval. The first was that
Respondent would not
have approved the grant in August 1984 if it had included the renovation
expenditure because the expenditure of $43,019 for renovation was excessive
and did not meet the
statutory requirement of "ameliorating the causes of
poverty in the community." We find OCS' underlying
rationale for why it
would not have funded such a grant to support a conclusion that OCS'
determination
denying retroactive approval was reasonable.
While it is not clear that respondent considered the circumstances
existing at the time that the City should
have requested prior approval
(i.e. that the Appellant was having difficulty finding suitable properties to
purchase), even under this new circumstance, the expenditure reasonably
could be viewed by OCS as
"excessive." This is evident from fact that the
expenditure constituted almost 85% of the grant money
actually spent on the
project and almost 40% of the total original grant award. Accordingly, the
Board
concludes that there is no basis to reverse OCS' determination. 5/
We note also that we are not persuaded by Respondent's second
stated reason for denying retroactive
approval: that such action would
encourage grantees to ignore OCS regulations. If Respondent's
determination were otherwise unreasonable, this alone would not be
sufficient to support the denial of
retroactive approval. Retroactive
approval provides funding despite a grantee's failure to comply with a
prior
approval requirement where the expenditure was otherwise allowable and clearly
furthered the
purposes of the grant. It is clear that a failure to
request prior approval cannot alone be grounds for the
denial of retroactive
approval. (See Id.)
C. GOOD FAITH
Appellant asked the Board to overlook any technical failure to
comply with approval requirements on
grounds that Appellant acted "in good
faith." Appellant cited as evidence of its good faith: (1) the fact that
it
had submitted reports during the grant period which "specifically referenced"
renovation work; and, (2)
the fact that it had taken the OCS Project
Coordinator on a
5/ The reasonableness of that determination is further highlighted by OCS'
willingness to approve the
expenditure of a portion of the $110,000 grant
for Appellant's jobs program when all the anticipated home
purchases could
not be accomplished.
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personal tour of on-going homeownership projects, which
included renovation. (Statement of Appellant
in Reply, pp. 1-2) 6/
Respondent argued that the quarterly reports submitted during the
grant period did not show OCS funds
as being used for renovation; the
reports merely indicated that "the Homeownership Program as a whole
included
rehabilitation activities." (Response Memorandum of FSA, p. 7) Respondent argued
further that
the City had never said that it had informed OCS before the
expenditure that OCS funds were being used
for renovation. Respondent
also argued that the projects visited by the OCS project coordinator did not
involve OCS funds.
The Board has no authority to overlook a
failure to comply with applicable regulations on grounds.that a
party acted
in good faith. (See, e.g., Office of Human Concern, Decision No. 590,
October 31, 1984; and
New Hampshire Division of Human Resources, Decision
No. 583, October 26, 1984) Moreover, the record
indicates that it was never
explicitly clear either from the quarterly progress reports or the personal tour
of
the Program Coordinator that OCS funds would be used for
renovation. Consequently, the actions relied
on by Appellant as
showing its good faith do not demonstrate that Appellant made OCS aware of its
use of
OCS funds.
CONCLUSION
Based on the
foregoing, we uphold the disallowance in full.
________________________________
Alexander G. Teitz
________________________________
Judith A. Ballard
________________________________
Cecilia Sparks
Ford
6/ The Appellant did not raise these points by way of arguing estoppel
against the government, but merely
as evidence that it had acted in good
faith. (Statement of Appellant In Reply, pp. 1-2) The Respondent
had earlier argued that this evidence was insufficient to make a case for
estoppel. (Response
Memorandum of FSA, pp. 8-9) We need not reach the
estoppel question here, since it was evident to us
that the Appellant was
not arguing estoppel.