Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Community Action Council for Lexington-Fayette, Inc.
DATE: June 21, 1991
Docket No. 90-227
Decision No. 1258
DECISION
The Community Action Council for Lexington-Fayette, Inc.,
(Council)
appealed a disallowance by the Office of Human Development
Services
(OHDS) 1/ of $25,480 charged to Head Start Grant No.
04CH-2750/19. OHDS
disallowed this amount because it found that the
Council had improperly
spent supplemental awards from program improvement
funds for purposes
other than to purchase buses and that this violated the
terms of the
awards.
As explained below, we conclude that OHDS did not clearly condition
its
award of supplemental funds so that the Council could properly use
these
funds only for the purchase of buses. Accordingly, we remand
the
disallowance to OHDS for further consideration so it can
determine
whether some or all of the amount disallowed was properly applied
either
to other types of expenditures which would be allowable for
program
improvement or to other approvable Head Start expenditures.
OHDS Information Memoranda
OHDS submitted copies of the Head Start information memoranda directed
to
grantees to inform them about increased program funds available for
fiscal
years 1987 and 1988.
The 1987 information memorandum contained one paragraph entitled
"Program
Improvement Funds" and stated that:
ACYF [the Administration for Children, Youth and
Families] will
again make available this year
one-time funds to be awarded to Head
Start grantees
for purposes of remedying problems which threaten
the health or safety of Head Start children and staff or
problems
which cause grantees to be out of
compliance with local or State
licensing
requirements. Regional Offices will advise programs
of
how to apply for these funds.
See Attachment 1 to OHDS Reply to Request for Additional Information,
p.
8. The 1988 information memorandum contained essentially the
same
language as the 1987 memorandum, but in addition, listed five
purposes
for which grantees could seek funds. Three of the purposes
listed were
relevant here: (1) replacement of old or unsafe vehicles;
(2) purchase
of new vehicles which would allow a program to initiate or
expand
transportation services to better serve its community; and (3)
other
one-time purchases of capital goods or equipment necessary to
provide
quality Head Start services. The other two purposes concerned
facility
renovation. See Attachment 2 to OHDS Reply to Request for
Additional
Information, pp. 8-9. (For the 1988 memorandum, OHDS
submitted only
pages 1, 8, and 9.)
Both memoranda state that the Regional Offices will advise grantees
about
applying for program improvement funds. OHDS, however, included
in the
record here no guidance concerning application for or use of
these funds
other than the information memoranda. OHDS noted that its
files for
these years had been purged and that it had provided all the
documentation it
located. See Attachment 3 to OHDS Reply to Request for
Additional
Information (a regional guidance for applications for
increased funding for
purposes other than program improvement, such as
pay increases).
Supplemental awards at issue
In 1987, the Council submitted a number of applications to OHDS
requesting
supplemental funds for the Council's Head Start program.
Council Exhibits
(Exs.) C-F. On April 28, 1987, the Council submitted
an application for
$178,397 in supplemental funds which stated:
Funds are requested to remedy health and safety threats and
to
remedy issues of non-compliance of standards. The bus fleet
of
the Head Start Program is old and in need of
extensive
maintenance. Two buses need to be replaced, the current
fleet
upgraded and a preventive maintenance program needs to
be
implemented. 2/
Council Ex. C, p. 2. As part of the April 28 application, the
Council
submitted budget information concerning the object class
categories
(such as equipment, which included $60,000 for two new buses) for
which
it requested additional funds and a narrative which recited
the
Council's problems in providing transportation to Head Start
children.
This narrative outlined "solutions and their feasibility
and
desirability" as follows:
1) Replace the two 66 passenger buses with over 110,000
miles
with two new ones. Keep the best one for back up and the
other
one for parts replacement as needed. This would solve
the
immediate problem if the other vehicles are up-graded.
2) Upgrade all vehicles used by Head Start to meet
minimum
safety standards. It is anticipated, based on the past
several
years, that the 1987-88 program year will put over 60,000
miles
on the fleet. Fayette County transporting is primarily
city
driving involving numerous stops and starts for 320
children
daily. The present fleet in its present condition
cannot
function another year. Safe transport of the children
is
absolutely essential.
3) Fully implement a preventive maintenance program once
the
fleet has been upgraded. This program should avoid the
majority
of "crisis" repairs and allow for planned scheduled check up
and
maintenance.
Council Ex. C, p. 50.
OHDS subsequently awarded the Council $20,000 on August 17, 1987.
The
notice of award simply stated "one-time program improvement
supplement
for a bus." Council Ex. A, p. 5 (amendment no. 1 to the
notice of
award). The award also reflected a corresponding change in
the
equipment category of Council's approved budget in the amount
of
$20,000. After this amendment, the Council's approved budget
totaled
$844,743 in federal funds.
On December 5, 1987, the Council submitted an application to OHDS
for
supplemental funding which included a request for "funds to replace
two
vehicles for transporting Head Start children." 3/ Council Ex. F,
p. 1.
This application also included budget information and a
three-page
program narrative as part of the application. The narrative
stated:
"Priority I: Replacement of old or unsafe vehicles," and
recited a
description of the Council's current vehicles, including their
mileage,
condition, age, and maintenance records. Council Ex. F, p.
7.
The program narrative also recited the Council's approach to
its
transportation problem:
Approach: The purchase of two buses to replace the two
old,
unsafe, and high mileaged vehicles described in the
previous
section is a necessity to attain a safe reliable
transportation
system. The proposed vehicle purchases are as
follows: 1986-87
International - "Thomas Conventional" 72
passenger gas engine,
1986-87 GMC "Thomas Mighty Mike" 42 passenger gas
engine. . . .
Council Ex. F, pp. 8-9. The Council's application requested funds
in
the amount of $65,000 to cover the costs of these vehicles. Council
Ex.
F, p. 5.
On June 21, 1988, OHDS awarded the Council additional
supplemental
funds. Included in the notice of award was a statement
that these funds
contained a "one-time program improvement supplement of
$34,000 for one
bus." This notice of award also reflected a
corresponding change in the
budget category for equipment in the amount of
$34,000, bringing the
equipment category to a total budget of $54,000.
After this amendment,
the Council's approved budget totaled $948,383 in
federal funds.
Council Ex. A, p. 2 (amendment no. 4 to the notice of
award). On August
16, 1988, the Council purchased two used buses for
$28,520. Council
Brief (Br.), pp. 8-9; Council Reply to request for
Additional
Information, Attachment B. The balance of the supplemental
funds,
$25,480, was used during the 1987-1988 grant period for other
program
costs. 4/ See 1987-1988 Audit, Council Ex. G.
It was undisputed that the Council received the $20,000 in
supplemental
funds pursuant to the 1987 information memorandum and received
the
$34,000 in supplemental funds pursuant to the 1988
information
memorandum. The awards were both made for the Council's
budget period
running from September 1, 1987 to August 31, 1988. OHDS
disallowed the
amount of the two supplemental awards which exceeded the
amount expended
by the Council to purchase two used buses.
Discussion
The Council's expenditures under the supplemental awards were governed
by
the cost principles set forth in Office of Management and Budget
(OMB)
Circular A-122, made applicable by 45 C.F.R. 74.174(a). OMB
Circular
A-122 provides that to be allowable under an award, costs must
"[c]onform to
any limitations or exclusions set forth . . . in the award
as to types or
amount of cost items." See OMB Circular A-122,
Attachment A, section
A.2.b. It was undisputed that OHDS had the
discretion to place
conditions restricting the use of these funds.
Instead, the issue here is
whether OHDS's notices of award effectively
set conditions limiting the use
of the supplemental awards solely to the
purchase of buses. To address
this issue, we reviewed the record to
determine whether the notice of award
established the conditions which
OHDS sought to apply or whether the Council
reasonably understood the
terms of the supplemental awards to permit it to
revise its amended
approved budget and to spend some of the awarded funds for
other
legitimate Head Start program costs.
We note at the outset that these supplemental funds were from general
Head
Start appropriated funds and that there were no statutory or
regulatory
restrictions on the use of the funds. These funds were
legally
indistinguishable from the Council's basic Head Start program
award.
See OHDS Reply to Request for Additional Information, pp. 4-5.
We also
note that ordinarily, a grantee has the authority to transfer
funds from one
object class category of its approved budget to another
without prior
approval. 5/ Of course, while a grantee may not by means
of budget
revisions undercut its program's scope or the overall purpose
for which the
grant was awarded, a grantee is permitted in general to
exercise its
discretion and revise its budget in order to fund allowable
program
expenditures. See OHDS Discretionary Grants Administration
Manual (OHDS
GAM), Chapter 1, section L.2. In this regard, the OHDS GAM
states that
--
The approval of a grant or subgrant budget constitutes
prior
approval for the expenditure of funds for specific
items
included in that budget. Except [for certain types of
revisions
not relevant here], HDS's recipients may make revisions
between
and among the object class categories within the total
direct
costs budget of the project, provided that the funds are
used
for allowable costs of the project.
OHDS GAM, Chapter 1, section L.3.
The Council maintained that it had considerable flexibility in
operating
its Head Start program and that in light of the purchase of the
two
school buses, the Council had the authority to revise approved
budget
categories and to expend any remaining funds for other allowable
Head
Start costs. Council Br., pp. 8-10. In the alternative, the
Council
argued that OHDS had approved an increase in the Council's
equipment
budget in the award notices. Thus, the Council reasoned that
it at
least had the authority to spend remaining supplemental funds
on
equipment. Council Br., pp. 8-9.
The Council also argued that its expenditures were consistent with
its
applications for supplemental funds and with the purposes for which
the
funds had been awarded. Council Br., p. 14. 6/
OHDS argued that: (1) it had awarded the Council $54,000 for
the
specific purpose of purchasing two buses for the Council's Head
Start
program; and (2) its awards of supplemental program improvement
funds
were expressly conditioned and could not be used for any other
purpose.
OHDS reasoned that, since it was undisputed that the Council
had
expended only $28,520 of the supplemental funds for the purchase of
two
buses, the Council should have returned the remaining $25,480
or
obtained a new supplemental grant. OHDS Br., pp. 2 and 6.
OHDS did not rely on documentation or evidence other than the
two
information memoranda with respect to: (1) the advice given to
grantees
by the regional offices on how to apply for program improvement; or
(2)
the use of program improvement funds. OHDS also conceded that the
1987
memorandum was more general than the 1988 information memorandum.
7/
OHDS Reply to Request for Additional Information, p. 3.
Moreover, it was also undisputed that Council officials
sought
clarification from OHDS on supplemental funding awards. 8/
Council Br.,
p. 13; see also Council Ex. AA (concerning confusion surrounding
the
purposes for a later year's supplemental awards). The Council
asserted
that OHDS had approved its use of these funds for its "most
urgent
priorities." Council Br., p. 11. While OHDS denied that
approval had
been granted orally to use the program improvement awards for
other
program purposes, as the Council asserted, OHDS did not dispute
that
when the Council sought guidance after amendment no. 1 was issued,
it
was told only that funds were limited and that this was the best
OHDS
could do. See Council Br., pp. 5 and 11; OHDS Br., p. 3.
Upon consideration of the information memoranda provided to grantees
in
conjunction with the language of amendments no. 1 and no. 4 awarding
the
supplemental funds in question, we conclude that OHDS did
not
effectively set the conditions which it later sought to apply to
these
supplemental funds. 9/ The award notices issued by OHDS
neither
cross-referenced the Council's applications for supplemental funds,
nor
explained how the award amounts had been calculated in response to
those
requests. More importantly, however, the notice of award did
not
expressly state that the supplemental funds did not increase
the
Council's overall funding level and that its expenditures were
limited
only to the bus purchase. The notices of award simply added
funds to
the Council's existing approved budget. While the notices say
"for one
bus" and "for a bus," the Council could reasonably interpret this
as
merely a shorthand reference to its applications, since there is
no
attendant condition limiting the Council to only this purpose
which
would serve to distinguish these funds from the Council's other
awarded
funds. There is no express statement informing the Council that
in the
event it is not feasible in the Council's judgment to use the funds
for
the purchase of a bus, the funds must remain unexpended
altogether.
Critical here is the absence of an express statement excepting
these
funds from the Council's general authority for budget revisions.
The record shows that the Council received amendment no. 1,
the
supplemental award of $20,000, early in its budget period. While,
as
noted above, it is reasonable to conclude that in light of the
1987
information memorandum, the Council should have understood that
these
funds were subject to some restriction for program improvement
purposes,
there is no basis to conclude that the Council was absolutely
precluded
from using these funds unless it purchased a bus. Not only
did OHDS
fail to award the Council the amount ($30,000) it requested for
the
purchase of a bus without explaining how the Council was to
accomplish
the purchase with the lesser amount, OHDS did so in the context of
the
Council having applied for substantial supplemental funds to
cover
expenditures other than buses. There is no evidence to show that
the
Council could have anticipated that amendment no. 4 would be issued
late
in that budget period to add additional funds for bus purchases so
that
it could have held the earlier award in reserve. OHDS cannot
require
that the Council be omniscient concerning the interpretation of
award
documents. As a practical matter, what OHDS asserted was that
the
Council should have known that it could not spend any of the
funds
awarded via amendment no. 1. This is simply not reasonable in
light of
OHDS's failure to spell out clearly what conditions it was setting
on
the use of the supplemental award. The Council could reasonably
have
interpreted the supplemental awards to accord it flexibility to
spend
these funds for any program improvement purpose if the purchase of a
bus
was not feasible.
The grantee explained that it was not until later that it thought
of
looking into the purchase of used buses (Council's Reply Br., p. 2),
and
there is no evidence to show that OHDS suggested this possibility at
the
time of the award of amendment no. 1. Also, we note that upon
receipt
of the amendment no. 4 funds, the Council contacted several vendors
and
was able to purchase two used buses for $28,500 of the 34,000
award.
There is no language in amendment no. 4 which restricted the
Council,
having accomplished its object of adding to its bus fleet, from
using
the remaining $5,500 of that award for other program
improvement
purposes.
These funds were awarded by means of amendments adding funds to
the
Council's basic Head Start grant. Therefore, it is not appropriate
to
treat these amendments as if they were separate grants, as OHDS
would
have us do, for purposes of construing any conditions imposed by
means
of the statements in the award notices concerning "one-time
program
improvement" supplements. Moreover, there is no indication that
the
Council deliberately disregarded conditions which it understood to
apply
to the supplemental funds. Nevertheless, in light of OHDS's
actions to
inform grantees that it was reserving Head Start funds for the
purposes
stated in the information memoranda, the Council could not
reasonably
conclude that its discretion to revise its budget with regard to
these
funds was completely unfettered.
While we understand OHDS's concern that the funds it awarded for
program
improvement be used in accordance with the terms of such awards, OHDS
in
turn has an obligation to clearly state in the notice of award
any
applicable conditions. In this regard, we conclude that under
the
particular circumstances here, OHDS should accept as allowable
charges
to these awards any expenditures for other program improvement
purposes,
particularly those for upgrade or repair of the bus fleet, 10/ as
well
as any other allowable program costs that OHDS would have approved
had
the Council sought approval at the time.
Remand for Consideration of Whether the Supplemental Awards Were
Applied
to Program Improvement Purposes or Allowable Expenditures Which
OHDS
Finds Approvable
While we emphasize that OHDS clearly has the authority to
reserve
specified amounts of Head Start funds for particular targeted
purposes
and to restrict a grantee from using funds so reserved for any
other
purpose, we conclude that under the particular circumstances here
OHDS
did not effectively set the conditions which it later sought to
apply.
OHDS must clearly communicate to a grantee in the notice of award
how
funds are limited. The terse language of the award notices at issue
was
not adequate.
The information memoranda provided that program improvement funds
were
available for purposes other than bus purchases. Moreover, OHDS
has the
general authority to waive conditions set for use of program
improvement
funds to permit a grantee to apply the funds to other types of
allowable
program costs. We conclude, therefore, that OHDS should
accept as
allowable charges to the funds in question expenditures that would
meet
the general purposes for which program improvement funds were
reserved
as well as any other expenditures which OHDS would have approved at
the
time.
While the Council explained the types and amounts of expenditures that
it
asserted could be paid from the supplemental funds, the record is
not
sufficiently detailed for us to determine whether OHDS should
accept
these items as allowable. Moreover, in light of our
conclusion
concerning what types of expenditures OHDS should accept, the
Council
may wish to submit information concerning expenditures other than
those
it briefed here. Accordingly we remand this matter to OHDS for
further
consideration consistent with our analysis.
Conclusion
For the reasons set forth above, we remand this case to OHDS to
determine
the Council's allowable costs in light of our decision.
Within 30 days of
receipt of this decision, or such longer time as OHDS
may permit, the Council
may present further information to OHDS
concerning its expenditures. In
the event the Council is dissatisfied
with OHDS's determination, the Council
may timely appeal that
determination to the Board.
___________________________
Judith
A. Ballard
___________________________
Donald
F. Garrett
___________________________
Cecilia
Sparks Ford Presiding
Board Member
1. As a result of organization changes within the Department of
Health
and Human Services, the grantor agency for Head Start is now
the
Administration for Children and Families.
2. Funds were also requested for "[a] tympanometer to diagnose
middle
ear infections" and for repairs to one facility.
3. The Council also submitted applications for $170,523 in
program
improvement funds on December 1 and 5, 1987. These
applications
included requests for funds for a bus ($30,000), supplies, and
facility
construction and renovation costs. Council Exs. D and E.
4. The Council detailed its uses for the remaining $25,480 as
follows:
$8,314 for equipment, $5,664 for bus repair, $1,620 for final
payment
for lease-purchase on Head Start vehicles, and $9,882 on other
program
costs. See Council Br., pp. 6-10.
5. 45 C.F.R. 74.105 provides that a grantee may, with
certain
exceptions not relevant here, revise its approved budget without
prior
approval.
6. The Council asserted that, if the Board upholds the
disallowance,
the Council does not have sufficient unrestricted funds to
reimburse
OHDS. Council Br., p. 16. As OHDS correctly pointed
out, we must
evaluate the issues here solely based on the applicable cost
principles
and other terms of the grant award in question. OHDS Br., p.
10. The
Council has raised a point which we cannot properly take into
account in
determining whether this disallowance is sound.
7. In fact, the record shows that there was some confusion in
this
region concerning a grantee's ability to use for other program
purposes
the increased funds available for pay increases for Head Start
personnel
as explained in the information memoranda in question here.
In an April
17, 1990 memorandum to grantees, OHDS informed grantees that
these funds
could not be used for other purposes and were subject to
disallowance if
this was done. See OHDS Reply to Request for Additional
Information,
Attachment 7.
8. In fact, a Council official recalled a conversation with an
OHDS
official after receipt of the $20,000 award, in which she asked "What
am
I supposed to do, buy the front or the back of a bus?" Grantee Reply
to
Request for Additional Information, p. 4.
9. We note that in contrast to the manner in which these funds
were
conditioned, OHDS has used a different approach to effectively
condition
supplemental funds in other cases. See Board Consolidated
Docket Nos.
89-249 and 91-5. There, OHDS not only stated in the notice
of award
that "There are special conditions attached to this award," but
also
provided an attachment. This attachment was entitled
"SPECIAL
CONDITION" and advised the grantee that: (1) the funds did
not
represent an increase to the planned funding level of the grantee's
Head
Start program; and (2) that the funds had to be expended for a
certain
purpose. We cite this as illustrative of an approach used by
OHDS which
clearly set conditions.
10. The Council had requested supplemental funding to upgrade
its
current fleet and "implement a preventive maintenance program."
Council
Ex. 2, p.2. It thus appears that the Council could reasonably
apply the
funds in question to repair costs. The record contains
documentation
for repair costs of $5,664. Council Ex. K (one invoice,
however, is
dated in 1990 and appears improperly included). Some of
these repairs,
such as new tires and brakes, clearly relate to vehicle safety
and,
therefore met the overall purpose for which OHDS stated it
reserved
program improvement funds. We note, however, that OHDS
objected in
general to charges to Head Start funds for vehicle repairs
because of
the Council's system for charging a mileage fee for vehicle
usage. OHDS
asserted that repair costs were factored into the mileage
fee charged by
the Council to each of its programs. OHDS asserted that
it was
inconsistent treatment of costs to both charge a mileage fee and
charge
Head Start directly for vehicle repair costs. In response, the
Council
stated that its mileage fee was structured to account for
the
responsibility of the primary program user to cover certain types
of
repairs and that the system had been audited by its own auditors as
well
as the HHS Inspector General with no finding that the Council
was
improperly charging direct repair costs. Since the consistency of
costs
principle relied on by OHDS concerns charging as direct costs costs
also
charged indirectly, it does not apply here to the charging of two
types
of direct cost items. We note this issue and our conclusion that
the
Council's explanation is adequate to refute OHDS's assertion
in
principle. Of course, on remand OHDS may require the Council
to
document that these supplemental funds are not being applied to
repair
costs which were reflected in the mileage rate calculation. Also
on
remand the Council can submit additional evidence to OHDS
concerning
repair costs incurred during the grant period in connection with
its
preventive maintenance program for Head Start vehicles (which were
not
included in the mileage fee calculation) or which were necessary for
the
used vehicles at the time of purchase. We note that the vehicles
were
purchased for delivery in the next program year so that if repairs
were
made to those vehicles after the end of the grant period in
question,
these expenditures would be allowable only if OHDS determines to
permit
the Council to carry-over supplemental