GAB Decision 446
Docket No. 83-4
June 30, 1983
Wayne County Intermediate School District (Michigan);
Settle, Norval; Teitz, Alexander Ford, Cecilia
Wayne County Intermediate School District (Michigan) (Grantee)
appealed the determination of the Office of Human Development Services
(Agency) to disallow $6,878 of costs claimed under a Head Start grant
for the fiscal year ended August 31, 1981.
During the course of proceedings before the Board, the parties agreed
on an appropriate adjustment for $930 in interest earned on a checking
account (see, Board's April 11, 1983 summary of conference call),
leaving in dispute $5,948.
The remaining dispute involved $2,100 expended to install a fence and
$3,848 expended in excess of the approved budget line item for a sound
slide program. Both expenditures were questioned by Grantee's auditors
because Grantee had not received prior approval to incur the costs. The
Agency asserted that both items required prior approval; the Agency
refused to grant retroactive approval for these expenditures, and
subsequently disallowed them. During this appeal the Agency again
considered granting retroactive approval, but did not. See, Agency's
Brief, pp. 4, 7. The question before the Board is whether the Agency
appropriately denied retroactive approval. For the reasons discussed
below, we have determined that the Agency's denial of retroactive
approval for Grantee's expenditure to install the fence was not a sound
exercise of Agency discretion and that the Agency's denial of
retroactive approval for the additional expenditure for the sound slide
program was appropriate.
Board Review
The issue before the Board is whether the Agency was justified in not
granting retroactive approval for these (2) costs. Chapter 1-105,
B.1.60 of the Department of Health and Human Services Grants
Administration Manual, which covers retroactive approval, provides that
the Agency may grant retroactive approval if, inter alia, "(the)
transaction would have been approved had the organization requested
approval in advance" and "(the) organization agrees to institute
controls to ensure that prior approval requirements are met in the
future." In applying this provision in a previous decision, Economic
Opportunity Atlanta, Inc., Decision No. 313, June 24, 1982, the Board
interpreted it as follows:
Since the language of this provision is permissive, i.e., may, it
does not preclude the Agency's consideration of all relevant factors,
such as a grantee's fiscal management history, in deciding whether or
not to ultimately grant retroactive approval where prior approval was
required but not obtained. In making its determination on a request for
retroactive approval, the Agency has considerable, but not completely
unbounded, discretion. Although the Board will not interfere when the
Agency appropriately exercises its discretion, the Agency must state the
basis for its decision and may not deny retroactive approval based on
unsubstantiated conclusions or on bases so insubstantial that the
decision fairly can be described as capricious. (Citations omitted)
With this standard in mind, we review the two disallowed expenditures
separately.
Cost of Installing a Fence
Grantee installed a fence costing $2,100 between its Head Start
playground and a school driveway. The Agency declined to grant
retroactive approval for this expenditure because the Agency stated that
the installation costs of the fence were not necessary and reasonable to
Grantee's program and, therefore, the Agency would not have approved the
costs had Grantee requested approval in advance and, in addition,
the Grantee has flagrantly disregarded advance approval requirements
in the fiscal years preceding and following the fiscal year at issue.
Agency Brief, p. 4.
(3) Grantee did not dispute that it was required to obtain prior
approval for this expenditure. Nevertheless, Grantee asserted that
installation of the fence was necessary to "address licensing issues
that affected the safety of children." Grantee Notice of Appeal, p. 2.
Grantee stated that it was informed by a licensing consultant from the
Michigan State Department of Social Services that a fence around the
playground was required.
In support of its contention, Grantee submitted an October 31, 1980
letter from the director of the involved Head Start center informing
Grantee's administrator of the state official's determination. Grantee
Ex. A.2.a.1. Grantee also submitted excerpts from the State of
Michigan's Licensing Standards for Child Care Centers and from the Head
Start Performance Standards, which Grantee asserted required it to make
outdoor play areas safe, i.e., by installing fences around them. Id.
at A.2.a.2. and A.2.b.1.
The sole reason given by the Agency in support of its determination
that the costs were not reasonable and necessary was that, considering
the Head Start director's letter, Grantee failed to show there was a
state or local requirement for the fence. Agency Brief, pp. 4-5. After
the Grantee submitted the state and Head Start requirements that
playgrounds be made safe, the Agency then maintained that these
provisions do not set out absolute requirements for the installation of
a fence. The Agency did not, however, dispute that the Licensing and
Performance Standards were binding on Grantee. While we agree with the
Agency that these standards do not set out absolute requirements, we do
not believe that the "reasonable and necessary" standard is so
restrictive as to require an item to be mandated in order to be
allowable. In addition, we find that a requirement of installing a
fence can be reasonably inferred from the standards.
The Michigan Licensing Standard, R400.5117 states, in part, that:
A center operating with children in attendance for 5 or more
continuous hours a day shall have a safe outdoor play area....
Grantee Ex.A.2.a.2.
(4) The Agency contended that this rule speaks to the requirement of
having an outdoor play area, not to what the requirements are for such
an area. Tape of June 16, 1983 Conference Call (Tape). While the
Agency appears to be correct in its contention that this rule addresses
when a play area is required, the rule also quite clearly states that
such a play area shall be "safe." Since "safe" is not defined,
we
believe that the common sense and discretion of Grantee's program
officials should be relied on to a large extent in defining what steps
are necessary to make a play area safe. In this case, Grantee's
officials stated that they run "dozens" of outdoor play facilities,
all
of which are enclosed by fences. Tape. In addition, the record shows
that Grantee was told that a fence was necessary for its state license.
Grantee also submitted Head Start Performance Standards which state:
(7) Outdoor play areas shall be made so as to prevent children from
leaving the premises and getting into unsafe and unsupervised areas.
Grantee Ex. A.2.b.1.
A section labeled "Guidance", which is apparently the Agency's
interpretation of the Performance Standard, states:
(7) Where outdoor space borders on unsafe areas... adults should
always be positioned to supervise the children. If possible such areas
should be enclosed. (emphasis added)
Id.
The Agency again argued that this is not an absolute requirement,
emphasizing the "if possible" language in the Guidance section. See,
Tape.
We find the Agency's position untenable. Grantee stated that the
fence was installed between its playground and a through driveway. This
is clearly an unsafe area. The Head Start guidelines state that play
areas shall be made safe. Grantee's interpretation of this provision
was that a fence was required. We find that this is a reasonable
interpretation of this provision. In addition, we find (5) that,
contrary to the Agency's interpretation, the statement in the Guidance
section that unsafe areas be enclosed "if possible", while not an
absolute requirement, is a positive statment supporting the use of a
fence to keep children from unsafe areas.
The Agency argued that the real issue is why Grantee never obtained
documentation showing prior approval for these costs. Grantee contended
that it requested prior approval in a letter dated December 2, 1980
(Grantee Ex. A.1.) and received oral approval to incur the costs (the
fence was actually installed in April, 1981). Grantee stated that it
did not receive any written response to its written request for prior
approval. The Agency argued that the regulations require written prior
approval and that a written request for approval is not enough.n1 Tape.
The Agency also stated that it attempted to confirm Grantee's allegation
that Grantee received verbal approval but the individual who allegedly
approved the expenditure denied ever doing so. Id.
The Agency's reasoning is circular. The Agency disallowed these
costs because Grantee did not have prior approval to incur them. Had
Grantee received prior approval, the Agency would not have disallowed
the costs and, therefore, there would be no need for retroactive
consideration of them. For the Agency to now rely on the same prior
approval requirement as a basis for not granting retroactive approval
renders the consideration of retroactive approval meaningless.
The Agency also contended that Grantee had ignored the prior approval
requirements in years prior to the year in question and, therefore, the
Agency declined to grant retroactive approval of these costs. Agency
Brief, p. 5. The Agency stated that in both fiscal years 1979 and 1980
Grantee (6) purchased equipment without first obtaining prior written
approval from the Agency. The Agency asserted that while these claims
were properly disallowed, the Agency by letter dated January 22, 1982
granted "a one-time post approval" of those expenditures. Id. at p.
5.
In addition, the Agency contended that Grantee is presently
requesting retroactive approval of an expenditure made without prior
approval during fiscal year 1982. The Agency asserted that because of
Grantee's continual failure to obtain prior approval for equipment
purchases the Agency declines to retroactively approve the costs of
installing the fence.
Grantee contended that, with regard to the equipment expenditures in
fiscal years 1979 and 1980, Grantee appealed those determinations to
this Board /2/ and Grantee "made no admission of improper management or
disbursement of funds." Grantee Brief, p. 3. In addition, Grantee
asserted that the costs in question here were incurred before the
Agency's retroactive approval of the 1979 and 1980 costs and, therefore,
before Grantee instituted additional controls to ensure that prior
approval requirements were met.
With regard to the 1982 request for retroactive approval, Grantee
stated that the expenditure involved was $530, which is $31 over the
dollar limit which requires prior approval, and was made by a delegate
program. Id. Grantee asserted that delegate program officials believed
at the time of purchase that the cost would be below $500 and,
therefore, no prior approval would be necessary but that the invoice
when received included shipping and set up charges which brought the
total costs to $530. Grantee stated that it recovered the $530 from the
delegate agency responsible for the oversight and had no intention of
appealing the matter. Id. at p. 4.
We do not agree that the Agency has shown that Grantee experienced
continuing fiscal management problems which support the denial of
retroactive approval for the costs in (7) question here. As Grantee
stated, and the Agency did not contest, for fiscal years 1979 and 1980
Grantee did not concede any managerial lapse with regard to the
disallowed equipment purchases. The Agency did not attempt beyond a
mere reference to the disallowances to show how those purchases
established any pattern or were related to the transactions involved in
this case.
We are unpersuaded that the questioned but approved expenditures for
FY 79 and 80 show that Grantee "flagrantly disregarded advance approval
requirements." Agency Brief, p. 4. The Agency made no attempt to show
that these were something more than mere isolated incidents in those
respective years. Although the Agency related these two events to the
costs in question as examples of Grantee's failure to obtain prior
approval, the Agency ignored Grantee's contention that Grantee never
conceded the fact that those funds were improperly expended. Therefore,
we are left with the Agency's unilateral determination that prior
approval was necessary for those costs and the Agency using that
determination as a basis for denying retroactive approval in this case.
Without some explanation of the events surrounding those disallowances,
we can accord little weight to this.
Likewise, we are unpersuaded by the Agency's argument that Grantee
continued to ignore the prior approval requirements. Grantee explained
how an oversight on the part of a delegate agency resulted in a purchase
surpassing the dollar limit which requires prior approval by $31.
Grantee also stated that it recovered the money involved and, although
the costs were questioned, no disallowance was taken. See, Tape. The
Agency did not question Grantee's explanation. We fail to see how
Grantee's actions were improper. Although there was a technical
violation of the prior approval requirements, albeit in a de minimis
amount, Grantee took action to alleviate the violation. No disallowance
was issued by the Agency. The Agency's mere allegation that Grantee's
actions were improper cannot be given substantial weight when compared
to the Grantee's uncontested explanation of questioned costs. We find
persuasive Grantee's point that the controls instituted in response to
the approval of the 1979 and 1980 costs have resulted in managerial
improvements, given the circumstances of the only questioned cost for
1982. In addition, the institution of controls would (8) satisfy the
retroactive approval policy requirement for controls to assure that
prior approval requirements are met in the future. Therefore, we find
that the Agency failed to support its allegation that Grantee
experienced continual fiscal management problems sufficient to support
the denial of retroactive approval.
Costs of a Sound Slide Program
For fiscal year 1981, Grantee had in its budget $6,000 for the
production of sound slide programs. This amount was stated as a line
item within the budget category of contractual services. Grantee
ultimately spent $9,848. Grantee did not exceed the total amount
approved for the budget category because Grantee did not make another
line item expenditure within the same category. The 32 page budget
justification specifically stated that the sound slide expenditure was
to cover four topics, including three actually named in the
justification. The Agency disallowed $3,848, the difference between the
$6,000 which was part of the approved budget and $9,848 eventually
spent, because Grantee did not have prior written approval to spend the
additional $3,848. Grantee did not contest that prior written approval
was necessary. /3/ The question before the Board is whether the Agency
was justified in not granting retroactive approval of these costs.
(9) The Agency denied retroactive approval of these costs because
Grantee presented no evidence that the additional topic and additional
copies of the sound slide programs were necessary and reasonable for
Grantee's program and, therefore, the Agency would not have approved the
costs had approval been sought in advance. Agency Brief, p. 7. In
addition, the Agency again asserted, as with the fence, that Grantee
failed to follow prior approval requirements for four consecutive years
and, therefore, the Agency declined to retroactively approve the costs.
Id.
Grantee ultimately explained that it incurred the additional expenses
for the slide programs because of a cost overrun, the production of the
fourth topic not specifically described in the budget justification, and
the production of additional copies of all the sound slide programs.
Grantee argued that the additional copies were needed to distribute to
its 25 centers around the county. In addition, Grantee contended that
the Agency invited it to make presentations to other grantees with the
sound slide programs. As justification for this expenditure, Grantee
also stated that it did not overexpend its budget but instead shifted
funds between line items within the budget category.
The Agency contended that it was not contesting the reasonableness
and necessity of the duplicate copies of the sound slide programs
covering the three topics and copies approved by the Agency in Grantee's
budget but was questioning the need for the additional topic and
additional copies. The Agency argued that Grantee made no showing of
the need for these items.
We find that the Agency was justified in denying retroactive approval
for the additional costs of the slide programs since Grantee failed to
show the need for the additional topic and copies. Grantee made only
conclusory statements to explain why the additional expenditures were
necessary. Grantee had, by virtue of its approved budget, authorization
to expend $6,000 for certain sound slide programs and duplicates of
those programs. However, after securing approval and proceeding with
production of the sound slides, Grantee unilaterally decided to spend
the money required to produce more. Grantee argued that it believed it
had such flexibility. Although Grantee was persuasive in describing the
ultimate high quality and low cost of producing the (10) slide programs,
Grantee produced no evidence to explain why the original topics and
duplicates were insufficient to meet its needs. Without such
information we cannot say that the Agency was unreasonable in stating
that it would have denied this request even if made in advance.
Conclusion
For the reasons discussed above, we sustain the disallowance of
$3,848 expended for the sound slide program, finding that the Agency was
not unreasonable in denying retroactive approval, and we reverse the
disallowance of $2,100 expended to install a fence, finding that the
Agency's decision not to grant retroactive approval of the fence cost
was not a sound exercise of its discretion. n1 The Agency could not
explain why Grantee received no written response to its request for
prior approval despite the requirement in 45 CFR 74.102(c) requiring the
Agency to notify Grantee within 30 days of receipt of such a request
either of its decision or when it will make its decision. /2/
Wayne County Intermediate School District, Board Docket No. 81-72. This
appeal was closed when the Agency issued its approval for the disputed
costs. /3/ Grantee stated that this expenditure was for
contractual services and not equipment and questioned whether this was a
budget revision for which prior approval is necessary since Grantee did
not overspend its total budget.Tape. Grantee's comments were made
during a discussion of the Board's questions about prior approval
requirements, and Grantee did not develop these arguments beyond mere
conclusory statements and, at times, rhetorical questions. Since
Grantee also stated both during the conference call and in its written
submission that it agreed that prior approval was necessary for these
additional costs and since, upon review, we agree that the Agency's
Grants Administration Manual at Chapter 1(L), Paragraph 2(e), requires
prior approval for this expenditure as the acquisition of equipment, we
consider here only the question of whether the Agency could properly
decline to grant retroactive approval.
JULY 07, 1984