Lakes & Pines Community Action Council, Inc., DAB No. 3078 (2022)

DECISION

Lakes & Pines Community Action Council, Inc. (L&P) appeals the March 23, 2020, decision of the Administration for Children and Families (ACF) disallowing $26,653 in Head Start program funding for Fiscal Year 2018 (October 1, 2017, through September 30, 2018).¹  ACF based its determination on an independent single audit that found L&P had charged the Head Start program for unemployment insurance in excess of actual claims during the fiscal year that ended September 30, 2018.  L&P does not dispute the overcharging but asserts that it reduced the amount owed by undercharging its Head Start grant for unemployment insurance claims in subsequent years.  For the reasons discussed below, we uphold the disallowance.

Legal Background

The Head Start program, authorized under the Head Start Act, 42 U.S.C. § 9801 et seq., as amended, provides comprehensive early child education, nutrition, and health services to low-income children and their families.  The recipient of a Head Start grant must (with some exceptions not relevant here) comply with the uniform grant administrative requirements, cost principles, and audit requirements at 45 C.F.R. Part 75.  See 45 C.F.R. §§ 75.100, 75.101(b)(1), 75.300, 75.400.  See also 45 C.F.R. § 1303.3 (making Part 75 applicable to Head Start grantees).

Head Start grants are administered through the “project period” system of funding.  ACF approves the Head Start project for a five-year period but funds the project in discrete annual awards with each award corresponding to a specific budget period or period of performance.  Act § 638; Grants Policy Statement (GPS) at I-34 “Project Period and Budget Period.”  See Loving Arms Learning Ctr., DAB No. 2921, at 2 (2019) (“[A] Head

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Start grantee receives discrete annual ‘federal awards,’ with each award corresponding to a specific ‘period of performance.’”) (quoting Part 75).  “Period of performance” means the “time during which the non-Federal entity [i.e., grantee] may incur new obligations to carry out the work authorized under the Federal award.”  45 C.F.R. § 75.2 (definitions).  An award recipient “may charge to the Federal award only allowable costs incurred during the period of performance” and any authorized pre-award costs.  Id. § 75.309(a).

Costs associated with fringe benefits, such as costs of leave, employee insurance, pensions, and unemployment benefit plans, “are allowable provided that the benefits are reasonable and are required by law, non-Federal entity-employee agreement, or an established policy of the non-Federal entity.”  45 C.F.R. § 75.431(a).  Reserve costs for a self-insurance program for unemployment insurance “are allowable to the extent that the provisions represent reasonable estimates of the liabilities for such compensation, and the types of coverage, extent of coverage, and rates and premiums [that] would have been allowed had insurance been purchased to cover the risks.”  Id. § 75.431(e)(1).  See also § 75.447(d)(1).  Additionally, contributions for certain self-insurance programs including unemployment compensation are allowable so long as they are:

based on sound actuarial principles using historical experience and reasonable assumptions[,] . . . analyzed and updated at least biennially[,] . . . [and] normally [are] limited to the value of claims:
(A) Submitted and adjudicated but not paid;
(B) Submitted but not adjudicated; and
(C) Incurred but not submitted.

Id. § 75.447(d)(3)(i).  Actual claims paid to or on behalf of employees for unemployment compensation “are allowable in the year of payment provided that the non-Federal entity follows a consistent costing policy.”  Id. § 75.431(e)(3).

A Head Start grantee that expends $750,000 or more during its fiscal year must undergo an annual single audit by an independent auditor to determine if the grantee is operating in compliance with federal regulations, as well as appropriate financial and administrative procedures and controls.  Id. § 75.501.  The grantee must promptly follow up and take corrective action on audit findings.  Id. §§ 75.508(c); 75.511(a). 

If a grantee fails to comply with federal laws, regulations, or the terms and conditions of its award, the awarding agency may, as appropriate, disallow the cost of the activity or action not in compliance.  See id. § 75.371(b); see also Loving Arms, DAB No. 2921, at 5 (upholding disallowance where grantee made charges to Head Start award for costs incurred outside of the specified period of performance).

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Case Background

L&P is a private, nonprofit corporation that offers a variety of programs to assist low-income families and individuals in seven counties in Minnesota, including the operation of Head Start and Early Head Start programs.  ACF Ex. 1, at 9.  The programs were funded, in part, with awards issued by ACF’s Office of Head Start on an annual basis.  See generally id. 

Pursuant to the Single Audit Act, an accounting firm conducted an independent audit of L&P’s financial statements and supplementary information for the fiscal year ending September 30, 2018.²  ACF Ex. 1 (Audit Report).  The auditors found “[L&P] charged federal and nonfederal programs for unemployment insurance at a set rate which was allocated based on salaries. The rate was not updated timely to reflect changes . . . that decreased the actual unemployment claims during the year.”  Id. at 29.  The auditors attributed this to “[m]anagement[’s] [failure to] analyze and timely update the rate allocated for unemployment insurance based on changes in certain programs.”  Id.  Furthermore, the audit concluded that “Federal and nonfederal programs were charged approximately $61,998 in excess of actual claims during 2018. No one federal grant award had a direct and material amount charged in error,” but L&P’s Head Start program “had questioned costs greater than $25,000 [approximately $26,653] (see Audit Finding 2018-003[³]),” both of which were repeat findings from 2017.  Id.; see also id. at 35-36.  

By letter dated March 23, 2020, ACF notified L&P that it was disallowing $26,653 based on the auditor’s findings.  Disallowance Letter at 1.⁴  The disallowance letter stated in pertinent part:

Here, [L&P] charged the Head Start Program for contributions to its unemployment insurance reserves at a rate that was based on salaries. This rate did not reflect program changes that reduced L&P’s actual unemployment liability, resulting in an overcharge of $26,653 during the 2018 fiscal year. The ACF therefore concludes that [L&P] charged the Head Start Program at a rate that was not based on reasonable assumptions or a reasonable estimate of

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projected unemployment liability, in violation of 45 C.F.R. §§ 75.431(e)(1) and 75.447(d)(3)(i).

Id. at 2-3.  ACF directed L&P to repay the total disallowed amount within 30 days and advised L&P of its appeal rights.  Id. at 3-4.   ACF further acknowledged that the audit period of October 1, 2017, to September 30, 2018, overlapped with two periods of performance for the grant:  August 1, 2017, to July 31, 2018 (Year 3 of the award), and August 1, 2018, to July 31, 2019 (Year 4 of the award).  As ACF explained, “to the extent portions of [L&P’s] $25,653 overcharge occurred within these two periods of performance, [L&P] could balance out these portions with any undercharges that occurred within the same period.”  Id. at 3.  However, as of the date of the disallowance letter, L&P “[had] not provided ACF with any documentation to support that such balancing occurred.”  Id.  Finally, ACF explained that if the disallowed amount was not paid in full within 30 days, interest and penalties would be assessed on the amount unpaid from the date of the disallowance letter.  Id. at 4-5 (citing 45 C.F.R. § 30.18).

On April 22, 2020, L&P appealed the disallowance.  Notice of Appeal.  In its Notice of Appeal, L&P conceded that the unemployment insurance amount charged to the Head Start program exceeded the actual unemployment claims attributable to Head Start for fiscal year 2018 but asserted the amount of the difference was $31,999.90⁵ – more than the ACF disallowed amount.  Id. at 1.  As such, L&P does not dispute the auditor’s finding that there were overcharges.

On appeal, L&P asserts that upon learning of the final audit results for fiscal year 2017 (which included similar findings, see ACF Ex. 1, at 29, 35) in late May 2018, “changes were made” to reduce the cost of unemployment insurance and to reduce the amount L&P was claiming against its Head Start award, which changes continued in fiscal years 2019 and 2020.  Notice of Appeal at 1-2; see also ACF Ex. 1, at 38-40.  This parallels the information L&P provided to the auditors.  See ACF Ex. 1, at 29-30, 38-40.  L&P now requests that the disallowed amount be lowered or omitted all together on the basis of the reduced charges to its Head Start awards for fiscal year 2018 and subsequent fiscal years, which, according to L&P, would have negated the original overcharge by the end of the second quarter of its 2020 fiscal year.  See Notice of Appeal at 1-2.

ACF addressed L&P’s position regarding mitigation of the overcharges in both the disallowance letter and its response brief, stating “grantees cannot balance out overcharges to a grant with subsequent undercharges unless the undercharges occurred within the same period of performance as the overcharges.”  Disallowance Letter at 3

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(citing Teaching & Mentoring Cmtys., Inc., DAB No. 2790, at 9-11 (2017) and 45 C.F.R. § 75.309 (charges to grant must correspond to liabilities that arose during the grant’s period of performance)); see also ACF Br. at 5-6.  Additionally, as indicated earlier, in the disallowance letter ACF acknowledged that the audit period of October 1, 2017, to September 30, 2018, overlapped with two periods of performance for the grant:  August 1, 2017, to July 31, 2018 (Year 3 of the award), and August 1, 2018, to July 31, 2019 (Year 4 of the award), and was open to consider any evidence from L&P of balancing out overcharging with subsequent undercharging during the applicable time frames.  However, as of the date of the disallowance letter, L&P “[had] not provided ACF with any documentation to support that such balancing occurred.”  Disallowance Letter at 3.  In its response brief, ACF interprets L&P’s assertions that it began taking corrective action by ceasing the overcharges in May 2018 [but not intentionally undercharging] (during Year 3 of its award), and then by undercharging its Head Start award beginning in fiscal year 2019 (which began October 1, 2018, or during Year 4), does not establish that the “balancing” out could have occurred during the same period of performance.  ACF Br. at 5-6. 

Analysis

The Board must uphold a disallowance if it “is authorized by law and the grantee has not disproved the factual basis for the disallowance.” Mobile Cmty. Action, Inc., DAB No. 3064, at 5 (2022) (quoting Middletown Cmty. Health Ctr., Inc., DAB No. 2754, at 6 (2016) (citing S.A.G.E. Commc’ns Servs., DAB No. 2481, at 5-6 (2012)).  “[I]t is a fundamental principle of grants management that a grantee . . . bears the burden of demonstrating the allowability and allocability of costs for which it received federal funding.”  Bright Beginnings for Kittitas Cnty., DAB No. 2608, at 6 (2014) (quoting Marie Detty Youth & Family Servs. Ctr., Inc., DAB No. 2024, at 3 (2006)).  In assessing whether there is a basis for the disallowance, the Board is bound by all applicable statutes and regulations.  45 C.F.R. § 16.14; Kids Central, Inc., DAB No. 2897, at 15 (2018).  Moreover, the Board “has no authority to ignore or waive an otherwise applicable grant administrative requirement.”  Teaching & Mentoring, DAB No. 2790, at 11.  As we explain below, and based on the record before us, the applicable regulations prohibit the solution that L&P has proposed to lower or omit the disallowance.

ACF based the disallowance on its determination that L&P violated the Federal requirements that apply to Head Start grantees concerning compensation for fringe benefits when it charged the Head Start program for unemployment insurance at a set rate and did not analyze and timely update the rate allocated for unemployment insurance based on changes in certain programs.  Disallowance Letter at 2-3 (citing 45 C.F.R. §§ 75.431(a), 75.431(e), and 75.447(d)(3)(i)).  L&P does not contest the determination that it overcharged its Head Start grant for unemployment insurance by $26,653 during its 2018 fiscal year.  L&P has thus identified no basis to reverse the disallowance of those costs.

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The uncontested determination that L&P expended $26,653 in grant funds for unallowable costs established a “debt” to the federal government – a debt that L&P must, of course, repay. See 45 C.F.R. § 75.391(a) (“Any funds paid to the non-Federal entity in excess of the amount to which the non-Federal entity is finally determined to be entitled under the terms and conditions of the Federal award constitute a debt to the Federal Government.”).  In general, the validity of a disallowance, and questions relating to repayment of the resulting debt, are distinct issues, the latter of which is not generally a matter within the Board’s jurisdiction to review.  Cf. Licking Cnty. Econ. Action Dev. Study, DAB No. 1159, at 5 (1990) (stating that a “grantee’s ability to repay a disallowance is immaterial to the propriety of the disallowance”); Md. Dept. of Human Res., DAB No. 358, at 6 (1982) (noting that “[i]f the substantive basis for [the] disallowance is valid, then the [non-federal party] must repay the funds[,]” and “[t]he question is merely what method should be used”); NC Coalition Against Domestic Violence, DAB No. 2851, at 4 (2018) (recognizing that, “‘once the Board concludes that there is a valid debt,’ . . . ‘the Federal Claims Collection Act regulations at 45 C.F.R. Part 30 provide a separate process for the Secretary . . . to determine how the debt should be repaid’” and that the Secretary’s decisions under Part 30 “are not subject to Board review”) (quoting United Me. Families, DAB No. 1707, at 1, 5 (1999) and Mich. Dep’t of Cmty. Health, DAB No. 2225, at 16 (2009)).  In this case, L&P’s Notice of Appeal clearly shows that its request to “lower[] or omit[] all together” the disallowance is not, in substance, a challenge to the disallowance’s validity but, rather, a request that we find that it has already reduced the resulting debt by means other than cash repayment.

We decline to make that finding, for a number of reasons.  First, there was nothing unlawful about ACF’s demand – stated in the March 23, 2020, disallowance letter – for repayment of the entire debt in cash.  Grant administration regulations applicable to L&P permit the grantor agency to demand repayment in cash, as ACF has done here, and then if the debt is not repaid “within 90 calendar days after demand,” to use other collection methods, including “administrative offset against other requests for reimbursements; [w]ithholding advance payments otherwise due to the non-Federal entity; or [o]ther action permitted by Federal statute.” 45 C.F.R. § 75.391(a); see also 45 C.F.R. § 75.410 (“Payments made for costs determined to be unallowable . . . must be refunded (including interest) to the Federal Government in accordance with instructions from the Federal agency that determined the costs are unallowable unless Federal statute or regulation directs otherwise.”).

Second, as we mentioned above, the Board has consistently ruled that matters relating to repayment of a valid debt arising from a disallowance – including disputes about the acceptability of the form of repayment – are outside its scope of review under 45 C.F.R. Part 16.  See Licking Cnty., DAB No. 1159, at 5 (stating that the Board’s holding that a disallowance was correct “ends our inquiry.”); Telamon Corp., DAB No. 1603, at 1, 10 (1996) (holding that the Board lacked the authority to grant the Head Start grantee’s request that a valid debt, arising from a disallowance based on the grantee’s failure to

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satisfy Head Start’s non-federal match requirement in one “program year,” be reduced to the extent of any “excess non-federal share” contributed in the same or subsequent program year, and stating that the grantee’s entitlement to such a reduction was “outside the scope of the Board’s review”); Camden Cnty. Council on Econ. Opportunity, DAB No. 881, at 7 (1987) (noting that the Board “has no independent authority to fix a repayment schedule or determine the form of repayment” and observing that the Head Start agency’s policy required the grantee to “repay the funds with cash or a check . . . rather than a deposit into the Head Start account”).  “[O]nce the Board concludes that there is a valid debt,” as we do here, “regulations at 45 C.F.R. Part 30 provide a separate process for the Secretary [of HHS] (or [their] designee within an operating division or regional office) to determine how the debt should be repaid.”  United Me. Families, DAB No. 1707, at 5 (1999).  “The Secretary’s decisions under 45 C.F.R. Part 30 are not subject to Board review.”  Mich. Dept. of Cmty. Health, DAB No. 2225, at 16 (2009). 

The Board has noted that “in ‘some circumstances, it may be appropriate to offset a debt owed by a grantee to the grantor agency by an amount of funds due to the grantee from the same agency.’”  NC Coalition at 4 (citing Huron Potawatomi, Inc., DAB No. 1889, at 5 (2003)).  However, “the discretion to determine a grantee’s repayment method ‘lies completely with’ the grantor agency.”  Id. (citing Action Inc., DAB No. 1400, at 4 (1993)).  Here, ACF afforded L&P the opportunity to submit evidence for ACF to review so ACF could determine whether L&P had undercharged its award any amount that could offset the disallowance from the same period of performance and any evidence that L&P had repaid even a portion of the disallowance.  See Disallowance Letter at 3.  Evidently, however, L&P did not pursue this opportunity and chose instead to propose its repayment schedule to the Board. 

Third, despite L&P’s arguments, it has not submitted sufficient evidence from which we (or ACF) could conclude that it in fact has reduced or altogether eliminated the overcharged amount by the end of the second quarter of fiscal year 2020.  See Notice of Appeal at 1-2.⁶  L&P submitted spreadsheets detailing unemployment benefits paid for fiscal years 2018, 2019 and 1st quarter 2020.⁷  However, the annual figures appear to represent unemployment claims for the calendar year, while the quarterly figures appear

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to represent unemployment claims for L&P’s fiscal year (which runs from October 1 through September 30).  Because L&P’s performance periods under its Head Start award ran from August 1 through July 31, and thus did not coincide with either the calendar year or L&P’s fiscal year, we are unable to determine from this evidence the amount of unemployment claims allocable to each discrete period of performance under the award.  Furthermore, there is no explanation as to which, if any, of those figures represents the amounts associated with the Head Start program.  None of the spreadsheets definitively indicates when any of the claimed amounts were actually paid.  Thus, the additional evidence L&P has submitted on appeal does not satisfy its burden to support that it had allowable costs that it did not charge to its Head Start grant for the time period beginning in late May 2018 through July 31, 2018, to reduce the amount of the disallowance during the same period of performance.⁸  The disallowance letter reflects that L&P had not previously presented ACF with evidence of partial repayment or allowable balancing (that is, evidence of allowable costs L&P did not charge to the grant for a specific period of performance in Year 3 or Year 4 to reduce the disallowance determined to have arisen during that same period of performance) within the multiple periods of performance given that the audit period for fiscal year 2018 overlapped with two periods of performance for the grant.  See ACF Exs. 1, 2, 3.  The evidence provided on appeal is equally deficient in this regard.

Finally, L&P seeks to use funds awarded to cover allowable costs incurred during subsequent periods of performance (August 1, 2018, through July 31, 2019, and beyond) to satisfy debt incurred during the Year 3 period of performance (August 1, 2017, through July 31, 2018).  ACF submits that such transactions would violate the funding-period restriction in 45 C.F.R. § 75.309(a).  We agree.  “[T]he Board has long upheld disallowances based on the principle that ‘grant funds earmarked for one funding period may not be used to pay costs incurred outside that period.’”  Loving Arms, DAB No. 2921, at 4-5 (citing Teaching & Mentoring, DAB No. 2790, at 10; Council for the Spanish Speaking, DAB No. 2718, at 6;Cent. Piedmont Action Council, Inc., DAB No. 1916, at 3 (2004)).

L&P asserted that it balanced out a portion of the identified disallowed costs through subsequent undercharging during fiscal year 2019 because the audit period overlapped with two periods of performance for the grant.  But any such balancing could only apply to overcharges that occurred during the portion of the performance period that was

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included in the audit (i.e., from August 1, 2018, through September 30, 2018).  However, as ACF has pointed out in its response, L&P asserts that “changes were made to our accounting system to lower the amount collected from [grant] funds,” and that it “stopped” paying unemployment insurance premiums for half of fiscal year 2018, after it learned of the audit findings in May 2018.  ACF Br. at 4-5 citing Notice of Appeal at 1.  If the overcharges ceased before the end of Year 3, any undercharges during fiscal year 2019 (which began on October 1, 2018, during the performance period of Year 4, (August 1, 2018, through July 31, 2019)) could not serve to offset the disallowance because they could not have been incurred during the same period of performance under the Head Start award.

Conclusion

We sustain ACF’s March 23, 2020, disallowance of $26,653.

Endnotes

¹ The relevant periods of performance for this grant were August 1, 2017, through July 31, 2018 (Year 3 of the award), and August 1, 2018, through July 31, 2019 (Year 4 of the award).  L&P’s fiscal year (October 1 through September 30) did not align with the periods of performance or the calendar year.  See ACF Exs. 2 and 3.  We discuss this in detail in the Legal Background and Case Background sections of this decision.

² The audit report references repeated findings from the prior year, which L&P also acknowledges.  See ACF Ex. 1, at 29, 35; Notice of Appeal at 1.  This appeal only addresses findings, and the subsequent disallowance, from the audit for the fiscal year ending September 30, 2018.

³ This reference appears to be erroneous in that Audit Finding 2018-04 addressed questioned costs for the Head Start Program.  See ACF Ex. 1 at 35.

⁴ L&P did not submit a Brief or an Index of Exhibits.  While L&P did submit supporting documents, each one a separate PDF file, none of the supporting documents submitted are marked as exhibits, so citations refer to the description of the document and the corresponding page number of that PDF document, if necessary.

⁵ The amount L&P identifies in the Notice of appeal has an incorrect calculation. Using L&Ps stated figures for the amount charged ($54,339.62) and actual claims ($22,669.72) the overpayment would be $31,669.90.

⁶ Again, there is a calculation error in the Notice of Appeal figures in that the “balance” of the overpayment at the end of the 1st quarter of fiscal year 2020 was stated to be $4,583.77 when in fact, presuming the accuracy of the unemployment charges for the first quarter of fiscal year 2020 and the amount L&P asserts it charged to the Head Start award for that period, the remaining “balance” would be $9,621.25.  While it is conceivable that L&P would have been able to undercharge the grant for that amount in the second quarter of fiscal year 2020, as it asserted it would be the miscalculated amount, it is more than double the amount L&P indicated.

⁷ See e.g., Calendar_Year_2018_Unemployment_Claims; Calendar_Year_2019_Unemployment_Claims; FY18_2nd_Qtr_Claims; FY18_3rd_Qtr_Claims; FY18_4th_Qtr_Claims; FY19_1st_Qtr_Claims; FY19_2nd_Qtr_Claims; FY19_3rd_Qtr_Claims; FY19_4th_Qtr_Claims; FY20_1st_Qtr_Claims.

⁸ L&P also submitted documentation of its unemployment insurance reserve account balances for fiscal years 2016 through 2020, which reflects unemployment claims paid from and deposits made into the account, as well as documents described as “Object Code Totals” for fiscal years 2016 through the first quarter of fiscal year 2020.  Aside from the fact that there appear to be discrepancies between the figures listed in these documents, they say nothing about the amounts charged to L&P’s Head Start awards for each respective performance period or clearly identify the allowable costs that L&P could have charged but did not charge for each respective performance period.