DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Texas Migrant Council
Docket Nos.85-158 85-182 85-258
Audit Control Nos. 06-51466 06-55007 06-55182
Decision No. 842
DATE: February 26, 1987
DECISION
The Texas Migrant Council (TMC) appealed determinations by the Office
of
Human Development Services (OHDS) of the Department of Health and
Human
Services (HHS) to disallow $365,253 in rental charges claimed by
TMC
under a grant for Head Start programs for the period of July
1978
through December 1984. The rental charges were claimed for
facilities
owned by TMC. 1/ OHDS further questioned $477,886 claimed by
TMC for
health insurance premiums, but this issue was severed by agreement
of
the parties and is being handled separately in a mediation
process.
During the course of this proceeding, OHDS agreed to reduce
the
disallowance to $172,894 based on new documentation of depreciation
and
other allowable costs submitted by TMC. We uphold the disallowance
to
the extent that the rental charges exceed depreciation and
other
allowable costs, in the amount of $172,894, for the reasons
discussed
below.
Case Background
TMC is a non-profit institution which operates Head Start centers
in
Texas, Ohio, Wisconsin, Indiana and Washington State,
providing
educational, medical, dental, nutritional and other social services
to
children of migrant farm workers. Most of the centers are open
only
during the season migratory workers are in the area. TMC staff
move
between these centers following the migratory patterns of the
children
they serve, providing, as much as possible, a continuity of
personnel
and service. TMC's assertion that it provides these services
effectively
and at reasonable cost was not contested in this proceeding.
In 1976, TMC started a program of purchasing land and buildings for use
as
Head Start facilities. The purchase program was conducted
without
federal government assistance, with funds raised by donations
and
mortgage commitments. TMC said it entered into these purchases
because
of the high costs of securing adequate facilities in the rental
market,
and the high cost of renovating rental facilities for part-year
usage.
TMC kept OHDS program officials apprised of these purchase
activities
and TMC claimed rental charges for the facilities from Head Start
funds.
In doing so, TMC followed the advice of the Director of the
OHDS
Indigent Migrant Programs Division to charge rent provided that
the
charge was below market rates for facilities of similar sizes
and
quality.
After questioning TMC's rental charges during reviews conducted in
1982
and 1983, OHDS sought to disallow rental charges for the period
at
issue, based on an audit conducted by the HHS Office of the
Inspector
General, and subsequent audits, which identified these rental
charges as
excessive under the regulations regarding charges for
grantee-owned
facilities. TMC appealed this deter- mination to the
Board. During the
course of the appeal, TMC argued that the regulations
were ambiguous and
did not prohibit the rental charges, that TMC had relied
upon advice
from an OHDS employee in charging rent, that the rental charges
were
reason- able, and that OHDS should have approved a waiver from
any
formal limitations since the use of grantee-owned facilities saved
the
Head Start program money. The Board held a hearing and
received
submissions on both legal and computational issues.
The case was also stayed for a considerable time while the
parties
attempted to resolve issues. Based on the analysis below, we
conclude
that the disallowance should be upheld in the amount of
$172,894.
Discussion
1. The regulations clearly do not permit rental charges
for
grantee-owned facilities.
In the disallowance at issue, OHDS sought to disallow rental charges
in
excess of costs based on a depreciation or a use allowance method.
In
the absence of documentation of depreciation costs, OHDS applied a
use
allowance method and disallowed rental charges in excess of 2 percent
of
the acquisition costs of the facilities, not including the cost of
the
land. TMC asserted that the regulations OHDS relied on are
ambiguous
and do not clearly limit grantees to depreciation or use allowances
for
facilities they own. TMC argued that it
could, alternatively, claim reasonable rental charges for
its
facilities. As we discuss below, we conclude that the
regulations
unambiguously prohibit rental charges for grantee- owned
facilities in
excess of depreciation or use allowances.
In 1974, HHS issued cost principles applicable to grant recipients at
45
CFR Part 74. Appendix F addressed "[p]rinciples for determining
costs
applicable to grants and contracts with non-profit institutions."
In
1981, Appendix F was superseded by Office of Management and Budget
(OMB)
Circular A-122, made applicable under 45 CFR 74.171(a). 46 CFR
30500
(June 9, 1981). OMB Circular A-122 is almost identical to
Appendix F in
the relevant parts. During the entire period at issue,
either Appendix
F or OMB Circular A-122, whichever was currently effective,
was made
part of the terms and conditions of TMC's grants, and copies
were
transmitted to TMC. OHDS argued that TMC is limited to
compensation
under Appendix F, section G.10, "for the use of buildings,
capital
improvements and usable equipment on hand through depreciation or
use
allowance." [emphasis added]. The clear sense of "on hand" means
that
this section applies to grantee-owned facilities. 2/ The
regulations
continue by clarifying how depreciation and use allowances must
be
calculated if those methods of compensation are chosen. Appendix
F,
G.10(d). Use allowances for buildings and improvements are limited
to
"an annual rate not exceeding 2 percent of acquisition costs." App.
F,
G.10(d)(viii). These sections would not preclude compensation for
costs
otherwise allowable, such as the costs of maintenance and repairs of
the
property, but act as a limit on the compensation for
capital
improvements and capital expenditures.
Rental costs are considered separately, in section G.38. Although
rental
costs are not expressly defined to exclude rental from the
grantee
itself, the language of section G.38 clearly indicates that such
a
transaction should not be treated as a rental. In G.38(b),
rental
charges between entities under common control are expressly limited
to
the "normal costs of ownership, such as depreciation, taxes,
insurance
and maintenance." Rentals allowable as part of a sale-lease
back
transaction or for facilities owned by affiliated persons
or
institutions are limited to "the amount the institution would
have
received had legal title to the facilities been vested in it."
G.38(c
and d). It is clear from these provisions that rental costs
incurred in
almost any circumstance other than an arms-length transaction are
not
allowable to the extent that those costs exceed the costs
of
depreciation or use calculable under Appendix F, section G.10.
This
would include, obviously, "rental" costs for grantee-owned
facilities,
since such costs could not be incurred as part of an
arms-length
transaction.
OMB Circular A-122, "Cost Principles for Non-profit Organiza-
tions,"
applicable after June 9, 1981, is virtually identical in all
relevant
parts. Attachment B, paragraph 9 allows grantees to claim
compensation
for buildings, capital improvements and equipment on hand
through use
allowances or depreciation. This section is somewhat more
detailed than
Appendix F, but is no less clear in its application to
grantee-owned
facilities. Attachment B, paragraph 9, also limits
compensation based
on a use allowance to 2 percent of acquisition
costs. Similarly,
Attachment B, paragraph 42, while more detailed than
Appendix F, clearly
applies only to rental costs incurred in an arms-length
transaction.
Thus, we disagree with TMC's assertion that rental charges are
an
alternative to charges based on depreciation or use allowances.
Any
alleged ambiguity in the application of these regulations to the
facts
of this case arises purely from a semantic misunderstanding:
the
persistent use by TMC of the term "rental" to refer to a
relationship
that was not, in fact, a rental. The regulations allow a
grantee to
claim any reasonable rental as a cost of the program, but limit
claims
for grantee-owned facilities, which are not rented in the
marketplace,
to actual costs of ownership. While this may be less than
the total
carrying costs to the grantee, since actual costs may
include
unallowable mortgage interest or principal payments, the regulations
are
unambiguous. For this reason, we agree with OHDS that the
rental
charges for grantee-owned facilities were improper.
2. OHDS is not estopped by approval given by employees who
lacked
authority to grant an exception from
regulatory requirements.
Although we find above that the regulations are clear regarding
the
treatment of grantee-owned facilities, TMC claimed that OHDS should
be
estopped from recouping overcharges which had been expressly approved
by
OHDS employees. TMC presented evidence that TMC claimed the
excess
funds with the express approval of OHDS employees who reviewed
TMC's
grant applications and budgets. The Director of the Indian
Migrant
Programs Division (IMPD) of OHDS testified that he advised TMC to
claim
rent charges based on a survey of market rates rather than on
costs
allowable under OMB Circular A-122 (apparently, he had not been aware
of
the requirements of A-122). Tr., pp. 82-85. When he learned of
the
requirements in 1982, he met with TMC and advised TMC to base its
claims
on depreciation or a use allowance. Both he and TMC apparently
viewed
that recommendation merely as a request to change the way the
claims
were labelled. Thus, TMC continued to claim the same rental
charges,
but called the charges a use allowance. See Tr., pp.
85-86.
We reject TMC's position because the traditional elements of estoppel
are
not present in this case. TMC has demonstrated no detrimental
change in
its position based upon reliance on the statements of the
Director of the
IMPD. TMC received a windfall in the form of excess
compensation for
space and has had the use of these excess dollars for a
lengthy period of
time. The only detriment TMC has demonstrated is "the
inability to
retain money that it should never have received in the
first place."
Heckler v. Community Health Services of Crawford County,
Inc., 467 U.S.
51, 61 (1984).
Any reliance TMC may have placed on the oral advice was not reasonable
in
view of the unambiguous provisions of the cost principles.
See
Shenandoah Professional Standards Review Foundation, Decision No.
652,
June 5, 1985. TMC had received copies of the cost principles with
each
grant award. Tr., p. 228. TMC should have known that its
claims were
not permissible. Heckler v. Community Health Services of
Crawford
County, supra, p. 63. Certainly, there was no suggestion of
affirmative
misconduct here; although the courts have not clearly defined
what
affirmative misconduct may create an estoppel against the government,
it
appears to require some- thing more than negligently giving
wrong
advice. Shenandoah, p. 10. This was not a situation in
which the
Director of IMPD had any exclusive knowledge or interpretive
authority
unavailable to TMC. In giving TMC advice, he had merely
misunderstood a
rule of law with which he was not very familiar. Tr.,
pp. 103-07.
Furthermore, TMC should have been aware that the regulations provide for
a
procedure to grant exceptions to the cost principles. Prior to
1981
deviations from Appendix F requirements could be granted only
if
authorized by the head of the granting agency or official
designated
pursuant to formal deviation control procedures established by
the
grant- ing agency. 45 CFR 74.6(c) and (d). The granting
agency is the
organizational component of HHS authorized to award and
administer
grants. 45 CFR 74.3. After 1981 deviations from OMB
Circular A-122 had
to be authorized by both the HHS Office of Procurement,
Assistance and
Logistics (OPAL) (formerly the Office of Grants and
Procurement
Management), and OMB. 45 CFR 74.6(c) and (d); OMB Circular
A-122,
section 8.
The Director of the IMPD did not have authority to authorize
a
deviation. He was not the head of the granting agency; TMC has
never
disputed that the grant was awarded and administered by OHDS and not
by
any smaller subdivision. Nothing in the record indicates that
the
Director had been delegated the authority to grant deviations under
any
formal plan, and it is undisputed that a deviation from A-122 was
never
authorized by either OPAL or OMB.
3. OHDS was not arbitrary or capricious in refusing to approve
a
deviation or in refusing to transmit TMC's request
to OMB.
TMC made several direct requests for an exception from the cost
principles
to responsible officials in HHS, OHDS, and OMB. As described
above, 45
CFR 74.6 authorizes certain OHDS officials to grant a
deviation from the cost
principles. OMB Circular A-122 contains a
provision at paragraph 8
which permits OMB to grant an exception to
A-122; but the language of that
provision makes it clear these
exceptions can only be granted if consistent
with a deviation under 45
CFR 74.6. An exception from A-122 may be
granted "only when permissible
under existing law," which would include 45
CFR 74.6. See OMB Circular
A-122, para. 8.
OHDS denied TMC's request. OMB refused to consider TMC's
request
without approval from HHS. Ex. CC. OHDS refused to submit
the request
to OMB with approval. Thus, TMC was effectively denied an
exception.
TMC argued that OHDS had arbitrarily and capriciously denied the
request
for an exception.
The Chief of Grants and Contracts Policy for OHDS testified that OHDS
had
decided to deny TMC's request on the basis that the general
philosophy of the
cost principles is that grantees are reimbursed only
for actual costs of
ownership; rental
charges in excess of the actual costs of ownership would be "profit"
and
would be contrary to the underlying theory of the cost principles.
Tr.,
p. 207. She added that HHS's policy is to avoid any possibility
of
impropriety because of self-dealing in setting rent for
grantee-owned
facilities, even if, in some cases, that resulted in higher
overall
costs. She testified that this was a general policy reflected
in the
language of OMB Circular A-122, and was not being applied arbitrarily
to
TMC.
In light of these reasonable justifications for OHDS action on the
request
for an exception, we find that OHDS was not arbitrary or
capricious in
denying TMC's request.
4. Even if reasonable, the grantee may not claim costs in excess
of
depreciation or use allowances and other
allowable items.
This Board is bound by all applicable regulations. 45 CFR 16.14. We
do
not have authority to grant an exception to the unambiguous
regulations
outlined above, even if we were to accept the grant- ee's
contention
that the rental charges were reasonable and that the Grantee's
decision
to purchase some facilities resulted in a lower overall program
cost
than alternative rentals. While the purchase program may have
been
supported by sound economic justification, this kind of
discretionary
management judgment concerning the types of costs which OHDS
deems
consistent with its policies is not the kind of determination with
which
this Board should interfere. If an exception is to be granted, it
must
be granted within the formal process established by the Agency in
the
regulations.
5. Calculation and repayment issues.
Under the regulations in either Appendix F or OMB Circular A-122, TMC
can
claim compensation for the costs of ownership either by use
allowances or
through a depreciation calculation supported by
documentation. The
original disallowance had been based on the
application of a use allowance by
OHDS. During the course of this
proceeding, TMC provided documentation
to support costs based upon
depreciation and other allowable costs for the
period of 1978 through
1985, which indicated that the rental charges exceeded
those costs by
only $98,883. OHDS accepted this docu- mentation for the
period 1978
through 1984 (the period covered by these disallowances).
OHDS did not
consider the data for 1985, which was beyond the period of
the
disallowances. OHDS agreed to reduce the disallowance to
$172,894. TMC
did not dispute OHDS' calculation of this figure, for the
time period of
the disallowance, based on the documentation TMC supplied.
Thus, we
uphold the OHDS determination that the amount of excess charges
was
$172,894.
TMC requested that, if the Board upholds the disallowance, a
five-year
payment schedule should be established to minimize the
financial
pressure on TMC. However, we are not aware of any authority
for the
Board to set a payment schedule. While OHDS disagreed with TMC
on its
proposed terms of the repayment schedule, OHDS asserted that the
actual
terms can be established by mutual agreement of the parties.
3/
Conclusion
For the reasons outlined above, we uphold the disallowance in the
amount
of $172,894 in rental charges in excess of actual depreciation and
other
allowable costs for grantee-owned facilities. The issue of
health
insurance premiums will be addressed separately.
________________________________
Donald
F. Garrett
________________________________
Alexander G. Teitz
________________________________
Norval
D. (John) Settle Presiding Board Member
1. OHDS initially disallowed an additional
$88,444, but determined
that this additional amount duplicated other
disallowed charges. See
Letter from McCarron to Settle, dated May 2,
1986.
2. Depreciation or use charges are to compensate the
grantee for the
wear on its facilities, not for any actual outflow of
cash. Contrary to
the view of OHDS' counsel, expressed at the hearing
and in a subsequent
submission, we know of no basis to say that a grantee may
not spend the
repayment for any purpose, without restriction. See Tr.,
pp. 162-71;
Letter from Billingslea to Settle, dated May 20, 1986. The
allowable
costs have already been incurred; what the grantee does thereafter
with
the cash to compensate it for the incurred costs would appear to be
none
of HHS's business. This, of course, is in contrast to the question
of
whether the grantee has incurred allowable costs, which it is always
the
grantee's obligation to prove.
3. We note that the documentation submitted by TMC
indicates that
approximately $74,011 may have been effectively repaid by
undercharges
for space used by the TMC Head Start program in 1985, beneath
the level
of actual depreciation and other allowable costs. Thus, OHDS
may want
to consider whether this can be considered in determining
repayment.