DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: All Indian Pueblo Council, Inc.
Docket No. 88-28
Audit No. CIN A-06-87-05086
Decision No. 976
DATE: August 10, 1988
DECISION
The All Indian Pueblo Council, Inc. (Grantee or Council) appealed
the
decision of the Office of Human Development Services, Administration
for
Native Americans (Agency or ANA) disallowing $81,678 claimed under
a
Native Americans Program Act grant for consultant services
contracts.
During the appeal proceedings, the Agency withdrew the
disallowance of
$27,511 for one contract (number 0860), reducing the amount
in dispute
to $54,167. The Agency had disallowed costs for the
remaining contracts
on grounds that one violated conflict of interest
requirements and that
the other three did not meet any grant objectives.
For the reasons explained below, we uphold the disallowance of the
reduced
amount.
I. BACKGROUND
The Council is a non-profit charitable corporation organized and owned
by
the Pueblo Indian tribes of New Mexico. The Council administers
a
variety of federal grant programs on behalf of the Pueblos.
The disallowance arose out of an audit report issued during December
of
1986 by the Office of Inspector General, Department of the
Interior.
The auditors had reviewed several grants awarded to the Council by
the
Bureau of Indian Affairs and other federal agencies, including
the
Department of Health and Human Services, ANA. The ANA grant covered
the
period March 1984 through April 1985 and totaled $641,082. The
general
purpose of the grant was to assist the Grantee to develop social
and
economic development strategies. The specific objectives stated in
the
grant application were: (1) to prepare plans for long-term
commercial
development on reservation lands; (2) to establish the Pueblo
Finance
Corporation; (3) to prepare business plans for natural
resource
utilization; (4) to provide developmental training to the Pueblo
tribes;
and (5) to identify strategies for improving health care.
The Agency disallowed the costs in question on grounds that the award
of
one contract violated a condition of the grant and that three
other
contracts did not further the objectives of the grant. Before
the
Board, the Agency cited as its legal basis Office of Management
and
Budget (OMB) Circular A-122, "Cost Principles for
Nonprofit
Organizations," which the Agency stated was applicable under 45
C.F.R.
1363.50 and 45 C.F.R. 74.174. Paragraph A.2. of Attachment A to
the
Circular states in part:
To be allowable under an award, costs must . . . a.
Be
reasonable for the performance of the
award and be allocable
thereto . . .
. b. Conform to any limitations or exclusions
set
forth in these principles or in the award as
to types or amount
of cost items.
The Grantee specifically stated that it accepted the controlling
legal
principles, but disputed the factual conclusions reached by the
Agency.
For simplicity, each contract will be discussed separately below.
II. DISCUSSION
A. Contract Number 0882
The Agency disallowed the $41,667 charged to the grant for training
and
technical assistance services over a six-month period on the
feasibility
of commercial development of the Albuquerque Indian School
property.
This 46-acre tract was located in downtown Albuquerque, and
development
of the property was viewed as a major opportunity for
economic
development for the Pueblos.
The Agency argued that the contractor had entered into both a
consultant
agreement and a contract before he resigned as Chairman of the
Council,
in violation of both the grant agreement and the Grantee's conflict
of
interest standards. The Agency cited part V, paragraph 7, of the
grant
agreement, which states that the Grantee:
. . . will establish safeguards to prohibit
employees from using
their positions for a purpose
that is or gives the appearance of
being motivated
by a desire for private gain for themselves or
others, particularly those with whom they have family, business,
or
other ties.
Appeal File, Tab A. The Agency also cited Grantee's conflict
of
interest standards, set forth in the Council's "Policies and
Procedures
Manual." Grantee's policy states that:
No . . . Council employee may enter into a contract
or consultant
agreement with any . . . Council
project.
Appeal File, Tab D-4, p. 6. The Agency alleged that the
Council
Chairman signed the consultant agreement on December 17, 1984 and
the
contract on January 1, 1985, but did not resign as Chairman until
later,
on January 2, 1985.
The Grantee alleged that the consultant resigned as Chairman on January
1,
1985, the same day he signed the contract. The Grantee also argued
that
even if the contractor had not resigned until the following day,
the Agency
was being overly technical to consider that improper. The
Grantee
asserted that the underlying motive in scrutinizing the
contracts was that
the contractor had been indicted for embezzlement
with regard to his dealings
at the Council. The Grantee argued that
while the contractor "may have
engaged in various transactions of
dubious character, this contract was not
one of them" and that this
contract was "in proper form, and was properly
approved, and there is no
ground for any suggestion that the work was not
performed . . . ."
Appellant's Brief, p. 7. The Council argued that the
contractor was
selected because of his unique knowledge of the job, not
because he was
Chairman.
The record contains three pertinent Council documents. Tab D-7 to
the
Appeal File is the minutes of the Council's regular monthly meeting
of
December 12, 1984. The minutes describe a discussion and favorable
vote
on a letter from the contractor stating the contractor's proposal
to
resign his position as Chairman on January 1, 1985 in order to become
a
contractor for the Council. The minutes also state that on January
1
the Vice-Chairman would become Chairman.
Exhibit D-6 to the Respondent's Brief is a consultant agreement.
The
agreement specifically states that it was "made" on December 17,
1984.
It appears to have been, essentially, an effort to record in writing
the
understanding reached at the Council meeting of December 12.
The
agreement provides that, effective January 2, 1985, the Chairman
would
resign and become an independent contractor employed by the Council
to
"oversee, direct, and coordinate the planning for development" of
the
Albuquerque Indian School property. Respondent's Brief, Tab D-6, p.
2.
This agreement was signed by the Chairman as "Consultant" and by
the
Vice-Chairman for the Council as "Employer."
Tab D-1 to the Appeal File is a consultant contract. The
contract
specifies that the contractor was to "Deliver Training and
Technical
Assistance in managerial, legal, financial, and other land
development
issues" to the Council and other officials and tribe
members. The
contract states that it was "entered into" on January 1,
1985; there was
no dispute as to that being the date of the contract.
The contract was
signed by the contractor and by the former Vice-Chairman as
Chairman.
The Grantee argued that it had complied with the requirements of the
grant
since it had established the requisite safeguards in its "Policy
and
Procedures Manual" and that the "unusual" circumstances here did not
result
in a violation of its policy. Rather, the Grantee asserted,
this
transaction was a "deliberate exception." Reply Brief, p. 3.
The only
reasonable reading of the provision requiring safeguards, however,
is as
a requirement to establish and follow complying policies. Without
such
a reading, a grantee could establish sham policies and circumvent
the
obvious intent of the provision--to prevent the misuse of grant
funds.
From the manner in which the Chairman became an independent contractor,
we
conclude that there is at least the appearance that the Chairman
was
motivated by a desire for private gain. During the December
Council
meeting, one Council member expressed "concern . . . because
no
provisions of the contract were spelled out, such as . . . objectives
of
[the] contract." Another Council Member preferred that the
Chairman
apply for the job along with other applicants, noting "the policy .
. .
[of] equal job opportunities for all." The minutes state that
the
Chairman informed the Council that "there is no money available" so
that
the proposed consulting arrangement was dependent on
the
Chairman/contractor's seeking the necessary funds. The minutes
also
evidence a concern among Council members that the issue of
the
Chairman's resignation and the issue of selecting a contractor for
the
development project should be considered separately. The
Chairman
ultimately cut off the discussion, insisted that the issues
remain
joined, and asked for a vote. Respondent's Brief, Tab D-7.
The Chairman thereafter entered into the consultant agreement.
The
consultant agreement stated that upon its effective date, he
would
resign as Chairman. There was no explanation as to why the
later
contract was needed as a separate document from the
consultant
agreement. In any event, the consultant agreement was signed
shortly
after the December Council meeting, while the contractor was
still
Chairman.
The record also includes an affidavit from the then
Council
Vice-Chairman. Appeal File, Tab D-3. This affidavit
attests to the
Chairman's on-going involvement with this project. It
also states that
this transaction was the Chairman's idea, that the
Vice-Chairman "had no
direct knowledge" but assumed that ANA officials were
aware of this
transaction due to "close and direct relations" with the
Chairman, and
that the Council Executive Committee "believed [the Chairman]
was
uniquely qualified."
We do not regard this affidavit as demonstrating that this transaction
was
proper because unique, as the Grantee argued. Rather, this
affidavit
together with the minutes of the December Council meeting
support a
conclusion that what happened here is precisely what the
policy in question
was designed to prevent. The record shows that the
Chairman was able to
persuade the Council to agree to a consulting
relationship where no financial
or contractual details were spelled out,
and with no consideration of whether
it presented even the possibility
of a conflict of interest. The
inescapable conclusion is that the
Chairman used the respect accorded his
position to complete this
transaction on the terms of his choosing. The
circumstances here
support a conclusion that this was not an arms length
transaction, but
instead, a situation where the Chairman used his position to
assure the
award of the consultancy.
Moreover, even assuming the Council received what it bargained for,
this
does not speak to the question of whether these costs were
properly
charged to the ANA grant. It is possible that the charge to
the grant
was an afterthought when no other funds were secured. We note
this
possibility since the Chairman had informed the Council that there
were
no funds for this transaction. In any event, there is no evidence
that
the Council considered this consulting arrangement in light of
the
specific objectives of the grant or that there was ever a
concrete
deliverable provided by the contractor.
We note that we do not find it dispositive of the ultimate issue here
that
one count of the criminal indictment related to this contract.
This fact
does, however, underscore the reasonableness of the Agency's
giving this
matter close scrutiny. Neither do we find the effective
date of the
Chairman's resignation to be significant. While the Grantee
argued that
the Chairman was no longer Chairman when he signed the
contract on January 1,
the Grantee made no such argument with regard to
the consultant agreement
which he entered on December 17, 1984. Under
the conflict of interest
provision, signing the consultant agreement was
no different from signing the
contract.
We conclude, then, that the award of this contract violated the
applicable
conflict of interest provisions. Furthermore, while the grant
agreement did
not expressly state that contracts awarded in violation of
policy are
unallowable, there is a general requirement that costs be
reasonable,
necessary, and allocable. See OMB Circular A-122,
Attachment A.
In determining reasonableness, consideration must be
given to factors such as
sound business practices, arms length
bargaining, and adherence to grant
terms. Whether the responsible
individuals "acted with prudence" and
whether the costs result from
"[s]ignificant deviations from established
practices" are also
considered. See OMB Circular A-122, Attachment A,
paragraph A.3. In
particular, the cost principles state that consultant
services costs are
allowable where the consultant is not an officer or
employee of the
Grantee. See OMB Circular A-122, Attachment B,
paragraph 34; see also
Office of Human Development Services Grants
Administration Manual, 1-3-5
and 1-5-1 (1977). Thus, there is ample
basis in the record for
concluding that the Agency properly disallowed the
costs in light of the
circumstances presented here.
Discussion of Contracts Number 0848, 0775, and 0864. The
following
discussion examines whether these three contracts furthered
the
objectives of the grant. Our purpose is to determine whether the
costs
charged were allocated to this grant consistent with the
"benefit
received." See OMB Circular A-122, Attachment A, paragraph
A.4. If the
contracts did not further the objectives of the grant then
the resulting
costs were unrelated to the performance of the grant and
provided no
"benefit" to it. Such costs would be unallowable because
not allocable
to the grant. We note that there is no basis in the
record to find that
this grant was intended to provide general operating
funds;
consequently, contract costs which are unrelated to the
specific
objectives are not allocable even if they further the overall goals
of
the grant.
B. Contract Number 0848
The Agency disallowed the $4,000 charged to the grant for a
management
audit of the Pueblo Insurance Agency, an existing company owned by
the
Council. The Agency found that the auditing services were not
included
in the grant objectives or requirements.
Grantee argued that the contract furthered grant objectives 3 and 4,
and,
to some extent, objective 2. Grantee also argued that the contract
was
consistent with the need for the development of business and
management
expertise expressed in the narrative accompanying the
grant
application. We examine each of these arguments
individually below.
1. Objective 3
Grant objective 3 reads:
To have prepared by February 28, 1985 a complete set
of business
plans for the six Pueblos [tribes] for
the comprehensive
utilization of all natural
resources for development of information
necessary
for negotiation of business arrangements.
Appeal File, Tab A. The Grantee argued that this objective was
designed
to enable individual Pueblos to develop their own businesses, and
that
it was broad enough to encompass the contract. The Grantee
reasoned
that the management audit was "complementary" to this goal since
it
provided a look at the real problems and potential of an
ongoing
business. Appellant's Brief, p. 8.
The Agency argued that objective 3, as described in the grant
application,
simply did not encompass the management audit. The Agency
noted that
the activities described under objective 3 did not include
this audit.
Respondent's Brief, p. 5. The Agency also argued that, by
the terms of
the grant, full responsibility for the activities were to
be subcontracted to
the Council's Water Office and that the FY 1985
budget included $103,068 for
that office.
After reviewing objective 3, we agree with the Agency that this
contract
does not meet that objective. The primary focus of objective 3
was on
businesses related to natural resources, particularly water.
Even the
expected results and benefits listed under the objective in the
grant
application make clear that the goal of the objective was
specifically
to generate information to enable Pueblos to start businesses
using
natural resources. See Appeal File, Tab A.
Further, we agree that the activities described in the grant
application
to accomplish this objective do not encompass a management audit
of the
insurance agency. The objective was to be accomplished
essentially by
researching and computerizing relevant data, preparing natural
resource
product reports for prioritization, preparing business plans for the
top
products, and exploring joint ventures or other arrangements
with
interested corporations, financial institutions and
industrial
development organizations. See Appeal File, Tab A.
We conclude that a management audit of an insurance company is
not
sufficiently related to this objective to be included. Moreover,
from
an accounting standpoint, the direct benefit of the costs were to
the
insurance agency, not to any grant-related activity. While the
nature
of the activity may have provided some incidental overall benefit to
the
Council from improved business management skills, there is no
evidence
that this contract was awarded in furtherance of any grant
objective.
The existence of a possible incidental benefit does not support
an
allocation of the costs to the grant.
2. Objective 4
This objective reads:
. . . the [Council's] Staff will have provided at
least 8
developmental training seminars and provide
[sic] information which
will be applicable in areas
of priority . . . and have fulfilled at
least 85% of
requests for individualized training. In addition .
.
. staff will provide coordination with State and
the private sector
in developing sound working
relationships affecting at least 70% of
the
Tribes.
The Grantee argued that objective 4 was broad enough to encompass
this
contract and that the contract was "fully consistent" with the goals
of
objective 4. The Grantee argued that although the objective was
written
in terms of training seminars, it "contemplated other means
of
delivering information . . . about organizing and operating
successful
businesses." Appellant's Brief, p. 8. The Grantee
argued further that
feedback on an actual Pueblo enterprise would be at least
as useful in
furthering that goal as seminars on general principles of
business
organization.
The Agency argued that while the contract may have been consistent
with
the goals of objective 4, that did not necessarily mean that
the
contract was a permissible expenditure under that objective. The
Agency
argued that the focus of the objective was to disseminate
information
through training, not to provide a management audit for an
individual
business enterprise. The Agency also argued that the cost of
the
management audit was not reasonable because the audit was performed
by
an outside contractor whereas activities under the objective were to
be
conducted by Council staff.
After reviewing objective 4, we agree with the Agency. The
primary
focus of objective 4 clearly was to enhance business skills
through
general training. The objective contains a long list of
activities, but
nowhere among these is a management audit of an existing
enterprise
described. While certain activities set forth in the
objective describe
data gathering, they refer to more generalized endeavors
such as a
"survey" of tribes "to determine developmental needs." Appeal
File, Tab
A. Although the information gained through such an audit may
be
reasonably related to the goal of enhancing management skills,
the
question of general relevance is separate from the question of
whether
an activity could reasonably be considered to further the
specific
objective.
Furthermore, even if we were to agree that the activity could
reasonably
be considered to be included in the objective, we would
nevertheless
concur with the Agency that the use of a private contractor for
the
activity cannot be considered reasonable since, as the Agency
argued,
the grant application specified that Council staff would
perform
objective 4. The Grantee countered by arguing that who
performed the
audit was "irrelevant quibbling" and that, in any event, the
grant
application referred to using outside organizations. Reply Brief,
p. 4.
The Grantee's counterarguments are not persuasive. The
grant
application does not indicate that outside contractors could be used
for
all of the activities under objective 4. The application indicates
that
outside individuals would perform only specific tasks, none of
which
reasonably could be considered to include a management audit.
3. Objective 2
This objective reads:
By December 31, 1984, the [Council] will have
established the
Pueblo Finance Corporation which
will begin to reverse the trend of
lost capital by
the reservations, estimated to be near $80 million
annually.
Appeal File, Tab A. The Grantee argued that the creation of the
Pueblo
Finance Corporation would have been served by the management audit
since
the audit provided an analysis of the only Pueblo business
then
operating. Although the Agency did not specifically address
this
objective, after reviewing it we conclude that it did not encompass
the
audit. The objective, in fact, is quite narrow in
scope--the
establishment of a finance corporation. Further, the
activities
specified in the grant application under this objective all
reflect the
narrow focus of the objective. They include such things as
developing
demand and cost analyses, return on investment data, marketing
and
financing strategies, and operational systems. A management audit
of an
ongoing business, even the only operating Pueblo business, can
be
considered only remotely related to this endeavor.
4. The narrative
The narrative submitted with the grant application is 33 pages
of
descriptive information. It provides a background and overview of
the
Council, discusses the Council's long range goals, and provides
a
detailed discussion of the needs to be served by the grant.
The
Grantee argued that the narrative emphasized the need for business
and
management development, and that the contract "was squarely
in
furtherance of this need." Appellant's Brief, p. 9.
While the narrative indeed does emphasize this need, and while
the
management audit reasonably could be considered to further it,
the
narrative alone is not a sufficient basis upon which to find a cost
to
be allowable where, as here, the cost has been found not to be
included
within any of the grant's specific objectives. The narrative
outlines
the overall goals for the project while the objectives specify
those
activities which, when funded, will further those overall goals.
C. Contract Number 0775
The Agency disallowed $2,500 charged to the grant for a contract
to
develop information on the problem of delinquent rental payments to
four
Indian Housing Authorities and a plan for solving the problem.
The
Agency found that the contract did not further any of the
grant
objectives.
The Grantee argued that the contract directly served the goals
of
objective 2. The Grantee's rationale was:
o Objective 2 was to "explore the feasibility"
of the Pueblo
Finance Corporation;
o a basic function of the corporation was to
finance housing
purchases and construction so as to
generate profits for commercial
investment;
o such financing could never succeed if loan
delinquency rates
were significant;
o thus, the experience of the Indian Housing
Authorities had
"direct bearing" on whether the
corporation would succeed, and the
study was
"undoubtedly a key piece of information" leading to
the
conclusion that the corporation was not a
feasible idea.
Appellant's Brief, pp. 9-10. We do not find the Grantee's
rationale
persuasive. Neither the contract nor the report on the study
refer to
the Pueblo Finance Corporation. Appeal File, Tabs F-1 and
F-2. The
report indicates that the motivation behind the study was
concern that
one housing authority might be unable to meet its operating
costs (in
particular its 1983 insurance premiums) and that the Department
of
Housing and Urban Development might discontinue future funding
of
housing projects in the area. Appeal File, Tab F-2, pp. 8-9.
Nowhere
does the report state that the implications for the Pueblo
Finance
Corporation were of concern (or were even remotely contemplated) at
the
time the contract was entered into or performed. The record
indicates
that the implications are, at most, an interesting
afterthought.
Moreover, the Grantee presented its argument as speculation rather than
as
fact; the Grantee simply alleged that the report was
"undoubtedly"
instrumental in the decision to forego the plan for the
corporation,
without providing any evidence that it was in fact
instrumental.
Finally, objective 2 does not include a study of delinquent
rental
payments among low-income residents of subsidized housing as a
listed
activity. As discussed above, objective 2 has a narrow focus
both in
the statement of its objective and in the nature of the activities
to
accomplish the objective. (See p. 10 above.) Again the costs were
of
direct benefit only to the Indian Housing Authorities. Any
incidental
benefit to the overall goals of the contract does not support
the
allocation of the costs to the grant.
D. Contract Number 0864
The Agency disallowed $6,000 charged to the grant for a contract
to
develop seminars on the legislative process and to assist in
designing
and implementing a computerized voter registration system.
The Agency found that the contract did not further grant
objectives
because the activities were not encompassed by the grant.
The Agency
also argued that even if the contract activities were encompassed
by the
grant, they did not further grant purposes because the
activities
contracted for were not performed.
The Grantee argued that the contract was encompassed under objective
4.
The rationale was that objective 4 "specifically referred to
increasing
the level of Pueblo participation in state government programs . .
."
and the contract furthered this purpose by providing information on
how
the Pueblos could play a more effective role in the political
process.
The Grantee conceded that the report generated by the contractor
was
incomplete, but contended that the Agency was limited to arguing
that
the contract did not fall within grant objectives.
Objective 4 (quoted on page 9 above) provided for three activities
that
relate broadly to enhancing political involvement among the
Pueblos.
These were: (1) to identify specific areas for potential
development of
cooperative working agreements and networking with state
agencies; (2)
to compile information on various kinds of boards and
commissions for
purposes of providing Indian representation; and (3) to
develop methods
for the dissemination of information regarding such positions
and likely
Indian candidates for the positions. The contract did not
include these
activities. Rather, the contractor was to (1) design and
develop a
series of community seminars on the legislative process, and (2)
assist
in developing and implementing a computerized voter
registration
program. Appeal File, Tab G-1. The mere fact that
these contract
activities were related to state government is not sufficient
to bring
them within the scope of the objective. Moreover, the
objective must be
read in light of the general purpose of the grant to mean
coordination
which will directly promote economic and financial
development.
Finally, as mentioned above, objective 4 was related to Council
staff
activities.
Moreover, to the extent that the report submitted to the Grantee
under
this contract actually touches on activities related to objective 4,
the
report is so vague and incomplete that it cannot be considered
as
furthering that objective. The report is only four pages long and
is
comprised of vague generalities. Two of the four pages consist of
a
broad outline of the sequence of events which should take place
to
implement a political awareness network. Although the report
mentions
that there are "several boards and governmental positions to
which
'Native Americans' could be elected," it does not identify
the
organizations or discuss how to increase Indian participation.
In addition, we find that the report itself did not fulfill
the
requirements of the contract. The report did not contain a design
for a
series of seminars on the legislative process or any discussion
of
methods to implement a computerized voter registration
program.
Further, we disagree with the Grantee that grounds for the
disallowance
are limited to those stated in the disallowance letter (i.e.,
that the
contract was not encompassed under objective 4). The Board has
held
that issues not raised in the original disallowance letter
could
nevertheless be considered so long as the appellant has an
adequate
opportunity to respond. See, e.g., West Central Community
Action
Agency, Inc., DGAB No. 861 (1987); Illinois Dept. of Public Aid,
DGAB
No. 634 (1985). Thus, even if we had concluded that the terms of
the
contract furthered the goals of the grant, we would
nevertheless
conclude that the disallowance should be upheld. Since the
report was
deficient and unrelated to the contract's stated goals, the costs
would
not, in any event, have been a reasonable and necessary charge to
the
grant.
III. CONCLUSION
We conclude that the Council awarded Contract No. 0882 in violation of
the
applicable conflict of interest requirements and that the record
does not
support a conclusion that the $41,667 for this contract was a
proper charge
to the grant. We also conclude that the other three
contracts, Contract
No. 0848 ($4,000), Contract No. 0775 ($2,500), and
Contract No. 0864
($6,000), did not further the objectives of the grant.
In light of that
general finding, we conclude that these three contracts
provided no benefit
to the grant project and therefore the costs for
these contracts were not
allocable to the grant. The Grantee could not
reasonably charge the
costs for these four contracts to its ANA grant.
Based on
the foregoing analysis, we uphold the Agency's determination that
$54,167
in contract costs were unallowable.
________________________________ Judith A. Ballard
________________________________ Alexander G. Teitz
________________________________ Cecilia Sparks Ford
Presiding
Board