GAB Decision 405
April 7, 1983
Ohio Department of Mental Retardation and Developmental Disabilities;
Ford, Cecilia; Teitz, Alexander Settle, Norval
The Ohio Department of Mental Retardation and Developmental
Disabilities (State) appealed a decision of the Office of Human
Development Services (Agency) under the Developmental Disabilities
Services and Construction Act (Public Law 88-164) as amended to 1977
(the Act). The decision disallowed, for calculation of federal
reimbursement under the Act, $174,784 that the State had reported as
outlays for federal fiscal year (FFY) 1977.
Because of subsequent agreement of the parties or action by the
State, only $35,050 of the disallowance remains for our consideration.
This $35,050 is part of a disallowance item referred to as "use of
fiscal agent", originally in the amount of $68,400, the background and
details of which are set forth below.
Of the $35,050 for our consideration, $14,214 is in a different
situation from the $20,836 balance. The State effectively conceded that
the $14,214 cannot be shown to represent proper program expenses.
Appellant's Written Appeal Statement dated August 17, 1982 (Appellant's
Statement), heading 5; letter from State to Board dated December 22,
1982. The State asked us to "waive" this much of the disallowance,
citing relevant program administration improvements that the State had
made in 1978. However, we do not have authority to waive disallowances.
See, e.g., Buckeye Health Plan, Inc., Decision No. 394, February 28,
1983. Therefore, we affirm the disallowance to the extent of $14,214 at
the outset and devote the rest of this decision to the remaining $20,836
of disallowance, which, for the reasons discussed below, we must affirm
also.
Outline of the underlying controversy
During FFY 1977 the Ohio Developmental Disabilities Planning Council
(Council) entered into a written agreement with the Ohio Association for
Retarded Citizens (OARC), under which OARC was to be the Council's
fiscal agent in connection with certain projects (2) within the scope of
the Council's statutory responsibilities. Appellant's Statement, tab
5A; Act, section 137. The agreement stated that the Council would
provide financial assistance to OARC in the amount of $100,000 and that
OARC would disburse funds as directed by the Council, maintain auditable
records of the disbursement, submit quarterly financial reports as
directed by the State and comply with the State's grant management
policies.
A short time later the State or the Council encumbered $100,000 in
its accounts to fund the agreement. Appellant's Statement, tab 5C.
Afterwards the State or the Council disbursed $75,000 to OARC.
Appellant's Statement, tabs 5D, 5E. Of the $75,000, $25,000 was
disbursed in FFY 1977 but the record does not show clearly whether the
$50,000 remainder was disbursed in FFY 1977 or in FFY 1978. Compare
Appellant's Statement, tabs 5D, 5E, and Report on Audit of The
Developmental Disabilities Program Administered by the Department of
Mental Retardation and Developmental Disabilities - State of Ohio -
Columbus, Ohio (Audit Report), pp. 12-13. The State included the
$75,000 in its outlay reports to the Agency for FFY 1977 and on that
basis claimed federal reimbursement in FFY 1977 at the federal financial
participation (FFP) rate applicable to the program (generally 75
percent).
After the end of FFY 1978, federal auditors recommended a downward
adjustment of $68,400 in the $75,000 reported or, in other words, a
disallowance of $68,400 of the base for application of the FFP rate.
Audit Report, p. 13. Although the auditors thought that it would have
been all right for the State to include the whole $75,000 if the State
had obligated it all in FFY 1977, the auditors considered the obligation
illusory except to the extent of $6,600. Audit Report, pp. 12-13.
What distinguished the $6,600 was that it represented an actual
expenditure in FFY 1977. Audit Report, pp. 12-13.
By letter from the Agency's Regional Administrator to the State dated
June 15, 1982 (Agency decision), the Agency adopted the auditors'
recommendation. Agency decision, p. 3.
The State appealed the Agency decision to this Board, contending that
the $20,836 with which we are now dealing should have been allowed as
the $6,600 was.
The State's position was that the $20,836 was validly reported in FFY
1977 because the State had obligated the $100,000 in FFY 1977, although
the $20,836 had been spent, against the obligation, for program services
bought and received albeit in (or mainly in) FFY 1978. Appellant's
Statement, heading 5.
(3) The Agency agreed that the $20,836 represented proper program
services. Response of the Office of Human Development Services (Agency
brief), p. 2; letter from Agency's attorney to Board dated December 9,
1982. However, while observing that the $20,836 might therefore be
includible in the State's FFY 1978 reports, the Agency maintained that
the sum did not belong to FFY 1977.
Regulations and statute
45 CFR 1386.15 (1977) provides in part:
(a) From each State's allotment for a fiscal year..., the State shall
be paid the Federal share of the expenditures... incurred during such
year under the State plan....
45 CFR 1386.13 (1977) provides in part:
(a) ... the Federal share for a State may not exceed 75 per centum of
the expenditures incurred by the State under the State plan. * * *
(d) For the purpose of determining the Federal share with respect to
any activity, program, or project described in the State plan,
expenditures on that activity, program, or project by a... nonprofit
private entity shall be deemed to be expenditures by such State....
We have included subsection (d) in this quotation to indicate that
expenditures by the Council are to be taken into account whether the
Council is considered part of the State or a nonprofit private entity.
45 CFR 74.71 (1977) provides in part:
"Accrued expenditures" are the charges incurred by the grantee during
a given period requiring the provision of funds for (a) Goods and other
tangible property received; (b) services performed by employees,
contractors, subgrantees, and other payees; and (c) amounts becoming
owed under programs for which no current services or performance are
required.
* * *
"Obligations" are the amounts of orders placed, contracts and grants
awarded, services received, and similar transactions during a given
period, which will require payment during the same or a future period.
(4) Section 134 of the Act provides in part:
(a) The Federal share of any project... may not exceed 75 per centum
of the necessary cost thereof as determined by the Secretary. * * *
(c) For the purpose of determining the Federal share with respect to
any project, expenditures on that project by a... nonprofit private
entity shall, subject to such limitations and conditions the Secretary
may be regulation prescribe, be deemed to be expenditures by such
State....
45 CFR 74.171 (1977) provides:
The principles to be used in determining the allowable costs of
activities conducted or administered by governments are in Appendix C to
this part.
45 CFR 74.174 (1977) provides in part:
Under nonconstruction awards, the principles for determining the
allowable costs of activities conducted by nonprofit organizations,
other than... governmental organizations are in Appendix F to this part.
The auditors' position and the Agency's final decision
The auditors found that the amount in question was improperly
classified as an obligation, when it should have been classified as a
mere advance. The auditors noted that under the March 28, 1977
agreement between OARC and the Council, OARC was to act as a fiscal
agent for the Council for the disbursement of grant funds, for which
OARC was to be reimbursed $5 per hour for bookkeeping services. The
agreement also required OARC to disburse funds as directed by the
Council, maintain records of the disbursement, submit quarterly
financial reports to the Council, and comply with applicable grants
management policies. The auditors found that under 45 CFR 416.35, the
State Plan was supposed to describe the fiscal control and accounting
procedures to be used, but that the plan did not provide for the use of
the fiscal agent here. The auditors also found that there was no valid
subgrant to OARC, since OARC received no financial assistance in
accordance with 45 CFR 74.3; the auditors argued that OARC received no
such assistance, and provided no program services to program clients.
The auditors argued that OARC essentially was only a bookkeeping
conduit. Audit Report, pp. 12-13.
The Agency in its final decision agreed with the auditors, and argued
further that OARC had been no more than an extension or (5) agent of the
grantee; the decision analogized the transfer of funds here to movement
of funds to a bank account. As such, said the Agency, the transfer was
no more than an advance of funds or a reserve, and did not arise to the
status of an obligation. The Agency also observed that even if the
foregoing were not true, the transfer would still run afoul of the
exclusion from the definition of a grant or subgrant in 45 CFR 74.3 of a
lump sum award for which the recipient is not required to account on an
actual cost basis.
The arguments on appeal
The State's argument on appeal essentially was that the transaction
was a sufficient obligation to meet the terms of the regulation defining
obligation (45 CFR 74.71 (1977)). the State argued that it recorded the
transaction on a State intra-departmental requisition form used under
the State's accounting system to encumber funds, and that the activities
performed by OARC represented allowable costs.
The Agency's argument essentially was that the agreement between OARC
and the Council "did not require any substantial, identifiable
recompensable duties to be performed by OARC that were related to
developmental disabilities, the purpose of the grant." Agency Brief, pp.
3-4. The Agency said that the contract was considered a subterfuge to
extend funds availability for an additional year. In short, argued the
Agency, there was no showing of an obligation for allowable costs, only
what amounted to a plea for forgiveness.
Discussion
Section 134 of the Act, quoted above, provides for federal
reimbursement to a state, for any FFY, only on the basis of
"expenditures" during that FFY. Since the $20,836 of program services
were bought, received and paid for in FFY 1978, there were no
"expenditures" in FFY 1977 unless the transactions among the State,
the
Council and OARC that took place in FFY 1977 included or constituted
"expenditures." We think that they did not.
Regarding the State, our reason is this: 45 CFR 74.71, quoted above,
defines "accrued expenditures". "Accrued expenditures" are
not
something different from "expenditures." They are the "expenditures"
of
an accounting entity that uses accrual accounting. Since the State used
accrual accounting (see Appellant's Statement, tabs 3A-3E), the
definition is immediately controlling as to whether there were
"expenditures" by the State in FFY 1977. There clearly were not. No
goods or other tangible property were received (clause (a)) and no
services were performed (clause (b)).
(6) The "amounts becoming owed" clause (clause (c)) plays no part
as
the program defined by the Act is not one "for which no current services
or performance are required" (clause (c)). It is expressly "for the
provision... of services and facilities for persons with developmental
disabilities." Act, section 132.
Regarding the Council, the situation is somewhat different. The
"accrued expenditures" definition applies to a "grantee"
and the Council
was not a "grantee" as defined by 45 CFR 74.3 (1977) nor do we know
that
it used accrual accounting. However, the result is the same for the
following reasons:
Since the term "expenditures" (other than "accrued expenditures")
is
not explicitly defined, we must look to the implied meaning of
"expenditures" as 45 CFR 1386.13 and 1386.15, both quoted above, use
the
word in specifying the federal reimbursement to which a State is
entitled.
Those sections provide that a state shall be paid "the Federal share
of the expenditures" and that "the Federal share... may not exceed
75
per centum of the expenditures...." The second of these quoted phrases
must be read in the light of section 103 of the Act, quoted above, which
requires that the "Federal share of any project... may not exceed 75 per
centum of the necessary cost thereof as determined by the Secretary." In
this light we interpret "expenditures", as used by the regulations,
to
be synonymous with, or at least limited to, "necessary cost."
The "necessary cost" to which section 103 of the Act refers is "the
necessary cost thereof", and "thereof" refers to the "project."
That is,
the statute does not say that the state shall be paid 75 percent of the
sum of the entries that the various participants in the project may have
made on their books under the heading "cost", but rather that the
state
shall be paid 75 percent of what the project costs. In a practical
sense this has to be so because otherwise "necessary costs" would
in
effect be multiplied by the number of levels of grantee-subgrantee or
subgrantee-subgrantee arrangements involved in the project. It follows
from this that, regardless of whether the Council did or did not incur a
cost, or expenditure, to OARC from the standpoint of the Council's
bookkeeping under whatever method of accounting it used, the "necessary
cost" and, therefore, the "expenditures" under the applicable
regulations consisted of the ultimate transactions establishing the cost
of the project; i.e., the transactions with the actual suppliers of
those services. These transactions occurred in FFY 1978 and the
"necessary cost" was therefore not FFY 1977 "expenditures."
(7) This is consistent with, and seems to be the sense conveyed by,
the definition of "cost" in 45 CFR Part 74, Appendix C, which 45 CFR
74.171, quoted above, makes applicable to "activities conducted or
administered by governments." That definition, section I.B.3 of the
Appendix, reads:
Cost, as used herein, means cost as determined on a cash, accrual or
other basis acceptable to the Federal grantor agency as a discharge of
the grantee's accountability for Federal funds.
Obviously, it is not the intermediate bookkeeping entries at the
various accounting entity levels through which funds pass, but only the
ultimate transactions, exchanging those funds for program goods or
services (if any are required by the program) that "discharge... the
grantee's accountability for Federal funds." As section I.A.2.b of the
Appendix states it, "The grantee... assumes the responsibility for
seeing that federally assisted program funds have been expended and
accounted for consistent with underlying agreements and program
objectives."
The point is consistent also with the "Basic Consideration" regarding
costs, which is set forth in section B.1 of Appendix F to 45 CFR Part 74
(1977). This Appendix states cost principles applicable to grants to
private nonprofit organizations. See 45 CFR 74.174, quoted above.
Appendix F, section B.1, states:
1. Composition of total cost. The total cost of a contract or grant
is the sum of the allowable direct and indirect costs allocable to the
grant/contract less any applicable credits. In determining what
constitutes costs, any generally accepted accounting method of
determining or estimating costs that is equitable under the
circumstances may be used.
The significance of this provision for the present point is in its
defining "total cost of a... grant" as "the sum of the allowable...
costs" (net of applicable credits). Under this definition, "costs"
cannot include intermediate-level accounting entities' cost accounts
entries since, as noted above, that would have a multiplying effect.
In sum, we conclude that the Council did not have any relevant
"necessary cost" in FFY 1977 within the meaning of section 103 of
the
Act; that it therefore did not incur any relevant "expenditures" in
FFY
1977 within the meaning of the program regulation, 45 CFR 1386.13; and
that the $20,836 at issue was not includible in the State's FFY 1977
expenditures as Council expenditures.Having (8) previously concluded
that there were no relevant "accrued expenditures" by the State itself,
we conclude finally that the disallowance of the $20,836 as part of the
State's reimbursement base was correct.
As we see it, the State originally reported a total of expenditures;
the Agency objected to the justification originally proffered for the
total, the agreement with OARC; and the State then was entitled to try
to show other justification for a part of the total, namely, that
$20,836 had been expended for proper program services in FFY 1977.
The State's appeal argument, as we read it, rested on the proposition
that the $20,836 was obligated (as part of the $100,000 referred to in
the agreement with OARC) in FFY 1977. Appellant's Statement, heading
5.However, we do not agree that any obligation resulting from the
agreement between the Council and OARC enables the State to obtain
federal reimbursement. That transaction was simply unrelated to the
obligations that would occur for particular purchases of program
services.
Conclusion
The disallowance is affirmed in the total amount of $35,050 subject
to the following: it may be that some of the $20,836 represents
expenditures in 1977 from even the Agency's point of view. It is our
understanding that the Agency would now allow such expenditures.
Therefore, we uphold the disallowance subject to the right of the State
to present to the Agency, within 15 days after receiving this decision,
any documentation the State may wish to present to show that there
should be a reduction in the disallowance for 1977.
SEPTEMBER 22, 1983