Campesinos Unidos, Inc. (CUI) appealed a determination by the Administration for Children and Families (ACF) to disallow $306,653 related to CUI's Migrant Head Start awards for the period September 1, 1991 through August 31, 1994 (program years 20, 21, and 22).¹ ACF made findings addressing cost allowability or funding issues in eight general areas of CUI's program. During Board proceedings, ACF reduced the disallowance by $11,630. CUI requested a hearing, and ACF opposed this request, arguing that there was no genuine dispute of material fact. In a telephone conference held by the Board, the parties agreed that the Board should first issue a decision addressing: 1) jurisdictional issues raised by CUI late in the proceeding; 2) threshold legal issues raised by the parties; and 3) CUI's hearing request.

For the reasons discussed below, the Board Chair (who is a member of the panel issuing this decision) rejects CUI's arguments opposing jurisdiction. The ACF determinations here clearly fall within the Board's jurisdiction at 45 C.F.R. Part 16, Appendix A, C(a)(1).

As explained below, we resolve certain threshold legal issues in ACF's favor, concluding that CUI has raised no genuine dispute of material fact requiring a hearing on the related ACF findings. Based on our analysis of these issues, we uphold ACF's determination with respect to the following: $23,178 in rent payments; certain amounts associated with expansion of CUI's Heber Center -- $50,000 awarded for salaries, fringe benefits, and supplies, part of the $14,000 disallowance for playground equipment (in an amount to be determined), and $9,252 for a modular unit set-up; $7,040 for program income (sale of vans); and $4,800 for literacy training. We reject ACF's position with respect to $56,613 for the Migrant Head Start Director's salary for two different program years and $3,705 for tax payments, and reverse the disallowances of these items. With respect to the remaining amounts in dispute, we do not fully accept either party's position. While ACF's findings raise substantial questions concerning these items, CUI's response accurately pointed out that the findings are insufficient as a basis for us to uphold ACF's determination without further development. Rather than our further developing the record at this time or finding in favor of CUI, however, we have determined that a remand to ACF is more appropriate. ACF's initial findings were based on a program-related review, and could be clarified in light of recent audits. In addition, to prevail, CUI must present additional documentation, rather than testimony. With the guidance we provide below, together with audit findings currently being developed, we think that the parties should be able to resolve these issues--or at least narrow them--on their own. Specifically, we are remanding the following determinations: the remainder of the $14,000 for playground equipment; $33,892 for insurance refunds; and $92,543 in quality improvement funds. CUI may return to the Board on these limited issues, in accordance with the guidance below.

Applicable Authority and Background

The Head Start Act, 42 U.S.C. 9831 et seq., establishes a program to provide developmental services primarily to low-income preschool children.² Some Head Start funds are set aside to serve migrant children and their families.

Head Start projects are approved for indefinite periods, but grantees must apply for continuation awards for each program year to operate their basic programs. In addition, if other funds are available, grantees may separately apply for supplemental awards for specific, limited purposes, such as expansion or quality improvement.

Federal grant funds may be spent only for allowable costs of activities for which a grant was awarded. 45 C.F.R. 74.170.³ The grantee has the burden to document the allowability of costs claimed under the grant program. 45 C.F.R. 74.61(b); Office of Management and Budget (OMB) Circular (Cir.) A-122, Attachment (Att.) A, A.2(g). The documentation must consist of records adequately identifying information pertaining to grant awards, authorizations, obligations, unobligated balances, assets, outlays and income. 45 C.F.R. 74.61(b). The records must be supported by source documentation such as canceled checks, paid bills, and payrolls. 45 C.F.R. 74.61(g). A grantee is required to submit reports to be used to monitor cash advanced and disbursements or outlays for each grant. 45 C.F.R. 74.74. Additionally, a grantee must ultimately account for all grant funds received by documenting that it incurred and actually paid program-related expenditures. 45 C.F.R. 74.112.

CUI, a community action agency, had been operating three Migrant Head Start Centers in Southern California: the Brawley Center, the Coachella Center, and the Heber Center. CUI had a total approved budget of $1,172,088 for its Migrant Head Start program for program year 20, the period September 1, 1991 through August 31, 1992 (basic funding of $1,019,765 and a supplemental award of $152,323 for one-time program improvements). For program year 21, the period September 1, 1992 through August 31, 1993, CUI received a total of $1,262,534 in Migrant Head Start funds (basic funding as well as supplemental funding for expansion, quality improvement, and service to an additional 24 children). For program year 22, the period September 1, 1993 through August 31, 1994, CUI received a total of $1,546,367 (including basic funding and supplemental funding for cost of living adjustments, quality improvement, disability services and training, and technical assistance). ACF's June 19, 1995 brief (br.) at 2 and exhibits (Ex.) C-E.

In March 1994, ACF conducted a site visit of CUI's Migrant Head Start program. ACF's review included use of the On-Site Program Review Instrument and selected CUI records dating from September 1, 1991 through March 24, 1994. Based on its review, ACF issued a "potential disallowance" notice. ACF also denied CUI's application for continuation funding for program year 23 (1994-1995). ACF issued a "final disallowance decision" only after CUI's appeal of the denial of refunding had been pending for some time. CUI separately appealed ACF's disallowance decision under 45 C.F.R. Part 16; the Board ruled that the disallowance matter should proceed separately and that ACF could not rely on findings related to the disallowance for its denial of refunding.⁴ By decision dated May 24, 1995, the Board upheld ACF's denial of refunding. See Campesinos Unidos, Inc., DAB No. 1518 (1995).⁵

ACF's final decision addressed eight general areas, some with several different items, as follows:

1. Rent paid to Valley Cam Tech
2. Heber expansion
   1. Salaries, fringe benefits, and supplies
   2. Playground equipment
   3. Modular unit set-up
3. Migrant Head Start Director
   1. 1992-93 program year
   2. 1993-94 program year
4. Program income (sale of vans)
5. Insurance refunds (workman's compensation credits)
6. Tax Payments
7. Literacy Training
8. Quality Improvement

In its reply brief submitted July 26, 1995, CUI argued for the first time that, with the exception of the rent paid to Valley Cam Tech and the tax payments, the Board lacked jurisdiction over its appeal of ACF's findings. CUI requested that the Board dismiss those findings. By submission dated August 10, 1995, ACF commented on CUI's request. The Board provided CUI an opportunity to reply in a telephone conference held September 8, 1995, which also addressed CUI's request for a hearing in this case and threshold legal issues raised by the parties.

Below, we first provide an analysis of the general jurisdictional objection raised by CUI. We then analyze each of the eight areas of ACF's determination, addressing the threshold legal questions, as well as CUI's jurisdictional arguments that were specific to any of those areas.

General Jurisdictional Issues

The Board's regulations at 45 C.F.R. Part 16, Appendix A, C, provide, in relevant part, with respect to direct, discretionary project grant programs such as Head Start:

(a) The Board reviews the following types of final written decisions . . . .
(1) A disallowance or other determination denying payment of an amount claimed under an award, or requiring return or set-off of funds already received. This does not apply to determinations of award amount or disposition of unobligated balances, or selection in the award document of an option for disposition of program-related income.

(Emphasis added.)

ACF here initially issued a determination it called a "potential disallowance" and then issued a determination it called a "final disallowance." The final disallowance informed CUI that, unless CUI appealed to the Board within 30 days, the ACF determination would also become the final decision of the Department. For each of the areas addressed in the determination, ACF concluded either that CUI had charged to Migrant Head Start funds specific cost items that were unallowable, that CUI had not expended funds for the purposes for which they were awarded, or that CUI had not properly credited amounts that should have been credited to its Migrant Head Start awards. ACF's "final disallowance" notified CUI that it would be required to pay back funds to the federal government "from non-Federal sources for the total disallowance." ACF Ex. B at 10. Thus, the determination here falls within the plain language of the regulations.

CUI argued conclusorily that "the Board hears only those matters involving the expenditure of Federal funds" and that this meant "disallowance of the expenditure of funds on unallowable costs as that term is defined . . . by OMB Circular A-122." CUI July 26, 1995 br. at 2. This argument is unclear since OMB Circular A-122 includes both general considerations in determining allowability of costs and provisions on the allowability of specific types of cost items. CUI argued, however, that "ACF repeatedly confuses program considerations with cost disallowances," implying that program considerations were outside the Board's jurisdiction. Id. CUI provided no support for its interpretation based on the wording or history of the Board's regulations or in past rulings by the Board Chair on jurisdiction.

The Board has consistently interpreted the term "disallowance" to cover determinations that find that charges to federal funds are not allowable, even if the basis for the finding is not a specific cost principle. This includes, for example, questions of whether costs are allocable (i.e., of benefit) to a particular grant or budget period and of whether funds were expended for the purposes for which they were intended. In addition, the Board regulations specifically cover determinations requiring return of funds, so long as the determination is not within the listed exceptions. This could include determinations that a grantee's failure to account properly for program income or applicable credits resulted in the grantee charging more to federal funds than permitted.

CUI's jurisdictional arguments, for the most part, rely either on CUI's characterization of the bases for ACF's determinations as going to what CUI calls "programmatic concerns" or on other grounds that challenge the bases for ACF's determinations. These arguments go to the merits of whether ACF properly disallowed costs or otherwise required a return of funds, not to whether ACF's determinations are properly within the Board's jurisdiction. In addition, some of CUI's arguments relate to ACF's reasons for rejecting CUI's position in response to ACF's original determination, not to the original determination itself. Thus, CUI did not provide any valid reason for finding that ACF's determinations are not within the Board's jurisdiction.

Analysis of ACF's determinations

1. Rent paid to Valley Cam Tech

ACF found that, for the 30-month period under review, CUI paid $37,250 in rent to Valley Cam Tech, a wholly owned subsidiary of CUI, for use of facilities referred to as the Brawley Center. Valley Cam Tech then reimbursed CUI's corporation account. Thus, in effect, CUI was paying rent to itself. ACF determined that this arrangement represented a less-than-arms-length transaction between CUI and Valley Cam Tech. Applicable cost principles specifically provide: "Rental costs under less-than-[arms]-length leases are allowable only up to the amount that would be allowed had title to the property vested in the organization." OMB Cir. A-122, Att. B, 42.c.; see 45 C.F.R. 74.174.

CUI did not deny that the rental arrangement was less- than-arms-length, nor challenge the applicability of the cost principle. Instead, CUI maintained that it had incurred depreciation costs, which, when set off against the disallowance, would result in a credit due to CUI of $4,737. CUI asserted that it was entitled to depreciation for its main office and for the Coachella Center, as well as for the Brawley Center.

ACF had accepted CUI's claim to a charge of depreciation on the Brawley Center and agreed to reduce the potential disallowance from $37,250 to $23,178. However, ACF rejected CUI's claim for substitution of depreciation charges on CUI's main office and CUI's Coachella Center for the remainder of the disallowed amount. ACF contended that for the costs to have been authorized, CUI would have had to have included them in its proposed budgets for the period in question, and have had the expenditure approved by ACF. Moreover, ACF asserted that federal guidelines as set forth in OMB Circular A-122, Attachment B, 42.c. do not permit such a substitution. ACF maintained that the applicable provision permits a grantee to make a partial recovery in a "deceptive leasing arrangement;" however, according to ACF, the recovery is limited to the allowable depreciation on the facility subject to the "deceptive leasing practice." ACF June 19, 1995 br. at 5 and 7. ACF also said that CUI had failed to provide adequate documentation of depreciation for the main office and the Coachella Center.

CUI argued that nothing in OMB Circular A-122 or the Head Start regulations prevents CUI from combining the amount of depreciation for each facility for the period in question to offset ACF's disallowance. CUI also argued that ACF could not properly raise the documentation issue because it had not been raised in the disallowance letter.

CUI's arguments do not provide a basis for us to reverse ACF's determination that CUI improperly charged to its grant rent for the Brawley Center, to the extent that that rent exceeded ownership costs on the Brawley Center. The cost principle contemplates a limit on rent for a particular property under a less-than-arms-length transaction.

CUI's arguments, however, raise the question of whether additional depreciation costs, not previously charged to its Migrant Head Start grant, may now be so charged to offset the disallowance amount for rent or other costs. The Board has previously held that the mere fact that a grantee charged unallowable costs to a grant does not necessarily mean that it has not discharged its obligation to account for federal funds and must return funds in the disallowed amount; if a grantee can demonstrate that it incurred additional allowable costs previously covered with its own funds, which it did not use to fulfill its non-federal share requirement, this could be an adequate accounting for part or all of the federal funds awarded. See Seminole Nation of Oklahoma, DAB No. 1385 (1993) at 5 and cases cited therein; Institute for Technology Development v. Brown, 63 F.3d 445 (5th Cir. 1995); see also 45 C.F.R. 74.112.

Such an offset claim, however, must be independently analyzed. Here, we disagree with ACF that the cost principle in OMB Circular A-122 precludes CUI's claim; that principle merely establishes the amount of rent which may be charged in a less-than-arms-length transaction. CUI is correct that OMB Circular A-122 elsewhere provides for compensation for the use of buildings, including depreciation costs, so long as certain conditions are met. OMB Cir. A-122, Att. B, 9.

ACF also failed to provide support for its argument that CUI's failure to include depreciation costs in its budgets for the program years in question is by itself "fatal" to CUI's claim. Where prior approval for a particular type of cost is required, inclusion in the budget will constitute such approval. 45 C.F.R. 74.177. If prior approval is not required, however, a grantee is not generally precluded from a budget revision transferring amounts from one category of cost to another. See 45 C.F.R. Part 74, Subpart L. On the other hand, the fact that CUI did not include these amounts in the budgets raises substantial questions which CUI did not satisfactorily answer here. For example, it is highly possible that depreciation on the main office was not included in the budget because this inclusion would mean that CUI would exceed the 15% limit on administrative costs for Head Start programs or because the costs were treated as indirect costs (see section 5 below). Other possible explanations for why depreciation costs were not included in the budget are: 1) CUI was using these costs as part of its non-federal match; 2) CUI was charging them (at least in part) to its other programs; or 3) CUI had previously determined that they did not meet the conditions for claiming depreciation costs, including that the costs of the depreciated buildings or improvements may not have been borne originally by federal funds. See OMB Cir. A-122, Att. B., 9.

Moreover, ACF is correct that the documentation of depreciation costs that CUI provided is inadequate. CUI provided mainly a summary of the costs, with supporting documentation that addresses only the division between the value of the land on which the buildings sit (which is not allowable) and the value of the improvements on that land. See CUI Exs. A-C.⁶ More complete supporting documentation is required generally by the provisions discussed above, and by the cost principle on depreciation, which addresses what records must be kept to support depreciation claims. OMB Cir. A-122, Att. B, 9. Such documentation would be particularly critical here since these costs were not charged to its Migrant Head Start grants during the periods in question and therefore were likely not audited as part of CUI's ongoing program audits.

Contrary to what CUI argued, ACF did not improperly raise the question of documentation of these costs. ACF raised the issue in response to CUI's offset claim, and CUI had ample opportunity to respond and to provide adequate documentation of the costs.

Thus, we reject CUI's offset claim. CUI maintained that, at the very least, a hearing is needed to address this issue. However, there are no genuine disputes of material fact the resolution of which would be assisted by oral testimony, nor would a hearing be helpful on this issue. Only documentation would be adequate evidence of depreciation costs; CUI had an opportunity to provide such documentation and failed to do so. Therefore, we uphold the disallowance of $23,178 for rent paid to Valley Cam Tech, without permitting offset of claimed depreciation on the Coachella Center and the main office.

2. Heber Expansion

In program year 21, CUI was awarded $152,323 in supplemental funds to expand its facilities for serving migrant children in the Calexico area. In applying for these funds, CUI stated that the funds would be used for relocation of the center in Heber, California to Calexico, California. The application included $14,000 for specific items of playground equipment for the new site, and $9,252 for installation costs for a modular unit. At the same time, CUI applied for other funds related to what it called the "Heber expansion," specifically: $50,000 for teachers' salaries, fringe benefits, and supplies. It is undisputed that, because of problems with obtaining the necessary approvals for the facility in Calexico, the expansion was delayed, and no center was opened in Calexico prior to ACF's action denying refunding of CUI's Migrant Head Start program.

ACF disallowed: (A) the $50,000 awarded for teachers and supplies; (A) the $14,000 for playground equipment; and (C) the $9,252 for a modular unit installation at the Calexico site. We discuss each of these disallowances below.

(A) $50,000 for salaries

ACF took the position that the $50,000 was awarded for teachers at the planned Calexico site and that, because the facility never opened within the period for which the funds were awarded, the expenditure of the $50,000 was unallowable. CUI argued that it served additional children during the period in question at its existing Heber Center, and that this was consistent with its funding proposal. CUI maintained that the funds were "used to cover expenses for the two additional teachers needed to meet child/teacher ratios (at a total of $41,365) and to pay for supplies and similar items." CUI's May 17, 1995 br. at 3; see CUI May 17, 1995 Ex. 1, 8 at 2-3. CUI argued that its program was expanded and that it spent the funds as authorized.

ACF maintained that CUI had violated the terms of the award, by spending funds for purposes that were not authorized. Moreover, ACF contended that CUI had failed to submit any evidence that it did, in fact, serve an additional 24 children at the Heber Center. In response, CUI submitted a list of children from the Calexico area served at the Heber Center, and offered to provide further evidence at a hearing. Transcript of September 8, 1995 Telephone Conference (Tr.) at 27. CUI also argued that, since ACF had not alleged that CUI spent the $50,000 on something other than teacher salaries, fringe benefits, and supplies, the Board did not have jurisdiction.

First, CUI's jurisdictional argument has no merit. ACF determined that CUI must return the $50,000 because it was not spent on authorized purposes, and further that the costs of any salaries and supplies for services at the Heber Center are not allowable charges to these funds. As noted above, this type of determination falls within the plain language of the Board's regulation on jurisdiction.

With respect to the merits, we conclude that ACF's position is supported by the record and applicable authority. In arguing that it was authorized to spend the funds for teachers and supplies at the Heber Center, CUI argued that the purpose of the award was for salaries and supplies to serve 24 additional children from the Calexico area and that purpose of the award was different from the award for physical expansion. CUI argued that it was irrelevant whether the money went for teachers at a new or old facility. Tr. at 24. CUI's position ignores language in CUI's application for the $50,000, however, as well as the context in which the application was made. The application includes as the descriptive title of the project: "Increase in service to mobile migrant children (3-5 years of age) in Calexico, CA." ACF Ex. U, unnumbered p. 1 (emphasis added). Given that CUI had also applied for funds to establish a new facility in Calexico, this language clearly suggests that the service was to be provided at the new center, not the existing one. This interpretation is confirmed elsewhere in the application, where it states the following:

The Parent Policy Council approved expansion to serve 24 additional children in the Calexico area where there are presently 138 unserved mobile migrant preschool children, only after ACF approval of our one time request for Heber Center relocation to Calexico, CA.

ACF Ex. U, unnumbered p. 10.

Thus, we hold that use of the funds to serve children at the existing Heber Center constitutes a change in the scope of the project, which would require prior approval. Section 74.103(b) of 45 C.F.R. provides, in relevant part:

Changes to project scope or objectives. The recipient shall obtain prior approval for any change to the scope or objectives of the approved project. . . .

See also HDS Grants Administration Manual (GAM) at 1-13; OMB Cir. A-122, Att. A, (2)(a) (costs "must conform to any limitations or exclusions set forth . . . in the award.").

CUI did not dispute that it had not obtained prior approval for this change, but suggested that, if the Board held for ACF on the threshold issue, the Board should hold a hearing into whether retroactive approval should be given.

ACF asserted that it has more than adequate grounds for declining any request for retroactive approval of the expenditures of funds earmarked for use at Calexico. ACF cited the Board's decision in Campesinos Unidos, Inc., DAB No. 1518 (1995), for its position that ACF had established that CUI has performed poorly in virtually every aspect of its Migrant program since 1990. Id. ACF also noted that it had previously found in On-Site Performance Reviews that the Heber Center facility was overcrowded, so that ACF would not have approved serving additional children at that facility, and that it had found that CUI did not meet enrollment requirements. Finally, ACF challenged the adequacy of the documentation provided by CUI to show that it in fact served additional children. Additionally, ACF had previously questioned whether CUI had, in fact, hired additional teachers, noting that "CUI's employee lists have consistently shown substantially fewer staff than its budget calls for." ACF August 10, 1995 br. at 6, n. 5.

While the Board has recognized that retroactive approval may be granted under certain circumstances, an agency has considerable discretion when determining whether to grant such approval, and may consider factors such as the grantee's past fiscal performance. See Arizona Affiliated Tribes, Inc., DAB No. 1500 at 7 and cases cited therein. ACF's stated reasons for denying retroactive approval are reasonable on their face since they raise substantial questions about whether additional children could have been adequately served at the Heber Center and about whether CUI did in fact spend the funds as it said it did. CUI did not specifically deny that ACF had previously found that the Heber Center was overcrowded, but said it could provide "testimony about the practicalities of running a migrant program, that there is in-flows and out-flows of children and we can have extensive testimony by CUI about how they served those additional children and why their license capacity was not exceeded." Tr. at 27.

We do not think a hearing is required or would be useful on this issue. CUI provided no documentation that additional teachers were hired beyond those authorized in its basic budget. Indeed, CUI did not specifically dispute ACF's assertions that CUI consistently hired fewer teachers than budgeted. Nor did CUI offer now to show that the findings it failed to dispute in the proceedings leading to Decision No. 1518 (such as failure to meet enrollment requirements) were erroneous. The reasons on which no documentation or testimony was offered by CUI provide an adequate basis for the denial of retroactive approval. Thus, the testimony offered by CUI would not be sufficient to support a conclusion that ACF abused its discretion in denying retroactive approval here.⁷

Moreover, CUI had an opportunity to provide documentation to support its assertion that it served 24 additional children at the Heber Center. The documentation originally provided was for the wrong time period. The documentation ultimately submitted is inadequate because it merely shows the names of some children and that they were from the Calexico area. See Attachment to CUI September 13, 1995 submission. Since CUI's application for expansion funds indicated CUI was already serving some children from the Calexico area (5 to 7 miles away from the Heber Center), the list is insufficient to show that CUI in fact expanded its program to serve other children from the Calexico area. This is the type of issue where documentation would be the best evidence, and ACF is not unreasonable in denying retroactive approval based on CUI's failure to submit such documentation when provided the opportunity.

We therefore uphold the disallowance of $50,000 awarded for salaries and supplies for a Calexico facility and determine that no additional proceedings are required on this issue.

(B) $14,000 for playground equipment

CUI received $14,000 to purchase playground equipment for the new Calexico site. As noted above, however, the site did not open. CUI first stated that the equipment had been purchased and used elsewhere in its program. Later, CUI stated that the equipment was being held, at no additional charge, by M&M Playgrounds, the company from which CUI purchased the equipment. Finally, in a September 25 telephone conference, CUI said that part of the equipment had been used elsewhere in the program and that part of it had been stored. Tr. at 39-40.

ACF asserted that if the equipment was stored but not used, the cost must still be disallowed because the children in the program have not benefitted from it. Further, ACF provided a list of the playground equipment that the $14,000 was awarded to CUI to purchase. See ACF's August 10, 1995 br. at 7; ACF Ex. B at 2-15 to 2- 16. ACF argued that the number of pieces of equipment listed in CUI's May 17, 1995 submission at Exhibit 2 as being stored is significantly less than the number CUI itemized for purchase.

CUI replied that the fact that it failed to use the equipment as planned because the Calexico Center did not open is not a question of cost but rather a question of programmatic objectives, and that the Board therefore lacked jurisdiction. On the merits, CUI argued that it was reasonable in purchasing the equipment when it did, in anticipation of the Calexico site opening. CUI also claimed that it had made the equipment available for the interim grantee which replaced CUI after it was denied refunding. ACF responded that the equipment is not part of the inventory of equipment slated to be turned over to the interim grantee. Further, ACF argued that even if ACF accepted the stored equipment, it is clear that the Migrant Head Start program has never benefitted from such equipment. ACF maintained that costs are not allocable and allowable unless they actually further the objectives of the grant. Id. at 7-9.

CUI's jurisdictional argument is without merit. ACF determined here that the funds were not expended in accordance with applicable requirements and that CUI must return them. This determination falls within the plain language of the Board's regulations, as discussed above.

CUI's documentation is sufficient to show that CUI purchased in 1992 and stored some playground equipment which meets the description of the equipment to be purchased with the $14,000 supplemental award. See ACF Ex. G; CUI May 17, 1995 br. Ex. 2. CUI did not provide any documentation, however, to support any finding that the remainder of the funds were used to purchase equipment that was used elsewhere in the program. While there is documentation showing the equipment CUI had, CUI presented nothing to connect this equipment with the time period involved, much less with the award of the supplemental funds for CUI's Migrant Head Start program. The absence of such documentation provides a basis for upholding ACF's determination with respect to that part of the $14,000 (which should be determined on remand, as indicated below) not used for equipment that was purchased within the scope of the award authorization and was stored. With respect to this amount, we do not need to reach the issue of whether CUI could properly use funds awarded for equipment for the Calexico site to purchase equipment used at other sites. CUI failed to provide any documentation that this is, in fact, how it used the funds.

With respect to the equipment which CUI purchased but stored, the key issue is whether ACF properly determined that the costs did not benefit CUI's Migrant Head Start program because the children did not actually use the equipment. The term "benefit" is a term of art used in grant programs which relates to the principle that costs must be allocable to an award to be charged to an award. This concept is essentially an accounting concept, and a finding of lack of actual use is not determinative. Indeed, in specified circumstances, costs of idle facilities or equipment are allowable. OMB Cir. A-122, Att. B, 16. For such costs to be allowable, however, idle facilities (which can include equipment) must have been necessary when acquired and idle for causes which could not have been reasonably anticipated. Id. ACF apparently meant "benefit" in this sense, to mean that CUI was not reasonable in buying the equipment, just to store it. OMB Circular A-122 provides generally that costs must be "reasonable in nature and amount" and sets out considerations in determining reasonableness, including that a cost must not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost. OMB Circular A-122, Att. A, A.3.

CUI argued that it was reasonable in purchasing the equipment under the circumstances, and presented evidence to support its assertion that it encountered unanticipated delays in receiving the necessary permits for the Calexico site. While this documentation supports CUI's position that it encountered unanticipated delays in opening the Calexico site (a position that was not directly disputed by ACF), we cannot evaluate whether these were the circumstances prevailing at the time of the purchase of the equipment. The documentation provided regarding the stored equipment indicates only that it was purchased in 1992, not giving a specific date. The record indicates that CUI thought it was on schedule in May 1992 and knew about the delays by May 1993, but it is unclear what knowledge CUI had between May and December 1992 regarding potential delays. ACF Ex. G at unnumbered p. 9; ACF Ex. I at 2. Moreover, while this documentation lists the type of equipment purchased it does not state what the purchase price was for each item of equipment.

In view of the fact that CUI did provide some documentation regarding this equipment, and asserted that it could turn over the stored equipment, we have determined that the appropriate action at this time is to remand to ACF. CUI should be provided an opportunity to document the cost of the stored equipment, to provide further documentation about the timing and the circumstances at the time CUI incurred the cost. If CUI did appropriately charge the costs of the stored equipment, it must nevertheless account for the equipment by turning it over. See OMB Cir. A-122, Att. B, 16. To the extent that CUI does not adequately document the expenditure for stored equipment, in accordance with the authorized use of supplemental funds, the disallowance is upheld.

(C) $9,252 for a modular unit set-up at Calexico

ACF argued that CUI's expenditure of $9,252 for costs connected with installation of a modular unit at the Calexico site did not benefit the Migrant Head Start program. ACF asserted that at the end of the 1992-93 program year, the year in which the Calexico program was to be established, the modular unit was in storage.⁸ ACF maintained that the modular unit still stood unused as of March 1995. According to ACF, when CUI became aware that it would be unable to install and use the modular unit at Calexico during the 1992-93 program year, it had the obligation to request authority to carry over the funds earmarked for that purpose. Since CUI did not make such a request, ACF asserted, CUI must bear the consequences of its decision.

CUI argued that it did not "claim" the funds allocated for set-up of the modular unit for the 1992-93 program year since installation of the modular units was delayed. CUI asserted, however, that the modular units were purchased and have now been installed, and that the cost of installation was properly charged to CUI's 1993-94 Migrant Head Start grant. Thus, in CUI's view, the Board lacks jurisdiction to dispose of ACF's allegation that "the funds were never expended" during the program year. CUI July 26, 1995 br. at 10.

First, the Board has jurisdiction over ACF's determination here. ACF's position that the funds were never expended for authorized purposes in the period for which awarded, and not properly spent later, is a determination that the costs were unallowable and is clearly within the Board's jurisdiction.

On the merits, we uphold ACF's determination. CUI conceded that it did not install the modular unit set-up in the 1992-93 program year, and CUI did not allege that it had timely obligated the funds for this or any other purpose. Therefore, CUI was required to treat the amount at issue as an unobligated balance for the 1992-93 program year. The granting agency has discretion concerning whether an unobligated balance remaining at the end of a budget period will be carried over into a later period (and if so, how) or will be deobligated. GAM at 1-8. CUI did not deny that it did not have authorization from ACF to carry these funds over as an unobligated balance into the 1993-94 program year to be used for installation of the modular unit in that year. Absent such an authorization, the funds were not available for expenditure in the later program year.⁹

Accordingly, we uphold the disallowance of the $9,252 in costs for installation of the modular unit.

3. Migrant Head Start Director

ACF disallowed: (a) $12,207 for the 1992-93 program year based on its finding that CUI did not have a Migrant Head Start Director from July 3, 1993 through August 31, 1993; and (b) $44,406 for the 1993-94 program year based on its finding that the person employed by CUI (to whom we refer as N.E.) was unqualified for the position and had not been approved by ACF.

CUI admitted that, from July 3-August 18, 1993, the Head Start Director's position was vacant. CUI May 17, 1995 br. at 6, n.5.¹⁰ CUI argued, however, that on August 18, 1993, N.E. was hired to serve as CUI's Migrant Head Start Director, and that she served in that capacity until March 7, 1994, when she was succeeded by another person. CUI asserted that she was qualified because of her experience in CUI's program, including as a head teacher, and because she herself had been a migrant worker, was from a migrant family and understood the needs of migrant children. CUI May 17, 1995 Ex. 3 at 7. CUI said that it did not know why ACF apparently determined that N.E. was unqualified, and requested a hearing on how ACF made the determination that she was unqualified and on her qualifications generally. CUI asserted that the salary paid to N.E. was $31,824, not $47,736 as stated by ACF. Thus, CUI argued, at the very least the amount of the disallowance should be adjusted.

Finally, CUI argued that there is no dispute that the "funds designated for the salary of the Migrant Head Start director during the periods in question were expended for that purpose." CUI July 26, 1995 br. at 12. Thus, according to CUI, ACF's claim is not properly before the Board "inasmuch as it does not involve the misexpenditure of funds." Id.

CUI's jurisdictional argument has no merit. Again, CUI is challenging the sufficiency of ACF's basis for a disallowance, rather than giving a reason why the determination does not fall within the scope of the Board's jurisdictional regulation.

The first issue on the merits is whether CUI was required to obtain approval before hiring N.E. We determine that such approval was not required. Prior approval for changes in key personnel of grants (other than research grants) was required only if the "terms of the award" made the provision at 45 C.F.R. 74.103 applicable. 45 C.F.R. 74.103(c); GAM at 1-13. As CUI pointed out, the terms of its Migrant Head Start award for the 1992-93 program year provided for "a basic Head Start grantee" merely that--

the grantee shall notify the HDS grants officer as soon as possible of any change in the status of the Head Start Director.

ACF Ex. D, DHHS/HDS Terms and Conditions. This is described as an exception to the rule that prior approval must be obtained for changes in status of the program director. Id.

For its position that prior approval was required, ACF relied on letters it sent to CUI. Specifically, by letter dated June 29, 1993, ACF advised CUI that it needed to obtain ACF's approval of a new Head Start Director. After CUI's selection of N.E., ACF on August 20, 1993 informed CUI that CUI needed to submit documentation with respect to the selection process and qualifications of the applicant prior to hiring. By letter dated August 27, 1993, ACF again requested information prior to approval and noted that approval of the salary listed in CUI's refunding application, $47,736, was contingent on CUI's hiring of a highly qualified individual. ACF's reliance on these letters as establishing a prior approval requirement is misplaced. As indicated above, under 45 C.F.R. 74.103, prior approval for changes in key personnel may be required only by the "terms of the award." The award in effect at the time of ACF's June 29, 1993 letter, and at the time N.E. was hired in August, specifically exempted basic Head Start grantees. Thus, we conclude that CUI was not required to obtain prior approval for hiring a new Director.

With respect to the issue of N.E.'s qualifications, no hearing is required to address how ACF determined that she was unqualified. How ACF made this determination is irrelevant here; the Board provides de novo review of agency determinations in this type of case. Moreover, ACF clearly stated here that the basis for its determination was CUI's own standards. ACF contended that CUI's announcement of the position included the qualifications that candidates were to have a Bachelor of Arts in education or a related field, at least 12 semester units or equivalent in Early Childhood Education, three years in pre-school programs and three years in a responsible supervisory or management position. ACF maintained that documentation provided by CUI regarding N.E.'s qualifications clearly demonstrates her lack of educational qualifications and experience necessary to function as a Migrant Head Start Director. Further, ACF asserted that CUI had previously taken the educational qualifications seriously in selecting a candidate, since the Migrant Head Start Director who preceded the one at issue here had one Master's degree and was pursuing a second in Early Childhood Administration.

As CUI pointed out, however, its position announcement listed only "Desired Qualifications." See ACF Ex. J. ACF did not allege that any other policies of CUI treated these qualifications as mandatory. The mere fact that CUI might have previously hired a Director who met or exceeded the desired qualifications does not transform them into a policy to require those qualifications. Thus, there is no basis for determining that CUI's hiring of N.E. contravened CUI's own standards, as ACF alleged.¹¹

ACF also argued that, because N.E. was unqualified, the costs for her salary did not "benefit" the Migrant Head Start program. CUI is correct, however, that there has been no finding that she did not provide services as a Migrant Head Start Director during the relevant period. Thus, to the extent the term "benefit" is used to address the question of whether costs are allocable to a program, we find that the salary costs did benefit the program here because the relevant cost objective was the Migrant Head Start program.

ACF's arguments, however, suggest that the real issue raised by ACF is whether CUI was unreasonable in hiring N.E., given what the documentation of her credentials shows and the fact that she did not meet the desired qualifications. ACF pointed out that she did not have a Bachelor's degree and said she did not have the years of experience listed in CUI's desired qualifications. CUI emphasized that the documentation showed she was working on a Bachelor's degree, had worked three years as a regular teacher and three more years as a head teacher in CUI's Migrant Head Start program, and had a certificate from California in child development. CUI also argued that she was uniquely qualified because she had herself been raised in a migrant family. CUI asked for a hearing on her qualifications.

We do not think a hearing is required, because we do not think the documentation ACF relied on is sufficient to justify a disallowance of N.E.'s salary. Her lack of desired educational credentials and experience does not per se make the cost unreasonable. By not adopting specific standards for Directors itself, ACF has, at least in part, left this evaluation up to the judgment of the grantees. While we understand why ACF would have some concern about her academic credentials, CUI could reasonably take other factors into account, such as her experience with CUI's program and her migrant background.

On the other hand, CUI did not challenge the authenticity of the documentation of N.E.'s qualifications, nor ACF's documentation about the much higher qualifications of the prior Director. That documentation supports a conclusion that CUI could not reasonably pay to N.E. the full amount budgeted for the Director's salary based on the prior Director's qualifications. Moreover, CUI was specifically informed by ACF's letter of August 27, 1993 that only a highly qualified applicant could justify this salary level. ACF Ex. O. More important, CUI admitted in a response letter that its own policies provided that CUI could pay N.E. no more than $3,000 or a 20% increase over what she was making as a head teacher. ACF Ex. P. (CUI requested a waiver of this policy, which it never obtained.)

ACF argued that CUI had failed to document that it paid N.E. a yearly salary of only $31,824, but did not state why CUI's documentation was insufficient to show that. Nor did ACF argue that CUI exceeded what was authorized by its own policy. CUI's employee action notice shows a monthly salary increase for N.E., associated with her replacing the prior Director, to $2,209.68. CUI July 26, 1995 Ex. 3. The notice then shows an additional increase to $2,652 based on it being the new program year 1993-94. Id. Thus, it appears that during the 1993-94 program year, N.E. was paid at a level of $31,824 and that this amount was consistent with CUI's policies.

We disagree with ACF, however, that the mere fact that CUI paid less than the $44,406 budgeted for the Director's position during the period in question means that CUI must pay back the difference between N.E.'s salary and the $44,406. CUI could account for this amount with other allowable costs either for salaries or within other categories to which CUI was permitted to transfer costs. Similarly, the mere fact that $12,207 was budgeted for the Director's position for a period during the part of which the position was vacant does not mean that CUI did not properly account for the funds. Absent a finding that CUI applied these amounts to unallowable costs, we do not have a sufficient basis for upholding the disallowance of these amounts.

Accordingly, we reverse the disallowance of the $12,207 and of the $44,406. In view of findings ACF previously made that CUI was not always reconciling actual to budgeted costs, however, our decision does not preclude ACF from examining whether CUI charged more to its Migrant Head Start grant for the salary of a Migrant Head Start Director than it authorized and actually paid.

4. Program Income (sale of vans)

ACF determined that, on November 2, 1991, CUI sold eight vans that had been purchased with Migrant Head Start funds, and that CUI did not report proceeds from the sale as program income. ACF found that CUI instead transferred the funds to its corporation account, and not to its Migrant Head Start grant, and reported the funds as income on its 1991 tax return. CUI admitted that, in 1991, it sold eight vans which had been purchased with Migrant Head Start funds and failed to report this income on its financial status report for that year. CUI July 26, 1995 br. at 14-15. CUI asserted, however, that the proceeds were used in 1991 to make minor repairs at its Brawley Center and generally to upgrade that center. CUI argued that Head Start regulations specifically allow CUI to use the funds in this manner. CUI relied on 45 C.F.R. 74.42(b)(1), arguing that this provision meant that CUI could retain program income and, in accordance with the terms and conditions of the award, add the income to funds committed to the project or program and used to further eligible project or program objectives. CUI May 17, 1995 br. at 7-8. CUI also cited to the cost principle at OMB Circular A-122, Attachment B, 23, which provides that costs incurred for necessary maintenance, repair, or upkeep of buildings are allowable under certain conditions.

ACF replied that CUI did not establish that the program income from the sale of vans purchased with Migrant Head Start funds was used to further the purposes of the Migrant Head Start program. ACF maintained that the facility at Brawley houses programs funded under migrant and non-migrant Head Start programs. ACF pointed out that CUI had offered no documentation to support its claim to have used the funds for purposes which further benefit Head Start.¹²

In its reply brief, CUI argued that ACF had failed to invoke the Board's jurisdiction because ACF merely raised an issue as to CUI's accounting methods. CUI also said a hearing was needed on certain issues related to this issue.

CUI's argument that the Board does not have jurisdiction here is without merit. As discussed above, the plain language of the relevant jurisdictional statement includes both a determination by ACF that a grantee must pay back funds because it has failed to document proper use of program income and a determination that costs are unallowable.

The first issue on the merits is whether CUI's admitted failure to include the $7,040 as program income on its Financial Status Report means that CUI failed to account properly for this amount. CUI did not specifically argue that it was not required to report this amount and such reporting was clearly required by 45 C.F.R. 74.73. The purpose of requiring grantees to report such income is to ensure accountability for the funds. The mere fact that CUI may have applied the actual proceeds of the sale to improve the Brawley Center does not satisfy that accountability, without a further showing that those costs of improving the Brawley Center were not otherwise charged to Migrant Head Start federal funds or to funds from other grants CUI had.

Moreover, proper accounting for the funds would require documentation that CUI in fact did incur the costs CUI said it incurred. Contrary to what CUI argued, ACF did not improperly raise the documentation issue. CUI asserted that it had spent the funds for allowable costs and therefore had a burden to support its assertion (as well as its general burden to document the allowability of costs). There was nothing improper in ACF pointing out that CUI had failed to do so.

We further reject CUI's argument that it was authorized by 45 C.F.R. 74.42(b)(1) to retain the income and to use it to further eligible project or program objectives. CUI's reliance on this section is misplaced. This section applies only to "general program income." "General program income" is defined to exclude special categories of income, including "proceeds from the sale of equipment and supplies purchased under a grant . . . and intended primarily for use in the [grant-supported] project." 45 C.F.R. 74.42(a); 74.43(b). Such proceeds are instead governed by Subpart O of Part 74. See 74.43(a). Subpart O provides that equipment (other than equipment with a unit acquisition cost of less than $1,000 or with no further use value) "may be retained or sold and the Federal Government shall have a right to an amount calculated by multiplying the current market value or the proceeds from sale by the Federal share of the equipment." 74.139(b)(1). Subpart O further provides:

If the grantee's project or program under which the equipment was acquired is still receiving grant support from the same Federal program and if the granting agency approves, the net amount due may be used for allowable costs of that project or program. Otherwise the net amount must be remitted to the granting agency by check.

74.139(b)(2) of 45 C.F.R.

CUI admitted that it purchased the vans with federal Migrant Head Start funds, and the nature of the equipment and the fact that CUI admittedly sold them for an average of almost $900 apiece establishes that this is the provision that governs. See also ACF Ex. B at 5-2 (indicating a purchase price of $10,500 for each van). Since CUI did not allege that it had ACF approval to use the proceeds for allowable costs of its Migrant Head Start program, CUI was required to remit the proceeds to ACF.

CUI requested a hearing on whether "ACF would have granted CUI retroactive approval to spend proceeds from the sale of vans . . . to make minor repairs and upgrade CUI's centers." CUI July 26, 1995 br. at 27. We do not think a hearing is required on this issue. ACF could reasonably deny retroactive approval based on CUI's admitted failure to report the program income, the failure to dispute ACF's assertion that the Brawley Center served purposes other than the Migrant Head Start program, and CUI's failure to document that in fact CUI used the funds to improve the Brawley Center (or any of its other centers). Moreover, only documentation of the use of the funds would satisfy program requirements, so we would not consider a hearing necessary or helpful on whether CUI used the proceeds for additional project costs or as income to the corporation.

The other issue on which CUI sought a hearing was the significance of ACF's finding that CUI reported the proceeds as income on its tax return. As previously noted, we consider this issue immaterial and do not rely on ACF's finding for our conclusions here.

Thus, we uphold ACF's determination regarding $7,040 for program income from the sale of vans.

5. Insurance Refunds

ACF originally determined that CUI had been the recipient of "insurance refunds" during the years 1988-1992 in the amount of $543,477, which was later revised to $252,734. Further, ACF determined that no credits to the grant had been recorded for the recovered insurance overpayments. CUI's August 17, 1994 response to the potential disallowance asserted that 1) it did not receive insurance refunds but instead earned dividends from its Workman's Compensation Insurance Fund based on CUI's low rate of claims; and 2) only $33,892 of the total was attributable to payments made under its Migrant Head Start program. As a result, ACF adjusted the disallowance to the current amount, but rejected CUI's claim that the dividends were not required to be applied to its Migrant Head Start program. ACF reasoned that: (1) the portion of the Workers' Compensation Insurance premiums paid by CUI with Migrant Head Start funds resulted in a return; (2) that return would not have been received had ACF not initially provided CUI with Migrant Head Start funds for its insurance expenses; (3) accordingly, CUI was required to use the return on those funds to offset expenses under its Migrant Head Start program. ACF cited in support of its conclusion OMB Circular A-122, Attachment A, A.1, which provides that "the total cost of an award is the sum of the allowable direct and allocable indirect costs less any applicable credits."

CUI alleged that it was not required to pay back the $33,892 because the dividends had been used to upgrade the Coachella Center in 1991, and the costs of these repairs were reasonable under OMB Circular A-122. Additionally, CUI asserted that the Division of Cost Allocation (DCA) is the agency within HHS that negotiates and settles indirect cost rate matters. CUI argued that ACF was not the proper HHS division to determine the disposition of the credits because the Workman's Compensation payments were indirect costs; therefore, CUI alleged the Board must reject jurisdiction of this issue. Finally, CUI argued that, since its indirect costs are between 18% and 19%, but Head Start allows only a maximum of 15%, CUI did not recover the entire amount of its allowable indirect costs from Head Start. Thus, CUI maintained that it should be allowed to keep these amounts to recover its indirect costs not reimbursed by Head Start.

First, CUI's claim that the Board has no jurisdiction over ACF's determination here lacks merit. When asked to support its argument that the issue related to indirect costs, CUI said that the final disallowance letter "stated that these were indirect costs." Tr. at 8. As ACF pointed out, however, that letter merely stated that "insurance costs are generally charged to the indirect cost pool." ACF Ex. B at 8. This statement was made, however, when ACF thought (based on the title of CUI's account) that the amounts were insurance refunds; CUI later clarified that they were credits to Workman's Compensation payments. While some of the original Workman's Compensation costs involved would have been charged indirectly, CUI's own budgets show it was claiming fringe benefits (which would ordinarily include Workman's Compensation) for some employees as a direct cost of its Migrant Head Start program. See ACF Exs. R and Z. Thus, we cannot accept the proposition that only indirect costs are involved here.

Moreover, as ACF pointed out, DCA's role is in the negotiation of indirect cost rates; the negotiation of a rate does not preclude an agency from later determining that a rate was inflated because misinformation was provided by the grantee. See CUI July 26, 1995 Ex. 5. Where an issue relates to programs of only one program agency, nothing in HHS policy or regulations precludes that agency from addressing the issue (although, as we discuss below, it may have been helpful here if ACF had consulted with DCA). In any event, once the program agency has made a determination which falls within the types of determinations the Board reviews, as this does, the Board has jurisdiction.¹³

On the merits, ACF is correct that a grantee is required to subtract any applicable credits from its total program costs, as is clearly required by OMB Circular A-122, Attachment A, A.1. Applicable credits is defined in the Circular as "those receipts, or reduction of expenditures which operate to offset or reduce expense items that are allocable to awards as direct or indirect costs." OMB Cir. A-122, Att. A, A.5. The fact that the amounts received by CUI here are not strictly speaking "insurance refunds" does not alter their nature as applicable credits, which properly should have been applied to reduce Workman's Compensation costs. CUI did not deny that it failed to treat the $33,892 as credits to its Migrant Head Start program.

In order to sustain a disallowance based on failure to account for applicable credits, however, we must also find that CUI's failure to subtract any applicable credits from its costs resulted in an overcharge to its Migrant Head Start program. In this case, ACF did not examine this question as part of its finding. To the extent that the credits would be applied to offset indirect costs, there is a substantial question here as to whether any overcharge resulted. ACF did not dispute CUI's position that, because of Head Start's 15% limit on reimbursement of administrative costs, CUI was being under-reimbursed for its indirect costs, which averaged between 18% and 19%.¹⁴ Thus, even if CUI had properly treated the amounts involved as applicable credits, there would likely have been no reduction in the amount it could properly charge to its Migrant Head Start program as indirect costs. Moreover, even if some of the costs were charged as direct costs, there was no finding here regarding the specific years to which those costs were charged or what the effect would be of applicable credits to those years' costs.

Therefore, we reverse the "insurance refunds" disallowance of $33,892. Our decision does not preclude ACF from further examining whether CUI's failure to treat the amounts as applicable credits might have resulted in overcharges to its Migrant Head Start program. If ACF does this, however, it should consult with DCA concerning the extent to which Workman's Compensation costs were included in CUI's indirect cost proposals and what effect, if any, this had on CUI's indirect cost rate.

6. Tax payments

ACF determined that CUI charged 50% of the property taxes on the Coachella Center to the Migrant Head Start program in program year 21, 1992-93, for a total of $3,705. ACF disallowed the cost.

CUI agreed that it charged property taxes incurred for the Coachella Center to its Migrant Head Start program. CUI argued, however, that it is entitled to charge such taxes in accordance with OMB Circular A-122.¹⁵

ACF argued that CUI's expenditure of Migrant Head Start funds for taxes on the Coachella facility was unauthorized and therefore not allowable in spite of the circular provision. ACF contended that CUI had submitted a budget for the 1992-93 program year as part of its application for refunding dated May 28, 1992. ACF stated that, while CUI requested funds for rent, utilities, telephone, child liability insurance and maintenance/repair, CUI did not request funds for "Other Occupancy" which might have included expenditures for the taxes on the Coachella Center. ACF June 19, 1995 br. at 23-25. Further, ACF argued that, while taxes may be an allowable cost under some circumstances, taxes are not allowable where the expenditure conflicts with the terms of the grant. Id. at 24-25.

OMB Circular A-122, Att. B, 46(a) provides, in relevant part:

In general, taxes which the organization is required to pay and which are paid or accrued in accordance with generally accepted accounting principles . . . are allowable . . . .

ACF did not find here that these taxes were not paid in accordance with generally accepted accounting principles (and costs associated with real property used for a Head Start Center owned by a grantee are a typical charge to Head Start grants in our experience). Nor did ACF point to anything in the terms of CUI's awards that specifically precludes charging such taxes.

While a budget is in a sense a "term" of an award, grantees are given some discretion to transfer costs from one budget category to another, and ACF did not find here that use of funds to pay the taxes was an unauthorized transfer. See GAM at 1-11. Moreover, the financial assistance application approval/negotiation sheet for the 1992-93 program year, which received final approval on September 16, 1992, and the 1992-93 financial assistance award to CUI, which received final approval on September 24, 1992, both included $84,078 in the "Other" budget category which may have included anticipated taxes. See ACF Ex. D.

Accordingly, we reverse the disallowance of $3,705 in property taxes. The fact that CUI did not specifically include these tax costs in its budget, however, may raise a question about whether CUI used all or some part of the taxes to satisfy it non-federal share requirement. Thus, our decision does not preclude ACF from seeking evidence from CUI to show that these taxes were not also claimed as costs to meet CUI's non-federal share requirement.

7. Literacy Training

CUI was awarded $6,680 in supplemental funds for the 1992-93 program year to operate a literacy training program for parents of Migrant Head Start children. ACF determined that CUI's records only support expenditures for sessions conducted in two out of ten months, which totalled an allowable expenditure of $1,880. Thus, ACF disallowed the remaining $4,800.

CUI argued that CUI had used the funds during the 1992-93 program year on allowable Migrant Head Start costs other than literacy training costs.¹⁶ CUI maintained that, under the principle of budget flexibility in the GAM, CUI was entitled to spend the funds designated for the literacy program on other allowable expenses. With regard to the Board's jurisdiction, CUI argued that ACF was challenging the way in which CUI carried out its program objectives, and that ACF had not alleged that the funds had been improperly expended.

ACF asserted that, while federal grants policy does permit in certain circumstances the shifting of costs between approved budget categories, there is no authority under the statute, regulations, applicable OMB Circulars, or agency policy directives that would permit a grantee to shift funds allocated for specified authorized purposes to cover activities or costs which were never part of a grantee's budget and were never authorized by the federal agency.

CUI's jurisdictional argument is without merit based on the Board's regulations, discussed above.

On the merits, we agree with ACF that CUI incorrectly interpreted the principle of budget flexibility in the GAM. While the GAM provides that certain transfers may be done without prior approval, section L.2. of the GAM at 1-11, provides, in relevant part:

There are . . . various types of changes . . . which may occur after the grant . . . is awarded and which require prior approval . . . . These changes are summarized below . . . .

a. Budget Changes
* * *
Transfer of funds between or among grant functions or activities.

b. Programmatic Changes
Change in project scope or objective.

See also 45 C.F.R. 74.103(b).

CUI did not dispute that it was awarded the funds at issue for the specific, limited activity of literacy training. Moreover, the funds were awarded in response to an application for "supplemental" funds, in addition to those for operating the basic Migrant Head Start program. ACF Ex. H at 28 and 31; see also Inter-Tribal Council of California, DAB No. 1418 (1993); Community Action Council for Lexington-Fayette, Inc., DAB No. 1258 (1991) at n. 9. If in fact CUI spent the funds on expenses of its basic Migrant Head Start program as CUI alleged, CUI not only improperly transferred funds among grant activities, but also changed its grant objectives in part. The GAM specifically provides that prior approval is required when there is a transfer of funds between grant activities or a change in project objective. Absent such prior approval, the costs were properly disallowed. CUI's argument that ACF has no authority to challenge how CUI carried out its program objectives is simply wrong under the applicable authority. In any event, the issue here is not how CUI carried out its program objectives but whether CUI spent funds awarded for a limited activity with a specific objective (literacy training) in a manner consistent with the terms of that award. CUI admitted with respect to the $4,800 that it instead used the funds for its basic program activities.

Thus, we uphold the disallowance of $4,800 awarded for literacy training.

8. Quality Improvement

Initially, ACF disallowed $104,162 based on CUI's alleged failure to hire 10 teacher aides, which ACF said was the purpose of a supplemental award of quality improvement funds. However, CUI maintained that ACF's findings were based on a draft budget that was never submitted to ACF. Rather, CUI maintained, it requested quality improvement funds in the amount of $104,173, which included $33,978 to hire three teacher aides at $1,193 per month. CUI maintained that, in April 1994, it hired three teacher aides at a salary of $980 per month, and that they served until July 15, 1994. Of the $33,978 budgeted, CUI stated that only $11,630 was expended. Further, CUI stated that the remaining $92,543 of quality improvement funds, which included the $22,384 designated for teacher aides and not spent for that purpose, were "never charged [to] CUI's Head Start grant and should be deobligated." CUI May 17, 1995 br. at 10. Subsequently, CUI argued that the funds had been deobligated, submitting a copy of a financial status report (SF-269) dated "5-17-95" that showed a cumulative unobligated balance of federal funds in the amount of $117,118. See CUI July 26, 1995 Ex. 9. With regard to the Board's jurisdiction, CUI argued that the Board does not have jurisdiction over the disposition of unobligated balances.

ACF accepted CUI's statement and numerical amount for the quality improvement award, and ACF stated that it was willing to reduce the quality improvement disallowance by $11,630. Tr. at 50. ACF admitted that the $117,118 on the SF-269 was deobligated on June 7, 1995. ACF pointed out, however, that this report covered the period September 1, 1993 through December 31, 1994, and argued that ACF had no assurance that the $92,543 in quality improvement funds was included in the cumulative amount for that period (which was longer than the period for which the quality improvement funds were awarded). ACF also continued to claim that CUI "has produced nothing which demonstrates that the deobligated funds in question include its 1993-94 Program Year Quality Improvement funds." ACF August 10, 1995 br. at 11.

Contrary to what CUI argued, the issue here is not the disposition of an unobligated balance. Under the GAM, the question of whether an unobligated balance may be carried over or will be deobligated is committed to program agency discretion and was excluded from the Board's jurisdiction for this reason. The issue here does not go to ACF's determination about how CUI must treat an unobligated balance.

On the merits, ACF is correct that CUI must account for all funds awarded to it, but accounting for funds properly does not always require documentation of "expenditures" as ACF's arguments suggested. CUI's obligation to account for funds does include, however, the obligation to claim only allowable costs and to maintain records showing unobligated balances and cash transactions. (See Part 74 requirements discussed at page 3 above.)

CUI did not deny here that it did not spend the funds for authorized purposes, with the exception of $11,630. Instead, CUI maintained that the funds have been credited back to the federal government, by being included in the unobligated balance (on the SF-269) that was deobligated. CUI asserted that it had never drawn down the $92,543 of quality improvement funds, and implied that the deobligated funds were all funds never drawn down for which authority to draw down was removed. If CUI's assertions are in fact so, CUI should not be required to make a payment of an additional $92,543. On the other hand, we agree with ACF that the mere fact that CUI reported an unobligated balance which could include the $92,543 is not sufficient to show that that amount was in fact included in the unobligated balance, nor does it directly support CUI's assertion that it never drew these quality improvement funds down under its letter of credit. A fund balance on this type of financial report merely reflects the difference between what was authorized and what was expended for reported program costs. It does not reflect what federal funds were actually drawn down, nor whether, if drawn down, the grantee actually has the cash on hand. Indeed, the GAM notes with respect to agency deobligation of an unobligated balance: "If cash has already been transferred to the grantee, the grantee must refund the unobligated funds." GAM at 1-9.

In our view, however, the question of whether the $92,543 in quality improvement funds was ever drawn down and whether it has now properly been accounted for is better addressed by the parties on remand. CUI indicated that audits of its program were in progress. ACF may wish to examine these audits to see if they answer the question of whether the quality improvement funds were included in the unobligated balance and if the deobligation in effect means that the funds have been accounted for. Otherwise, ACF may require CUI to present satisfactory documentation showing this.

Therefore, we remand the quality improvement disallowance of $92,453 back to ACF for further review.

Conclusion

Based on the foregoing analysis, we uphold ACF's determination with respect to: $23,178 in rent payments; certain amounts associated with expansion of CUI's Heber Center -- $50,000 awarded for salaries, fringe benefits, and supplies, part of the $14,000 disallowance for playground equipment (in an amount to be determined), and $9,252 for a modular unit set-up; $7,040 for program income (sale of vans); and $4,800 for literacy training. Further, we reverse ACF's determination with respect to: $56,613 for the Migrant Head Start Director's salary; and $3,705 for tax payments. Finally, we remand ACF's determination with respect to: the remainder of the $14,000 for playground equipment; $33,892 for insurance refunds (workman's compensation credits); and $92,543 in quality improvement funds. If the parties are not able to resolve the remanded items informally, ACF should issue a new written determination, and CUI may return to the Board within 30 days of receipt of such determination, for resolution solely of any remanded items.

______________________
Cecilia Sparks Ford

______________________
Norval D. (John) Settle

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Judith A. Ballard
Presiding Board Member

[1] ACF stated the total disallowance amount as $306,642. However, since both parties agreed that $104,173 of quality improvement funds are at issue rather than $104,162 for ten teacher aides, the total disallowance amount at issue is $306,653.

[2] This cite is to the Head Start Act as in effect during the relevant time period.

[3] Part 74 was amended after ACF conducted its 1994 review. 59 Fed. Reg. 43754 (August 25, 1994). We cite here to Part 74 provisions as in effect during the relevant time periods.

[4] Under the Part 16 procedures (unlike the procedures for a denial of refunding), there is no right to an evidentiary hearing. The Board will provide such a hearing if "it finds there are complex issues or material facts in dispute the resolution of which would be significantly aided by a hearing, or if the Board determines that its decisionmaking otherwise would be enhanced by . . . a hearing." 45 C.F.R. 16.11.

[5] In June 1995, the Center for Education and Manpower Resources was selected to serve as interim grantee for the area previously serviced by CUI.

[6] CUI did also submit an affidavit of its Acting Executive Director, but this affidavit simply states conclusorily that CUI is entitled to depreciation and that CUI's calculations were based on ACF methodology. CUI Ex. 1, 6 at 2. It does not explain what it means by ACF methodology, nor assert that CUI has the documentation to support the calculations, consistent with the applicable cost principle.

[7] We also note that CUI's own statements, already in the record, support ACF's determination. For example, in the application for these funds, CUI indicated that Policy Council approval of the request was given only because the new facility was planned. See ACF Ex. U, unnumbered p. 10. Moreover, CUI's statement in its brief that it used the funds to improve the teacher/child ratio at the Heber Center calls into question whether the children served were in fact additional children, representing an expansion of the program.

[8] CUI incorrectly identified the program year as 1991-92. However, the Heber expansion funds were awarded for the 1992-93 program year (program year 21).

[9] CUI did not allege that it ever requested carryover of these funds. Even if we considered CUI's arguments here as such a request and ACF's position as a denial, this would not change our result here. The Board's regulations provide that the Board does not have authority to review an agency's determination regarding the disposition of unobligated balances. See 45 C.F.R. Part 16, Appendix A, C(a)(1).

[10] CUI later requested a hearing on how ACF determined that the position was "vacant" during these periods. CUI July 26, 1995 br. at 26. How ACF made its determination is irrelevant, however. To the extent that this request suggests that the position was not vacant during the first period, it is insufficient to place this question in dispute, in light of CUI's previous admission that the position was vacant during this period and CUI's complete failure to offer any documentation to the contrary.

[11] In the September 8, 1995 conference, the Board asked ACF if it was relying on anything else for this disallowance. ACF cited to sections 644 and 653 of the Head Start Act and to regulations at 45 C.F.R. 1301.31(a) and 1302.10(b)(2). These sections generally require a Head Start grantee to hire only qualified personnel and to have personnel policies in place. They do not, however, specify any particular educational credentials or experience that a Head Start Director must have. Thus, they do not provide a basis for finding that N.E. was unqualified.

[12] As noted above, ACF contended that CUI returned the "program income" to the corporation and reported it as income in its 1991 federal income tax return. These actions led ACF to conclude that CUI treated the income from the sale of the vans as income to the corporation to be used for any purpose it chose. Given our findings in the text, we do not need to consider the effect of how CUI claimed the costs on its income tax return.

[13] We note, also, that determinations by DCA ultimately may be subject to Board review, under 45 C.F.R. Part 75. If DCA made the determination, CUI would have been required to exhaust the Part 75 process prior to coming to the Board.

[14] Section 1301.32(a)(2) of 45 C.F.R. provides for a maximum of 15 percent for administrative costs. Section 1301.32(e)(2) requires grantees to charge all costs either directly to the project or as part of an indirect cost pool. Section 1301.32 was revised, effective October 14, 1992 (see 57 Fed. Reg. 41885, September 14, 1992). Prior to this revision, a grantee was required to provide with its application a statement that the cost of administration would not exceed 15 percent of the total cost.

[15] CUI also asserted that, in any event, CUI is entitled to take a depreciation for the Coachella Center in the amount of $27,915, which would offset the disallowed amount. As we discussed above, however, CUI did not provide adequate documentation to support its depreciation offset claim.

[16] CUI had initially argued that while only $1,880 was expended during the 1992-93 program year, the literacy program was fully implemented in the 1993-94 program year and, therefore, no disallowance should be taken. In view of CUI's later admission that it spent all the funds in the 1992-93 program year, we do not need to address this argument. We note, however, that CUI did not claim that it was given authority to carry over to the following year any excess funds awarded for literacy training.