The Administration for Children and Families (ACF) of the Department of Health and Human Services (HHS) notified Home Education Livelihood Program, Inc. (HELP) by letter dated December 8, 1994 that ACF was disallowing $642,426 because of alleged improper expenditures of federal funds for HELP's Migrant Head Start program (Board Docket No. A-95-55). HELP appealed this disallowance pursuant to 45 C.F.R. Part 16.

ACF also notified HELP, by a separate letter dated December 8, 1994, that it proposed to terminate HELP's Migrant Head Start grant (Board Docket No. A-95-54). This action was taken pursuant to 45 C.F.R. § 1303.14(b) based on HELP's alleged non-compliance with requirements of the program, including continuing failure to meet performance standards, failure to comply with eligibility requirements and limitations on enrollment, failure to comply with the Head Start grants administration requirements, and failure to abide by terms and conditions of the award and other applicable laws, regulations or requirements. see Termination Letter of December 8, 1994, submitted with HELP's Notice of Appeal, attachment 1 (Termination Letter), at 1-6; Respondent's Statement of Basis for Allegations Concerning Pesticides and Other Matters (April 17, 1995); 45 C.F.R. Part 1301 and § 1305.7.

These alleged failures were the result of findings made during an on-site program review conducted at HELP's facilities on August 22-26, 1994 (1994 on-site review), including the fiscal findings which led to the disallowance. Many of the alleged program violations were also found during an on-site review conducted in August 1991. The alleged violations on which this termination was based were listed in the termination and disallowance letters, as well as in the Departmental Appeals Board's (DAB's) Rulings of February 2, 1995 (as modified in the DAB's Summary of April 6, 1995 Teleconference) and Notice of May 17, 1995 issued pursuant to 45 C.F.R. § 1303.16(g). HELP requested a hearing on the proposed termination under 45 C.F.R. § 1303.14(c)(2).

The DAB held a hearing on both the disallowance and termination actions in El Paso, Texas from June 5-9, 1995 and in Las Cruces, New Mexico from October 23 to November 1, 1995. The record consists of the transcripts of these two hearings (Tr. I and Tr. II, respectively), as well as many volumes of documents submitted by each party (which we refer to as Appellant's Appeal File (AAF) and Respondent's Appeal File (RAF)).

Summary of the decision

ACF contended that its findings that HELP had charged the grant with $642,426 in unallowable costs and that the fiscal and administrative practices that led to this misuse of federal funds, along with the 14 repeat findings of program deficiencies and two safety-related incidents that occurred during the 1994 on-site review, showed that HELP was an unfit grantee and that termination of the grant was therefore justified. After fully considering all of the evidence of record and the parties' arguments, we uphold only $58,965 of the $642,426 alleged as misspent funds. After considering all of the evidence and arguments (including the weight that should be given to the hearing testimony and documents presented by the parties), we sustain only two of the fourteen findings of program deficiencies and neither of the safety-related incidents. In addition, although ACF alleged that any single finding of non-compliance was sufficient in and of itself to justify termination, it failed to provide us with any basis to conclude that the two remaining findings of non-compliance were material and therefore would satisfy the criteria of 45 C.F.R. § 1303.14(b) for termination of HELP's grant. We therefore conclude that ACF has not shown that the standards set forth in 45 C.F.R. § 1303.14(b) for termination of a Head Start grant had been satisfied.

The rationale for our decision is organized as follows.

First we review the applicable statute and regulations (pages 3 to 6).

Next we address each item of the disallowance (pages 7 to 40). We find that ACF properly disallowed $58,965, as follows:

• $5,200 for rental of the Deming Rainbow Center; and
• $53,765 for exceeding the administrative cost limit.

We reverse ACF's finding with regard to the remainder of the eleven disallowed costs amounting to $581,923 of federal expenditures.

We then review the findings of repeat deficiencies in complying with program standards that were reported by the 1994 OSPRI review team (pages 40 to 95). We conclude that the record supported only two of the fourteen alleged deficiencies. We also discuss the two safety- related incidents in this section, which we find did not support ACF's decision to terminate HELP's program.

Finally, we consider whether the findings of non-compliance which are established by the record before us amount to a material breach of the Head Start regulations, since 45 C.F.R. § 74.113(a) (applicable to all HHS grants) requires that termination under 45 C.F.R. § 1303.14(b) be based on a material failure to comply with grant requirements (pages 95 to 100). We conclude that the findings of non-compliance, either alone or in combination, do not compromise HELP's ability to provide quality Head Start services so as to amount to a material breach. Consequently, the criteria of 45 C.F.R. § 1303.14(b) for termination of HELP's Migrant Head Start program have not been satisfied.

Background

I. Overview of Applicable Law and Regulations The Head Start program is designed to deliver comprehensive health, educational, nutritional, social and other services to economically disadvantaged children and their families. 42 U.S.C. § 9831 and /hslc/Program%20Design%20and%20Management/Head%20Start%20Requirements/Head%20Start%20Requirements/1304/1304.1%20Purpose%20and%20scope.htm45 C.F.R. § 1304.1-3. Some Head Start funds are set aside for the purpose of providing these comprehensive services to low-income children whose families migrate to engage in agricultural work. Campesinos Unidos, Inc., DAB No. 1518 at 4 (1995). ACF provides funds to grantees to serve as Head Start agencies within designated communities and reviews their performance in meeting program and fiscal requirements. See generally 42 U.S.C. §§ 9836, 9837, and 9846. The federal share of costs may not exceed 80% of the program's budget and the grantee must provide a 20% matching share, unless a waiver is granted. Costs expended for program administration may not exceed 15% of the grantee's total annual budget. 42 U.S.C. §§ 9835(b) and 9839(b).

The law requires that in administering a Head Start grant --

[e]ach Head Start agency shall observe standards of organization, management, and administration which will assure, so far as reasonably possible, that all program activities are conducted in a manner consistent with the purposes of this subchapter and the objective of providing assistance effectively, efficiently and free of any taint of partisan political bias or personal, or family favoritism. Each such agency shall establish or adopt rules to assure full staff accountability in matters governed by law, regulations, or agency policy . . . . Each such agency shall adopt for itself rules designed to . . . assure that only persons capable of discharging their duties with competence and integrity are employed . . . .

42 U.S.C. § 9839(a); see also 45 C.F.R. § 1301.30. All Head Start grantees are required to "keep such records" as the Secretary of HHS (Secretary) prescribes, including those which will fully disclose the disposition of federal funds and will facilitate an effective audit. 42 U.S.C. § 9842(a). The Secretary ". . . shall have access for the purpose of audit and examination to any books, documents, papers, and records . . . that are pertinent to the financial assistance received." 42 U.S.C. § 9842(b).

Grantees are subject to requirements related to eligibility, enrollment and attendance of children served. 42 U.S.C. § 9836(c)(2)(A). The Head Start program is unique in that parents are expected to participate in the management of the program, as well as in the actual development and implementation of the program. 42 U.S.C. § 9837. The Secretary is authorized to prescribe regulations binding on all Head Start agencies. 42 U.S.C. § 9839(c).

The Secretary has promulgated program performance standards covering the education, health (including medical, dental, mental health and nutrition), disabilities, social services, and parent involvement areas of Head Start. see 45 C.F.R. Parts 1304 and 1308. Generally, each grantee is required to develop, with the advice and concurrence of its Policy Council, a written plan to implement the performance standards for each component area and to update each plan at least annually. 45 C.F.R. § 1304.1-4. Under the Head Start Act, HHS is required to conduct a full review of each Head Start program at least once during each three-year period in order to monitor the program's compliance with Head Start requirements, including performance standards. 42 U.S.C. § 9836(c)(2)(A). The Head Start Act states that a program will not be terminated based solely on one on-site review finding program performance deficiencies. 42 U.S.C. § 9836(c)(4).

The regulations governing the general administration of HHS grants contain the provisions applicable to the financial reporting, procurement, and fiscal management of Head Start grants. 45 C.F.R. Part 74; 45 C.F.R. § 1301.10. The requirements include:

1. accurate, current and complete financial reporting;
2. maintenance of accounting records which identify adequately the source and application of grant funds;
3. maintenance of internal controls that effectively account for all grant funds and other assets and assure that all such property is safeguarded and used only for authorized purposes;
4. comparison of actual and budgeted amounts to exercise budgetary control;
5. adoption of procedures to minimize the time elapsing between the advance of federal funds and their use by the grantee;
6. compliance with applicable cost principles to assure that costs are allowable, reasonable, and properly allocated;
7. retention of source documentation, such as paid bills, checks, or payroll records to support accounting records; and
8. systematic resolution of audit findings and recommendations.

45 C.F.R. § 74.61. Each Head Start grantee must be audited annually by an independent auditor and the audit is subject to certain government requirements. 45 C.F.R. § 1301.12(a).

In addition to the codified regulations designed specifically for Head Start, non-profit organizations which receive Head Start funds are subject to the requirements of Office of Management and Budget Circular A-122 (see 45 Fed. Reg. 46022 (July 8, 1980) (OMB A-122), made applicable to HHS grants by 45 C.F.R. § 74.174 (1993)). OMB A-122 provides a uniform set of cost principles for determining costs of grants, contracts, and other agreements and is designed to promote efficiency and understanding between non-profit grantees and the federal government. It provides guidance on allowable direct costs and allocable indirect costs, as well as guidance on specific cost items.

Finally, Head Start grantees are subject to the requirements of the Office of Human Development Services Discretionary Grants Administration Manual (OHDS/DGAM). This manual provides the policies for management of all Head Start grants, as well as other grants administered by ACF. The OHDS/DGAM provides ACF grants policies on competition and awarding, funding, payment procedures, reporting and cost limits.

II. Factual Background of this Program

HELP is a non-profit organization, with a home office located in Albuquerque, New Mexico, which was incorporated on October 6, 1965. HELP's purpose is to provide economic and other assistance to low-income residents and farmworkers in New Mexico, and to foster community-wide concern for the problems of such underprivileged persons. AAF (HELP, Inc., Tab A) at 3223. At all times relevant to this proceeding, HELP received federal funds from HHS through ACF to run a Head Start program for families of migrant farm workers who move into or within New Mexico for the purpose of engaging in agricultural work (Migrant Head Start). Throughout the relevant time period, HELP likewise received federal funds from ACF to provide Head Start services to low-income families who are regular residents of New Mexico (Regional Head Start).¹ HELP's two Head Start programs were jointly administered by a management team in Las Cruces until fall of 1992, when ACF required that HELP separate the two programs and administer them independently from one another (the "divorce" of the programs). Tr. II at 681-682. HELP regularly receives federal, state, and private funds to run other types of assistance programs.

HELP operates on a fiscal year running from October 1 through September 30.² AAF (HELP, Inc., Tab A) at 3220. During the relevant time period, HELP operated five Migrant Head Start centers in New Mexico, located in the areas (and referred to) as follows: Las Cruces, Deming, Anthony, Rincon, and Portales. Each of the centers, except for Portales, is located less than an hour's drive from the program's offices in Las Cruces; Portales is located approximately 250 miles to the east of Las Cruces. Tr. II at 501. Throughout the relevant time period (1992-1994), HELP's Migrant Head Start centers were generally open from June until August, with some open as late as November. The principal language of the majority of the families served by HELP's Migrant Head Start program is Spanish. AAF (HELP Inc., Tab D) at 3375.

Analysis

I. The Disallowance Proceeding

The disallowed expenditures consisted of the following eleven items:

1. $155,384 for less-than-arms-length rental costs;
2. $134,251 for overexpenditures of federal funds;
3. $5,200 for the Deming Rainbow Center rental costs;
4. $4,175 for office equipment rental costs;
5. $62,411 for the Social Services and Parent Involvement Coordinators' salaries;
6. $777 for prior year expenses;
7. $27,300 for La Primera Iglesia Bautista rental costs;
8. $131,720 for exceeding administrative cost limitations;
9. $30,633 for staff hired without prior approval;
10. $81,590 for the salary of the Child Development Director; and
11. $7,447 for literacy programs.

Notice of Disallowance Letter of December 8, 1994, submitted with HELP's Notice of Appeal, attachment 2 (disallowance letter).³

1. Less-Than-Arms-Length Rental Costs

ACF disallowed $155,384 on the grounds that HELP had engaged in less-than-arms-length negotiations with regard to leases for three buildings used for its Migrant Head Start program.⁴ Disallowance Letter at 3-4. The three buildings were leased from Rural Housing, Inc. (RHI), and the disallowed amount represented 41 months (April 1991 through August 1994) of rental payments for each of the three buildings. ACF alleged that the three lease arrangements were less-than-arms-length transactions because the Executive Director of HELP also functioned as the management agent who signed checks for RHI and had broad authority over RHI's business transactions, including the leases at issue. ACF Br. at 4, 5, 6. Moreover, according to ACF, the senior accountant for RHI had the authority to sign checks issued by both RHI and HELP. ACF Br. at 4. Finally, ACF argued that RHI received a substantial loan from HELP and that the terms of that loan contemplated that it might become a donation to RHI, an agreement which would not be consistent with an arms-length transaction. ACF Br. at 5. ACF found that these less-than-arms-length transactions resulted in an overcharging of the grant in violation of OMB A-122, att. B, sec. 42.c, which limits payments for contracts which were not negotiated at arms-length.⁵ Disallowance Letter at 4.

HELP responded that the concept of a less-than-arms-length transaction was based on the ability of a person or party to substantially influence the outcome of the transaction. HELP Br. at 5. HELP argued that there could be no substantial influence here due to the sheer size of both organizations: RHI obtained only 2% of its annual income from leasing the Migrant Head Start facilities to HELP, and HELP obtained only 1.5% of its revenue from (unrelated) management agreements with RHI. HELP Br. at 6. HELP discussed several criteria established by the DAB in prior decisions addressing less-than-arms-length transactions and argued that, applying these criteria to these transactions, the transactions were arms-length transactions. see , generally, HELP Br. at 7-14. In discussing these criteria, HELP asserted that its Executive Director had no role in negotiations with RHI on the Migrant Head Start building leases which were in effect throughout the relevant time period, and that the leases on which ACF relied as evidence of a less-than-arms-length transaction were not applicable to the time period at issue here. HELP Br. at 12. Moreover, HELP argued, RHI's accountant did not personally sign checks for HELP during the relevant time period; her signature remained on a check signing machine for HELP due to an oversight after she left HELP's employment. HELP Br. at 15.

We do not find the evidence produced by ACF on this matter to be convincing. There is no doubt that HELP and RHI had a working relationship and engaged in business transactions designed to foster the goals of each organization. It is clear from the record that their relationship took two main forms: 1) HELP managed certain housing properties (unrelated to Migrant Head Start) as a management agent for RHI; and 2) HELP leased certain buildings and properties from RHI, three of which were used for Migrant Head Start.⁶

With regard to the first of these two relationships, the record provides evidence that HELP's Executive Director, Ernest Ortega, served as the management agent for the housing properties which HELP managed for RHI. Tr. II at 632. With regard to the management agency agreements, Mr. Ortega was involved in lease negotiations and signing contracts. Mr. Ortega, as HELP's Executive Director, represented HELP's interests in these matters and had a fiduciary responsibility to HELP. Tr. II at 651. ACF conceded that Mr. Ortega did not personally receive fees for these services, but the fees went into HELP's bank accounts. The management agreements involved the work of RHI in providing housing to low-income persons with HELP's assistance as a management agent; the agreements had no impact on the interests of HELP's Migrant Head Start program. see , generally, Tr. II at 622-633. Thus, we are not concerned with Mr. Ortega's management agent relationship with RHI through HELP in determining whether the three leases for HELP's Migrant Head Start facilities were the product of less-than-arms-length negotiations.

With regard to the leases for the three buildings used by Migrant Head Start, we must carefully scrutinize the relationship of Mr. Ortega to both organizations because of the potential impact any conflict of interest might have on the migrant program. We find that, while ACF argued that Mr. Ortega was involved with lease negotiations for both organizations, there is no evidence of such involvement. We conclude that RHI and HELP did not engage in less-than-arms-length transactions with regard to these leases.

There are three completed leases in the record pertaining to the buildings at issue: 1) a lease for the Deming Center, effective October 1, 1987 through September 30, 1990 (the 1987-1990 Deming lease); 2) a lease for the Las Cruces office, effective June 1, 1992 through May 30, 1997 (the 1992-1997 Las Cruces lease); and 3) a lease for the Portales Center (as well as two other buildings unrelated to the disallowance here), effective October 1, 1993 through September 30, 1998 (the 1993-1998 Portales lease). RAF Tab 30, at 767-775. The 1987-1990 Deming lease was signed on October 1, 1987 by Jack M. Harris for RHI and by Mr. Ortega for HELP. Id. at 770. The 1992-1997 Las Cruces lease and the 1993-1998 Portales lease were signed on June 1, 1992 and October 1, 1993, respectively, by Jack M. Harris for RHI and Henrietta C. de Baca for HELP.⁷ Id. at 772, 775. Thus, the most recent lease pertaining to any of the three buildings used by Migrant Head Start which is signed by Mr. Ortega is dated October 1, 1987, and is wholly irrelevant to the time period at issue.⁸ The two leases which cover the relevant time period, for the Las Cruces and Portales facilities, were not signed by Mr. Ortega but by Ms. de Baca. ACF has not argued that Ms. de Baca had any relationship with RHI.

Mr. Ortega testified that he does not currently sign leases with RHI for Head Start facilities. Tr. II at 641. Mr. Ortega stated that he did not take part in the 1992 and 1993 lease negotiations because, by that time, HELP had become aware of the possible less-than-arms-length transaction issue as a result of RHI's dealings with the Department of Labor, and had made efforts to correct any potential conflicts of interest. Tr. II at 634-637. Mr. Ortega stated that the leases effective throughout the relevant time period for the three Migrant Head Start buildings were based on leasing needs identified by HELP's Migrant Head Start Director, Loui Reyes, and on negotiations between the Boards of both RHI and HELP. Tr. II at 642. Mr. Ortega testified that the Boards of the two organizations did not have common members. Tr. II at 629. Moreover, Mr. Ortega testified that RHI was discussed at HELP's Board meeting solely because HELP was managing housing units for RHI and HELP's Board had a duty to know the results of actions taken under those contracts. Tr. II at 647. Based on the above factors, we find no evidence of any improper influence exerted by either party in the manner in which the three leases were negotiated.

As asserted by HELP, OMB A-122, att. B, sec. 42.c provides that a less-than-arms-length transaction is one under which one party to the lease agreement is able to control or substantially influence the actions of another. The section provides examples of such organizational relationships, such as when the parties are divisions of the same larger organization, when the parties have common officers, directors or members, or where key personnel of one party have a controlling interest in the other party. The provision states that less-than-arms-length transactions are not limited to transactions among parties with these specific relationships. Enterprise for Progress in the Community, Inc., DAB No. 1558, at 7 (1996) (EPIC). ACF conceded that HELP and RHI did not have one of these specific organizational relationships. ACF Br. at 2.

In EPIC, we stated that --

The Minutes, so far as they reflect the routine business activities of the [landlord] Foundation, support a conclusion that the Executive Director [for the tenant Head Start program] was in a position to, and often times did, exert substantial influence over the Foundation's actions. This factor alone supports a conclusion that the organizations' relationship was less-than-arms-length.

Id.⁹ Here, we find that there is no evidence that Mr. Ortega was in a position to exert substantial influence over both organizations. While he was the Executive Director of HELP and thus presumably had significant influence over the dealings of HELP, his only proven relationship with RHI is that he was acting as the management agent for HELP once certain housing properties of RHI were contracted to HELP for management. However, his fiduciary and employee relationships were still exclusively with HELP. see RAF Tab 33, at 914-915 (letter from Mr. Ortega to ACF's William McCarron stating that Mr. Ortega, as Executive Director for HELP, could not provide proprietary or other information on RHI because it was a separate and distinct legal authority); Tr. II at 648-649, 651.

Moreover, we agree with HELP that the relationship between RHI and HELP is clearly distinguishable from the relationships between the organizations discussed in EPIC and in Salt Lake City Community Action Program, DAB No. 1261 (1991). In each of those cases, the organizations providing facilities for lease to the Head Start programs had no purpose other than to supply facilities to Head Start. In this case, RHI is an independent organization providing housing for low-income persons in New Mexico; its leasing of Head Start facilities to HELP is a very minimal part of its business, as are HELP's management agreements with RHI a minimal part of HELP's business.

ACF also argued that the senior accountant of RHI had check signing authority for both organizations, and that this indicated a less-than-arms-length relationship between the organizations. HELP replied that the accountant worked exclusively for RHI but her signature inadvertently remained on a check signing machine for HELP. Tr. II at 638-639. ACF did not introduce copies of any checks issued by HELP within the relevant time period which contained this employee's personal signature. While we do not endorse the business practice of having one employee's signature available to two organizations involved in negotiations, contracts, and the transfer of money, we find that this practice was the result of oversight rather than of intentional undue influence. Thus, we do not find it to be of material significance on the less-than-arms-length negotiation issue.

While during the late 1980's it was brought to HELP's attention that the relationship between RHI and HELP might be considered less-than-arms-length, HELP has convinced us that it made a good faith effort to correct this potential conflict of interest and that a conflict of interest did not exist during the relevant time period. There is also evidence that the Department of Housing and Urban Development (HUD) considers the current relationship to be arms-length.¹⁰ Finally, ACF, in arguing that this was a less-than-arms-length relationship, relied in part on the fact that HELP had loaned money to RHI and that the loan's terms contemplated that such loan might become a donation to RHI. ACF Br. at 5. However, HELP argued, and ACF did not rebut, that the loan came from funds raised by HELP through its management agreements and was unrelated to Migrant Head Start's funding. HELP Br. at 10; Tr. II at 704-705, citing ACF Hearing Ex. 1. Moreover, HELP stated (and ACF did not rebut) that the loan always had been repaid on a regular basis. see also HELP Br. at 10, citing Tr. II at 1095.

For the above reasons, we reverse the disallowance of $155,384 for what ACF characterized as less-than-arms-length lease transactions.

2. Overexpenditure of Federal Funds

ACF disallowed $134,251 for overexpenditures which HELP allegedly incurred during the 1992-93 program year and which, according to ACF, HELP carried forward and paid out of 1993-94 federal grant funds.¹¹ ACF argued that this carry-over of 1992-93 expenditures effectively reduced the amount available from HELP's 1993-94 grant award which could be utilized in meeting its program needs for 1993-94. ACF Br. at 8. ACF disallowed this amount as a violation of the requirement that expenses be charged to the proper budget period, citing to OMB A-122, att. A, sec. A. see Disallowance Letter at 4.

ACF's witness, William McCarron, testified that this disallowed cost was based on HELP's Balance Sheet of 4/31/94 through 7/31/94 (1994 Balance Sheet) and on a 1993 Migrant Head Start itemized statement for the program year 4/93 through 3/94 (1993 Statement). Tr. I at 99-103, citing RAF Tab 30, at 786, 787. The 1994 Balance Sheet, under a category entitled "Capital and Fund Balance," lists "-$134,250.82" in "prior year unexpended" funds. The 1993 Statement lists $134,250.82 in unexpended funds. Mr. McCarron asserted that this represented a 1992-93 overexpenditure that was paid for from 1993-94 federal grant funds, thus leaving only $1,031,276 of the $1,165,527 of federal funds HELP received for 1993-94 available for 1993-94 expenses. Tr. I at 107. He stated that he based this on the fact that the records did not indicate that the $134,250.82 deficit was again carried over to 1994-95. Tr. I at 111.

HELP admitted that it kept its Migrant program open longer than it originally planned in 1992-93 and 1993-94 (due to an extended agricultural season), resulting in expenditures in excess of its budget for those program years. Tr. II at 652-653. According to HELP, it carried those expenditures on its books as "prior year unexpended" while, at the same time, it sought money from ACF to cover the overexpenditures. HELP alleged that when ACF refused additional funding, HELP covered the expenditures itself out of its unrestricted funds that it earned from its RHI management contracts. Tr. II at 656. HELP produced a journal entry form, dated March 31, 1994, reflecting a cash contribution to the Migrant Head Start from HELP's unrestricted funds in the amount of $134,250.54. ACF Hearing Ex. 2. HELP contended that Mr. McCarron's conclusion from the documents that it used 93- 94 funds to cover these costs is contradicted by its financial status report for the 1993-94 program year, as well as its income statement, which showed that HELP spent $130,928.72 more on its Migrant Head Start program for the 1993-94 year than the amount which ACF claimed that HELP spent. HELP Br. at 17-18, citing AAF (HELP, Inc., 5/22/95 Filing, Tab F) at 3391. Moreover, HELP argued, the on-site team reviewer who reviewed financial matters testified that she found no payments for out-of-period costs for the 1993-94 budget year among the federal expenditures, which would have indicated HELP was paying previous year's expenses with current year's grant funds. HELP Br. at 18. HELP argued that it is clear from the record that HELP had unrestricted funds from which it could have paid the overexpenditures. HELP Br. at 18-19.

We reverse this cost item of the disallowance. ACF did not point to any evidence showing that the overexpenditures were applied against federal funds during the 1994 grant year, a year in which HELP actually had federal funds totalling $188,132 left over. HELP's submission of 8/4/96, attachment B. The disallowance is based solely on the 1994 Balance Sheet and the 1993 Statement, which are internal documents of HELP and do not show on their face that the overexpenditures came from federal funds. Mr. McCarron stated that he was given these documents as part of his request for financial records from HELP, but he admitted he never inquired as to what these documents were and did not speak with anyone at HELP regarding this cost item. Tr. I at 101-102, 113. Mr. McCarron asserted that he did not believe that the overexpenditures were paid for out of HELP's unrestricted funds simply because "[i]t is not a normal practice for a grantee to use unrestricted funds for situations such as this." Tr. I at 113. Yet ACF's reviewer for the financial administration portion of the OSPRI stated that she did not find any charges for a prior year paid for with 1993-94 federal program funds. Tr. I at 397. The record substantiates HELP's claim that it had unrestricted funds available to cover the overexpenditures in the full amount. HELP Submission of July 8, 1996, att. 1, at 3.

Based on the above factors, we reverse ACF's findings with regard to $134,251 for alleged out-of-period costs.

3. Deming Rainbow Center Rental

HELP paid RHI $5,200 to rent classroom space for four months (June-September 1993) at a location known as the Deming Rainbow Center. HELP argued that it leased and renovated this facility to accommodate additional children who could not be accommodated at its other Head Start center located in Deming, New Mexico. see Disallowance Letter at 4-5. The renovation was not completed until December 1993, and there is no dispute that the space was never utilized by HELP's Migrant Head Start program due to an underenrollment of children in the Deming area throughout the relevant time period. Id. ACF disallowed the rental costs on the grounds that the Migrant Head Start program received no benefit from the rented space and that an expenditure without a comparable benefit to the program was a violation of OMB A-122, att. A, sec. A.3.c.¹² ACF's witness, Mr. McCarron, testified that this expenditure was a violation because no children were ever served by the center. Tr. I at 22-23, 121-122, 124.

In response, HELP argued that section A.3.c. clearly establishes that whether a cost is reasonably incurred is determined from the perspective of an individual making an assessment at the time rather than from hindsight:

Since the cost standard at issue is whether a grantee has a reasonable belief that it needs the facility at the time that it signed the lease, Mr. McCarron's formulation -- i.e., that it could not be reasonable to lease a facility if the grantee ends up not using it [citation omitted] -- is simply wrong.

HELP Br. at 20 (emphasis added). HELP argued that since it is impossible to know with certainty if a Migrant Head Start program will reach peak enrollment during any given year because of numerous factors outside of its control, the cost incurred here for the Deming Rainbow Center was reasonable.¹³ HELP Br. at 21-22. Moreover, HELP argued, evidence in the record indicated that HELP leased the center because it was under pressure from ACF to increase its licensed capacity to its funded level. HELP Br. at 21, citing Tr. II at 1342, 1432.

We conclude that ACF properly disallowed this expenditure. We agree with HELP that the standard, which calls for a determination of whether the decision-maker acted with prudence under the circumstances known to him at the time, clearly contemplates that a review should be based on the perspective of the person making the decision at the time rather than from hindsight. However, we do not find that the decision to lease the Deming Rainbow Center was based on a reasonable belief that leasing this facility was necessary.

At the hearing, Mr. Loui V. Reyes, Director of HELP's Migrant Head Start program, explained that the purpose of the Deming Rainbow Center was to serve children in the event that HELP's Migrant Head Start enrollment in the Deming area at any given time exceeded the licensed capacity of its other center in Deming. Mr. Reyes also stated that the purpose of the center was to ensure that HELP was licensed to accommodate 404 migrant children in the event there were that many eligible children enrolled in its Migrant Head Start program at one time. Tr. II at 1342. The following colloquy then occurred:

Mr. Waters: In your opinion, was it necessary to rent that facility?

Mr. Reyes: No.

Mr. Reyes then explained that HELP rented the Deming Rainbow Center because ACF asked that HELP's Migrant program ensure that it had licensed capacity for its funded enrollment of 404 children in the event that the program was fully enrolled at any single point in time. Id. Mr. Reyes also explained that the Las Cruces Public Schools would accommodate HELP's migrant pre-school children in the event of overflows and would not charge rent to the program. Tr. II at 1342-1343. Las Cruces is located approximately 60 miles east of Deming. Tr. II at 501.

We find that HELP's actions were not based on a reasonable belief that rental of the center was necessary. First, HELP's Migrant Head Start Director, Mr. Reyes, stated outright that he did not believe that it was necessary to rent the facility. Mr. Reyes' belief was apparently based on HELP's history of serving migrant children in the Deming area and his belief that HELP's current licensed capacity was adequate for the number of children ordinarily served in Deming at any single point in time. This belief is borne out by findings showing that at least since 1991, HELP's migrant program enrolled substantially fewer children than the 404 it was funded to serve and there were no waiting lists at any of its Head Start centers. RAF Tab 39, at 958; RAF Tab 48, at 984, 990; Termination Letter at 5-6. ACF's requirement that HELP have a licensed capacity for 404 was based on the fact that HELP requested and received funding for 404 children. AAF (Cost Disallowances, Tab 3) at 1343. HELP could have simply asked for funding for fewer children if it believed that there would not be a peak season in which the program was fully enrolled.

Moreover, HELP asserted that it had an agreement with the Las Cruces Public Schools to take Migrant Head Start children in the event the need exceeded the licensed capacity at the Las Cruces center. Oral Argument at 258-259; Tr. II at 1342-1343. While there was no evidence in the record as to whether such agreement covered an unlimited number of children, HELP used this agreement as its defense to ACF's charge that it could not serve 404 children at once. Thus, it is reasonable to presume that HELP believed such agreement would allow for serving a total of at least 404 migrant children during a peak season. Neither party presented any evidence that the grant required that a precise number of children had to be accommodated at a particular center.

Based on the standard asserted by HELP, and the testimony of its Migrant Head Start Director, we conclude that it was not reasonable and prudent for HELP to lease and renovate the Deming Rainbow Center. We therefore uphold ACF's disallowance of $5,200 for the rental of that center.

4. Equipment Rental

HELP leased from RHI a Xerox typewriter which RHI originally purchased for $499. According to ACF, during the 87 months HELP leased the typewriter (May 1987 through August 1994), HELP's Migrant program paid RHI a total of $1,465 in monthly payments ranging between $15 and $35. Disallowance Letter at 5. According to ACF, the typewriter was used approximately 50% of the time by HELP's Migrant Head Start program and 50% of the time by HELP's Regional Head Start program. ACF disallowed $1,215, which represented the total of the monthly payments ($1,465) minus $250. The $250 which ACF determined was the allowable cost of the typewriter was based on Migrant Head Start's 50% usage of the equipment multiplied by the purchase price of $499 (rounded to the next dollar). Id.

HELP also leased a photocopying machine from RHI which RHI purchased for $740. Over the 74 months that HELP leased the machine, HELP's Migrant program paid RHI a total of $3,700 in $50 monthly payments. The photocopier was used exclusively by the Migrant Head Start program. ACF disallowed $2,960, which represents the total of the monthly rental payments minus the purchase price of the photocopier. Id. at 5.

ACF alleged that these lease arrangements violated OMB A-122, att. B, sec. 42.d, which, according to ACF, provides that lease costs for office equipment are not allowable beyond the purchase price of the equipment. ACF also argued that these costs violated cost principles because they were not reasonable to the performance of the award and exceeded costs which would be incurred by a prudent person. ACF Br. at 12-13. ACF argued that one of HELP's witnesses, who stated that the typewriter was previously transferred to the Regional Head Start program solely for its use and that the photocopier had been disposed of, could not explain why HELP's records did not reflect these changes so that the migrant program was no longer being charged for the equipment. ACF Br. at 13-14.

HELP responded that ACF's witness on this matter, Mr. McCarron, could not explain how he made his determination on this disallowance item, but only stated that purchasing this equipment "would have been more prudent." HELP Br. at 22-23. HELP objected that this involved a hindsight analysis not proper under the cost principles, and that ACF generally does not allow funds for the outright purchase of equipment. HELP Br. at 23. Moreover, HELP argued, ACF received additional benefits from the lease arrangements, including maintenance of the equipment and replacement of both machines at least once each. HELP Br. at 24.

The provision on which ACF relied in taking this disallowance, section 42.d of OMB A-122, att. B, provides that --

[r]ental costs under leases which create a material equity in the leased property are allowable only up to the amount that would be allowed had the organization purchased the property on the date the lease agreement was executed; e.g. depreciation or use allowances, maintenance, taxes, insurance but excluding interest expense and other allowable costs. For this purpose, a material equity in the property exists if the lease is noncancelable or is cancelable only upon the occurrence of some remote contingency and has one or more of [certain characteristics.]

(emphasis added). The equipment leases at issue here were not introduced into the record, so it is not possible for the Board to determine if the leases created a material equity in the property and thus were covered by the provision.¹⁵ However, we find it unlikely that the leases were covered by this provision. HELP's accountant testified that the equipment was replaced during the term of the lease, the leases were eventually terminated, and the equipment was returned. Tr. II at 1099-1100, 1103-1104. These actions would be consistent only with a term lease arrangement and not with a lease-purchase contract.

HELP did not show that it requested funds for the purchase of the office equipment and was denied them. HELP provided no evidence supporting its assertion that ACF did not usually approve funding for the outright purchase of equipment. In fact, instances of ACF giving advance approval for the purchase of office equipment for use in Head Start programs have come before the Board in previous cases. E.g., Urban League of Arkansas, Inc., DAB No. 1269 at 3 (1991) (prior approval for purchase of an electric typewriter was granted); Inter-Tribal Council of California, DAB No. 1418 at 5, n.4 (1993) (prior approval for purchase of an office computer was granted).

Nonetheless, we do not find the failure to request funds from ACF for purchasing office equipment to be determinative of this matter. Entering into term leases for the use of office equipment is a common business practice today, and ACF has not shown that the terms of the lease were outside that which is normally reasonable. ACF also did not allege that the equipment was not needed by HELP for the efficient operation of its program. ACF's only charge is that leasing rather than purchasing this equipment was not prudent; however, this is based on a hindsight analysis of the fact that HELP's lease costs, over a period of many years, far exceeded the purchase price of the equipment. ACF has not shown that equipment term leases are per se prohibited. While the cost may not seem reasonable in retrospect, it may have been a reasonable arrangement at the time it was entered into; HELP may not have known how long it would need the equipment or whether the equipment would meet HELP's needs. Moreover, HELP may have contemplated that the equipment would need servicing and eventual replacement. ACF has not established sufficient grounds on which to disallow these expenditures absent some offer of proof that term lease arrangements for office equipment are always prohibited or that the terms of these leases were unfavorable when compared with other lease arrangements either entered into in the normal course of business or which HELP could have entered into in these instances.

For the reasons stated above, we reverse ACF's disallowance of $4,175 for office equipment leases. However, ACF may bring a future disallowance with regard to this amount if either it can show that the lease terms were not reasonable because they were not similar to those entered into in the normal course of business or were not among the best terms available to HELP at the time.

5. Social Services and Parent Involvement Coordinators' Salaries

During program year 1992-93, HELP's Migrant Head Start budget (as approved as part of its grant application) called for a Social Services Coordinator and a Parent Involvement Coordinator each to be paid $24,685.¹⁶ According to ACF, instead of hiring personnel to fill each of these two positions, HELP hired only one person to fill both positions. Thus, ACF disallowed $24,685. Disallowance Letter at 6.

During program year 1993-94, the budget called for a Social Services Coordinator to be paid $28,881 and for a Parent Involvement Coordinator to be paid $26,526. According to ACF, the Social Services Coordinator position was filled but the Parent Involvement Coordinator position was not filled. Thus, ACF disallowed $26,526. Id.

During program year 1994-95, the budget called for the Social Services Coordinator to be paid $26,859. ACF determined that this position was not filled (at least) during the first five months of the program year. Thus, ACF disallowed $11,200. Id.

Based on these three findings, ACF disallowed a total of $62,411. ACF stated that its finding with regard to each of the three hiring failures was based on a lack of documentation to support the expenditure of funds for these key positions. ACF stated that there were no carry-over funds reflected which would indicate that the money for these positions was never spent; moreover, filling these positions was a condition of the grant as approved. ACF Br. at 18.

ACF argued that HELP's Parent Involvement Coordinator, Rita Morales, testified as to her functions in enrollment and recruitment, responsibilities which are listed in the regulations as part of the social services component.¹⁷ ACF argued that Ms. Morales' testimony indicated that she performed all of the tasks of a Social Services Coordinator as well as the tasks of a Parent Involvement Coordinator except for staff training, stating that she had to do these tasks in order to supervise two summer interns. ACF Br. at 19-20. ACF argued that HELP had Ms. Morales providing most of the social services functions so that the designated Social Services Coordinator, Nancy Baptiste, who had been denied separate funding by ACF as a child development associate (CDA) trainer, could still be paid by Head Start to provide training to the program under the guise of being the Social Services Coordinator.¹⁸ ACF Br. at 21-22.

In response, HELP submitted personnel action reports showing annual increases for Social Services Coordinator Nancy Baptiste and for Parent Involvement Coordinator Rita Morales for each of the years 1991, 1992, 1993 and 1994. Both were hired in 1987, and each held their respective positions for each of the years 1991-1994. AAF (Cost Disallowances, Tab 6) at 1355-1366. HELP did not dispute that Ms. Baptiste's primary function was to train staff; however, HELP argued, ACF conceded that the job duties of coordinator positions are left up to the grantee and that HELP had the authority to move the Social Services Coordinator's salary to a new position under which training would be a primary function. HELP Br. at 25-26. Moreover, HELP argued, ACF conceded at the oral argument that providing staff training was an important part of the Social Services Coordinator's responsibility as listed in the position description provided by HELP; thus, at most, ACF should disallow only the portion of the Social Services Coordinator's position in excess of the amount of time ACF believes a Social Services Coordinator should spend on training. HELP Br. at 199.

There are documents in the record which list Ms. Baptiste as the Social Services Coordinator throughout the relevant time period. AAF (Cost Disallowances, Tab 6) at 1355. There are other documents in the record which list Ms. Baptiste as the CDA trainer or the Professional Development Coordinator throughout the relevant time period and which either do not refer to the existence of a Social Services Coordinator position or list such position as being vacant. RAF Tab 30 at 856, 858, 860, 862, and 864. However, the labels applied to a particular position are not what is relevant in determining whether a salary cost should be disallowed; the relevant consideration is the functions which Ms. Morales and Ms. Baptiste were performing.

Following the in-person hearing, briefing and oral argument, it is clear from the record that the majority of Ms. Baptiste's duties were to oversee and perform CDA and other training for HELP's staff. E.g., Tr. II at 931-932; HELP Br. at 25; Oral Argument Tr. at 200-201. Ms. Morales was performing all of the remaining usual functions of a Social Services Coordinator and all of the usual functions of a Parent Involvement Coordinator. This is essentially undisputed by both parties. While we do not agree with ACF that HELP had no left-over funds from its migrant program for program year 1993-94, it is undisputed that HELP was paying salaries both to Ms. Morales and Ms. Baptiste throughout the time period at issue. The question remains whether HELP had the flexibility to structure these positions in this manner under its grant award, and, if not, whether all or only a portion of Ms. Baptiste's salary should be disallowed.

We reverse this cost item of the disallowance. It is undisputed that both Ms. Baptiste and Ms. Morales were working for and being paid by HELP's Migrant Head Start program. However, both employees were performing functions required by the Head Start Act and regulations -- Ms. Morales was performing the usual tasks of a Parent Involvement coordinator as well as overseeing recruitment and enrollment, and Ms. Baptiste was performing training required by the Head Start Act to qualify HELP's teaching staff for continued employment. ACF has not disputed that the program received a benefit from the services of both employees. While ACF argued that it had previously denied funding for HELP to hire a CDA trainer, ACF has not provided any proof or explanation of that denial. The Board does not know the basis for such alleged denial or whether that denial was clearly communicated to HELP. The Board has been presented with no basis as to why ACF would deny funding for an employee who was providing services required by the Head Start Act.

Under the OHDS/DGAM, a grantee has certain flexibility in structuring positions as it desires and, except for expenditures requiring prior approval, may make revisions between and among the object class categories within the total direct costs of the project, provided that the funds are used for allowable costs of the project. OHDS/DGAM at chapter 1, § L.3. Moreover, this case is clearly distinguishable from Lake County Economic Opportunity Council, Inc., DAB No. 1580 (1996), where ACF clearly informed the grantee that ACF considered failure to fill two coordinator positions inimical to proper grant administration, and the grantee could not even say what it had done with the funds it failed to spend. In this case, HELP clearly hired and paid two full-time employees to perform tasks required by the grant. ACF may not base a disallowance simply on HELP's approved budget items unrelated to any finding that expenses charged to grant funds were unallowable.

For the reasons stated above, we reverse ACF's disallowance of $62,411 for the salary of the Social Services Coordinator.

6. Prior Year Expenses

HELP incurred $777 of costs for tuition payments made to New Mexico State University for classes taken by HELP's Migrant Head Start Director, Mr. Reyes, during the 1992-93 school year. There is no dispute that these tuition costs were paid for from the 1993-94 program year budget. ACF disallowed the tuition costs in full as not being charged to the proper grant period, in violation of OMB A-122, att. A, sec. A. Disallowance Letter at 7.

In response, HELP submitted the bill for Mr. Reyes' tuition charges, dated February 28, 1993, and a grade report summary dated May 19, 1993. HELP also submitted several pages from its Personnel Rules and Regulations, effective January 1993, which provide that employees may be reimbursed up to $1,500 per year for tuition costs for furthering their education if they maintain a grade of "C" or better. AAF (Cost Disallowances, Tab 9) at 1377-1383. These documents were submitted to show that the cost was charged to the following year's budget because that was when the grade report was received showing that the student maintained at least a grade of "C" and was thus eligible for reimbursement. ACF informed the Board during the hearing in El Paso that it would withdraw this portion of the disallowance if HELP established that this policy was in writing and had been approved by its Policy Council.

On October 12, 1995, prior to the second week of the hearing in this matter, HELP submitted a copy of its Personnel Rules and Regulations, which clearly establish that it is HELP's policy to reimburse staff tuition costs up to $1,500 annually if a grade of "C" or better is obtained. These personnel policies are dated October 1988 and incorporate all revisions made since July 1, 1984. Tab B. Also attached to HELP's October 12, 1995 submission is a copy of the minutes of HELP's Policy Council meeting of August 30, 1992. Tab C. At that meeting, the Policy Council adopted the personnel policies in full.

At the oral argument, ACF argued that the actions of this Policy Council were irrelevant because the approval was not made by the Policy Council acting for the applicable time period -- i.e., the period to which the charges were made. Oral Argument Tr. at 53-55. We disagree. The classes were taken in the spring semester of 1993 and the tuition was billed in February 1993; the spring semester began and the billing date was within the 1992-93 grant year. see AAF (Cost Disallowances, Tab 9) at 1383. HELP's Policy Council approved the personnel policies on August 30, 1992, which is also within the 1992-1993 grant year and less than six months prior to the time in which the tuition costs were incurred. ACF has not pointed to any provision which holds that personnel rules approved six months earlier would not still be in effect. The fact that the Policy Council may not have yet approved the policies for 1993-94 is not determinative; even though the costs were paid from the 1993-94 grant, this transaction was completed when the grade report was received in May 1993, which was prior to the time the Policy Council would have been expected to have revisited the personnel policies in August 1993.

For the above reasons, we reverse ACF's findings with regard to the $777 in tuition costs.

7. La Primera Iglesia Bautista Rent

HELP paid rent to a local church, La Primera Iglesia Bautista, where its Las Cruces Migrant Head Start center was located. The rental rate was $15,600 per year to be paid in semi-annual installments due in May and November. Based on this rate, HELP paid $39,000 for rental of the church space between May 1992 and November 1994. see Disallowance Letter at 7. According to ACF, the Migrant Head Start program operated in the church only during the months of June, July and August in 1992, 1993 and 1994. ACF disallowed a majority of the cost on the ground that it was not reasonable to pay rent for space for 12 months each year when the facility was only being used for three months each year. ACF Br. at 25. ACF determined that, based on other lease arrangements its on-site teams had reviewed, the payment of $5,200 per month ($15,600 per year divided by the three months allegedly in use) was not reasonable. Thus, ACF pro-rated the portion of the rental payments made for these three June-August quarters at $3,900 per three-month period (($15,600 per year divided by four quarters) x (three years) = $11,700). ACF disallowed $27,300, which represents the total rent paid ($39,000) minus the allowable portion of the rent paid ($11,700), on the ground that payment of rent when space is not utilized is a violation of OMB A-122, att. A, sec. A, which prohibits expenditures which are not reasonable for the performance of the grant award. Disallowance Letter at 7.

The record contains copies of HELP's leases, both in English and in Spanish, for the rental of space in La Primera Iglesia Bautista from May 20, 1992 through November 20, 1995. The contract confirms the annual rental cost of $15,600 made in two semi-annual payments. The 1992-95 contract does not restrict HELP's use of the space to limited months out of the year.¹⁹ AAF (Cost Disallowances, Tab 8) at 1373-1376. HELP disputed ACF's implication that space could be found to rent on a part-year basis which met zoning and state child care facility requirements and which could be obtained at the monthly pro-rated amount allowed by ACF. HELP contended that it was prudent to have annual leases on child care facilities in New Mexico because there was a shortage of available child care space and the cost of making necessary renovations to meet state child care facility licensing standards was enormous. Oral Argument Tr. at 203. HELP argued that ACF failed to controvert evidence in the record showing that the lease amount was reasonable. HELP Br. at 30, citing Tr. II at 662-664.

We reverse this cost item of the disallowance. According to the applicable cost principles, a cost is reasonable if it does 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 A-122, att. A, sec. A.3. While ACF asserted that it was a violation of cost principles for HELP to rent space on an annual basis when it was only using the center for three months of each year, ACF offered no evidence to counter the sound business reasons offered by HELP for year-round leases. ACF also did not refute the testimony of Mr. Ortega, who served on Boards and Advisory Councils for the National Community Investment Coalition, the Federal Home Loan Bank Board, and the State Housing Authority, that the lease amount for this particular church was reasonable. Tr. II at 662-663. ACF's position is unequivocally based on at least two assumptions which it did not substantiate. First, ACF assumed that HELP was not using the space except during the three-month period when children were present in the center. ACF did not attempt to show what HELP did (or could do) with its furniture, supplies, files and equipment during the months the center was closed, nor did ACF show that it was feasible to move such property, on an annual basis, both to and from the center into storage. ACF did not show that other Migrant programs vacate their properties during the months when their centers are not open. Second, ACF implied, but did not show, that other Migrant programs are generally able to rent space on a less-than-annual basis at the same pro-rated amount as they could have if they were renting the space on an annual basis (or that they have extensive documentation that they have tried to do so). ACF has not pointed to any instructions requiring Head Start grantees to present such documentation. Thus, we have no evidence on which we could determine that HELP did not act as prudently as other Migrant Head Start programs. When asked at the oral argument if it was possible that HELP's annual payment rate for the facility was based on the lessor's (and HELP's) assumption that HELP would have children in the center for only a fraction of the year and would use the premises for storage or other purposes during the remainder of the year, ACF's counsel conceded that this was possible. Oral Argument Tr. at 182-183.

Thus, ACF's determination that HELP should have been able to arrange part-year leases for the same pro-rated amount as an annual lease appears to have been based solely on speculation. Of course, HELP should be required to make the most favorable lease arrangements possible. Nonetheless, there is absolutely nothing in the record which would indicate that HELP's arrangement was unreasonable or outside of the range of what other Migrant Head Start programs are doing.

For the above reasons, we reverse ACF's disallowance of $27,300 for the rental of La Primera Iglesia Bautista.

8. Administrative Cost Limitation

According to the disallowance letter, HELP was authorized to spend $1,165,527 of federal funds for the 1993-94 program year, of which HELP expended $1,162,205. HELP was also required by its financial assistance award to contribute a non-federal matching share to the program of $291,382, of which HELP was found to have contributed $84,893. see Disallowance Letter at 8-9. Under applicable Head Start regulations, a grantee is permitted to spend no more than 15% of its total approved expenditures for administrative costs. 45 C.F.R. § 1301.32. The disallowance letter calculated HELP's total approved costs to be $1,247,893 ($1,162,205 + $84,893), thus resulting in allowable expenditures for administrative costs of $187,065 ($1,247,893 x 15%).

ACF found that HELP actually spent $318,785 for administrative costs, thus exceeding the limit on expenditures for administrative costs by $131,720 ($318,785 - $187,065). ACF subsequently reduced this portion of the disallowance by $480 to $131,240.²⁰ ACF stated that HELP did not properly identify or document which of its costs were administrative; ACF asserted that it was HELP's responsibility to document the allocation of its expenditures between administrative and programmatic costs. ACF Br. at 28, 29. ACF took the position that absent such documentation, any costs which had some administrative component should be treated as wholly administrative costs.

Specifically, ACF found that the salary of the Migrant Head Start Director should be considered 100% administrative absent some documentation showing programmatic work he had done. ACF Br. at 29. According to the ACF reviewer, the salaries of the Lead Teachers or Center Directors should also be considered 100% administrative based on conversations with these employees during the 1994 on-site visit. ACF stated that the testimony of lead teacher Nancy Moore, as well as common sense, indicated that Lead Teachers and Center Directors were involved in administrative (i.e., supervisory) functions at least part of the time, although HELP designated these salaries in full as program costs. ACF Br. at 29-30, 32-33. Moreover, according to ACF, certain office supplies should have been designated as administrative costs but were not. ACF Br. at 31.

In response, HELP first disputed ACF's calculation of the allowable expenditure for administrative costs. Thus, HELP argued, the limit should have been $218,536 (15% x ($1,165,527 + $291,382)) rather than $187,065 (15% x ($1,165,527 + $84,893)). While ACF calculated the allowable administrative cost limit using the amount of non-matching funds actually provided and documented by HELP, HELP argued that ACF should have applied the limit using the amount of non-matching funds required by the financial assistance award. HELP Br. at 32. In determining the amount HELP actually spent on administrative costs, HELP argued that ACF used the wrong figure of $142,452 for indirect costs which were charged to administrative costs of the program instead of the correct figure of $134,948. HELP Br. at 33. HELP argued that a significant percentage of the Migrant Program Director's salary should be allocated to programmatic costs because Mr. Reyes was involved in both administrative and programmatic functions.²¹ HELP disputed that the salaries of the Lead Teachers or Center Directors, totalling $39,966, were administrative since these employees were not involved in fiscal accounting functions; HELP cited to attachments 2 and 3 to ACF's brief. HELP Br. at 33-34. HELP argued that the office supply costs were nearly 100% programmatic because the paper and printing costs went toward carrying out programmatic functions. HELP Br. at 35-36. HELP nonetheless conceded that it exceeded the administrative cost limit by $29,274 and requested retroactive approval based on extenuating circumstances. HELP Br. at 37.

Initially, we note that the administrative cost limit is to be based on 15% of "total approved costs." This term is defined in the regulations as follows:

Total approved costs mean the sum of all costs of the Head Start program approved for a given budget period by the Administration on Children, Youth and Families as indicated on the Financial Assistance Award. Total approved costs consist of the Federal share plus any approved non-Federal share, including non-Federal share above the statutory minimum.

45 C.F.R. § 1301.2 (1993). We believe that a common sense interpretation of the plain language of this regulation supports HELP's calculation here using the total of the federal financial award plus the amount of non-federal matching funds indicated in the financial assistance award. If ACF had intended for grantees to be limited by the amount of non-federal matching funds actually credited to each grantee at the close of the budget period, ACF could have written the regulation to say that the administrative cost limit would be based on 15% of the approved federal award plus the non-matching share actually raised (where the amount raised is less than that required by the financial assistance award). While there might be strong policy reasons to support such an approach, such approach would not be consistent with the plain language of the current regulation and grantees would not fairly be on notice that they should limit their administrative costs in such manner. Thus, we believe that the proper amount of allowable administrative costs should be $218,536, as calculated by HELP.

Second, we agree with HELP that ACF applied an unsupported amount for indirect costs. Apparently, the figure of $142,452 which ACF applied for indirect costs came from the 1994 on-site investigation notes of a member of the 1994 on-site investigation team who did not testify at the hearing. see RAF 30, at 828; Tr. I at 186-187. Neither Mr. McCarron, any of ACF's witnesses, nor ACF's counsel explained how this figure was derived. HELP argued that its indirect costs instead should have been $134,948, as found in its independent audit for the applicable time period. Oral Argument Tr. at 204. We agree with HELP that an indirect cost rate substantiated by an independent audit is reliable; a page of handwritten notes by a reviewer who was not a witness and regarding which no ACF witness testified is not. However, we find that the indirect costs should be $135,998 (based on the breakdown of $134,948 and $1,050 listed as indirect costs in HELP's independent audit), instead of $134,948 as contended by HELP.

With regard to the salary of the Head Start Director, we agree with ACF that 100% of his salary should be charged to administrative costs absent any reliable documentation indicating what portion of his time was spent on programmatic functions. It is generally anticipated that a Head Start Director, who is responsible for overseeing a program and supervising all aspects of the program, would be performing administrative functions nearly exclusively, except for occasional tasks to fill in for others as necessary. see ACF Br., Tab 2 (Information Memorandum to all Head Start grantees regarding 15% limit on administrative costs, dated 4/11/83). Mr. Reyes' position description confirms that it was his duty to perform tasks which would be considered administrative. AAF (Cost Disallowances, Tab 10) at 1386-1390. If HELP intended to allocate part of the director's salary to programmatic costs for other occasional tasks, it should have kept accurate documentation of the time spent on these tasks. Moreover, HELP's line-item budget attributes 100% of the director's salary to administrative costs; this indicates what HELP anticipated the director's work would be at the time it filed its refunding application. RAF Tab 30, at 829. Thus, we uphold ACF's allocation of Mr. Reyes' salary in full to administrative costs.

However, with regard to the salaries of the Lead Teachers, we do not agree with ACF that their salaries, totalling $39,966 should be allocated to administrative costs. First, the line-item budget for HELP lists teachers as 0% administrative. RAF Tab 30, at 831. There is no separate category for "Lead Teachers;" thus, we assume that the Lead Teachers are included among the 20 teachers accounted for in this item and that the budget assumed that none of their time would be counted as administrative. While there is a separate line item for a "Center Director" which contemplates that a Center Director's time would be 100% administrative, there is no funding provided for such a position in the budget and no indication that there was such a position within HELP's particular Migrant Head Start program during the relevant time period. RAF Tab 30, at 829.

Mr. Reyes testified that the Lead Teachers were responsible for the overall implementation of the program at each center, including observing and mentoring teachers. They would also be doing home visits, family needs assessments, referrals for health examinations, and working with disabled children. Tr. II at 1320-1321. These activities would make their salaries programmatic costs. This is consistent with the testimony of Lead Teacher Nancy Moore, who indicated that most of her time was spent on programmatic functions with some limited amount of time spent on supervisory functions. She testified that she was not responsible for budget matters, which appear to be the majority of administrative costs associated with ACF's guidelines. see ACF Br., Tab 2; Tr. II at 1034, 1049-1050. Moreover, ACF's finding was based on a conversation by its reviewer with a single, unnamed Lead Teacher. This is not persuasive evidence, especially for the conclusion that 100% of the time of all Lead Teachers was administrative. Thus, we conclude that the Lead Teachers' time should not be charged to administrative costs.

Finally, with regard to the office supply costs, we find that -- absent a more specific breakdown of what the supplies were used for -- these costs should be considered 100% administrative. This is consistent with the general guidelines developed by ACF in the Information Memorandum of 4/11/83, and we see no reason to depart from them absent better documentation. ACF Br., Tab 2, at 6 (unnumbered). Moreover, HELP has an obligation to document its costs. see 45 C.F.R. § 74.21 (formerly 45 C.F.R. §74.62).

For the above reasons, we reduce the disallowance for exceeding limits on administrative costs to $53,765.²² An explanation follows:

$1,165,527 Federal Expenditures
+ 291,382 Non-Federal Share
$1,456,909 Total Approved Costs

$1,456,909 Total Approved Costs
x 15% Allowable Administrative Percentage
$ 218,536 Allowable Administrative Expenditures

$ 272,301 Funds Expended for Administration
- 218,536 Less Allowable Administrative Costs
$ 53,765 Amount Disallowed

$ 272,301 Funds Expended for Administration

1. $135,998 Indirect Costs
   $134,948 Indirect Costs
   $ 1,050 Indirect Costs H/C
2. $ 80,095 Personnel²³
   $40,950 H.S. Director
   $17,438 Admin. Asst.
   $21,707 Accts. Payable Clerk
3. $ 22,346 Fringe Benefits ($80,095 x 27.9%)
4. $ 33,862 Other (Office Supplies, etc.)

ACF disallowed the cost of a professional staff developer who was paid a total of $30,633 (including fringe benefits) from HELP's Migrant Head Start funds for the period April 1, 1993 through August 30, 1994. ACF disallowed this amount in full on the grounds that the position was not approved in advance by the Migrant Programs Branch of ACF, allegedly in violation of 45 C.F.R. § 74.103(c)(2).²⁴ see Disallowance Letter at 9. ACF argued that this employee was hired as a staff CDA trainer and never functioned as the Social Services Coordinator as HELP alleged.

The regulation on which ACF relied, which is substantially the same as OHDS/DGAM, chapter 1, § L(4)(b), is inapplicable. The regulatory section requires prior approval from ACF for a grantee to replace persons named and expressly identified as "key project people" in the notice of grant award. The purpose of the provision, which is more fully developed in the OHDS/DGAM, is to address situations where a grant may have been awarded in part based on the qualifications or participation of a named project director or principal investigator. The Board has not been provided with any evidence that the Social Services Coordinator was expressly identified as one of the key personnel in the notice of grant award. In fact, the notices of grant award for the relevant time period list only Mr. Ortega and Mr. Reyes by name. (Mr. Reyes is listed as the Principal Investigator or Program Director.) RAF Tab 30, at 850-855. Thus, we have no basis on which to find that the Social Services Coordinator position requires prior approval from ACF.

Thus, we reverse ACF's disallowance of $30,633 based on an alleged failure to obtain prior approval to hire this employee.

10. Salary of Child Development Director

ACF calculated the salary for HELP's Migrant Head Start Director, listed as the Child Development Director, to total $81,590 for April 1993 through August 1994 (including fringe benefits). ACF disallowed the entire salary on the grounds that HELP did not have a full-time Head Start Director as represented in its Migrant Head Start application. Instead, according to ACF, HELP's Child Development Director also had overall responsibility for the nutrition program, the Regional Head Start program, the before- and after-school child care program, and the Institute of Children, Youth and Family Studies, as well as the Migrant Head Start program. According to the disallowance letter, the Child Development Director's entire salary was paid by the Migrant Head Start program. See Disallowance Letter at 10. In support of its position, ACF introduced a promotional brochure developed by HELP which indicated that the Child Development Director had authority over these five different programs. ACF Br. at 40, citing RAF 30 at 868. HELP provided no documentation showing an allocation of the Director's time between Migrant Head Start and other programs. ACF alleged that this division of time by the Migrant Head Start Director was a violation of the grant award, and thus of applicable cost principles, since a full-time Migrant Head Start Director was approved in the budget request. ACF Br. at 41.

HELP responded that, while the Migrant Head Start Director did have involvement in other programs, he devoted at least the equivalent of a full-time position to the migrant program. HELP Br. at 38; 41, n.40. HELP conceded that, during the seventeen-month period involved here, the Migrant Head Start Director reported on Regional Head Start to HELP's Executive Director (Mr. Ortega) and Board, interacted with ACF's Regional project manager, oversaw a 1994 on-site visit to Regional Head Start, provided occasional advice to the Regional program, and managed the food program for both Migrant and Regional Head Start. HELP Br. at 38-39. However, HELP argued, the time which the Migrant Head Start Director spent on these other programs was insignificant and was justified by the nature of the other programs or by his prior relationship with these programs.

Based on testimony presented at the hearing, we find that HELP sufficiently proved that Mr. Reyes was a full-time Migrant Head Start Director and that his contact with the other programs was minimal and appropriate. HELP provided unrebutted testimony that Mr. Reyes had charge of the food program, which provides meals for Head Start children in both Migrant and Regional Head Start, because the state required one contract and one person to contact per agency, not per program. Tr. II at 1366. The testimony indicated that Mr. Ortega was temporarily assigned responsibility for Regional Head Start following the "divorce" of the programs, and that Priscilla Mendoza was appointed to take over as Director of the Regional Head Start program on September 3, 1992. AAF (Cost Disallowances, Tab 12) at 1396. Mr. Reyes' contacts with the Regional program were limited to contacts with Ms. Mendoza to answer questions, contact with on-site reviewers to the Regional program who were reviewing a period inclusive of when Mr. Reyes had run both the Regional and Migrant programs, and some very limited presentations to HELP's Board which encompassed both the Regional and Migrant programs (and were done in order to limit the number of persons who would have to travel from Las Cruces to Albuquerque.) see generally Tr. II at 1182-1186. Mr. Reyes stated that he did not have responsibility for the school-age child care program. Moreover, Mr. Reyes stated that while he did have responsibility for the Institute for Children, Youth, and Family Studies, this program was a training and research arm of Migrant Head Start and was chargeable to the Migrant Head Start grant. Tr. II at 1366- 1367.

To the extent that Mr. Reyes had contact with the other programs, his testimony indicated that his time spent with such programs was minimal and that he put in many overtime hours serving HELP's migrant program on a regular basis. We found Mr. Reyes generally to be a credible witness, and do not find it determinative that some of the staff still believed him to be associated with the regional program, since he had previously performed both roles. We find it curious that ACF would urge us to rely on HELP's promotional brochures and position descriptions rather than on Mr. Reyes' testimony when, with reference to other disallowed items, ACF argued that written documents contemplating what an employee or consultant is expected to do are unreliable as to what an employee or consultant actually did. Thus, absent any evidence to the contrary, we conclude that Mr. Reyes functioned and was properly paid as the Director of the Migrant Head Start program.

For the above reasons, we reverse ACF's disallowance of $81,890 for the Migrant Head Start Director's salary.

11. Literacy Program

HELP requested and was awarded $7,447 ($2,447 in 1993 and $5,000 in 1994) for consulting services to operate a literacy training program for parents of Migrant Head Start children. According to ACF, there was no documentation showing that these funds were spent on a literacy program, and it was not certain to what use the funds were put. ACF alleged that this violated the basic cost principles of OMB A-122, att. A, sec. A. see Disallowance Letter at 11.

In response, HELP submitted copies of the following three signed contracts for literacy consulting services:

• a contract entered into with C.V. on June 7, 1993 for a fixed fee of $5,000;
• a contract entered into with S.W. on July 1, 1994 for a fixed fee of $5,000; and
• a contract entered into with V.D. on August 1, 1994 for a fixed fee of $2,500.

AAF (Cost Disallowances, Tab 13) at 1397-1405. Each of these documents contained an attached list of services to be provided by the consultants. Two of these contracts specifically stated that payment will be made upon receipt of invoices.²⁵ Id. at 1397, 1399. Following the oral argument and at the request of the Board, HELP provided the Board with a copy of a payment voucher for program year 1993 covering services provided by consultant V.D., a copy of an invoice signed by V.D., and a copy of a check dated August 31, 1993 made payable to V.D. The voucher, the invoice, and the check were each for the amount of $2,500. see HELP submission of July 8, 1996. In addition, HELP provided the Board with a July 17, 1996 letter from HELP's independent accountant stating that the Migrant program paid consultant V.D. $1,250 and consultant S.W. $2,500 for literacy services provided during the period July through December 1994. see HELP submission of July 17, 1996.

A reliable invoice has been produced for the 1993 program year, along with a payment voucher and a copy of a check made payable to one of the listed literacy program consultants. Since HELP was given $2,447 for budget year 1993 and since HELP paid a literacy consultant $2,500 for services for the 1993 program year, we find that HELP has met its burden of showing that it spent the money it was awarded for literacy services in 1993 on such services.

We likewise find that HELP has met its burden of documentation with regard to literacy services provided during program year 1994. The July 17, 1996 statement signed by HELP's independent certified public accountant indicates that a total of $3,750 was paid by HELP's Migrant Head Start program to two consultants for literacy program seminars provided during the second half of calendar year 1994. The accountant gave the dates of the checks and the check numbers. We conclude that HELP spent $3,750 of the $5,000 it was awarded on literacy services for 1994.

The disallowance letter was unclear as to whether the funding for literacy services was specifically appropriated (and therefore mandated) for those services or whether the funds were simply a line-item in HELP's budget.²⁶ If the funds were not awarded to HELP with any restrictions, then HELP had some flexibility under the OHDS/DGAM to reprogram the $1,250 in 1994 literacy program funds which it did not spend on literacy services to other budget categories or to request permission to carry over the excess funds to the following program year. OHDS/DGAM, chapter 1, § L(3). There is no requirement that a grantee spend the full amount in its budget for a specific item or service if, for example, it can obtain the item or service for less money than it expected when it developed its budget. With regard to HELP, we note that according to its financial status report (SF-269) submitted to ACF, it did not spend the full amount of its financial award in 1994. see HELP submission of August 14, 1996. Thus, the $1,250 which HELP did not spend on its literacy services in 1994 could have been accounted for in its unobligated balance for that year.

For the above reasons, we reverse ACF's disallowance of $7,447 for literacy services. However, if ACF determines that the $5,000 it sought to disallow for literacy services for 1994 was restricted and could only be used for literacy services, if that restriction was clearly communicated to HELP, and if HELP nevertheless spent the $1,250 for other purposes, then ACF is not barred from bringing a disallowance limited to the amount of $1,250 for this item.

12. Conclusion on Disallowance

For the above reasons, we uphold $58,965 and reverse $581,923 of the disallowance.

II. The Termination Proceeding

Pursuant to 42 U.S.C. § 9841 and the Head Start regulations at 45 C.F.R. §§ 1303.14(c)(2) and 1303.16(a), a full and fair hearing must be afforded to a Head Start grantee before its grant is terminated. The Head Start regulations at 45 C.F.R. § 1303.16 set forth procedures for the conduct of a hearing. To the extent not inconsistent with these procedures, the hearing procedures of the DAB at 45 C.F.R. Part 16 also govern. see 45 C.F.R. § 1303.14(c)(2).

The regulations list nine grounds for which a Head Start grantee may be terminated from the program. Specifically, a grantee may be terminated when the grantee --

1. is no longer financially viable;
2. has lost the requisite legal status or permits;
3. has failed to comply with the required fiscal or program reporting requirements;
4. has failed to meet the performance standards for operation of Head Start programs;
5. has violated enrollment or eligibility rules;
6. has failed to comply with the Head Start grants administration requirements;
7. has failed to comply with the requirements of the Head Start Act;
8. has been debarred from receiving federal funds; or
9. has failed to abide by other terms and conditions of its award of financial assistance, or any other applicable laws, regulations, or other Federal or State requirements or policies.

45 C.F.R. §§ 1303.14(b). Regulations which are applicable to all HHS grant awards, including Head Start grants, state that an agency of HHS may terminate for cause when "a grantee has materially failed to comply with the terms of a grant." 45 C.F.R. §§ 74.4, 74.113; see also 45 C.F.R. § 74.115. ACF is seeking to terminate HELP's Head Start program here based on grounds which fall under above paragraphs 4, 5, 6 and 9 and which ACF asserts amount to a material breach of Head Start requirements. HELP Br., att. 1, at 6.

ACF must establish a prima facie case that HELP did not meet the federal requirements to continue its program for one or more of the reasons listed at 45 C.F.R. § 1303.14(b). To establish a prima facie case, ACF must set forth reasons for its decision which are legally adequate to support the termination. Once ACF establishes a prima facie case, HELP has the burden of rebutting that evidence by providing evidence to show that ACF's position is wrong and that the grantee did meet Head Start requirements during the relevant period. See Rural Day Care Association of Northeastern North Carolina, DAB No. 1489 (1994) at 7-8; Meriden Community Action Agency, DAB No. 1501 (1994) at 6.

For policy reasons, the Head Start Act does not allow grantees an unlimited amount of time to correct deficiencies in meeting performance standards; otherwise families would not receive the full benefits of the Head Start program and grantees would not have an incentive to improve their programs until termination or denial of refunding proceedings were initiated. Meriden at 6. HELP was notified in a November 1, 1991 report of deficiencies which were found to exist in its program during an August 1991 on-site visit; HELP received a written report on December 27, 1994 identifying deficiencies found to exist during the August 1994 on-site visit. see , generally, RAF Tabs 1-28, at 1-758. Thus, we have determined that the relevant time period for this matter is the period reviewed in the August 1991 on-site visit through the August 1994 on-site review.

Below we discuss each of the findings of non-compliance on which the proposed termination is based, along with our conclusions as to each item. During this appeal process, HELP produced documents and supporting testimony which, if credible and reliable, showed that HELP's compliance with the performance standards was significantly better than the reviewers found. In response, ACF argued that nearly all of HELP's witnesses were not credible. We found HELP's witnesses, as well as the majority of ACF's, to be sincere and capable people with a desire to serve children and to provide the best services available. Notwithstanding ACF's allegations, we found all of HELP's witnesses to be honest and credible.

A. Financial Management System

Following the 1994 on-site visit, ACF concluded that HELP violated the regulatory standard measured by On-Site Program Review Instrument (OSPRI) Item 218, which requires that --

[t]here is a financial management system that ensures budget management, maintains control over current operations, and provides timely, accurate, current and complete disclosure of financial matters.

See also 45 C.F.R. Part 74, Subpart H.²⁷ ACF's financial reviewer, Barbara Ricketts, reached this conclusion by examining HELP's financial records in its home offices in Albuquerque and consulting other review team members, including some who visited HELP's Migrant Head Start headquarters and facilities in Las Cruces and other locations. Tr. I at 380, 388-391. Specifically, she found that accounting records were supported by source documentation, but that HELP failed to post accounts payable and indirect costs for the period April through July 1994. She also found a violation of the requirement that there be a clear separation of duties with regard to financial operations in that one person had the authority to authorize transactions, sign checks, and reconcile bank accounts. In addition, she concluded that HELP had not reconciled financial records and individual cost elements to the cost categories in its projects budget or used budgetary controls to prevent overexpenditures in excess of the grant award, the object classes, or the program account. Finally, she concluded that HELP failed to ensure that expenses charged to Head Start were properly allocable to Head Start.

HELP argued that ACF's determination on this matter, which was based in substantial part on the cost disallowances discussed above, should be overturned if the majority of the cost disallowances were overturned. HELP Br. at 46. We do not agree with HELP that such a reversal automatically warrants a finding of compliance with this OSPRI item. However, in reviewing the testimony of the financial reviewer on this item, we find that many of her conclusions on HELP's compliance with financial requirements were indeed based on disallowed items that we have found unsubstantiated or on reports of other OSPRI team members that she may have misunderstood. We find her conclusions on most other items to be unsupported as well.

In connection with her review of whether transactions were being posted in the accounting records in a consistent and timely manner, Ms. Ricketts found during her August 1994 visit that accounts payable and indirect costs had not been posted for the period April through July 1994. HELP attributed this delay to ACF's failure to approve HELP's funding, which expired March 30, 1994, until July 13, 1994. HELP Br. at 46-47. Ms. Ricketts noted that HELP was also behind in posting in 1993, and HELP responded that refunding that year was also delayed, until July 8, 1993. Ms. Ricketts stated during cross examination that HELP was not allowed to draw down funds to pay its payables until its funding had been approved and agreed that it also would not be prudent to post its indirect costs until funding had been received. We discuss below the parties' ongoing dispute about who was to blame for HELP's late funding, but, as it applies here, this would seem to explain the late posting of some items. Consequently, we find that the late posting does not support a finding that HELP's financial management system was materially out of compliance with regulatory standards.

HELP admitted that it made changes in its separation of accounting duties as a result of the suggestions of its independent auditors, although these changes occurred after the 1994 on-site visit. HELP Br. at 47; Oral Argument Tr. at 262. Thus, HELP recognized that it did not have the proper separation of accounting functions within its structure; however, it argued that this failing alone did not justify a non-compliance finding on the entire OSPRI item. HELP Br. at 47. We therefore conclude that HELP did fail to implement this one internal control as part of its financial management system. We discuss below whether this was indeed the only failing of HELP's system.

With respect to her review of whether financial records and individual cost elements used were reconciled to the cost categories in the project's approved budget, Ms. Ricketts wrote that there were "major variances." ACF ex. 26, p. 713. When questioned, Ms. Ricketts identified those major variances as "instances of positions not being filled causing variances within the salary category of the general ledger. Also, equipment that had been purchased had not been prior authorized." Tr. I at 345. Specifically, she was referring to her understanding that a Social Services Coordinator position had been approved but not filled, and that a computer system had been purchased without prior approval. Id. She could not recall any other variances. Tr. I at 404. Ms. Ricketts therefore was apparently basing her opinion on whether the position was filled on the disallowance item, which we have overturned, and on the $1,538 computer system purchased without prior approval, for which HELP is seeking retroactive approval. HELP conceded that unforeseen events such as unusually severe weather had caused it to exceed its budget for some consumables. (See OHDS/DGAM, ch. 1, § L.3, which allows grantees certain budget flexibility.) That admission coupled with Ms. Ricketts' findings on this subitem are not sufficient support to conclude that HELP had "major variances" between its budgeted and actual expenditures. Moreover, ACF did not refute HELP's assertion that it was extremely hard to have adherence with a Migrant Head Start program budget and that to expect such adherence was inconsistent with the budget flexibility discretion accorded to grantees and ACF's policy of being more lenient with regard to Migrant program grantees. HELP Br. at 48, n.5. Consequently, we conclude that these issues were not significant enough to find HELP's financial management system unsound.

We find a similar problem with Ms. Ricketts' finding concerning whether "[b]udgetary controls are in place to preclude incurring obligations in excess of total funds available for (1) grant, (2) object class category, and (3) program account." Ms. Ricketts testified that her recommendation that this be found out of compliance was "[b]ased on the fact that there had been significant deficits incurred in a prior year's grant period. . . . I believe it was around $130,000." Tr. I at 346. This is a clear reference to the alleged overexpenditure disallowance item that we have already found unsubstantiated. Consequently, we conclude that this finding cannot serve as a basis for determining that HELP's financial management system was unsound.

Finally, Ms. Ricketts testified that she based her finding as to whether budgetary controls were in place to assure that obligations incurred for the Head Start program were allocable to the Head Start program on her understanding that "[t]here were numerous instances of staff that were performing duties for the regional program as well as the Migrant Head Start program . . . . There was also a situation with food costs where USDA-related expenditures and revenues were not being properly allocated." Tr. I at 406. Ms. Ricketts based her assertion that migrant staff were performing duties for the regional program on her understanding of other OSPRI team members' interviews, however, and we have determined above that the disallowance item based on this assertion, the disallowance of the Migrant Head Start Director's salary, was not supported by substantial evidence in the record. As for the assertion concerning the USDA expenditures, these funds were apparently provided to HELP from USDA through the state and thus, strictly speaking, were irrelevant to the subitem under consideration, since the subitem refers to assuring that Head Start funds are spent only for the Head Start program. We note that there was testimony by the Migrant Head Start Director that USDA required a single contact for all USDA programs, which would explain the unified accounting system but not necessarily assuage Ms. Ricketts' concerns that food costs were being improperly allocated to the two Head Start programs run by HELP. Without further information, however, we do not rely on this assertion as establishing that HELP's financial management system was materially deficient.

Thus, while we do not find that HELP's fiscal management practices were perfect in that it failed on one internal control, we do not find that ACF's substantiated findings on this item provide a sufficient basis for concluding that HELP's financial management system did not meet program standards. We therefore reverse ACF's findings with regard to OSPRI Item 218.

B. Education Component

The Head Start regulations require that there be --

procedures for ongoing observation, recording, and evaluation of each child's growth and development for the purpose of planning activities to suit each child's individual needs.

45 C.F.R. § 1304.2-2(d); OSPRI Item 16 (1994 and 1991). At the on-site visit in 1994, ACF found that there was a lack of individualized education plans for children at four of the five centers, and that classroom plans did not reflect activities designed to meet children's needs individually and in small groups at one of the centers. see RAF Tab 18, at 130. ACF found that the Denver II screening tool was being used by HELP as the only assessment tool, and ACF offered testimony that the Denver II could properly be used as a screening tool but was insufficient as an assessment tool. Tr. II at 446-447; ACF Br. at 55. Thus, according to ACF, HELP did not meet the requirement of assessing and evaluating each child. ACF alleged problems with the updating of HELP's observations of the children's progress. ACF Br. at 53. ACF disagreed with HELP's position that it properly used a technique known as portfolio assessment to evaluate the development of the children, although ACF conceded that proper use of portfolio assessment by a program would fulfill the assessment requirement. ACF Br. at 58. ACF argued that the observations recorded in the children's files by HELP were insufficient in number and frequency, there was no assessment of the children's progress from those observations, and no relating of any assessment to developmental plans for the children. ACF Br. at 64, 68- 69. ACF stated that the teachers who were interviewed during the on-site visit, when asked about assessment of the children, referred only to the Denver II and did not mention portfolios or observations.²⁸ ACF Br. at 58-59, 67-68. In the 1991 OSPRI, ACF found that HELP did not comply with this standard for similar reasons, although ACF subsequently found some progress had been made since 1991. ACF Br. at 53-54.

HELP argued in response that it provided ACF with a copy of the Denver II in support of future compliance with this OSPRI item in a quality improvement plan following the 1991 OSPRI, and that ACF never stated that the Denver II was inadequate. HELP Br. at 50, n.47, citing RAF at 1064-1067. Moreover, HELP responded, it properly used portfolio assessment to evaluate the children and suggested that what was at dispute here is a matter of opinion as to what constitutes adequate portfolio assessment. HELP Br. at 50. HELP argued that the new proposed regulations for Head Start support its position that ongoing assessment consists of a collection of observations. Oral Argument Tr. at 212. HELP stated that the files did not reflect numerous instances of updating for each child because, at the time of the 1994 on-site visit, the centers had been operating for only a few weeks and all the children did not begin the program at the same time. HELP Br. at 54. Finally, HELP argued, ACF's reviewer did not understand the requirement for individualization of activities in that she reviewed files for evidence of work on identified problems rather than determining if HELP properly observed the children. HELP argued that the education component reviewer's approach was proper only for addressing the special needs of children with disabilities and that there was no requirement for individualized education plans (IEPs) for all children. HELP Br. at 55 and n.53.

The record reflects some confusion in the use of the terms "individualizing" and "individualized education plan."²⁹ ACF's education component reviewer described "individualizing" as "classroom plans designed to meet children's needs individually and in small groups." She then related that concept to her review of HELP's classroom plans. Tr. I at 448. She stated that she did not see evidence of individualizing in all of the children's folders, and stated that the needs of children who did not have individual goals and plans were not being met. Tr. I at 449-450. Thus, the reviewer implied that HELP was to have IEP's (or some similar type of individualized plans) for all of its children regardless of whether they had identified disabilities or special needs. ACF also argued this in its brief, where it stated that each child's plan (file) should reflect the individualized activities done with each child. ACF Br. at 73. However, at no time did ACF present testimony as to what individualization of classroom plans meant.

We find that IEP's are not necessary for children who do not have identified disabilities. On April 11, 1995, the Academy for Educational Development, a Migrant Head Start task force which provides training and technical assistance to Migrant Head Start grantees, sent HELP's Migrant Head Start Education Coordinator some articles discussing the evaluation of children in Head Start. see Tr. II at 537, 591. One of those articles, "Screening and Assessment in Head Start," issued by the Head Start Bureau in 1993 ("Screening and Assessment" article), states:

If the multidisciplinary evaluation team determines that a child meets eligibility criteria for a disability and needs special education, an Individualized Education Plan (IEP) must be developed.

AAF (Education Training Doc., 5/8/95 Filing) at 1538 (emphasis added). Likewise, another of those articles, "An Introduction to Developmental Screening in the Education Component," also issued by the Head Start Bureau in 1993 ("Developmental Screening" article), states that --

[w]hen screening identifies children who are in need of further evaluation or diagnostic testing, and the subsequent results indicate that the child has a disability, an Individualized Education Plan (IEP) must be developed for that child.

AAF (Education Training Documentation, 5/8/95 Filing) at 1540 (emphasis added). Given the above language, we reverse ACF's conclusion that HELP did not meet program standards because it did not have IEP's for each of its enrolled children at four out of five centers.

The "Developmental Screening" article also gives insight into the meaning of the term "individualizing:"

Although IEP's differ from individualizing curricula, the underlying spirit is similar to the principle of individualizing as it applies to each child in Head Start. In both situations, everyday activities are designed to strengthen all areas of development: physical, emotional, social, and intellectual, and classroom teachers and home visitors should work at including every child in day-to-day activities and experiences, as well as implementing the IEP.

Id. at 1545. It appears from the above-quoted language that individualizing curricula means simply to have daily activities which are designed to strengthen each child's skills and to ensure that all children are able to participate in each of the classroom experiences as much as possible. It is not clear from the record on what basis ACF's reviewer concluded that HELP's classroom plans did not show individualized plans at one of the five centers.

The record contains an Activity Plan Guide prepared by some of HELP's component coordinators consisting of hundreds of classroom ideas for teachers to use to teach various skills to infants, toddlers and pre-schoolers in the areas of education, health and nutrition. AAF (Education, Tab 1) at 1 et seq. While each of the proposed classroom plans has an area marked "Individualized" and a place for a few children's names, all of these areas are blank on each plan. However, the fact that there are no specific plans for individualization on these forms is reasonable given that these are merely lesson plan ideas, and the Migrant Head Start coordinators who developed these plans could not predict which plans each center would use and what individualizing might have to be done with particular children at each center. Such individualizing decisions would have to be made by the teachers who worked with the particular children at each center, and there are some activity plans contained in the record which do show that individual modifications were made in doing group activities. AAF (Education, Tab 4) at 321-325. Given that ACF has not shown that HELP failed to have educational plans designed to strengthen the children's skills and to ensure that all children could participate to the best of their ability, we do not find any merit to ACF's finding with regard to the individualization of activities.

There also appears to be much confusion within ACF (and undoubtedly among Head Start grantees) in the use of the terms "screening" and "assessment." At the hearing, ACF's education component reviewer stated that a grantee must comprehensively screen its children and, regardless of the results of the screening, perform an assessment of each child. Tr. I at 480-481. However, the Head Start Bureau makes a distinction between "indepth assessment" (which is required only for those children whose screenings indicate specific problems) and "on-going assessment" (required of all Head Start children). The "Screening and Assessment" article states that --

[i]f the results from the child's comprehensive screening indicate some difficulties, the child is referred for a more indepth evaluation of the problems or concerns that were flagged in the screening process . . . . [T]his is labeled as "indepth assessment."

If no need for followup is indicated at any step in the process, the child then is assessed on an ongoing basis throughout his or her experience at Head Start. Ongoing assessment provides information on the progress of the child and the family, how the program can be planned to meet the individual needs of the child and the family, and how best to communicate those needs to the parents.

In conducting the ongoing assessment process, teachers are strongly encouraged to use a combination of checklists, teacher observations, parent reports, and collections of work done by the child.

AAF (Education Training Doc., 5/8/95 Filing) at 1538-1539.³⁰

Thus, we agree with HELP that the real dispute in this matter is what constitutes adequate ongoing assessment and whether HELP was sufficiently conducting such assessment through the portfolio method or otherwise. The regulations do not specify how ongoing assessment is to be conducted and the articles above emphasize that a grantee is to have considerable flexibility.

HELP provided the Board with a list entitled "Migrant Classroom Documentation Education Forms," which lists various forms which Head Start teachers and staff are to fill out and place in the children's records. The forms applicable to screening and assessment are to be used on the following schedule:

• Child's Observations -- one observation per month per child, as well as when the need arises.
• I.E.P.'s -- only when the need arises, i.e. when staff can detect a child having difficulty doing a specific task.³¹
• "Notitas de Orgullo"³² -- three of these notes to parents per program year per child.
• Denver II -- within two weeks after the child enters the program.
• Report of Contacts -- two educational home visits per child per program year.
• Infant/Toddler Checklist -- filed in child's file.
• Child's Activity -- three activities per program year per child.
• AAF (Education Training Doc., 5/8/95 Filing) at 1489. Samples of each of these documents are scattered throughout the record and particularly in HELP's exhibit marked "Sample Files." AAF (Sample Files, 5/8/95 Filing) at 1553 et seq. The majority of these documents are dated prior to the 1994 on-site visit. In the sample files, HELP has included the education files for several of its children. It is clear from the forms listed above, as demonstrated in the sample files, that HELP was using each of the methods discussed in the "Screening and Assessment" article: checklists, teacher observations, parent reports (through notes of discussions with parents during home visits), and collections of the children's work. While HELP did not introduce the files for each of its children, it introduced sufficient information through its sample files to convince the Board that HELP was doing an adequate job in observing its children. We do not find it reasonable to ask HELP to reproduce files for hundreds of children served in 1992-1994 when ACF has given us no basis on which to believe that the sample files were not representative or that HELP's witnesses who testified to this matter were not credible.

Finally, we need not address ACF's contention that Mr. Reyes is not an expert on screening and assessment procedures and that ACF was not informed following the 1991 on-site visit that HELP was using "portfolio assessment" in addition to the Denver II screening instrument. It is clear that Mr. Reyes , who is pursuing his Ph.D. in childhood education and who has been with Head Start for more than 20 years, is at least as qualified as ACF's education component reviewer, who has a bachelor's degree and five years with Head Start, to discuss evaluation methods. Tr. I at 443-444; Tr. II at 1167-68, 1177. Moreover, it does not matter that HELP's teachers did not specifically mention portfolios or observations during the on-site visit; it is clear that they were meeting the OSPRI requirement, and there is apparently some confusion even among ACF and its reviewers as to the meaning of terms such as screening, indepth assessment, and ongoing assessment.

For the above reasons, we reverse ACF's finding that HELP was out of compliance with the regulatory requirements measured by OSPRI Item 16.

C. Disabilities Component

The Head Start regulations require that --

at least 10 percent of the total number of enrollment opportunities in each grantee and delegate agency during an enrollment year [be] made available to children with disabilities who meet the definition of children with disabilities.

42 C.F.R. § 1305.6; OSPRI Item 153 (1994). The regulations further require that resources to implement the disabilities services plan be adequate. 45 C.F.R. § 1308.4(n-o); OSPRI Item 155 (1994).

The 1994 on-site reviewer found that the program had not met the ten percent mandate for the two previous program years (1993 and 1992). see Termination Letter at 3-4. The reviewer found that only six of the 270 enrolled slots for the previous year were filled with children with disabilities, and that this enrollment figure was indicative, though not conclusive, of whether the program was making such slots available to disabled children. ACF Br. at 81, citing Tr. I at 599. ACF found that there was no evidence of specialized efforts to recruit disabled children and that there was no specific tracking of funds set aside to provide services to disabled children. ACF Br. at 81-82, citing Tr. II at 120-121, 124-125. ACF stated that HELP's position that it would never turn away a disabled child on account of the disability was never an issue in this matter, and that ACF's position was that it was the responsibility of a Head Start grantee to actively recruit disabled children rather than simply enrolling them once the families got in touch with the program. ACF Br. at 82.

Based on staff interviews, the 1994 on-site reviewer found that the staff at the centers responsible for the recruitment of children were unfamiliar with the laws and program requirements relating to serving persons with disabilities, including the Americans with Disabilities Act (ADA) and the Individuals with Disabilities Education Act (IDEA). ACF Br. at 77-78, citing Tr. I at 488. She found that the local center staff had not received training concerning specific disabilities occurring among children in their centers; her conclusion was purportedly based on a lack of attendance records from any training and on no specific recollection by the staff that they attended any training. ACF Br. at 78-79, citing Tr. I at 520. ACF concluded that a lack of an adequately trained staff regarding services for children with disabilities meant that HELP did not have adequate resources to serve disabled children. Moreover, ACF found, the staff exhibited uncertainty as to what kinds of activities should be done with disabled children. ACF provided testimony that the inappropriate placement of one child in the program reinforced its belief that HELP lacked sufficient knowledge in the area of disabilities. Tr. I at 601-604. Finally, ACF found that there was no documented training of parents regarding disabilities even among parents whose children were believed to have disabilities. ACF Br. at 80.

In response, HELP emphasized that the standards do not require that 10% of enrollment slots actually be filled with children with disabilities but only that they be made available to such children, a fact not disputed by ACF. HELP Br. at 56. HELP argued that the fact HELP had not, and would not have, turned away disabled children from enrollment in the program was evidence that at least 10% of its enrollment opportunities were available to children with disabilities, particularly in the years at issue when HELP was significantly underenrolled and thus had plenty of room for additional children with or without disabilities. HELP Br. at 57, citing Tr. II at 1069. HELP stated that it actively recruited children with disabilities by "posting posters, placing public services announcements, and obtaining referrals from schools and governmental agencies;" HELP noted that ACF's Migrant Head Start Branch Chief admitted that he saw one of HELP's disabilities recruitment fliers. HELP Br. at 59, citing Tr. II at 400.

With regard to the adequacy of resources, HELP argued that its staffing levels met state law requirements, that it could supplement staff with temporary employees, volunteers or parents, and that it would not be reasonable for it to hire staff to handle children with disabilities if such children were not, in fact, enrolled. HELP Br. at 61. HELP noted that its Disabilities Coordinator testified that she conducted disabilities training sessions for all staff at the pre-recruitment and pre-service training, and that ACF never indicated or proved that separate sign-in sheets for such training were necessary. HELP Br. at 62. HELP stated that staff were trained in the requirements of the ADA, the IDEA, and the requirements of state child care regulations for serving persons with disabilities. HELP argued that ACF's evidence on a lack of training of parents on disabilities was weak. HELP Br. at 64. HELP stated that it provided appropriate treatment to the one child about whom ACF's reviewer raised questions. ACF Br. at 60, n.58, citing Tr. II at 1036-1037.

As ACF conceded, the requirement that a program make 10% of its enrollment positions available to children with disabilities does not require that a grantee actually ensure that 10% of its enrollment in any given year consist of children with disabilities. Tr. II at 927- 928. In some years, it might not be possible to enroll 10% of a program with children with disabilities because of a dearth of such children while, in other years, it may be that a program can accommodate more than 10%. HELP introduced a copy of its enrollment plan listing its priorities for enrolling children. see AAF (Disabilities, Tab 2) at 1331. The plan contemplates that a disabled under-income child is the highest priority for enrollment, and is enrolled ahead of other under-income children. Likewise, a disabled over-income child is enrolled ahead of other over-income children. Thus, we conclude that HELP was aware of its responsibility to serve children with disabilities and would do so to the extent such children were available to be enrolled. Moreover, we agree with HELP that it had at least 10% of its slots available to serve disabled children in each of the relevant program years where it was underenrolled by at least 10% in each of those years.

Moreover, HELP introduced some records of children with disabilities enrolled during the 1994 program year. Those children included one with asthma, three with speech impairments, one with Down's Syndrome, one with a hearing impairment, and one with a combination of speech, behavioral, and nutritional (weight) problems. AAF (Disabilities, Tabs E-K) at 2608-2903. These documents show the extensive efforts of HELP to diagnose and provide services to these seven children. Thus, we conclude that HELP was making reasonable efforts to diagnose and assist children with disabilities.

A central charge of ACF is that HELP did not make sufficient efforts to recruit children with disabilities. We do not agree. HELP's Disabilities Coordinator testified to the extensive efforts she made to recruit children with disabilities, and the record contains evidence of these efforts. These efforts included contacting local and state agencies which serve children with disabilities and asking for referrals of children who might be eligible. Tr. II at 765-769. She also testified that HELP put out public service announcements and recruitment fliers which solicited the enrollment of children with disabilities. We found this witness to be quite credible. Moreover, ACF's Head Start Migrant Programs Branch Chief testified that he had seen at least one recruitment flier seeking the enrollment of disabled children. Tr. II at 400.

The record contains a copy of HELP's 1994 recruitment plan and copies of 1994 fliers, public service announcements, posters, and notices. The recruitment plan specifically contains references to developing posters targeted to the enrollment of disabled children, distributing information specifically to agencies which serve children with disabilities, and training recruitment staff to recruit disabled children. AAF (Social Services, Tab 1) at 590-593. For example, a copy of a June 8, 1994 letter addressed to the public service departments of newspapers, radio stations, and cable companies states that --

[t]he Migrant Head Start program will also accept Migrant children with disabilities. Over income migrant children with disabilities are considered.

AAF (Social Services, Tab 2) at 598. A copy of a letter sent to agencies serving disabled children specifically states --

[t]he Head Start Performance Standards mandate that the Migrant Head Start Programs actively recruit and serve children with disabilities. Having identified your program as an organization that works with special needs children, we are asking for your assistance in helping us locate and serve migrant children with disabilities.

AAF (Social Services, Tab 3) at 601. There are also examples of recruitment fliers and newspaper articles in the record; each of these sources contains references to the enrollment of children with disabilities. AAF (Social Services, Tabs 7-8) at 625-628. Based on the above factors, we find that HELP made more than sufficient efforts to recruit children with disabilities.

ACF also found that HELP did not adequately train staff in specific disabilities. Again, we find this charge to be without merit. The record contains copies of the Migrant Head Start program's pre-service training agenda schedules for 1991, 1992, 1993, and 1994. The record also contains an in-service training agenda for July 11, 1994. see ACF Hearing Ex. 4. Each of these programs provided some training in a combination of the following relating to disabilities: the disabilities component generally, identifying and using disabilities resources, meeting special needs of and handling children with disabilities, behavior disorders and differences (including attention deficit hyperactive disorder and learning disabilities), AIDs, child abuse reporting, identifying children exposed to drug and alcohol abuse, and helping crack-addicted children. With regard to the 1994 pre-service training, HELP introduced a detailed agenda for the disabilities training. AAF (Disabilities, Tab 1) at 1325-1326. The 1994 pre-service training agenda contemplates that all staff will attend the disabilities training. Thus, we do not find it determinative that HELP did not have an individual sign-in sheet for the pre-service disabilities training session, as ACF's witness alleged was required. see Tr. I at 521-522. While ACF's witness implied that HELP should have had individual sign-in sheets for each of its 17 sessions throughout the week (each ranging between 45 minutes and several hours in length), ACF has pointed to no source for such an unduly burdensome requirement. Moreover, HELP provided testimony that if an employee missed part of the mandatory pre-service training, the Lead Teacher was responsible for ensuring that the employee received the necessary training. Tr. II at 1071-1072.

While the ADA and the IDEA are not mentioned in the training agenda, HELP's witnesses testified that HELP's staff are trained in the requirements of the ADA and the IDEA. Tr. II at 1074-1075, 1048. Copies of some resource materials discussing the requirements of the ADA and the IDEA, dated September 1992 and 1991, respectively, are in the record, and HELP's Disabilities Coordinator testified that these materials were used for staff recruitment training and pre-service training. AAF (Disabilities, 5/8/95 Filing, Tabs A-B) at 2553-2582; Tr. II at 1074-1077. Thus, it is not significant under this OSPRI item that the center staff in charge of recruitment purportedly did not recognize usage of the terms "ADA" and "IDEA" and what each law individually provided for, as long as the staff was aware of the requirements for serving disabled children. Tr. I at 488. HELP's Disabilities Coordinator testified that she trained the staff one-on-one, depending on the particular disabilities identified at the various centers. Tr. II at 1061. ACF has not convinced us that the staff was unaware of the requirements for serving children with disabilities.

With regard to the alleged inappropriate placement of one child with disabilities, we do not find ACF's evidence reliable.³³ Moreover, HELP's Disabilities Coordinator explained why the child was placed where he was. Tr. II at 1066-1067. If ACF believed this placement was inappropriate, it should have had an expert testify; ACF's charge appears to be based on mere speculation made by a non-expert who neither observed nor assessed the child. Tr. II at 1067-1068.

Finally, with regard to training parents in disabilities, HELP's Migrant Program Disabilities Coordinator stated that HELP teaches parents whose children have disabilities both individually and at monthly parent meetings at each center. She stated that disabilities information is available to the parents, and that the pre-service and in-service training is open to them. Tr. II at 1060. We find this training to be sufficient to meet the standard, particularly given the limited availability of Migrant parents to actively participate in the program due to their work schedules.

For the reasons stated above, we reverse ACF's findings with regard to HELP's compliance with the standards measured by OSPRI Items 153 and 155.

D. Mental Health Component

The Head Start regulations provide that mental health services shall include the active involvement of parents in planning and implementing services to meet the individual mental health needs of their children. 45 C.F.R. § 1304.3-8(b)(8); OSPRI Item 88 (1994) and OSPRI Item 84 (1991). The 1994 on-site reviewer for mental health found that parents were not in any way involved with the mental health needs of their children. RAF Tab 20, at 330. ACF's reviewer testified that she based this finding on interviews with staff members and parents; ACF argued that HELP's Mental Health Consultant testified only that she had contact with parents concerning mental health needs at group meetings. ACF Br. at 93, citing Tr. II at 1206-1209. The 1991 OSPRI found no written documentation that the mental health component was actively involving all of the parents, and suggested that mental health awareness might decrease parental anxieties concerning their children. RAF Tab 12, at 61.

HELP responded that, according to the testimony of its Mental Health Coordinator, parents are asked to meet with HELP's mental health consultants and staff once a child's mental health needs are determined, and parents are actively involved in the planning and implementation of the mental health program. HELP Br. at 66-67. HELP argued that the on-site reviewer did not interview key staff such as the Mental Health Coordinator or consultants regarding HELP's compliance with the mental health component, and that the reviewer's questioning of other staff was vague and misleading.³⁴ HELP Br. at 68-69. HELP stated that its parents are also involved in mental health planning through approval of the mental health component by the Policy Council. HELP Br. at 66.

Moreover, HELP argued, ACF unfairly based its findings on interviews with only two parents, whose children did not have special mental health needs. HELP Br. at 68. HELP argued that ACF failed to review the education and social services components of the children's files which would have indicated parental involvement in the mental health needs of their children. HELP Br. at 70.

The conclusion of ACF's on-site reviewer that HELP had no involvement of parents in the mental health program was critically flawed because she reached this conclusion without interviewing the Mental Health Coordinator or either of the two mental health consultants. HELP's Mental Health Coordinator testified that he traveled to the various centers with the on-site review team and introduced the members of the team to the staff at the centers. Tr. II at 506. Clearly, the OSPRI team had numerous opportunities to ask questions of him. Moreover, one of the two mental health consultants, who testified at the hearing, stated that her office is close to HELP's office and that she and HELP's Mental Health Coordinator speak on the phone whenever they have concerns they need to discuss. Tr. II at 1214-1215. ACF's on-site reviewer never testified that she attempted to contact this mental health consultant but was unable to reach her. We do not find that interviewing only two parents and one staff member, none of whom were specifically involved in the mental health program, provides a reliable basis for drawing conclusions on this matter. For these reasons, we find that the on-site reviewer for this component did not undertake a thorough review, and thus we find her to be less than credible on the involvement of HELP's parents in the mental health program.

HELP's Mental Health Coordinator testified specifically as to the involvement of parents in the mental health needs of the children. He testified that HELP retained two mental health consultants. Tr. II at 561. The first of these consultants was involved primarily in holding meetings and training sessions with the parents to discuss subjects such as the home environment and discipline, or other subjects which the parents wished to discuss. Id. at 562-563. He stated that staff are not permitted to attend these sessions and that the parents can, and reportedly do, ask very individualized questions at these sessions about handling their children. Id. at 563. The subjects discussed at these meetings are based on informal surveys of the parents and teachers about what topics should be discussed with the parents. Tr. II at 1210.

The second consultant was involved primarily in visiting the centers and observing the children. Often she was consulted about, and requested to observe, children who were having particular problems in the classroom, and she would meet with staff and parents individually in an attempt to solve those problems. While this consultant did not testify at the hearing, her role in working with the staff, children and parents to identify and solve problems was established by both HELP's Mental Health Coordinator and the other mental health consultant, who were sequestered during the testimony and were unable to hear each other's statements. Tr. II at 505, 576, and 1205. The second consultant, who was the business partner of the consultant who testified, worked specifically with the parents in terms of obtaining permission to work with their children, consulting and "connecting" with them, soliciting information from them about their children, and generally coordinating with them. Tr. II at 1207-1208.

A review of HELP's sample files provides specific examples of HELP having contacts with parents regarding the mental health needs of their children. For example, with regard to the first child in the sample files, there is an assessment of the child's behavior, behavior at play, and attitude. The comments section states that the child adjusted well to the center and the teachers, which is confirmed in a note to the parents in Spanish dated July 20, 1994. AAF (Sample Files) at 1591, 1600. With regard to the second child in the sample files, there is a notation of a mental health observation notice to parents and several notes to parents in Spanish addressing the child's increasing ability to communicate. Id. at 1640, 1669, 1079-1080. With regard to the sample files of the third child, there is a mental health evaluation which discusses the child's shyness, good attitude, but total lack of communication and possible need for speech therapy. Id. at 1885. The files reflect many contacts with parents regarding obtaining speech therapy for the child. E.g., id. at 1856, 1860, 1862, 1752-1753,

For the reasons discussed above, we reverse ACF's findings with regard to OSPRI Item 88.

E. Parent Involvement

The Head Start regulations require that every Head Start program must have effective parent participation in the process of making decisions about the program. 45 C.F.R. § 1304.5-2(a) and Appendix B, I-30-2B. OSPRI Item 137 contains a checklist of items for a reviewer to examine in determining whether a Head Start agency is effectively involving parents. The list contains the following requirements:

1. The Policy Council minutes for the last 12 months should indicate that -
   1. parents from all the program options are represented;
   2. training is provided for all policy groups;
   3. the Policy Council members had input into the budget prior to the meeting in which final approval was considered;
   4. the Policy Council approved or disapproved all hiring and firing decisions prior to action on them;
   5. the Policy Council annually reviewed and approved component plans, personnel policies and recruitment plans;
   6. the Policy Council was trained in and actively participated in program self-assessment; and
   7. the Policy Council was presented with periodic financial reports and statements of funds expended for Head Start.
2. In addition, the program must show that --

   8. the Policy Council has approved a written complaint procedure for community or parental concerns about Head Start;
   9. no Policy Council member has served more than three years total; and
   10. there are approved by-laws reflecting the current structure and operations of the program.

On the sheet expressing the on-site reviewer's overall findings with regard to this component, sections C through H and J (corresponding to the letters above) of the 1994 OSPRI were marked out of compliance. RAF Tab 25, at 650. The reviewer found that there was no input of parents into the budget process and no training of the parents in that process. ACF Br. at 97-98. ACF argued that HELP's assertions that it provided parent training in budget issues, despite the fact HELP offered some training agendas into evidence, is undermined by the fact that there was no documentation indicating that training was actually provided, and none of HELP's witnesses described the actual training received. ACF Br. at 98-99. ACF found that there was no evidence that the Policy Council was involved in hiring and firing decisions prior to such decisions being implemented, and argued that blanket pre-approvals for hiring staff are insufficient to meet the requirements measured by OSPRI Item 137. ACF Br. at 101-103. ACF argued against HELP's position -- that filling new positions with existing staff did not require Policy Council approval -- on the grounds that HELP might be filling particular positions with persons who were not qualified to fill them. ACF Br. at 103-104. ACF found that HELP had no annual reviews and approval of component plans, personnel policies, or recruitment plans at least prior to the ending of the program year and prior to the 1994 on-site visit. ACF Br. at 104-105. ACF found a lack of parental training in self-assessment of the program, a failure to provide periodic financial reports and statements of funds to the Policy Council, a lack of a written complaint procedure for parents and persons in the community, and no annual Policy Council approval of bylaws that reflected the current structure and operations of the program. ACF Br. at 105-110.

In response, HELP commented that the 1994 on-site reviewer for the parent involvement component did not properly fill out the OSPRI form and only spoke with one member of the Policy Council prior to reaching her conclusions. HELP Br. at 73. HELP stated that the reviewer testified that HELP's Policy Council had approved a 1993 budget, contradicting the OSPRI finding to the contrary, and that she testified inconsistently regarding parent participation in approval of hiring and firing decisions. HELP Br. at 74. HELP referred to the testimony of its Parent Involvement Coordinator, which emphasized steps HELP was taking to encourage maximum parental participation: holding Policy Council meetings on Sundays; surveying parents as to their interests; providing food at meetings as an incentive for attendance; and providing information to parents on topics such as child abuse, child development, nutrition, and budgeting. HELP Br. at 75, citing Tr. II at 825-828, 832, 834. HELP acknowledged that the Policy Council gave HELP the power to rehire employees who left in good standing, and stated that there was not much turnover of staff and therefore very few new hires each year. HELP stated that its Parent Involvement Coordinator testified to specific examples in the Policy Council minutes where parents were informed of and encouraged to participate in interviewing applicants for a new Lead Teacher position at one center. HELP Br. at 76-77. HELP asserted that it provided effective parent participation by having its Policy Council involved in hiring decisions; by offering educational activities in budget concepts; and by having parents involved in mental health issues, nutrition, health fairs, conducting self-assessments, approving bylaws, and reviewing financial reports. HELP Br. at 77.

ACF's on-site reviewer for this component did not mark her findings with regard to three out of five of HELP's individual migrant centers. ACF argued that a failure to properly fill out the OSPRI was a matter only of internal concern within ACF. ACF Br. at 95. However, we do not agree where the failure may indicate that the on-site reviewer did not review three of the five centers for each of the parent involvement requirements. The reviewer's notes do not reflect that she specifically reviewed all five centers. see RAF Tab 46, at 975-981. Thus, we did not find her testimony or her findings to be particularly thorough or reliable.

HELP's Parent Involvement Coordinator, Rita Morales, testified at length concerning the efforts HELP has made, particularly since the 1991 on-site visit, to perform all the activities required by the parent involvement regulations and index, as listed in OSPRI Item 137. With regard to educating the parents in the budget process, Ms. Morales testified that parents are educated about budgeting through videotaped presentations. Tr. II at 832. Starting in July of each year and continuing through subsequent monthly meetings, the Policy Council is trained in the Head Start budgeting process and has input into the budget which is being developed. Tr. II at 839, 841, 854, and 901-902. Final approval of the budget occurs in November or December of each year, according to HELP's implementation of a timetable which was supplied to HELP by the 1991 on-site reviewer for parent involvement. Tr. II at 895-896 and 907-908. In addition, financial reports and information are provided at each Policy Council meeting. Tr. II at 913.

Ms. Morales' testimony is substantiated by documents in the record. The documents show that the Policy Council approved the tentative 1994 budget (pending receipt of further materials from ACF) at a November 21, 1993 meeting. AAF (Policy Council Minutes, Vol. II) at 3089.

That budget was also discussed at an October 3, 1993 meeting, at which time Mr. Reyes instructed the Policy Council on how to develop a budget. AAF (Policy Council Minutes, Vol. II) at 3137, 3159. The following year, the record reflects that training on the budget occurred at the July 24, 1994 Policy Council meeting. Id. at 3033. A copy of the budget training agenda is attached to the minutes of that meeting. Id. at 3060. At the following meeting on August 14, 1994, the Policy Council discussed the role of in-kind contributions on the budget and ways to give Migrant programs more funding. Id. at 3005-3006. Financial reports for 1994 were reviewed by the Policy Council at June 19, 1994 and August 26, 1994 meetings. Id. at 2934; AAF (Parent Involvement) at 988. Based on these documents and the testimony discussed above, we find that HELP met the requirements embodied in OSPRI Item 137(C) and (G) for training and soliciting the input of parents into the budget process and presenting financial reports on the fiscal condition of the program.

Ms. Morales testified extensively regarding the role of parents in hiring and firing employees. She testified that the Policy Council meets monthly and consists of migrant parents who often do not have telephones in their homes, so that they could not be consulted more frequently. Because employees must often be hired between meetings to fill vacancies which could not or should not remain unfilled, they are hired on a conditional basis until their employment is approved by the Policy Council. Tr. II at 837-838, 902-903. The Policy Council is also asked to approve or disapprove new hires when it meets for the first time in June. Tr. II at 910, 1582-1583. Ms. Morales testified that she had permission from the Policy Council to dismiss immediately any teacher who was mistreating a child in any manner, to rehire employees who left in good standing (in accordance with HELP's personnel policies), to fill vacancies which could not wait until the next Policy Council meeting on a conditional basis, and to hire employees where parental input was reasonably sought but could not be obtained because of the parents' work schedules. Tr. II at 837- 838, 849; cf. AAF (Policy Council Minutes, Vol. II) at 2953, 3065.

The Policy Council minutes reflect that parents did regularly approve new hires at their meetings. E.g., AAF (Policy Council Minutes, Vol. II) at 2934-2935, 2953, 3065, 3138, 3164. The record also reflects many instances of individual parents being involved in interviewing and selecting persons to fill positions. E.g., AAF (Policy Council Minutes, Vol. II) at 2934-2935, 3064-3065, 3090, 3164; Tr. II at 862-863, 910. We find it quite reasonable that HELP acted to fill vacancies which could not wait until the next Policy Council meeting, but hired the new employees on the condition that they subsequently be approved by the Policy Council. Given the conditional status of their hiring, these new hires were not full employees of HELP until they were approved by the Policy Council. Given the unique circumstances of the migrant population, we do not see how HELP could have dealt any more reasonably with the need to fill vacancies which could or should not wait. Moreover, while ACF argued that a Policy Council should also be required to approve employees who switch positions within the Migrant Head Start program, the language of the regulation states only that "new hires" must receive Policy Council approval and consequently, HELP had no prior notice of this interpretation.

For the above reasons, we find that HELP did not fail to involve parents in hiring decisions prior to implementing them, and we find that HELP met the requirements of OSPRI Item 137(D).³⁵

With regard to annual approval of component plans, Ms. Morales testified that the Policy Council spent a whole day reviewing and approving the plans on October 24, 1993. Tr. II at 847, 978. That testimony is supported by the record. AAF (Policy Council Minutes, Vol. II) at 3122-3123. The role of the Policy Council in reviewing component plans was explained to the Policy Council at a previous meeting. Id. at 3165. The following year, the component plans were reviewed and approved on various dates, beginning in June. Id. at 2934, 3034, 3067; AAF (Parent Involvement) at 991. With regard to the personnel policies, Ms. Morales stated that there was no guidance on how often the personnel policies must be reviewed but that it was HELP's practice to have the Policy Council review them annually. Tr. II at 911. The record reflects that the personnel policies were approved on August 30, 1992 and August 29, 1993. HELP's 10/12/95 submission, Tab C, at 8-9 (unnumbered); AAF (Parent Involvement) at 983. Portions of the personnel rules relating to the firing process were again approved on June 19, 1994. AAF (Parent Involvement) at 989. With regard to the recruitment plan, Ms. Morales stated that the recruitment plan was approved annually as part of the social services component. Tr. II at 911. Moreover, the record reflects that recruitment plans were specifically discussed by the Policy Council on August 14, 1994 and at times after the relevant time period at issue here. AAF (Policy Council Minutes, Vol. II) at 2823, 2955. Based on this testimony and documentation, we do not agree that HELP failed to do annual reviews of component plans, personnel policies, and recruitment plans, and we reverse ACF's findings with regard to OSPRI Item 137(E).

Ms. Morales testified further that HELP performed an annual self-assessment. While she stated that the self-assessment for 1994 was not done as of the time of the on-site visit because the centers had opened late that year, she must have been mistaken. see Tr. II at 912. The minutes of the August 14, 1994 Policy Council meeting reflect that the results of a recent in-house OSPRI were discussed. AAF (Policy Council Minutes, Vol. II) at 3008. Though the pages are difficult to read, it appears that some parents participated in an in-house OSPRI at the Anthony and Deming Centers in July 1994. AAF (Parent Involvement) at 998-1001. The July 24, 1994 meeting minutes state that the self-evaluation was completed. AAF (Policy Council Minutes, Vol. II) at 3034. Ms. Morales testified that training of the Policy Council in the self-evaluation process usually starts in July, but that the parents who do the self-evaluation at the centers are usually not the same parents who are on the Policy Council and so the training is often not helpful. Tr. II at 840, 896, 903, 912. Ms. Morales testified that she uses a training agenda for the in-house OSPRI which she received at a Head Start parent training conference. Tr. II at 975.

HELP's Policy Council minutes do not specifically reflect that HELP provided training to parents in performing a self-assessment; thus, HELP did not meet the requirement that a grantee's Policy Council minutes reflect that it provided such training. However, the sub-items of OSPRI Item 137 are designed to ensure that parents are actively participating in the Head Start program. Here, it is clear that parents were trained and participating in conducting a self-assessment, despite the severe restrictions on their time because of work schedules. We find that HELP did not materially violate the underlying provisions of the parent participation regulations found in 45 C.F.R. Part 1304, Subpart E and in Appendix B where this one sub-item requiring references to training in the Policy Council minutes was out of compliance.

Ms. Morales testified that HELP's Migrant Head Start program contains a grievance procedure which is explained to parents when their children are enrolled in the program. Tr. II at 913-914. The record reflects that grievance procedures were approved by the Policy Council on July 18, 1993 and again on August 14, 1994. AAF (Policy Council Minutes, Vol. II) at 3005, 3172. However, the grievance forms attached to the minutes of these two meetings are very narrow in scope; they appear to apply only to discrimination in hiring and enrollment. Elsewhere in the record, there is another copy of the July 18, 1993 minutes with a copy of a different grievance form attached. AAF (Parent Involvement) at 1005, 1009. This form is captioned "Personnel Rules and Regulations" and has a place for an employee's supervisor to sign and date it. Thus, it is designed for internal rather than external complaints. There does not appear to be a general grievance form for parental and community complaints against the program unless the complaints are limited to complaints about the failure to enroll, or otherwise treat equitably, a child or family. However, one parent testified that she speaks with the teachers on a daily basis and lets them know if she has any problems. Tr. I at 1059. She also stated that when she has a complaint, she (as well as other parents) go straight to the Migrant Head Start Director, Mr. Reyes. Tr. I at 1079. Thus, while we find that HELP failed to have an approved general grievance procedure for parents and community members which has been approved by the Policy Council, we find that parents were not discouraged from bringing complaints notwithstanding the lack of a formal grievance process. Nonetheless, we agree that HELP did not fully meet the standards of OSPRI Item 137(H). While this is a violation of the requirement contained in Appendix B to Part 1304, Chart B, Item II(d), we do not find it to be sufficient to mark OSPRI Item 137 out of compliance in its entirety because it is only one of ten indicators included in this OSPRI item.

Finally, with regard to the approval of bylaws which reflect the current structure and operation of HELP's Migrant Program, OSPRI Item 137(J) does not specify what bylaws a program must have. However, HELP's Parent Policy Council Bylaws as well as the Parent Center Committee Bylaws were adopted on July 18, 1993 after some changes were made to both from their 1992 versions. AAF (Policy Council Minutes, Vol. II) at 3170. The Parent Policy Committee Bylaws were again adopted by the Policy Council on July 24, 1994, after being reviewed at the previous meeting. Id. at 3033, 3064. ACF has not argued that either of these sets of bylaws does not accurately reflect the structure of HELP's program. Copies of both sets of bylaws are in the record. Id. at 3074-3079, 3080-3085. Thus, we find that HELP complied with OSPRI Item 137(J). For the above reasons, we reverse ACF's overall findings with regard to OSPRI Item 137 and find that HELP complied with the requirements of this section. See Lake County at 50 (while grantee's performance in this area could be improved, it was essentially in compliance with OSPRI Item 137 where it sought to involve parents in the program through various methods).

F. Administrative Component

1. OSPRI Item 181

Head Start regulations require that each program have a comprehensive community needs assessment (CNA) completed every three years, with annual updating, and that the program be able to describe how the CNA data was used in program planning and decision-making. 45 C.F.R. § 1305.3(b) and (d); OSPRI Item 181 (1994).

ACF asserted that HELP did not perform or update a CNA for 1994, and that the one ACF reviewed during the 1994 on-site visit was for 1992-93. ACF Br. at 114. The 1994 on-site reviewer found that the CNA did not adequately assess certain factors which were required to be contained in a CNA. These factors included the approximate number of children in the service area, the ethnic composition of the families, the number of disabled children within the community, and other services available in the community to Head Start-eligible children. ACF Br. at 111. ACF found that, although HELP's CNA did contain an estimated number of disabled children, HELP derived this number by applying a random figure of 10% based on the federal mandate of 10%. ACF Br. at 116. ACF argued that HELP's assertion in its CNA that there were no other programs serving Migrant Head Start-eligible children was inconsistent with the on-site reviewer's experience and with HELP's own community resource book. ACF Br. at 112-113. ACF questioned the validity of the CNA as a whole given that it allegedly misstated that HELP would "continue to serve 404 children," which exceeded HELP's licensed capacity and the number of children actually enrolled during recent years. ACF Br. at 115, 117.

In response, HELP disputed ACF's authority to now question a CNA which was attached to HELP's grant application and was never rejected or brought to the attention of HELP as being deficient. HELP Br. at 78-79, n.80. HELP argued that, while it did not perform a complete CNA in 1994, it was only required to (and did) update its previous CNA since a complete CNA is only required every three years. HELP Br. at 79, n.82. HELP pointed to the testimony of Mr. Reyes, who stated that HELP does consider the ethnic background of the community's children in conducting the CNA, and asserted that the estimated number of eligible children is clearly stated in its CNA. HELP Br. at 79-80.

HELP also disputed the OSPRI finding that HELP was not the only program providing child care services to migrant families in the communities where its centers are located. HELP stated that the other two programs mentioned in its resource directory were not reliable sources of assistance because they either charged the families for services or were dependent on public funding which had not been forthcoming. Moreover, HELP charged, the on-site reviewer (who was from the State of Washington) did not cite to any other programs serving migrant children in New Mexico of which he had knowledge. HELP Br. at 81-82. HELP stated that it reasonably relied on the federal mandate of a minimum of 10% enrollment opportunities for disabled children in assuming that if the community had an estimated 1,236 migrant children, 123 of them would have disabilities. HELP Br. at 83. HELP asserted that its CNA addresses community resources available to migrant families, but listed them in a separate community resources document attached to the CNA. HELP Br. at 83-84.

Both parties agree that the CNA which the 1994 on-site reviewer examined was for the 1992-93 year. Under the regulations, a CNA must be done once every three years, with annual updating. Thus, a 1992-93 CNA is valid for the time period at issue here, which ended with the August 1994 on-site visit. Moreover, HELP submitted a copy of what appears to be a 1994 CNA update. Although it is undated, it cites to 1993 findings and was submitted in March 1995, prior to the time period in which an updated CNA for 1995 would likely have been prepared. see AAF (Administration, Tab 2) at 1017-1020. We do not find that HELP conceded that it did not update its CNA during 1994, as alleged by ACF, and HELP appears to have in fact updated it.

HELP also submitted a copy of its 1992-93 CNA. see AAF (HELP, Inc., 5/22/95 submission, Tab D) at 3367-3383. We do not find that that CNA was lacking all of the required information which ACF found missing. The CNA does state that, at the time of the CNA, there are (approximately) 3,815 migrant children in New Mexico, of whom 1,236 are under the age of five years. The CNA also states that "[n]early 99 percent of Migrant children in New Mexico are hispanic . . . ." Id. at 3375. Thus, we do not agree that HELP's CNA failed to address the number or ethnicity of migrant children and their families in its service areas.

The one piece of information which we do agree with ACF is missing from the CNA is an accurate estimate of the number of children with disabilities in the service area. HELP's CNA simply states that --

Presently 40 children have been identified with special needs during FY 1991-1992. Given that the program serves 404 children and that of the 404 children enrolled, 10% were identified as children with special needs, we are assuming that there is a greater amount of children with special needs. As indicated earlier there are 1,236 eligible migrant children in New Mexico. Utilizing the federal 10% mandate as a guide to determine numbers of children with special needs, it is estimated that there are approximately 123.6 migrant children with special needs.

It appears from this language that HELP assumed that there were 123.6 children with disabilities in its service area based solely on the federal mandate that 10% of its enrollment opportunities be available to children with disabilities. However, the CNA requirement does not require that a program identify how many slots for disabled children it would have to make available in order to meet the 10% goal if it could serve all eligible children in the community. The provision requires a grantee to determine how many disabled children there are in its particular service area. Many more or many fewer than 10% of the eligible children in the service area might have disabilities, and the purpose of the CNA is to assess the unique needs of a grantee's particular community.

HELP stated that it identified 40 out of 404 children enrolled during the 1991-92 program year who had disabilities. Mr. Reyes testified that HELP simply applied the 10% mandate to its total enrollment of 404 in the CNA and assumed that 40 of its 1991-92 enrolled children had disabilities. Tr. II at 1394-1395. We find that HELP should have made a greater effort to identify the actual number of disabled children in its service area. However, we find that the absence of an accurate estimate of the number of disabled children in its service area was insufficient to mark the entire OSPRI item out of compliance.

We further find that HELP's decision not to list, in its CNA, programs designed to serve migrant families where those programs either charged the families for services or were unfunded in recent years was a reasonable exercise of judgment. ACF has pointed to no guidelines which would specifically instruct a grantee to include programs which the grantee believed to be effectively unavailable to the families served. The fact that HELP chose to list these services in its community resource directory but not in its CNA is not critical.

Moreover, we are not concerned with HELP's statement in its CNA update that HELP would "continue to serve 404 children." While this statement is technically incorrect, it is quite possible that the CNA language was based on HELP's projected enrollment. In any case, we do not find the misstatement to be significant where ACF was clearly aware of HELP's ongoing underenrollment.

For the reasons stated above, we reverse ACF's finding with regard to OSPRI Item 181.

2. OSPRI Item 187

Head Start regulations require that there be written procedures which include an ongoing monitoring process that assures program objectives are completed in a timely manner. 45 C.F.R. part 74, subpart J; OSPRI Item 187 (1994).

While the 1994 reviewers found a written monitoring process, they alleged that they found no documentation verifying that the written procedures were actually implemented. RAF Tab 28, at 747. According to ACF, written documentation such as periodic reports showing actual implementation is referenced by the standard as material which should exist and be reviewed. ACF Br. at 118. ACF found that, from interviewing staff, no one could provide attendance information or other information which would indicate that regular monitoring was being done. Id.

In response, HELP asserted that it did implement a monitoring process and that evidence of that implementation is found in Appellant's Hearing Exhibit 7. HELP argued that this document shows that at several times throughout program year 1994, HELP's Education Coordinator monitored progress and data on children at one of HELP's centers. HELP Br. at 87. HELP argued that this document was representative of the monitoring which HELP did at all five of its centers and in each component area, and that each component area had a control summary sheet providing the information which the on-site reviewer was looking for. HELP stated that counsel for ACF refused HELP's offer to provide documents indicating implementation of HELP's monitoring process at each of the five centers. HELP Br. at 88, n.91. HELP questioned the ACF reviewer's testimony that, had HELP reported its underenrollment to ACF, it would have been in compliance with OSPRI Item 187, stating that reporting to ACF was not covered by this item. HELP Br. at 89-90. HELP asserted that it had submitted reliable documentary and testimonial evidence of its compliance with this item. HELP Br. at 91.

We find that HELP's Migrant Head Start program adequately monitored its centers. HELP introduced copies of reports of monitoring by its Migrant Head Start Education Coordinator at one of its five centers between June and November 1994. HELP's Hearing Ex. 7. With the exception of October 1994 (a period of time not relevant here), this monitoring occurred on a monthly basis. The monitoring reports contain individual pages for the infant, toddler and pre-school classrooms and indicate what information needed to be obtained or action taken to bring each child's file up-to-date. The reports note instances where the following information is missing from a particular child's file or where there are insufficient instances of particular activities: home visits, class activities, IEP follow-ups, Denver II screenings, classroom observations, and health and behavior observations. In addition, the monitoring reports note where there are materials which need to be labeled, where children's artwork needs to be displayed, and generally where other improvements can be made. HELP's Migrant Head Start Director testified regarding these reports during the hearing. Tr. II at 1303-1307.

ACF complained that the 1994 monitoring only provided evidence of monitoring at one center and only in one component area. At the hearing, HELP offered evidence regarding its monitoring at other centers and in other component areas. ACF's counsel objected to the production of additional volumes of documentation. The record reflects that ACF's counsel, in lieu of having the record flooded with additional voluminous documents, agreed that HELP would introduce the records from the one center as examples of the monitoring it did at each center and that HELP's witnesses would testify that these records were representative of the monitoring done at all of the centers. Tr. II at 1299-1300. Thus, ACF cannot complain now that HELP did not submit monitoring documents with regard to each of its centers. Moreover, in addition to the 1994 monitoring reports, HELP also introduced some 1992 monitoring reports covering several component areas at each of its centers. HELP's submission of 10/12/95, Tab A.

We find the monitoring documents which HELP submitted to be exactly of the type which OSPRI Item 187 calls for. They are based on a thorough review of each child's file, as well as observations by HELP's Education Coordinator of the general practices at the center. HELP's Migrant Head Start Director testified as to the general procedure for setting up and conducting monitoring visits by the component coordinators, how the coordinators work in teams and assist one another, and how they report back at weekly coordinator meetings. Tr. II at 1292-1293. Moreover, several of HELP's component coordinators testified to the monitoring they do at each center. For example, HELP's Health Coordinator testified that he helps each of the centers set-up for the program year and then, for the first two months, he did two monitoring visits per month. After that, he did one monitoring visit per month at each center. Tr. II at 546. HELP's Parent Involvement Coordinator testified that she visited each center "at least once a month, if not more" for the purpose of monitoring. Tr. II at 764. Thus, we conclude that HELP's component coordinators were appropriately monitoring the five Migrant Head Start centers.

For the above reasons, we reverse ACF's findings with regard to OSPRI Item 187.

3. OSPRI Item 196

A Migrant Head Start program must maintain a system of files and records for each staff member related to that staff member's qualifications for appointment or promotion, periodic pay increases, continued training or education, performance evaluations, and any adverse actions taken against such employee. 45 C.F.R. § 1301.31 and Appendix A; OSPRI Item 196 (1994).

The 1994 on-site reviewers found most of the required personnel file data missing. RAF Tab 28, at 754. According to ACF's Migrant Head Start Branch Chief, employees had multiple job descriptions in their files, their files were not complete, and some did not have performance evaluations. Tr. II at 128. ACF argued that HELP's explanation that there were no performance evaluations in the files because evaluations were not done until the end of the year was not reasonable given that the on-site reviewers did not find evaluations in the files for the previous year. ACF Br. at 121-122. ACF asserted that the multiple job descriptions suggested that HELP's personnel might be performing job functions for which they were not hired or qualified and that HELP's Migrant Head Start Director had conceded as much. ACF Br. at 122-123, citing Tr. II at 1321. ACF argued that HELP's failure to produce complete personnel files during this proceeding was evidence that such files did not exist. ACF Br. at 125.

HELP argued in response that ACF never made clear the basis for the 1994 OSPRI conclusions with regard to this standard nor disclosed which files were reviewed. Oral Argument Tr. at 223. HELP stated that its Migrant Head Start Director testified that HELP maintained criminal checks, tuberculosis (TB) testing records, and other employee information at the employee's center location, and that it kept information on reference checks, qualifications, wage information, training, performance evaluations, criminal checks and TB testing at its Las Cruces office. Thus, HELP suggested, it is likely that the on-site reviewers did not find all of the information they were looking for because they did not look in these locations. HELP Br. at 93-94. HELP pointed to evidence in the record which suggested ACF reviewed employee files which contained some of the information required by the standard. HELP Br. at 94-95, citing RAF Tab 28, at 74. HELP disputed ACF's finding that HELP waived appropriate qualifications for personnel in some instances as not being encompassed by this standard, and HELP asserted that updating files to reflect new position descriptions could not be given the highest priority due to the ongoing process of "divorcing" HELP's Regional and Migrant Head Start programs. HELP Br. at 95-96.

HELP has never stated that it had personnel files for the relevant time period for each of its employees containing all of the required information. At most, HELP has pointed to a few sample personnel files in the record, stating that they were examples of HELP's "substantial compliance" with the requirements for these files. HELP submitted some blank personnel forms which indicate that HELP was aware that certain information needed to be obtained, yet there is no evidence that such forms were completed in the regular course of business. We do not find it to be significant that ACF allegedly did not identify which personnel files it reviewed or that HELP may have kept substantial portions of its files in Las Cruces and ACF only reviewed files in Albuquerque: HELP could have produced sample completed personnel files for 1994 employees that were in existence as of the OSPRI review, as well as performance evaluations for 1993 employees, during one of HELP's many opportunities to submit documents throughout these proceedings. (As previously noted, there was not much turnover from year to year.) We agree with ACF that the fact that HELP did not produce such documents indicates it is likely that they do not exist.

We do not believe that whether HELP was using its personnel to fill positions for which they were not qualified is covered by this OSPRI item. Nonetheless, HELP should not be excused from having accurate job descriptions of the positions currently held by each employee in its files on the grounds that the Migrant and Regional programs were divorced in 1992; sufficient time has passed that the administrative burden of separating the programs no longer provides a valid basis for not meeting requirements of the program.³⁶

For the above reasons, we uphold ACF's findings with regard to OSPRI Item 196.

G. Social Services/Enrollment Component

The Head Start regulations provide that there shall be ongoing procedures for the recruitment of children into the Head Start program, taking into account the demographic make-up of the community and the needs of the children and families. There shall also be procedures for the recruitment of children with disabilities. 45 C.F.R. § 1304.4-2(a)(1-2); OSPRI Items 119(E) and (H) (1994). A Head Start program is required to maintain a waiting list which ranks children according to the program's selection criteria to ensure that eligible children enter the program as vacancies occur. A program is to have clearly-established criteria for the selection of children. 45 C.F.R. § 1305.6(d); OSPRI Item 174 (1994).

The 1994 reviewers found that there was no waiting list of eligible children and that the program never reached full funded enrollment for the 1994 year. ACF Br. at 126, citing Tr. I at 803-805 and 809. The 1994 reviewers found that only 174 children were enrolled in the program in 1994 even though the program was funded for 404 children.³⁷ ACF Br. at 149. The 1994 reviewers also questioned whether some of the children enrolled in the program, who were counted in the number of children served, were in fact eligible for Migrant Head Start; thus, ACF argued that HELP's underenrollment of migrant children was greater than the enrollment numbers alone would reflect. ACF Br. at 127, 129. Moreover, ACF argued, in some cases HELP knowingly enrolled ineligible children, ignoring certain eligibility requirements of the program relating to income sources and the definition of migrancy. ACF Br. at 131-132.

In response, HELP conceded that it did not maintain a waiting list at the time of the 1994 OSPRI, but argued that it did not have to do so under 45 C.F.R. § 1305.5(c) (1994 OSPRI Item 172). HELP argued that an underenrolled program could not have a waiting list and that ACF's reviewer agreed with that position. HELP Br. at 100. HELP accused ACF of improperly trying to inject into the case the new issue of whether HELP met its full funded enrollment for the 1994 program year. HELP stated that it was inconsistent for ACF to accuse it of not meeting full funded enrollment for 1994 when the on-site visit, which established the ending time period for the issues before us, occurred prior to the end of the program year. HELP Br. at 117. HELP explained that there were valid reasons why it did not reach full funded enrollment in 1994. These reasons included extreme weather conditions causing crop failures (thus resulting in fewer families migrating into the area), and delayed center openings caused by late funding of several months from ACF. HELP Br. at 118. HELP argued that it had a history of receiving late funding from the Migrant programs branch, that other Migrant programs had had the same problem, and that late funding without initiating a denial of refunding or termination proceeding is a violation of the Head Start Act. HELP Br. at 119, citing North Shore Community Action Programs, Inc. v. Shalala, Civ. Action No. 93-1834 (D.D.C. October 10, 1993). Moreover, HELP argued, ACF should have followed its policy of reducing funding prospectively in the case of underenrollment. HELP Br. at 118, n.126.

With regard to selection criteria, HELP asserted that it had such criteria, and that ACF agreed that the only issue was with regard to whether the criteria were implemented. HELP argued that the testimony indicated that HELP did implement a process for intake of migrants and review of their eligibility. HELP Br. at 102, citing Tr. II at 804, 818-819. HELP argued that the eligibility criteria for the Migrant Head Start program were ambiguous, that the Chief of the Migrant Head Start Branch did not fully understand them, and that HELP's eligibility determinations fell within a reasonable interpretation of those mbiguous criteria.

1. Recruitment System and Criteria

We agree with HELP that it had a recruitment system, and that that system ranked children according to certain criteria. The system for recruiting children is well established in the record, where there is a recruitment plan and copies of fliers, posters, and public service announcements used for recruitment. AAF (Social Services, Tabs 1, 2) at 588-595, 598-599. There are also lists of media contacts and an extensive list of locations where posters were displayed for the 1994 program year. Id. , (Tabs 2, 5, 6) at 596-597, 610-611, 613-624. Ms. Morales testified to the extensive efforts which HELP makes to recruit children, including visiting the fields where migrant families work, leafletting vehicles at migrant worksites, visiting houses and barracks where migrant families have previously lived, and looking for signs of migrant families (such as out-of-state license plates and agricultural tools in front yards). She stated that if the program was not fully enrolled, HELP would constantly send recruitment teams out to see if posters were still up and to see if public service announcements could be run again. Tr. II at 765-766. We find this recruitment system to be quite extensive, and that it more than fulfills the requirement that a grantee have a system for the recruitment of children.³⁸

Moreover, HELP has a system for prioritizing children for enrollment which is also contained in the record. AAF (Social Services, Tab 4) at 608. The system consists of assigning points based on a family's income and whether the child to be enrolled has disabilities. Thus, we also find that HELP met the basic requirement that it have a system in place to rank children for enrollment according to set criteria.

2. Waiting Lists

HELP conceded that it had no waiting lists, but provided testimony that it did not have any need for a waiting list because the program was underenrolled in 1994 at the time of the on-site visit. Tr. II at 917. ACF's Migrant Programs Branch Chief agreed that an underenrolled program would not have a waiting list. Tr. II at 403. Thus, the parties appear to agree that the real issues relate to the number of enrolled children in the program and whether the enrollment numbers were inflated by the enrollment of ineligible families.

3. Enrollment and Late Funding

There is no doubt that HELP's Migrant Head Start program was underenrolled throughout the relevant time period. While HELP was funded to serve 404 migrant children, its enrollment had dropped to an all-time low of 200+ by 1994.³⁹ HELP attributed the underenrollment in 1994 primarily to two factors: 1) there were fewer migrant families migrating into New Mexico that year due to an extended heatwave which reduced the volume of crops to be harvested; and 2) HELP's migrant program did not receive its approval for funding until July 13, 1994 even though its program year was to begin on April 1, 1994; thus, its centers were unable to open until July and many of the migrant families who passed through the area early that summer were not able to be enrolled in the program. HELP Br. at 118-119.

There was conflicting testimony in the record as to how funded enrollment must be calculated. ACF's Migrant Programs Branch Chief, Mr. Fuentes, initially stated that a program would meet full enrollment if it served the total number of children it was funded to serve over the course of the migrant season. Tr. II at 378. Consistent with that testimony, Mr. Fuentes later testified that funded enrollment is "the number of children that move through sub-slots" over the course of a program year and "the number of warm toasty bodies that [the grantee] touch[es] during the year for any length of time." Tr. II at 479-480. However, at another point in his testimony, Mr. Fuentes stated that a Migrant Head Start program would have to meet its full funded enrollment level on a particular day (i.e., at some point in its peak season) in order to comply with the requirement that a grantee maintain its funded enrollment levels. Tr. II at 379-380, citing 45 C.F.R. § 1305.7. ACF argued that HELP's facilities were not licensed to accommodate 404 children at one time.⁴⁰ ACF argued that, regardless of how the regulation is interpreted, HELP still fell seriously short of its funded enrollment. Oral Argument at 41. However, Mr. Fuentes conceded that it was "an understood ground rule" of the Migrant Programs Branch to give migrant grantees more latitude in meeting funded enrollment than Regional Head Start programs, and that the "vast majority" of Migrant programs have trouble meeting funded enrollment levels. Tr. II at 380-381, 383.

Mr. Reyes stated that he understood that ACF would want a Migrant Head Start grantee to reach its funded capacity at some point during its peak season, but that that wasn't always possible because of a number of factors unique to migrant programs. Tr. II at 1425. HELP argued in favor of interpreting funded enrollment to allow a program to serve the total number of children over the course of the season rather than at one particular point in time.

There was testimony in the record that there was a heatwave in New Mexico during the summer of 1994 and that that heatwave may have had a direct impact on the number of families migrating into New Mexico. Tr. II at 1340, 1359. There was also testimony that many families from Texas who normally migrated into the area did not come during 1994, resulting in fewer migrant children available to be enrolled. Tr. II at 273. Ms. Morales testified that she believed that there were overall fewer families migrating into New Mexico by 1994. Tr. II at 917. There was conflicting testimony about whether there were generally fewer migrant families in the country than previously: Mr. Fuentes stated that he did not believe that the migrant population had decreased over the past decade, but conceded that "it depends on who you talk to." Tr. II at 381-382. A report issued by the Office of the Inspector General, which was based on interviews with Migrant Head Start grantees who represented a total of 28% of migrant families served, expressed concern that there might be fewer families generally who meet the definition of migrant because of the changing nature of migrant work. AAF (Miscellaneous, Tab 1) at 1424.

HELP also blamed the 1994 underenrollment in large part on late funding approval (of 3-1/2 months) from ACF. HELP did not receive its funding for 1994 until July 13 even though HELP's Migrant program centers usually begin operating on approximately May 15 of each year and its program year begins on April 1. AAF (Administration, Tab 3) at 1021. Likewise, in 1993, HELP did not receive its funding approval until July 8. The funding was also late in 1992 and 1991. HELP provided testimony at the hearing that many Migrant Head Start programs are not funded on time, which led HELP and two other migrant programs to complain to ACF about the management of the Migrant Programs Branch.⁴¹

The instances of late funding are not disputed by ACF. However, ACF asserted that the funding was late because HELP did not submit an approvable application for refunding, which ACF needed in order to fund the program.⁴² ACF Br. at 175. According to ACF, the 1994 application was deficient because it did not have Policy Council approval, lacked authorized signatures, and had illegible pages and inexplicable changes. ACF also argued that HELP received its funding at approximately the same time every year (albeit well after the start of its program year) and that the delays did not result in the loss of any funds; thus, it should not have had any impact on enrollment. ACF Br. at 177. According to ACF, HELP never informed ACF that it was having to curtail activities because it had not yet received funding, and HELP stated when asked by ACF during the funding process that it was running its program as usual.⁴³ Id. Moreover, ACF alleged, HELP should have had excess funds because of its substantial underenrollment. Oral Argument Tr. at 83. ACF conceded that it could have issued the funding on April 1 subject to "special conditions." Tr. II at 190-191.

There is very little evidence in the record which would firmly establish whose "fault" it was that HELP was not being funded on time. There is very little documentation which would indicate which party, if either, was making a good faith effort to resolve the matter. However, there is sufficient evidence in the record suggesting that ACF's Migrant Programs branch often did not fund programs on time and that communication with the branch was difficult. AAF (Miscellaneous, Tab 1) at 1425-1426; Tr. II at 492. Mr. Fuentes conceded that if late funding made it impossible for a grantee to comply with certain program regulations, the late funding would be a factor to consider in determining whether the grantee had an acceptable excuse for failure to meet the regulatory requirements. Tr. II at 489.

The fact of the late funding is undisputed, and we are convinced that the late funding had an adverse effect on HELP's ability to enroll sufficient numbers of migrant children. Of course, given the probable decrease in the number of migrant families in New Mexico, it is possible that HELP would not have been able to reach full funded enrollment anyway (although we note that late funding for HELP began in 1991, which was the first year HELP did not meet its full enrollment.) The real issue is whether HELP was making its best efforts to recruit and enroll eligible children and whether it was a good steward of the federal funds to which it was entrusted. HELP cannot enroll migrant children who simply are not there. It is not reasonable to hold HELP in violation of its grant award because it could not accurately predict how many eligible children would move into the area in a given season or because it could not predict when it would receive its funding from ACF. ACF was in no better position to accurately predict the number of children HELP would be able to serve, and it kept funding HELP for 404 children each year even when HELP did not enroll that many. We find that HELP's well-documented recruitment efforts were more than reasonable under the circumstances.

We do not agree with ACF that HELP's late funding should have had no impact on HELP's ability to serve children. The fact that HELP was able to keep its program running at all without its grant award is a testament to the resourcefulness of HELP and does not diminish the difficulty of the situation. The fact that HELP chose not to discuss in depth with ACF its means of continuing its program is not material. Moreover, we are inclined to believe that the late funding could not have been wholly HELP's fault; the record suggests that Mr. Ortega may have mortgaged his home to keep the program running, a step which a reasonably prudent person would not take unless he had exhausted all simpler and less risky means. Tr. II at 394.

Finally, ACF argued that HELP should have had unobligated funds at the end of each fiscal year because it served significantly fewer children than it was funded for. ACF claimed that HELP did not have unobligated funds but in fact overspent its budget. The financial reports for 1993 and 1994, which we find to be credible, show unobligated funds of $3,322 and $188,132, respectively. AAF (HELP, Inc., 5/22/95 submission, Tab F) at 3391; HELP submission of August 14, 1996. ACF has not produced any evidence showing us that HELP misappropriated, misspent, or otherwise wasted the federal dollars which it did spend during these years (other than the funds for the Deming Rainbow Center, for which we have affirmed a disallowance elsewhere in this decision).⁴⁴ Moreover, as noted by ACF in Item 2 of the disallowance, it is a violation of applicable cost principles for HELP to spend prior year's funds for current year expenditures without ACF approval.

4. Eligibility

ACF alleged that HELP's enrollment figures were overstated because HELP enrolled ineligible children. ACF limits eligibility for Migrant Head Start to families --

with children under the age of compulsory school attendance who change their residence by moving from one geographic location to another, either intrastate or interstate, within the past 12 months, for the purpose of engaging in agricultural work that involves the production and harvesting of tree and field crops and whose family income comes primarily from this activity.

45 C.F.R. § 1305.2(l). Mr. Fuentes testified that it was the Migrant Branch's position that in order for children to be eligible for full-day Migrant Head Start services, both parents had to be working in agriculture. He said that this policy was discussed at meetings with Migrant Head Start Directors and that it was the understanding of most migrant grantees. However, he stated that there was no opinion from HHS's Office of General Counsel confirming that interpretation and that he would have to search his office for documentation of that interpretation. Tr. II at 231-232. The Board has never been provided with such documentation.

HELP argued its position that a child was eligible for services if 1) more than 50% of his or her family's income came from agriculture (regardless of whether one or both parents worked in agriculture), and 2) the family had moved within the past 12 months for the purpose of working in agriculture. see , generally, HELP Br. at 102-104. HELP said that this position was based on a reasonable interpretation of the regulation and that it had no notice of any alternative interpretation. We agree with HELP that it reasonably relied on this interpretation.

ACF pointed out one instance in the record where it appeared that HELP had enrolled the child of a family that did not migrate and another instance where it appeared that HELP had enrolled a child whose family income came primarily from non-agriculture. see AAF (Social Services, 5/8/95 Filing) at 2487-2489, 2503-2505. However, Ms. Morales testified as to these two families at the hearing. With regard to the first family, Ms. Morales testified that the error was made by an intern and that, while the family was enrolled, the child was subsequently dropped when Ms. Morales reviewed the application. Tr. II at 960. With regard to the second family, Ms. Morales stated that a closer look at the family's employment revealed that the work from which the greater portion of the income derived was, in fact, related to agriculture. Tr. II at 949. Ms. Morales also emphasized that HELP requires documentation of employment of the families of all migrant children enrolled in its program. Tr. II at 983, 986.

5. Conclusion

For the above reasons, we reverse ACF's findings with regard to OSPRI Items 119(E) and (H) and Item 174.

H. Health Component

1. OSPRI Item 58

The Head Start regulations require that where funding is provided by non-Head Start sources there be written documentation that such funds are used to the maximum extent feasible. 45 C.F.R. § 1304.3-4(a)(1); OSPRI Item 58 (1994). In 1994, the on-site reviewers were unable to determine the source of payment for the children's medical care (with the exception of some Medicaid coupons) or to verify that non-Head Start funds were used to pay for medical care before Head Start funds were used. RAF Tab 22, at 440. In 1991, the reviewers found that there was no evidence or documentation showing that sources other than Head Start funds were being used to provide health care to the children, except for one brief reference in a child's file to a dental examination paid for by Medicaid. There was no documentation showing how a $10,000 medical grant from Johnson and Johnson Company was used. RAF Tab 10, at 35.

ACF stated that while it did find some limited evidence of the use of non-Head Start sources to pay for health care, such documentation was inadequate and inconsistent. ACF argued that there should be some sort of documentation if free services were provided in the community, and that the contracts with local health clinics to provide services did not constitute documentation of payment from non-Head Start sources. ACF Br. at 136. In fact, according to ACF, while the contracts did provide for reduced fees for services provided to Head Start children, the provider contracts contemplated that bills would be sent to Head Start (rather than to Medicaid first, as HELP alleged.) ACF Br. at 139. ACF argued that there was no merit to the implication on the part of HELP that there was no documentation because there were no other sources of funding for medical care in that the record established that Medicaid was available in at least some instances. ACF Br. at 137. ACF also argued that, contrary to what HELP implied, HELP never introduced any evidence showing that the children could not have yet been given medical services at the time of the on-site visit because they had just arrived in the program or left a short time after enrollment. Id. In response, HELP pointed to testimony in the record of its Health Coordinator indicating that HELP used other sources of payment to the extent possible.⁴⁵ HELP Br. at 105.

We find that HELP did make some efforts to comply with the requirement that a grantee use other sources of funding for health care to the extent feasible, but that it did not fully meet the requirement outlined in this OSPRI item. HELP's Health Coordinator testified that when children are enrolled in the Migrant Head Start program, they are asked if they are on Medicaid or if they have any other funding sources to pay for health care. If they state they are on Medicaid, HELP obtains a copy of their Medicaid card and places it in the child's file. If they are not on Medicaid, they are referred to the Medicaid office. Tr. II at 540-541. We found this testimony to be credible, and, moreover, the record contains copies of some bills which were submitted to Medicaid by La Clinica de Familia for services provided to nine children enrolled in HELP's Migrant program. AAF (Health, Tab 5) at 535-543.⁴⁶

However, we have difficulty reconciling HELP's Health Coordinator's testimony that the providers were required to bill Medicaid first before billing HELP with the face of the contracts between HELP and the two primary provider clinics which served HELP's children. Each of those contracts provided that --

[the provider] agrees to bill HELP'S CHILDREN'S DIVISION within ten (10) working days of the date services are rendered. [The provider] will submit a statement of charges for each child seen. HELP CHILDREN'S DIVISION agrees to pay for the above charges for services within [30 or 60] days of receipt of billing.

AAF (Health, Tab 3) at 513 and 515. Neither contract specifically requires initially billing Medicaid or First Health. On the other hand, we know that such billing was occurring in at least some instances because some Medicaid bills are in the record, as acknowledged by ACF. Perhaps these were the only children who qualified for Medicaid; however, it would have been helpful to have had some documentation of those facts. Moreover, it would have been helpful to have clauses in the contracts with the providers requiring that Medicaid be billed first, since presumably HELP would not have the authority to seek payment from Medicaid as it was neither the provider nor the recipient of the health care.

Thus, what we are left with is the assumption that either HELP had an informal agreement with the providers to bill Medicaid first, or the providers did so on an individual (and perhaps inconsistent) basis. In either case, this would not fulfill the requirement that HELP document that it was using other sources of payment for health care first.

For the above reasons, we uphold ACF's finding that HELP did not meet the requirements of OSPRI Item 58.

2. OSPRI Item 70

Head Start regulations provide that employed program staff must have initial health examinations and periodic check-ups as follows:

The plan shall provide, also, in accordance with local and state health regulations that employed program staff have initial health examinations, periodic check-ups, and are found to be free from communicable disease.

45 C.F.R. § 1304.3-3(d); OSPRI Item 70 (1994).

The 1994 on-site reviewer found no evidence of initial examinations or periodic check-ups in the personnel files. RAF Tab 22, at 446. ACF argued that the standard requires the examinations and check-ups in accordance with federal law even if they are not required by state and local law, and that to read this protective provision any other way would unduly weaken it by allowing programs to not perform the examinations. ACF Br. at 143. ACF argued that, although its Region VI office has taken a different interpretation of this standard, the standard should be interpreted in a manner consistent with the view of the central office of ACF, which was communicated to HELP in the 1991 OSPRI findings. ACF Br. at 143-144. Moreover, ACF argued, HELP agreed to conduct the examinations following the 1991 OSPRI and was obligated to do so if it continued to accept Head Start funds. ACF Br. at 145.

HELP argued in response that the regulation is worded in such a way that grantees are directed to follow their state and local laws regarding staff health examinations. Given that there were no state or local requirements for these examinations in New Mexico or in the localities where HELP's centers are located, HELP did not require them. HELP stated that ACF's Region VI office has taken the position that health examinations and check-ups are not required unless required by state or local law, and that HELP, which also runs a Regional Head Start program governed by the Region VI ACF office, reasonably took the position that the health examinations were not required. Moreover, HELP argued, ACF approved HELP's corrective action plan following the 1991 OSPRI, which stated that health screenings would be performed in accordance with state law. HELP introduced a letter from the state indicating that under state law, employees in child care facilities are required to have tuberculosis screenings but not health examinations. AAF (Miscellaneous, 5/8/95 Filing) at 2813-2815.

While it is true that the federal government can impose restrictions more stringent than those of a state in connection with its provision of funding for Head Start, the federal government must be clear that that is its intent. Here it was not at all clear from the wording of the regulation that imposing a federal requirement for annual staff health examinations where there were otherwise no state or local requirements to that effect was the intent of the regulation.

It is undisputed from the evidence in this case that there are at least two conflicting interpretations of the regulation even within ACF. Tr. II at 369. ACF's central office, which oversees Migrant Head Start programs, has taken the position that a program is required to obtain annual staff health exams even in the absence of a state or local regulation requiring them, but must follow state and local requirements to the extent they exist. Tr. II at 63. ACF's Region VI office, which oversees Regional Head Start programs in Texas, New Mexico and several other states, has taken the position that such exams are only required where a state or local provision requires them. HELP Br. at 107, n.111. We find it reasonable that HELP, which runs two Head Start programs, one governed by the central office and one by the Region VI office, relied on the interpretation of the Region VI office where ACF has offered no evidence that there was ever any specific intent or policy reason to treat the Migrant and Regional programs differently on this matter. Moreover, HELP's Health Coordinator testified that he requested clarification as to how to interpret the regulation from the Academy for Educational Development, a Migrant Head Start task force, and the person he spoke with there was "just as stumped as we were." Tr. II at 538.

It is clear from the record that the state of New Mexico does not require annual health examinations for child care workers. ACF has not argued, let alone proven, that staff health examinations are required by local ordinances in any of the communities where HELP's Migrant Head Start centers are located. HELP's Health Coordinator testified that once HELP became aware of the central office's interpretation of the federal regulation following its receipt of the 1994 OSPRI, HELP began requiring annual health examinations of its staff. Tr. II at 536-537. Although this change was made after the relevant time period here, we find it indicative of HELP's good faith attempt to comply with this requirement.

ACF argued that it was pointed out to HELP in the 1991 OSPRI that HELP was required to obtain annual staff health examinations, and that HELP agreed to do so. However, the 1991 OSPRI indicated only that HELP was out of compliance with the statement that "[e]mployed program staff must have initial health examinations and periodic check-ups" and HELP's plan of correction in response to the 1991 OSPRI states only that HELP agreed to follow state law. 1991 OSPRI, Item 66; RAF Tab 58 at 1141. This is consistent with a reasonable interpretation of the regulation, which the OSPRI language is intended to implement. ACF accepted HELP's plan of correction, and HELP then followed state law. HELP attempted to get further clarification from the Academy for Educational Development, a Migrant task force, but was unable to get a definitive answer. While ACF argued that HELP's further acceptance of the Migrant Head Start grant award obligated HELP to begin doing annual staff examinations, we do not agree that it was clear to HELP that that was required of it. ACF conceded that there was no specific line-item in HELP's grant award which would signal that funds were being given to HELP specifically for the purpose of staff health examinations. Oral Argument Tr. at 150.

For the above reasons, we reverse ACF's finding that HELP did not comply with OSPRI Item 70.

3. OSPRI Item 71

Staff and volunteers must have tuberculosis (TB) screenings in accordance with state and local regulations. 42 C.F.R. § 1304.3-3(d); OSPRI Item 71 (1994). According to HELP, New Mexico state regulations require that volunteers who work with children more than eight hours of any given week must be found to be free of TB. HELP Br. at 109, citing Tr. II at 528, 530. In 1994, ACF found no evidence of TB screenings of volunteers. RAF Tab 22, at 446. ACF argued that, while HELP implied that the on-site reviewers simply did not find the documentation, HELP has never produced sufficient documentation even though it has had an extensive opportunity to do so. ACF Br. at 147-148.

HELP conceded that it was not in compliance with this standard at the time of the 1991 OSPRI; however, HELP asserted that it was in compliance at the time of the 1994 on-site visit. HELP Br. at 109, n.114. HELP pointed in the record to TB screenings of ten volunteers taken during 1994 prior to the on-site visit, and stated that it generally has only about 30 volunteers per year. HELP Br. at 110.

We find that ACF has failed to establish that HELP violated the standard requiring volunteers to obtain TB tests in accordance with state or local law. In the record are the results of TB tests performed prior to the 1994 OSPRI on ten persons, who HELP asserts were Migrant program volunteers. AAF (Health, Tab 8) at 578-587; Tr. II at 532-533. New Mexico law requires TB tests only of those employees or volunteers who work directly with children in facilities eight or more hours per week. AAF (Miscellaneous, 5/8/95 Filing) at 2815. ACF has not proven that during the 1994 on-site visit, at which time HELP's centers had only been open a few weeks, HELP had more than ten volunteers each working with children in excess of eight hours per week.

For the above reasons, we reverse ACF's findings with regard to OSPRI Item 71.

I. Safety-Related Incidents

ACF also alleged as grounds for terminating HELP's Migrant program two alleged safety violations which occurred during the on-site visit. These are not covered by specific OSPRI items. ACF alleged that these safety violations constitute violations of the Head Start Act, and therefore provide a basis for termination under 45 C.F.R. § 1303.14(b)(7). We discuss the applicable sections of the Head Start Act below.

1. Pesticide Spraying Incident

During the time of the 1994 on-site review, one of the centers was sprayed with pesticides by a professional exterminator at a time when the on-site team and children were present at the center. ACF Br. at 152. ACF presented evidence that the on-site team members experienced symptoms such as burning noses and throats and watering eyes, and that they observed damp spots on the carpet in one or more classrooms where the exterminator had sprayed and where children were later playing. ACF Br. at 152, 156. ACF argued that HELP did not produce evidence that the chemicals were safe and that, in fact, the exterminator allegedly stated to the Chief of the Migrant Programs Branch of ACF, Frank Fuentes, that he normally would not spray with children present. ACF Br. at 154. ACF argued that the documents introduced by HELP, including a handwritten note and a letter from the exterminator stating that persons in the center during the spraying were not in any danger, were not reliable because their authors were not subject to cross-examination. ACF Br. at 154-155. Finally, ACF argued that an alleged phone call from Mr. Fuentes to Mr. Reyes to discuss the situation at the time it occurred did take place despite the testimony to the contrary of HELP's Health Coordinator.⁴⁷ ACF Br. at 159, 161.

The Head Start Act provides that Head Start grantees "will provide such comprehensive health . . . and other services as will aid the children to attain their full potential . . . ." 42 U.S.C. § 9833(a)(1). ACF alleged that subjecting children to this health hazard did not comport with the statutory directive. ACF Submission of April 17, 1995, at 2.

In response, HELP conceded that the spraying occurred when the center was open but argued that ACF had not established that the spraying was dangerous. HELP Br. at 111. HELP stated that the testimony showed that pesticide spraying did not occur when children were present at the center except for this one occasion. Id. HELP argued that the only person involved in this incident who was an expert in pesticides, the exterminator, told Mr. Fuentes that the spraying was safe, and that ACF's allegation that the situation was highly dangerous was based on hearsay. HELP Br. at 112, citing Tr. II at 316. HELP pointed out that none of the on-site reviewers had more than a minor allergic reaction to the spray and that none of them acted to have the children removed from the building, which they presumably would have done had they sincerely believed the children were in danger. HELP Br. at 112-113.

We find that ACF has not established that the children (or on-site reviewers) were placed in any danger by being present at the center when it was being sprayed by a professional exterminator. ACF has not presented any reliable evidence that the chemicals were dangerous. ACF placed in the record some handwritten notes taken during a telephone call to a poison control center after the 1994 on-site review. RAF Tab 32, at 894-896. However, those notes are unreliable for the same reason ACF argued that HELP's letters from its exterminator are unreliable: they are based on hearsay, they do not establish the qualifications of the person making the assertions, and the person was not available for cross-examination.

While ACF provided testimony that several of its on-site reviewers had reactions to the spraying, such as burning eyes and coughing, there is no evidence that the children were observed to have these reactions. Tr. I at 592-593. In fact, the evidence showed that the exterminator sprayed the building interior while the children were outside, and sprayed the playground while the children were inside, thus minimizing any contact the children had with the pesticide chemicals. Tr. I at 497, 581-585. While ACF's witnesses stated that they saw at least one pool of fluid on a classroom floor following the spraying and that this pool was near where at least one child was playing, there is no evidence that this pool consisted of pesticide nor is there any reliable evidence that the child was in danger. Tr. I at 588, 685-686.

We believe that if ACF had sincerely believed the children to be in danger, ACF's on-site reviewers would have acted to have the appropriate HELP personnel order that the children be removed immediately from the center.⁴⁸ In fact, during his phone call to Mr. Reyes at the time of the incident, there is no evidence that Mr. Fuentes suggested that the children ought to be removed from the facility immediately. The fact that the on-site reviewers did not take any actions to have the children removed causes us to believe that the alleged danger was greatly exaggerated. Cf. Tr. I at 709 (on-site reviewer present during the incident stated that she would have acted to remove the children had she believed the children to be in danger). ACF stated that this incident would not have been an issue had HELP acknowledged the seriousness of the situation and taken actions to assure that this was a one-time occurrence. However, ACF has not disputed HELP's assertion that the spraying ordinarily did not occur when the center was open, and Mr. Fuentes acknowledged that Mr. Reyes stated that the incident should not have happened. ACF Br. at 150-151; Tr. II at 297. Thus, we find that HELP did not exhibit the indifference towards children's health which ACF alleges, and we find that this incident did not constitute a health hazard that violated the applicable Head Start Act provision. Consequently, this incident does not provide a basis for termination of HELP's Migrant Head Start program.

2. Alleged Choking Incident

According to the findings of the 1994 on-site review team, some members of the team allegedly observed a baby being fed inappropriately-sized meat, causing it to cough and thrash about. ACF asserted that HELP's staff did not properly respond to the situation. ACF Br. at 165. According to ACF, the staff member feeding the child had trouble removing the child from a strapped-in safety seat but eventually did, at which time she took the child into another room and laid him face down on a changing table. ACF Br. at 166, 167. Shortly thereafter the child vomited the food and stopped choking. One of ACF's witnesses estimated the child's age to be about 7-10 months; another ACF witness identified the child to be about 18 months. Tr. I at 555; Tr. II at 138. ACF alleged that it was improper for the child to be fed a large chunk of meat, to be placed face down on a table while choking, and to be cared for by staff untrained in child care (i.e., a bus driver and bus aide). ACF Br. at 167, 168.

The Head Start Act requires grantees to "assure that only persons capable of discharging their duties with competence and integrity are employed . . . ." 42 U.S.C. § 9839(a)(2). ACF alleged that HELP failed to meet this requirement by having untrained staff caring for children.

HELP responded that the child, who was seven months old at the time, had a history of vomiting but was not choking nor was he in any danger during the incident. HELP Br. at 114. HELP stated that its position that the child was not in danger was buttressed by the fact that ACF's on-site reviewers who saw the child allegedly choking did not intervene. HELP Br. at 115-116. HELP questioned whether ACF's witnesses to the incident, who placed the child at significantly different ages, were credible and whether they had, in fact, observed the same incident. HELP Br. at 115, 122. HELP also provided documents showing that the staff involved were experienced in child care and had certificates in first aid and cardiopulmonary resuscitation (CPR).

Again, we find that ACF has not shown that HELP's response with regard to this alleged choking incident was improper or should provide a basis for terminating HELP's program. ACF offered evidence that HELP's staff had trouble removing the child from a feeding table because he was strapped into the table. Tr. I at 492-493. ACF offered no evidence that the child was strapped into the seat in an inappropriate manner or that the child should not have been strapped in at all. We find it perfectly reasonable that an employee would have difficulty removing a coughing child from a seatbelt when needing to do so quickly. Moreover, ACF offered no expert testimony that it was inappropriate to place the child face down on the feeding table; the only testimony was that of the health component reviewer, who stated that placing a choking child on his side "is the best position." Tr. I at 559. While Ms. Pasley testified that the size of the meat was inappropriate for the age of the child, she and Mr. Fuentes placed the child at widely different ages. Tr. I at 555; Tr. II at 256-257. Moreover, HELP provided unrefuted documentation and testimony that the two principal staff members involved in the incident, Rosario Diaz and Luz Rubelcaba, had had training in child care, first aid, and CPR. AAF (HELP, Inc., Tab B) at 3306-3312 (Diaz), 3326-3333 (Rubelcaba); Tr.II at 1221-1223 (Diaz), 1440 (Rubelcaba).

Finally, ACF attacked the credibility of Luz Rubelcaba, arguing that she was not the same person who was observed attending to the choking child. ACF believed the person attending to the child to be one Luz Deramos. ACF Br. at 170. ACF argued that these were two different persons based on the fact that ACF's on-site reviewers did not recognize the witness as being the same person they saw attending to the coughing child, and the witness apparently did not recognize the members of the on-site review team at the hearing. Id. However, evidence in the record shows conclusively that Luz Rubelcaba, prior to marriage, was Luz Deramos and that the witness was, therefore, the same person attending to the coughing child during the on-site visit. see App. Hearing Ex. 10 at 3 (unnumbered) (driver's license of Luz E. Deramos and Social Security card of Luz E. Rubelcaba have same Social Security number).

For the reasons stated above, we find that what has been referred to throughout these proceedings as the alleged choking incident does not show that HELP failed to have qualified staff caring for the children in its program, as required by the Head Start Act. Thus, this incident does not provide a basis for terminating HELP's migrant Head Start program.⁴⁹

Materiality

The Department-wide grants administration regulations in Part 74 apply to all HHS grants to the extent that they are not inconsistent with federal statutes, regulations, or other terms of a particular grant. 45 C.F.R. § 74.4(a). The provisions for termination of a grant in Part 74 state, "The granting agency may terminate any grant in whole, or in part, at any time before the date of expiration, whenever it determines that the grantee has materially failed to comply with the terms of the grant." 45 C.F.R. § 74.113(a) (1993).⁵⁰ Thus, this concept of "materiality" is included in 45 C.F.R. Part 1303, which is specifically applicable to termination of Head Start grants, unless it is inconsistent with the grant terms. Given the general statutory preference for continuing funding to existing grantees (42 U.S.C. § 9836a(c)(1)) and, where appropriate, permitting a grantee the opportunity to correct deficiencies (42 U.S.C. § 9836a(d)(1)(B)), it is consistent to read materiality into 45 C.F.R. § 1303.14(b), which lists the bases for termination or denial of refunding actions.⁵¹ Indeed, Mr. Fuentes testified at the hearing that the overwhelming majority of programs he reviewed during his five-year tenure as Chief of the Migrant Programs Branch were not in compliance with 100% of the OSPRI items. Tr. II at 200.

The Board has held that ACF may properly deny refunding based on a single, material failure to meet the performance standards for operation of a Head Start program. Lonoke Economic Development Agency, DAB No. 1568 (1996). As in that case, in order to support termination of a Head Start grant, ACF must show that any violation of performance, grant administration, enrollment or eligibility standards that it establishes by a preponderance of the evidence constitutes, either alone or in combination with other established violations, a material failure to comply with the terms of the grant.

We note that in connection with recent amendments of the Head Start Act, ACF has proposed incorporation of the materiality standard through adoption of a distinction between "non-compliance" and "deficiencies:"

[A] new distinction is made between "non-compliance" (i.e., a single instance of a grantee's failure to conform to some specific requirement) and "deficiencies" which involve a grantee displaying such serious problems in one or more areas of its program that the grantee's ability to provide quality Head Start services is being compromised.

61 Fed. Reg. 17754, 17774 (April 22, 1996).

In this case, ACF initially took the position that it decided to terminate HELP's Migrant program based on "the cumulative findings in both the programmatic and fiscal management areas, and the seriousness of the issues and all other information available to [it]." Termination Letter at 6 (emphasis added). However, in its post-hearing brief ACF contended that "if the Board sustains any one of these grounds, especially any that constitute repeat violations from 1991, the Board must sustain the termination as these constitute material violations." ACF Br. at 45, citing Springfield Action Commission, Inc., DAB No. 1447 at 8 (1995). It also argued that --

. . . any of the stated grounds is sufficient to uphold the termination of the grant. This is true as a matter of law. Thus, there is nothing in the regulations that says, for example, that a grantee may consistently and continually violate Standard 16 and remain in the program. There is nothing in the regulations or the statute which says that a grantee has to violate more than one standard in order to have its grant terminated. Indeed, such a rule would undermine the program.

Id. at 157. ACF cited Community Action of Laramie County, Inc. v. Bowen, 866 F.2d 347 (10th Cir. 1989), as support for its assertion that a single violation of a program standard could support termination.

Springfield involved a grantee that failed to contest even one of 42 repeat deficiencies in seven performance standard components. Laramie County involved, as did Lonoke, a grantee that failed to obtain Policy Council approval for its grant application, a fundamental failure to comply with parental involvement standards. Neither of those situations is applicable here, and ACF's post-hearing submissions did not address the materiality of the two particular OSPRI items that we have found out of compliance. We therefore reviewed the underlying regulations and the testimony of the 1994 on-site reviewers, which ACF frequently cited in other instances as instructive on the importance of various program requirements, in light of ACF's most recent policy announcement on distinguishing between serious and less serious incidences of non-compliance. see 61 Fed. Reg. 17754, 17774 (April 22, 1996).

With respect to OSPRI Item 196, which reviews a grantee's personnel files, we found that ACF provided no testimony or documentation whatsoever on what impact the particular, substantiated failings of this grantee would have on programmatic performance. The regulation underlying this item is 45 C.F.R. § 1301.31, which generally requires a grantee to have personnel policies in place governing the recruitment and selection of personnel. These policies must be approved by the Policy Council (we have found above that HELP's were) and must include a requirement that, prior to employment, an employee must sign a declaration concerning his or her criminal record, the employee must be interviewed, and a check of personal and employment references furnished by the employee must be conducted.⁵² The OSPRI item is apparently designed to review whether a grantee has, in an organized records system, documentation showing that its personnel policies have been followed.

In the present case, we have found that HELP failed to produce any personnel files that contained all of the documents listed in Item 196. This was not the same non-compliance found in 1991. ACF's witnesses did not testify that HELP had no personnel files during the 1994 review; rather, the testimony was that many staff members' files were missing one or more of the documents listed in Item 196. Tr. II at 128. While ACF established noncompliance here, ACF did not establish the extent of the non-compliance. Clearly some performance evaluations and other documents were missing from some files. The record before us, however, shows that HELP had the required personnel policies and had documents in the personnel files for some personnel; this shows that HELP was applying each of these policies at least part of the time. Moreover, the record shows that HELP's Policy Council reviewed and approved personnel policies that met the regulatory requirements discussed above, that at least some applicants for positions were interviewed (since the Policy Council minutes reflect participation or requests for participation of parents in interviews), and that the Policy Council approved applicants presented to them. We can conclude from this that there was at least a method for Policy Council oversight of HELP's compliance with its personnel policies regarding hiring.

Credible testimony by HELP's witnesses indicates that HELP was making a good faith effort to comply, and its failings here may have been mere failure to retain and file required documents. The concern that ACF expressed -- that HELP may have been hiring unqualified personnel -- was based in large part on ACF's findings regarding position descriptions in the disallowance, which we found above were not clearly established and which are not based on a clear regulatory requirement. Since ACF's evaluation of the noncompliance appeared to be so heavily reliant on its position description findings, we cannot rely on that evaluation to find that HELP's failings were material. Contrary to what ACF argued, the evidence here does not show that HELP was "lackadaisical" in its approach to personnel policies. Thus, we conclude that, under the circumstances present in this case, HELP's failure to document fully its compliance does not compromise HELP's ability to provide quality Head Start services or otherwise constitute a material failure to comply with the terms of the grant.

OSPRI Item 58 measures the grantee's compliance with 45 C.F.R. § 1304.3-4(a)(1): "Where funding [for treatment of health problems] is provided by non-Head Start funding sources there must be written documentation that such funds are used to the maximum feasible extent. Head Start funds may be used only when no other source of funding is available." ACF's former Migrant Programs Branch Chief testified that the purpose of this provision was to avoid using Head Start to supplant other resources in the community already available for such purposes. As with the personnel records issue, ACF's reviewers found evidence that HELP had some system for complying with this requirement, but that there was not sufficient documentation to show that HELP took all the steps necessary for full compliance. Specifically, the record showed that HELP's intake form called for a review of whether a prospective enrollee had or could qualify for Medicaid payment for health services, and HELP's Health Coordinator testified that, if a family had a Medicaid card, it was photocopied and placed in the child's file. However, ACF's reviewer found the number of Medicaid cards she would normally expect to find under such a system in sampled files for only one HELP site, which she marked in compliance. In addition, although HELP's Health Coordinator testified that its contracts with local health providers required those providers to bill Medicaid first, he was mistaken, because the contracts actually specified that HELP would be billed. Consequently, although it is clear that HELP was aware of this requirement and took some steps to comply with it, HELP failed to document full compliance.

Although ACF contended in its post-hearing statement that any single deficiency was sufficient to support termination, we have no indication from the record before us that ACF determined in its programmatic judgment that this particular deficiency was as important as, for example, a grantee's failure to obtain Policy Council approval for its refunding application. Moreover, ACF did not explain how this deficiency, either alone or in combination with the other deficiency discussed above, compromises HELP's ability to provide quality Head Start services so as to amount to a material breach of the terms and conditions of HELP's grant.

We do not mean to imply that a Head Start grantee may blatantly disregard any requirement of its grant, regardless of how minor the requirement may appear. In fact, it may be that a grantee's inability or unwillingness to bring itself into compliance with such a requirement could ultimately amount to a material breach of the grant. However, with respect to these two items, it was apparent that HELP strove to meet all program requirements when it understood ACF's interpretation of those requirements.

Consequently, under the circumstance of this case, we are compelled to find that the requirements of 45 C.F.R. § 1303.14(b) for termination of HELP's grant have not been satisfied.

Conclusion

For the reasons stated above, we uphold $58,965 of the disallowance as follows:

• $5,200 for rental of the Deming Rainbow Center; and
• $53,765 for exceeding the administrative cost limit.

We reverse the remaining $581,923 of the disallowance.

Moreover, we conclude that ACF did not provide sufficient evidence to support terminating HELP's Migrant Head Start program under the criteria of 45 C.F.R. § 1303.14(b) and the circumstances of this case.

______________________
Donald F. Garrett

______________________
Norval D. (John) Settle

______________________
M. Terry Johnson
Presiding Board Member

[2] This is in contrast with HELP's funding cycle or "program year" for the Migrant Head Start program, which runs April 1 through March 31. see RAF Tab 30, at 850-855.

[3] In the disallowance letter, ACF also disallowed $1,538 based on HELP's purchase of a Vista I computer system from CompuSoft in Albuquerque during May 1993. ACF disallowed this expenditure on the grounds that no prior approval was given by ACF for this purchase, in violation of OMB Circular A-122, attachment B, section 13.b. Prior to hearings held in this matter, HELP stated that it was not contesting this disallowed expenditure but would be seeking retroactive approval for the purchase from ACF. see Notice Pursuant to 45 C.F.R. § 1303.16(g) and Summary of May 17, 1995 Teleconference, dated May 18 1995, at 7. ACF stated in its brief that HELP had not yet repaid this amount (nor, presumably, received retroactive approval from ACF). ACF Brief at 26-27. Thus, to the extent that this issue has not been resolved by the parties, we uphold this portion of the disallowance as uncontested.

[4] The three buildings at issue were those used for the Deming and Portales centers and for office space in Las Cruces.

[5] ACF conceded that disallowing the full $155,384 was not proper and that, under this provision of OMB A-122, if the Board found the leases to have been the result of less-than-arms-length transactions, HELP would be entitled to rental costs up to an amount that would be allowed had title to the properties been vested in the organization. Oral Argument Tr. at 12-13.

[6] RHI also leased to HELP the office equipment which is at issue in Disallowance Item 4, discussed below. However, there is no discussion in the record of the extent of RHI's office equipment leasing arrangements with HELP and there are no allegations that a less-than-arms-length relationship existed with regard to these expenditures.

[7] Ms. de Baca is the Secretary of HELP's Board of Directors. Tr. II at 641; AAF (HELP, Inc. Tab A) at 3217.

[8] ACF's counsel argued at the oral argument that this lease was extended to the relevant time period by some handwritten notes on the leases themselves. Oral Argument Tr. at 15-16. However, we do not find those handwritten notes in the record. There is one cover page of a 1990-1993 lease for the Deming center; however, it does not contain any handwritten notes, and there are no signatories shown. RAF Tab 30, at 766.

[9] HELP focused on the fact that there was no actual control or influence between the parties. However, the OMB A-122 provision addresses whether one organization is able (i.e., had the capability) to control or influence the other party.

[10] HELP submitted a letter from HUD, dated December 19, 1994, stating that that department did not consider the relationship between HELP and RHI to be less-than-arms-length. AAF (Cost Disallowances, Tab 1) at 1337. While, as ACF argued, the assessment by HUD is not binding on HHS, we use this letter as an indication that HELP and RHI may have reasonably believed that their relationship did not violate the less-than-arms-length transaction provisions of OMB A-122 and that they acted in good faith.

[11] Mr. Ortega testified that the $134,251 is apparently cumulative of an alleged shortfall over both fiscal years 1991-92 and 1992-93. Tr. II at 653-654. However, because ACF has characterized these costs as a 1992-93 overexpenditure, we will refer to them in that manner since the distinction is unimportant.

[12]12. Section A.3.c of OMB A-122, att. A, states that one consideration in determining the reasonableness of a given cost is -- [w]hether the individuals concerned acted with prudence in the circumstances considering their responsibilities to the clients, the public at large, and the government.

[13] In this particular year, HELP argued, factors contributing to underenrollment included late funding and reduced migration into New Mexico due to crop failure. HELP Br. at 21-22.

[14] ACF also stated that this oversight was further evidence that HELP had poor financial management practices, an issue taken up in the termination proceeding discussed below.

[15] ACF's counsel conceded that this section might not apply. ACF Br. at 12-13.

[16] The salary figures quoted throughout this section include expenditures for fringe benefits.

[17] Neither party disputed that this witness served in the role of the Parent Involvement Coordinator. ACF Br. at 19; Tr. II at 894.

[18] The Head Start Improvement Act required that grantees ensure that a teacher with a CDA certificate or the equivalent be assigned to each classroom no later than September 30, 1994. Head Start Improvement Act of 1992, P.L. 102-401 (1992). Although the date was later extended, this provision was applicable during the relevant time period.

[19] HELP also offered into evidence a copy of its 1991 contract for the church. The 1991 contract gave HELP access to the building for less than a five-month period, from May 21, 1991 until October 5, 1991, for a total of $12,000 (made in two payments of $6,000 each). AAF (Cost Disallowances, Tab 8) at 1370. Since this 1991 contract does not cover the relevant time period of the disallowance, we are not relying on it in determining this disallowance item. However, the 1991 lease (written in Spanish) would seem to indicate HELP had once obtained a lease for less than a 12-month period, but not for significantly less total cost than what it was later paying for an annual lease.

[20] At the hearing and in its brief, ACF recalculated this portion of the disallowance when it purportedly accepted HELP's position that the administrative cost limit should be based on 15% of a program's total federal award plus the matching share, not on 15% of its actual expenditure of federal funds plus the matching share. see ACF Br. at 27, n.6. Thus, ACF changed its calculation of the administrative cost limit to 15% x ($1,165,527 + $84,893) rather than 15% x ($1,162,205 + 84,893). At the oral argument, ACF retreated on its position that the administrative cost limit should be based on 15% of the approved federal award rather than actual expenditures, but stated that it would allow the additional $480 because it had previously agreed to do so. Oral Argument Tr. at 248-249. However, we find that, based on the plain language of the regulation, ACF properly revised the calculation of the administrative cost limit using the higher figure of the approved federal award rather than the lower figure of the actual expenditures.

[21] HELP also objected to disallowing any portion of the director's salary for exceeding administrative cost limits since ACF disallowed the salary in full on the basis discussed in item 10 below. HELP Br. at 33. However, since we are reversing ACF's decision to disallow the Head Start Director's salary in item 10, there is no double-counting of this cost item as argued by HELP.

[22] The Board does not have the authority to retroactively approve overexpenditures by a grantee, as requested by HELP. Such request should be made directly to ACF.

[23] In the disallowance letter, ACF had incorrectly totalled the personnel costs to be $80,145. Disallowance Letter at 9.

[24] This section provides that a HHS grantee must obtain prior approval from the awarding agency to replace any persons expressly identified as key project people in the notice of grant award.

[25] The contract entered into with consultant V.D. does not specify the procedure for payment. AAF (Cost Disallowances, Tab 13) at 1403. However, since this consultant submitted an invoice for services provided for the 1993 program year, we assume that she would have followed the same procedure for the 1994 program year.

[26] At the hearing, ACF's witness Mr. McCarron stated simply that --

[t]he grantee requested funds for consultant services to operate a literacy training program for parents of Migrant Head Start children. There's no evidence of any work being done.

Tr. I at 291.

[27] While OSPRI items do not, in themselves, provide statutory or regulatory standards of the program, they interpret the statutory and regulatory requirements of the program. In most instances, the language of the OSPRI item is substantially similar to the language of the statute or regulation which it interprets. In addition, both parties in this case frequently referred to complying or not complying with an OSPRI item. For this reason, in many instances we quote or summarize the language of the OSPRI item rather than the underlying statute or regulation.

[28] In addition, the 1994 OSPRI found that there was a problem with communicating with the parents in their primary language (Spanish) concerning their children's progress and needs. RAF Tab 18, at 130. However, ACF did not pursue this matter in its brief nor did it argue in support of this assertion at the oral argument.

[29] An individualized education plan is a written plan developed by teachers and education specialists, usually with the input of parents, to set out specific goals or tasks to be accomplished by an individual child. IEP's are used most frequently in establishing goals for children with particular disabilities. see , e.g., 42 U.S.C. § 1413(a)(11) (requiring state plans for education of the handicapped to provide for annual evaluations of IEPs).

[30] HELP cited to a recently-published Notice of Proposed Rulemaking for Head Start regulations, which states that --

[a]t a minimum, ongoing assessment procedures include: periodic observations and recordings, as appropriate, of individual children's developmental progress, changes in physical appearance (e.g., signs of injury or illness) and emotional and behavioral patterns. In addition, ongoing assessments must include the periodic use of parental, staff, and mental health consultant observations about each child.

Oral Argument Tr. at 212, citing 61 Fed. Reg. 17754, 17778 (April 26, 1996). While these regulations are neither final nor intended to be retroactively applied, they give us additional guidance on what ACF envisions in requiring ongoing assessments of Head Start children.

[31] We note that HELP requires IEP's more frequently than the Head Start program regulations: Head Start requires them only when a child has been diagnosed with a specific disability, not whenever he or she is having difficulty with a specific task.

[32] HELP's Education Coordinator testified that Notitas de Orgullo were "notes of an accomplishment that the children have done in the classroom" that were sent home to parents, and were part of the observation process. Tr. II at 1137-1138.

[33] Although ACF's Disabilities Component reviewer testified at the hearing in El Paso that she "observed" an older child who was "much larger than the other children in [the infant] room" and who "had some behavior problems," she testified during the hearing in Las Cruces that she did not see the child but only reviewed the child's disability and mental health files. Tr. I at 602; Tr. II at 1627-1628. HELP's staff testified that the child at issue was no longer enrolled in the program at the time of the 1994 on-site visit; thus, it would have been impossible for ACF's reviewer to have observed the child. Tr. II at 1067-1068.

[34] At the oral argument, ACF did not rebut HELP's argument that ACF's on-site reviewer for this component did not interview the Mental Health Coordinator or mental health consultants. see Oral Argument at 180-181.

[35] We are not aware of any firings which occurred or were recommended during the relevant time period.

[36] HELP alleged that ACF's requirement in 1992 that HELP separate its Regional and Migrant Head Start programs, and its failure to provide additional funds for it to do so, is still causing an impact on the Migrant program today and is interfering with its ability to meet program requirements. HELP argued that it was unfair for ACF to use any deficiencies which were the direct result of the separation of the programs as a grounds for the disallowance or the termination. HELP Br. at 123.

[37] ACF conceded that, while the regulation requiring full funded enrollment in Head Start (45 C.F.R. § 1305.7) did not make any exceptions for Migrant programs, it was ACF's policy to be more lenient with Migrant programs. Tr. II at 380-381.

[38] See "Disabilities Component" section above for a discussion of HELP's efforts to recruit children with disabilities.

[39] We note that ACF's finding that there were only 174 children enrolled in HELP's Migrant Head Start program is based on a mathematical error and is possibly misleading. In fact, the on-site reviewers' notes contain figures which, if added correctly, suggest that there were only 164 children who had been enrolled in HELP's program during 1994 as of July 31. see RAF Tab 48, at 984. However, Mr. Reyes testified that there were more than 200 children enrolled in 1994, including those who entered the program in August. Tr. II at 1358.

[40] We do not find this to be significant. As stated earlier in this decision, we find that HELP had an agreement with the Las Cruces public schools to accommodate any overflow, which ACF's reviewer agreed would meet the licensed capacity requirement.

[41] In October 1992, Mr. Reyes and Mr. Ortega, as well as representatives of Campesinos Unidos and Idaho Migrant Head Start programs, complained to Olivia Golden, ACF Commissioner about problems with the Migrant Head Start Branch. Since that time, ACF's Migrant branch has moved to terminate both HELP and Campesinos Unidos (whose termination was upheld by the Board in 1995). See Campesinos Unidos, Inc., DAB No. 1518 (1995). ACF has also written to Idaho Migrant Head Start stating that it has "serious deficiencies" which must be corrected or ACF will have no recourse but to terminate. Tr. II at 468-469.

[42] ACF argued that a delay in refunding while ACF seeks clarification from a grantee is not the same as a denial of refunding (which involves a loss of the right to funds) and therefore does not warrant notice and an opportunity for a hearing, as HELP alleged. see ACF Br. at 176-177; HELP Br. at 119.

[43] Mr. Fuentes testified that ACF was wondering how HELP was operating its program prior to its funding award but that it was not his responsibility to ascertain that information. Tr. II at 186. Mr. Fuentes stated that he recalled Mr. Ortega had mentioned borrowing money to pay the costs of the program, but that he had not been informed that Mr. Ortega had mortgaged his house to secure the loan. Tr. II at 393-394. Mr. Fuentes admitted that interest on such a loan would not be an allowable cost under federal cost principles. Id.

[44] HELP's Health Coordinator stated that HELP had extra expenditures during 1994 due to the heatwave. Tr. II at 1339, 1341.

[45] ACF also disputed HELP's assertion that there were no dentists within 250 miles of the program who would perform surgery on migrant children or accept Medicaid reimbursement. ACF pointed out that El Paso, Texas, a mid-sized city, was within a relatively short drive of Las Cruces, where HELP's Migrant program is administered. ACF Br. at 140. However, at the oral argument, it became clear that HELP was asserting that there was a shortage of pediatric dentists within the vicinity of its Portales center, which is located in a remote part of New Mexico far from its other centers and more than 300 miles from El Paso. Oral Argument Tr. at 260.

[46] The bills state that the payer is "First Health." HELP's Health Coordinator testified that First Health is Medicaid. Tr. II at 544.

[47] At the oral argument, HELP agreed that the alleged discussion by telephone between Mr. Fuentes and Mr. Reyes concerning the pesticide spraying incident did, in fact, take place, despite the testimony of HELP's Health Coordinator, Mr. Masters, implying the contrary. Oral Argument Tr. at 234. Thus, we do not discuss this matter further.

[48] ACF's counsel stated at the oral argument that he would have advised the on-site reviewers that they did not have the authority and should not act to remove the children from the center because of the potential for incurring liability. Oral Argument Tr. at 157-158.

[49] HELP also took issue with allegations which arose in the termination letter and again in the hearings that the Las Cruces Head Start facility was not in an acceptable and safe condition. Because this was not a charge on which ACF was relying as a basis for the termination action, we do not need to resolve it. see Notice Pursuant to 45 C.F.R. § 1303.16(g) and Summary of May 17, 1995 Teleconference, dated May 18, 1995.

[50] This regulation has been amended and redesignated as 45 C.F.R. § 74.62, but continues to require materiality. see 59 Fed. Reg. 43,760 (August 25, 1994).

[51] The Board first considered and ruled on whether the materiality provision is consistent with the termination provision in Rulings on Burden of Proof, Materiality, and Jurisdiction Under 45 C.F.R. Part 1303, Board Docket No. A-95-66 (May 19, 1995). The parties in the HELP proceeding were furnished a copy of that ruling; during the hearing the Presiding Board Member noted that neither party had asked that the Board reconsider or not apply that ruling in this case. Tr.I at 756.

[52] There is nothing in the regulation referenced by this OSPRI item requiring position descriptions or performance evaluations. However, we take judicial notice that § 9839(a) of the Head Start Act requires that "[e]ach such agency shall adopt for itself rules designed to . . . assure that only persons capable of discharging their duties with competence and integrity are employed . . . ." Thus, we find that the inclusion of position descriptions and performance evaluations as part of this OSPRI item's required review of personnel policy provisions is intended to measure a grantee's implementation of this statutory requirement.