Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
International Educational Services, Inc.
Docket No. A-18-46 and A-18-47
Decision No. 3055
DECISION
International Educational Services, Inc. (IES)
Challenging both decisions, IES asserts that the decisions are legally unsupportable because OIG’s audit was flawed and ACF wrongly disallowed costs that are allowable. However, IES has elected not to dispute $22,600 disallowed for consultant fees, personal property tax, charitable donations, and the proceeds from a related-party vehicle sale. Accordingly, on the disallowance determination, the amount remaining in dispute is
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$19,633,161.05, which represents the difference between the $19,655,761.05 disallowed minus the $22,600 for which IES does not seek Board review.
We issue one decision for both appeals consistent with our prior order consolidating the appeals under lead docket number A-18-46. For the reasons and bases set out below, we uphold a total disallowance of $17,673,785.40. This amount accounts for disallowances of $851,756.35 in excess executive compensation, $217,500 in depreciation costs on related-party leases, $8,111,360.35 (of $10,070,736 disallowed) for related-party lease costs, and $8,493,168.70 for the San Benito shelter costs. We also uphold ACF’s decision to withhold a non-competing continuation award.
Authorities
The UC program is authorized by the Homeland Security Act of 2002 (Act), Public Law No. 107-296, 6 U.S.C. § 101 et seq. Section 462(a) of the Act transferred the functions of the (former) Immigration and Naturalization Service with respect to the care, custody, and placement of unaccompanied children in appropriate custody to ORR within ACF. 6 U.S.C. § 279. The UC program provides placement, housing, food, and other services to children under the age of eighteen who have no lawful immigration status in the United States and who have no parent or legal guardian in the United States or no parent or legal guardian in the United States available to provide care and physical custody. Id. § 279(b), (g)(1)-(2) (defining “placement” and “unaccompanied alien child”). Among other things, the Director of ORR is responsible for “coordinating and implementing the care and placement of” unaccompanied children, “identifying . . . qualified individuals, entities, and facilities to house” unaccompanied children, and “overseeing the infrastructure and personnel of facilities in which [the unaccompanied children] reside.” Id. § 279(b)(A), (F), (G).
ORR generally administers the UC program through contracts and cooperative agreements
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agreements, state licensing requirements, the terms of the Flores Settlement Agreement,
The regulation at 45 C.F.R. § 75.371(e) authorizes ACF to withhold further federal awards for a project or program, “as appropriate in the circumstances,” if a non-federal
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entity fails to comply with federal statutes, regulations, or the terms and conditions of a federal award, and ACF determines the noncompliance cannot be remedied by imposing additional conditions. The GPS states that a non-competing continuation award – which could be awarded after the first year – may be withheld for various reasons, including the recipient’s failure to show satisfactory progress in achieving the objectives of the project, and “for whatever reason” that continued funding would not be in the government’s best interests. GPS II-89. The GPS provides that continued federal financial support is “contingent on satisfactory progress, the availability of funds, and the continued best interests of the Federal government.” Id. I-34.
The Part 75 cost principles are based on the fundamental premise that recipients of federal awards are “responsible for the efficient and effective administration of the Federal award through the application of sound management practices,” and “for administering Federal funds in a manner consistent with underlying agreements, program objectives, and the terms and conditions of the Federal award.” 45 C.F.R. § 75.400(a)-(b). For costs to be allowable under a federal award, they must be “reasonable for the performance of the Federal award and be allocable thereto.” Id. § 75.403(a); see also GPS II-25. If the recipient of the federal award fails to comply with federal laws, regulations, or the terms and conditions of its award, the awarding agency may, as appropriate, disallow the cost of the activity or action not in compliance. 45 C.F.R. § 75.371(b).
Case Background and Procedural History
ORR and IES entered into multiple cooperative agreements for IES to provide residential shelter services for unaccompanied children in Texas under two Funding Opportunity Announcements (FOAs). See IES Ex. 3 (FOAs HHS-2015-ACF-ORR-ZU-0833 and HHS-2017-ACF-ORR-ZU-1132); IES Ex. 5 (cooperative agreements); ACF’s May 3, 2018 “Response on Request for Agency Opinion” (Agency Opinion), Ex. B (cooperative agreements); see also IES Ex. 4 (notices of award).
OIG began auditing IES’s FY2015 awards in June 2016.
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allowable costs. After considering OIG’s audit findings, on November 2, 2017, ACF restricted IES from drawing down award funds due to concerns about its ability to effectively control and be accountable for federal funds and property. ACF required IES to obtain ACF’s approval before drawing down any funds. Disallowance Decision at 1-2.
On February 21, 2018, ACF issued two decisions after considering OIG’s audit findings. IES appealed both to the Board. The first ACF decision, the appeal of which was docketed under number A-18-46, declined to award a Year 2 NCC award (associated with nine cooperative agreements).
On March 23, 2018, IES timely filed two similar submissions, both titled “Notice of Appeal and Motion to Dismiss,” along with hundreds of pages of documents organized and labeled as “Audit Documentation - IES Volume 1,” “Audit Documentation - IES Volume 2,” “Audit Documentation - IES Volume 3,” and “Audit Documentation - IES Volume 4.”
In light of IES’s inconsistent position on the question of Board authority to review ACF’s decisions (that is, arguing that the Board has no authority to review the decisions, but also asking the Board to review and overturn them), by two separate issuances on April 16, 2018, the Board asked ACF to opine on whether ACF’s decisions were “final written
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decisions” subject to Board review under 45 C.F.R. Part 16. See 45 C.F.R. Part 16, App. A, ¶¶ A
On May 3, 2018, ACF submitted its “Response on Request for Agency Opinion,” along with documents (exhibits A and B),
The parties thereafter informed the Board they wanted to attempt to resolve their dispute through mediation. We stayed the appeals for some time at the parties’ request to enable them to do so. The parties were unable to resolve their dispute.
On January 9, 2019, the Board ordered the parties to show cause why it should not lift the stays and resume Board proceedings. In that order, the Board set out a revised briefing schedule to be followed should the Board lift the stays. IES submitted a status report, stated that it had been unable to reach ACF, and asked the Board to lift the stays and direct the parties to proceed with briefing in accordance with the January 9, 2019 order. ACF did not respond to the Board’s order. IES thereafter timely filed a consolidated brief (Consol. Br.) and appeal file (supporting exhibits)
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On March 14, 2019, the Board ordered ACF to show cause why the Board should not close the briefing opportunity. The Board stated that, in the absence of good cause shown, the Board will close the briefing and proceed to decision, but that it may later order the parties to supplement the records with additional information or documents. See 45 C.F.R. § 16.13 (The Board has the power to order the parties “to submit relevant information” and “to take any other action necessary to resolve disputes in accordance with the objectives of” Part 16.). ACF did not respond to the order to show cause by the due date. Belatedly, ACF asked the Board to stay the appeals for another month. By order issued March 25, 2019, the Board denied the request, noting “[t]hat ACF counsel’s office has experienced an unusually heavy workload in 2018 and 2019” did not establish good cause for not timely complying with the Board’s orders or timely requesting an extended stay, or not responding to IES’s attempts to confer with ACF. March 25, 2019 Order at 2. Accordingly, the Board closed the briefing opportunity, but stated that it may later order the parties to submit additional information or documents. Id.
By order and notice issued August 25, 2021, the Board directed ACF to submit, within three weeks, additional information and documents, to include cooperative agreements not already submitted by either party, in order “to develop a prompt, sound decision” in accordance with 45 C.F.R. § 16.9. The Board also notified the parties that, in the absence of any objection, it intended to consolidate the two cases under lead docket number A-18-46 for future submissions and to issue a single decision for both cases in the interest of judicial convenience and economy inasmuch as the cases share common questions of law and fact.
By notice issued on September 27, 2021, we gave ACF another two weeks to submit documents and information responsive to the Board’s August 25, 2021 order. However, we also stated that if ACF failed to respond by the end of the two-week period, we would proceed to decision based on the existing record and construe against ACF any document or information within the scope of our August 25, 2021 order determined necessary to the resolution of these cases but which ACF failed to submit. ACF remained silent. Thus, other than the Agency Opinion and the exhibits submitted with it, the Board does not have any additional arguments or evidence from ACF in support of its decisions.
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Standard of Review
We review the federal agency’s decisions de novo. See, e.g., Delta Found., Inc., DAB No. 1710, at 25 (1999), aff’d, Delta Found., Inc. v. United States, No. 4:00CV104-P-B (N.D. Miss. June 14, 2001) (adopting Magistrate’s Report and Recommendations), aff’d, 303 F.3d 551 (5th Cir. 2002); Cmty. Med. & Dental Care, Inc., DAB No. 2556, at 4 n.1(2014); Minn. Dep’t of Hum. Servs., DAB No. 2122, at 25 (2007); Minn. Dep’t of Hum. Servs., Reconsideration of Decision No. 2122, Board Ruling No. 2008-3, at 2 (Feb. 15, 2008) (“The Board determines the facts de novo, based on the entire record before it, including evidence from both parties.”).
Analysis
IES asks the Board to convene a hearing and raises numerous arguments in challenging ACF’s decisions. IES asserts, among other things, that ACF’s decisions are “wrong” and “not justified” “because [they] lack[] a sound legal or factual foundation” or are inadequate to the extent certain allegations in those decisions “are not detailed or final enough.” Consol. Br. at 3, 4, 13. IES also questions the validity of ACF’s decisions to the extent they were based on an OIG audit that allegedly was “incomplete or flawed” and asserts that ACF failed to abide by the cooperative agreements. Id. at 1, 3-5. IES moreover raises arguments about the disallowed costs and the decision to withhold a non-competing continuation award and disputes that it violated award terms and conditions and cost principles. Id. at 6-16.
We first address IES’s request for a hearing and overarching arguments in sections I and II, respectively. In sections III and IV, we address the disallowed costs and the decision to withhold a non-competing continuation award. We uphold a total disallowance of $17,673,785.40. This amount accounts for disallowances of $851,756.35 in excess executive compensation, $217,500 in depreciation costs on related-party leases, $8,111,360.35 (of $10,070,736 disallowed) for related-party lease costs, and $8,493,168.70 for the San Benito shelter costs. We also uphold ACF’s decision to withhold a non-competing continuation award.
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I. Request for hearing
In its June 21, 2018 ruling, the Board instructed IES to state why an evidentiary hearing is necessary or would aid the Board’s decision-making, identify potential witnesses, and summarize the nature of their expected testimony. In its February 2, 2019 consolidated brief, IES merely indicated that it wanted a hearing before the Board by including the words “HEARING REQUESTED” in the caption to its brief, Consol. Br. at 1 (IES’s emphases), and, in the last sentence of its brief, urged the Board to “reverse” ACF’s decisions “following a full hearing on the merits.” Id. at 15-16.
In general, the Board decides Part 16 appeals based on the written record without holding an evidentiary hearing, but could convene one if appropriate or necessary. Section 16.4 provides in part:
The Board’s basic process is review of a written record (which both parties are given ample opportunity to develop), consisting of relevant documents and statements submitted by both parties . . . . The written record review also may be supplemented by a hearing involving an opportunity for examining evidence and witnesses, cross-examination, and oral argument . . . . A hearing is more expensive and time-consuming than a determination on the written record alone . . . . Generally, therefore, the Board will schedule a hearing only if the Board determines that there are complex issues or material facts in dispute, or that the Board’s review would otherwise be significantly enhanced by a hearing.
45 C.F.R. § 16.4. “If the appellant believes a hearing is appropriate, the appellant should specifically request one at the earliest possible time . . . .” Id. § 16.11(a). “The Board will approve a request [for hearing] (and may schedule a hearing on its own . . .) if it finds there are complex issues or material facts in dispute the resolution of which would be significantly aided by a hearing, or if the Board determines that its decisionmaking otherwise would be enhanced by oral presentations and arguments in an adversary, evidentiary hearing. The Board will also provide a hearing if otherwise required by law or regulation.” Id.
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Thus, in Part 16 matters, as IES’s appeals are, the Board will provide an opportunity for an evidentiary hearing to an appellant who is entitled to one by governing law or regulation, consistent with section 16.11(a). Although IES has asked the Board to convene an evidentiary hearing, it has not claimed legal entitlement to one in these cases, and we are not aware of any law or regulation that requires the Board to hold an evidentiary hearing in an appeal of the type presented by IES’s appeals.
The question, then, is whether a hearing is nevertheless necessary or appropriate in these appeals. Other than requesting a hearing by brief references in the caption and at the end of its brief, IES has not further addressed the need for or benefit of a hearing. IES has not identified any issues or material factual disputes, the resolution of which it believes would be aided by further evidentiary development through the taking of oral testimony, or explained how a hearing would enhance the Board’s ability to resolve the parties’ dispute. IES has not indicated that it has any witness testimony it wishes to present.
II. Overarching arguments challenging validity of ACF’s decisions
IES cites numerous alleged errors in ACF’s decisions and ORR’s alleged failure to abide by the cooperative agreements, and in OIG audit process and findings. The common thread in its contentions is that ACF’s decisions are legally infirm, as IES initially set out
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in its “Notice of Appeal and Motion to Dismiss.” In subsections A through C below we address the three overarching arguments raised by IES and explain why we reject them.
A. ACF’s decisions are not invalid for lack of specificity to a level IES asserts is necessary.
IES argues that ACF’s decisions are “wrong” because they “lack[] a sound legal or factual foundation.” Consol. Br. at 3, 13. According to IES, ACF’s allegations are “not detailed or final enough to support” the decisions since, “[i]n some instances, the ACF simply reference[d] citations with no factual predicate for the alleged noncompliance.” Id. at 13. As an example of ACF’s alleged failure to specify the basis for its noncompliance allegation, IES points to ACF’s citation of regulations on internal control requirements without stating the supporting “facts,” which IES says “makes a response impossible” and impedes its ability to “mount a meaningful defense.” Id. at 14. IES also asserts that, as to certain allegations, “ACF admit[ted] that it has not reached a final decision, making review by the Board premature.” Id. at 13. Because the allegations in the decisions are “inadequa[te]” due to “lack of finality or . . . the lack of specif[icity],” IES states, “the Board should reverse” the decisions “or, at the least, dismiss [the] remaining allegations” that, according to IES, are not specific. Id. at 13-14.
A discussion of the parties’ burdens of proof is in order. The awarding federal agency must first sufficiently articulate the basis for its decision to enable the non-federal party to understand the issues raised by the agency’s decision. See, e.g., Mass. Exec. Off. of Health & Hum. Servs.,DAB No. 2218, at 11 (2008) (citations omitted), aff’d, Mass. ex rel. Exec. Off. of Health & Hum. Servs. v. Sebelius, 701 F.Supp.2d 182 (D. Mass. 2010); Me. Dep’t of Health & Hum. Servs.,DAB No. 2292, at 9 (2009) (citation omitted), aff’d, Me. Dep’t of Health & Hum. Servs. v. United States Dep’t of Health & Hum. Servs.,766 F.Supp.2d 288 (D. Me. 2011); Mo. Dep’t of Soc. Servs., DAB No. 2994, at 6 (2020) (and cited cases). If the federal agency carries that minimal burden, the non-federal party must demonstrate that the federal agency’s decision was wrong. See Mass. Exec. Off., DAB No. 2218, at 11 (citations omitted); Dr. Arenia C. Mallory Cmty. Health Ctr., Inc., DAB No. 2659, at 6-7 (2015) (citations omitted); N.J. Dep’t of Hum. Servs., DAB No. 2328, at 4-5 (2010) (citations omitted); Gulf Coast Cmty. Action Agency, Inc., DAB No. 2670, at 3 (2015) (citation omitted) (The non-federal party “always bears the burden to demonstrate that it has operated its federally funded program” consistent with applicable authorities and the award’s terms and conditions.); Friendly Fuld Neighborhood Ctr., Inc., DAB No. 2121, at 3 (2007) (citations omitted) (The federal grantee bears the burden to show it has operated federally-funded programs consistent with grant terms and conditions and applicable regulations.); see also Targazyme, Inc., DAB No. 2939, at 4 (2019) (“[I]n the kind of cases that come before the Board under 45 C.F.R. Part 16, the appellant always bears a general burden of proof.”); Tuscarora Tribe of N.C., DAB No. 1835, at 10-11 (2002) (citation omitted) (That burden would include the burden to show that the non-federal party spent award money in support of the award’s objectives and in compliance
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with the award’s terms and conditions.) And, where the decisions appealed involved an audit of the award recipient, the award recipient typically has the burden to show that the audit results are “legally or factually unjustified.” Mass. Exec. Off., DAB No. 2218, at 11 (citing Wis. Dep’t of Health & Soc. Servs., DAB No. 1121, at 15-16 (1989) and Ind. Dep’t of Pub. Welfare, DAB No. 970, at 6-7 (1988), aff’d, Ind. Dep’t of Pub. Welfare v. Sullivan, 934 F.2d 853 (7th Cir. 1991)).
The regulations in 45 C.F.R. § 75.371 provide in relevant part: “If a non-Federal entity fails to comply with Federal statutes, regulations, or the terms and conditions of a Federal award,” and “[i]f the HHS awarding agency . . . determines that noncompliance cannot be remedied by imposing additional conditions, the HHS awarding agency . . . may take one or more of” the actions as specified in section 75.371, “as appropriate in the circumstances.” Those actions include “[t]emporarily withhold[ing] cash payments pending correction of the deficiency by the non-Federal entity”; “[d]isallow[ance of] . . . all or part of the cost of the activity or action not in compliance”; “[w]holly or partly suspend[ing] . . . award activities” or termination of the award; and “[w]ithhold[ing of] further Federal awards for the project or program.” 45 C.F.R. § 75.371(a)-(c), (e). The awarding agency also may “[t]ake other remedies that may be legally available.” Id. § 75.371(f). We are not aware of, and IES does not cite, any law or regulation or other binding authority governing these cases that requires ACF to identify within a decision itself every questioned cost or explain in detail the reasons for disallowing costs or for not giving a non-competing continuation award to a degree of specificity IES demands in order for ACF to pursue remedial action authorized by these regulations.
We are satisfied that ACF met its minimal initial burden. We find that ACF’s decisions provided sufficient information about the bases for the decisions to enable IES to respond during the appeal. To the extent IES asserts that ACF failed to meet its initial burden to “sufficiently articulate” the bases for its decisions and must have been more specific and detailed for its decisions to be legally valid, we reject that assertion. IES does not support its assertion with any authority.
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Board review under Part 16 is generally limited to resolving disputes about material facts and deciding whether the determination in question is consistent with applicable statutes and regulations. We therefore must uphold a determination where it is authorized by law and the non-federal party has not disproved the factual basis for the determination. See 45 C.F.R. § 16.14 (captioned “How Board review is limited” and stating that the Board is “bound by all applicable laws and regulations”); see also S.A.G.E. Commc’ns Servs., DAB No. 2481, at 5 (2012) (citations omitted) (The Board must uphold a disallowance when it is “authorized by law” and its “factual basis” has not been “disproved.”); Tenderloin Health, DAB No. 2420, at 2 (2011) (and cited cases).
As for the suggestion that Board review would be premature as to matters on which ACF has not made a final determination, we note that the only matters on which ACF did not make a final determination concern (1) alleged incurrence of “millions” of dollars in charges for procurement without obtaining competitive bids or performing cost or price analyses for purchases, and alleged incurrence of “millions or hundreds of thousands” of dollars awarding independent contractors without demonstrating compliance with procurement regulations; and (2) alleged incurrence of unallowable charges related to the leasing of vacant land owned by Ruben Gallegos, Sr., Ph.D., and payment by IES to Dr. Linda Gallegos for clearing vacant property. ACF did not state that it was disallowing any specific amount for those charges. ACF indicated that, although it agreed with OIG as to those charges, it intended to further review them to determine whether a separate disallowance would be appropriate. See Disallowance Decision at 2, 5-6; Agency Opinion at 2. As we stated in our August 25, 2021 order, we have not been made aware of ACF’s issuance of an appealable decision related to these charges. The only issues before us concern final determinations to deny the non-competing continuation award and to disallow specific amounts based on reasons other than those still being considered. The alleged “lack of finality” based on the absence of a determination of a disallowed amount concerning such charges in ACF’s February 21, 2018 decisions, therefore, has no bearing on the broader question of the validity of the remainder of ACF’s determinations that we may properly review.
B. ACF is entitled to take a disallowance or withhold a non-competing continuation award regardless of whether OIG issued a report of its audit findings.
IES asserts that ACF’s decisions are “wrong” and “doomed” because they were based on an audit that is “incomplete or flawed.” Consol. Br. at 1, 3. Surmising that OIG might have “abandoned” its audit, IES states the “audit was never completed because IES was never provided with a copy of the report.” See id. at 3, 4. IES thus implies that OIG would have prepared and provided IES a report of its audit findings had it finished its audit. Even assuming OIG had completed its audit, IES says, OIG did not follow the Generally Accepted Government Auditing Standards (GAGAS) (also referred to as the Government Accountability Office (GAO)’s Yellow Book) or “its customary practices
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when conducting performance audits,” which, IES says, require an auditor to “issue audit reports communicating the results of each completed performance audit.” Id. at 4 (citing GAO-12-331G, Government Auditing Standards 7.03 at 163 (2011 rev.)).
We recognize that it may be the usual practice for OIG to prepare a draft audit report and give the audited entity an opportunity to respond to the draft report,
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OIG did not first issue a report of its audit findings. IES cites no such authority.
In the analogous context of the Centers for Medicare & Medicaid Services (CMS)’s imposition of civil money penalties and other sanctions against skilled nursing facilities for violation of Medicare program participation requirements, the Board has repeatedly rejected arguments about the quality of surveys
The concepts from the Board’s Part 498 appeals inform our analysis of IES’s appeals. Just as the Part 498 appeals process affords skilled nursing facilities an opportunity to challenge the underlying facts concerning their compliance with program participation requirements, the Part 16 appeals process affords IES an opportunity to challenge the underlying facts concerning its compliance with applicable authorities, to include cost principles, and award terms and conditions. Just as the Board assesses skilled nursing
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facility compliance with program participation requirements rather than surveyor performance, we here assess IES’s compliance with applicable laws, regulations, and award terms and conditions, rather than OIG’s performance of its audit. ACF would be no more bound to OIG’s audit findings whether or not documented in an audit report than CMS would be bound to surveyor findings, though ACF and CMS could pursue authorized action against, respectively, an award recipient and a skilled nursing facility, based on surveyor and audit findings. The Part 16 process empowers the Board to assess, de novo, any relevant documentation OIG and ACF considered in connection with the audit and produced by IES and ACF on appeal to ascertain facts necessary to determine whether ACF’s decisions are sound. Accordingly, the absence of a report of OIG findings, whether in draft or final form, itself is of no consequence to ACF’s ability to take authorized action, such as taking a disallowance.
C. The cooperative agreements’ monitoring provisions did not preclude ACF from issuing its decisions.
IES asserts that ORR failed to meet its obligations under the cooperative agreements before issuing the two decisions. Consol. Br. at 1, 3. According to IES, in accordance with the cooperative agreements, ORR was required to monitor and provide IES with a “[monitoring] report following formal monitoring visits or if required site visits, that will include citations for noncompliance, recommendations, a corrective action plan if needed, timelines for reporting, and consequences for not responding.” Id. at 5-6 (quoting page 28 of the cooperative agreements for San Benito, Casa Norma Linda, and Weslaco). Also, IES says, under the cooperative agreements, following review of the monitoring report, a formal corrective action plan that identifies objectives, specific actions, persons responsible, and the date of each monitoring citation, was to be submitted to the designated project officer within 30 days. According to IES, the “clear implication of these provisions is that ORR would notify IES of compliance issues and would allow IES to implement a corrective action plan.” Id. at 6. Because ORR failed to adhere to those cooperative agreement provisions, IES says, ACF’s decisions were “premature.” Id. at 4. IES further states that ORR’s not giving IES an opportunity to implement a corrective action plan “means either that ORR did not have any significant concerns or that ORR failed to fulfill its obligations under the cooperative agreement” and therefore “[e]ither option leaves the ACF’s decisions unfounded.” Id. at 6.
The monitoring provisions on which IES relies state that ORR will conduct announced and unannounced monitoring activities (which could include “desk” and “on-site” monitoring reviews) throughout the project period “to ensure compliance with the Flores settlement agreement, pertinent federal laws and regulations, and ORR policies and procedures.” See, e.g., IES Ex. 5, at 000483 (Casa Norma Linda cooperative agreement, page 27) (emphasis omitted). ORR is to give IES a monitoring report that includes citations for noncompliance, recommendations, a corrective action plan requirement if needed, timelines for reporting, and consequences for not responding. After review of
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the monitoring report, ORR is to submit a formal corrective action plan that identifies objectives, specific actions, persons responsible, and the date of completion for each monitoring citation, to the designated Project Officer within 30 business days. See id. at 000482-483. However, here, the noncompliance for which ACF issued its decisions was not found through a performance monitoring review or visit by ACF/ORR, but through an OIG audit. IES has not shown any authority requiring ACF to follow the monitoring provisions for notifying IES of performance problems disclosed by an OIG audit and providing IES an opportunity to correct them. Furthermore, even assuming the monitoring provisions applied, IES does not address what IES could or would have done to correct the financial mismanagement problems identified through the OIG audit.
In any case, we reject IES’s arguments implying that ACF/ORR, having assented to the monitoring procedures, was limited to using them to remedy any performance problems and therefore that ACF, not having used them, later had no grounds to issue the decisions. We see nothing in the cooperative agreements’ terms that either expressly imposes such a limitation on ACF’s authority to pursue appropriate, legally authorized remedial action or reasonably could be read as limiting ACF’s authority to do so.
We note, moreover, that the cooperative agreements expressly state that (1) the agreement and the terms and conditions in the notice of award establish the requirements and responsibilities for implementing IES’s residential services; and (2) IES “agrees . . . [t]o comply with HHS policy and regulations, unless otherwise expressly waived in the approved application and all other applicable Federal statutes and regulations in effect during the time that it is receiving grant funding.” IES Ex. 5, at 000479 (Casa Norma Linda cooperative agreement, page 24). The award terms consistently state that “any applicable statutory or regulatory requirements, including 45 CFR Part 75, directly apply to this award apart from any coverage in the HHS GPS.” See, e.g., IES Ex. 4, at 000437 (Casa Norma Linda); see also, e.g., id. at 000137 (standard award term: “This grant is subject to the requirements as set forth in 45 CFR Part 75.”). Accordingly, IES was
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required to comply with all applicable authorities, including the regulations in Part 75, notwithstanding the monitoring procedures. Having determined that IES had not complied, ACF was within its authority to proceed to decisions not to allow a non-competing continuation award and to disallow costs. Cf. Renaissance III, Inc., DAB No. 2034, at 11-12 (2006) (“Having determined that Renaissance materially failed to comply with the terms and conditions of its cooperative agreements, [the awarding agency] acted within its legal authority to terminate those agreements immediately. Although an awarding agency may, as a matter of policy or prudence, give an award recipient the opportunity to correct noncompliance before imposing termination, nothing in the applications regulations required [the awarding agency] to do so . . . .”); Recovery Resource Ctr., Inc., DAB No. 2063, at 20 (2007) (federal agency “had the authority and discretion to take immediate enforcement action without giving [the grantee] an opportunity to correct”).
III. We uphold a total disallowance of $17,673,785.40.
A. Excess executive compensation ($851,756.35)
ACF determined that, in 2015, IES paid its executives “salary compensation through its indirect or overhead accounts” in amounts that exceeded $183,300, the ceiling for Executive Level II salary, which “reflect[ed] an individual’s base salary exclusive of fringe benefits and any income that the executive may be permitted to earn outside of the duties” to IES. Disallowance Decision at 2-3. ACF stated that, based on information in box 5 of IRS W-2 forms, IES compensated its “top five paid employees” as follows:
| EMPLOYEE | TITLE | COMPENSATION | AMOUNT OVER $183,300 |
|---|---|---|---|
| Dr. Ruben Gallegos, Sr., Ph.D. | President | $506,003.22 | $322,703.22 |
| Ruben Gallegos, Jr. | Chief Executive Officer | $492,001.62 | $308,701.62 |
| Juan Gonzalez | Finance Director | $377,060.96 | $193,760.96 |
| Norberto Perez | Director of Business Affairs | $208,190.49 | $ 24,890.49 |
| Edgar Osiel Vela | Finance Manager | $185,000.06 | $ 1,700.06 |
TOTAL: $851,756.35
Id. at 3. ACF wrote, “IES did not comply with the award terms and conditions regarding the Federal Financial Accountability and Transparency Act of 2006 (FFATA), executive reporting requirements which requires large grantees to report the compensation of its top five paid employees. The Notice of Award for IES clearly stated that this condition applied to the IES grants.” Id.; see also, e.g., IES Ex. 4, at 000137 (standard award term:
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“This award is subject to the [FFATA] subaward and executive compensation reporting requirements.”).
IES does not dispute that the maximum annual Executive Level II compensation for 2015 was $183,300. See Audit Documentation, Vol. 4, at 83 (executive salary table for 2015). Nor does IES dispute that ACF correctly identified the “top five” highest-paid individuals employed by IES or the accuracy of the above figures (total compensation paid and compensation exceeding $183,300). IES does not assert that, contrary to ACF’s determination, any of the five named individuals were paid less than $183,300. IES instead raises two arguments. First, IES asserts that the executive compensation caps do not apply to the compensation paid because the payments were made as indirect, rather than direct, costs. Second, IES asserts that, since ACF gave multiple awards to IES, IES may pay each executive a salary up to the cap for each award. Consol. Br. at 7.
According to IES, “HHS interprets the salary limit as applying to each agreement in full, which means that an organization such as IES that has multiple awards can charge up to the full amount to each award without running afoul of the limits in the Consolidated Appropriations Act.” Consol. Br. at 7. IES quotes the Consolidated and Further Continuing Appropriations Act, 2015, Pub. L. No. 113-235, 128 Stat. 2130, 2485 (2014): “SEC. 203. None of the funds appropriated in this title shall be used to pay the salary of an individual, through a grant or other extramural mechanism, at a rate in excess of Executive Level II.” Id. (also stating that the same language has appeared in various appropriations acts funding HHS since at least 2012 and re-enacted in 2016); Audit Documentation, Vol. 4, at 81 (copy of page of statute that includes section 203 IES quotes). IES asserts that ACF’s determination that IES exceeded executive compensation limits is “wrong” because it disregards HHS’s interpretation that the Executive Level II compensation caps apply to direct salaries rather than to salaries treated as indirect costs, as in these cases. Consol. Br. at 6-7 (citing 48 C.F.R. § 352.231-70(a) (2018) and GPS II-39), 8. According to IES, given this interpretation and because IES received multiple awards, “the indirect costs incurred by IES for executive compensation did not exceed the salary limits because the salary limits did not apply” and each award could support compensation up to the limit. Id. at 8-9.
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In describing what “Salaries and Wages” entail, GPS II-39 states in part that:
[c]ompensation costs are allowable to the extent that they are reasonable, conform to the established policy of the organization consistently applied regardless of the source of the funds, and reflect no more than the percentage of time actually devoted to the OPDIV-funded project or program. Where restricted by language in the HHS appropriations act, OPDIVs will not reimburse recipients for the direct salaries of individuals at a rate in excess of the level specified. Direct salary is exclusive of fringe benefits and indirect costs.
GPS II-39 (emphasis added).
The above GPS language indicates that restrictions on reimbursement for compensation, including salary caps, do apply to direct salaries. However, relying on that language, IES asserts that the salary caps do not apply to the executive compensation ACF asserts were paid in excess of the caps simply because the compensation payments were classified as indirect costs. IES’s argument is flawed. The GPS language on which IES relies applies the cap to “direct salaries,” not to “direct costs” and does not indicate that any executive salary compensation paid as an indirect cost would not be subject to the cap. Instead, the language on direct salary not including “fringe benefits and indirect costs” merely means that the amount of compensation is determined (for purposes of evaluating whether the cap was exceeded) based on the amount paid out to the employee directly as salary and not the additional costs of employment to the award recipient or grantee that would be allocable to that employee’s position. We know of, and IES identifies, no law, regulation, or GPS provision that supports IES’s proposition that any compensation cap that would apply had the compensation been paid as a direct cost would not apply so long as salary compensation is paid as an indirect cost. Put differently, IES cannot avoid the consequences of paying executive compensation above the cap just because it paid the compensation, as ACF stated, “through its indirect or overhead accounts.” Disallowance Decision at 3.
Furthermore, in classifying the compensation of executives as an indirect cost, IES did not comply with applicable authorities and award terms. Salary compensation is typically recognized as a direct rather than indirect cost, as the regulations and GPS provide. “Direct costs are those that can be identified specifically with a particular cost objective, such as a Federal award, or other internally or externally funded activity, or
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that can be directly assigned to such activities relatively easily with a high degree of accuracy.” 45 C.F.R. § 75.413(a). “Typical costs charged directly to a Federal award are the compensation of employees who work on that award, their related fringe benefit costs, the costs of materials and other items of expense incurred for the Federal award.” Id. § 75.413(b) (emphasis added); see also GPS II-25-26 (defining “direct costs” using language similar to that in section 75.413 and stating that direct costs include “salaries”). Indirect costs, in contrast, are generally considered to be “facilities and administration” (or “F&A”) costs which cannot be allocated specifically to a single grant-funded activity. “Facilities” costs would include costs such as depreciation on buildings and equipment and capital improvement, and operations and maintenance expenses. “Administration” costs would include costs for general administration and general expenses not included as “Facilities” costs, such as accounting or human resources services costs used by multiple cost objectives and impossible to effectively allocate among them as direct costs. 45 C.F.R. § 75.414(a); GPS II-26 (Indirect costs are incurred for “common or joint objectives that, therefore, cannot be identified specifically with a particular project, program, or organizational activity.”). The GPS also provides that “[o]rganizations must have or negotiate an indirect cost rate to support a request for reimbursement of indirect costs . . . .” GPS I-22. “The organization is responsible for presenting costs consistently and must not include costs associated with its indirect rate as direct costs.” GPS II-26.
The materials IES submitted, which include evidence of early communication between IES and ACF concerning budget projections and subsequent notices of award, consistently indicate that salary compensation was to be treated as it is typically treated – as direct costs. The evidence, in particular the notices of award, consistently shows that personnel costs (and fringe benefits for those personnel) were included in approved budgets as direct costs; that IES and ACF negotiated an indirect cost rate of 12.8 percent of direct costs; and that personnel costs represented a significant portion of the total budget that, as a percentage of the direct costs, represented a percentage significantly higher than the indirect cost rate of 12.8 percent. See, e.g., IES Ex. 4, at 000135-136; IES Ex. 6, at 000766, 000772 (2014 budget proposal for San Benito, indicating that personnel costs were expected to be almost $2 million out of a total budget of $5.17 million, whereas indirect costs were calculated to be about $662,000, 12.8 percent of direct costs). We see nothing in the record indicating that, notwithstanding the notices of award indicating personnel costs were to be paid as direct costs, ACF later determined IES may pay any salary compensation as an indirect cost.
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any executive salary compensation as an indirect cost, it appears IES did not comply with the applicable regulations, GPS, and the award terms.
We also reject IES’s assertion that the compensation limits “apply[] to each agreement in full” so that IES, to which ACF has given multiple awards, may properly “charge up to the full amount to each award.” Consol. Br. at 7. The only authority IES cites in support of this assertion is the document titled “Salary Rate Limitation Questions and Answers APM 2012-03 Implementation of the Requirements of the FY2012 HHS Appropriations Acts and HHS’ Nondiscrimination Policy,” accessible at https://www.hhs.gov/grants/contracts/contract-policies-regulations/salary-rate-limitation/index.html#Q11. See id. (including the link to the document and referring to the document as “Question 11, Salary Rate Limitation Questions and Answers”). We quote verbatim the portion of this document on which IES relies:
Question 11: The interim rules clearly state that the limitation is an annual salary cap per contract. For example, if an employee who is paid $200,000 per year were to work on two different contracts, both subject to the salary cap, and charge direct salary costs over the course of the year of $100,000 on one contract and $85,000 on the other contract, plus $15,000 to an indirect cost activity, that employee’s salary costs would not exceed the cap on either contract. There is some inconsistency in how this is being implemented.
Since most staff do not receive their full annual salary by working on one contract, but probably 3 or 4 different contracts, does this limitation apply to them?
Answer: The answer necessarily proceeds from the following Q’s and A’s:
Question 11a: Does the salary rate limitation need to be applied as an hourly, monthly, or annual rate?
Answer: Annual.
Question 11b: If the rate limit should be hourly what is the annual number of hours we should use to calculate the rate (e.g. 1,950 hours)? Also, how will this apply to institutions using a % of completion type contracts (e.g. educational institutions)? In these scenarios, is it appropriate to use a monthly rate limit?
Answer: It is not hourly.
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The only way to apply the limitation across multiple contracts would be to use an hourly rate. Because the responses above preclude such a methodology, we conclude that the limitation only prevents an employee making more than $179,900 for his or her work on a single contract. (Please also see the answer to Question 3 and Question 14.)
The “Question 11” document on which IES relies is not a law or regulation and does not have the force and effect of law. Moreover, IES does not assert, and the record does not support, that the document is one that governs the cooperative agreement relationship between IES and ACF. IES does not suggest that it actually relied on the document as an explanatory aid or guidance issued by ACF to determine how to pay executive salary compensation in 2015 consistent with the applicable authorities, the cooperative agreements, and the award terms and conditions. In any case, the “Question 11” language quoted above does not support IES’s proposition that, because IES received multiple ACF awards, IES may pay any of its executives as many $183,300 salaries (2015 limit) as it has awards. The basic problem the “Question 11” language addresses is how to properly allocate an individual’s annual salary where an individual who is subject to a salary cap is working on more than one award or “contract,” so that multiple salaries paid on awards or contracts collectively do not exceed the cap. The “Question 11” document does not support the idea that an executive of a UC program awards recipient may be paid multiple salaries, each up to the annual cap, on multiple awards.
Furthermore, the proposition that a single executive may be paid multiple salaries each up to the executive compensation cap for performing a single job or taking a single position (such as CEO of IES) for a single entity receiving ACF funding (IES) simply because ACF issued multiple notices of award to that entity would render the executive compensation cap meaningless in every instance involving multiple awards to a single entity. Such an interpretation would run afoul of a basic cost principle – that a cost must be reasonable. “A cost is reasonable if, in its nature and amount, 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.” 45 C.F.R. § 75.404; see also GPS II-25 (same language). “Costs of compensation are allowable to the extent they satisfy the specific requirements of [Part 75], and that the total compensation for individual employees . . . [i]s reasonable for the services rendered . . . .” 45 C.F.R. § 75.430(a); see also GPS II-39 (“Compensation costs are allowable to the extent that they are reasonable . . . and reflect no more than the percentage of time actually devoted to the OPDIV-funded project or program.”). It would hardly be a prudent, sound business practice to
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pay up to the maximum salary cap per award so that, effectively, a single executive could be paid multiple salaries for performing the same job for a single organization simply because that organization, as is the case with IES, received multiple notices of award.
We note that ACF failed, despite multiple opportunities, to provide the specific W-2 forms on which it relied in determining the executive compensation amounts from which it calculated the disallowance of $851,756.35. Nevertheless, IES nowhere disputes the accuracy of the underlying compensation amounts as calculated by ACF, and has not produced any documentation that causes us to question the accuracy of the amounts. Accordingly, we uphold the disallowance of $851,756.35 in full.
B. Related-party leases: rent expenses ($10,070,736) and depreciation ($217,500)
ACF disallowed a total of $10,070,736 in rent and $217,500 in depreciation associated with related-party leases. ACF derived the total of $10,070,736 by adding together the disallowed lease costs associated with the following awards: 90ZU0095 ($546,720, $1,332,000, $678,000); 90ZU0097 ($171,788, 314,880, $157,572); 90ZU0099 ($245,100, $288,000, $432,000); 90ZU0117 ($188,400, $202,800, $304,200); 90ZU0119 ($373,016, $513,600, $748,760); 90ZU0234 ($912,000); 90ZU0235 ($426,000); 90ZU0236 ($202,800); 90ZU0237 ($202,800); 90ZU0238 ($108,480); 90ZU0239 ($525,600); 90ZU0240 ($874,392); 90ZU0241 ($98,292); and 90ZU0242 ($223,536). ACF derived the total of $217,500 by adding together the depreciation amounts associated with the following awards: 90ZU0119 ($43,500, $43,500, $87,000) and 90ZU0239 ($43,500). Disallowance Decision at 3-4 (table).
ACF determined that IES failed to show that its lease agreements and rent expenditures complied with 45 C.F.R. § 75.465. Id. at 4. ACF stated:
Dr. Ruben Gallegos, Sr., doing business as Ideal Realty, maintained more than a dozen less than arms-length leases with IES of either land or buildings. Ruben Gallegos Jr. also maintained a number of less-than-arms- length leases, either by doing business as ILT Enterprizes, or through a limited partnership of GaCris, LP.
IES leases the San Benito Shelter and buildings at the Driscoll Shelter from ILT Enterprizes and GaCris, L.P. According to the State of Texas Secretary of State filings, ILT Enterprizes is the Director of GaCris, L.P. GaCris, L.P. is a limited partnership in which Ruben Gallegos Jr. has a 50 percent interest. . . . The Director and Manager of ILT Enterprizes is Ruben Gallegos, Jr., [who] is also the Chief Operating Officer of IES. . . . These arrangements constitute a less than- arms-length transaction.
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As the Chief Operating Officer of IES, Mr. Gallegos, Jr. is a key employee of the non-profit organization and thus IES is prohibited from entering into a lease with any corporation in which Mr. Gallegos holds a controlling interest. In addition, [IES] appears to have entered into more than a dozen leases with Ideal Realty, which leases show was a corporation controlled by Ruben Gallegos, Sr[.] (the leases are actually between IES and Mr. Gallegos, Sr., “dba Ideal Realty.”)[.] IES also charged full rental for these leases, rather than following the regulations that would govern less than-arms-length transactions. Yet another lease shows that IES knowingly entered into lease agreements with Juan Gonzales as well as Mikel Gonzalez for portable structures. Juan Gonzalez was the Finance Director of IES . . . .
IES included costs for both rent and depreciation. 45 CFR 75 Subpart E; Cost Principles under [section] 75.465 provide[] that costs for both rent and depreciation are unallowable in less-than-arms-length arrangements. Rental costs in less-than-arms-length arrangements are allowable up to the amount of depreciation or use allowance, maintenance, taxes and insurance with appropriate documentation.
Id. at 4-5 (internal citations omitted).
IES asserts that ACF’s allegations about the related-party leases are “incorrect” because ACF “misinterpreted the rules for related-party leases” and “included third-party leases in its calculations.” Consol. Br. at 9. Citing prior regulations in 2 C.F.R. Part 230 (2013) and 45 C.F.R. § 75.465, IES states it disagrees with ACF’s apparent “treat[ment of] any transaction involving a director, officer, or family member as a per se violation of the standards of conduct,” asserting that the regulations recognize that less-than-arm’s-length leases are “legitimate and that leases with directors, officers, and family members can benefit the organization and do not violate standards of conduct because of the limitations on allowability built into section 75.465.” Id. at 9, 10-11 (emphasis omitted). Also, according to IES, ACF did not correctly credit the allowable rental costs under any of the awards even though the same regulations state that rent is allowable, subject to certain limitations. Id. at 9. According to IES, “[n]ot every lease was a related-party lease, but the ACF does not seem to have taken that into account.” Id. at 11. “In particular,” says IES, “the ownership of several properties changed following the change in ownership of the landlord resulting from the restructuring of GaCris, L.P., and the withdrawal of Ruben Gallegos from the enterprise on January 1, 2015,” at which time “the GaCris properties no longer constituted related-party leases.” Id. (citing Ex. 8). IES also asserts that ACF appears to have mistakenly included “third-party properties” in its disallowance calculations even though they were not “related properties.” Id. at 9. According to IES, with respect to the “actual related-party properties (Los Fresnos, Brownsville, Driscoll, Harlingen, Training Center, and Arroyo Science Center),” the allowable rental costs for
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the period under section 74.465(b) (depreciation, maintenance, taxes, and insurance) from 2013 to 2018 is $1,481,925.65. Id. at 11 (citing IES Ex. 7); see also IES Ex. 7, at 000945.
Rather than simply holding the rental costs involving key IES personnel unallowable per se, ACF clearly asserted that IES’s expenditures on its less-than-arm’s-length leases failed to meet the standards set by section 75.465. Under section 75.465 provisions, rental costs are generally allowable to the extent the rates are reasonable in light of various factors, such as the rental costs of comparable property and market conditions in the area. 45 C.F.R. § 75.465(a). The allowability of rental costs as stated in section 75.465(a), however, is subject to the limitations in sections 75.465(b) and (c). Section 75.465(b) provides that “[r]ental costs under ‘sale and lease back’ arrangements are allowable only up to the amount that would be allowed had the non-Federal entity continued to own the property. This amount would include expenses such as depreciation, maintenance, taxes, and insurance.” Section 75.465(c), regarding less-than-arm’s-length leases, then states in part:
Rental costs under “less-than-arm’s-length” leases are allowable only up to the amount as explained in paragraph (b) of this section. For this purpose, a less-than-arm’s-length lease is one under which one party to the lease agreement is able to control or substantially influence the actions of the other. Such leases include, but are not limited to those between:
(1) Divisions of the non-Federal entity;
(2) The non-Federal entity under common control through common officers, directors, or members; and
(3) The non-Federal entity and a director, trustee, officer, or key employee of the non-Federal entity or an immediate family member, either directly or through corporations, trusts, or similar arrangements in which they hold a controlling interest. For example, the non-Federal entity may establish a separate corporation for the sole purpose of owning property and leasing it back to the non-Federal entity.
(4) Family members include one party with any of the following relationships to another party:
(i) Spouse, and parents thereof;
(ii) Children, and spouses thereof;
(iii) Parents, and spouses thereof;
(iv) Siblings, and spouses thereof;
(v) Grandparents and grandchildren, and spouses thereof;
(vi) Domestic partner and parents thereof, including domestic partners of any individual in 2 through 5 of this definition; and
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(vii) Any individual related by blood or affinity whose close association with the employee is the equivalent of a family relationship.
45 C.F.R. § 75.465(c); see also GPS II-38 (“[r]ental costs under ‘less-than-arms-length’ leases are allowable only up to the amount that would be allowed under the applicable cost principles had title to the property been vested in the recipient;” “[a] less-than-arms-length lease is one in which one party to the lease agreement is able to control or substantially influence the actions of the other”).
In short, despite IES’s casual acknowledgement of some limitations on less-than-arm’s-length leases, it fails to recognize the fundamental rule that applies, i.e., that a property leased from any person or entity with a listed close relationship to the grantee must be treated as if it were a property owned by the grantee itself. Therefore, if such relationships existed, the lease payments for these properties were only allowable up to the amounts that would have been permitted for costs incurred had IES owned the properties. This means only up to what could be charged as depreciation, taxes, and use costs (such as insurance and maintenance).
Turning to the claims for depreciation costs that were disallowed, we note first that “[d]epreciation is the method for allocating the cost of fixed assets to periods benefitting from asset use.” 45 C.F.R. § 75.436(a). The non-federal entity may be compensated for the use of its buildings and capital improvements in accordance with the applicable requirements in section 75.436, provided that the use is needed in the non-federal entity’s activities and properly allocated to federal awards and depreciation is computed in accordance with the regulatory requirements. See id. § 75.436(a), (c), (d); see also GPS II-33 (“Depreciation or Use Allowance[]” is “[a]llowable,” but “[s]uch costs usually are treated as indirect costs”). Depreciation is a cost of ownership.
As noted, less-than-arm’s-length lease costs are allowable only up to the amount that would be allowable to the grantee if it owned the property. Depreciation thus may be included in calculating the allowable portion of related-party rental costs but is not independently allowable for a rental property.
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We note that IES does not dispute ACF’s recounting of the less-than-arm’s-length leases between IES and Ruben Gallegos, Sr., Ph.D., Ruben Gallegos, Jr., Juan Gonzalez, Mikel Gonzalez, or the companies in which these individuals held an interest.
Moreover, the record is replete with evidence of less-than-arm’s-length leases and related payments:
Ruben Gallegos, Sr., Ph.D., President of IES, owns Ideal Realty. See, e.g., IES Ex. 7, at 000953-955; Audit Documentation, Vol. 1, at 73. IES entered into multiple leases with Ruben Gallegos, or Ruben Gallegos doing business as Ideal Realty, as landlord. See Audit Documentation, Vol. 2, at 1-5 (for “Driscoll Staff Housing” in Brownsville, for FY 2015, for $1,000 a month); id. at 7-30 (leases for multiple properties in Los Fresnos, for FY2015, for monthly rent of $2,000-$5,000 or annual rent of $51,360); id. at 42-46, 48-52 (Harlingen properties, for FY2015, for monthly rents of $5,000 and $16,500); id. at 54-58 (lease for Harlingen property, for April 2015-Sept. 2015, for $19,433.34 per month); id. at 67-71 (land in Brownsville for FY2015, for $5,000 per month); id. at 73-77 (buildings in Brownsville, FY2015, for $14,500 per month); id. at 79-83 (buildings in Brownsville, April 2015 to September 2015, for $17,233.34 per month); Audit Documentation, Vol. 3, at 1-5 (26 acres of land in Los Fresnos, FY2015, for $5,000 per month) and 19-23 (20 acres of land in Brownsville, FY2015, for $5,000 per month).
The record includes evidence that IES paid Ruben Gallegos, Sr., Ph.D. rent and income other than the employee compensation discussed above. Such payments included $200,500 in rent and $140,500 in additional income in 2014, and $1,076,071.70 in rent in 2015. Audit Documentation, Vol. 2, at 35, 37. IES paid “Ideal Realty/Ruben Gallegos” $271,860 in rent in 2014. Id. at 39.
Ruben Gallegos, Jr., CEO of IES, is affiliated with ILT Enterprizes, LLC (or ILT Enterprises, LLC) and held a partnership interest in GaCris, L.P. See IES Ex. 7, at 000953-955; IES Ex. 8; Audit Documentation, Vol. 1, at 73, 77-78 (Office of the Secretary of State of Texas, Certificate of Formation of Limited Partnership for GaCris, L.P., whose registered agent and general partner is ILT Enterprizes, LLC, filed May 1,
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2014, and signed for ILT Enterprizes, LLC, by Ruben Gallegos, President), 81 (Texas Franchise Tax Public Information Report for 2015, reflecting ILT Enterprizes, LLC, as the taxpayer and Ruben Gallegos, Jr. as “MGR” (Manager) and Director), 83-85 (Certificate of Formation of Limited Liability Company for ILT Enterprizes, LLC, signed January 17, 2014, reflecting Ruben Gallegos, Jr. as the “Governing Person”).
The evidence reflects multiple leases between IES and Ruben Gallegos, Jr. or ILT Enterprizes or GaCris, L.P. See Audit Documentation, Vol. 1, at 65-69 (five-year commercial lease agreement between GaCris, L.P., as the lessor and IES as the lessee of property at 299 E. Heywood, San Benito, Texas 78586, the address of the San Benito shelter, lease term beginning July 1, 2014, for annual rent of $420,000, payable in monthly installments of $35,000); id. at 70 (apparently an addendum to the San Benito lease, signed July 1, 2014, by a representative for GaCris, L.P., expressing “inten[t] to grant [IES] (the Lessee) permission to make any necessary alterations, additions, or improvements to the leased property”); Audit Documentation, Vol. 2, at 88-92 (lease between IES and ILT Enterprises, LLC, for FY2015, for an office building in Los Fresnos, for $11,250 a month); id. at 94-98 (lease between IES and ILT Enterprises, LLC, for FY2015, for two “Portable Buildings” at Driscoll Shelter, for $4,400 a month); Audit Documentation, Vol. 3, at 51 (the first page of a five-year commercial lease, from Sept. 1, 2014, between GaCris, L.P., as lessor and IES as lessee, for Port Isabel Office, Cameron County, Texas, for $28,800 per year). In 2015, IES paid GaCris, L.P., $448,800 in rent and ILT Enterprizes, LLC, $190,800 in rent. Audit Documentation, Vol. 1, at 63; Vol. 2, at 102.
Juan Gonzalez is IES’s Finance Director. See, e.g., Audit Documentation, Vol. 1, at 1. IES paid Juan Gonzalez rent. See also id. at 91-95 (one-year Lease Agreement between IES as tenant and Juan Gonzalez as landlord, for FY2015, for the “Portable Building” at 32120 FM 1847, Los Fresnos, Texas; monthly rent of $2,200); id. at 102 (IES paid Juan J. Gonzalez $26,400 in rent in 2015); id. at 104 (IES paid Juan J. Gonzalez $6,600 in rent and $140,250 in additional income other than employee compensation discussed above in 2014).
John Mikel Gonzales is the son of Juan Gonzalez. See IES Ex. 7, at 000955 (identifying John Mikel Gonzalez as “Finance Director’s Son”) and 000957 (email from Juan Gonzalez to OIG identifying himself as IES’s Finance Director). The record includes evidence of payment of rent to John Mikel Gonzalez under leases with IES. See Audit Documentation, Vol. 1, at 96-100 (one-year Lease Agreement between IES as tenant and John Mikel Gonzalez as landlord; lease term October 2014-September 2015, for the “Portable Building” at 32120 FM 1847, Los Fresnos, Texas, for $2,200 monthly rent); id. at 106 (IES paid John Mikel Gonzalez $26,400 in rent in 2015); id. at 108 (IES paid John Mikel Gonzalez $6,600 in rent and $3,225 in nonemployee compensation in 2014).
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Since the record evidences, and IES does not dispute, the related-party leases, IES may not charge depreciation on the properties that were leased (because depreciation can only be claimed by an owner), or any rent exceeding what would be allowable for a property owned and leased back by IES. Although IES asserts that ACF did not correctly credit the allowable rental costs under any of the awards (Consol. Br. at 9), it does not dispute ACF’s statement that IES charged both rent and depreciation in some instances, which it could not do. We therefore uphold the disallowance of $217,500 in depreciation charged in addition to lease costs under awards 90ZU0119 ($43,500, $43,500, $87,000) and 90ZU0239 ($43,500).
As to what portion of the rental costs should have been allowed, IES does not specifically dispute the disallowance of $10,070,736, but states only that, with respect to the “actual related-party properties (Los Fresnos, Brownsville, Driscoll, Harlingen, Training Center, and Arroyo Science Center),” the allowable rental costs for the period under section 74.465(b) (depreciation, maintenance, taxes, and insurance) from 2013 to 2018 is $1,481,925.65. Consol. Br. at 11 (citing IES Ex. 7). Although IES does not point to a specific page within IES exhibit 7, it apparently is referring to the “Schedule of Total Expenses Available to Related-Parties” on page 000945. The Schedule sets out the total amounts for four categories (depreciation, maintenance and repairs, taxes, and insurance) for each of the six aforementioned facilities and includes a note that reads: “This schedule represents total expenses that could have been paid to the related-parties for leased properties for the period 2013-2018.” IES exhibit 7 also includes similar schedules for the six facilities, but one for each year, from 2013 through 2018. IES Ex. 7, at 000946-951. We understand IES to be asserting that, as these schedules show, the allowable rental expenditures based on the actual costs IES would have incurred had it owned the properties directly is $1,481,925.65. ACF did not respond to dispute any of IES’s calculations, so we accept them. Therefore, we affirm the disallowed lease costs less $1,481,925.65 in allowable costs identified by IES.
As for IES’s assertion that ACF appears to have mistakenly included “third-party properties” even though they were “related properties” (Consol. Br. at 9), IES mentions only that “the ownership of several properties changed following the change in ownership of the landlord resulting from the restructuring of GaCris, L.P., and the withdrawal of Ruben Gallegos from the enterprise on January 1, 2015,” at which time “the GaCris properties no longer constituted related-party leases.” Id. (citing IES Ex. 8). IES’s exhibit 8 is a January 1, 2015 amendment to the May 1, 2014 Limited Partnership Agreement among the partners of GaCris, L.P. (ILT Enterprises, LLC, General Partner; Ruben Gallegos, Limited Partner; Law Office of Luigi Cristiano P.C., Limited Partner), which was “formed for the purpose of owning, acquiring, investing in, selling and otherwise disposing of Real Estate Property and to do all things necessary or useful in connection with the foregoing.” IES Ex. 8, at 001131. In accordance with the amendment, ILT Enterprises, LLC, ceased to be the general partner of GaCris, L.P. and assigned its general partnership interest to the new general partner, Law Office of Luigi
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Cristiano, P.C.; ILT Enterprises, LLC, had no remaining partnership interest in GaCris, L.P.; and Ruben Gallegos withdrew from GaCris, L.P. and assigned his interest in GaCris, L.P. to the Law Office of Luigi Cristiano, P.C., the sole limited partner as a result of the amendment. Id. at 001131-001132. ACF has not raised any dispute concerning the January 1, 2015 amendment. Accordingly, we accept the January 1, 2015 amendment as evidence supporting IES’s argument that Ruben Gallegos, Jr., and ILT Enterprises, LLC, relinquished their interest in GaCris, L.P., effective January 1, 2015, thus ending the less-than-arm’s-length status of the affected leases upon the transfer of Ruben Gallegos, Jr.’s and ILT Enterprises, LLC’s interest in GaCris, L.P.
The remaining question is whether any additional amount should be credited to IES in calculating the disallowance amount for rental costs based on undisputed evidence concerning the relinquishment of Ruben Gallegos, Jr.’s and ILT Enterprises, LLC’s interest in GaCris, L.P., effective January 1, 2015. Based on the documents before us, we determine that the following lease amounts should be credited to IES against the disallowed amount for rental costs in light of the January 1, 2015 amendment:
$315,000 ($35,000 per month for the last nine months of FY2015, January -September 2015), for the five-year lease between GaCris, L.P., and IES for San Benito, beginning July 1, 2014, for annual rent of $420,000, payable in monthly installments of $35,000 (Audit Documentation, Vol. 1, at 65-69).
$101,250 ($11,250 per month for the last nine months of FY2015, January - September 2015), for the lease between IES and ILT Enterprises, LLC, for FY2015, for an office building in Los Fresnos, for $11,250 a month (Audit Documentation, Vol. 2, at 88-92).
$39,600 ($4,400 per month for the last nine months of FY2015, from January - September 2015), for the lease between IES and ILT Enterprises, LLC, for FY2015, for two “Portable Buildings” at Driscoll Shelter, for $4,400 a month (Audit Documentation, Vol. 2, at 94-98).
$21,600 (prorated monthly rent of $2,400 on an annual rent of $28,800, for the last nine months of FY2015, from January - September 2015), for a five-year lease beginning Sept. 1, 2014, between GaCris, L.P., and IES for Port Isabel Office, for $28,800 per year (Audit Documentation, Vol. 3, at 51).
TOTAL: $477,450
During the appeal, IES had an opportunity to specify any additional related-party leases or properties for which any credit would be due against the disallowed rental costs as a result of the January 1, 2015 amendment, but it did not do so.
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In sum, we uphold the disallowance of $217,500 for depreciation, as well as the disallowance of $10,070,736 in related-party rental costs, less the $1,481,925.65 IES identified as allowable costs of related-party leases and less the $477,450 as calculated above. Thus, the net disallowance for this item is $217,500 in depreciation and $8,111,360.35 for rental costs.
C. Leasehold improvements for San Benito ($8,493,168.70)
ACF determined that IES improperly spent $8,493,168.70 for “major renovations to the San Benito shelter, including during [FY2015], when the shelter was not operational.” Disallowance Decision at 5. In disallowing this amount, ACF cited GPS II-98, which provides, in part: “To provide support for construction or modernization that is considered ‘major,’ an OPDIV must have specific statutory authority allowing construction or modernization. Even if[] an OPDIV has this authority, [an awards] recipient may not incur costs for construction or modernization unless the OPDIV specifically authorizes such costs.” Id. (quoting GPS II-98). ACF also noted that Part IV.5 of FOA for FY15 HHS-2015-ACF-ORR-ZU-0833 “made clear that Construction is not an allowable activity or expenditure under this grant award.” Id.
IES asserts that ACF wrongly disallowed the San Benito costs for two reasons. IES first asserts that ACF erroneously “reli[ed] on the nebulous concept of ‘construction’” in the GPS and instead should have considered “the actual, controlling regulations [that] allow for rearrangement costs” under these circumstances. Consol. Br. at 11-12. IES states that the regulations in effect at the time the award was made and those that went into effect during the award period in question allowed for costs incurred for rearrangement of a facility necessary to make it suitable for project use. Id. at 12 (quoting 2 C.F.R. Part 230, App. B, ¶ 39 (2013)
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those items that are designated as requiring prior approval by the part and its appendices. Generally, this permission will be in writing. Where an item of cost requiring prior approval is specified in the budget of an award, approval of the budget constitutes approval of that cost.” Id. “Consequently,” IES says, “approval of the project budget would have been enough, although that was not the only way to obtaining prior approval for arrangement costs.” Id. (citing IES Ex. 9). According to IES, moreover, the question of what constitutes a “major” renovation (versus what it calls necessary repairs) is “vague.” Notice of Appeal and Motion to Dismiss at 8.
Second, IES takes issue with ACF’s failure to consider the “nature of the award[s],” i.e., cooperative agreements, which, in contrast to grants, involve substantial involvement between the awarding agency and the award recipient. Consol. Br. at 12-13. IES writes, “IES and ORR were in constant communication about the San Benito shelter, and the ORR was really the driving force in the start-up of the new shelter. Records of communications between ORR and IES show that ORR was perfectly aware of the costs and the unexpected delays in opening the shelter and directed IES to continue with the project.” Id. (citing IES Ex. 6). IES maintains that, in consideration of the “partnership” between ORR and IES “and the ability of funding sources to grant an extension of the time for performance for up to twelve months, it becomes clear that these costs were approved and allowable.” Id. at 13 (citing 45 C.F.R. § 75.308(d)(2) (2017)).
We note, however, that the $8,493,168.70 disallowed for San Benito was not limited strictly to the renovation costs, but also included various other costs, such as personnel and fringe benefits costs and security costs – all incurred before IES obtained a state operating license for San Benito. See NCC Award Decision at 5 (“Grant funds were spent on a lease, to make major renovations and to pay for security during a time that the [San Benito] shelter was not being used to house [unaccompanied children].”); Agency Opinion, Ex. A at 1-2 (March 2, 2018 email from ACF to IES, which included a table of various categories of costs totaling the $8,493,168.70 disallowed and stated that the state operating license for San Benito “was issued on October 7, 2015”
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included $3,232,150.21 for “Maintenance & Repairs Bldg”). Although ACF did not set out in detail the cost categories and amounts that together comprised the disallowed amount for San Benito in its Disallowance Decision, ACF did so shortly after it issued its two decisions through its March 2, 2018 email to IES, and reiterated that IES had improperly spent over $8 million for San Benito in 2015, before IES received a state operating license or provided any services to unaccompanied children. As we noted earlier, the Board permits a federal agency to amend or clarify the basis for its decision so long as the non-federal entity is given an adequate opportunity to respond to that basis during the appeal. See supra note 19 and cited cases.
Capital expenditures for improvements to land and buildings, such as renovation costs, may be allowed as a direct cost, unless barred by program legislation, but only as a direct cost (unless otherwise approved in advance); whereas new construction or “modernization” costs are unallowable absent authorization in the program legislation and specific agency approval. See 45 C.F.R. § 75.439(b)(3) (“[c]apital expenditures for improvements to land, building, or equipment which materially increase their value or useful life are unallowable as a direct cost except with the prior written approval of the HHS awarding agency . . .”); GPS II-30 (“Alteration and Renovation” or A&R costs “are allowable unless the program legislation, implementing regulations, or other terms and conditions of the award specifically exclude such activity”); GPS II-32 (“Construction/modernization” costs are “[a]llowable only when program legislation specifically authorizes new construction, modernization, or other activities considered major A&R, and the OPDIV specifically authorizes such costs in the [notice of award].”); GPS II-66 (“[A]ctivities under individual grants that constitute major renovation of real property . . . may be charged to HHS grants only with specific statutory authority and GMO approval.”); GPS II-98-99 (“major” construction or modernization requires “specific statutory authority” and the OPDIV must specifically authorize costs).
Contrary to IES’s position, GPS does provide guidance on what “major” and “minor” construction or A&R costs entail. It is true that the Part 75 regulations and GPS do not spell out what the term “rearrangement costs” means. Rearrangement costs, however, may be contrasted against costs that involve very significant alterations, and against major construction or renovation. See Virgin Islands Dep’t of Justice, DAB No. 1067, at 1-2 (1989) (concluding, in part, that office renovation costs occasioned by office moves that did not involve construction of wings or work on exterior walls were not construction or major renovation costs, but were rearrangement and alteration costs). “A&R costs that do not exceed the prior approval thresholds in” the GPS section headed “Prior Approval Requirements-OPDIV Prior-Approval” (see GPS II-48-49) (or in Part IV of the GPS, as applicable) “generally are considered ‘minor A&R’ and those exceeding that amount generally are considered ‘major A&R.’” GPS II-32; see also GPS II-99 (“Generally, an A&R project that is under the OPDIV threshold is treated as minor A&R; however, depending on the activity proposed, it may be considered modernization (which cannot be supported unless the OPDIV has the required statutory authority).”). In general, prior
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approval is required where A&R costs would exceed the lesser of $150,000 or 25 percent of the total approved budget for a budget period or the total costs reasonably expected to be awarded for a project period. See GPS II-49. We therefore conclude that the guidance is sufficiently specific for IES to have known whether it was completing minor rearrangements or repairs or undertaking major renovations, and to have recognized that the scale of the renovation or alterations involved here was clearly major. Furthermore, we note that, even assuming for the moment that the disallowed costs may properly be considered “arrangement” costs that did not involve significant or major capital expenditures, the net effect of the regulations on which IES relies (2 C.F.R. Part 230, App. B, ¶ 39 (2013) and section 230.25(b) (2013), and 45 C.F.R. § 75.462(a) (2017); see Consol. Br. at 12) is that affirmative, advance approval by the awarding agency is required under these circumstances, where the notices of award clearly and consistently stated that no money was allocated for capital expenditures. See, e.g., Audit Documentation, Vol. 1, at 1 (first page of the notice of award for the Driscoll shelter, indicating that “$0.00” was allocated in the approved budget for the cost category “Facilities/Construction”).
We now turn to the issue of IES’s incurrence of costs for San Benito before IES could operate San Benito. We note that FOA HHS-2015-ACF-ORR-ZU-0833 provides that, to be eligible to apply for a cooperative agreement, the applicant is “required to be licensed by a state licensing agency to provide residential, group, or foster care services for dependent children.” IES Ex. 3, at 000030.
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be included in the cooperative agreements, and to continue to be licensed. But IES does not dispute that San Benito was not licensed by the state of Texas until October 7, 2015. Audit Documentation, Vol. 1, at 45 (certificate authorizing “General Residential Operation” of “IES San Benito Shelter Care program” issued by the Texas Department of Family and Protective Services, Child-Care Licensing Division, on October 7, 2015, and to remain “effective until April 7, 2016”). IES did not argue or show that San Benito was licensed earlier, or even that it had a temporary or provisional state operating license that ACF could have considered accepting as reasonable assurance that IES would be able to operate, any earlier than October 7, 2015. What is more, IES has the burden of showing that any costs disallowed beyond the renovation of the building already discussed reasonably served the program goals despite having no assurance of a license and no children on site to be served. See, e.g., Gulf Coast, DAB No. 2670, at 3 (2015) (grantee “is clearly in a better position to establish that it did comply with applicable requirements than” the awarding agency “is to establish that it did not”); Southern Del. Ctr. for Children & Families, DAB No. 2073, at 5-6 (2007) (grantee has the ultimate burden of persuasion to show compliance with program standards since it is in a better position to show compliance); Norwalk Econ. Opportunity Now, Inc., DAB No. 2002, at 7 (2005) (similar discussion). IES has offered little more than broad claims that the expenditures were somehow needed by way of preparation for the eventual startup and that ACF was in close touch and knew what was being done. See Consol. Br. at 13 (citing IES Ex. 6).
We do not find IES’s submissions sufficient to establish that ACF was kept aware of, much less agreed to, the full situation in relation to the San Benito shelter and costs incurred during its licensing delays. For example, the communications IES included in its exhibit 6 (186 pages of emails between various individuals at IES and ORR) actually reflect that ORR spent much of spring 2014 trying to obtain from IES a budget for San Benito that ORR did not consider greatly inflated and unreasonable. See generally IES Ex. 6, at 000759-792; id. at 000762 (at one point during this period, ORR wrote that “the start-up [costs are] astronomical” and asked whether “there is room to reduce costs”). For the first half of July, IES repeatedly sought and received approval for personnel hires in the run-up to a scheduled opening on July 15, 2014. See id. at 000794-796, 000798, 000800, 000802-805. Yet, on July 11, 2014, IES’s ORR contact stated that she had requested an update “numerous times” and still had no confirmation that San Benito’s beds would be open on July 15, 2014. Id. at 000801. Ruben Gallegos, Jr., apologized for the lack of information, claiming he had assumed his staff were “responding.” Id. at 000800-801. On July 14, 2014, the ORR contact emailed IES, asking about the opening date and when the beds were expected to be ready. Id. at 000800 (stating that this was “the first that [she was] getting information on the building still not having a license” and asking for “timeline for completion”). IES responded on July 14, 2014 that it still had no permits due to “zoning issues,” and would need about two months to “build out” once it obtained them, immediately after which ORR asked IES to further reduce the budget in light of the delayed opening. Id. at 000799-800.
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The email exchanges continue to show ORR asking for updates on the opening date and pressing for budget reductions, with IES missing dates and belatedly reporting obstacles. In a September 16, 2014 email, the ORR contact stated that, based on her conversation with IES as of that date, the openings of the San Benito and Harlingen II programs were “postpone[d]” again and the bed capacity of Weslaco reduced, and therefore IES was to stop all recruitment of staff until further notice. Id. at 000837. By email dated December 17, 2014, IES responded to more ORR inquiries to report that “[n]o beds will be available in February [2015],” and claimed that “100 Beds budgeted for FY 15 are projected to be ready by March 1, 2015.” Id. at 000838-839. By March 3, 2015, IES responded to further ORR inquiries with new projections for partial opening on April 30, 2015, and full opening by May 30, 2015. Id. at 000842. In short, IES’s own collection of its communications with ORR reveals a pattern of promising dates and not notifying ORR of its failure or inability to provide the promised beds for unaccompanied children until the last minute, and only in response to repeated ORR inquiries.
Nor are we convinced by IES’s rather vague suggestion that the “constant” communication between IES and ORR staff about the budget leading up to the award and the “cooperative” relationship between IES and ACF somehow suffice as approval of the costs or establish that express approval of such costs was not necessary under these circumstances. IES does nothing more than cite globally to its exhibit 6 and exhibit 9 (a 49-page exhibit, which comprises multiple 2014-15 budget proposals and worksheets for Driscoll and San Benito and general ledger entries from the same period). See Consol. Br. at 12-13. Nowhere does IES identify anything specific in those exhibits from which we can reasonably conclude that ACF/ORR approved the subject costs. Certainly, our review of the exchanges between IES and ORR about the budget for San Benito discloses nothing suggesting ACF/ORR approved incurring costs in excess of $8 million before San Benito had any assurance that it would be able to operate. As noted, the opening of San Benito was postponed repeatedly, evidently in part due to difficulties in passing various required inspections and obtaining required local permits. See, e.g., IES Ex. 6, at 000837, 000840-863, 000885-886, 000891-895, 000906-908. ACF continued to question IES about the budget and negotiated for a lower, more reasonable budget while continually asking about the status of licensing and the opening date, which hardly demonstrates affirmative prior approval of any of the costs that were disallowed.
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IES’s arguments about budget negotiations regarding the cooperative agreement for San Benito do not address the issue, which is not about the budget for San Benito,
We uphold ACF’s determination to disallow $8,493,168.70.
IV. ACF properly withheld a non-competing continuation award.
By its decision dated February 21, 2018 (A-18-46), ACF notified IES that it would not allow a non-competing continuation award for nine grants based on information from OIG’s audit, which “identified to ACF findings that included less than arms-length agreements related to property leases, violation of executive compensation levels, non-compliance with conflict of interest requirements and procurement procedures, and numerous examples of substantial failures . . . to comply with regulations governing allowable costs under HHS awards.” NCC Award Decision at 1. ACF also stated, “As a result of these findings, on November 2, 2017, ACF placed IES on drawdown restriction (Costs Reimbursement) due to concerns regarding [IES’s] lack of effective control over, and accountability for federal funds, property, and other assets. IES was also prohibited from requesting draw down of federal funds without prior ACF approval.” Id.
“The non-Federal entity must . . . [e]stablish and maintain effective internal control over the Federal award that provides reasonable assurance that the non-Federal entity is managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal award.” 45 C.F.R. § 75.303(a). The non-federal entity also must “[c]omply with,” and “[e]valuate and monitor” its compliance with,
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federal statutes, regulations, and the terms and conditions of the federal awards. Id. § 75.303(b), (c). It also must have a financial management system that, among other things, maintains “[e]ffective control over, and accountability for, all funds, property, and other assets,” and “must adequately safeguard all assets and assure that they are used solely for authorized purposes.” Id. § 75.302(b)(4).
ACF has authority to take remedial action if a non-federal entity fails to comply with federal law, regulations, or the terms and conditions of a federal award. Those actions include the disallowance of all or part of the cost of the activity or noncompliant action, whole or partial suspension of award activities, termination of the award, withholding of further awards for the project or program, and such “other remedies that may be legally available.” See 45 C.F.R. § 75.371; see also GPS II-88-89. ACF may withhold a non-competing continuation award if, among other reasons, “[a] recipient failed to meet the terms and conditions of a previous award” or “continued funding would not be in the best interests of the Federal government.” GPS II-89.
Award recipients must establish conflict-of-interest policies for federal awards and must disclose to the awarding agency information about, for instance, relationships or outside interests that could pose a potential conflict of interest. See 45 C.F.R. § 75.112. HHS requires award recipients to establish safeguards, in written standards of conduct, to prevent those involved in grant-supported activities from using their positions for purposes that are, or give the appearance of being, motivated by a desire for private financial gain for themselves or others, such as those with whom they have family, business, or other ties. See GPS II-7.
IES does not dispute that it entered into less-than-arm’s-length leases with Ruben Gallegos, Sr., Ph.D., Ruben Gallegos, Jr., Juan Gonzalez, or Mikel Gonzalez, all of whom held high-level positions in IES, or with the companies in which they held an interest. As discussed earlier, the record evidences the leases and that the individuals or the companies in which they held an interest financially benefited from those transactions, raising serious concerns about the conflict of interest between these individuals personally and the positions they held as executives or key employees of IES. IES nowhere addresses what safeguards, if any, it had in place or any actions it took to mitigate the conflict-of-interest concerns posed by multiple related-party transactions. Thus, there is, under these circumstances, a basis for determining that continued funding would not serve the government’s best interests.
Award recipients “must [maintain] . . . [e]ffective control over, and accountability for, all funds, property, and other assets,” and “must adequately safeguard all assets and assure that they are used solely for authorized purposes.” 45 C.F.R. § 75.302(b)(4). Award recipients also must “[e]stablish and maintain effective internal control over the Federal award that provides reasonable assurance that [they are] managing the Federal award in compliance with Federal statutes, regulations, and the terms and conditions of the Federal
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award.” Id. § 75.303(a). Award recipients must comply with, and evaluate and monitor the compliance with, the law, regulations, and the terms and conditions of the award. Id. § 75.303(b), (c). They must take prompt action when instances of noncompliance are identified, including noncompliance identified in an audit. Id. § 75.303(d). IES’s entering into less-than-arm’s-length leases with multiple key employees who stood to gain and did gain personally from those transactions, as well as IES’s spending millions of dollars of federal funds on a facility that IES could not legally open and run, show that IES was not maintaining effective control over, accounting for, and safeguarding federal funds so that they were used only for authorized purposes, consistent with applicable law, regulations, and the terms and conditions of the awards.
Based on these failures, ACF properly withheld a non-competing continuation award.
Conclusion
We uphold a total disallowance of $17,673,785.40. This amount accounts for disallowances of $851,756.35 in excess executive compensation, $217,500 in depreciation costs on related-party leases, $8,111,360.35 (of the $10,070,736 disallowed) for related-party lease costs, and $8,493,168.70 for the San Benito shelter. We also uphold ACF’s decision not to give IES a non-competing continuation award.
/s/
Leslie A. Sussan Board Member
/s/
Constance B. Tobias Board Member
/s/
Susan S. Yim Presiding Board Member