Nebraska Department of Health and Human Services, DAB No. 3071 (2022)

DECISION

The Nebraska Department of Health and Human Services (Nebraska or State) appeals the September 21, 2021 decision of the Administration for Community Living (ACL) disallowing $6,936 in costs charged to Older Americans Act program grants.  ACL decided, based on the findings of an audit performed for fiscal year 2019, that Nebraska failed to adequately monitor its subrecipients to ensure that payments made to those subrecipients were allowable costs.  For the reasons set out below, we conclude that ACL properly disallowed $6,936.

Legal Background

The Older Americans Act of 1965 (Act), Pub. L. 89-73, as amended and codified in 42 U.S.C. § 3001 et seq., supports social services and programs for individuals 60 years and older.  Services and programs authorized and funded by the Act include nutrition services, family caregiver support, community service development, and services to prevent the abuse, neglect, and exploitation of older persons.  More recently, the Supporting Older Americans Act of 2020, Pub. L. 116-131, enacted in March 2020, re-authorized funding for Older Americans Act programs through fiscal year 2024.

ACL is an operating division within the U.S. Department of Health and Human Services.  The Administration on Aging is a unit within ACL, established pursuant to Title II of the Act (42 U.S.C. §§ 3011-3020g), which administers the programs at issue in this case.  Also established pursuant to Title II of the Act are State and Territorial Units on Aging (SUAs), which are state-level agencies responsible for planning and policy developments and administration of activities in accordance with the Act.  Title II of the Act also established Area Agencies on Aging (AAAs), which are public or private nonprofit agencies designated by a state to operate within a planning and service area, or “PSA,” to

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carry out a comprehensive and coordinated system to deliver services to older individuals at regional and local levels.¹

The regulations in 45 C.F.R. Part 75, “Uniform Administrative Requirements, Cost Principles, and Audit Requirements for HHS Awards,” govern this appeal.  The regulations in Part 75, subpart E include cost principles that 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).  

A cost must be allowable.  To be allowable, a cost, among other requirements, must “[b]e necessary and reasonable for the performance of the Federal award and be allocable thereto . . . .”  45 C.F.R. § 75.403(a).  “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.”  Id. § 75.404.  “In determining the reasonableness of a given cost, consideration must be given to,” among other things, “[w]hether the cost is of a type generally recognized as ordinary and necessary for the operation of the non-Federal entity or the proper and efficient performance of the Federal award.”  Id. § 75.404(a). 

A cost also must be allocable to the award.  “A cost is allocable to a particular Federal award or other cost objective if the goods or services involved are chargeable or assignable to that Federal award or cost objective in accordance with relative benefits received.”  45 C.F.R. § 75.405(a).  “This standard is met if the cost:  (1) [i]s incurred specifically for the Federal award; (2) [b]enefits both the Federal award and other work of the non-Federal entity and can be distributed in proportions that may be approximated using reasonable methods; and (3) [i]s necessary to the overall operation of the non-Federal entity and is assignable in part to the Federal award . . . .”  Id.

The regulations in Part 75, subpart D, captioned “Post Federal Award Requirements,” include provisions concerning, among other things, requiring the grantee, i.e., the award recipient, to monitor and manage the activities of subrecipients (i.e., AAAs mentioned

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above) to ensure that award funds are used in accordance with applicable requirements.  If the grantee 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).   

The procedural regulations in 45 C.F.R. Part 16 govern this appeal.  See 45 C.F.R. Part 16, Appendix A, ¶ B(a)(4) (stating that the Board has authority to review “[d]isallowances under Title III of the Older American[s] Act”).  The Board is “bound by all applicable laws and regulations” when reviewing a disallowance decision.  45 C.F.R. § 16.14.  A grantee “bears the burden of documenting the existence and allowability of its expenditures of federal funds” under the applicable regulations and cost principles.  See Touch of Love Ministries, Inc., DAB No. 2393, at 3 (2011) (citation omitted); see also Bright Beginnings for Kittitas Cnty., DAB No. 2623, at 5 (2015) (noting that the Board has held that it is a fundamental principle of grants management that a grantee “‘bears the burden of demonstrating the allowability and allocability of costs for which it received federal funding’”) (quoting Marie Detty Youth & Fam. Servs. Ctr., Inc., DAB No. 2024, at 3 (2006)).  It is well-settled that the grantee bears the burden to show that a cost claimed under a grant is supported by adequate documentation, once that question has been raised by the grantor or awarding agency.  See, e.g., Galveston Cnty. Comm. Action Council, DAB No. 2514, at 2 (2013) (citation omitted); Northstar Youth Servs., Inc., DAB No. 1884, at 5 (2003) (citations omitted).  Where a disallowance is authorized by law and the grantee has not disproved its factual basis for the disallowance of costs, the Board must affirm the disallowance.  Touch of Love Ministries at 3 (citations omitted).

Case Background

The Nebraska Auditor of Public Accounts (auditor)² performed a financial audit, pursuant to the Single Audit Act,³ of Nebraska’s Older Americans Act programs for the fiscal year that ended on June 30, 2019.  The auditor set out its findings in a report titled “State of Nebraska Comprehensive Annual Financial Report for Fiscal Year Ended June 30, 2019” (Audit Report No. A-07-20-60209).  ACL Exhibit (ACL Ex.) 1; ACL Ex. 2, at 218-367. 

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ACL’s subsequent disallowance decision that was based on the audit findings concerns six awards (18AANET3SS (2018), 18AANET3CM (2018), 18AANET3HD (2018), 1901NEOASS (2019), 1901NEOACM (2019), and 1901NEOAHD (2019)) under two Catalog of Federal Domestic Assistance (CFDA)⁴ grants, numbered 93.044 and 93.045.⁵  ACL Ex. 1, at 1, 3. 

As relevant to this appeal, the audit report indicates that, with respect to CFDA grants 93.044 and 93.045, Nebraska had failed to comply with applicable Part 75 regulations, including certain cost principles, and to adequately monitor the performance of multiple subrecipients (i.e., AAAs).  ACL Ex. 2, at 222 (audit finding 2019-031, stating that Nebraska had not met the “Allowability & Subrecipient Monitoring” “Compliance Requirement”).  The audit report also stated:

A significant deficiency in internal control over compliance is a deficiency, or a combination of deficiencies, in internal control over compliance with a type of compliance requirement of a Federal program that is less severe than a material weakness in internal control over compliance, yet important enough to merit attention by those charged with governance.  We consider the deficiencies in internal control over compliance described in the accompanying schedule of findings and questioned costs as items [to include audit finding] . . . 2019-031 . . . to be significant deficiencies. 

Id. at 225 (italics in original); see also id. at 226 (noting that audit finding 2019-031 was among those considered to identify “[s]ignificant deficiencies in internal control over the major programs”) and 285-287 (citing Part 75 provisions and explaining why the auditor found deficiencies).

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By letter dated September 21, 2021, ACL notified Nebraska that it was disallowing the following costs totaling $6,936 based on audit finding 2019-031 concerning three of eight subrecipients.  ACL Ex. 1, at 1, 3.  ACL set out the following table:

Questioned Costs:  $6,936

CFDA	Grant	Questioned Costs
93.044	18AANET3SS	$915
93.044	1901NEOASS	$968
93.045	18AAANET3CM	$530
93.045	1901NEOACM	$2,713
93.045	18AAANET3HD	$415
93.045	1901NEOAHD	$1,395

Id. at 3.  ACL also wrote:

[Nebraska] receives monthly expense reports from eight subrecipient Area Agencies on Aging (AAAs).  These reports include attachments with a breakdown of the current month’s expenses by cost categories and indicate the amount of local matching funds used for each of the activities.  The monthly expense reports are reviewed by [Nebraska] staff; however, no invoices or detailed supporting documentation are required at the time of payment.  [Nebraska] also reviews Single Audit reports submitted by the AAAs.  For fiscal year 2019, [Nebraska] engaged a contractor [i.e., the auditor] to perform agreed-upon procedures of the subrecipients’ expenditures.  The contractor sampled transactions for varied months throughout the fiscal year ended June 30, 2019.  The contractor prepared a report for each subrecipient review that detailed various items of insufficient documentation, inadequate procedures, or noncompliance with Federal guidelines.  [Nebraska] then provided the subrecipients with a letter that briefly summarized the results of the agreed-upon procedures report with general recommendations for the subrecipient.  Three of eight subrecipients did not have adequate follow-up to ensure compliance with Federal regulations.

Id.⁶; see also ACL Ex. 2, at 286 (audit report, from which ACL took the above language).

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As ACL explains in its brief submitted to the Board, the three subrecipients and the disallowed amount of the total of $6,936 attributed to each subrecipient are:

• Midland AAA (Midland) - $1,860
• Blue Rivers AAA (Blue Rivers) - $5,056
• South Central Nebraska AAA (South Central Nebraska) - $20

See ACL Response Br. at 2-3, 4 (exhibit citations omitted).

According to ACL, “Subrecipient monitoring procedures were inadequate.  [Nebraska] did not follow up adequately on deficiencies noted by agreed-upon procedures to ensure that corrective action was implemented by the subrecipients.”  ACL Ex. 1, at 3.  ACL also stated, “Without adequate follow-up procedures to ensure subrecipient expenditures are allowable, there is an increased risk for the misuse of Federal funds and noncompliance with Federal regulations.”  Id. at 4; see also id. at 2-3.  ACL recommended that Nebraska “improve procedures for following up on subrecipient deficiencies to ensure subrecipient payments are for actual and allowable costs, in accordance with Federal requirements,” and “issue management decisions for subrecipients’ single audit findings.”  Id. at 4.  ACL further stated that Nebraska “did not have adequate documentation” showing that the subrecipients had “corrected” the deficiencies found upon audit and on which $6,936 in costs were disallowed, and had made “adjustments” “as needed.”  Id.

Nebraska timely appealed ACL’s decision to the Board pursuant to 45 C.F.R. § 16.7(a).  The parties have submitted briefs and exhibits in compliance with the Board’s instructions in its October 26, 2021 letter acknowledging the appeal.

Standard of Review

The Board reviews de novo an agency’s decision to disallow costs charged to federal awards.  See, e.g., Delta Found., Inc., DAB No. 1710, at 25 (1999), aff’d, No. 4:00-CV-104-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).

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Analysis

Nebraska has received adequate notice of the disallowed costs of $6,936 and why they are not allowable, and has been given an opportunity to show that ACL was wrong to disallow the costs.  However, Nebraska has not borne its burden to prove that any of the costs are allowable.  Accordingly, we uphold the disallowance in full.

I.    Notice of basis for disallowance and opportunity to respond; burden of proof

Nebraska states that the auditor, the Nebraska Auditor of Public Accounts, “has not provided support for the . . . [disallowance of] $6,936, and no alert that questioned costs were found at all was provided until after the audit period had ended.”  Nebraska Br. at 3.  This statement calls for a discussion of the burden of proof and raises an issue of whether Nebraska was given adequate notice of the basis for ACL’s disallowance decision and an opportunity to respond to that decision.⁷

In appeals governed by Part 16 regulations (such as Nebraska’s appeal), the awarding federal agency must first articulate the basis for its decision to enable the non-federal party to understand and respond to 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,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,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 meets that burden, which we have described as minimal, the non-federal

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party bears the burden to demonstrate that the federal agency’s decision was wrong.  See Mass. Exec. Off. at 11 (citations omitted); see also 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) (stating that the grantee bears the burden to show it has operated federally-funded programs consistent with grant terms and conditions and applicable regulations); 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) (stating that the grantee’s burden would include the burden to show that the grantee spent award money in support of the award’s objectives and in compliance with the award’s terms and conditions).  Where the decisions appealed involved an audit of the grantee, the grantee typically has the burden to show that the audit results are “legally or factually unjustified.”  Mass. Exec. Off. at 11 (citations omitted).

Given Nebraska’s assertion and in accordance with the parties’ burdens, we consider whether ACL’s disallowance decision sufficiently explained the basis for the disallowance, thereby giving Nebraska adequate notice of the reasons for the decision and carrying ACL’s initial, minimal burden.  We find that ACL provided Nebraska adequate notice and met its initial burden.  As noted elsewhere in our decision, the disallowance decision incorporated language from the audit report, the findings from which, as ACL explained, were the basis for its decision to disallow $6,936.  We have determined that federal agencies met their initial burden of proof by sufficiently explaining in their decisions that the decisions were based on audit findings.  See Tex. Health and Human Servs. Comm., DAB No. 3066, at 10 (2022) (and cited cases).  ACL, too, has done so here. 

ACL having provided adequate notice of the basis for the disallowance and having met its initial, minimal burden, the question becomes whether Nebraska has borne its burden to prove that the disallowed costs were allowable.  Nebraska has had an opportunity to show that the disallowed costs are allowable through the appeal process, which afforded Nebraska an opportunity to “submit a written statement of its arguments concerning why” the disallowance decision is “wrong” and to “submit copies of the documents on which its arguments are based,” as well as an opportunity to submit a brief replying to ACL’s response brief and supporting documents, i.e., ACL Exs. 1-16.  See Board’s October 26, 2021 letter at 2.  Nebraska has availed itself of the opportunity to submit its opening brief and supporting documents (NE Exs. 1-5) but did not use its opportunity to submit a reply brief (or additional exhibits).

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Nebraska complains that “no alert that questioned costs were found at all was provided until after the audit period had ended.”  Nebraska Br. at 3.  Nebraska does not cite any authority as support for its complaint that specific notice of a questioned cost must have been given before the end of an audit period where the award recipient is subject to an audit such as the Single Audit Act audit Nebraska underwent, and we are not aware of any such authority.  To the extent the complaint could be understood to assert that notice of the basis for the disallowance was somehow insufficient or defective because it allegedly was provided late (“after the audit period had ended”), as we explained, the relevant notice issue is whether the disallowance decision sufficiently set out the basis or bases for the disallowance to enable Nebraska to respond during the appeal before the Board.  ACL gave Nebraska sufficient notice of the basis for the disallowance and Nebraska has used its opportunity to respond during these appeal proceedings.   

Board review under Part 16 procedures is generally limited to resolving disputes about material facts and deciding whether the appealed decision is consistent with applicable law and regulations.  The Board therefore must uphold a decision, such as ACL’s disallowance decision, if it is authorized by law and the non-federal party (Nebraska) has not disproved the factual basis for the decision.  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 5-6 (2012) (citations omitted) (The Board must uphold a disallowance when it is “authorized by law” and its “factual basis” has not been “disproved.”).  As we explain in the next section, Nebraska has not borne its burden to show that the costs in question were allowable and, accordingly, we affirm the disallowance in full.

II.    Disallowed costs

Nebraska, as a “pass-through entity,” must monitor a subrecipient’s activities to ensure that a subaward is used for authorized purposes, in compliance with laws, regulations, and the terms and conditions of the subaward, and that the subaward performance goals are achieved.⁸  45 C.F.R. § 75.352(d).  A pass-through entity’s monitoring of a

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subrecipient must include reviewing financial and performance reports required by the pass-through entity; following up and ensuring that the subrecipient takes timely and appropriate action on all deficiencies pertaining to the federal award provided to the subrecipient from the pass-through entity detected through audits, on-site reviews, and other means; and issuing a management decision for audit findings pertaining to the federal award provided to the subrecipient from the pass-through entity as required by 45 C.F.R. § 75.521.  Id. § 75.352(d)(1)-(3); see also id. § 75.521(a) and (c) (setting out additional requirements concerning the management decision the pass-through entity is responsible for issuing).

A.    Midland – disallowance of $1,860

Quoting the audit report, ACL’s disallowance decision states:

[Midland] was allocating personnel costs and other expenses based on budgeted amounts, which is not in accordance with Federal cost principles.  [Midland] did not submit a cost allocation plan or a time study for fiscal year 2019 and did not make any adjusting entries for the fiscal year.  [Nebraska] did not adequately follow-up on findings to ensure corrective action was taken.  Known questioned costs for the payment tested were $1,860. 

ACL Ex. 1, at 4 (quoting ACL Ex. 2, at 287); see also ACL Br. at 3 and 4 (discussing $1,860 disallowed for Midland).

ACL asserts that, concerning the three employees to which Nebraska’s subrecipient monitoring report for Midland (NE Ex. 2) referred, the report indicated the auditor could not verify whether the correct program was charged for personnel costs and noted that the allocation of personnel costs was based on budgeted amounts or on budgeted line items and estimates, and not on actual time the personnel had worked.  See ACL Br. at 3 (citing NE Ex. 2, at 11-12), 6 (stating that “personnel payments . . . were based on budgeted line items and estimates . . . .”).  ACL states that, because personnel costs were not documented, Midland did not comply with 45 C.F.R. § 75.430 (captioned “Compensation – personal services”).  Id. at 3 (citing NE Ex. 2, at 11), 6 (stating that “[t]he personnel costs . . . are clearly unallowable and not in conformity with the regulatory requirements . . . .”).  The auditor, ACL states, made recommendations for improved procedures and corrective actions.  Id. at 3 (citing NE Ex. 2, at 11-20), 6 (“For [Midland] there was a corrective action plan and procedures identified to ensure compliance . . . .”).  After considering Nebraska’s management response to the audit findings, the auditor indicated

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that Nebraska had not shown the subrecipients had remedied the identified problems.  Id. at 7 (citing ACL Ex. 2, at 286-287).⁹

Nebraska states that its monitoring report for Midland (NE Ex. 2)¹⁰ included a summary of the results of fiscal monitoring performed by the auditor and the corrective action plan prepared by the auditor and Midland.  Nebraska Br. at 1-2.  Nebraska writes, “In the summary of results completed by the [auditor], there is no reference to the amount of questioned costs noted in the final Single Audit finding of $1,860.  That amount is also not referenced in the corrective action plan . . . .  If the amount of those costs were sufficient[ly] enumerated in the SFY2019 Single Audit, referencing $1,860 in questioned costs in the [auditor’s] summary of results (or referencing questioned costs at all), and including remediation of those costs in the corrective action plan would have allowed for timely follow up by [Nebraska].”  Id. at 2 (Nebraska’s emphasis). 

According to Nebraska, “it’s indeterminable which costs make up the questioned costs” for Midland.  Id.  Nebraska maintains that its “follow up” “focused on procedural changes” for Midland “to ensure good use of funds going forward . . . .”  Id.  Thus, on appeal, Nebraska complains, essentially, that it could not have monitored Midland and implemented appropriate corrective actions earlier because it was not notified earlier about the specific breakdown of costs that totaled $1,860.    

Nebraska’s complaint rings hollow.  The auditor completed its audit of the fiscal year (ending June 30, 2019) on December 19, 2019.  See ACL Ex. 2, at 218, 219, 225.  In its report on Midland, issued in December 2018, well before the audit which could not have been completed before June 30, 2019, Nebraska itself indicated that the auditor had “tested three [Midland] employees and could not verify whether the correct program was charged for the duties performed,” and that the auditor had determined that “[t]he allocation of the personnel costs was based on budgeted amounts and not a reflection of

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actual time worked.”  NE Ex. 2, at 1 and 11 (citing 45 C.F.R. § 75.430).  The report also identified the three Midland employees in question by number (employees 1, 2 and 3), and included information about the programs to which their personnel costs were charged, the specific amounts charged to various programs, and the “salary for pay period” for each employee.  Id. at 11.  Although the report did not identify each Midland employee by name or other identifier other than by number, Nebraska (and certainly Midland) had to have known which employees were the subject of the auditor’s concerns to have been able to include in the report a breakdown of charges for those employees by program and each employee’s compensation.  Thus, Nebraska’s own report that pre-dates the audit indicates Nebraska’s awareness of the employees’ costs at issue and why those costs were being questioned.¹¹  Although the auditor’s subsequent report did not explicitly break down the specific costs that totaled $1,860, it informed Nebraska of a problem common to the personnel costs for the employees, i.e., Midland had “allocat[ed] personnel costs and other expenses on budgeted amounts, which [was] not in accordance with Federal cost principles.”  ACL Ex. 2, at 287.  We do not see how not being told specifically which costs made up the total of $1,860 before the end of the audit period (assuming for the moment that claim is accurate) could have impeded Nebraska’s ability to address the problem of failing to allocate personnel costs to actual time the employees had worked – a problem determined to be common to all three employees and about which Nebraska and Midland already knew.¹²

We note, moreover, that Nebraska itself appears to have acknowledged the validity of the auditor’s concerns about the irregularities in allocating personnel costs well before the audit was completed because the monitoring report stated that Midland was “currently working on conducting a time study to more accurately charge [personnel] costs to its

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various programs.”  NE Ex. 2, at 11.  “However, at the time of the monitoring, the time study was not complete and had not been approved by” the U.S. Department of Health and Human Services.  Id.  The report went on to state, “Because the method used to allocate personnel costs [was] not documented, [Midland] was not in compliance with the Uniform Grant Guidance . . . . ”  Id.  This language indicates both awareness and acknowledgment of shortcomings in Midland’s method of allocating personnel costs and that Midland was, around the time of the issuance of the report, still working to remedy the problem through the time study, which had yet to be completed.

More to the point, however, we must bear in mind that the gravamen of ACL’s allegations in its disallowance determination is not that Midland had not fully completed corrective actions (which Nebraska does not dispute),¹³ but that the irregularities in subrecipient personnel cost allocation problems and ongoing efforts to remediate them implicated inadequate subrecipient monitoring by Nebraska.  Nebraska’s alleged inability to ensure a subrecipient’s remediation merely because, allegedly, it was not given, earlier, a specific breakdown of the amount disallowed for Midland is, essentially, an unsuccessful attempt to deflect shortcomings in its monitoring responsibilities under section 75.352.¹⁴  It was incumbent upon Nebraska to comply with monitoring requirements all along, and its obligations thereunder were not relieved or excused because it allegedly was not informed of exactly the amounts that comprised the disallowed costs attributable to Midland.  To the extent Nebraska’s inadequate monitoring of Midland contributed to the subsequent audit findings that necessitated corrective actions and which led to ACL’s disallowance – which Nebraska nowhere directly challenges, let alone successfully rebuts with any proof – Nebraska has not complied with the regulations.¹⁵

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Moreover, Nebraska does not allege that the auditor was incorrect or inaccurate when it determined that personnel costs did not reflect the work performed and were based on budgeted amounts.  It certainly has not offered any proof to the contrary.  Nebraska therefore has not shown compliance with cost principles governing compensation for personal services (i.e., wages, salaries, and fringe benefits), which provide that such costs are allowable to the extent they satisfy certain requirements.  See 45 C.F.R. § 75.430(a).  Among those requirements are standards for documenting personnel expenses.  Id. § 75.430(i).  “Charges to federal awards for salaries and wages must be based on records that accurately reflect the work performed.”  Id. § 75.430(i)(1).  “Budget estimates (i.e., estimates determined before the services are performed)” for personnel expenses “alone do not qualify as support for charges to Federal awards but may be used for interim accounting purposes” provided that certain requirements are met.  See id. § 75.430(i)(1)(viii).  Nebraska has not disputed that these provisions applied nor that they were not met as to the Midland employees in question, thus disqualifying their employee costs from being allowable.  See id. § 75.403(a) (providing that an estimate determined before the services are performed, that is, one based on a budget, raises concerns about whether the costs charged to the award were allowable, e.g., whether they were necessary and reasonable for the performance of the award).¹⁶

Based on the foregoing, we conclude that Nebraska has not borne its burden of proof to show that ACL improperly disallowed $1,860.

B.    Blue Rivers – disallowance of $5,056

ACL’s disallowance determination quotes the following language from the audit report:

[T]he agreed-upon procedures report noted that personnel costs were based on estimates and were not a reflection of actual time worked.  Also, operating expenses were allocated to various programs, but the support was not adequate to ensure costs were charged based on relative benefits received.  [Blue Rivers] did not conduct a new time study or cost allocation plan for fiscal year 2019, but it indicated a new cost allocation plan would be implemented in fiscal year 2020.  Known questioned costs for the payment tested were $5,056.

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ACL Ex. 1, at 3-4 (quoting ACL Ex. 2, at 287); ACL Br. at 3-4 (discussing audit finding of $5,056 in questioned costs for Blue Rivers).

On appeal, ACL asserts that, according to Nebraska’s subrecipient monitoring report dated February 12, 2019, four Blue Rivers employees’ personnel costs were charged to more than one program and there was insufficient support for the percentages used to allocate the personnel costs.  ACL Br. at 3-4 (citing NE Ex. 3, at 13-19); see also id. at 6 and 7 (stating that personnel costs were based estimates and not on actual time worked).  ACL also alleges, “A corrective action plan was not created until 2020.”  Id. at 4 (citing NE Ex. 3, at 20-23); see id. at 6 (“the corrective action plan was not instituted until 2020”).

Nebraska, too, refers to the February 12, 2019 subrecipient monitoring report on Blue Rivers (NE Ex. 3).  Nebraska Br. at 2.  According to Nebraska, “there is no reference to the amount of questioned costs noted in the final Single Audit finding of $5,056.”  Id.  Nebraska writes, “[S]pecifically noting any questioned costs in the [auditor’s] summary of results (or referencing questioned costs at all), would have allowed for timely follow up by [Nebraska].”  Id. (Nebraska’s emphasis).  Nebraska claims that “it’s indeterminable which costs make up the questioned costs” for Blue Rivers.  Id.  Nebraska maintains that its “follow up” “focused on procedural changes” for Blue Rivers “to ensure good use of funds going forward . . . .”  Id.  Nebraska thus makes an argument concerning Blue Rivers that is similar to its argument concerning Midland.

The argument about Blue Rivers is as unavailing as the argument about Midland, for similar reasons.  The monitoring report on which Nebraska relies (NE Ex. 3), issued before the end of the audited fiscal year ending June 30, 2019, stated in part:

[Blue Rivers] did not update its process for the allocation of costs between multiple programs . . . .  Generally, the allocation of costs between multiple programs is based on budgets or estimates, which are not adequately supported. . . .

For example, the method used to allocate personnel costs was not adequate.  Employees who worked on multiple programs had personnel costs allocated based on estimated time worked on each program. . . .

[The auditor] tested four employees.  All four employees had their personnel costs charged to more than one program.  There was not adequate documentation to support the percentages used to allocate the costs . . . .

NE Ex. 3, at 1, 13.  The report also states, “[Blue Rivers] should implement procedures to ensure the correct program is charged for the actual work performed.”  Id. at 14.  The report also included a chart setting out information about the programs to which the

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personnel costs for four employees were charged or allocated for the “November 2018 payroll” and the specific amounts charged to each identified program.  Id. at 13-14.  Although the report did not identify each employee by name or number or other identifier, Nebraska (and Blue Rivers) had to have known which employees’ costs were at issue to have been able to include in the report a breakdown of the November 2018 payroll charges allocated to various programs for those employees.  Thus, Nebraska’s report for Blue Rivers indicates awareness of broader problems related to the four employees’ costs and why the costs were questioned.  Although the auditor’s subsequent report did not break down the specific costs that totaled $5,056, it expressly informed Nebraska of a problem common to the personnel costs for the four employees, i.e., allocation among multiple programs based on estimates or budgets, about which Nebraska and Blue Rivers already knew.  See ACL Ex. 2, at 287.  Nebraska fails to provide a reasonable, convincing argument about how knowing which specific costs were included in the total of $5,056 would have enabled it and Blue Rivers to remedy the allocation issues common to the four employees and about which it and Blue Rivers already knew before the end of the audit period.

Moreover, Nebraska’s shortcomings concerning Blue Rivers are similar to those concerning Midland.  Nebraska does not dispute that it failed to monitor Blue Rivers with respect to its personnel cost allocation problems to take appropriate remedial action in accordance with 45 C.F.R. § 75.352.  Nor does it dispute that the disallowed amount of $5,056 was not based on records that accurately reflect the work performed, and were not based simply on budgeted amounts, much less offer any evidence to the contrary.  Accordingly, Nebraska has not shown that the amount was incurred for allowable costs.  Just as Nebraska fails to show compliance with various cost principles, to include section 75.430, with respect to the personnel costs for Midland employees, Nebraska similarly fails with respect to the personnel costs for Blue Rivers employees.  And, although, in our view, Nebraska’s fundamental failing is failure to fulfill its monitoring obligations, we note that ACL alleged in its response brief that a corrective action plan specifically addressing the identified Blue Rivers employee cost allocation problem “was not created until 2020” (ACL Br. at 4, citing NE Ex. 3, at 20-23) and “not instituted until 2020.”  ACL Br. at 6.  Nebraska makes no attempt to challenge this allegation and our reading of Blue Rivers’ corrective action plan (NE Ex. 3, at 20-23) is consistent with ACL’s statement.  Nebraska does not assert or attempt to show that Blue Rivers has fully remediated the identified problems.

We determine that Nebraska has not borne its burden to show that ACL improperly disallowed $5,056.

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C.    South Central Nebraska – disallowance of $20

ACL disallowed $20, stating that South Central Nebraska “charged a staff Christmas meal to the Federal grant.”  ACL Ex. 1, at 4; see also ACL Ex. 2, at 287.  ACL states that, according to the auditor, a $265.61 expense was identified for a South Central Nebraska Christmas meal that included alcohol and was allocated among all of Nebraska’s programs.  Of that amount, $20 was identified as a questioned cost.  ACL Br. at 4 (citing NE Ex. 4, at 5-6), 6 (“there was an unallowable expenditure for Christmas meals that included alcohol”); see also ACL Ex. 7, at 15-16; NE Ex. 5, at 5.

The regulation at 45 C.F.R. § 75.438, captioned “Entertainment costs,” states:  “The costs of entertainment, including amusement, diversion, and social activities and any associated costs, are unallowable, except where specific costs that might otherwise be considered entertainment have a programmatic purpose and are authorized either in the approved budget for the Federal award or with prior written approval of the HHS awarding agency.”  Nebraska does not dispute ACL’s determination that the $20 disallowed were a part of a $265.61 cost for a holiday meal for subrecipient staff.  Holiday meals for staff are appropriately considered as being in the nature of “social activities,” the costs of which are not allowable under section 75.438 unless they are shown to have been incurred for a programmatic purpose and approved or authorized in advance by ACL.  There is no argument, or evidence, that any part of the holiday meal cost was preapproved or authorized for a programmatic purpose.  And any such cost not preapproved or authorized for a programmatic purpose would not be “necessary and reasonable for the performance of” a federal award under 45 C.F.R. § 75.403(a).  Moreover, the cost of goods and services (food and beverages) at issue is not chargeable to the federal award; nor would it meet any cost objective in furtherance of benefiting a federal award, in compliance with 45 C.F.R. § 75.405(a).  Accordingly, $20 were properly disallowed.

The parties have not squarely addressed why $20 of the $265.61 remain in dispute when neither party disputes that $265.61 were charged for a holiday meal for staff and that none of that amount was preapproved or authorized for a programmatic purpose.  In any case, as noted, the specific amount at issue in the disallowance decision on appeal before us is $20, not $265.61.  ACL’s disallowance decision sheds light on why the $20 cost remains in dispute, as it states, “There was not adequate documentation to support that the charges were properly repaid.”  ACL Ex. 1, at 4 (our emphasis).  We understand that the dispute, now, concerns whether Nebraska has repaid the unallowable $20.  Nebraska’s statements on appeal are consistent with our understanding, as Nebraska states, in response to ACL’s statement about inadequate documentation on the repayment of $20, that this amount was “moved” from one internal account to another.  Nebraska Br. at 2.  Nebraska also states that, in its reimbursement request submitted to Nebraska, South Central Nebraska “incorporated this change.”  Id. (citing NE Ex. 4, at 1; NE Ex. 5, at 12); see also ACL Ex. 1 (disallowance decision), at 5 (noting Nebraska’s position that

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South Central Nebraska had “remediate[d] this unallowable expense”); ACL Ex. 10, at 1 (email from Nebraska to ACL on September 2, 2021, 19 days before the issuance of the disallowance decision, in which Nebraska indicated that the subrecipient had previously informed Nebraska that it had “removed” $20 “from the service cost account,” thereby communicating Nebraska’s belief that the issue was resolved).  Nebraska also states that it is “unable to determine the basis for the $20.00 amount in the [audit report].”  Nebraska Br. at 3.  Nebraska surmises that the “reference” to the $20 amount in the audit report is “an honest error” and “appear[s] unclear.”  Id.  It is reasonable to read Nebraska’s statements, collectively, to mean that, as far as Nebraska is concerned, the remaining unallowable $20 charge of the total of $265.61 has been repaid through certain accounting adjustments.

It is not for the Board to direct ACL and Nebraska on exactly how to accomplish remittance of costs they agree are not allowable.  It is certainly not for the Board to direct a grantee and its subrecipient on how to coordinate repayment or conduct their internal accounting procedures.  The question before us is whether $20 are allowable.  As explained, that amount is not allowable, and we have no evidence that causes us to question whether that amount could be allowed.  Our decision does not, however, preclude ACL and Nebraska from discussing between themselves a workable solution to accomplish remittance of $20 if that has not already been accomplished.

Conclusion

We uphold the disallowance of $6,936.

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Endnotes

¹  The first two paragraphs of the “Legal Background” section set out a broad overview of the Act, the services and programs authorized by the Act, and the administration of authorized services and programs, for context for the discussion to follow.  More information about the Act, its authorized services and programs, and the 2020 reauthorization of funding is available on ACL’s website and in Congressional Research Service’s reports, “Older Americans Act: 2020 Reauthorization” (July 1, 2020) and “Older Americans Act: Overview and Funding” (updated June 23, 2022).  See https://acl.gov/about-acl/authorizing-statutes/older-americans-act, https://crsreports.congress.gov/product/ pdf/R/R46439, and https://crsreports.congress.gov/product/pdf/R/R43414.  More information about the structure and organization of ACL and the entities established pursuant to Title II of the Act is also available in the aforementioned Congressional Research Service reports and on ACL’s website, at https://acl.gov/about-acl/organization.

²  Nebraska and Nebraska Auditor of Public Accounts entered into a contract for the latter to “assist” Nebraska “with fulfilling its subrecipient monitoring requirements” for the period from August 15, 2017 through September 30, 2018, and later agreed to renew the same contract terms through September 30, 2019.  Nebraska Exhibit (NE Ex.) 1, at 1, 10.  (Nebraska did not paginate its exhibits.  Our page number references to Nebraska’s exhibits are to the PDF document page numbers.  We also note that the parties submitted multiple copies of several items, making the evidentiary record duplicative in many respects and much larger than necessary.  We need not and do not cite to every exhibit where multiple copies were submitted.)

³  Under the Single Audit Act, as amended, 31 U.S.C. § 7501 et seq., non-federal entities whose expenditures of federal funds in any fiscal year exceeds a certain threshold amount must undergo an annual financial and compliance audit of its programs to determine, among other things, whether the entity has complied with applicable laws, regulations, and award terms and conditions.  See 31 U.S.C. § 7502(a)(1)(A), (e)(4); see also 2 C.F.R. §§ 200.100, 200.501; 45 C.F.R. Part 75, subpart F (captioned “Audit Requirements”).

⁴  The Catalog of Federal Domestic Assistance is the authoritative source “list[ing] all of the available funding programs to all levels of government, nonprofit organizations, for-profit businesses and other eligible entities.”  See https://www.grants.gov/learn-grants/grant-programs.html.

⁵  By way of background on the Older Americans Act programs from which this case arises, Title III of the Act authorizes grants for state and community programs on aging, which include funding for supportive services and centers (Title III, Part B) and nutritional services, e.g., congregate meals and home-delivered meals (Title III, Part C).  See 42 U.S.C. §§ 3030d (Title III, Part B) and 3030d-21-3030g-23 (Title III, Part C).  CFDA grants 93.044 and 93.045 were authorized, respectively, under Parts B and C of Title III of the Act.  See ACL Ex. 2, at 185, 203, 285.  The objectives of CFDA grant 93.044 are “[t]o encourage State Agencies on Aging and Area Agencies on Aging to concentrate resources to develop and implement comprehensive and coordinated community-based systems of service for older individuals via Statewide planning, and area planning and provision of supportive services, including multipurpose senior centers.  The objective of these services and centers is to maximize the informal support provided to older Americans to enable them to remain in their homes and communities.  Providing transportation services, in-home services, and other services, this program insures that elders receive the services they need to remain independent.”  The objectives of CFDA grant 93.045 are “[t]o provide grants to States and U.S. Territories to support nutrition services including nutritional meals, nutrition education and other appropriate nutrition services for older adults in order to maintain health, independence and quality of life.  Meals and nutrition services are to be served in a congregate setting or delivered to the home, if the older adult is homebound.”  The descriptions of the objectives of these grants are derived from the CFDA grant listings accessible through the search function at https://sam.gov/content/home.

⁶  Nebraska paid $6,319,083 in aid to eight subrecipients during fiscal year 2019.  ACL Ex. 1, at 4.  Of that amount, ACL reviewed $354,694 in payments and disallowed $6,936 (attributable to three of those subrecipients) of $354,694.  Id.

⁷  We understand Nebraska to be arguing that ACL’s disallowance decision ought to be reversed because the audit findings on which the disallowance was based are not substantiated.  We do not read Nebraska’s statement that the auditor – Nebraska’s contractor – failed to provide support for the disallowance (Nebraska Br. at 3) as asserting that the auditor is a party to this appeal.  It is not.  And, importantly, as we discuss in the text, Nebraska, not the auditor with whom Nebraska had contracted to assist Nebraska with its subrecipient monitoring and managing activities, must bear the burden to show that it met applicable requirements.  We also note, generally, that the Board has rejected arguments seeking to fault an auditor whose findings formed the basis for the unfavorable agency decisions appealed to the Board.  See Int’l Educ. Servs., DAB No. 3055, at 13-16 (2021) (rejecting a challenge to the validity of decisions disallowing costs and withholding a non-competing continuation award for financial mismanagement problems identified through an audit on the ground that the auditor failed to “complete” the audit by not issuing a draft audit report for comment by the award recipient and then issuing a final audit report, and concluding that the absence of such reports did not render the federal agency’s decisions based on the audit results infirm because the award recipient has an opportunity to challenge the audit results before the Board); see also Campesinos Unidos, Inc., DAB No. 2720, at 5 (2016) (noting that “the Board’s jurisdiction lies in reviewing the disallowance . . ., not in [ ] evaluating the conduct of audits” performed by an accountant under contract with the federal agency); Kan. Dep’t of Social & Rehab. Servs., DAB No. 2056, at 9 (2006) (noting that a federal agency’s motives in pursuing an audit or the ensuing disallowance are immaterial to the Board’s review of the disallowance) (citations omitted).  Although this case differs from the cases cited here in numerous ways, the broader principle to be drawn from the cited cases is that, on appeal, the Board does not review an auditor’s performance, but determines whether, based on all evidence, including any audit findings on which the appealed decision was based, the federal agency’s decision was authorized and grounded in law and fact.

⁸  ACL states that Nebraska is a “pass-through entity” that was subject to various regulatory requirements, including those requiring pass-through entities to monitor subrecipient activities.  See ACL Br. at 3 (“ACL . . . issues grant awards to States, who serve as a pass-through entity for subrecipient [AAAs].”), 4-6 (citing, inter alia, 45 C.F.R. §§ 75.352(d) and 75.521), 6 (“The evidence demonstrates that [Nebraska] has failed to adequately follow-up on subrecipient monitoring to ensure that subrecipient payments were for actual and allowable costs.”).  A “pass-through entity” is defined as “a non-Federal entity that provides a subaward to a subrecipient to carry out part of a Federal program.”  45 C.F.R. § 75.2.  A “[s]ubrecipient” is defined, in part, as “a non-Federal entity that receives a subaward from a pass-through entity to carry out part of a Federal program; but does not include an individual that is a beneficiary of such a program.”  Id.  A “subaward” is “an award provided by a pass-through entity to a subrecipient for the subrecipient to carry out part of a Federal award received by the pass-through entity.  It does not include payments to a contractor or payments to an individual that is a beneficiary of a Federal program.  A subaward may be provided through any form of legal agreement, including an agreement that the pass-through entity considers a contract.”  Id.  Nebraska does not dispute that it is a pass-through entity subject to the regulatory requirements as ACL maintains in its response brief.

⁹  In its response brief, ACL to some extent clarifies and elaborates on the reasons and bases for its disallowance decision.  For instance, ACL’s response brief identifies the three subrecipients (Midland, Blue Rivers, South Central Nebraska) to which the questioned costs were attributed (ACL Br. at 2-3, 4) (neither the audit report nor the disallowance decision named the three subrecipients).  The Board permits federal agencies to clarify or amend the basis for the decision on appeal during the appeal so long as the non-federal party is given adequate notice and an opportunity to respond.  See, e.g., Texas, DAB No. 3066, at 12 (citing cases); Touch of Love Ministries, DAB No. 2393, at 17 (citing cases).  Nebraska had an opportunity to submit a reply brief (with additional exhibits) in which it could have made arguments disputing anything in ACL’s response brief.  See Board’s October 26, 2021 letter at 2.  Nebraska did not use its opportunity to reply.

¹⁰  Nebraska refers to the monitoring report for Midland (NE Ex. 2) as the “September 2018 Subrecipient Monitoring Report.”  Notice of Appeal at 1.  The report was issued in December 2018 (see NE Ex. 2, at 1), but it included a section headed “Summary of Results – Subrecipient Monitoring – September 2018 DHHS Payment FYE 6/30/2019” and bearing “Issued 12/12/2018” on the lower right corner of the pages that comprise this section.  See id. at 11-16.  We assume Nebraska’s reference to the “September 2018” date is intended to refer specifically to this section of this report, which is relevant to our discussion.

¹¹  Nebraska unquestionably is better positioned than ACL to address and, if necessary, produce, specific information concerning the three employees of Midland, a subrecipient over which Nebraska has monitoring obligations.  See, e.g., Gulf Coast, DAB No. 2670, at 3 (2015) (stating 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”); So. Del. Ctr. for Children & Families, DAB No. 2073, at 5-6 (2007) (stating 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).

¹²  In any event, ACL’s submissions to the Board include sufficient information for us to determine the costs included in the disallowed amounts of $1,860 for Midland, as well as $5,056 for Blue Rivers, about which Nebraska makes similar unpersuasive arguments (addressed below).  See ACL Ex. 1, at 3 (table); ACL Ex. 8, at 2-3 (ACL’s Aug. 16, 2021 email to Nebraska providing similar information); ACL Ex. 4, at 1 (table identifying CDFA grant numbers, subrecipients, and dollar amounts by subrecipient that, added together, yield the $1,860 for Midland and $5,056 for Blue Rivers).  The amounts for Midland were $915.20, $529.76, and $414.53, which total $1,859.49, rounded up to $1,860.  The amounts for Blue Rivers were $962.09, $2,702.86, and $1,391.45, which total $5,056.40, rounded down to $5,056.  See ACL Ex. 4, at 1.  As we explain, we reject Nebraska’s argument that not having had such information earlier, even if true, somehow impeded its ability to monitor its subrecipients and implement appropriate corrective actions.  And, since Nebraska has been given such information through ACL’s submissions to the Board during the appeal, it could have submitted supplemental briefing on reply concerning ACL’s submissions but did not use its opportunity to do so.

¹³  Nebraska does not specifically assert that Midland fully remediated to return to compliance.  It does, however, maintain that Midland has been and is working on remediation in accordance with a corrective action plan instituted after the earlier, 2018, audit, submitted as part of Nebraska’s exhibit 2.  See NE Ex. 2, at 4, 17-20.

¹⁴  Generally speaking, Nebraska’s monitoring responsibilities here may be viewed as analogous to what the Board characterized as a Substance Abuse and Mental Health Services Administration (SAMHSA) grantee’s “stewardship responsibilities” or “duty to ensure that” a “subrecipient” – an entity that served as SAMHSA’s contractor and agent for administering certain scholarships to be paid with SAMHSA award funds – “has[, among other things,] financial management systems and controls in place . . . so that [the grantee] can meet its obligation to have effective control over and accountability for all [award] funds” in furtherance of meeting its “burden to document that the claimed costs were actually incurred, allowable, and allocable to [its] grants.”  Nat’l Alliance on Mental Illness, DAB No. 2612, at 8 (2014).  Just as the National Alliance was responsible for monitoring program functions and activities supported by the SAMHSA award, including functions and activities of any subrecipient, in accordance with applicable regulations in 45 C.F.R. Part 74 (see id. at 6), Nebraska is similarly obligated under the applicable Part 75 regulations to monitor Midland’s (and other subrecipients’) functions and activities.

¹⁵  The auditor apparently made similar findings earlier, thus also giving Nebraska and its subrecipients notice of similar inadequacies earlier.  Referring to “inadequate” subrecipient monitoring procedures and deficient follow-up to ensure that subrecipients corrected deficiencies, ACL also stated in its September 21, 2021 disallowance decision, “A similar finding was noted in the prior audit.”  ACL Ex. 1, at 3.  See also ACL Ex. 2, at 286 (referring to a prior “Repeat Finding” 2018-025 concerning inadequate subrecipient monitoring requirements), 406 (discussing deficiency finding 2018-025 concerning recurrent, inadequate subrecipient monitoring procedures).  The only matter before us is the disallowance of $6,936 based on the FY2019 audit findings.  Nevertheless, that similar findings were made in a prior year’s audit reinforces ACL’s determination to issue a disallowance based on subsequent findings is indicative of ongoing problems concerning insufficient subrecipient monitoring.

¹⁶  Moreover, if a grantee could not verify whether personnel costs were charged to the correct programs, that would raise similar concerns about whether the costs were allowable and properly allocated to the award or cost objective in accordance with the relative benefits received.  See 45 C.F.R. § 75.405(a).