TGU Public School District No. 60, DAB No. 3154 (2024)

DECISION

TGU Public School District #60 (TGU) appeals the December 4, 2019 decision of the Administration for Children and Families (ACF) to disallow $43,933 in Head Start program funding.  ACF based its determination on an audit for the period of July 1, 2017 through June 30, 2018, which found grant-reimbursed expenditures that were incurred before the period of availability for the grant award.  For the reasons explained below, we uphold the disallowance.  

Legal Background

The Head Start program serves to “promote the school readiness of low-income children” by providing a supportive learning environment and necessary “health, educational, nutritional, social, and other services.”  Head Start Act (Act) § 636.¹  The Secretary of the Department of Health and Human Services (HHS) “is authorized to designate as a Head Start agency” any qualified local public or private nonprofit agency.  Id. § 641(a)(1).  ACF financially assists Head Start agencies for multi-year “project periods” generally funded in annual increments known as “budget periods.”  Id. § 638; 45 C.F.R. § 75.2 (defining “Project period”); HHS Grants Policy Statement (GPS) §§ I-1 (summarizing ACF’s grant program responsibilities), I-15 (explaining “annual increments known as ‘budget periods’”) (Effective Jan. 1, 2007).²  ACF also makes grants to Early Head Start agencies for Early Head Start programs “providing family-centered services for low-income families with very young children.”  Act § 645A.  ACF awards are payable to a grantee in advance or by reimbursement, and generally occur by electronic transfer

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pursuant to a grantee’s request to “draw down” federal funds (that is, transfer funds from the United States Treasury to the grantee’s account).  Council for the Spanish Speaking, Inc., DAB No. 2718, at 3 (2016).

A Head Start grant recipient must comply with uniform grant administration requirements at 45 C.F.R. Part 75.  See 45 C.F.R. §§ 75.100, 75.101(b)(1), 75.300(b).  A grantee’s financial management system must provide “[a]ccurate, current, and complete disclosure of the financial results of each Federal award” as well as “[r]ecords that identify adequately the source and application of funds for federally-funded activities” and “[e]ffective control over, and accountability for, all funds, property and other assets.”   Id. § 75.302(b)(2)-(4).  The grantee generally “may charge to the Federal award only allowable costs incurred during the period of performance.”  Id. § 75.309(a).  Grant closeout procedures require award recipients to submit, within 90 calendar days after the end date of the period of performance, all financial, performance, and other reporting that the terms of the award require.  Id. § 75.381.  Recipients use Form SF-425, Federal Financial Report, for this purpose.  Id. § 75.2 (defining “Expenditure report”). 

A grantee that expends $750,000 or more in federal funds per fiscal year generally must undergo an annual “single audit” to determine the grantee’s compliance with federal statutes, regulations, and award terms and conditions.  45 C.F.R. § 75.501.  The grantee must promptly follow up and take corrective action on audit findings.  Id. §§ 75.508(c), 75.511(a).

If a grantee fails to comply with federal laws or regulations or the terms and conditions of its award, the awarding agency may, as appropriate, disallow “all or part of the cost of the activity or action not in compliance.”  See 45 C.F.R. § 75.371(b).

Case Background

TGU, which operates public schools in Towner, North Dakota, received from ACF a grant award for TGU’s Early Explorers Head Start and Early Head Start program for a project period of December 1, 2014 through November 30, 2019.  ACF Ex. 1, at 22; Docket # 8 (TGU Appeal File) at 6-10.  Under the Standard Terms of the grant award, it was “subject to the requirements of the [GPS]” and “any applicable statutory or regulatory requirements, including 45 CFR Part 75.”  TGU Appeal File at 8.

A private firm of certified public accountants (Auditor) conducted a single audit of TGU for its fiscal year running from July 1, 2017 through June 30, 2018.  ACF Ex. 1.  The Auditor’s report acknowledged that TGU’s “[m]anagement is responsible for compliance with federal statutes, regulations, and the terms and conditions of its federal awards applicable to its federal programs.”  Id. at 62.  The Auditor recognized that, “[w]here a funding period is specified, a non-Federal entity may charge to the award only costs

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resulting from obligations incurred during the funding period and any pre-award costs authorized by the Federal awarding agency.”  Id. at 70. 

The Auditor opined that TGU “did not comply with requirements regarding . . . Head Start as described in finding 2018-003.”  Id. at 63.  In that finding, the Auditor reported expenditures that were “reimbursed by the federal grant that were incurred prior to the period of availability for the grant award.”  Id. at 70.  The Auditor had reviewed “draw requests containing expenditures for the end of grant award 08CH1046/03, which contains a budget period of December 1, 2016 to November 30, 2017, as well as the beginning of grant award 08CH1046/04, which contains a budget period of December 1, 2017 to November 30, 2018.”  Id.  In the latter of those two annual budget periods, the Auditor had found two draw requests containing expenditures totaling $43,933.38 that “occurred prior to the beginning of the grant period.”  Id.

On December 4, 2019, ACF issued a letter to TGU disallowing $43,933.38 (rounded to $43,933).  Docket # 1a (Dec. 4, 2019 ACF disallowance letter) at 1-2.  ACF explained that the Auditor had found two of TGU’s draw requests during the 2017-2018 budget period included expenditures that occurred before that period:  $5,271.88 of payroll expenditures for catch-up wages, and $38,661.50 of other expenditures, totaling $43,933.38.  Id.; see ACF Ex. 1, at 70.  ACF required repayment of the disallowed amount and provided information on extended repayment plans and appeal rights.  Docket # 1a at 2-3.

On December 19, 2019, the Program Director of TGU’s Head Start and Early Head Start program filed with the Board a notice of appeal with 34 pages of attachments.  Docket #1 (Notice of Appeal).  TGU acknowledged that “$43,933 was drawn down and recorded in the wrong grant year” but stated “the program did have enough money to cover the last batch of bills for the fiscal year.”  Id. at 1.  TGU attributed the drawdown error to several events that coincided late in the fiscal year and asserted that the disallowed “$43,933 worth of bills” were “allowable costs” and the auditor’s recommendations were followed.  Id.  Thus, TGU requested reversal of the disallowance.  Id.  The Board acknowledged receipt of TGU’s appeal and issued a schedule for submissions.  Docket #2 (Dec. 30, 2019 Acknowledgment of Notice of Appeal).

On February 18, 2020, the Board issued an Order to Show Cause.  Docket # 4.  The Order explained that TGU’s brief and appeal file were overdue but TGU had not yet “filed either its brief and appeal file or a request for an extension of time to make those submissions.”  Id. at 2.  The Board ordered TGU “to show cause why the Board should not dismiss [TGU’s] appeal for failure to meet the deadline for filing its brief and appeal file.”  Id.  TGU timely replied that it already had submitted its brief and appeal file on December 19, 2019, “out of sequence,” and asked “that the appeal not be dismissed as this was an oversight.”  Docket # 5.

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On February 26, 2020, the Board ruled that the appeal would proceed and the Board would “treat [TGU’s] December 19, 2019 notice of appeal and supporting documents as appellant’s brief and appeal file.”  Docket # 6, at 2 (emphasis omitted).  The Board further ordered that “it is not necessary for appellant to resubmit those documents.”  Id. (emphasis omitted).  The next day, TGU resubmitted its notice of appeal with a revised exhibit list and 31-page appeal file.  Docket # 7 (resubmitted notice of appeal and exhibit list); TGU Appeal File. 

ACF timely submitted its brief and one exhibit, and the record now is closed.  ACF argues that “TGU does not dispute that it submitted expenditures for reimbursement that were incurred prior to the grant award period,” and “TGU seeks to explain why the error occurred but it does not deny that the error occurred.”  ACF Br. at 1-2.  “Moreover,” ACF argues, “TGU’s documents do not prove that it did not draw down funds for two expenditures that occurred prior to the beginning of the grant period.”  Id. at 2.

Standard of Review

The Board reviews disallowance determinations de novo.  Los Angeles County Dep’t of Pub. Health, DAB No. 2842, at 6-7 (2018) (citing decisions).

Analysis

“A grantee always bears the burden to demonstrate that it has operated its federally funded program in compliance with the terms and conditions of its grant and the applicable regulations.”  Central Miss., Inc., DAB No. 2757, at 4 (2016).   

TGU has not met its burden of proof in this case.  Based on the Auditor’s findings, ACF determined that a disallowance was warranted because TGU submitted expenditures for federal reimbursement during the 2017-2018 budget period that TGU had incurred before that period.  Docket # 1a, at 1 (“There were expenditures reimbursed by the federal grant that were incurred prior to the period of availability for the grant award.”).  The regulations make clear that (with only inapplicable exceptions) a grantee “may charge to the Federal award only allowable costs incurred during the period of performance.”  45 C.F.R. § 75.309(a) (emphasis added).  TGU does not refute the factual accuracy of the Auditor’s finding or deny that section 75.309(a) gave ACF a legal basis for the disallowance.

We uphold ACF’s determination as consistent with the established legal requirement that generally “grant funds earmarked for one funding period may not be used to pay costs incurred outside that period.”  Teaching & Mentoring Cmtys., Inc., DAB No. 2790, at 10 (2017).  We have “long upheld disallowances based on th[at] principle.”  Loving Arms Learning Ctr., DAB No. 2921, at 4 (2019).  Where ACF has determined that a grantee used Head Start funds awarded for one funding period “to cover obligations incurred in

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earlier funding periods,” and “admit[ted] that it used the funds in that fashion,” we have held that “ACF was therefore authorized to disallow the expenditures.”  William Smith, Sr. Tri-County Child Dev. Council, Inc., DAB No. 2647 at 6 (2015); see also Kids Central, Inc., DAB No. 2897, at 8 (2018) (upholding disallowance when grantee “spent funds in one funding period to pay for costs incurred in the prior funding period” and “demonstrated no prior approval or other basis to show that this expenditure was permissible”).  “[T]he governing regulations and cost principles do not permit an award recipient to shift costs allocable to one award to other awards with different funding periods or different funding sources and objectives.”  Council, DAB No. 2718, at 1.  In particular, “any cost allocable to a particular award generally may not be shifted to other Federal awards to overcome funding deficiencies.”  Id. at 6.  The GPS, to which this grant award was subject, “explains that cost transfers by a recipient between grants, whether as a means to compensate for cost overruns or for other reasons, generally are not allowed.”  Id.

TGU’s assertion that “the program did have enough money to cover the last batch of bills for the fiscal year,” even though “$43,933 was drawn down and recorded in the wrong grant year,” is unavailing.  See Notice of Appeal at 1.  “[T]he prohibition on using federal funds awarded for a specific time period for expenses from a previous period (which should be charged to grant funds awarded for that previous period) reflects the general requirement . . . that allowable costs charged to a federal award must be allocable to the award.”  Council, DAB No. 2718, at 6.  “The concept underlying the principle of allocability is that federal funds may be spent only for the purposes for which they were appropriated.”  Rio Bravo Ass’n, DAB No. 1161, at 9 (1990).  “To be allocable to the federal award, charges must benefit the activities for which that award was made.”  Council, DAB No. 2718, at 6.  “The term ‘benefit,’ as used in connection with the principle of allocability, derives from accounting principles that the costs must relate not only to cost objectives, but to funding periods as well.”  Id.

The Board also cannot reverse a disallowance due to extenuating circumstances such as TGU alleges.  TGU explains that its recordation of the drawdown “in the wrong grant year” resulted in part from a confluence of “significant events” late in the fiscal year, including a change of banks and associated problems with paying a health insurance premium and receiving USDA reimbursement.  Notice of Appeal at 1.  However unfortunate (and unfortunately timed) such events might be, when reviewing a disallowance of Head Start funds, the Board is “bound by all applicable laws and regulations,” 45 C.F.R. § 16.14, “and is not empowered to reverse a disallowance based on equitable arguments.”  Chautauqua Opportunities, Inc., DAB No. 3011, at 9 (2020); see also Council, DAB No. 2718, at 7 (“[T]he Board has consistently held that it has no authority to waive a disallowance based on equitable principles and, in accordance with 45 C.F.R. § 16.14, is bound by all applicable laws and regulations.”)

Furthermore, we cannot reverse a disallowance based upon arguments, such as TGU’s,

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that a responsible official’s noncompliance was unintentional and eventually corrected.  TGU asserts that “the program had enough funds for the last batch of bills of the fiscal year, but the Fiscal Officer was not able to change anything in the software to reflect this.”  Notice of Appeal at 1.  “Since the mistake,” TGU claims, “the Fiscal Officer has learned the correct way to close out a Fiscal year and has resubmitted the 2016-2017 Final SF425.”  Id.  TGU does not cite to any specific documentation to support these assertions, but even if we assume their truth, they are inconsequential.  “That an employee failed to maintain an accurate accounting ledger, or erred in charging the supplies to the wrong fiscal year, does not exculpate” a grantee from its burden to comply with 45 C.F.R. § 75.302(b)(4).  Loving Arms, DAB No. 2921, at 5.  “A party’s good faith, honest efforts, or financial hardship do not provide a legal basis for the Board to overturn a disallowance.”  River E. Econ. Revitalization Corp., DAB No. 2087, at 12 (2007).  Intentional misconduct or culpability are not necessary to justify a disallowance, which “is a matter of grants management, and is not in the nature of punishment.”  Id. at 13.

“A grantee always bears the burden to demonstrate that it has operated its federally-funded program in compliance with the terms and conditions of its grant and the applicable regulations,” and TGU has not met that burden in this case.  See Municipality of Santa Isabel, DAB No. 2230, at 3 (2009).  “We must uphold a disallowance where,” as here, “it is authorized by law and the grantee has not disproved the factual basis for the disallowance.”  Los Angeles, DAB No. 2842, at 9.

Conclusion

For the reasons explained above, we uphold the disallowance in the amount of $43,933.

Endnotes

¹  The Act is codified at 42 U.S.C. §§ 9831 through 9852c.  We cite to legal authorities in effect from December 1, 2014 (when the grant’s multi-year project period began) until November 30, 2018 (when the grant’s last relevant annual budget period ended).  The regulations in 45 C.F.R. Part 75 took effect December 26, 2014, adopting the Uniform Guidance at 2 C.F.R. Part 200 with certain agency-specific modifications; HHS stated all grantees should have been compliant with those prior requirements already.  Federal Awarding Agency Regulatory Implementation of Office of Management & Budget’s Uniform Administrative Requirements, Cost Principles, & Audit Requirements for Federal Awards, 79 Fed. Reg. 75,871, 75,875 (Dec. 19, 2014) (Interim final rule).

²  The GPS for the relevant time period is available, along with the updated version effective October 1, 2024, at https://www.acf.hhs.gov/policy-guidance/hhs-grants-policy-statement (last visited Oct. 10, 2024).