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                              Mobile Community Action, Inc., DAB No. 3064 (2022)
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Mobile Community Action, Inc., DAB No. 3064 (2022)








  
  
    

  
      
Department of Health and Human Services 
    DEPARTMENTAL APPEALS BOARD
          Appellate Division





Mobile Community Action, Inc.
Docket No. A-19-83Decision No. 3064May 24, 2022

        
              
    

      DECISION

Mobile Community Action, Inc. (Mobile) appeals the April 23, 2019 decision of the Administration for Children and Families (ACF) to disallow $806,149 in Head Start program funding.  ACF based its determination on a Single Audit for the period of January 1, 2016, through December 31, 2016, which found that Mobile had drawn funds in excess of allowable expenditures for the budget period ending June 30, 2016, and for the subsequent budget period ending June 30, 2017.  For the reasons explained below, we uphold the disallowance in the revised amount of $601,632.

Legal Background

The Head Start program provides comprehensive early childhood education, nutrition, health, and other services to low-income children and their families “to promote the school readiness of low-income children by enhancing their cognitive, social, and emotional development.”  Head Start Act (Act) § 636. Head Start grants are administered through the “project period” system of funding.  ACF will approve the Head Start project for a five-year period but will fund the project in discrete annual awards with each award corresponding to a specific budget period.  Act § 638; Grants Policy Statement (GPS) at I-34 “Project Period and Budget Period.”  *See also Loving Arms Learning Ctr.*, DAB No. 2921, at 2 (2019).

The recipient of a Head Start grant must comply with the uniform grant administrative requirements at 45 C.F.R. Part 75.  *See*45 C.F.R. §§ 75.100, 75.101(b)(1), 75.300(b).1

**Page 2**

The Part 75 requirements identify several principles to which grantees must adhere in spending federal awards.  For example, grant funds provided for one funding period may not be used to pay costs incurred in a prior funding period.  *Chautauqua Opportunities, Inc.*, DAB No. 3011, at 7 (2020); 45 C.F.R. § 75.309(a).2
  Also, in general, a grantee must seek prior written approval to revise its budget or project scope or objective.  *Id*. § 75.308(b).  Under certain circumstances, ACF may waive the prior written approval requirement, such as for a grantee to carry forward unobligated funds or for a grantee to seek a no-cost extension of up to twelve months.  *Id*. § 75.308(d)(2), (3).  A grantee that expends $750,000 or more in federal funds per fiscal year must undergo an annual audit to determine if the grantee is operating in compliance with federal regulations and appropriate financial and administrative procedures and controls.  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, 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.” *See*45 C.F.R. § 75.371(b).

Case Background

Mobile is a non-profit organization “formed to develop and provide resources for the purpose of assisting low-income individuals through a variety of programs.”  ACF Ex. 1, at 8.  While Mobile receives several federal grants, it receives a significant portion of its revenue under the Head Start program.  *Id*. at 8, 18.  ACF’s Office of Head Start granted Mobile a non-competing continuation award for the project period of July 1, 2013, through June 30, 2018.  ACF Ex. 4, at 1.  In June 2014, ACF awarded Mobile $9,288,267 for the budget period of July 1, 2014, through June 30, 2015 (Year 2).  *Id*.3
 In June 2015, ACF awarded Mobile another $9,288,267 for the budget period of July 1, 2015, through June 30, 2016 (Year 3).  ACF Ex. 5, at 1.  And, between June 2016 and December 2016, ACF awarded Mobile a total of $9,509,721 for the budget period of July 1, 2016, through June 30, 2017 (Year 4).  ACF Exs. 6-9.4

**Page 3**

In compliance with its obligations under the Single Audit Act, Mobile underwent an audit of its federal grant programs for the calendar year ending December 31, 2016.  *See*ACF Ex. 1.  Thus, the audit covered portions of the budget periods for the Year 3 and Year 4 awards.  *Id*. at 30.  Among other findings, the audit found that Mobile had drawn down $559,091 from its Year 3 award in excess of documented Head Start expenditures for Year 3, and as of December 31, 2016, Mobile had drawn down $247,058 from its Year 4 award in excess of documented Head Start expenditures for Year 4.  *Id*. at 30.5
  The audit found that the excess draws, which totaled $806,149, were used “to cover losses and sustain operations.”  *Id*.  The audit noted Mobile’s “[o]ver-expenditures, primarily in the Head Start program” led to the depletion of unrestricted cash reserves and a deficit.  *Id*.  Specifically, in Year 2, Mobile’s Head Start expenditures exceeded its approved budget by $608,021 and Mobile did not have funds available to cover the over-expenditures.  *Id*. at 31; *see also* Mobile Ex. 3, at 22 (describing Year 2 over-expenditures in 2015 audit report).  As a result, the audit found that Mobile was not in compliance with cash management regulations.  ACF Ex. 1, at 30.  According to the audit report, Mobile’s “[m]anagement agrees with the finding and has developed and begun implementation of a corrective action plan.”  *Id*.

With regard to the audit finding concerning cash management, Mobile submitted a corrective action plan noting that it would submit monthly budget-to-actual reports to its CFO and provide staff with additional training in utilizing its accounting software.  ACF Ex. 2, at 2.  Mobile further stated that it would work with its “funding sources to resolve under-spent grant funds” and support all cash draws with “documentation of actual expenses and immediate cash needs.”  *Id*.

Based on the audit findings and Mobile’s corrective action plan, ACF determined that Mobile had strengthened its procedures to ensure future drawdowns would not exceed Mobile’s immediate needs and would be supported by appropriate documentation.  *See*ACF Ex. 3, at 4.  However, ACF noted that Mobile’s corrective action plan did not resolve the questioned costs identified in the audit report.  *Id*. at 4-5.  ACF, therefore, disallowed the questioned costs in the amount of $806,149.  *Id*. at 1, 5.

Mobile filed a timely notice of appeal asking the Board to “reevaluate” the disallowance.  Notice of Appeal at 1.  Mobile subsequently filed its brief and appeal file, which consists of nine exhibits (Mobile Exs. 1-9).  In its brief, Mobile explains that its prior audit from the 2015 calendar year reflected a $608,021 over-expenditure in Year 2, which “consisted of allowable costs that benefitted the Head Start program.”  Mobile Br. at 3-4.  Mobile states that this over-expenditure in Year 2 was the result of “turnover in the Fiscal

**Page 4**

Manager position” and “an accounting software change/upgrade” that “led to a short-term inability[] [to] monitor the timing of expenses.”  *Id*. at 4.  With its brief, Mobile submitted a statement from its auditor acknowledging that Mobile “had drawn excess funds on the Head Start grant year ending June 30, 2016 [Year 3] to cover the over-expenditure in the June 30, 2015 [Year 2] grant.”  Mobile Ex. 6.  According to Mobile, the audit reports “clearly show that through inadvertence or mistake, the agency over-spent and under-spent, which actually resulted in a wash.”  Mobile Br. at 4.  Mobile asserts that it does not have the funds to repay the disallowed amount and proposes the following alternative “solutions”:

(1)    Reprogramming funds awarded in Year 3 (2015-16), retroactively back to Year 2 (2014-15);

(2)    Permission to move otherwise allowable expenditures from Year 2 (2014-15) to Year 3 (2015-16);

(3)    Extend the budget period of Year 3 (2015-16) to begin 180 days earlier which would allow transferring expense from Year 2 (2014-15); and/or

(4)    Allow [Mobile] to reprogram [Child and Adult Care Food Program] and/or Pre-K grant funds to other Head Start grant periods.

*Id*. at 5-6.  Mobile further alleges that the balance of funds that were drawn but not spent in Year 4 was somehow “adjusted” from $247,058 to $204,517 and that Mobile “returned” the adjusted amount “to the PMS system [Payment Management System].”  *Id*.  In support of this assertion, Mobile submitted a June 28, 2019 receipt for an outgoing wire transfer in the amount of $204,517.  Mobile Ex. 9.

ACF submitted a responsive brief and supplemental appeal file, consisting of three exhibits, and asserts that Mobile’s proposed solutions violate federal requirements.  ACF Br. at 4; ACF Exs. 1-3. ACF did not address Mobile’s assertion that the amount of the disallowance relating to the Year 4 award had been reduced to $204,517 or that Mobile had returned that amount.  The Board determined that additional information would facilitate its decision-making and ordered ACF to respond to Mobile’s assertions about the amount of the disallowance and the amount allegedly refunded.  Order to Develop the Record at 3.  The Board further ordered ACF to submit the pertinent Notices of Award for Year 2, Year 3, and Year 4.  *Id*.

In response to the Board’s Order, ACF stated that it has no documentation substantiating Mobile’s assertion that the disallowance of funds from the Year 4 budget period was reduced to $204,517.  ACF Response to Order at 2.  ACF, however, confirmed that Mobile did refund $204,517 to PMS and that ACF had not factored the refunded amount into the disallowance it previously calculated.  *Id*.  Thus, ACF acknowledged that “[t]he

**Page 5**

total disallowance should now be $601,632.”  *Id*.  ACF also submitted the pertinent Notices of Award (including several amended Notices) as ACF Exhibits 4 through 9.6

Analysis

The Board must uphold a disallowance if it “is authorized by law and the grantee has not disproved the factual basis for the disallowance.”  *Middletown Cmty. Health Ctr., Inc.*, DAB No. 2754, at 6 (2016) (quoting *S.A.G.E. Commc’ns Servs.*, DAB No. 2481, at 5-6 (2012)).  “[I]t 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.”  *Bright Beginnings for Kittitas Cnty.*, DAB No. 2608, at 6 (2014) (quoting *Marie Detty Youth & Family Servs. Ctr., Inc.*, DAB No. 2024, at 3 (2006)).  In assessing whether there is a basis for the disallowance, the Board is bound by all applicable statutes and regulations.  45 C.F.R. § 16.14; *Kids Central*,*Inc.*, DAB No. 2897, at 15 (2018).  Moreover, the Board “has no authority to ignore or waive an otherwise applicable grants administrative requirement.”  *Teaching & Mentoring Cmtys., Inc.*, DAB No. 2790, at 11 (2017).  As we explain below, the applicable regulations prohibit the “alternate solutions” that Mobile has proposed to “resolve” the disallowance.  And, Mobile’s remaining arguments based on principles of equity, inapplicable caselaw, and a different regulatory review process provide no basis to overturn the disallowance.

**I.    Mobile has not met its burden of demonstrating that the disallowed amount of $601,632 is allowable.**

***A.    Mobile cannot “reprogram” funds from the Year 3 budget period to compensate for its over-expenditures during the Year 2 budget period.***

The Board has consistently upheld disallowances where funds awarded for one budget period were used to pay for expenses incurred during a different budget period.  *See, e.g.*,*Chautauqua* at 6, 10 (upholding disallowance where Head Start grantee used funds awarded for one budget period to pay for expenses incurred in prior budget period and citing cases); *William Smith, Sr. Tri-Cnty. Child Dev. Council, Inc.*, DAB No. 2647, at 6 (2015) (upholding disallowance where grantee paid for costs incurred with funds awarded in subsequent years); *El Grito Head Start Agency*, DAB No. 1309, at 5-6 (1992) (upholding disallowance where grantee used current program year funds to pay for previous year cost overruns).

**Page 6**

The basis for the prohibition on the use of funds awarded for one budget period to pay for expenses incurred during a separate budget period rests on principles of allocability.  As the Board has previously explained:

[A]llowable costs charged to a federal award must be allocable to the award.  *Central Piedmont Action Council, Inc.*, DAB No. 1916, at 4 (2004), citing OMB Circ. A-122, Att. A, ¶ A.2.a; *see also William Smith, Sr. Tri-County Child Development Council, Inc*., DAB No. 2647, at 5 (2015).  To be allocable to the federal award, charges must benefit the activities for which that award was made.  *River East Economic Revitalization Corp*., DAB No. 2087, at 6 (2007).  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.*; *see also*DAB No. 1916, at 4 (“Grant expenditures incurred outside of the applicable budget periods are not allocable to awards for those budget periods, and this violation of the requirement of allocability is a basis for a disallowance.”).

*Council for the Spanish Speaking, Inc.*, DAB No. 2718, at 6 (2016).  Thus, Mobile’s request to “reprogram” funds from Year 3 to Year 2 would violate basic principles of allocability and longstanding Board precedent applying those principles.

Moreover, Mobile’s request to “reprogram[]” funds awarded for Year 3 to the prior budget period would constitute budget revisions for both the Year 2 and Year 3 awards.  Mobile Br. at 5.  Such revisions generally require prior approval from the awarding agency.  *See*45 C.F.R. § 75.308(b), (c)(1)(viii), (d); *id*. § 74.25(b), (c)(4), (d).  Mobile neither requested nor obtained such approval before it exceeded its Year 2 funding and used funds awarded for the subsequent year to compensate for the excess expenditures.  While an awarding agency may waive prior written approval requirements for certain budget revisions, as applicable here, such a waiver would be available only to carry *forward*, not backward as Mobile requests, unobligated funds from one budget year to a subsequent budget year.  *Id*. § 75.308(d)(3); *id*. § 74.25(d)(3).  Indeed, Mobile recognizes this regulatory authority allowing a grantee to carry forward unobligated funds.  *See*Mobile Br. at 5-6.  However, Mobile does not explain how it could be permitted to carry *backward* unobligated funds to a prior budget period, and we find no authority for such action.  Therefore, while it may have been possible for Mobile to have carried over unobligated funds (if any) from Year 1 to pay for expenses incurred during Year 2, there is no authority that would allow Mobile to carry funds backward from Year 3 to pay for obligations incurred during Year 2.

**Page 7**

***B.    Mobile cannot “move” expenses incurred during one budget period to a subsequent budget period.***

Mobile also proposes that expenses incurred during Year 2 be moved to Year 3 to eliminate the disallowance.  Mobile Br. at 5.  This proposal is a variation of the previous proposal in that it, too, would cause expenses incurred during one budget period to be paid with funds awarded for a subsequent budget period.  This proposal, like the previous one, is impermissible because it violates basic principles of allocability as well as the specific applicable regulations discussed below.

A grantee may charge to an award only allowable costs that are incurred *during* the period of performance (*i.e.*, budget period) for that award.  45 C.F.R. § 75.309(a).  *See also Chautauqua* at 6, 10 (affirming disallowance where grantee sought to transfer obligations incurred in one budget period to subsequent budget period); *Teaching & Mentoring* at 10 (“[G]rant funds earmarked for one funding period may not be used to pay costs incurred outside that period.”); *Bright Beginnings* at 5 (concluding use of funds from one year to pay for expenses obligated in subsequent year was clear violation of applicable cost principles).  Thus, Mobile’s request to transfer expenses incurred during Year 2 to the subsequent budget period would violate section 75.309(a).  *See* *Chautauqua* at 7, 10.

We recognize that an exception exists that could allow for the payment of pre-award “costs [that] are . . . incurred prior to the effective date of the Federal award directly pursuant to the negotiation and in anticipation of the Federal award where such costs are necessary for efficient and timely performance of the scope of work.”  45 C.F.R. § 75.458.  Such costs would be subject to prior written approval requirements unless ACF waived that requirement as allowed for costs incurred within 90 days of the award.  *Id*. §§ 75.458, 75.308(d)(1).  Mobile does not assert, nor does the record demonstrate, that the disallowed amount represented any “pre-award costs” as contemplated by section 75.458.  Nor does the record demonstrate that Mobile obtained the required prior written approval or that ACF waived that requirement for such costs here.  Thus, this exception is not applicable.  *See* *William Smith, Sr.*, DAB No. 2647, at 6 (recognizing single exception regarding “pre-award costs” but rejecting applicability of the exception as unsupported by the record).

***C.    The Year 3 budget period cannot be “extended” backward to begin 180 days earlier.***

Mobile’s third proposal seeks to retroactively extend backward the start date of its Year 3 budget period for the purpose of allowing expenses incurred during the second half of Year 2 to fall within the subsequent budget period.  Mobile Br. at 5.  The applicable regulations do not authorize such an “extension.”

**Page 8**

To begin, 45 C.F.R. § 75.308(d)(2) permits a grantee, under certain circumstances, to extend a period of performance one time by up to 12 months.  A grantee that initiates such an extension is required to notify the awarding agency at least ten days before the end of the original period of performance of the reasons supporting the extension and the new period of performance.  45 C.F.R. § 75.308(d)(2).  Nothing in the applicable regulation suggests an extension would be available to move *back* the start date of an award rather than to move *forward* the end date.  That the notice requirement in section 75.308(d)(2) is based on the *end*of the original performance period suggests that extensions are intended to alter the *end*date of a performance period, not the start date.  *Black’s Law Dictionary* (11th ed. 2019) defines an “extension” generally as “[a] period of additional time to take an action, make a decision, accept an offer, or complete a task.”  It would make little sense to retroactively modify the start date of a period of performance to begin at an earlier date in order to allow more time for a grantee to meet the objective of its project.

Even if the regulations permitted a grantee to “extend” a budget period backward, a grantee generally must seek prior written approval to extend a period of performance.  *See*45 C.F.R. § 75.308(b).  If ACF waives that requirement, section 75.308(d)(2), as mentioned above, allows a grantee to initiate one 12-month extension and requires the grantee to notify the awarding agency.  *Id*.7
  The record here does not reflect, nor does Mobile assert, that it either received the necessary prior written approval or that ACF waived that requirement.  Further, the record does not reflect that Mobile provided the required notice to ACF that it sought to extend its period of performance.  Moreover, any such extension could not be “merely for the purpose of using unobligated balances.”  45 C.F.R. § 75.308(d)(2).  This, though, is precisely what Mobile seeks to do here—to extend (backward) the Year 3 budget period to use unobligated funds to compensate for overspending during the prior budget period.  Thus, we find no authority that would permit Mobile to retroactively modify the start date of its Year 3 budget period to cover overspending during a prior budget period.

***D.    The Board cannot transfer funds from other grants to compensate for Mobile’s Head Start overspending.***

Mobile’s final proposal is that it be permitted to “reprogram” funds from other awards administered by other agencies or entities to its Head Start award.  Mobile Br. at 5.  However, Mobile has not cited any legal authority by which the Board, on review of the

**Page 9**

disallowance assessed here, could transfer funds from other grants to Mobile’s Head Start grant (particularly where neither ACF nor any other division within the Department of Health and Human Services administers the grants from which Mobile seeks transfers).8
  Further, the Board has long recognized that our role is not to administer grants or to order the transfer of funds among various sources.  *See Anderson-Oconee Headstart Project, Inc.*, DAB No. 90, at 3 (1980) (refusing to direct unexpended funds from one account to set off over-expenditure and stating the Board “will not engage in grant administration by transferring authorizations from one account to another” (quoting *Cmty. Action Agency of Memphis & Shelby Cnty.*, DAB No. 38, at 2 (1977))).

Moreover, such fund transfers violate basic grants principles.  For a cost to be allowable under a particular federal award, it must “[b]e necessary and reasonable for the performance of the Federal award and be allocable thereto.”  2 C.F.R. § 200.403(a); *see also*45 C.F.R. § 75.403(a).  A cost is allocable to an award if, among other requirements, it “[i]s incurred specifically for the Federal award.”  2 C.F.R. § 200.405(a)(1); *see also* 45 C.F.R. § 75.405(a)(1); 31 U.S.C. § 1301(a) (“Appropriations shall be applied only to the objects for which the appropriations were made except as otherwise provided by law.”).  For these reasons, as ACF has pointed out, interfund transfers generally are impermissible.  *See Council for the Spanish Speaking* at 6 (stating that “any cost allocable to a particular award generally may not be shifted to other Federal awards to overcome funding deficiencies, or to avoid restrictions imposed by law or by the terms of the award” and rejecting grantee’s attempt to charge costs allocable to one grant to other grants with different funding periods or sources (citing former applicable cost principles at 2 C.F.R. Part 230, App. A, ¶ A.4.b)); *Evangeline Cmty. Action Agency, Inc.*, DAB No. 1379, at 3-4 (1993) (upholding disallowance where appellant loaned Head Start grant funds to other programs and recorded them as “accounts receivable”).

The Board has no authority to engage in grants administration and transfer funds among various federal and state awards, as Mobile has requested.  We also have no authority to determine the allowability and allocability of costs Mobile may attempt to charge to its other (non-Head Start) awards because those awards are not before us.  In short, Mobile cannot avoid the disallowance by interfund transfers, and we reject its request to somehow authorize Mobile to make such transfers.

**Page 10**

***E.    Mobile has not met its burden of demonstrating the allowability of the balance of the disallowed amount relating to Year 4.***

While ACF has agreed to reduce the original amount disallowed for excess draws in Year 4 ($247,058) based on Mobile’s return of $204,517, a balance of $42,541 remains.  *See*ACF Response to Order at 2; ACF Ex. 3, at 4.  To be allowable under a federal award, costs must, among other things, “[b]e adequately documented.”  45 C.F.R. § 75.403(g).  Indeed, “a grantee is required to document its costs, and bears the burden of demonstrating the allowability and allocability of costs for which it received federal funding.”  *Bright Beginnings* at 6 (quoting *Marie Detty*at 3).  Here, the audit found that Mobile had drawn down funds in excess of its Year 4 expenditures, and Mobile’s management explicitly agreed with that finding.  ACF Ex. 1, at 30.9
  Mobile reports, and ACF acknowledges, that it returned $204,517 of those excess draws.  Mobile Br. at 5; ACF Response to Order at 2.  Mobile, however, has not submitted any documentation (or even argument) demonstrating that the remaining disallowed amount was, in fact, allowable and allocable to the Year 4 award.  Moreover, Mobile was limited to drawing down the minimum amounts necessary in accordance with its immediate cash requirements for its approved project.  *See*45 C.F.R. § 75.305(b)(1); *Cmty. Action P’ship of W. Neb.*, DAB No. 2537, at 5 (2013) (sustaining disallowance where grantee did not have immediate funding need for drawdown and failed to meet its burden to demonstrate it spent the funds on costs allowable and allocable to its Head Start grant).  Thus, Mobile has neither documented it spent the funds on Year 4 allowable and allocable costs nor has it demonstrated that it had an immediate funding need for the excess draws in Year 4.  Thus, we sustain the remaining disallowance of $42,541.

**Page 11**

**II.    Mobile’s other arguments provide no basis to overturn the disallowance.**

In addition to Mobile’s four proposals, Mobile appears to draw on principles of equity to excuse the disallowance.  Specifically, Mobile asserts that the over-expenditure in Year 2 in conjunction with the under-expenditure in Year 3 resulted purely from “inadvertence or mistake” and “resulted in a wash”; it is unable to repay the funds that were spent; and it subsequently earned non-compete status for the 2018-2023 grant cycle and completed “FOCUS 1 federal review” with no findings and several program highlights.  Mobile Br. at 4.  It is well-settled, however, that the Board is “bound by all applicable laws and regulations,” 45 C.F.R. § 16.14, and cannot reverse a disallowance based on principles of equity or fairness.  *Kids Central* at 15.  *See also ChildCareGroup*, DAB No. 3010, at 10 (2020) (holding that grantee’s subsequent actions to strengthen internal controls and the financial hardship imposed by the disallowance provide no basis to modify or reverse the disallowance); *Chautauqua* at 9 (holding that the lack of “further incidents” following the audit and the grantee’s review and revision of its procedures provides no basis to reverse the disallowance); *Loving Arms* at 5 (rejecting grantee’s argument that an accounting mistake should excuse disallowance because employee error “does not exculpate [grantee] from its burden to ‘adequately safeguard all assets and assure that they are used solely for authorized purposes’” (quoting 45 C.F.R.§ 75.302(b)(4))); *Bright Beginnings* at 6 (rejecting grantee’s contention that unintentional regulatory violation should be excused because grantees are responsible for documenting expenses and bear the burden to show allowability and allocability, and there is no intent element to establish disallowance); *Harambee Child Dev. Council, Inc.*, DAB No. 1697, at 4 (1999) (holding that equitable relief is not available to reverse a disallowance simply because grantee does not have sufficient funds to repay amounts disallowed).  Thus, Mobile’s arguments concerning its culpability, its ability to pay, its current non-compete status, and its allegedly successful performance review of its current program provide no basis to reverse or modify the disallowance.

We further acknowledge Mobile’s reference to *East Arkansas Legal Services v. Legal Services Corp.*, 742 F.2d 1472 (D.C. Cir. 1984), in the context of its assertion that it does not have the funds to pay the disallowance.  Mobile Br. at 3.  While the purpose of Mobile’s reference to *East Arkansas* is unclear, to the extent Mobile asserts that the disallowance in this case is akin to the termination of its award, Mobile is incorrect.  In *East Arkansas*, the United States Court of Appeals for the D.C. Circuit concluded that the withholding of funding from a grant recipient’s current award to recover or offset excess funds carried over from a prior year was akin to a termination and, thus, triggered notice and hearing rights under the statute and regulations applicable to that program.  *See* 742 F.2d at 1480.  That is not the situation here.  Apart from the fact that *East Arkansas* involved a different program, statute, and regulations, there is no evidence, let alone an allegation, that ACF awarded funds to Mobile and then withheld a portion of those funds to offset any carryover from a prior year.  Nor has Mobile asserted that ACF has withheld funds to offset the disallowance.  Moreover, the D.C. Circuit distinguished *East Arkansas*

**Page 12**

when it concluded that a routine disallowance (such as we have here) is not a termination because a disallowance is not a “permanent withdrawal of the grantee’s authority to obligate previously awarded grant funds.”  *See* *Salt Lake Cmty. Action Program, Inc. v. Shalala*, 11 F.3d 1084, 1090-91 (D.C. Cir. 1993), *rev’g and remanding* *sub nom. Salt Lake Cmty. Action Program, Inc. v. Sullivan*, 785 F. Supp. 1013 (D.D.C. 1992), *vacating* DAB No. 1261 (1991).  In short, *East Arkansas* is inapposite because this matter does not involve a withholding or termination of any award.

Finally, Mobile requests that this matter somehow be resolved pursuant to the procedures outlined in former 45 C.F.R. §§ 1304.60 and 1304.61.10
  Mobile asserts “that the issue of ‘disallowed cost’ was effectively resolved based on its financial audit reports for 2013, 2014, 2015, 2016, and 2017,” but “if there still is disagreement as to the issue of ‘disallowed costs’ then the matter should be resolved through a ‘Quality Improvement Plan.’”  Mobile Br. at 6-7.

Mobile confuses two separate review processes.  *See William Smith Sr. Tri-Cnty. Child Dev. Council, Inc.*, DAB No. 2549, at 11-12 (2013) (discussing distinction between audit and program review processes).  The disallowance in this matter arose from an independent audit conducted for the 2016 calendar year in accordance with the Single Audit Act and 45 C.F.R. § 75.501(a).  *See*ACF Exs. 1, 3.  The former regulations at 45 C.F.R. §§ 1304.60 and 1304.61 were part of a separate performance review process pertaining to the implementation and enforcement of program performance standards, as required by the Act.  *See generally*45 C.F.R. Part 1304; Act § 641A(c).  “The purpose of an audit is to identify any weaknesses in financial operations and questionable costs,” whereas a performance review conducted under Part 1304 “is designed to determine whether a Head Start agency is in compliance with the Head Start performance standards.”  *William Smith Sr.*, DAB No. 2549, at 12 (citing Head Start Act § 641A(c)).

The Act requires program monitoring to evaluate whether Head Start agencies meet the performance standards the Secretary has established (including financial management requirements) and to “identify areas for improvement and areas of strength.”  Act § 641A(c).  Former sections 1304.60 and 1304.61 required that Head Start grantees correct deficiencies identified as the result of monitoring reviews either immediately or pursuant to a Quality Improvement Plan, as determined by the responsible HHS official.  45 C.F.R. § 1304.60(b).11
  Any other noncompliance (below the level of a deficiency)

**Page 13**

identified pursuant to a review would need to be corrected within the time specified by the responsible HHS official.  *Id*. § 1304.61(a).  If not corrected as required, the noncompliance would be deemed a deficiency that must be corrected either immediately or pursuant to a Quality Improvement Plan, as specified in section 1304.60.  *Id*. § 1304.61(b).  Under the former section 1304.60, a deficiency which remains uncorrected would result in the issuance of a letter of termination or denial of refunding.  *Id*. § 1304.60(f); *see also* Act § 641A(e)(1).

Here, the disallowance clearly arose from an audit—not a performance review conducted under the Act.  Indeed, there is no evidence in the record that a performance review was conducted involving the Part 1304 regulations.  Moreover, the Board has long held that “the opportunity to correct noncompliance pursuant to the [Part 1304] regulations does not provide a legal basis for avoiding a disallowance, even if the disallowance arises from the same facts as the noncompliance.”*William Smith Sr.*, DAB No. 2549, at 12.  Thus, the procedures under Part 1304 have no bearing on this matter and provide no basis to avoid the disallowance.

Finally, to the extent Mobile’s argument can be understood as an assertion that ACF should have taken an alternative enforcement action, the Board has recognized that an agency’s selection and timing of an enforcement action is committed to the agency’s discretion.  *Pro. Counseling Res., Inc.*, DAB No. 2448, at 9 (2012).  Once ACF determined that Mobile failed to comply with the requirements applicable to its Head Start grant, ACF was authorized to choose one or more of the enforcement remedies available under 45 C.F.R. § 75.371, “as appropriate in the circumstances.”  A disallowance to recover federal funds inappropriately spent or drawn is certainly “appropriate in the circumstances” and expressly authorized by regulation.  *See* 45 C.F.R. § 75.371(b).

**Page 14**

**Conclusion**

For the reasons explained above, we sustain the disallowance in the amount of $601,632.


          /s/
        Constance B. Tobias

                      Board Member
          /s/
        Susan S. Yim

                      Board Member
          /s/
        Michael Cunningham

                      Presiding Board Member
      1.   Throughout this decision we cite to the regulations at 45 C.F.R. Part 75, which superseded the regulations at 45 C.F.R. Part 74 and Part 92.  See 79 Fed. Reg. 75,875 (Dec. 19, 2014).  The Part 75 regulations, effective December 26, 2014, adopted for HHS the Uniform Guidance found at 2 C.F.R. Part 200, with certain agency-specific modifications.  Id.  When the Part 75 regulations were issued, HHS acknowledged that the requirements contained therein were already in effect at Part 74 and Part 92 and, thus, all grantees already should have been in compliance with the requirements.  79 Fed. Reg. at 75,875.  We cite to the Part 75 regulations because those were the regulations in effect when Mobile’s award for the 2015-2016 budget period was issued.  See ACF Ex. 5, at 2; Cent. Ala. Comp. Health, Inc., DAB No. 2625, at 2 n.3 (2015).  In our analysis, we also provide corresponding citations from Part 74 (superseded), to the extent our analysis concerns the requirements applicable to Mobile’s award for the 2014-2015 budget period. back to note 1
                      2.   The regulations, however, recognize an exception for pre-award costs “only to the extent that they would have been allowable if incurred after the date of the Federal award and only with the written approval of the HHS awarding agency.”  45 C.F.R. § 75.458; see also id. § 75.309(a). back to note 2
                      3.   The first budget period for this project ran from July 1, 2013, through June 30, 2014 (Year 1).  The record does not reflect that the disallowance involved any expenses incurred or funds awarded in Year 1. back to note 3
                      4.   ACF initially awarded Mobile $9,288,267 for Year 4.  ACF Ex. 6, at 1.  ACF subsequently amended the Year 4 notice of award three times.  See ACF Exs. 7-9.  The first amended notice awarded Mobile an additional $165,082 for a cost-of-living adjustment.  ACF Ex. 7, at 1, 4.  The second amended notice awarded Mobile an
additional $56,372 “to extend the duration of Head Start services” and “include[d] funds for start-up activities, and operations funds for the current budget period . . . .”  ACF Ex. 8, at 1, 4.  The third amended notice did not award additional funds but approved a budget revision to allow Mobile to purchase three vehicles.  ACF Ex. 9, at 1, 5. back to note 4
                      5.   The audit made findings concerning Mobile’s journal entries, budgetary compliance, account reconciliations, and cash management.  ACF Ex. 1, at 26-30.  ACF issued the disallowance based on the final finding regarding cash management.  See ACF Ex. 3, at 4-5. back to note 5
                      6.   The Order to Develop the Record allowed Mobile fifteen days to submit a response to ACF’s submission.  Mobile filed no response. back to note 6
                      7.   It is not clear that such an extension is even available to prolong a discrete budget period within a multi-year project period because doing so would create overlapping budget periods from two different awards.  See GPS at II-58, “Extension of Final Budget Period of Previously Approved Project Period.”  We need not reach that issue here because we conclude the regulations do not authorize the reverse “extension” sought by Mobile. back to note 7
                      8.   Mobile requests that it be allowed to “reprogram” funds from its “CACFP and/or Pre-K” programs.  Mobile’s funding for the Child and Adult Care Food Program was awarded by the U.S. Department of Agriculture and passed through the Alabama State Department of Education.  ACF Ex. 1, at 18.  The “Pre-K” program is evidently not a federal program as it is not listed in the Schedule of Expenditures of Federal Awards and List of Programs in Mobile’s 2016 audit report.  ACF Ex. 1, at 18.  ACF has stated that the program is state-funded, and Mobile has not indicated otherwise.  ACF Response Br. at 6. back to note 8
                      9.   With its notice of appeal, Mobile attached a letter from the auditor dated May 9, 2019, in which the auditor clarified the amounts Mobile “owed” to Head Start.  The auditor explained that the $247,058 drawn in excess of Year 4 expenditures, as identified in the 2016 audit, was not the “final amount” of excess draws because the Year 4 budget period did not end until June 30, 2017—six months after the end of the 2016 audit period.  In the letter, the auditor stated that Mobile actually withdrew $295,440 from the Year 4 award in excess of program expenditures as reflected in the 2017 audit (Mobile Ex. 5, at 24).  The disallowance at issue in this appeal, however, is not based on any findings from the 2017 audit.  Therefore, we do not make any determination about any additional or subsequent disallowed amounts based on the 2017 audit.  Our decision is limited to the disallowance identified in ACF’s notice dated April 23, 2019 (ACF Ex. 3), which was based on findings in the 2016 audit (ACF Ex. 1, Mobile Ex. 4). back to note 9
                      10.   The Head Start regulations were amended effective November 7, 2016, to modernize the program performance standards in accordance with the 2007 statutory amendments.  81 Fed. Reg. 61,294 (Sept. 6, 2016).  The current regulations continue to provide for a program monitoring process, separate from fiscal audits, as required by Section 641A of the Act.  See 45 C.F.R. Part 1304, subpart A. back to note 10
                      11.   The term “deficiency” is defined in section 637 of the Act (as well as in former section 1304.3).  “Deficiency” includes “an unresolved area of noncompliance.”  Act § 637(2)(c). back to note 11 Back to top
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