GAB Decision 281
April 23, 1982 Alameda County Cost Plan; Docket No. 81-218 Garrett,
Donald; Teitz, Alexander Settle, Norval
Alameda County appealed a decision of the Regional Director, Region
IX (Agency), to disallow $490,005.75 related to agreements to acquire
computer equipment. The Agency determined that the disallowed costs
were interest and finance charges which were unallowable under OMB
Circular A-87. The County claimed that the costs should be considered
short term leasing costs, which are allowable. In the alternative, the
County claimed that a disallowance based on the OMB Circular provision
prohibiting interest and finance costs would be arbitrary and
capricious.
OMB Circular A-87, Attachment B, Part D, paragraph 7 provides that:
/1/
Interest on borrowings (however represented) . . . (and the) cost of
financing and refinancing operations . . . are unallowable except when
authorized by federal legislation and except as provided for in
paragraph C.2.a of this Attachment. /2/
Whether the costs were interest/financing charges connected with a
purchase.
The Board concludes that the Agency correctly determined that the
acquisitions of computer equipment in this case were purchases, and that
the charges in question were unallowable interest and finance charges.
The record indicates that there were 65 agreements between the County
and IBM, each of which contained essentially the same language stating
that the County was purchasing the equipment and that the County's
payments over time would include a finance charge.
(2) The agreements were titled, "Agreement for Purchase of IBM
Machines -- State and Local Government" and "Installment Payment
Agreement (State and Local Government)." Appellant's Brief, Exhibit 13.
The Agreements for Purchase stated in part that (quoting from a contract
in Exhibit 13):
The Customer agrees to purchase and International Business Machines
Corporation (IBM) by its acceptance of this Agreement agrees to sell, in
accordance with the following terms and conditions, the machines listed
below.
The Customer promises to pay in full the Total Cash Payment
consisting of the Down Payment and State and Local Taxes (if applicable)
. . . and to pay the Contract Time Balance in consecutive Periodic
Payments including Finance Charge . . . . (emphais added)
The Customer may at any time pay in advance the full amount due
hereunder and the Time Price Differential will be adjusted by IBM to
reflect the shorter payment period.
The Installment Payment Agreements provided:
Provided this agreement is accepted by IBM, title to each machine
passes to the Customer on date of shipment from IBM, or on the date of
receipt of this agreement by IBM, whichever is later. Id.
The County maintained that a non-appropriation clause in the
Agreements for Purchase (titled "Funding") is evidence that the County
was paying IBM for the use (rather than purchase) of the equipment. The
Clause provided:
Since the Customer intends to request appropriation of funds
periodically to be paid for the machines, if funds are not appropriated
for the Customer for such Periodic Payment for any future Fiscal Period,
the Customer will not be obligated to pay the remainder Total Time Sale
Price Due beyond the end of the then Current Fiscal Period. Such event
will not constitute an event of default . . . .
(3) In the event that funds are not appropriated as provided above
and the Customer is unable to make further payments due under this
Installment Payment Agreement beyond the end of the then current Fiscal
Period, IBM will . . . enter and take the machines from the Customer's
premises and will retain all sums previously paid by Customer to IBM as
partial compensation for machine use and depreciation.
The County argued that this clause made its agreements fit the
description of short term leases as used in Cost Plan Information
Release No. 16, issued by the Controller of the State of California.
Release No. 16 provided at Section III.A.1.a. that:
Short term lease rental of equipment (period not to exceed two
years). The costs under a short term lease are allowable when: (1) the
rates are reasonable at the time of the decision to lease and after all
available alternatives have been investigated, (2) the costs represent
charges only for the current use of the equipment including but not
limited to, incidental service costs such as maintenance, insurance, and
applicable taxes, (3) the costs of the equipment do not represent
material equity in the equipment.
The County did not present evidence which persuades the Board that
the Agency's characterization of the charges was incorrect. The
Agreements are clear on their face. They are titled Agreements for
Purchase, they state that title to the equipment passes to the County,
and that the County will pay a down payment and pay the remainder in
installments ". . . including a finance charge." The Agreements identify
the amounts of the "Finance Charge" to be paid. The record also shows
that the County's financial statements for the years involved
characterized portions of its data processing costs as "Interest on
Notes and Warrants." See, Appellant's Brief, Exhibit 1.
We find that the non-appropriation clause does not change the
character of the agreement. We agree with the Agency that the clause,
most reasonably interpreted, does not indicate an agreement to rent the
equipment but is a repossession clause intended to give IBM and the
County protection in the event that funds requested for payment on the
purchase of the equipment are not appropriated.
Without deciding the legal effect of the State's Cost Plan
Information Release, we also find that Section III.A.1.a. of Release No.
16 does not support the County's position. That section outlines
conditions (4) for when costs under short term leases are allowable; it
does not state that any agreement which meets those conditions is a
short term lease to which the provision applies. Furthermore, there is
no indication that the agreements between IBM and the County were
limited to a two year duration, as required by the section on short term
leases. To the contrary, the agreements spell out payment schedules for
four to five years. See, Appellant's Brief, Exhibit 13. Therefore, we
find that if any provision in Release No. 16 applies, it is the
provision regarding the purchase of equipment (at Section III.A. 2)
which states that "interest expenses or other finance charges are
unallowable," not the section on short term leases.
Whether OMB Circular A-87 was applicable.
The County also argued that if the charges at issue were determined
to be interest within the meaning of A-87, then the disallowance should
be overturned because the County's method was the most economical way to
acquire the equipment and therefore the A-87 policy was arbitrary and
inequitable. The County further maintained that to the extent A-87
prohibits reimbursement of interest costs under these circumstances, the
Department was not required to follow it because there was no
legislative authorization for OMB to promulgate A-87.
As the Board has held in other decisions where grantees have
presented arguments for allowing interest expenses for the purchase of
computer equipment, the Board cannot disregard the cost principle
prohibiting federal reimbursement of those costs because it has been
implemented by Departmental regulations. See, e.g., Vermont State-Wide
Cost Allocation Plan, Decision No. 84, February 26, 1980. For the
period involved here, the Department's regulations incorporated the OMB
prohibition on interest and other finance charges. 45 CFR Part 74, Sec.
74.171, Appendix C, Section D.7, 38 Fed. Reg. 26275, September 9, 1973;
Sec. 74.171, Fed. Reg. 34273, May 22, 1980. The Board is bound by all
applicable laws and regulations. 45 CFR 16.14 (1981). Since we find
those regulations are clearly applicable to the County, the Board must
deny the appeal. /3/
(5) Conclusion
Based on the foregoing analysis, we uphold the disallowance in the
amount of $490,005.75. /4/
/1/ OMB Circular A-87, issued January 28, 1981, 46 Fed. Reg.
9543, was previously designated as FMC 74-4. Both were incorporated in
the Department's regulations at 45 CFR Part 74 (see discussion on p.
4). There are no relevant substantive differences between OMB A-87 and
FMC 74-4 as it read during the period involved in this appeal in the
provisions prohibiting interest and finance expense. /2/ Section
C.2.a. allows interest costs connected with rental of certain publicly
and privately owned buildings and is not relevant to the charges at
issue here. /3/ Although OMB was encouraged to amend the
no-interest rule to allow for reimbursement of interest cost connected
with the purchase of computer equipment, OMB did not do so when it
modified the rule with respect to certain publicly and privately owned
buildings, and the Department's regulations continue to implement the
OMB policy. See, 45 Fed. Reg. 27363, April 22, 1980; Appellant's Brief,
pp. 4-5. /4/ The record does not indicate to what extent funds
of other federal agencies may be involved in this appeal. This has not
been an issue in the case, and we express no opinion on the effect of
OMB A-87 on funds of other agencies, if any, which may be included in
the disallowance amount.
OCTOBER 22, 1983