DEPARTMENT OF HEALTH AND HUMAN SERVICES
Departmental Appeals Board
Civil Remedies Division
In the Case of: New World Christian Ministries, Petitioner,
- v. -
Office of Human Development Services.
DATE: July 21, 1989
Docket No. C-78
DECISION
The Petitioner, New World Christian Ministries (NWCM), requested a hearing
to contest the determination
made by the Office of Human Development Services (OHDS) to deny refunding of
the Petitioner's
federally funded Head Start program in 1989. This determination was made by
the Regional Administrator
for OHDS, Region V, in a letter to NWCM dated December 2, 1988, and was based
upon, inter alia, the
Petitioner's failure to correct a series of deficiencies. OHDS Ex 30. A hearing
was held before this
Administrative Law Judge (ALJ) on March 21, 22, and 23, 1989, in Chicago, Illinois.
Based on the record developed at the hearing, the parties' post-hearing briefs,
and the applicable law and
regulations, I hereby conclude that OHDS's determination to deny refunding of
the direct grant is fully and
substantially supported by the evidence. My decision, the "initial decision"
under 45 C.F.R. 1303.25,
upholds the Regional Administrator's determination.
APPLICABLE LAW AND REGULATIONS
The federally funded Head Start program was established by the Economic Opportunity
Act of 1964. Pub.
L. 88-452, Title II, section 222(a)(1); 42 U.S.C. 2809(a)(1) (1970); OHDS Memo
1, for 1. In recognition
of the program's effectiveness in serving economically disadvantaged children
and their families, a
subchapter cited as the "Head Start Act" was enacted by Public Law
97-35 on August 13, 1981. The
current statutory authority for th
program is found at 42 U.S.C. 9831 et seg. (1976) (Supp. V 1981), and 42 U.S.C.
9834 (Supp. 1988)
(extending funding for Head Start through 1990).
Department regulations governing the administration of the Head Start program
are found at 45 C.F.R. Part
1301-1305. Regulations providing "program performance standards" for
Head Start grantees are contained
in 45 C.F.R. Part 1304. Fiscal requirements for Head Start grants are found
at 45 C.F.R. Part 74, the
general Department regulations governing "Administration of Grants."
In this Decision, I set out each of
the relevant fiscal and program requirements as I discuss their significance
in the context of this case.
The rules governing this hearing and decision are found at 45 C.F.R. 1303.20
- 1303.26 and at 45 C.F.R.
1303.35.
The burdens of justification and proof are found at 45 C.F.R. 1303.22.
BACKGROUND
The national Head Start program is administered by OHDS, a component of the
United States Department
of Health and Human Services (DHHS). The Head Start program's purpose is the
effective delivery of
comprehensive health, educational, nutritional, social, and other services to
economically disadvantaged
children and their families. OHDS Br 1.
Under the Head Start Act, OHDS, as a delegate of the DHHS Secretary, is authorized
to provide financial
assistance, upon proper application, to a qualified local public, or private,
nonprofit agency for planning,
conducting, administering and evaluating a Head Start program. Among the criteria,
a "qualified" Head
Start agency must be determined by the Secretary to be capable of such functions.
The Act provides,
however, that financial assistance shall not be withheld from a recipient agency
for failure to comply with
terms and conditions unless the agency has been given reasonable notice and
the opportunity to show cause
why such action should not be taken. The Secretary also has authority to issue
regulations and other
guidance for program administration and grant management.
The actual conduct of a Head Start program is the responsibility of the local
agency grantee. Each grantee
is expected to comply with all relevant laws, regulations, instructions, guidelines,
performance standards,
as well as terms and conditions of the grant.
OHDS instructions are issued in correspondence to grantees and in official documents.
Terms and
conditions of grants are contained or referenced in the grant documents. All
of these are promulgated to
local grantees.
All grantees must hire qualified personnel who must use grant funds effectively.
Adequate financial
management systems must be implemented and maintained, with effective internal
controls.
If a grantee fails to abide by these requirements, or does not maintain required
legal status or financial
viability, the administrative office which makes the grant is responsible for
taking termination action.
ISSUES
The issues in this care are:
1. Whether OHDS established that NWCM failed to comply with fiscal and program
requirements, and
with the terms of its grant, as set forth by OHDS in its December 2, 1989 letter
to NWCM.
2. Whether NWCM submitted an inadequate application for continued funding (refunding application).
FINDINGS OF FACT AND CONCLUSIONS OF LAW
Having considered the entire record, the arguments and submissions of the parties,
and being fully advised
herein, I make the following Findings of Fact and Conclusions of Law:
l. NWCM is a nonprofit social service organization which has operated a Head
Start program in
Chicago, Illinois since approximately 1979. TR I/99.
2. From 1979 until 1984, NWCM's Head Start program was funded entirely on a
sub-contract basis,
or under a "delegate contract," with the City of Chicago. TR I/100;
TR III/7.
3. A "delegate agency" includes a public or private non-profit organization
or agency to which a
grantee has delegated all or part of its responsibility for operating a Head
Start program. 45 C.F.R. 1301.2.
4. A "Head Start Agency" or "grantee" is a local public
or private non-profit agency designated to
operate a Head Start program by the responsible DHHS official, pursuant to 45
C.F.R. 1302. 45 C.F.R.
1301.2.
5. NWCM became a direct grantee on July 1, 1984, when it was awarded a direct
grant for a Head
Start program by OHDS. TR I/92; TR III/6-7.
6. At the time NWCM became a grantee, it continued operating a separate and
distinct Head Start
program as a delegate agency of the City of Chicago. TR III/7.
7. Pursuant to DHHS regulations, NWCM retained Adler & Associates, Certified
Public
Accountants, to audit and prepare a financial report on NWCM Grant No. 05CH5232
as of December 31,
1986.
8. On April 10, 1987, Adler & Associates issued its Financial Report of
examination of the NWCM
balance sheet and the related statements of revenue, expenditures and changes
in fund balance (deficit) and
changes in financial position for the calendar year. OHDS Ex 33.
9. Adler & Associates determined that NWCM is primarily dependent upon
grants from
governmental agencies, with a secondary dependency on public contributions.
Adler & Associates
concluded that NWCM's financial support had been inadequate to cover the net
NWCM costs, resulting in
an accumulated deficit in excess of $625,000 on December 31, 1986. Id.; OHDS
Ex 34; TR I/29; TR
III/80.
10. NWCM's chief fiscal officer, Luther Hinton, acknowledged that he believed
the Adler & Associates
audited deficit of $625,000 to accurately reflect NWCM's corporate deficit.
TR I/129.
11. The Adler & Associates audit was rejected by the Region V Inspector
General for Audit, DHHS,
due to non-conformity with federal audit standards. P Ex 5.
12. In 1987, the City of Chicago conducted an internal review of NWCM's delegate
Head Start program.
This investigation revealed that approximately $250,000 in undisbursed payroll
checks for delegate
program employees had been stored in an NWCM safe, although the City of Chicago
had funded NWCM
for those payroll expenses. TR I/124; TR III/72-74.
13. As a result of the Adler & Associates audit and the City of Chicago
internal review, DHHS and
the City of Chicago jointly decided to retain Washington, Pittman & McKeever,
Certified Public
Accountants (WPM) to perform an independent certified audit of NWCM. TR III/76-78.
14. OHDS notified NWCM of this decision on June 18, 1987, pointing out the
OHDS was "concerned
about the safety and proper usage of Head Start funds, particularly in view
of the large amount of such
funds flowing through your agency ($1,279,003)." NWCM was further told
that the scope of the WPM
audit would include NWCM's entire agency, concentrating on its Head Start operations
as both a delegate
and as a grantee. P Ex 5.
15. The WPM audit of NWCM for the period December 1, 1985 to November 30, 1986
reflected that
NWCM had a corporate deficit of $649,388. OHDS Ex 1/4,6.
16. In its audit report for the period December 1, 1985 through November 30,
1986, WPM
determined that the corporate deficit of $649,388, the net loss of $102,315
for 1986, and an Internal
Revenue Service (IRS) tax liability of $131,838, as well as NWCM's substantial
reliance on reimbursable
cost basis contracts with federal, state and local government agencies for its
programs, "indicate that the
agency (NWCM) may be unable to continue in existence." OHDS Ex 1/4,12.
17. NWCM's chief fiscal officer conceded that the debt to the IRS was of a
short-term nature which
could "threaten the existence" of NWCM. TR I/132.
18. WPM further found that, as of November 30, 1986, NWCM regularly submitted
claims and received
reimbursement for operating and payroll expenses before such expenses were actually
paid; that NWCM
made payments of those amounts as late as 90 days after reimbursement was received;
that NWCM failed
to pay its employees on regularly scheduled pay dates; and that NWCM had various
accounting problems.
OHDS Ex 1/16-25.
19. WPM also performed an agency-wide audit of NWCM for the period December
1, 1986 through
May 31, 1987, which reflected that NWCM's corporate deficit had grown to 799,
707, including a net loss
of $141,503 for the six-month period ending May 31, 1987. OHDS Ex 2/64, 66.
20. WPM concluded that NWCM's six-month net loss of $141,503, its corporate
deficit of $799,707 and
its IRS tax liability of $131,838, indicated that "the agency may be unable
to continue in existence."
OHDS Ex 2/64, 71.
21. On October 20, 1987, NWCM filed its application with OHDS for continued
funding of its Head
Start program for fiscal year 1988. OHDS Ex 4.
22. On December 11, 1987, the Regional Administrator of OHDS designated NWCM
a "high risk
organization" because of a continuing corporate deficit and other deficiencies.
A "high risk organization"
is an organization whose management practices create relatively high risks of
poor programmatic use and
financial stewardship of grant funds. OHDS Ex 5.
23. In its December 11, 1987 correspondence, OHDS relied on the Adler &
Associates audit, which
disclosed a $625,373 corporate deficit, and that the WPM audits reflected a
deficit of $799,707 as of May
31, 1987, which was an increase of $150,319 since November 30, 1986. OHDS concluded
this was
"evidence of serious deficiencies in your program or business management
practices." OHDS Ex 5.
24. OHDS placed NWCM on a cost reimbursement payment system effective January
1, 1988, and noted
that NWCM's failure to comply with the requirements of 45 C.F.R. Part 74 would
be grounds for the
immediate suspension of its Head Start direct grant pursuant to 45 C.F.R. 74.114.
OHDS Ex 5.
25. In a letter to NWCM dated December 22, 1987, the Regional Administrator
of OHDS determined to
conditionally fund NWCM for its Head Start direct grant during the period January
1, 1988 through
December 31, 1988. NWCM was requested to correct deficiencies set forth in that
letter by March 31,
1988. OHDS Ex 7.
26. Also in that letter of December 22, 1987, OHDS instructed NWCM to provide
a detailed report
by January 29, 1988 on its progress in correcting the nine categories of deficiencies
outlined. OHDS Ex 7.
27. The December 22, 1987 letter warned NWCM that failure to correct such deficiencies
could
constitute grounds for termination of its direct grant. OHDS Ex 7.
28. On December 28, 1987, NWCM requested technical assistance from OHDS to "reconcile"
its records
with that of the WPM audits for the periods ending November 30, 1986 and May
31, 1987, and to change
its designation as a "high risk organization." OHDS Ex 6.
29. OHDS personnel conducted an on-site review at NWCM on February 9-12, 1988.
OHDS provided
detailed technical assistance to correct program deficiencies, and transmitted
a ten-page "report of
findings" from the on-site review to NWCM on March 25, 1988. OHDS also
instructed NWCM to submit
a Grantee Improvement Plan by May 25, 1988, and to achieve full compliance by
June 25, 1988. OHDS
Ex 10.
30. On February 17, 1988, NWCM assured the Regional Administrator of OHDS that
it would "take
steps to address the fiscal and management deficiencies" outlined in the
audit findings and the Regional
Administrator's December 22, 1987 letter. OHDS Ex 8.
31. The February 17, 1988 letter enclosed a "deficit reduction plan,"
which included a specified
deadline for correcting each of the deficiencies noted by the Regional Administrator
and the WPM audits.
OHDS Ex 8.
32. The first described deadline in the NWCM deficit reduction plan was to
"settle" or otherwise
liquidate NWCM's tax debt of $131,838 by December 30, 1988. OHDS Ex 8.
33. The NWCM deficit reduction plan outlined in the February 17, 1988 letter
proposed a deficit
reduction schedule that included a projected salary contribution of $60,000
from NCWM's employees, a
projected income of $20,000 from an Annual Recognition Banquet, a projected
income of $25,000 from
Community Advisory Board fund raising efforts, and contributions totalling $115,000
during 1987 and
1988 from supporting organizations. OHDS Ex 8.
34. NWCM never established the Community Advisory Boards which it had planned
to create as part
of the deficit reduction plan submitted to OHDS. TR I/76.
35. NWCM never held an Annual Recognition Banquet. TR I/150.
36. NWCM currently owes the IRS approximately $250,000. TRI/132.
37. The IRS has placed a lien on NWCM property. TRI/132.
38. The large IRS debt seriously threatens NWCM's existence. TR I/132.
39. NWCM's deficit reduction plan "just did not work out," according
to its chief fiscal officer. TR
I/81-82.
40. The only credible evidence that any of the financial contributions and
goals of NWCM's deficit
reduction plans were met was a $41,434.39 donation from Douglass/Tubman Youth
Ministries. OHDS Ex
8; TR I/76, 150, 152; TR III/ 88-90, 96.
41. The Grantee Improvement Plan required by OHDS was for a reasonable, well
documented, specific
deficit reduction plan with definite dates for specific fund raising events.
TR III/84-89. The NWCM
deficit reduction plan and schedule set forth in its letter of February 28,
1988 (OHDS Ex 8) lacked
credibility and was not acceptable to OHDS. TR III/84-89.
42. NWCM wrote to OHDS on March 28, 1988, outlining a number of "significant
milestones" that had
been achieved in complying with the Regional Administrator's letter of December
22, 1987. NWCM
stated that past salary liabilities had been reduced by $80,000, that internal
management systems had been
strengthened, and that discussions continued with the IRS regarding NWCM's tax
liability. OHDS Ex 11.
43. On April 13, 1988, OHDS corresponded with NWCM and reviewed the NWCM submissions
of
February 17 and March 28, 1988 (outlining the action taken by NWCM to correct
the deficiencies cited by
OHDS in its December 22, 1987 "special condition" letter). OHDS concluded
that the NWCM corrective
action plan failed to sufficiently describe the progress made, and that it did
not provide adequate
information for a full evaluation. OHDS Ex 12.
44. The April 13, 1988 letter from OHDS further advised NWCM that its deficit
reduction schedule failed
to address the requirement that the plan provide documentation of measurable
events and dates by which
the deficit would be reduced. OHDS Ex 12.
43. OHDS further instructed NWCM to provide the basis of its projections for
net income from its
fund raising activities. OHDS Ex 12.
45. Also, in the April 13, 1988 letter, OHDS expressed concern to NWCM regarding
the nature and status
of negotiations with the IRS concerning the high tax delinquency and requested
that the results be
immediately reported to OHDS. OHDS Ex 12.
46. The April 13, 1988 letter further advised NWCM that it had failed to address
the impact which its
deficit had or might have on the OHDS grant, and that NWCM had not specified
the safeguards which
NWCM would take to insulate the OHDS grant from any future impact. OHDS
Ex 12.
47. OHDS extended the date by which NWCM must take corrective measures from
March 31, 1988 to
May 31, 1988, in "order to allow NWCM an opportunity to thoroughly address
these issues and avail itself
of the technical assistance being provided by CSR, Inc. in the areas of fund
raising, management
organization, budgeting and cost allocation." OHDS Ex 12.
48. On May 13, 1988, at the request of NWCM, OHDS extended the due date to
June 30, 1988 for the
audit of the program year ending December 31, 1987. OHDS Ex 13.
49. NWCM's only attempt to document its claim that salary liability had been
reduced by $80,000 was a
list of employees and their alleged contributions set out in a letter to OHDS
dated May 28, 1988. No
supporting documentation was produced to substantiate this assertion. OHDS Exs.
11, 15.
50. In a letter dated May 28, 1988, NWCM set forth its efforts and plans for
correcting the deficiencies
previously noted by OHDS. OHDS Ex 15.
51. The May 28, 1988 letter outlined projected revenue of $50,000 from a gospel
concert planned for
December 1988, but NWCM never raised any funds from the concert. OHDS Ex 15;
TR I/152.
52. On June 23, 1988, NWCM corresponded with OHDS concerning the on-site followup
review
conducted February 9-12, 1988. OHDS Ex 16.
53. On July 22, 1988, OHDS provided the application forms necessary for refunding
Head Start Grant
05CH5232 for fiscal year 1989. In that letter, OHDS noted that it had not received
an acceptable annual
audit for the Head Start program for the year ended December 31, 1987, and that
"(f)ailure to submit
acceptable audits on a timely basis, will result in your agency being put in
High Risk status and the
possibility of losing the Head Start granteeship." OHDS Ex 17.
54. On September 28, 1988, NWCM corresponded with OHDS concerning its inability
to obtain an
independent certified audit for the program year ended December 31, 1987 because
the Department of
Human Services of the City of Chicago (DHS Chicago) had refused to pay "its
fair share" of the cost of the
audit. NWCM accused DHS Chicago of "unethical practices...to effectuate
the ruination of NWCM, a
competing Head Start grantee." OHDS Ex 18.
55. On October 6, 1988, OHDS notified NWCM that its Head Start application
was due by October 3,
1988 and had not been received. NWCM was informed that it was in violation of
OHDS requirements, and
that because of NWCM's noncompliance, timely release of Head Start grant funds
could not be guaranteed.
OHDS Ex 19.
56. In a letter dated October 6, 1988, NWCM requested an extension of the deadline
for filing its grant
application until October 12, 1988. OHDS Ex 20.
57. NWCM's Head Start grant application number 05CH5232, for fiscal year 1989,
was received by
OHDS on October 12, 1988. TR III/17, OHDS Ex 21.
58. On October 20, 1988, OHDS corresponded with NWCM, concerning its September
28, 1988 letter
about the status of the audits for the periods ending December 31, 1987 and
September 15, 1988. OHDS
pointed out that NWCM's failure to begin the required audit five months after
it was originally due
required OHDS to consider the alternatives available under 45 C.F.R. 1303, Subpart
D. OHDS Ex 22.
59. In another letter to NWCM on October 20, 1988, OHDS notified NWCM that
an on-site review would
be conducted on October 26-27, 1988 to focus on the issues of NWCM's problems
in achieving full
enrollment; to follow up on the issues raised during the February 9-12 on-site
review; to follow up on the
various fiscal and administrative problems set out in the OHDS letter of December
22, 1987; and to
consider NWCM's grant application for fiscal year 1989. OHDS Ex 23.
60. On October 21, 1988, OHDS corresponded with NWCM concerning the fiscal
year 1989 grant
application which had been submitted on October 12, 1988, nine days beyond the
deadline. OHDS
indicated an informal review of the application revealed it to be unacceptable
for formal processing and
review, and rejected the tendered application. OHDS instructed NWCM that in
order for it to be
considered for funding of a Head Start program during fiscal year 1989, NWCM
would have to submit an
acceptable application no later than November 4, 1989, and stressed the importance
of a timely submission.
OHDS Ex 24.
60. OHDS identified several major inadequacies of the October 12, 1988 application,
including concern
about the parental involvement in the program's decision-making process; the
inadequacy of the non-
Federal resource section; unexplained increases and changes in staffing time;
and failure to address
NWCM's fiscal and administrative problems. OHDS Ex 24.
61. On October 26-27, 1988, OHDS conducted an on-site review at NWCM. Darrell
Nelson and
Steve Krasner of OHDS reviewed records, interviewed NWCM personnel, and provided
technical
assistance, including instructions about the inadequacies of the 1989 refunding
application submitted
October 12. TR III/96.
62. On November 2, 1988, OHDS summarized the findings of the October 26-27
on-site review, and
advised NWCM that all concerns raised by OHDS in its October 21, 1988 letter
(OHDS Ex 24) had to be
adequately addressed in the 1989 refunding application. OHDS Ex 25.
63. In the November 2, 1988 letter, OHDS questioned NWCM's ability to generate
the non-federal share
which NWCM estimated in its refunding application, and OHDS stated that there
was an apparent shortfall
in the required non-Federal share. OHDS also reiterated its concern that the
refunding application failed to
adequately consider the 15 percent limitation on administration and development
costs, and further advised
NWCM that its program audit for the period ending December 31, 1987 was substantially
delinquent.
OHDS
Ex 25.
64. The OHDS November 2, 1988 letter also noted that NWCM's corporate deficit
appeared unchanged
from the beginning of the year, since NWCM had produced accounting records reflecting
an agency deficit
of $564,986.48 as of January 1, 1988, subject to audit. OHDS Ex 25.
65. OHDS also expressed concern that NWCM had postponed or abandoned most of
its fund raising
projects, and that NWCM had failed to present documentation which showed progress
or resolution of its
continuing indebtedness. OHDS Ex 25.
66. During 1988, NWCM received approximately 210 hours in technical assistance
from CSR, Inc. for
management, program and fiscal problems. This assistance was provided at no
cost to NWCM and was in
addition to its financial assistance award. TR III/14-16; OHDS Ex 9.
67. NWCM resubmitted its application on November 4, 1988, which OHDS still
found to be unacceptable.
OHDS Ex 28; TR III/18.
68. NWCM has failed to submit a satisfactory refunding application for fiscal
year 1989. The
application resubmitted on November 4, 1989 contained major deficiencies in
planning, budgeting and
staffing. TR III/18.
69. On November 25, 1988, OHDS acknowledged receipt of correspondence from
NWCM dated
November 14, 1988 (OHDS
Ex 26) which "strongly disagreed" with OHDS' findings from the on-site
review. OHDS advised NWCM
that it had "not provided [to OHDS] any information which would serve as
a basis for altering the
findings." OHDS Ex 29.
70. OHDS informed NWCM on December 2, 1988 that its refunding application for
its direct grant for the
fiscal year 1989 was being denied "due to NWCM's failure to comply with
the terms and conditions of its
grant and applicable regulations in 45 C.F.R. Part 74 and 45 C.F.R. Part 1301
et seq." OHDS Ex 30.
71. OHDS has given NWCM adequate opportunity to satisfactorily explain its
financial problems and
resolve the questions surrounding its financial status, but it has not done
so.
72. Both the October 12 and the November 4, 1988 refunding applications for
fiscal year 1989 which
NWCM submitted were deficient and unacceptable.
73. Federal regulations provide that "special grant conditions more restrictive
than those prescribed in this
Part 74 may be imposed as needed when the granting agency has determined that
the grantee: (1) Is
financially unstable, (2) Has a history of poor performance, or (3) Has a management
system which does
not meet the standards of this part." 45 C.F.R. 74.7(a).
74. Federal regulations require a grantee whose legal condition has changed
or whose financial resources
have been diminished to show satisfactorily that it has or will continue to
have legal status and financial
viability. 45 C.F.R. 1302.20.
75. NWCM did not show that it had acted effectively to reduce its deficit.
76. NWCM did not show that it had met the requirement to submit an audit for
the year preceding the
proposed refunding year.
77. NWCM did not show that it met the requirement for matching 25 percent of
the federal funding or 20
percent of the total funding. 45 C.F.R. 1301.20.
78. NWCM did not show tht it had obtained the required Parent Policy Council
approval to apply for
refunding for 1989. 45 C.F.R. Part 1304, Appendix B; OHDS Ex 24.
79. NWCM did not demonstrate that it met the OHDS compliance standards in a
timely manner in
order to be restored refunding for its Head Start direct grant for 1989.
80. OHDS has supported by a preponderance of the evidence that its determination
to deny NWCM
refunding for its Head Start direct grant for 1989 was appropriate under federal
law and regulations.
DISCUSSION
The Regional Administrator's December 2, 1988 determination to deny refunding
of NWCM's Head Start
direct grant was based upon a series of fiscal and programmatic deficiencies
outlined in a document
attached to the determination letter, which was headed "Grounds for Intent
to Deny Refunding of NWCM."
The record indicates that each of these deficiencies had been identified in
previous correspondence with
NWCM, and that OHDS personnel discussed the problems with NWCM personnel during
the on-site visits
of February 9-12 and October 26-27, 1988. NWCM's 1988 grant had been refunded
by OHDS contingent
upon its compliance with certain special conditions, which had been outlined
to NWCM on December 22,
1987. NWCM was required to correct these same deficiencies by March 31, 1988
(later extended to May
31, 1988). OHDS found that NWCM had not corrected these deficiencies at the
time the 1989 refunding
application was submitted.
NWCM did not contend that the grounds cited by the Regional Administrator were
an improper basis for
denying refunding to a Head Start grantee. Neither did NWCM specifically refute
most of the Regional
Administrator's findings. Instead, NWCM sought to explain the circumstances
of each of the alleged
deficiencies, claiming that several of the deficiencies had arisen because of
"unavoidable" problems which
NWCM had with its entirely distinct Head Start delegate grant with the City
of Chicago. This "delegate
contract" with the City (in effect a sub-grant) existed from 1979 until
the City terminated it in mid-1988.
NWCM argued that it had been a victim of a "vendetta" by the City
because it was in direct competition
with the City as a Head Start grantee with OHDS. This "vendetta" caused
NWCM's substantial corporate
deficit, it claimed, and consequently, also caused some of its other problems.
In order to ensure that NWCM received a full and fair hearing, I allowed it
to present evidence concerning
its problems with the City, over the objection of OHDS that these matters were
irrelevant to questions
concerning the direct grant with OHDS. I agree with OHDS, however, that it is
not my role to evaluate the
circumstances of the termination of the delegate contract with the City of Chicago.
Moreover, in
considering the evidence presented concerning its delegate contract, I do not
find NWCM's purported
problems with the City to excuse any of the deficiencies cited by the Regional
Administrator.
In this Discussion, I first consider NWCM's specific allegations concerning
its delegate contract with the
City. I then address briefly each of the findings by the Regional Administrator
cited as a basis for the
nonrenewal determination in the December 2, 1988 OHDS determination letter.
I. NWCM's Deficit.
A major basis for OHDS's determination to deny refunding was the continued
existence of a large
corporate deficit by NWCM, which the December 2, 1988 determination noted was
$799,707 as of May
31, 1987 (OHDS Ex 30) of a total NWCM budget as of May 31, 1987 of approximately
$1.5 million. TR
I/129. One allegation by NWCM was that the size of this deficit was exaggerated
by a "hostile audit"
performed by WPM, an accounting firm that was jointly hired by OHDS and the
City of Chicago to audit
NWCM. TR 158. NWCM also alleged that the debt was attributable to unavoidable
problems in its
dealings with the City, as well as an outstanding debt by the City to NWCM.
NWCM attempted to impeach the reliability of the WPM audits. One witness, an
employee of the City as
well as a former NWCM employee, testified to her low opinion of the CPA firm.
TR III/210, see also TR
I/67. The accounting firm was used by the City to audit all their delegate contracts.
NWCM itself hired
another accounting firm for an independent audit for the same time as the WPM
audit. OHDS Ex 31. As
far as the deficit is concerned, I do not find any of the allegations concerning
the WPM audit ultimately
relevant, since NWCM's own audit, by Adler and Associates, also found a deficit
of $625,373 as of
December 31, 1986. OHDS Ex 34. I find OHDS's concern about the financial viability
of NWCM to be
justified whether the amount of NWCM's deficit was found to be either $799,707
or $625,373.
NWCM maintained that the deficit was due in large part because of actions taken
by the City to withhold
certain "payment vouchers" to NWCM to which it allegedly was rightfully
entitled. TR I/71. The NWCM
chief fiscal officer testified that the City of Chicago was indebted to NWCM
in the amount of
approximately $500,000. TR I/138. NWCM thus implied that its corporate deficit
occurred because of
circumstances beyond its control.
Even if I found this to be an accurate picture of the City's indebtedness to
NWCM, I would not find this to
be an adequate basis on which to question OHDS's findings concerning the debt.
As OHDS repeatedly
emphasized, NWCM's direct grant with OHDS was entirely separate from its delegate
contract with the
City. This is not the proper forum for NWCM to resolve its accounting dispute
with the City of Chicago.
Furthermore, the record does not substantiate the allegation concerning this
$500,000 debt owed by the
City to NWCM. None of the documentary exhibits refers to such a debt, nor do
they support an inference
that a debt of this size existed. Neither the Adler and Associates audit nor
the WPM audits alluded to such
an indebtedness. OHDS Ex 33, 34; OHDS Ex 1, 2. An NWCM witness did maintain
that NWCM's
reimbursement vouchers were "always late," but did not testify as
to the size of any outstanding
indebtedness. (TR III/200). Another witness, the trustee under the current arrangement
between NWCM
and the City, testified that the City may owe NWCM about $6,000 related to tax
payments. TR II/69. An
accountant for the City government denied the existence of the $500,000 debt,
and stated that the City
owes nothing to NWCM. TR III/154. A March 9, 1989 letter on City of Chicago
stationery, drafted by the
accountant, states that NWCM actually owes the City $78,871.41 for advances
from the 1987 fiscal year.
OHDS Ex 35, TR III/158-159.
I conclude that OHDS's finding concerning the substantial NWCM debt is substantiated
by the record, and
I am not convinced by NWCM's allegations that the debt was attributable to unavoidable
problems with its
delegate contract with the City.
II. Failure to comply with terms and conditions of the current grant award.
This ground, cited in the December 2, 1988 determination letter, relates essentially
to the "special
conditions" that were imposed on the continuation of the grant award for
calendar year 1988. OHDS Ex 7.
The Regional Administrator required NWCM, initially by March 31, 1988, to correct
"extremely serious
deficiencies" which she found. This deadline was later extended to May
31, 1988. Id.; OHDS Ex 12. The
major deficiency cited was the large corporate deficit, which the Regional Administrator
associated with a
"threat of insolvency." OHDS Ex 7. The record amply demonstrates that
NWCM has to date been unable
to reduce the substantial deficit found by the auditors, and the record indicates
that it has even continued to
increase.
NWCM presented no evidence that the $625,000 deficit found by the Adler and
Associates audit has been
reduced. NWCM conceded that it has not paid its debt to the IRS, and currently
has an outstanding tax
liability of over $200,000. TR I/132. The IRS has placed a lien on NWCM's property
because of the debt.
TR I/92. OHDS's site visit to NWCM on October 26-27, 1988 confirmed the existence
of the large deficit.
OHDS Ex 25. OHDS's fiscal expert assigned to the NWCM grant testified that in
his opinion, NWCM's
current deficit was even greater than that found by the WPM audits. TR III/112.
NWCM submitted a deficit reduction plan as part of a February 17, 1988 submission
to OHDS. OHDS Ex
8. The plan established a series of self-imposed deadlines, including as a first
priority the dissolution of its
tax liability to the Internal Revenue Service by December 30, 1988. An OHDS
witness, the fiscal expert
assigned to the NWCM grant, testified that the plan itself was unrealistic.
TR III/86-87.
NWCM's deficit reduction plan listed various sources of revenue to reduce the
deficit, including
contributions of employee salaries, contributions from "supporting organizations,"
an "annual recognition
banquet," and other fund raising activities. However, NWCM's plans for
fundraising activities were all
aborted or were apparently unsuccessful. OHDS Ex 25, TR I/83-84.
One allegation by NWCM concerning its deficit was that it had been unable to
absorb the effect of its loss
of its delegate contract with the City of Chicago. However, NWCM did not articulate
specifically why this
was so, or what measures had been undertaken to reduce its deficit since the
loss of the delegate contract on
June 15, 1988. OHDS Ex 18. Its fiscal officer also alleged that one must examine
the "composition of the
debt," and that some of it was of a long-term nature that did not threaten
the survival of the organization.
TR I/130. However, NWCM presented no details of why some of the debt was of
a long-term nature and
presented no documentation at all concerning the state of the current debt.
NWCM's witness
acknowledged that more short-term debt could threaten the organization since
it could force a bankruptcy
(id.), and admitted under cross-examination that its tax debt was of such a
short-term nature. TR I/132.
III. Failure to submit an audit for the period ending December 31, 1987.
The second ground for OHDS's nonrenewal determination was NWCM's failure to
submit an audit for the
1987 program year, which OHDS described as a "serious impediment to OHDS's
determination of the
viability of NWCM's financial status." Determination letter/Att., p. 4.
(OHDS Ex 30).
Under 45 C.F.R. 1301.12, Head Start programs must submit an audit for each
budget period by an
independent auditor to determine:
A. whether the agency's financial statements are accurate;
B. whether the agency is complying with the terms and conditions of the grant; and
C. whether appropriate financial and administrative procedures and controls
have
been installed and are operating effectively.
45 C.F.R. 1301.12(a).
Subsection (c) provides that the program must submit such an audit within four
months of the close of each
budget period, or by April 30, 1988 for the 1987 program year, unless otherwise
approved.
According to the December 2, 1988 determination letter, NWCM was granted an
extension of 60 days, to
June 30, 1988, to submit its budget. OHDS notified NWCM by letter of July 14,
1988 that the submission
of the audit was delinquent. OHDS Ex 22. As of September 28, 1988, NWCM had
still not submitted the
audit, and wrote to the Regional Administrator to complain that the Chicago
Department of Human
Services "has refused to honor its fair share of $10,000.00 for the cost
of auditing the delegate Head Start
program." OHDS Ex 18. NWCM also requested "responsible and definitive
actions" from OHDS,
apparently concerning the interpretation of 45 C.F.R. 1301.12, and particularly
whether the audit must be
for the "grantee Head Start program only" Id.
In a letter of October 20, 1988, the Regional Administrator advised NWCM that
it was required to submit
an audit to OHDS regardless of any arrangements it had made concerning its delegate
contract with the
City. OHDS Ex 22. In a letter of November 14, 1988, NWCM noted in a post-script
that "NWCM is
making every effort to comply with the required audit of the budget period ending
December 31, 1987, as
soon as possible." OHDS
Ex 26.
As of the March 21-23, 1989 hearing, NWCM still had not submitted the required
audit for 1987. TR I/86.
The claimed justification expressed in testimony was that OHDS was demanding
an audit solely of the
OHDS funded Head Start program only, which comprised only 20 percent of NWCM's
total operations,
and that such an audit would not allow OHDS to properly assess NWCM's financial
viability. TR I/86-87.
However, contrary to NWCM's assertion, the record provides no indication that
OHDS would refuse to
accept an audit for all of NWCM's operations. E.g., OHDS Ex 22.
NWCM started to hire an auditor to conduct an audit for the 1987 program year,
but the auditor was
"somewhat skeptical about getting involved and not having a clear understanding
of what HHS wants . . ."
(apparently referring to the issue of whether the audit should be for the OHDS
Head Start grant only.) TR
I/87; TR I/158-163. NWCM also submitted two letters from the firm of Blackman,
Kallick, and
Bartelstein, Certified Public Accountants, to explain the circumstances of its
failure to submit the audit. P
Ex 2, 3. In a letter of March 22, 1989, apparently prepared for purpose of the
hearing, the firm wrote that
the 1987 audit "is now scheduled for completion by the end of March 1989."
P Ex 2. The record does not
indicate whether such an audit was actually submitted. The letter explained
that the audit had been
postponed for three reasons: "changes in the entity to be audited"
(apparently referring to the loss of the
delegate contract with the City); "approval to perform an audit" of
the OHDS funded program only; and
delay in receiving payment.
Assuming that I would have the authority to consider these excuses for NWCM's
failure under the
regulations to submit an audit almost one year after it was due, I would not
find them to justify the
delinquency. The record does not indicate that NWCM sought approval from OHDS
to delay submission
of the audit for these reasons, and NWCM did not sufficiently explain why they
would justify the failure.
The regulations unequivocally require such an audit, and NWCM was repeatedly
warned of the
consequences of its failure to comply with the requirement. Especially given
the precarious financial
condition of the entity, OHDS in this case had a compelling need to evaluate
the current financial status of
the organization.
I find that OHDS had a reasonable basis for denying refunding for the 1989
program year, when the
grantee had not yet submitted a required independent audit for the program year
1987.
IV. Failure to meet non-Federal matching requirements and failure to maintain
accurate and current
accounting records.
The federal funds to a Head Start program must be matched by a 25 percent non-federal
share, or the total
cost of the program has to be matched by 20 percent of a non-federal share.
TR III/22, 45 C.F.R. 1301.20.
Further, the corporation (NWCM) is responsible under 45 C.F.R. 1320 for proper
recording of the
matching funds or in-kind contributions, and for showing by verifiable records
that the matching
requirements have been met. The Regional Administrator found a "serious
shortfall" in NWCM's non-
federal match. As of September 30, 1988, OHDS found a non-federal match of only
$21,121.38 out of a
required match of $73,368.
NWCM's fiscal officer acknowledged in testimony the existence of this shortfall
at the time of OHDS's
determination, but nonetheless maintained that NWCM had since then met its non-federal
match through
"in-kind contributions." The fiscal officer testified that NWCM "got
a heavy amount of in-kind
contribution" in the last part of 1988, which fulfilled its required non-federal
share. TR I/88. The written
record does not substantiate this testimony, however. The amount of in-kind
contributions (presumably
from volunteer activities) would need to be substantial, and the witness did
not offer any details of the
circumstances underlying his assertion. OHDS itself would be unable without
written documentation to
accept NWCM's claim of compliance.
Another regulatory requirement is that a grantee make and keep accurate, current,
and complete disclosure
of the financial results of each project or program. 45 C.F.R. 74.61(a). OHDS
found that the failure to
meet the non-federal share may have been due to the lack of accurate records
concerning contributions,
which itself was a violation of this requirement.
V. Failure to keep OHDS informed as required.
The Regulations require specifically that grantees must submit quarterly performance
reports within 30
days after the close of each quarter. 45 C.F.R. 74.82(b). However, as OHDS Ex
27 demonstrates, NWCM
submitted its reports for both the quarters of "March, 1988 through May,
1988" and "June, 1988 through
August, 1988" on November 21, 1988, well beyond their due dates. See TR
III/24.
OHDS also objected to NWCM's failure to notify OHDS of the fact that the Internal
Revenue Service had
filed a lien against the City of Chicago on May 23, 1988 because of unpaid FICA
taxes due from NWCM
for the period ending December 31, 1987. 45 C.F.R. 74.84 requires a grantee
to notify the granting agency
of events which "have significant impact upon the grant . . . activity."
Given OHDS's clearly stated
concern about NWCM's financial situation, I agree that failure to notify OHDS
about the status of its debt
to the IRS was further ground for not renewing the grant.
VI. Failure to submit an approvable application for refunding.
OHDS gave NWCM a full opportunity to submit an approvable application for refunding
for 1989.
OHDS's ultimate objection to NWCM's application for refunding set forth a number
of concerns too
numerous to mention. One major objection to the application was that it failed
to contain approval from
the Parent Policy Council, as required by 45 C.F.R. Part 1304, Appendix B. That
section provides for
policy groups (comprised of at least 50% of children's parents enrolled in the
program) to be actively
involved in policy making and in operation of the Head Start program.
OHDS agreed to accept the late filing of NWCM's 1989 grant application on October
12, 1988. In a letter
of October 21, 1988, OHDS returned the grant application, stating that the application
was "unacceptable
for formal review and processing by OHDS," noting a series of problems
with the application that it would
allow NWCM to further address in another application. OHDS Ex 24. The first
problem cited was
NWCM's failure to include proper evidence of Parent Policy Council approval.
As noted by OHDS's
October 21, 1988 letter, the minutes of the meetings of the Parent Policy Council
indicated that only two
parents were present at one meeting on October 12, 1988, and three parents were
present at a meeting on
October 6, 1988. OHDS Ex 21. The letter also noted that the minutes of the meetings
were not signed.
OHDS raised concern about whether three parents constituted a proper quorum
under the bylaws of the
Council, and, generally, whether there was a sufficient level of parent involvement
in the decision-making
at the organization.
The application resubmitted on November 4, 1988 failed to contain any evidence
of parent approval of the
revised application, and merely included a copy of the same Parent Policy Council
minutes which OHDS
had found to be insufficient in the initial application. OHDS Ex 28.
The NWCM Assistant Program Director testified about the circumstances of the
Parent Policy Council
approval of the 1989 grant application. TR III/218-228. The NWCM Parent Policy
Council had seven
members, but the assistant program director could not recall if the bylaws stated
whether a majority of four
was required for a quorum. TR III/224. The Council had approved the initial
application for funding, but
after NWCM received the rejected application back from OHDS, "the parents
met and worked with us to
give the additional information and we didn't feel that we needed a new approval
from the Parent Policy
Committee, because that was the same budget that we were working with."
TR III/226; see also TR I/173.
The record does not reflect that the Parent Policy Council met between the OHDS
return date (October 21,
1988) and the resubmission of the application on November 4, 1988.
While the record concerning the Parent Policy Council approval is less than
clear, I agree with OHDS that
NWCM should at least have clarified whether the Parent Policy Council had properly
approved the
application when it was resubmitted on November 4, 1988.
The other major problem which OHDS noted concerning the resubmitted application
by NWCM was that it
included administrative and development costs which exceeded the 15 percent
limitation as required by 45
C.F.R. 1301.32. NWCM did not deny that it exceeded the amount of allowable costs
here, but its chief
fiscal officer claimed that there was confusion as to whether the non-federal
part of administrative costs
needed to be included in calculating the allowable costs. T I/180-184.
NWCM's explanation is not persuasive, since NWCM easily could have inquired
about the meaning of the
regulatory limit. 45 C.F.R. 1301.32 clearly states that the costs of administration
and development shall
not exceed 15 percent of the total costs of the program, meaning all administration
and development costs,
not just those of the federal share. The obvious purpose of the limitation is
to ensure the efficient operation
of the grant program, and I find NWCM's failure to meet this requirement was
a proper ground on which to
reject its application for refunding and for denying refunding of the grant
for the 1989 program year.
VII. Failure to notify OHDS in writing regarding maintenance of financial viability.
45 C.F.R. 1302.20 provides:
(a) Upon the occurrence of a change in the legal condition of a grantee or
of a substantial
diminution of the financial resources of a grantee, or both, . . . the grantee
is required within 30 days after
the . . . grantee has notice of knowledge of the change, . . . to show in writing
to the satisfaction of the
responsible HHS official that it has and will continue to have legal status
and financial viability. Failure to
make this showing may result in suspension, termination or denial of refunding.
OHDS's December 22, 1988 determination letter found that NWCM had violated
this provision by not
notifying OHDS of a tax lien imposed by the Internal Revenue Service on NWCM
on May 23, 1988, in the
amount of $136,368.58, which OHDS found constituted a "substantial diminution
of the financial
resources" of NWCM. NWCM presented no response at the hearing to this OHDS
complaint.
The record also demonstrates that the Regional Administrator of OHDS, in renewing
NWCM's grant for
1988 subject to special conditions, warned NWCM of OHDS's continuing concern
about the financial
viability of the organization. As found above, NWCM did not implement a viable
deficit reduction plan,
nor does the record indicate that it adequately continued to keep OHDS informed
of its financial status.
Although NWCM submitted a deficit reduction plan on February 17, 1988 (see OHDS
Ex 8), the
organization did not apprise OHDS of how it was complying with the plan over
the course of the year, and
the record does not indicate that any true progress indeed was made or that
its debt was in any way
reduced.
I therefore conclude that NWCM's failure to keep OHDS informed of the organization's
financial status
was further ground to deny refunding.
CONCLUSION
Based on the foregoing, I find and conclude that NWCM did not demonstrate that
it met the OHDS
compliance standards in a timely manner in order to be restored refunding for
its Head Start direct grant for
1989. Further, I find and conclude that OHDS has supported its determination
to deny NWCM its 1989
refunding based on the entire record in this case and the applicable federal
Regulations.
_________________________________
Charles E. Stratton
Administrative Law Judge