HHS Disallows $144,000 in Community-Development Grant Funds Awarded to Washington-Area Non-Profit

This Client Alert may be of interest to non-profit organizations that receive federal grant funds from the U.S. Department of Health and Human Services.

In a written opinion published on August 5, 2010, the U.S. Department of Health and Human Services Departmental Appeals Board (DAB) disallowed $144,000 in community-development funds awarded by the Substance Abuse and Mental Health Services Administration (SAMHSA) to a Washington, D.C.-area community organization.

The funds at issue were awarded to the Suitland Family and Life Development Corporation (Suitland), a non-profit community-development organization in Suitland, Maryland. SAMSHA awarded the funds during fiscal years 2006 and 2007 (“FY06,” “FY07”) under two grant programs—the Drug Free Communities Support Program, and the Drug Free Communities Mentoring Program. The grant funds were to assist with development projects involving a technology center and residential housing—projects aimed at reducing substance abuse among young people in Suitland’s community. DAB disallowed portions of Suitland’s awards based on (1) inadequate documentation; and (2) improper conflicts of interest.

Specifically, DAB disallowed two types of costs related to Suitland’s compensation of its executive director. DAB disallowed $69,000 in costs that Suitland claimed as compensation to the executive director (ED) as the project director for the DFC-Mentor grant in FY06 and FY07 because Suitland failed to provide any documentation showing that it actually paid this money to the ED. Furthermore, the DAB found that the consulting contract between Suitland and the ED was overly vague and insufficiently particular under OMB cost principles (2 C.F.R. Part 230, formerly OMB Circular A-122). Finally, the DAB held that the costs incurred under the grant for the ED’s services were not properly and adequately supported. The grantee bears “central responsibility” of documenting the existence and allowability of its expenditure of federal funds—indeed, the burden is on the grantee to account for expenditures and show that they are allowable.

DAB also disallowed costs on the basis of improper conflicts of interest, specifically: $30,360 for consulting payments for services provided by a logistics coordinator and $33,816 as wages and fringe benefits paid to a community liaison. DAB stated that the circumstances surrounding the hirings “evidence a conflict of interest [or at least] the appearance of a conflict of interest” and a “material failure to comply” with cost principles and Suitland’s own Financial Management Manual. These two employees were the only two people who responded to the job announcements. At the time of hiring, one employee was the president of the board the ED’s consulting company. At the same time, the other employee was president the Suitland Civic Association (SCA). Suitland identified SCA on its grant application as one of two “key stakeholders” in the network for which the funding was requested. The minutes from Suitland’s board’s hiring meetings demonstrate that the ED participated in the meeting rather than removing herself during the Board's discussion and decision. The ED’s failure to recuse herself violated 45 C.F.R. § 74.42 and Suitland’s own policy. As for the second employee, the ED had an ongoing professional relationship with her in other connections (e.g. worked with her in another organization, used this employee’s name in filing other grant applications, and hired her periodically as a consultant).

DAB also disallowed $10,600 in FY06 DFC grant funds for services based on a consulting contract executed by Suitland’s ED and the pastor of a local church. This transaction also involved an improper conflict of interest, since the pastor was a member of Suitland’s board.

The opinion is Suitland Family and Life Development Corp., DAB No. 2326, 2010 WL 3184256 (Aug. 5, 2010).

For questions about this opinion, or about other legal issues affecting not-for-profit recipients of federal grant funds, contact Ted Waters at ewaters@feldesmantucker.com.

This Client Alert is provided solely for educational and informational purposes. It is not intended to constitute legal advice or to create an attorney-client relationship. Readers should obtain legal advice specific to their enterprise and circumstances in connection with each of the topics addressed.