Federal strings attached to faith-based grants

By J. Kent Holland, Jr., Esq.

July-August 2005

Let the acceptor beware! With the acceptance of federal grant money through the Faith-based Initiative, churches and other religious organizations enter a quagmire of government regulation. Former government attorney J. Kent Holland, Jr., Esq., outlines some of the legal implications for accepting a federal grant based on his personal experience as a grant appeals board member.

With the acceptance of federal grant funding comes an obligation to meet the government's strict rules regarding grant management and financial principles. As a Christian and an attorney with years of experience in federal grants law, including several years as a Standing Member (quasi-judge) on the former Environmental Protection Agency (EPA) grant appeals board, I am gravely concerned that with federal grants, faith-based grantees will receive more harm than good. I wrote many appeal decisions holding that EPA grantees (counties, municipalities and utility districts) must return their funding to the EPA because they lacked written documentation to prove they properly expended the funds. Legal action was taken against grantees that refused to pay the funds back to the agency. If this can happen to large cities, how much more common will it be for small charitable organizations that lack experience with the requirements?

An organization that signs a grant agreement accepts government oversight of their program, including reviews and audits to determine whether the government's rules for running grant programs have been satisfied. One such rule is for an organization that performs both social services and religious activities, which must be separated from each other either in time or location.

When audited, a grantee must present evidence, including contemporaneous written documentation, to prove it spent the federal funds on costs that the government agrees were "allocable" (necessary) to the program and that were reasonable and otherwise allowable under the federal cost principles for grants.

Government Recovery of Disallowed Costs

Disallowance of costs could result for any number of reasons, such as the grantee's failure to expend the funds on allocable costs for the specific grant purpose. An example of misspent funds would be for items or costs that are not necessary for the grant program. Even something that is necessary for the grant program, however, may be disallowed if it is found to be an unreasonable cost. Buying the most expensive, high-end refrigerator or microwave oven for a child care center might be questioned--especially if it is purchased without competition and price comparisons. Compensation paid to executives or employees that is excessive in comparison to what prudent persons would have paid may likewise be disallowed as an unreasonable cost. Some cost items are unallowable for federal grant funding no matter how reasonable they may appear. Lobbying efforts, for example, cannot be paid for with grant funds.

The burden of proof to show that the money was spent properly falls on the grantee. If the grantee cannot present adequate written documentation, the federal agency is within its rights to presume that the funds were misspent. The federal agency is not required to prove any wrongdoing on the part of the grantee. Instead, the grantee must prove that it did everything in strict accordance with all the federal program regulations and cost principles.

As explained by the Department of Health and Human Services (HHS) Grants Administration Manual (Chapter 1-105-60), "[I]f a determination is made that a cost is unallowable, the Action and Approving Officials do not have the authority to 'waive' (forgive) collection of the disallowance. These disallowances constitute claims by the Government, and may be waived or reduced only under the limited conditions prescribed in the Federal Claims Collection Act." This means that the government will take action to recoup money from the grantee. In one case involving a grant to a religious organization, the HHS Grant Appeals Board directed the grantee to sell real estate that had been purchased under the grant for use as a child development center. Oakwood Child Development Center, Inc. (DAB No. 1092)

What Are the Rules?

The federal regulations for agencies regarding faith-based entities state that grantees may not engage in inherently religious instruction or proselytization as part of the programs or services funded with grant money. To the extent such activities are conducted by an organization, they must be offered separately in time or location from the federally funded programs or services, and participation must be voluntary. All eligible activities under an HHS grant, for example, must be carried out "in accordance with all program requirements, statutes, and other applicable requirements governing the conduct of Department-funded activities." 45 CFR 87.1 (c) (e) and (f)

All grant recipients are required to maintain financial management systems that provide "accurate, current and complete disclosure of the financial results of each HHS-sponsored project or program in accordance with the reporting requirements" of the HHS regulations. This includes maintaining "written procedures for determining the reasonableness, allocability and allowability of costs in accordance with the provisions of the applicable Federal cost principles and the terms and conditions of the grant" and "accounting records, including cost accounting records, that are supported by source documentation." 45 CFR 74.21 (b) Nonprofit grantees are also required to meet all the federal cost principles set forth in Office of Management and Budget Circular A-122.

A grantee may feel that because it accomplished its program objectives the government should be kind, patient and understanding when it comes to auditing the grant. This is not the case. In fact, the HHS Grants Administration Manual specifically admonishes the HHS grant officials as follows: "In determining whether a cost is allowable or unallowable, factors such as the good faith of the organization, its successful accomplishment of program objectives or its ignorance of the provisions of the awards, although important for other purposes, shall not be used as a basis for allowing costs which are unallowable under the provisions of the awards. The organization's ability to make restitution also has no bearing on the allowability of a cost. ..."

A Judge's Perspective on the Grantee's Burden of Proof

When EPA grantees appealed the adverse audit decisions, it was my responsibility as a member of the grant appeals board to determine whether the grantee had met its burden of proving that the questioned costs were "allowable" and properly expended for the allocable grant purposes. This had to be accomplished with written documentation showing that the grantee satisfied the EPA program regulations and the relevant cost principles. In most cases that came before me for review and decision, I found in favor of the EPA against the grantee. This was so even though virtually every grantee had accomplished the basic grant purpose of building a project to improve water quality.

There were cases that I decided against a grantee for the sole reason that the grantee did not maintain proper paper documentation to prove how the funds were expended and that they were used for allocable and allowable costs. It did not matter that I believed the project worked great and accomplished its intended purpose. It did not matter that I personally believed the mayor and city personnel acted with integrity and honesty in managing their grant. It did not matter that I thought the EPA and its auditors were being unduly demanding and perhaps interpreting and applying the regulations in an overly strict manner.

It is impossible to overemphasize the extent of the burden on the grantee for showing compliance with government rules. To avoid an adverse decision, the grantee must prove the federal agency acted arbitrarily and capriciously in disallowing the questioned costs. On review to an appeals board, the only question is whether the grantor agency decision was reasonable, not whether it was the only decision that could have been reached or even the best decision. This same standard applies if a grantee files suit in court against the federal grantor agency. The court will only review the administrative record to determine whether the agency acted within its legal discretion. There will be no jury trial and no witnesses testifying.

Conclusion

When an organization accepts federal grant funds, it must know the regulatory requirements and be prepared to prove with written documentation that religious services were kept strictly apart from the social services funded under the grant. They also will need to be able to prove where, how and why the funds were spent and that they were spent only on necessary, reasonable and allowable costs. This may not be an easy task, but it is too important not to do it right. The consequences of failing to document that every dollar is spent consistent with federal requirements could be devastating. In the event the grantor agency demands to recoup its grant funds, for example, and the grantee lacks liquid funds to make payment, it is conceivable that the government could obtain a judgment and then sell-off physical property (perhaps church buildings) belonging to the grantee organization in order to recover the debt.

Faith-based organizations are well advised to carefully weigh the requirements and the risks before accepting federal grant funds!

Kent Holland is an attorney with more than 25 years of experience in federal grants law. He is completing a Master of Divinity degree at the John Leland Center for Theological Studies in Arlington, Va.