Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Texas Neighborhood Services v. United States Department of Health & Human Services

United States District Court, District of Columbia

March 28, 2016




Plaintiff Texas Neighborhood Services (“TNS”) brings this action under the Administrative Procedure Act, 5 U.S.C. § 701 et seq. (the “APA”). TNS alleges that the United States Department of Health and Human Services (“HHS”)[1] violated section 706(2)(A) of the APA when one of its divisions, the Administration for Children and Families (“ACF”)[2]disallowed approximately $1.3 million in incentive compensation charged to TNS’s Head Start awards for fiscal years 2010, 2011 and 2012 (“FY 2010, ” “FY 2011” and “FY 2012”).

TNS moves for summary judgment pursuant to Federal Rule of Civil Procedure 56. It argues that Defendant’s decision to disallow the aforementioned charges was arbitrary and capricious, contrary to law, and an abuse of discretion because (i) the decision by the Board upholding the disallowance was based on different grounds than Defendant’s initial disallowance decision; (ii) the disallowance decision is contrary to Defendant’s prior interpretations of the relevant cost principles; and (iii) Defendant failed to differentiate between proper and improper incentive payments during the fiscal years in question, instead disallowing across the board all incentive payments made during those years. Defendant cross-moves for summary judgment, arguing that the administrative record supports the disallowance of the aforementioned charges, and that TNS’s arguments to the contrary are without merit.

Upon consideration of the parties’ briefs, and for the reasons set forth below, TNS’s motion is hereby DENIED and Defendant’s cross-motion is hereby GRANTED.


TNS is a private non-profit organization that provides community services, including Head Start and Early Head Start services, to children in nine Texas counties. Non-profit organizations that receive federal grants, including Head Start grants, are subject to the cost principles in Office of Management and Budget Circular A-122, which are now codified at 45 C.F.R. § 75.400 et seq. (the “Cost Principles”).[3] The Cost Principles provide that a cost is allowable under a federal award if, among other things, it is necessary and reasonable for the performance of the award, allocable thereto and adequately documented. See Id. § 75.403. The Cost Principles also state as follows with regard to incentive compensation:

Incentive compensation to employees based on cost reduction, or efficient performance, suggestion awards, safety awards, etc., is allowable to the extent that the overall compensation is determined to be reasonable and such costs are paid or accrued . . . pursuant to an established plan followed by the [organization] so consistently as to imply, in effect, an agreement to make such payment.

Id. § 75.430(f).[4]

The Cost Principles further provide that a “cost is reasonable if, in its nature and amount, it does not exceed that which would be incurred by a prudent person under the circumstances prevailing at the time the decision was made to incur the cost.” Id. § 75.404. Consideration must be given to the following factors, among others, in determining the reasonableness of a given cost:

• “Whether the cost is of a type generally recognized as ordinary and necessary for the operation of the [organization] or the proper and efficient performance of the Federal award”;
• “Market prices for comparable . . . services for the geographic area”;
• “Whether the individuals concerned acted with prudence in the circumstances considering their responsibilities”; and
• “Whether the [organization] significantly deviates from its established practices and policies regarding the incurrence of costs.”

Id. If an organization “fails to comply with Federal statutes, regulations, or the terms and conditions of a Federal award, ” an awarding agency is permitted, among other things, to “[d]isallow (that is, deny both use of funds and any applicable matching credit for) all or part of the cost of the activity or action not in compliance.” Id. § 75.371(b).

In 2007, TNS instituted an incentive compensation policy (the “2007 Policy”), the purpose of which was “to allow TNS personnel to receive increases in salary for consistent or exemplary job performance in the form of incentive awards paid to individuals pursuant to an incentive plan approved by the Executive Director of TNS.” (J.A. 136).[5] The 2007 Policy also set forth a number of “Guidelines.” One Guideline states:

To be eligible for incentive compensation awards, TNS managerial staff must present to the TNS Executive Director a plan of performance, which defines the measures that must be achieved prior to payment of any incentive award. The specific measures may include, but [are not] limited to, cost reduction, efficient performance, safety awards, or other types of measure[s] identified in the performance plan.

(Id.). Other Guidelines provide that, “[t]o be eligible to receive incentive compensation, employees must not have received verbal or written performance warnings within 90 days of the payment of the incentive, ” and that “[f]or employees that have been with TNS more than one year, a current employee evaluation with a satisfactory evaluation must be on file.” (Id.).

In 2009, TNS instituted the “plan of performance” referenced in the 2007 Policy (the “2009 Plan”). (J.A. 138-42). The 2009 Plan states that “TNS recognizes [that] some of its employees are higher performers than other employees in similar positions and wishes to compensate those higher performing employees in a manner [commensurate] with their contributions to the organization.” (J.A. 139). It also states that

it is the plan of the TNS board of directors to direct the Executive Director to operate the grants at approx. 95% of full funding by implementing a system of cost reductions, cost management and efficient purchasing processes. Should the management of TNS be successful in operating the programs efficiently, then all staff will be able to share in an incentive plan to help the agency achieve fair and reasonable compensation for all employees.

(Id.). The 2009 Plan further provides that “[n]ot all incentive compensation should be paid at the same percentage of annual salary, ” and that “[i]ncentives for superior work performance should be higher than for average or below average performers.” (Id.). It also dictates that “[n]o employee compensation will be in excess of the Level II Executive Compensation set by the Federal Government at the time of the payment, ” and that “[t]otal compensation for all employees will not exceed the maximum compensation for that position” as determined by a wage comparability study prepared for TNS. (Id.). Additionally, the 2009 Plan contains an appendix with a matrix for TNS to follow in “determining employee worth to the organization” when deciding on incentive compensation awards. (J.A. 139, 141-42).[6] Lastly, the 2009 Plan explicitly states that TNS will follow the Cost Principles in making incentive compensation awards. (J.A. 139-40).

In February 2013, Defendant conducted a triennial monitoring review of TNS’s expenditure of Head Start grant funds in FY 2010, FY 2011 and FY 2012. (J.A. 123-25). That review led to an April 2013 monitoring report in which Defendant determined that TNS was out of compliance with the Cost Principles (the “Monitoring Report”). (J.A. 123-30). The Monitoring Report stated that TNS “did not ensure incentive compensation payments to employees were allowable to the extent the overall compensation was determined to be reasonable, ” and that TNS “was unable to document the basis for amounts awarded as incentive compensation.” (J.A. 127).[7]

In September 2013, Defendant sent TNS a letter disallowing $1, 332, 698.09 in unsupported incentive payments for FY 2010, FY 2011 and FY 2012 pursuant to the Cost Principles (the “Disallowance Letter”) (J.A. 23-26). The Disallowance Letter reiterated the findings in the Monitoring Report, stating that the incentive compensation payments made during these three years were unreasonable and insufficiently supported. (J.A. 23-24). Specifically, it stated that “there was no support to indicate which employee met the requirements of which band of [performance measure] criteria, nor how much would be paid per employee for meeting each band, ” and that “the amounts paid out as ‘incentives’ were unreasonable in total based on the high percentage of total incentive payments versus total salary costs, and unreasonable on a per individual basis for some administrative staff.” (Id.).[8]

TNS timely appealed Defendant’s disallowance decision to the Board. Board precedent establishes that, under the applicable regulations and Cost Principles, “a grantee bears the burden of documenting the existence and allowability of its expenditures of federal funds.” Touch of Love Ministries, Inc., DAB No. 2393, 2011 WL 3251319, at *3 (2011) (citing Benaroya Research Inst., DAB No. 2197, 2008 WL 4338767, at *2 (2008) (collecting cases)); see also Recovery Res. Ctr., Inc., DAB No. 2063, 2007 WL 522127, at *8 (2007) (“Being able to account for the expenditure of federal funds is a central responsibility of any grantee.”) (citations omitted). Thus, “[o]nce a cost is questioned as lacking documentation, the grantee bears the burden to document, with records supported by source documentation, that the costs were actually incurred and represent allowable costs, allocable to the grant.” Northstar Youth Servs., DAB No. 1884, 2003 WL 21801698, at *3 (2003) (citations omitted).

The Board issued its decision in May 2014. It found that Defendant “properly disallowed incentive compensation payments that TNS ha[d] not established are reasonable, supported by adequate documentation, and made pursuant to a pre-existing agreement or established plan.” (J.A. 3). TNS subsequently moved the Board to reconsider, making the same three arguments that it makes in this litigation. (J.A. 87-100). In July 2014, the Board ruled that TNS had failed to show a clear error of fact or law in the Board’s decision, and declined to reconsider. (J.A. 14-20). TNS then commenced the instant litigation.


A. The Administrative ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.