OMB Circular No. A-122, Attachment A, General Principles, paragraph A.2.a. states that:

"To be allowable under an award, costs must . . . be reasonable for the performance of the award and be allocable thereto under these principles."

OMB Circular A-122, Attachment A, paragraph A.3., Reasonable Costs, states that:

"A cost is reasonable if, in its nature or 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 costs. The question of the reasonableness of specific costs must be scrutinized with particular care in connection with organizations or separate divisions thereof which receive the preponderance of their support from awards made by Federal agencies. In determining the reasonableness of a given cost, consideration shall be given to:

            b.     . . . generally accepted sound business practices; and

            c.     whether the individuals concerned acted with prudence . . ., considering their
                    responsibilities to the organization, its members, employees, and clients, the
                    public at large, and the Government."

    Further, OMB Circular No. A-122, Attachment A, paragraph A.6., Advance Agreements, states that:

"Under any given award the reasonableness and allocability of certain items of costs may be difficult to determine. This is particularly true in connection with organizations that receive a preponderance of their support from Federal agencies. In order to avoid subsequent disallowance or dispute based on unreasonableness or nonallocability, it is often desirable to seek a written agreement with the cognizant or awarding agency in advance of the incurrence of special or unusual costs." [Emphasis added.]

    MFET did not request nor did it receive Grant Officer approval for the 92.3 percent salary increase of the Executive Director during PY 1992. In determining our questioned costs of $117,843, our "audit-recommended" salary includes allowing the Executive Director a 5 percent annual cost of living salary increase for each year.

    The following table depicts our calculation of the excessive and unreasonable salary and fringe benefits paid to the Executive Director during our audit period. For CY 92, our calculation is based on the 3-month period October through December 1992. For CY 96, our calculation is based on the 6-month period January through June 1996.

    In a written response dated October 23, 1996, MFET stated that the last time MFET had a permanent Executive Director with managerial experience was in 1986. At that time, the Executive Director was making $34,500 per year. If the agency had a permanent Executive Director from that time, by the end of the year 1992, the Executive Director would have been making $55,900 - $61,500. These amounts are based on a 5 percent yearly cost of living raise and a 10 percent merit increase every 2-3 years. MFET added that among many factors, their Board of Directors considered the following in increasing the Executive Director's salary:

    -- the difficulty that was going to be faced making necessary changes - primarily personnel
        issues;

    -- the difficulty in recruiting for an Executive Director for the area - there was no prominent
        person from the area willing to apply for the position;

    -- the Board needed a person with managerial experience and a vision for the future of the
        agency and farmworkers;

    -- the agency's inability to offer comparable employment benefits (i.e., retirement);

    -- the present Executive Director lost retirement and seniority in state government to accept
        this position which has only a 2-year funding cycle;

    -- the current Executive Director's willingness to not take a pay raise for 4 years; and

    -- recognition of the commitment of the present Executive Director to the agency and
        farmworkers including time, travel, and availability to the Board (24 hours a day, 7 days a
        week).

    MFET stated that taking the above and other factors into consideration, the Board of Directors increased the salary from $33,900 to $65,200 to be able to keep continuity, stability and credibility in the agency. This salary was the same for 4 years with no increase.

    We disagree with MFET's assertions. In its grant agreement MFET listed the qualifications of the prior Executive Director as an asset to the organization. It is somewhat perplexing that in their October 23, 1996 response to this issue, MFET stated that the prior Executive Director 

AUDITEE'S RESPONSE AND AUDITOR'S COMMENTS
 

In MFET's opinion, the Executive Director's salary was both reasonable and received prior approval by DOL, and thus should not be a questioned cost. MFET submitted for negotiation and approval to DOL, as part of its annual Indirect Cost Proposal, the Executive Director's salary and fringe benefit amounts. The Personnel Costs Worksheet of the Indirect Cost Proposal reflects the actual amounts of salary and fringe benefits for the Executive Director. MFET's Indirect Cost Proposals were negotiated and approved for each year of the audit period reflecting the Executive Director's salary and fringe benefits by DOL's Office of Cost Determination. Indirect Cost Rate Agreements were entered into annually between MFET and DOL. Thus, MFET received prior approval from DOL for the Executive Director's salary and fringe benefits since 1992 and can not now question this expenditure. MFET believes that DOL's Office of Cost Determination approved the Executive Director's salary and fringe benefits because it was reasonable within OMB Circular A-122. Also, it is apparent that the OIG ignored the statements provided to them by the previous Executive Director who accepted a salary of $36,400 indicating that he was seeking other employment when the present Executive Director was hired. The OIG's calculations and assumptions can only be applied to the same Executive Director/person and can not be applied once a new director is hired. Simply because the previous Executive Director accepted a lower salary does not mean that the next director would accept the same salary. The Board of Directors recognized that it received a bargain but it also had received what it had paid - an Executive Director with two month's experience as the Deputy Director. While the OIG cites MFET's Executive Director's salary

history, it fails to recognize that the same salary history would have placed MFET's Executive Director's salary at between $55,900 and $61,500 for the period in question. Also MFET's salary surveys of other 402 JTPA migrant programs indicates that the present Executive Director's salary was at the bottom of the scale for a three (3) state grantee and thus reasonable. In fact, other 402 JTPA Executive Directors responsible for only one state were receiving comparable salaries.

EXECUTIVE DIRECTOR'S TRAVEL

    Salary, related fringe benefits and travel expenses totaling $10,659 were charged to MFET's overhead pool for trips that MFET's Executive Director took to his previous hometown that appear to be personal in nature. MFET did not provide any documentation to justify the business necessity for these trips.

Following are specific examples of trips taken by the Executive Director that appear to be personal in nature.

Example 1. The Executive Director attended a conference in San Diego scheduled from Monday through Friday, February 22-26, 1993. The conference was scheduled to begin at 2:00 p.m. on Monday and end at 11:00 a.m. on Friday. For reimbursement purposes, the Executive Director normally would have traveled to San Diego on Monday morning and returned to Minnesota on Friday afternoon. However, he departed Minnesota (MFET's home office location) for Corpus Christi, Texas (the Executive Director's previous hometown) on Thursday, February 18. He remained in Corpus Christi until Tuesday, February 23, when he departed Corpus Christi at 5:56 p.m. for San Diego. (Thus, he missed Monday afternoon's and all of Tuesday's conference activities.) He did not charge lodging or M&IE for Thursday and Friday, February 18 and 19, or Monday, February 22.

    There is no documentation to support that the trip to Corpus Christi was for business purposes. It appears the trip was of a personal nature; however, the Executive Director was not charged leave for those days. In a written response, MFET categorized both Thursday and Friday as travel days and stated that there were no flights available for Monday. We believe the trip to Corpus Christi was personal in nature and questioned the Executive Director's salary for Thursday, Friday and Monday. (We are questioning the amount of the Executive Director's salary corresponding to our recommendation on a reasonable salary for the Executive Director.)

    We identified several instances similar to the above examples. A complete list of the Executive Director's travel days to Corpus Christi that appear to be personal in nature and for which there is no supporting documentation to support the business necessity of the trip is located at Schedule 1.
 

MFET's grant agreement, Special Clause No. 2, Travel, states:

"Non-profit grantees are subject to OMB Circular A-122 which sets standards for cost principles related to activities under Federal grants/agreements including travel and transportation cost. Grantees are allowed to use their established agency travel procedures for staff travel if their procedures are more restrictive than the Federal Regulation. Travel cost must be consistent with policies and procedures that apply uniformly to both federally financed and other activities of the organization. However, reimbursement should be reasonable and consistent with those normally allowed by the organization. A general test of the reasonableness of a travel expense is the degree to which it conforms to the current Federal travel requirements with respect to cost limitations and documentation. Detailed travel records are expected to be kept in order to substantiate travel charges made in connection to grant activities." [Emphasis added.]

    MFET stated that the Executive Director was in Corpus Christi on official business and that the travel was not to Corpus Christi, but through Corpus Christi, for the benefit of cost savings to the agency. MFET stated that the trips to Corpus Christi were cost effective because of reduced airfares when staying over on Saturday nights.

    MFET did not provide cost analyses that were prepared at the time of the trips which demonstrated that there were any cost savings to the agency for the Executive Director's trips to Corpus Christi. It is unclear what cost savings there would be to the agency for the Executive Director to route his travel from Minneapolis through Corpus Christi (his previous hometown) prior to traveling to such destinations as San Diego, California, or Washington, D.C. Nor did MFET provide any documentation to support any business necessity for the Executive Director to be in Corpus Christi for those days that we are questioning. This situation is similar for all of the questionable travel days that the Executive Director spent in Corpus Christi.

    We, therefore, question $10,659 of salary, related fringe benefits and travel costs for trips taken by the Executive Director to Corpus Christi that appear to be personal in nature.

AUDITEE'S RESPONSE AND AUDITOR'S COMMENTS
 

MFET disagrees with the OIG's conclusions that the Executive Director's travel appears to be personal in nature. All travel accomplished by the Executive Director and reimbursed by MFET was for business purposes including trips through Corpus Christi. The Executive Director's trips through Corpus Christi were for MFET's financial benefit. By the Executive Director traveling through Corpus Christi, MFET was able to realize substantial financial travel savings, primarily through airline transportation costs. It has long been the custom of the airline industry to reduce airfares that include a Saturday night stay. In example 1 cited by the OIG, the costs savings to MFET was $724.65, and in example 2 the savings was $461.46, primarily due to reduced airfare. MFET realized this financial gain simply because of the Saturday night, thus a business reason for the stay in Corpus Christi. The OIG is incorrect in questioning the Executive Director's salary and fringe benefits for travel days or any days simply because they are Monday through Friday days. The OIG was informed many times that MFET's Executive Director is a salaried employee. Title 29 CFR 541.99(a) Subpart B, the Fair Labor Standards Act, exempts from the wage and hour provisions of the act "any" employee employed in a bona fide executive, administrative, or professional capacity. Also, Section 541.118, in relevant sections states, "An employee will be considered to be paid on a salary basis within the meaning of the regulations if under his employment agreement he regularly receives each pay period . . . a predetermined amount constituting all or part of his compensation . . . the employee must receive his full salary for any week in which he performs any work without regard to the number of days or hours worked." The OIG is incorrect to determine that the Executive Director's work week is only Monday through Friday, and he is certainly

not an hourly employee. The OIG is prohibited by the Fair Labor Standards Act from questioning his salary and fringe benefits because he is not an hourly employee.

    MFET charged $2,890 to its overhead pool for office renovation work that had not been done. In accordance with its lease agreement, MFET paid an additional $170 per month for leasehold/remodeling improvements during the period February 1995 through June 1996. There was no evidence that any leasehold/remodeling improvements had been done.

OMB Circular A-122, Attachment A, paragraph A.3., Reasonable Costs, states that:

"A cost is reasonable if, in its nature or 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 costs. The question of the reasonableness of specific costs must be scrutinized with particular care in connection with organizations or separate divisions thereof which receive the preponderance of their support from awards made by Federal agencies. In determining the reasonableness of a given cost, consideration shall be given to:

        b.     . . . generally accepted sound business practices; and

        c.     whether the individuals concerned acted with prudence in the circumstances,
                considering their responsibilities to the organization, its members, employees, and
                clients, the public at large, and the Government."

    MFET agreed that the office renovation work had not been done and stated that the DOL grants would be reimbursed their proportionate share of the office renovation charges. MFET also presented a letter from the landlord which stated that MFET would be reimbursed all costs for renovation work that had not been done. We, therefore, question costs of $2,890 (CY95 -