Federal Grant and Contract News for Nonprofits – May 2017

6 min

As May comes to a close, we continue to review President Trump's full budget, which is conceptually similar to the "skinny" budget released in March. Namely, it includes steep cuts to various civilian agencies, such as the U.S. Environmental Protection Agency, the U.S. Department of Health and Human Services (HHS), the U.S. Department of State, and the U.S. Agency for International Development. This budget also includes a proposed cap on indirect rates under the National Institutes of Health (NIH) grants. In addition to the budget, we also note an extension to the procurement rules of the Uniform Administrative Requirements, Cost Principles, and Audit Requirements for Federal Awards (Uniform Guidance), and a recent Ninth Circuit decision relating to a criminal conviction related to a U.S. Department of Agriculture (USDA) grant.

President's FY18 Budget Seeks to Impose a Uniform Indirect Cost Rate of 10% on NIH Grants

In one cost-cutting effort, the President's proposed FY18 budget seeks to reduce costs by imposing a cap on indirect cost rates at just 10% for all grants issued by the NIH. While indirect costs are currently negotiated between grant recipients and a cognizant agency, a budget-related document, issued by HHS, explains that the Administration wants to do away with the time and paperwork associated with this negotiation in lieu of a uniform indirect cost rate of just 10%. In part, this effort is being couched as relieving the indirect cost rate negotiation burden on grantees. However, what is odd is the fact that the relatively new Uniform Guidance allows some grantees the option of selecting a 10% indirect cost rate in lieu of going through the process of obtaining a negotiated rate, which may be higher. Therefore, under the current structure, some grantees are given the ability to decide for themselves whether they want the lower 10% rate or find it more useful to go through the more labor-intensive negotiation process to capture a greater amount of their indirect costs. Instead, the Administration is proposing to uniformly limit grantees in their ability to recapture all of their costs. A compromise could be to allow more organizations to opt out of the indirect cost rate negotiation process in lieu of a flat rate, yet the currently proposed approach takes that decision away from the grantee recipients, which may well impact organizations' willingness to take on NIH grants, thereby potentially slowing the important and critical scientific and medical research of this agency.

We will be following and updating our readers on this, among many other aspects of the President's budget.

OMB Extends Grace Period for Non-Federal Entities to Comply with Uniform Guidance Procurement Standards

On May 17, 2017, the U.S. Office of Management and Budget (OMB) amended 2 C.F.R. § 200.110 to extend the grace period for non-federal entities (states, local governments, nonprofits, institutions of higher education, and Indian tribes) to comply with the procurement standards set forth in the Uniform Guidance (2 C.F.R. §§ 200.317-200.326). Such entities now have through December 25, 2017 to implement changes to their procurement policies and procedures to come into compliance with the Uniform Guidance standards, and the implementation date for the standards will begin for fiscal years beginning on or after December 26, 2017. This serves as an important reminder to non-federal entities—including nonprofit organizations—to ensure that their procurement policies and procedures are meeting the standards set forth in the Uniform Guidance, which require, among others, that non-federal entities maintain oversight to ensure that contractors perform according to the terms of their contracts; that non-federal entities maintain written standards of conduct covering conflicts of interest and governing the actions of their employees engaged in contract selection, award, and administration; that procurements are conducted using full and open competition; and that non-federal entities take steps to utilize minority- and women-owned businesses when possible.

Ninth Circuit Affirms Conviction for Misprision of Felony in Connection with USDA Federal Grant Application

On May 15, 2017, the Ninth Circuit affirmed the conviction of Karen Olson, a former Alaska executive director of the USDA Farm Service Agency, who had been convicted of concealing and failing to notify authorities of her business partner's submission of false statements to the USDA Rural Development Program in connection with a federal grant application, in violation of 18 U.S.C. § 4 (misprision of a felony). See United States v. Olson, Case No. 15-30022 (9th Cir. May 15, 2017). The USDA had awarded Robert Wells a grant to open a milk processing facility. Olson and Wells had an informal partnership in which Olson signed Wells' grant application and was entitled to 50% of the profits from the facility. At about the same time, Kyle Beus received a separate USDA grant to establish an ice cream and cheese manufacturing facility. Both grant applications cautioned that anyone who made false or fraudulent statements could be fined or imprisoned for up to five years.

Wells, Olson, and Beus agreed to locate their projects at the same facility. Olson later became aware of certain fraudulent actions by Beus. First, Beus had leased "technologically obsolete" equipment instead of purchasing new equipment, as was required in Beus's grant application. Olson later informed the USDA, on both the Proposed Money Grant Expenditure and the Final List of Expenditures by Category and Completion, that some smaller equipment had been leased, but she did not mention two larger pieces of equipment ($35,000 and $50,000) that had been leased instead of purchased. Second, Olson became aware that Beus had been misappropriating grant funds by submitting false invoices to his contractor so that he could receive kickbacks in return. Olson further learned that Beus had improperly used grant funds to make an investment in a milk jug manufacturer. Olson made notes of these dealings in her day planner and informed her board that Beus had been diverting grant money.

The misprision of a felony statute under 18 U.S.C. § 4 states that

Whoever, having knowledge of the actual commission of a felony cognizable by a court of the United States, conceals and does not as soon as possible make known the same to some judge or other person in civil or military authority under the United States, shall be fined under this title or imprisoned not more than three years, or both.

Having determined that 18 U.S.C. § 4 requires the federal government to prove both that the defendant knew that someone had engaged in conduct that satisfies the essential elements of the underlying felony and that the defendant knew that such conduct was a felony, the Ninth Circuit found that sufficient evidence existed for the jury to have found that Olson had knowledge that submitting false statements to the USDA was punishable by incarceration of more than one year because Olson had completed Wells' USDA grant form, which expressly cautioned that any individual who submitted false statements to the USDA could be imprisoned for up to five years. The court also considered the fact that Olson had previously seen similar warnings on numerous occasions and that "the jury could have inferred Olson's sophistication from her experience as executive director of the USDA Farm Service Agency." Therefore, the Ninth Circuit affirmed Olson's conviction.

Though the Ninth Circuit did not mention it, of particular note is the fact that Olson had not signed Beus's grant application—only Wells' grant application—although each contained language warning that false statements could be punishable by up to five years in prison.

This, of course, serves as yet another cautionary tale that knowledge of any wrongdoing involving federal funds should be addressed and reported immediately, and that nonprofit federal award recipients should have a sufficient mechanism in place for their employees to report their concerns, as well as a program for handling such reports. More information on establishing an ethical culture and appropriate internal controls can be found here.