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«Audit Report Consumer Federation of America Foundation - Costs Claimed Under EPA Cooperative Agreements CX825612-01, CX825837-01, X828814-01, ...»

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X825837-01 ETS Public Service Advertising (requiring quarterly and final reports) The Foundation customized reports for this project officer upon request on several occasions. Examples of these reports are included as Attachment #16.

The project officer also received at least quarterly (and sometimes more often upon request) copies of media usage reports. These reports indicate where the advertisements aired, frequency of airings and donated media value - the key indicators used to measure the effectiveness of the advertising. The project officer also received periodic cumulative media usage reports. Examples of these reports are included in Attachment #17.

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X825612-01 Radon Public Service Advertising (requiring quarterly and final reports) For each of the five media campaigns developed and distributed under this CA, media usage reports were submitted to the project officer on a quarterly basis.

Frequently, the project officer requested weekly reports. The project officer also received cumulative media usage reports. Examples of these reports are included as Attachment #19.

The Foundation submitted the final financial and technical reports for this CA. Copies are included as Attachment #20.

X28814-01 Energy Efficiency (requiring quarterly and final reports) The Foundation submitted annual reports for 2001-2002 and 2002-2003, the project period covered by this agreement. The Foundation has also submitted the final financial and technical report for this agreement. Copies of these reports are included as Attachments #21 and #22.


The DAR’s analysis and recommendations are neither fair nor reasonable, for three reasons: First, the DAR is based on a fundamental misunderstanding of the circumstances under which the CAs were awarded and implemented. Second, it focuses on technical defects in documentation and lack of sophistication of CFA’s financial management system, ignoring the fact that the underlying transactions were sound and adequately documented. Third, it proposes a $4.7 million disallowance based on a legal interpretation of LDA Section 18 that is untenable on its face, and whose retroactive application to the Foundation is prohibited by law.

In addition, the DAR ignores the fact that the programs were undertaken by CFA at EPA’s specific request, and were later transferred intact from CFA to the Foundation at EPA’s specific request. It ignores five years of successful program performance by the Foundation, and the considerable benefits for public health and education that flowed from those programs. Finally, it ignores the fact that Foundation acted, at all times and in all matters, in the utmost good faith.

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At your request, we have reviewed the draft audit report (?DAR?) dated November 21, 2003, prepared by the Office of Inspector General, U.S. Environmental Protection Agency (?OIG/EPA?), and submitted to the Consumer Federation of America (?CFA?) for comment.1 The DAR covers costs claimed by the Consumer Federation of America Foundation (the ?Foundation?) under five cooperative agreements (?CAs?) administered by the Foundation on EPA’s behalf between 1997 and 2002, and makes a series of recommendations to EPA regarding, among other things, the allowability of costs claimed.

In particular, you asked that we express our views on two significant legal questions raised

in the DAR:

A. Whether from the time the first CA was awarded through the end of 2002, CFA was ineligible to receive Federal funds under Section 18 of the Lobbying Disclosure Act of 1995, as amended, 2 U.S.C. §1611 (?LDA?), and whether EPA can require CFA, the Foundation’s successor in interest, to return all of the funds received by the Foundation from EPA to implement the CAs (approximately $4.7 million).

Office of Inspector General, ?Audit Report: Consumer Federation of America Foundation - Costs Claimed under EPA Cooperative Agreements,? Report No. 2004-x-xxxxx (November 21, 2003)(draft - not for public distribution).

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B. Whether the Foundation was required, by EPA regulation, policy or otherwise, to award the assistance subawards authorized under three of its CAs on a competitive basis.

This memorandum sets forth our preliminary analysis and conclusions on these two questions. It is based on information made available to us by CFA staff, and research regarding the LDA, its legislative history, and the cases and materials relating to agency enforcement of Federal law. If the questions discussed in this memorandum become the subject of a court proceeding, further research and analysis is likely to be required.


A. In our view, the OIG’s interpretation of LDA Section 18 - that is, its expansion of the statutory disqualification beyond the 501(c)(4) organizations referred to in the statute - is incorrect as a matter of law, and unenforceable against the Foundation. We believe that, as a matter of law, a 501(c)(3) or a non-lobbying 501(c)(4) may share directors, facilities and staff — may be all but indistinguishable from the non-lobbying 501(c)(4) — without losing its eligibility under LDA Section 18, as long as the organizations respect their separate incorporation and maintain separate books of account.

Our conclusion is based on the following considerations:

First, OIG’s interpretation of LDA Section 18 is inconsistent with the statute's plain and unambiguous terms.

Second, the legislative history of LDA Section 18, cited by OIG to support its expansion, appears instead to contradict its position — i.e., it appears to exclude separately incorporated 501(c)(3) organizations from the statute’s coverage. The legislative history also suggests that Congress was concerned about the effect that LDA Section 18 would have on important First Amendment interests - interests which, in our view, could be chilled or compromised if eligibility for Federal funds were to depend on an undefined ?degree of separation? between 501(c)(3) and 501(c)(4) organizations.

Third, we question whether EPA has the legal authority to adopt a broad interpretation of LDA Section 18, as EPA is not the only Federal agency charged with administering the statute, and it has no special expertise with respect thereto. If EPA does adopt that interpretation, its view would be entitled to no deference in a court of law, and should be vulnerable to legal challenge.

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Fourth, even if EPA has the authority to adopt the OIG interpretation of LDA Section 18, under well established legal precedent, it cannot apply that interpretation retroactively to the Foundation.

B. With respect to the alleged obligation of an EPA recipient to compete subawards: There is no requirement in the EPA Uniform Regulation, in the any of the CAs, or in official EPA policies or procedures, that require a recipient to ?competitively solicit and award sub-agreements.? EPA regulations actually prohibit the agency from imposing requirements on its recipients, by policy or by contract, that are not already set forth in the regulations, or are inconsistent with their provisions, without obtaining a special deviation from the agency (for case-by-case deviations) or from the Office of Management and Budget (for class deviations), or unless specifically required by Federal statute or Executive Order. To our knowledge, no deviation, statute or Executive Order authorizes EPA to require competition of subaward.

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1. OIG’s Interpretation of LDA Section 18 LDA Section 18, as amended, provides that ?[a]n organization described in section 501(c)(4) of the Internal Revenue Code of 1986 which engages in lobbying activities shall not be eligible for the receipt of Federal funds constituting an award, grant or loan.? In the DAR, OIG acknowledges that, at all relevant times, the Foundation was not ?an organization described in section 501(c)(4) of the Internal Revenue Code of 1986?; it was, instead, a organization described in IRC Section 501(c)(3) — a charitable and educational organization. OIG maintains, however, that the Foundation was ineligible to receive Federal funds because of its close relationship with CFA. According to OIG, ?[t]here was no discernible separation between [CFA] and the Foundation other than having separate general ledgers for each organization.?

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Because the Foundation and CFA did not have the “required degree of separation,” OIG concludes that [i] the Foundation and CFA must be treated as a single organization; [ii] CFA was therefore the effective recipient of all CA funds; [iii] because CFA was a 501(c)(4) organization that engaged each year in a small amount of lobbying,, CFA’s receipt of Federal fund was a violation of LDA Section 18, and, as a result [iv] ?all the costs claimed [by the Foundation] and paid under the [CAs] are statutorily unallowable.? 3

2. Statement of Facts.

At the outset, we note that the DAR misstates the historical relationship between the Foundation and CFA, and understates the actual ?degree of separation? between the two organizations. As noted, OIG acknowledges that the Foundation was a duly established 501(c)(3) charitable organization. It acknowledges, as well, that the Foundation and CFA kept separate books of account, but it passes quickly over this point and focuses instead on the fact that [i] the Foundation was housed in CFA space, and [ii] the Foundation relied almost exclusively on CFA personnel, working under a contract between the Foundation and CFA, for its administrative and technical support.4 But OIG ignores other significant evidence of legal and practical separation between the two organizations. For example, it fails to note that each organization had its own Board of Directors, and that during a portion of the relevant period, a majority of the Foundation’s Board were directors with no affiliation to CFA. In addition, the OIG’s statement that ?all personnel proposed and used under the CAs were Federation employees? is not accurate.5 While the Foundation had no permanent employees, we understand that, under several of the Foundation’s CAs, a DAR at 6 (emphasis added).

DAR at 6.

In this respect, the Foundation was no different from many small 501(c)(3) and 501(c)(6) organizations whose Boards economize — personnel costs (salary and benefits) and space in particular — obtaining administrative and technical support from a management services company.

DAR at 6.

–  –  –

portion of the program work was done by consultants engaged directly by the Foundation.

Furthermore, as noted in the CFA’s Response to the DAR,6 OIG misstates the historic relationship between the CFA and the Foundation. According to OIG, CFA established the Foundation ?to receive federal funds, while CFA retained its rights to lobby as a 501(c)(4) organization.? This statement implies that the Foundation was a CFA front, created in response to the enactment of LDA Section 18 in order to keep EPA funds flowing to CFA. The implication is incorrect. The Foundation was not formed by CFA ?to receive Federal funds? on its behalf. In fact, the Foundation was incorporated in 1972. It was recognized by the IRS as a tax-exempt charitable organization in August 1972.7 From the date of its incorporation, the Foundation conducted its activities separately from CFA, under its own Board of Directors, its own accounting system, and its own budget.8 Until 1996, the Foundation operated substantially without Federal funds.9 That changed, according to the Response, in 1996 and 1997 when the EPA awarded the Foundation three separate CAs. In each case, the award was initiated by EPA, and was intended by EPA to transfer CAs previously administered by CFA on EPA’s behalf, from CFA, a 501(c)(4) organization precluded by LDA Section 18 from receiving Federal funds, to the Foundation, an eligible 501(c)(3) recipient.

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