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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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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.

[1] In 1991, EPA asked CFA to manage a program on indoor air quality; two years later, EPA asked CFA to manage a national public service campaign to educate consumers about the Appendix B health risks of radon. Both awards were initiated by EPA - that is, EPA determined the need for Federal action, defined the scope of the program, established the amount of available funding, and only then approached CFA to implement the program on its behalf. Each CA was awarded to CFA without competition. In 1996 and 1997, when CFA, a 501(c)(4) organization, became ineligible to receive Federal funds, EPA arranged for CFA’s programs to be transferred from CFA to the Foundation under new CAs. At the time, EPA was well aware of the CFA/Foundation relationship - and, in fact, relied on that relationship to assure that the transferred programs would continue to be managed by the same CFA personnel. In 1997, EPA asked the Foundation to undertake a public service campaign to alert consumers to the health effects of secondary smoke on children. This third CA was also awarded without competition.

On each program undertaken at EPA’s request, the Foundation worked closely with EPA on a weekly and often daily basis. Indeed, EPA was involved in all important program decisions, including the selection of sub-recipients and contractors. EPA was, without question, extremely satisfied with the Foundation’s stewardship of the CA programs. It expressed that satisfaction by repeatedly praising the programs to the Foundation’s staff, consultants, and contractors; by providing substantial additional funding to the programs each year; and by making two additional sole-source awards to the Foundation in 2001.

[2] For each of its CAs, the Foundation kept detailed and accurate financial records, including job cost activity reports for each CA, that show the receipt and expenditure of the EPA funds disbursed under the CAs, and support the costs claimed under those awards.1 Its employees prepared personal activity reports and other time-keeping records sufficient to support all (or substantially all) of the labor hours charged to the CAs.2 Each of its procurement contracts was awarded on the basis of a competitive solicitation or, if awarded with less than "open and free competition," on the basis of specific instructions from EPA ("directed contract") or another wellrecognized sole-source justification.3 For each of those contract awards, it conducted a detailed price analysis, as required by EPA regulations.4 Finally, it complied with its contractual obligations regarding submission of indirect cost proposals.5 Moreover, final cost data for 1997 to 2002 show that the Foundation recovered significantly less in indirect costs than it was entitled

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The issues raised in the DAR relate almost exclusively to compliance with documentation requirements (e.g., procurement procedures, cost/price analysis, written procedures, standard contract clauses) rather than compliance with substantive rules and regulations. These documentation issues were first called to our attention in March 2002 by the EPA Grants Management Office. At that time, we took immediate steps to address EPA’s concerns; by May 2002, EPA had approved our proposed plan of action, which we then implemented.

Consequently, we do not believe that any of these documentation issues can reasonably support a disallowance of costs.

[3] Finally, with respect to the Foundation’s eligibility to receive Federal funds:

According to the DAR, the Foundation, a 501(c)(3) organization, was not sufficiently separated from CFA, then a 501(c)(4) organization, to be treated as a separate organization for purposes of LDA Section 18. In addition, at the time CFA engaged in a small amount of lobbying. On that basis, the DAR concludes that the Foundation was not a 501(c)(3) organization, but was instead a 501(c)(4) organization that engaged in lobbying, and it was therefore not eligible to receive Federal funds. Accordingly, every penny of the $4.7 million received by the Foundation must be refunded.

As explained in detail in the legal memorandum, the DAR’s interpretation of Section 18 is based on factual misrepresentations and flawed legal analysis.

The DAR misrepresents the Foundation’s history and corporate purpose. The !

Foundation was not, as the DAR suggests, established "to receive the Federal funds" that CFA, a 501(c)(4) organization that engaged in lobbying, was no longer eligible to receive. In fact, the Foundation was established in 1972, more than 20 years before the enactment of the LDA, and in 1996, was a fully functioning 501(c)(3) organization. It was not a sham designed to mislead EPA

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In fact, it appears that EPA already considered and rejected the OIG interpretation of LDA Section 18 [i] in 1996 and 1997, when it transferred CFA’s radon programs to the Foundation under new CAs even though EPA officials were aware of the very facts and circumstances which, according to OIG, made the Foundation ineligible to receive Federal funds, and [ii] in May 2002, when, after considering, once again, the relationship between the Foundation and CFA, it continued disbursing Federal funds to the Foundation under five separate cooperative agreements through the end of 2002.

In light of the foregoing, OIG’s proposed $4.7 million disallowance is entirely without legal justification. It is based on an interpretation of LDA Section 18 that is untenable and, indeed, has already been considered and rejected by EPA; and retroactive application of that interpretation to the Foundation would be arbitrary, capricious and a denial of due process of law.

The proposed disallowance is also patently unfair and reasonable. It 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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The Consumer Federation of America ("CFA"), established in 1967, is a consumer advocacy organization, working to advance pro-consumer policies on a variety of important issues before the U.S. Congress, the White House, Federal and State regulatory agencies, and the courts. It is also an educational organization, disseminating information on consumer issues to policymakers, the media and the public. In 1968, CFA was recognized by the Internal Revenue Service ("IRS") as an advocacy organization exempt from Federal taxation under Section 501(c)(4) of the Internal Revenue Code ("IRC"). CFA maintained 501(c)(4) status until January 2003, when it was recognized by the IRS as a charitable and educational organization, and the basis of its exemption was changed from IRC Section 501(c)(4) to IRC Section 501(c)(3).

CFA established the Consumer Federation of America Foundation (the "Foundation") in 1972 to serve as the CFA’s research and education arm. The Foundation was known originally as The Paul H. Douglas Consumer Research Center, Inc. ("PHDCRC"); thereafter, its corporate name was changed twice - in March 1997, to the Consumer Research Council and, in March 1999, to the Consumer Federation of America Foundation. In 1972, the Foundation was recognized as a charitable and educational organization exempt from Federal taxation under IRC Section 501(c)(3). Thus, the Foundation has existed as a separate tax-exempt charitable organization without interruption for more than 30 years.

During that period, the Foundation had its own board of directors, financial accounts, and funding, and conducted its own charitable and educational programs.

The Draft Audit Report ("DAR") prepared by the Office of Inspector General states that CFA established the Foundation in response to the enactment of the Lobbying Disclosure Act of 19951 ("LDA") in order "to receive the Federal funds"

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that CFA, a 501(c)(4) organization that engaged in lobbying, would no longer be eligible to receive under LDA Section 18.2 This statement is misleading on two counts. First, the Foundation was not organized in response to the enactment of LDA Section 18; it was organized nearly twenty-five (25) years earlier. Second, CFA’s purpose in establishing the Foundation was not - could not have been - to avoid the effects of LDA Section 18. This misrepresentation of the Foundation’s history and corporate purpose is highly significant. The DAR relies on it, and on a distorted interpretation of LDA Section 18 and its legislative history,3 to propose the disallowance of all of the $4.7 million in funding received by the Foundation from EPA during the period covered by the audit.

Prior to 1991, neither CFA nor the Foundation was a significant recipient of Federal funds. However, in that year, the U.S. Environmental Protection Agency ("EPA") asked CFA to undertake work on EPA’s behalf to increase consumer awareness of radon contamination of indoor air. EPA approached CFA and asked for its assistance because of CFA’s expertise on indoor air quality ("IAQ") issues and because of its unique network of state and local consumer groups. When CFA agreed, EPA awarded CFA a sole-source cooperative agreement ("CA") to perform the work.

In light of CFA’s successful performance of the IAQ CA, over the next few years EPA significantly expanded the scope of the IAQ program, and the amount of program funding. It also asked CFA to undertake several other CAs, including, in 1993, a CA to manage a national public service campaign to educate consumers about the health risks of radon. In each case, the new award was initiated by EPA that is, EPA determined the need for Federal action, defined the scope of the program, established the amount of available funding, and only then approached CFA to implement the program on its behalf. Each CA was awarded to CFA without competition. CFA never sought additional program responsibilities or responded to a competitive solicitation. During the same period, the Foundation received no Federal funds; its funding - about $110,000 per year between 1993 and 1995 - came

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almost exclusively from private foundations.

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