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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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In January 1996, the enactment of LDA Section 18 made 501(c)(4) organizations that engage in lobbying ineligible to receive Federal funds. CFA, which engaged in small amounts of lobbying on consumer issues, was swept up in the ban. But EPA wanted to maintain the programs that CFA was implementing on its behalf - including the public service campaign on radon pollution. Accordingly, EPA officials suggested that in the future, EPA funding would go, not to CFA, but to the Foundation. At the time they proposed this approach, it was clear that the responsible EPA officials knew about the relationship between CFA and the Foundation - in particular, they knew that the two organizations shared facilities and staff. In fact, the EPA officials required (and, on several occasions, specifically asked CFA to confirm) that the substitution of the Foundation as recipient would not mean a change in program staff - i.e., that the CFA employees who ran the program and the CFA contractors that provided services to the program would continue to do so under the new CA. At the same time, these EPA officials were clearly sensitive to the legal issues raised by program staff working for both CFA and the Foundation. For example, Mary Ellen R. Fise, then CFA’s general counsel, was often asked to explain how key personnel (including Ms. Fise) could work on CA programs for the Foundation and, at the same time, appear before Congress and state legislatures as consumer advocates on behalf of CFA. In each case, Ms. Fise would explain that CFA and the Foundation shared staff and facilities, but that the organizations were legally separate and, moreover, took great care to assure that no CA funds received by the Foundation were used to support lobbying by CFA.4 In August 1996, EPA awarded the Foundation its first CA (CX 824939-01) covering work on radon and indoor air quality, including administration of the "Radon Fix It" program. In purpose and effect, this award replaced a CA between EPA and CFA that had expired in 1996, and was intended to transfer the IAQ program intact from CFA to the Foundation, where it continued to be managed and The relationship between CFA and the Foundation was also disclosed in CFA’s OMB Circular A-133 audits for 1997 through 2002. The audit reports indicate that the Foundation paid no salaries, but each year made a payment for salaries and overhead to CFA. In addition, Note A to the each annual financial statements states clearly that CFA and the Foundation "share facilities and staff.

Salaries and overhead expenses are reimbursed to CFA based on contractual agreements." For example: "Consumer Federation of America/Consumer Research Council: Audited Financial Statements, December 31, 1997" at 3, 7 (July 15, 1998) (Attachment #1).

Appendix B implemented by the same personnel. In July 1997, EPA awarded the Foundation a second CA (CX 825612-01), with a five-year term, to conduct a public service campaign (including the production and distribution of public service announcements, or PSAs) on the health hazards of indoor radon pollution. In purpose and effect, this award replaced a CA between EPA and CFA that had expired in 1997, and was intended to transfer the program intact (including staff and contractors) to the new CA.5 In September 1997, EPA awarded the Foundation a third CA (CX 825837-01), with a five-year term, to develop a public service campaign designed to alert the general public to the dangers of secondary smoke to children.

EPA made these awards to the Foundation even though the details of the CFA/Foundation relationship - in particular, their sharing of facilities and staff were disclosed to EPA officials on numerous occasions. At no time did any EPA program official or grants-management official suggest that the CFA/Foundation relationship - including the sharing of facilities and staff - might transform the Foundation from a duly established 501(c)(3) organization eligible to receive Federal funds into a 501(c)(4) organization whose receipt of Federal funds was illegal. On the contrary, the message that EPA consistently delivered was that separate incorporation was sufficient to meet the requirements of LDA Section 18. For example, the standard terms and conditions set out in each of the Foundation’s CAs contains the following provision, designed to determine eligibility for Federal funds

under LDA Section 18:

–  –  –

There is nothing in this request for affirmation to suggest any basis for LDA Section 18 eligibility other than separate incorporation, no reference to laws, regulations or policies that would alert the recipient to the existence of a different standard of eligibility.7 Having disclosed the details of the CFA/Foundation relationship to EPA, and having received from EPA clear indications that it was an eligible recipient, the Foundation, in good faith, agreed to execute the CAs and, each year thereafter (through 2002), to execute CA amendments providing additional increments of funding for each program. Its performance during the period was outstanding. The public service campaigns, in particular, were recognized as highly effective (one of its PSA was awarded an Emmy); the competence and efficiency of its program administration were never questioned. In March 2002, however, the EPA Grants Management Office abruptly suspended all of the Foundation’s CAs and, for the first time, expressed concern about the relationship between the Foundation and CFA, and about a number of the Foundation’s financial management and procurement practices. The Foundation maintained (and continues to maintain - see Part II below) that, as a duly incorporated non-profit corporation exempt from Federal taxation under IRC Section 501(c)(3), it is fully eligible under LDA Section 18 to receive Federal funds. But, in deference to EPA concerns on that issue, it was agreed that CFA would change its tax-exempt status from 501(c)(4) to 501(c)(3),8 and that the Foundation would then merge its operations into the reorganized CFA.

See, for example, Cooperative Agreement No. CX 825837-01-0 at 4-5 (September 22,

1997) Attachment #3.

In fact, there was (and is) no standard for LDA Section 18 eligibility other than separate incorporation in the statute and its legislative history, or in any regulation, policy statement or program rule issued by the Federal government or the EPA. See Part III below, and the legal memorandum of Sonenthal & Overall submitted with this Response.

Because the amount of CFA’s lobbying activities was de minimus, it was easily able to satisfy the limitations on lobbying activities imposed on organizations exempt under Section 501(c)(3).

Appendix B In addition, while not conceding any violations of law or regulation, it was agreed that CFA would take additional steps to assure the effectiveness and transparency of its financial systems and procurement practices, as detailed in its correspondence with EPA Grants Management. On that basis of these assurances, in May 2002, EPA lifted its suspension of the Foundation’s CA activities. Since then, EPA has awarded the Foundation a new CA extending the ETS Campaign (XA 830590-01 in October 2002), and two new CAs for an energy efficiency program (XA 830875-01 in February 2003, and XA 831201-01 in October 2003), and increased funding for another (X 829178-01 in August 2002), and has awarded CFA a new CA for a radon indoor air quality program (in March 2003). Each award was made under a competitive solicitation.


The positions taken by OIG/EPA on the meaning of Section 18 and on the applicability of Section 18 to the Foundation, are untenable, for the following reasons. First, although its statement of the facts is generally accurate as far as it goes, the DAR misstates the historical relationship between the Federation and the Foundation and understates the actual "degree of separation" between the organizations. Second, the OIG/EPA’s interpretation of Section 18 - that is, its extension of the Section 18 prohibition from the 501(c)(4) organizations identified in the statute to duly constituted 501(c)(3) organizations - is inconsistent with Section 18's plain and unambiguous terms, and has no support in the section’s legislative history. To the contrary, the extension of Section 18 proposed by OIG/EPA crosses an important constitutional boundary that Congress, when it enacted the section, explicitly recognized and tried to avoid. Third, EPA does not have the authority to adopt the OIG interpretation of Section 18; and if EPA does adopt that interpretation, it should be vulnerable to legal challenge. Finally, even if EPA has the authority to adopt the OIG/EPA interpretation, under well-established legal precedent, it cannot apply that interpretation retroactively to the Foundation.

These arguments are discussed at length in a memorandum for our legal counsel, Sonenthal & Overall PC, submitted along with this response.

–  –  –

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 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, EPA does not have the legal authority to adopt a broad interpretation of LDA Section 18. as it 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.

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.


According to the DAR, the Foundation’s "financial management system was not adequate to account for the source and application of funds for Federallysponsored activities as required by Title 40 CFR 30.21."

–  –  –

fact that CFA and the Foundation were separate corporations, with inter alia separate governing bodies, separate budgets, and separate financial accounting systems. The independent corporate status of the organizations was scrupulously observed. The fact that the Foundation obtained its administrative and technical support under contract from CFA does not negate this independent status, or make the Foundation a mere alter ego of CFA.

The DAR questions costs incurred by the Foundation, but then cites no basis for its questioning. To be allowable, costs charged to Federal awards must be allowable per OMB Circular A-122 and the Federal award, allocable to the Federal award, and reasonable. The DAR does not provide a basis for (unallowable, unallocable and/or unreasonable) or quantification of questioned costs. Instead, the DAR seems to take the view that perceived inadequacies in our financial management system are a sufficient basis for questioning all costs we incurred under the Federal awards subject to audit. We disagree with the underlying premise - that our systems were inadequate for audit and reporting on Federal awards - and we are perplexed that the contract files provided to OIG, which contained job cost accounting reports and the supporting documentation for each, and which had previously been audited under OMB Circular A-133, were not audited and reported upon by OIG for criteria of allowability, allocability, and reasonableness.

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