New Mexico Human Services Department, QC No. 69 (1994)

Department of Health and Human Services

Departmental Appeals Board

QUALITY CONTROL REVIEW PANEL

SUBJECT:  New Mexico Human       
Services Department
Docket No. A-94-169
Decision No. QC69

DATE:  October 19, 1994

 DECISION

The New Mexico Human Services Department (New Mexico)
appealed a June 9, 1994 quality control determination
by the Regional Administrator of the Administration for
Children and Families (ACF) in State Quality Control
No. 2755.  The Regional Administrator sustained the
federal Quality Control (QC) review finding that the
sample case was ineligible for Aid to Families with
Dependent Children (AFDC) assistance and determined that
New Mexico erred by coding the payment discrepancy as a
Payment Adjustment Lag (PAL) error rather than as regular
error.

For the reasons discussed below, we find that the payment
discrepancy in this case was a regular error; therefore,
we sustain the Regional Administrator's decision.

Facts

The assistance unit (AU) in this case received a $322
AFDC payment for the review month of September 1993. 
Prior to the review month, the last action taken on this
case was a redetermination on June 23, 1993, recertifying
assistance for the AU for payment months July 1993
forward.  Because the client did not report earnings at
the redetermination, the amount of assistance for the
recertification period including the September review
month payment was based on an estimate of zero earned
income.   1/

The State QC reviewer discovered that the client had been
working for Employer 1 from January 1, 1993 through
July 2, 1993 and had received a final paycheck based on
gross earnings of $216.56 on July 2, 1993.  The State QC
reviewer also discovered that the client started
employment for Employer 2 on August 11, 1993 and received
two paychecks in August (August 20, 1993 and August 27,
1993) totaling $272.81 in gross wages.  The client
continued working for Employer 2 through the review month
of September, 1993 earning gross wages of $831.20.

The State QC reviewer originally determined that the
household was ineligible for assistance for the month of
September 1993 because the actual review month income
exceeded the 185% State standard of need.  New Mexico,
however, revised this determination and found that the AU
was correctly paid.  The State Quality Control file did
not address the basis for this change.

The federal QC reviewers disagreed with the State QC
reviewer's finding that the AU was correctly paid.  The
federal reviewers determined the case was ineligible. 
The federal reviewers stated that since the local
agency's current best estimate (made at the
redetermination in June 1993) of zero income was
inaccurate, and there were changes in the AU's income
circumstances subsequent to the most recent best estimate
which were not acted upon by the local agency, quality
control must re-estimate the AU's income circumstances by
using actual review month income and circumstances. 
Using actual review month income, the federal reviewers
determined that the AU received $831.20 in income in the
review month and was ineligible because the client's
income exceeded the 185% test.  The federal reviewers
then determined that this payment discrepancy should be
cited as a regular payment error since the original best
estimate was incorrect and all payment errors linked to
or associated with an inaccurate estimate are classified
as regular discrepancies.

Relevant Authority

Title IV, Part A of the Social Security Act (Act)
establishes the Aid to Families with Dependent Children
program (AFDC) to provide assistance to certain needy
children and their caretakers.  Under section 408(a) of
the Act, states must establish a quality control system
to determine the amount of any erroneous AFDC payments
made by a state.  Under this system, states review a
sample of AFDC payments made during the review period in
order to determine the level of erroneous payments.  The
Act then provides for federal QC re-review of a subsample
of the cases reviewed by the state.  See section
408(b)(1)(A) of the Act.  Pursuant to this statutory
mandate, the Secretary has issued regulations for the
operation of the federal and state AFDC QC systems.  45
C.F.R. �� 205.40 through 205.43.  Those regulations
provide that a state agency must operate its QC system in
accordance with the applicable regulations and the
policies and procedures prescribed in the Quality Control
Manuals issued by the Department.  45 C.F.R. �
205.40(d)(1).

States use prospective budgeting to determine eligibility
for AFDC and have the option of using that method to
determine the amount of AFDC assistance payments.  42
C.F.R. � 233.31.  Under prospective budgeting, the state
AFDC agency computes the amount of assistance for  future
months based on the state agency's best estimate of
income and circumstances which will exist in those
months.  45 C.F.R. � 233.31(b)(1); QC Manual (QCM) � 3420
at IV-7.  This estimate is based on the agency's
reasonable expectation and knowledge of current, past or
future circumstances.   2/  Monthly assistance payments
thereafter are based on this estimate unless there is a
change in the AU's circumstances or the estimate expires.

A change in circumstances means a change occurring after
the date of authorization of the initial payment which
may affect the AU's eligibility or payment amount.  45
C.F.R. � 205.42(d)(1).  In QC, an error resulting from a
change in circumstance is classified as either a regular
discrepancy, which counts towards the state's error rate,
or a PAL discrepancy, which is not counted in the state's
error rate.  QCM � 3300 at III-1.  (The purpose of the
PAL concept is to account for "advance notice
requirements or system limitations" which may prevent
timely corrections to payment amounts when changes in
circumstances occur.  QCM � 3300 at II-2.)  A PAL
discrepancy is an error caused by a change in
circumstance which occurred in the review month or the
month immediately preceding the review month.  45 C.F.R.
� 205.42(d)(1); QCM � 3300 at III-1.  A regular payment
discrepancy occurs when the change in circumstance
occurred before the month immediately preceding the
review month.  45 C.F.R. � 204.42(d)(1); QCM � 3300 at
III-1.

Under prospective budgeting, if a local agency's best
estimate of income was incorrect at the time it was made,
all income and income related discrepancies in the review
month which are linked to or associated with the
inaccurate estimate are considered regular errors.  QCM �
3420 A. at IV-9; � 3400 at IV-10 and IV-11.  Income
discrepancies in the review month that are not linked to
or associated with an inaccurate best estimate are PAL or
regular depending on the date of the relevant change in
circumstances.  QCM � 3400 at IV-11.

New Mexico's Position

New Mexico does not dispute that a payment discrepancy
occurred in this case.  New Mexico, however, contends
that the discrepancy resulting from the client's wages
should be considered a PAL discrepancy and, therefore,
should not be included in a determination of New Mexico's
error rate.

New Mexico relied on 45 C.F.R. � 205.42(d)(1) which
states that all changes in circumstances must be
evaluated individually to assess their impact on the
payment error determination and that those changes
occurring in the month preceding the review month shall
not be counted as payment errors.  New Mexico also relied
on the language in the QCM which provides "that if the
agency budgeted the correct income at any point prior to
the review month, the reviewer determines if a change
occurred from that point forward to determine if the
discrepancy is PAL or regular."  QCM � 3300 at III-5.

New Mexico argued that, because the client's income
circumstances between July 2 and August 20 became the
same as those the local agency used to make its estimate,
the review month discrepancy was caused by a change of
circumstance (employment August 11 with Employer 2) which
occurred in the PAL period.  Therefore, New Mexico
contended that the review month income discrepancy in
this case was not linked to or associated with its
original incorrect estimate because the client's loss of
employment on July 2 interrupted the association between
the incorrect estimate and the review month error.

Analysis

When a prospectively budgeted case is pulled for QC
review, the reviewer must determine whether the local
agency's best estimate was correct at the time it was
made.  QCM � 3400 C. at IV-15.  If the reviewer
determines that the estimate was inaccurate because the
agency estimated "no income when income was actually
received, then any [review month payment] discrepancy
linked to or associated with the inaccurate estimate is
regular."  QCM � 3420 I.C.2.(d) at IV-18.   3/ (Emphasis
added.) 

In this case, there is no dispute that the June estimate
was incorrect at the time it was made because the client
had unreported earned income in June.  Further, there is
no dispute that the September review month's payment was
based on this inaccurate estimate and that the client's
earned income in September made the AU ineligible for
assistance in September.  Rather, the dispute centers on
whether the September payment error is linked to or
associated with New Mexico's original incorrect estimate
or whether the August employment should be considered a
change of circumstances occurring in the PAL period.

We conclude that the payment error in this case is linked
to or associated with New Mexico's original inaccurate
estimate because the estimate error and the payment error
were both caused by the fact that the client had earned
income when the agency had budgeted zero earned income. 
Therefore, the payment discrepancy (earned income during
the payment month) is linked to the inaccurate estimate
(failure to budget earned income in the estimate).   4/

New Mexico argued that the client's period of
unemployment between July 2 and August 11 broke the link
between the inaccurate estimate and the payment error. 
It relied on the following language at QCM � 3300 at
III-5:

 In ongoing cases involving income, the change in
circumstance is the date the income first differs
from income amount which the local agency used to
compute the review month's payment.  This assumes
that the local agency budgeted the incorrect income
and continued to budget the incorrect income through
the review month.  If the agency budgeted the
correct income at any point prior to the review
month, the reviewer determines if a change occurred
from that point forward to determine if any
discrepancy is PAL or regular.

(Emphasis added.)

New Mexico argued that, under this provision, the
client's unemployment made its estimate of zero income an
accurate estimate and that the September payment
discrepancy was therefore caused by a subsequent change
of circumstances (i.e., employment with Employer 2)
occurring in the PAL grace period.

ACF did not dispute that this provision could make an
inaccurate estimate accurate and thereby allow subsequent
changes in circumstance to create PAL errors.  Rather,
ACF maintained that this provision was not applicable to
these facts because the client had earned income during
every month prior to September so that the estimate never
became accurate.  New Mexico responded that ACF was
erroneously imposing a "calendar month" requirement on
the estimating process.  It argued that the language
"budgeted the correct income at any point" meant that the
six-week period of unemployment between July 2 and August
11 made New Mexico's zero income estimate correct.

We reject New Mexico's construction of this provision. 
The QCM requires a state to have "budgeted" the correct
income in order to break the link between an inaccurate
estimate and a subsequent payment error.  AFDC
"budgeting" is governed by a comprehensive set of rules
prescribing how income and need are to be calculated in
determining an AFDC payment.  Under these rules, the AFDC
budgeting unit is a month.   5/  Without reference to
these AFDC rules and the monthly budgeting unit, there
would be no way to determine whether a state had
"budgeted" the correct income.  Therefore, we conclude
that ACF reasonably construed this provision to require
that an initially inaccurate estimate correspond with the
income circumstances of a specific month rather than the
income circumstances of some random four and a third
weeks.   6/

In this case, New Mexico's July and August payments were
based on an estimate of zero income when, in fact, the
client had earned income in both months.  Therefore, New
Mexico never budgeted the correct income for any month
prior to the review month.  The zero income estimate
remained inaccurate for July and August and the payment
amounts were erroneous in both July and August.  Because
the estimate never corresponded to the client's actual
circumstances during any month, the provision of the QCM
on which New Mexico relies is inapplicable.

New Mexico also argued that the provisions of 45 C.F.R. �
205.42(d)(1) require a QC finding that the client was
eligible and correctly paid in the review month.  The
regulation provides that multiple changes in
circumstances shall be evaluated individually to assess
their impact on the final payment error determination. 
New Mexico argued that the impact of the first change
(loss of employment) was to make the zero income estimate
correct.  Because the first change occurred outside the
PAL period, New Mexico argued it must be considered in
the QC determination.  The second change (re-employment)
occurred within the PAL period and, according to New
Mexico, cannot be considered.  Therefore, New Mexico
concluded that consideration of the first change and
exclusion of the second change made its finding that the
client was eligible correct.

New Mexico's reliance on the regulation is misplaced
because it evaluated the impact of the first change of
circumstance (loss of employment) without regard to its
prospective budgeting methodology.  New Mexico focused on
the fact that the client lost her job with Employer 1 in
July and therefore, after July 2, had no prospect for
future earnings.  It ignored the fact that, despite this
change, the client still had unreported income in that
calendar month and subsequent months.  Therefore, its
estimate of zero income, on which the payments for July,
August, and September were based, continued to be
incorrect.  The preamble to this regulation specifically
states that "if the income estimate was incorrectly
calculated and a subsequent change in income
circumstances occurred in the PAL period, the payment
error would be included in the State error rate since the
change in the PAL period does not negate the initial
incorrect estimate."  57 Fed. Reg. 46,782, at 46,790
(October 13, 1992).  That is precisely the case here,
where the best estimate was incorrectly calculated and
New Mexico budgeted incorrect income through the review
month.  Accordingly, we conclude that, under 45 C.F.R. �
205.42(d)(1), the review month payment discrepancy is
appropriately considered a regular payment error.

Moreover, there is no basis for New Mexico's contention
that the QCM requires a finding that the payment error in
this case is a PAL error.  The QCM states that the key to
whether an error is PAL or regular is usually the date
the change in circumstance occurred which precipitates
the error.  QCM � 3300.  The QCM specifically provides
that in ongoing cases, if a state incorrectly budgets
income through its prospective budgeting method and
continues to budget incorrect income through the review
month, the change in circumstance is the date income
first differs from the estimate used to compute the
review month's payment.  QCM � 3300 B. at III-5.  Other
sections of the QCM reiterate this proposition stating
that since the agency's best estimate forms the basis for
future payments including the review month payment, the
estimate must have been correctly calculated.  The
estimate must consider all income that exists at the time
the estimate is established.  If the estimate was
incorrectly calculated, then all payment errors linked to
or associated with the inaccurate estimate are classified
as regular discrepancies.  QCM � 3420 A. at IV-9 and �
3400 at IV-10 and IV-11.

Applying the facts to the QCM provisions, we find no
basis for New Mexico's contention that the client's loss
of employment on July 2 made the local agency's June 1993
best estimate of zero income correct for July and
interrupted the association between the review month
payment and the initial incorrect estimate.  Even if the
local agency had made a best estimate based on the
circumstances in July, it would have had to consider the
income received by the client in that month in making its
estimate.  Accordingly, because each payment from July
through the review month was based on an estimate of zero
income and since the client had unreported income in each
of those months, the payment discrepancies in the review
month were directly linked to the initial incorrect
estimate.  Moreover, the purpose behind the PAL concept
was that changes in recipient circumstances, even if
properly reported, cannot be immediately reflected in a
corrected payment.  However, in this case, the payment
error was not due to a change of circumstance in the PAL
period which could not be reflected in the payment month;
rather, the error was cause by the initial incorrect
estimate of zero income which was not changed.

Thus, the estimate of zero income used by the agency and
the client's actual earnings were not the same in July. 
 Consequently the agency's estimate of zero income, the
basis for all the assistance payments, has been in error
continuously from the date of redetermination through the
review month because the client has had income in each of
those months.  Therefore, under the QCM provisions, the
payment discrepancy is a regular payment error because
June 1993 is the date income first differed from the
estimate used at redetermination to compute the review
month payment.

Conclusion

For the reasons discussed above, we sustain ACF's
determination that the assistance unit was ineligible for
assistance in the review month and that this payment
discrepancy is a regular error.


 _____________________________
 Sara Anderson


 _____________________________
 Thomas D. Horvath


 _____________________________
 Andrea M. Selzer


* * * Footnotes * * *

       1.    New Mexico uses a prospective budgeting
method to determine eligibility and the amount of
assistance to be paid.
       2.    The Regional Administrator's decision
indicated that New Mexico's methodology for estimating
earned income in cases in which the recipient had a
history of earnings was to use earnings from a specified
time period and estimate future income through income
conversion, income averaging, or use actual past income.
 New Mexico Financial Assistance Manual � 440ff.  New
Mexico did not dispute that this is the relevant
methodology, nor did it argue that this methodology was
inapplicable to the situation here.
       3.    Conversely, "any income/income-related
discrepancy not linked to or associated with the
inaccurate estimate . . . is PAL/regular depending upon
when the change in circumstance first occurred."
       4.    The fact that an inaccurate estimate
involves two different employers does not, in itself,
break the link between the estimate error and the payment
error.  ACF has addressed this type of issue in at
example at QCM � 3300 at III-4:

 The review month is June.  The AU consists of a
caretaker/parent and two children.  June's payment
is based on a standard for three, no income
considered.  The parent began to work in March and
was first paid for this job in April.  This had not
been report to the agency thus, no earnings had been
budgeted.  In June the recipient left this job for
another job.  Earnings from the first job ended in
June while earnings form the second job also began
in June.

 The error in this situation is regular.  The agency
budgeted no earnings, yet the recipient had been
earning income continuously since April.  The fact
that the recipient had subsequent change in his/her
earning circumstances (going form one job to another
does not negate the initial timing of the earned
income error.

New Mexico never argued that the change in employer, in
itself, broke the link between the estimate and the
error.
       5.    For example, the regulations speak in terms
of a budget month (42 C.F.R. � 233.32(b)(3) and a payment
month (42 C.F.R. � 233.32(b)(4); in prospective
budgeting, the agency is to base it estimate on the
income and circumstances which will exist in that month
(42 C.F.R. � 233.32(b)(1); in retrospective budgeting,
the agency must base the amount of assistance for a
payment month on actual income or circumstances which
existed in a previous month (42 C.F.R. � 233.23(b)(2)).
       6.    Under the budgeting regulations, a state has
a choice whether to use a calendar month or a fiscal
month as its budget unit.  The record indicates that in
this case New Mexico authorized and paid the assistance
on the first day of each calendar month from the date of
redetermination through the review month and each of
these monthly payments was based on an estimate of zero
income.  Consequently, in light of this evidence and in
the absence of any proof to the contrary, the record
supports a finding that New Mexico used a calendar month
basis as its budget and payment month. 
 
 

(..continued)