DAB Decision 71
December 14, 1979 California Department of Benefit Payments; Docket
Nos. 78-57-CA-SS; 78-59-CA-SS; Decision No. 71 Mason, Malcolm S.
SUMMARY
(The following summary is prepared on the responsibility of the
Executive Secretary of the Board as a convenience to the interested
public. It is not an official part of the decision. Similar official
summaries of earlier cases appear in 45 CFR Part 16, Appendix.)
California requested reconsideration by the Board Chairman pursuant to
45 CFR 201.14, as amended at 43 FR 9266-7, March 6, 1978, of two
disallowances of Federal financial participation claimed by the State
under Titles IV-A, X and XIV of the Social Security Act. The
disallowances, originally made by the Social and Rehabilitation Service,
had been upheld by the Social Security Administration on the ground that
the amounts represented erroneous payments which had been individually
identified. For identification of the disallowed amounts in Docket No.
78-59-CA-S5, the agency relied on an ambit, performed by the State
Controller's Office, which contained a general statement concerning
reports of overpayments in categorical aid programs in Alameda County.
In Docket No. 78-57-CA-S5, the agency cited an HEW audit, but that audit
relied on a State audit of Lake County for actual identification of
overpayments.
The Board Chairman reversed the disallowances, holding that the audits
did not provide a sufficient basis for a finding of fact that
overpayments in the amount of the disallowances had been made. The
normal audit processes had been disrupted by the State's application of
a State Court decision regarding county liability for erroneous
payments; the auditors applied State rather than Federal standards; and
the statement in the Alameda County audit was not based on individual
case review but was taken from county summaries which used a definition
of overpayment different from the Federal definition and which covered
programs not within the scope of the audit. Moreover, the agency had
used the State audits without testing to determine if the audits were
performed in accordance with generally accepted principles and otherwise
met HEW requirements. Federal Management Circular 73-2 requires such
testing for non-Federal audits used in lieu of Federal audits.
The question whether as a matter of law the State would have been liable
had there been a sufficient factual basis for individual identification
of erroneous payments was not reached.
John J. Klee, Jr., Deputy Attorney General, California Department of
Justice, for the California Department of Benefit Payments. Randolph W.
Gaines, Chief of Litigation, HEW Office of the General Counsel, Social
Security Division, for the Social Security Administration.
CHAIRMAN'S DECISION
I. Procedural Background.
This decision is the final step in the reconsideration process provided
in Section 201.14 of Title 45 of the Code of Federal Regulations,
implementing Section 1116(d) of the Social Security Act. Section 1116(
d) entitles a State to receive upon request reconsideration of
disallowances under certain titles of the Social Security Act including
Titles IV-A, X, and XlV. Docket No. 78-57-CA-S5 ("Lake County") arises
from a disallowance issued on March 24, 1976, by the Regional
Commissioner of the Social and Rehabilitation Service ("SRS"),
disallowing $962.50 in Federal financial participation ("FFP") claimed
by the State under Titles IV-A, X, and XIV. Docket No. 78-59-CA-S5
("Alameda County") arises from a determination issued on October 6,
1975, by the Regional Commissioner, SRS, disallowing $194,302.53 in FFP
claimed by the State under Title IV-A. The determinations were reviewed
under the reconsideration process and were consolidated for purposes of
a conference held with the Administrator of SRS on October 19, 1976.
They were transferred to the Social Security Administration when the SRS
was abolished, and on June 7, 1978, the then Acting Commissioner of
Social Security issued decisions upholding each of the disallowances.
By letter dated July 3, 1978, addressed to the Acting Commissioner, the
State requested further reconsideration by the Chairman of the
Departmental Grant Appeals Board. Although the State was entitled under
45 CFR 201.14, as amended March 6, 1978 (43 FR 9266), to exercise an
option to have the matter considered by the Board under 45 CFR Part 16,
it expressly chose not to do so but to be governed by the Section 201.14
procedure with the Chairman substituted for the Administrator, SRS, in
accordance with the transfer of functions of March 6, 1978 (43 FR
9266-7).
Under the transfer of functions, the State was entitled to a conference
with the Board Chairman and requested one. Accordingly, by a Notice of
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Conference dated May 31, 1979, I gave notice that such a conference
would be held, invited the parties to suggest agenda items for the
conference, and directed them to come prepared to discuss certain
questions present in the case and also the correctness of the
preliminary analysis of facts and issues set forth in the Notice. The
conference was held on July 30, 1979. A transcript was made at the
State's expense in accordance with Section 201.14(d)(7) and is part of
the file. Both parties have been afforded an opportunity to review and
propose corrections to the transcript. At the conference the parties
were afforded the opportunity to discuss the questions that had been
placed on the agenda as well as others that arose for discussion in the
course of the conference and were invited to file post-conference briefs
which have since been received. In addition, new issues having been
raised, each party was permitted to file a reply to the other party's
post-conference brief.
During proceedings in these cases, two basic issues have been
considered: (1) whether the State audits relied upon by the agency
provided a sufficient basis for identifying erroneous payments; and (2)
whether, if the amounts do in fact represent erroneous payments, the
State must return the full Federal share, regardless of how low an error
rate the State had achieved. Based on the findings of fact and
conclusions of law set forth below, I have determined upon
reconsideration that the specific State audits here do not provide a
sufficient basis for individually identifying erroneous payments
according to Federal standards. I do not, therefore, reach the issue of
liability for erroneous payments.
Background
The primary means of reducing errors in State grant-in-aid programs is
through a quality control system designed to identify payment errors
through careful examination of a representative sample of assistance
cases and determination of an error rate which is then extrapolated to
the program universe. Through regulations first proposed in 1973, HEW
attempted to provide for disallowances of FFP for those States in which
the quality control determined error rate was not within certain
tolerance levels. A successful court challenge to the particular
tolerance levels utilized resulted in the decision of Maryland v.
Mathews, 415 F. Supp. 1206 (D.D.C. 1976). HEW revoked the disallowance
provisions and announced that, until it could establish acceptable
levels, it was returning to a system of disallowing FFY only in
individually identified erroneous payments. 42 FR 14717, March 16, 1977.
In this context, the Regional Commissioner determined that certain
audits, performed by the California State Controller's Office ('SC0"),
which referred to "categorical aid overpayments" provided a basis
for
disallowance on grounds that the audits individually identified
erroneous payments. In determining to utilize the State audits, the
agency apparently relied on the reputation
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of the SC0 and on general statements to the effect that the audits were
performed in accordance with generally accepted accounting principles.
The agency did no testing to determine whether the audits were in fact
performed in accordance with generally accepted principles or whether
the audits otherwise met HEW requirements. Although the State requested
the agency to examine the audit workpapers, the agency declined until
the State submitted some of those papers at the conference.
Alameda County Audit
The disallowance in the Alameda County case was based on an SC0 audit
for the period July 1, 1972 through September 30, 1973, covering three
Alameda County public assistance programs: Aid to Families with
Dependent Children ("AFDC") Family Group, AFDC - Unemployed, and AFDC
-
Boarding Homes and Institutions. The 5C0 policy stated in the audit
report was to limit recoveries of State and Federal funds for the audit
to "errors actually observed in the months which were audited." (Alameda
Audit Report, p. 1.)
The auditors reviewed the county's internal controls, listing the
results of their review as "findings" with corresponding
"recommendations." Under the heading "Overpayments: a. Abatement
of
State Claims," the following appears in the "findings" column:
A review of County policies and procedures...and discussions with
personnel responsible for the handling of reported categorical aid
overpayments...revealed that this County is not adjusting its
assistance expenditure claims for amounts previously claimed but
subsequently found to be ineligible for State and Federal
participation... A review of fiscal records showed for the audit
period July 1, 1972 through September 30, 1973 there were 2,118
reports of categorical aid overpayments which were found to be
uncollectible due to administrative error totalling $388,605.06.
(p. 14)
At the conference, the State submitted documents which were identified
without contradiction as the auditors' workpapers used to calculate the
$388,605 in "overpayments." These workpapers are monthly recaps
summarizing reports by county workers of amounts determined by them to
represent non-collectible overpayments to assistance recipients. While
the summaries cover a number of assistance programs, including Food
Stamps and county relief, the auditors obtained their figures through
adding only those figures related to certain categorical aid programs.
In doing this, however, they exceeded the scope of their audit of the
three AFDC programs and, also, according to uncontradicted statements
made by the State during proceedings in this case, included programs
certain portions of which are not subject to Federal participation.
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County and State regulations (copies of which were submitted at the
conference) indicate, contrary to the State's assertion in this case,
that the overpayments were probably identified as "non-collectible"
because they were due to administrative rather than client error. On the
other hand, the definition of "overpayment" employed to identify the
summarized amounts is different from the definition of erroneous payment
employed in the Federally regulated quality control system, and
includes, for instance, aid paid pending an eligibility determination
appeal. Furthermore, the summaries do not indicate when the overpayments
were made, only when they were reported as non-collectible.
The auditors identified the case of Marin County v. Martin, discussed
below, as the reason for the County's failure to adjust for overpayments
and recommended that the County make adjustments for amounts previously
claimed but found to be ineligible for State and Federal participation.
The auditors did not recommend disallowance action by the State nor
apportion the $388,605 among the various funding sources.
The auditors did specify that $3,206.23 was the Federal share in
$6,308.14 (thus, slightly more than 50%) in specific exceptions related
to the audited programs and set forth in the audit report. These
exceptions were apparently identified after the computation of the
County summaries and thus presumably not included in them. They were
not all taken on the basis of a determination that an actual error in
payment had been made, some being based on lack of documentation. State
rather than Federal regulations are cited for the exceptions, and the
audit report does not show whether the auditors allowed the County a
grace period for adjustment established by Federal rule with respect to
erroneous payments. (Handbook of Public Assistance Administration,
Section 5512, sometimes referred to as the "due diligence" rule.)
The disallowance in the Alameda County case was calculated as a flat 50%
of the $388,605 drawn from County summaries. The fact that no
adjustments were made for the specific audit exceptions suggests a lack
of careful analysis in the disallowance.
Lake County Audit
In the Lake County case, the agency asserted that the disallowance was
based on the findings of HEW Audit Report ACN 60250-09, dated October 8,
1975. This HEW audit, however, consisted solely of a review of
procedures utilized by the State to adjust for overpayments of Federal
funds reported by the SC0. The HEW Audit Agency made no direct,
independent review of the payments in question. The $962.50 disallowed
was taken from an SC0 audit report dated April 18, 1975, covering Lake
County programs under Titles IV-A, X, and XIV of the Social Security Act
for the period October 1, 1971 through March 31, 1973. The amount
disallowed does in the Lake County case represent the Federal share of
specific audit exceptions. These exceptions are based on State
standards, however, and it is not clear from the audit whether the
Federal grace period for adjustment was allowed. The agency performed
no testing to determine the reliability of the Lake County audit for
purposes of Federal disallowance.
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The Marin County Decision
Prior to the early 1970's, the State practice was to require counties to
pay back all but the county share where payment errors were identified
through State audits. When the State attempted, however, to audit only
a small proportion of the counties' welfare cases and to project the
percentage of error found to the whole of each county's caseload, the
counties sued, challenging the sampling technique. Marin County v.
Martin, 117 Cal. Rep. 364 (Cal. App. 1974). The State Court focused
instead on the question of liability for errors in the first instance,
finding that the practice of placing the entire burden on the counties
was inconsistent with State statutory responsibilities for program
administration. Although the Marin County decision can be read as
allowing recoupment where county liability can be shown, the State
claims that it was enjoined from recouping any money for erroneous
payments from the counties, and the record supports a position that this
was the State interpretation of the Marin County decision. HEW Audit
Report ACN 60250-09 states that the State informed Lake County, by
letter dated May 9, 1975, that there would be no adjustment of State
claims pursuant to the Lake County audit "since all assistance
expenditures within this audit are covered under the Marin County vs.
Martin decision...." (p. 2.) The HEW auditors also found that a similar
waiver of adjustments recommended by SC0 audits had been applied to
other counties and that the State considered itself unable to make the
adjustments because of the Marin County v. Martin case. (p. 3.)
Under normal State procedures (consistent with an agreement between the
SCO and the State Department of Benefit Payments) the auditors
recommended adjustments and then the State made a determination to
disallow based on the audit and on any materials presented by a county
during a post-audit appeal process. These procedures were made
pointless by the State's interpretation of Marin County. Since the
adjustments were waived, there was no direct monetary incentive for a
county to dispute the audit exceptions. According to the State, prior
to the Marin County case, in a substantial number of cases a county
would be able to successfully challenge the audit findings during the
clearance process, usually by providing documentation not available to
the auditors. The 55A has not challenged the State on this point, and,
while the State's estimate that as many as 50% of the exceptions would
be cleared seems high, experience with audit processes, generally,
indicates that the auditors' recommendations would not have been
accepted wholesale if there had been more incentive for the counties to
dispute them.
Discussion
Federal Management Circular (FMC) 73-2 sets forth policies to be
followed in the audit of Federal operations and programs by executive
departments. With respect to reliance on non-Federal audits, FMC 73-2
provides that
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The scope of individual Federal audits will give full recognition
to the non-Federal audit effort. Reports prepared by non-Federal
auditors will be used in lieu of Federal audits if the reports and
supporting workpapers are available for review by the Federal
agencies, if testing by Federal agencies indicates the audits are
performed in accordance with generally accepted auditing
standards..., and if the audits otherwise meet the requirements of
the Federal agencies.
The Acting Commissioner cited FMC 73-2 as a basis for use of State
audits, but 55A has argued in post-conference briefing that its failure
to comply with the FMC 73-2 requirements for use of non-Federal audits
does not matter here because the audits were not used as part of an
agency audit plan. Although FMC 73-2 gives guidance to agencies for the
efficient and coordinated development of audit plans, the provision
quoted above addresses the broader situation of the use of non-Federal
audits "in lieu of' Federal audits.
Under normal circumstances, the State's complaint that its own audits
were unreliable might be less convincing. The State has, indeed,
admitted that State audits may be a valid basis for disallowance if
performed for that purpose and otherwise reliable. Here, not only is
there a substantial question of reliability due to disruption of the
normal audit process by the State's application of the Marin County
decision, but the purpose for which the audits were relied on by the
Federal agency requires that certain standards should have been met.
Individual identification of erroneous payments implies identification
through individual case review pursuant to audit or pursuant to
inclusion in a sample for purposes of quality control, which requires
review according to even stricter standards. Cf. 45 CFR 205.40. Both
the Alameda and Lake County audits contain some exceptions resulting
from individual case review, but there is a substantial question as to
whether Federal standards, such as the "due diligence" rule of the
Handbook and the Federal definition of overpayments, were applied by the
State auditors. With respect to the gross figure in the Alameda County
audit, pulled from County summaries (and including programs not even
within the scope of the audit), there was no individual case review by
the auditors.
In post-conference briefing, 55A has contended that, to succeed in its
appeal, the State must meet a burden of proof of demonstrating
"conclusively" the agency's error in its disallowance determination.
Application of this standard is not warranted by the language of Section
201.14 and would be contrary to the policy underlying the section,
however. The Section 201.14 proceedings were established to provide a
means for agency reconsideration of disallowances pursuant to Section
1116(d) of the Social Security Act. Before becoming final, an initial
decision to disallow should be reexamined at a sufficiently high level
within the Department, through a process affording a State a meaningful
opportunity to dispute the disallowance.
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In general, a State must be prepared to document its claims for FFP. To
ask the State provide sufficient documentation to conclusively show that
the amounts disallowed here do not represent erroneous payments would be
unfair, however, in light of the defective nature of the disallowance
determination, particularly with respect to the figures pulled from the
County summaries with no identification of relevant case files.
The State has here met its burden of going forward by introducing new
relevant evidence, documentation, and argument, and 55A has responded
with mere assertions that it ought to be able to depend on 5C0 audits,
that the State should submit more documentation, and that the 5C0
Alameda County audit presented findings based on Federal standards. 55A
places too much weight on the fact that the auditors' statement with
respect to overpayments reported on County summaries is labeled a
"finding" and refers to Federal standards. The State has shown that
the
audits were not reliable for purposes of adjustment of county claims due
to the Marin County case. The State has moreover introduced
documentation which raises substantial doubt that the audits otherwise
provide a valid basis for determining the Federal share in individually
identified erroneous payments in the programs audited.
Conclusion
The State has demonstrated that the State audits do not present a
sufficient basis for findings of fact, required by Section 201.14, that
the State had claimed FFP in individually identified erroneous payments
in the amounts -disallowed. Accordingly, as successor to the
Administrator, SRS, for purposes of this review, I hereby reverse the
disallowances of $194,302.53 in the Alameda County case and $962.50 in
the Lake County case. This decision is the final administrative action
in these matters. D11 May 15, 1992