DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: New Jersey Department DATE: December 30, 1988 of Human
Services Docket No. 88-15 Decision No. 1006
DECISION
The New Jersey Department of Human Services (State) appealed a
determination by the Regional Administrator, Family Support
Administration (Agency/FSA), disallowing $178,115 in federal financial
participation (FFP) claimed by the State under Title IV-A, Aid to
Families with Dependent Children (AFDC), of the Social Security Act
(Act). The disallowed amount represented costs of the Family Assistance
Management Information System (FAMIS) that the Agency attributed to the
State's AFDC-N program, a program funded solely by the State, for the
quarters ending March 31, 1983 through September 30, 1986.
Although the costs of the FAMIS program for the benefit of a
state-funded program would ordinarily be ineligible for FFP, the Agency
initially paid claims for FFP for these costs as "incidental" costs.
In June 1985, the State filed a retroactive FAMIS adjustment and claimed
$132,599 FFP for its AFDC-N program. The Agency subsequently reviewed
all the FAMIS costs and determined that the benefit received by the
State's AFDC-N program was not incidental. On December 21, 1987, the
Agency notified the State of the disallowance. As discussed below, we
uphold the Agency's disallowance.
Background
The regulations at 45 C.F.R. sections 205.35 through 205.38 (1983)
authorize the use of mechanized claims processing and information
retrieval systems. To receive federal funding for an automatic data
processing system, a state must submit an advance planning document
(APD) for the Agency's approval. 45 C.F.R. 205.36. The APD may not be
approved unless it meets the requirements of the AFDC Automated
Application Processing and Information Retrieval System Guide (AAPIRS).
45 C.F.R. 205.37. It is uncontested that the State's system met the
regulatory requirements.
FAMIS, a system of automatic data processing equipment and services, is
used by the State to implement various programs under the Act, including
the AFDC program. The State's AFDC program has three program segments:
(1) AFDC-C; (2) AFDC-F; and (3) AFDC-N. Both the AFDC-C and AFDC-F
programs receive FFP. The AFDC-N program, however, is strictly a State
program and receives no FFP. The State, in its brief at page 3,
described the AFDC-N program:
[A] state-funded program of welfare assistance to children whose
parents reside in the home, are not incapacitated, and who are
employed but earn income insufficient to support the family. . . .
With respect to eligibility criteria, AFDC-N differs chiefly from
the federally financed "AFDC-C" and "AFDC-F" program segments
insofar [as] it extends benefits to dual-parent households who do
not meet the more restrictive federal criteria for unemployment.
The AAPIRS Guide is the Agency's manual that sets out the requirements
necessary to receive FFP for FAMIS. Section 32. J. of the AAPIRS Guide
provides, in part:
Allocation of Costs
In the APD, estimates must be provided of how the costs will be
distributed to the various State and Federal funding sources. An
explanation of the basis for these estimates should also be
provided.
Actual costs should be allocated in accordance with an approved
cost allocation plan as required by 45 CFR Part 95, Subpart E.
State agencies must be able to provide documentation to support
wages, benefits and other expenditure items. In general, since the
activities of FAMIS are specific to the AFDC program, costs
determined to be FAMIS can be charged directly to OFA even though
certain products may incidentally benefit other programs. Unique
requirements of other programs are not considered FAMIS costs and
should be borne by those programs, for example, Medicaid ID cards,
Food Stamp grant calculations and ATPs. (Emphasis added)
State appeal file, pp. 21a-22a.
After approval of the State's APD in 1981, the State began incurring
costs for the development of the State's FAMIS and submitting claims to
the Agency for reimbursement. Prior to 1985, claims by the State
identified as being for FAMIS costs allocable to the State-supported
AFDC-N program were minimal. As discussed fully below, when the State
filed substantially increased retroactive claims for FFP that were
identified as FAMIS costs benefitting the AFDC-N program, the Agency
re-examined the costs allocable to the AFDC-N program and determined
that the costs generated by the AFDC-N program could no longer be
considered incidental. The disallowance letter stated, in part, at page
1:
These costs are being disallowed because New Jersey's approved
State Plan does not provide for funding of the AFDC-N program to
include federal funds. Therefore, federal matching is not
available for FAMIS costs allocable to the AFDC-N program. In
addition, OMB Circular A-87, Attachment A, Section C.2.a. provides
that "a cost is allocated to a particular cost objective to the
extent of benefits received by such objective." As the development
of FAMIS benefits the AFDC-N program and the AFDC-N program
generates additional costs for that development, a portion of the
development cost is allocable to the AFDC-N program.
In addition to the disallowance letter, this determination was also
explained to the State by the Agency's Regional Administrator in a
letter on January 27, 1988. See State appeal file, p. 70a.
Analysis
I. The Agency did not change its policy.
The State admitted that its AFDC-N program was all State funded and,
apart from the FAMIS costs at issue here, was not entitled to any FFP.
The State also agreed that during the period of the disallowance the
AFDC-N program benefitted from FAMIS. We agree with the Agency that the
only question to be determined is whether the Agency's disallowance of
costs for the development of FAMIS which benefitted the AFDC-N program
was correct. Therefore, the issue before us is whether the benefit
received from FAMIS by the State's AFDC-N program was incidental and did
not require allocation to that program. Based on the record before us,
we affirm the Agency's finding that the benefit received by the State's
AFDC-N program from FAMIS was more than incidental. Thus, as stated in
the AAPIRS Guide, noted above, the State's AFDC-N program should bear a
portion of the FAMIS costs from which it benefitted.
The State stressed in its argument that the Agency changed its policy
about charging the AFDC-N program costs to FSA, making this change
retroactively without any advance notice to the State. The State cited
court cases to the effect that such a retroactive policy change was not
permitted. See State's brief, pp. 11-12. These cases are irrelevant
here, however, because there was actually no change of policy.
Therefore, we do not discuss these cases or the Agency's response to
them.
The Agency never disavowed the policy in the AAPIRS Guide that if there
was only an "incidental" benefit to a state program (not entitled
to
FFP) then all the costs were properly chargeable to FSA. The Agency
changed its position on whether the policy applied to the State's
program. Initially, for the quarters ending September 30, 1981 through
June 30, 1984, the State identified only $554 of costs as having been
allocated to the AFDC-N program. State Appendix, p. 4a. When the State
identified such small amounts as being allocable to the AFDC-N program,
the Agency paid them as being an incidental benefit and not requiring
any allocation to the State-only program. On June 28, 1985, however,
the State submitted a retroactive adjusted claim for FFP for the FAMIS
program, identified as being for costs of the AFDC-N program, for the
quarters ending March 31, 1981 through June 30, 1984. This claim was
for $132,599 FFP. State Appendix, p. 4a, and Excerpts, Quarterly
Statements of Expenditures, First Quarter 1985-Third Quarter 1986
(Unnumbered second-last page of excerpts). When the Agency found out,
by the State's claim, that the costs associated with the AFDC-N program
were in excess of a hundred thousand dollars, instead of only a few
hundred dollars, the Agency determined that the State's costs did not
qualify for FFP under the applicable policy.
It was only when the State began claiming substantial amounts for FFP
which it identified as being allocable to the AFDC-N program that the
Agency decided that the benefit was no longer incidental under the terms
of the AAPIRS Guide, and that the State's AFDC-N program should pay for
all the benefits it derived from FAMIS. We find the Agency's actions
were reasonable under the circumstances.
The State misconceives the nature of the disallowance here. The Agency
recognized that the AFDC-N program would use the FAMIS system and
benefit from it; the Agency did not contemplate that the State would
seek FFP (either at 50% or 90%) for FAMIS costs associated with AFDC-N
if they were more than minimal.
For example, the State contended that until the disallowance notice it
was the Agency's policy that FAMIS costs allocable to the AFDC-N program
qualified for FFP under the "incidental benefit" clause of AAPIRS.
The
State argued that the existence of this policy was established
"indirectly, but conclusively" by reference to AFDC-N in the APDs
which
the Agency approved. State brief, p. 9. The references given by the
State (State appendix, pp. 64a-66a) refer only to reducing the error
rate in the several AFDC segments through use of FAMIS. See
cost-benefit analysis, State appendix, p. 63a. These portions of the
APD do not address the question of cost allocation in any way.
In fact, wherever the cost allocation plans in the record refer to
AFDC-N, they invariably refer to it as a totally State-funded program.
Thus, in the Cost Allocation Plan Revisions for October 1, 1981 (p. 2,
Exhibit I-A), the funding source for AFDC-N under income maintenance
programs is identified as "100% State." The same identification appears
on page 2, Exhibit I-A of the Revisions for July 1, 1983. The same 100%
State funding for AFDC-N is repeated in the listing of Division
Supervised and Administered Programs in the Cost Allocation Plan
Revisions for July 1, 1985. The disallowance was correct for the reason
given: the claimed costs were being disallowed because the State AFDC
plan did not provide for funding of the AFDC-N program to include
federal funds. State appendix, p. 1a.
The disallowance was dated December 21, 1987. It was not until January
27, 1988, however, that the Regional Administrator explained why FFP had
been paid for AFDC-N program costs in the past, why the payment was
improper, and why FSA would not pay for AFDC-N program costs. The exact
language appears on page 70a of the State Appendix: "It is now our
position that the benefits provided by FAMIS to the AFDC-N program are
more than incidental." In other words, when FSA thought the amounts
paid to the State were very small (i.e., the $554 identified by the
State), it had not insisted on having the State program bear the costs;
the benefit was only incidental. It was only when a substantial claim
($132,559) came in and was identified by the State as being for the
State AFDC-N program that the Agency realized that the benefit was not
incidental, and decided to look not only at this claim, but at claims it
had paid in the past which included costs attributable to the AFDC-N
program.
In retrospect, the Agency should perhaps have included the language in
the January 1988 explanation in the December 1987 disallowance; but
there was no prejudice to the State. The State included the January 27,
1988 comment of the Regional Administrator in its appeal file, and has
had the opportunity to argue about its effect in the proceedings before
this Board. The State has not misunderstood what the Regional
Administrator said; it has simply contended that the Administrator could
not make the change effective for any period before the letter's date.
We do not agree with the State. The Agency did not change its policy.
It simply found that its policy did not actually apply to the AFDC-N
costs, given the extent of the previously unallocated benefit to the
AFDC-N program.
II. The amount of the disallowance was not overstated.
The State argued that the amount of the disallowance was greatly
overstated, even if it were substantively correct. The State objected
to the Agency's use of the case count method to allocate total FAMIS
costs to the AFDC-N program. The Agency arrived at the disallowance
amount by calculating a percentage that represented the ratio between
AFDC-N cases and all AFDC cases and then multiplying the total FAMIS
costs by that percentage. The State contended that the "sole increment
in FAMIS costs caused by service to the AFDC-N segment was an increment
to the cost of FAMIS program's Grant Calculation (G-CAL) Mode. . . .
Total expenses for development of G-CAL are estimated at $180,902."
State brief, pp. 16-17. Application of the "n" factor of 2% (based
on
the percentage of AFDC-N cases to total AFDC cases) to this amount would
come out to $3618.94. This amount, said the State, was the maximum
amount of the disallowance on the Agency's own theory.
However, we find that there is nothing unusual in using the case count
method for allocating FAMIS costs to the AFDC-N program. The Agency was
correct when it stated that case count was a common method of allocating
costs. In fact, in the State's October 1, 1981 revision to its FAMIS
CAP, income maintenance expenditures (except for a few specialized
categories) were to be allocated to the AFDC-C, AFDC-F, and AFDC-N
programs on the basis of respective case counts. Revision of 4/81, p.
30, in Agency submission of November 15, 1988.
Moreover, there is an apparent fallacy in the State's reasoning. The
State's submission estimated the G-CAL cost to be $180,902. State
appendix, p. 74a. The affidavit submitted by the State stated that the
G-CAL development cost was due to the AFDC-N program alone. If the
actual additional cost of the parts of the FAMIS program required
exclusively for the AFDC-N program was $180,902, then there is reason to
conclude that the entire $180,902 should be charged to the AFDC-N
program, not just a fraction of it based on any case count allocation.
(We note that this amount exceeds the Agency's disallowance here.) A
case count allocation is appropriate where the development costs benefit
several programs. If the development costs of $180,902 benefitted only
the AFDC-N program, then that program should pay for that entire amount,
not just 2% of it.
In any event, the proper calculation of the actual amount of the
development costs associated exclusively with the AFDC-N program has no
direct bearing on our conclusion that the Agency reasonably determined
that the benefit to AFDC-N from the overall costs of FAMIS development
was more than incidental and ought to be allocated.
Conclusion
For the reasons stated above, we affirm the Agency's disallowance.
________________________________ Cecilia Sparks Ford
________________________________ Norval D. (John) Settle
________________________________ Alexander G. Teitz Presiding
Board