Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: New York State
DATE: August 23, 1990
Department of Social Services Docket No. 90-40
Audit Control No. 02-89-01007
Decision No. 1186
DECISION
The New York State Department of Social Services (New York/State)
appealed a determination by the Social Security Administration
(SSA/Agency) disallowing $2,038,063 in federal funding for the period
April 1, 1980 through September 30, 1983. The Agency alleged that the
funding represented an applicable credit for interest earned by New York
following the State's premature letter of credit drawdowns of federal
funds for employee retirement contributions related to the New York
Disability Determination Program (DDP). Generally, the State argued
that SSA lacked authority to take this disallowance and in any event
failed to calculate the interest correctly.
The record in this appeal consists of the parties' briefs and exhibits,
as well as the tapes of a July 12, 1990 telephone conference. As
explained in the following analysis, we reject the State's arguments and
sustain the entire disallowance of $2,038,063.
Background
The Board's earlier decision
This Board has previously considered issues related to this disallowance
in New York State Dept. of Social Services, DAB No. 910 (1987), referred
to below as New York I. In New York I, the Board found that the State's
drawdown procedures were improper in that they did not minimize the time
between the drawdown and the actual payment of the corresponding
obligation. We found that federal funds had been drawn down and
retained by the State for excessive periods before the State disbursed
funds to liquidate its obligations. New York I, p. 3.
Although we concluded that New York's drawdown procedures were fatally
flawed, we also found that SSA had not shown any authority which
permitted it to assess interest for excessive drawdowns without
reference to whether the State had actually earned the interest.
Consequently, the Board reversed SSA's assessment of imputed interest
against the State. However, since neither party had provided any
evidence on whether interest had actually been earned, the Board
afforded SSA the opportunity to review that issue and impose a new
disallowance based on a finding of interest actually earned on excessive
drawdowns. Id. at 6-7.
The current disallowance
Following the Board's decision in New York I, at the Agency's request,
the Department's Regional Office of the Inspector General (I.G.)
conducted a follow-up audit investigation into whether New York had
earned interest on the premature letter of credit drawdowns for the
period April 1, 1980 through September 30, 1983. In response to
inquiries by the I.G. during that investigation, the State's Deputy
Comptroller, Division of Investments and Cash Management, stated in a
letter dated August 12, 1988 that the Fringe Benefit Escrow Funds were
included within the pool of monies "available" for investment. He
also
stated that it "may" be possible to determine the pro rata share of
earnings based on the dates and amounts of the fringe benefit drawdowns.
SSA Exhibit (Ex.) 1, p. 3.
The I.G.'s April 11, 1989 audit report, which is the basis for this
disallowance, concluded that during the period in question the DDP
retirement funds were first deposited by New York State in an escrow
account which was part of the State's short term investment pool (STIP).
The report verified that the investment pool earned interest on the
funds in the account. Finally, by identifying the critical dates
involved in the drawdowns and the fund transfers, the report
demonstrated that the funds routinely were drawn down approximately 15
months prior to their transfer to the State Retirement Fund.
The audit report also explained specifically the method used in
computing the interest the State earned. It stated:
[W]e obtained the average monthly yields (monthly interest rates)
earned by the State on the STIP for the periods applicable to our
review. For example, the monthly rates of return for calendar year
1981 ranged from a high of 16.59 percent to a low of 11.52 percent.
We also determined the dates the quarterly vouchers containing the
ODD [Office of Developmental Disabilities] fringe benefits (which
includes State retirement) were deposited to the STIP. Using the
average monthly rates of return, the dates of deposit, the dates
the DDP funds were transferred to the State retirement account . .
., and the portion of the fringe benefit amount applicable to State
retirement, we calculated the interest earned by the State. Our
calculations included compounded interest.
New York Ex. 2, p. 5.
The State made three arguments concerning the validity of the current
disallowance derived from the audit report. The State argued (1) that
the SSA lacked the authority to assess interest earned by New York on
letter of credit drawdowns; (2) that issues relating to the timing of
the drawdown could be raised only by the Department's Division of Cost
Allocation (DCA); and (3) that the State acted properly in drawing down
and administering the funds for the fringe benefit obligations. In the
alternative, the State also argued that SSA failed to calculate
correctly the actual interest earned as required by New York I.
In response, the Agency argued that the State was barred by res judicata
from raising any issues concerning the validity of the disallowance and
that the State's arguments in any event lacked merit. The Agency also
argued that it had correctly calculated the interest earned by the funds
that had been improperly drawn down.
Analysis
I. The State's arguments concerning the validity of the disallowance
are barred by res judicata and, in any event, lack merit.
In New York I, the Board resolved the issues of whether the State's
drawdown procedures were proper and whether the Agency had authority to
impose a disallowance for interest earned on improperly drawn down
funds. The Board concluded that the drawdowns here were improper since
they were made substantially in advance of the time that the State used
the funds for fringe benefit obligations. We also concluded that if New
York had in fact earned interest on the improperly drawn down funds, the
Agency was entitled to disallow an amount of funding equal to the amount
of interest earned as an applicable credit. Since New York disputed
that it had earned interest and since the record contained no evidence
that it had in fact earned any interest, we reversed the disallowance,
which had been based solely on the Agency's decision to impute the
earning of interest. Nevertheless, we gave the Agency the opportunity to
review this issue further and impose a new disallowance to the extent
that interest was in fact earned by the State from funds that were
improperly drawn down.
Although New York I left open only the issue of whether the State had in
fact earned interest on improperly drawn down funds, the State here
again raised issues concerning the Agency's authority to impose a
disallowance. These issues were either raised and considered in New
York I or could have been raised in that appeal. The Agency argued that
the State is bound by the Board's decision in the earlier appeal on
these issues under the legal principle of res judicata. We agree. The
State argued that this appeal must be viewed as a continuation of the
earlier appeal and that these issues accordingly remain open for further
consideration by the Board. However, New York's argument clearly
misconstrues the scope of the earlier decision which resolved all of the
issues raised by the State concerning the validity of the disallowance
and left open only the issue whether the State had actually earned
interest on improperly drawn down funds. The Board clearly did not
leave open for further consideration any issue concerning the validity
of the disallowance that the State here raises.
A Board decision is the final administrative action for this Department
on the matters considered and resolved in the decision unless a party
requests reconsideration by timely alleging a clear error of fact or
law. 45 C.F.R. 16.13. The State's arguments here do not allege a
clear error of fact or law in the earlier decision and can, under no
stretch of the imagination, be viewed as timely, coming approximately
three years after New York I.
The principle of res judicata applies in administrative proceedings.
The Supreme Court has stated that "[w]hen an administrative agency is
acting in a judicial capacity and resolves disputed issues of fact
properly before it which the parties have had an adequate opportunity to
litigate, the courts have not hesitated to apply res judicata to enforce
repose . . . ." United States v. Utah Construction and Mining Co., 384
U.S. 394, 422 (1966). In Louisiana Dept. of Health and Hospitals, DAB
No. 1176 (1990), we said that "case law supports enforcing finality as
to issues that the parties have previously litigated before us."
Louisiana, p. 4. Thus, New York is bound by the earlier decision on all
issues related to the validity of this disallowance.
Even if New York were not bound by our earlier decision, however, we
would still conclude that its arguments here lack merit. In New York I,
we fully discussed the question of whether the drawdowns were improper.
The State here presented no argument that would cause us to reconsider
any aspect of that analysis, and we reaffirm it in full. 1/
The only new arguments about the validity of the disallowance that the
State raised here concerned DCA's role in approving the unified fringe
benefit rate, including the retirement portion of the rate. The State
alleged that only DCA had the authority to disallow for improper
drawdowns since it approved the fringe benefit rate that determines the
amount of the funding for each portion of the fringe benefit rate. The
State further alleged that, for the period at issue, DCA was aware that
the State was drawing down the retirement fund portion of the rate
fifteen months in advance of the liquidation of the retirement fund
obligations.
As the Agency noted, the agreement between DCA and New York concerning
the State's indirect cost rate for the period in question merely sets,
for a given fiscal year, the fringe benefit rate for making
contributions to employee retirement and to seven other parts of the
State's fringe benefit package. The agreement does not mandate the
timing for the State's letter of credit drawdowns for DDP. Nor does the
agreement authorize New York to earn interest on any prematurely drawn
down funds for DDP. The agreement does not in any event preclude SSA,
or any other operating division, from recovering any interest New York
earned on the premature drawdown of funds.
Moreover, even if DCA knew, as the State alleged, that the State was
prematurely drawing down the retirement portion of its fringe benefit
funds as part of its systematic drawdowns under the unified fringe
benefit rate, DCA clearly did not authorize the investment of the funds
in interest-bearing accounts or the retention by the State of any
interest earned. Thus, DCA's knowledge, if any, of the premature
drawdowns is irrelevant to the ultimate investment practices of the
State that led to the disallowance and clearly cannot be viewed as a
form of sanction or approval for those practices.
The State also pointed to the 1984 Agreement it had entered into with
DCA as support for its argument that DCA, not SSA, should be handling
the issues raised by this disallowance. The particular issue resolved
by that agreement, however, is substantively different from the issue
raised here. The 1984 Agreement addressed the allowability of penalty
interest amortized over a period of 17 years that the State had to pay
because it was late in making payments to the Retirement Fund account.
The issue raised here concerns the interest the State earned when it
prematurely drew down funds for the Retirement Fund account. This issue
was not addressed in any applicable indirect cost agreements between DCA
and the State and, as we discussed in New York I, SSA clearly has the
authority to disallow for this type of interest.
II. The State's arguments concerning the interest computation lack
merit.
In addition to its arguments concerning the validity of the
disallowance, the State raised several objections to the Agency's
interest computation. The State alleged that while the retirement
portion of the fringe benefit package may have been invested in the STIP
account, other fringe benefit obligations were covered entirely with
State funds for a period of time before the State drew down federal
funds to cover the obligations. New York offered its Exhibit 9 as a
hypothetical example of the cash flow for the STIP account for a given
fiscal year. New York explained that during the period in issue it would
draw down federal funds in August. Prior to that point in the State's
fiscal year, the State Comptroller would have used State funds to prepay
a portion of the federal fringe benefit obligation leaving a deficit
balance for the State to cover when it drew down federal funds. Based
on that scenario, the State asserted that the STIP balance was never as
high as SSA believed. Thus, New York asserted, "[i]t would be difficult
at best to calculate actual interest earned on the . . . retirement
portion of the SSA contributions . . . ." New York Br., pp. 17-18.
The State also argued that it was inappropriate to include any
compounded interest in the interest computation and that the computation
should reflect the fact that prematurely drawn down funds invested in
the STIP may have been withdrawn by the State in the interim and used
for other purposes before being applied to the retirement contribution
15 months later. Also, as part of its challenge to the Agency's
computation, the State asked the Board to bifurcate the computation
issue from the rest of the appeal so that it could be given additional
opportunity to present its own computation of the interest earned.
We reject each of the State's computation arguments. The focus of this
disallowance is on the State's investment of funds earmarked for
disbursement as the DDP employee retirement contributions. The
allegation that the State used its own funds to cover certain other
elements of the fringe benefit package has no relevance to the propriety
of its actions with regard to the funds for the retirement
contributions. The State's drawdown practices with respect to other
elements of its fringe benefit package cannot absolve it from
responsibility for interest earned from funds for the retirement
contributions. Moreover, the State's indirect cost rate procedures
clearly did not require it to make the premature drawdowns in question.
Even though the State's central accounting system may have imposed
constraints on drawdowns that caused the State to act as it did, those
constraints cannot be used as justification for the interest earned on
the retirement funds and for the retention of the interest.
Furthermore, although the State argued that interest should not have
been compounded, it did not provide the Board with any evidence
demonstrating that the STIP escrow account at issue would not receive
interest on a compounded basis. Since the State made the decision to
invest the funds in the STIP account and had full knowledge as to the
terms of the investment, it necessarily has the burden here to
demonstrate that interest would not have been computed on a compounded
basis in this account.
Finally, we find that as long as the State placed retirement funds in
the STIP and then withdrew funds in this amount 15 months later in order
to cover the retirement fund obligations, the State's intermediate
deposits and withdrawals from its STIP for other purposes during the
same 15-month intervals are irrelevant to any interest computation. The
Agency may reasonably assume that the State had not intercepted the
retirement funds and used them for improper purposes.
This Board has previously upheld interest computations in related
circumstances that employed comparable assumptions and techniques. See,
e.g., West Virginia Division of Vocational Rehabilitation, DAB No. 869
(1987). In West Virginia, which also involved a disallowance by SSA,
the auditors had multiplied average month-end balances for each year by
the average yearly interest rates prescribed in the Monthly Statement of
the Public Debt of the United States. West Virginia challenged the
calculation and argued that since the funds in question were commingled
with other funds, interest could not be accurately calculated. The
Board held that SSA could use reasonable estimates of interest earned on
commingled funds, subject to revision if the appellant provided more
accurate information to determine the amount of interest actually
earned. The Board added that West Virginia had the burden of proof to
show how much interest was earned in a commingled account since West
Virginia chose the account and complicated the accountability of the
interest in question. Id. at 7.
Although the State has asked the Board to "bifurcate" this appeal
so
that it can have substantial additional time to present its own
computation of interest, we decline to do so. The State has had ample
opportunity to complete its own calculation and to supply all of the
necessary supporting evidence and has not done so. The interest
question was raised initially during the pendency of New York I, where
the State denied that it had in fact earned interest. New York I, pp.
4-5. The I.G. review that followed that decision concluded that the
State had earned interest based in part on concessions by the State's
Deputy Comptroller, Division of Investments and Cash Management, in a
letter dated August 12, 1988. SSA Ex. 1. The Agency's subsequent
disallowance, first at the regional level dated August 1, 1989 and then
by the Deputy Commissioner for Programs, dated January 4, 1990, again
raised this issue as the basis for a disallowance. Both appeals
provided a forum for the State to provide an alternative computation.
Given this lengthy history of the issue, which in effect has already
been the subject of one Board remand, we find that New York properly
should have presented any alternative calculation during the pendency of
the present appeal. The State itself made all of the decisions leading
to the investment of these funds and has custody of all of the relevant
information and documentation. It is clearly inappropriate to remand
this case a second time to allow the State a further opportunity to
contest the Agency's computation. Moreover, none of the arguments made
by the State in this appeal persuade us that the Agency's computation
was incorrect or that the State could present a computation that is in
any way superior. We therefore sustain the Agency's calculation of the
interest and deny the State's request to bifurcate this appeal.
Conclusion
Based on the foregoing analysis, as well as the rationale in New York I,
we sustain the entire disallowance of $2,038,063.
Norval D. (John) Settle
Alexander G. Teitz
Donald F. Garrett Presiding Board Member
1. See New York I, pp. 2-5. In particular, we stated in footnote 4
(p. 5):
It is well-established that where a state in fact earns interest on
grant funds, claimed costs equal to the amount of interest earned may be
disallowed based on applicable cost principles. See, e.g., Utah Dept.
of Social Services, DAB No. 759 (1986); Indiana Dept. of Public Welfare,
DAB No. 859 (1987). The regulations concerning the disability
determination program authorize a disallowance for earned interest as an
"applicable credit" under these circumstances. 20 CFR 404.1626(e);
41
CFR 1-15.703-3(a); see West Virginia Division of Vocational
Rehabilitation, DAB No. 869 (1987), pp. 1-3.
See also Section 439.5 of the Disability Insurance State Manual cited by
the Agency in the earlier