Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Maryland Department of Human Resources
DATE: April 29, 1991
Docket No. 90-204
Decision No. 1247
DECISION
The Maryland Department of Human Resources (Maryland, State) appealed
a
decision by the Office of Child Support Enforcement (Agency,
OCSE),
Family Support Administration, to disallow federal
financial
participation (FFP) in $449,550 claimed by the State under Title
IV-D of
the Social Security Act (Act), for the period July 1, 1987 through
June
30, 1989. 1/
The amount at issue represents child support collections that Maryland
was
unable either to forward to families due support or to return to the
absent
parents who made the support payments, because the State had been
unable
either to identify or to locate the families or absent parents.
OCSE
determined that when Maryland transferred the undistributable
collections to
the State's Unclaimed Property Section (UPS), they became
program income
which should have been deducted from the State's total
expenditures before
the State could claim FFP for those expenditures
under the Title IV-D
program. 2/
We agree with OCSE that the State should have deducted the
undistributable
child support payments from total IV-D expenditures. As
discussed
below, we conclude that these amounts are "income resulting
from program
activities" within the meaning of section 455(a) of the
Act, which requires
that program expenditures be reduced by such
income. Accordingly,
we uphold the disallowance.
Background
Congress established the Child Support and Establishment of
Paternity
Program as Title IV-D of the Act by Pub. L. 63-457, effective July
1,
1975. Federal funds were made available to the states for
"enforcing
the support obligations owed by absent parents to their
children,
locating absent parents, establishing paternity, and obtaining
child
support." Section 451 of the Act.
As a condition for receiving FFP, a state must operate its Title
IV-D
program in accordance with a federally approved state plan
and
applicable regulations. Federal monies are advanced to states
quarterly
to accomplish the necessary child support enforcement
activities. Prior
to the beginning of each calendar quarter, after a
certification and
justification statement has been submitted by the state,
OCSE estimates
and makes available to a state the amount it expects the state
will use
that quarter in administering the program. 45 C.F.R.
301.15(a)(1) and
(2). The State must also submit a quarterly statement
of expenditures
which provides the basis for making necessary adjustments for
the
current quarter and for prior quarters. 45 C.F.R.
301.15(a)(3). The
state is to exclude from its claimed expenditures the
total of any fees
it collects and other income resulting from Title IV-D
services.
Section 455 of the Act.
The State's Child Support Enforcement Administration is comprised of
a
headquarters office located in Baltimore City and 24 local
departments,
which are located in the 23 counties and Baltimore City.
3/ The State
agency has responsibility for operating a statewide child
support
system, collecting child support payments from absent parents
and
forwarding these funds to the custodial parent. This agency also
helps
the custodial parent to enforce the absent parent's legal obligation
to
support his or her children. State's Appeal File, Ex. C, p. 2.
When
the State collects child support payments, it holds them in a trust
fund
while determining how to distribute them in accordance with
program
regulations. See 45 C.F.R. 302.51 and 304.26.
The Agency reviewed the State's program to determine: (1)
if
undistributed collections contained in the trust fund were being
handled
according to federal regulations, and (2) how well child
support
collections were managed (receipt and disbursement) and whether
any
interest income earned on the collections was shared with the
Agency.
State's Appeal File, Ex. C, pp. 2 and 3. As a result of the
review, the
Agency determined, among other things, that the State had
transferred
$449,550 in undistributable child support collections to the UPS
for the
period July 1, 1987 to June 30, 1989. The Agency determined
that the
State should have reported this amount, on its quarterly
expenditure
report, as an increasing adjustment to prior quarter program
income.
The State explained that it handled the disposition of the
undistributable
child support collections in accordance with the
Maryland Uniform Disposition
of Abandoned Property Act (UDAPA), codified
at Title 17 of the Annotated
Commercial Law Code of Maryland. In
particular, section 17-307 of the
UDAPA provides that intangible
property held by the State for more than 5
years is presumed abandoned.
4/ Sections 17-310 and 17-312 of the UDAPA
provide that a holder of
property that is presumed abandoned must file a
report with, and
transfer the property to, the UPS. 5/ The UPS must
mail a notice to the
last known address of potential claimants entitled to
$50 or more and
publish the claimant's name for two weeks in a paper of
general
circulation in the county where the claimant was last known to
reside.
Section 17-311 of the UDAPA. A proper claimant may file a claim
at any
time. Section 17-319 of the UDAPA.
Under Section 17-317, funds resulting from abandoned property are
credited
to a special fund. The State Comptroller, as Administrator of
the
special fund, retains an amount not to exceed $50,000 for paying
subsequent
claims and also uses some funds to cover the costs of
administering the
UDAPA. The balance of the fund, however, is allocated
for state and
county purposes like amounts from Maryland's General Fund.
Relevant Authority
Section 455(a) of the Act contains a formula for determining the amount
of
federal financial participation in a state's IV-D program under its
approved
state plan. The section states that in determining the amount
expended
under Title IV-D, "there shall be excluded an amount equal to
the total of
any fees collected or other income resulting from services
provided under the
plan . . . ." (Emphasis added.)
OCSE's regulations implementing Title IV-D contain the
following
provision, at 45 C.F.R. 304.50, on treatment of program income:
The IV-D agency must exclude from its quarterly
expenditure
claims an amount equal to:
(a) All fees which are collected during the quarter under
the
title IV-D State plan; and
(b) All interest and other income earned during the
quarter
resulting from services provided under the IV-D State plan.
Regulations containing general administrative requirements for
grant
programs (made applicable to Title IV-D by 45 C.F.R. 304.10)
also
contain provisions on treatment of grant-related income.
These
regulations define "program income" as --
gross income earned by a recipient from activities part or
all
of the cost of which is either borne as a direct cost by a
grant
or counted as a direct cost towards meeting a cost sharing
or
matching requirement of a grant. It includes but is not
limited
to such income in the form of fees for services performed
during
the grant or subgrant period, proceeds from the sale of
tangible
personal or real property, usage or rental fees, and patent
or
copyright royalties.
45 C.F.R. 74.41. 6/
Analysis
The State's major arguments concerning why undistributable
collections
were not properly used to offset IV-D expenditures were that 1)
the
collections were not "income" because they were not a "gain
or profit"
to the State; and 2) that the collections were not
"earned" by the State
since the State never obtained title to the funds and
was required to
distribute them if a proper claimant was ever identified and
located.
The State also cited several Board decisions for the proposition that
the
disallowance should be overturned because the State did not have
notice of
OCSE's interpretation of the statute and regulations. The
State argued
that OCSE had addressed how states must distribute child
support collections,
but had never informed states in its regulations,
or the preamble discussions
accompanying them, that collections would be
treated as program income after
being held by a state for five years.
State's Reply Br., pp. 7-9.
While the State cited the case of Lukhard v. Reed, 481 U.S. 368,
374
(1987), for the proposition that the State must as a minimum have a
gain
or profit to have income, the State provided no persuasive reason why
we
should find that the State has no gain at the time of transfer of
the
funds to the UPS. After transfer, the State treats these
funds
essentially like other State revenues. The State is in an
overall
better financial situation by reason of the transfer of
the
undistributable collections than the State otherwise would be. 7/
The State cited no authority for the proposition that funds are
"earned"
only when title is acquired. Nor did the State explain how one
can
acquire "title" to money or why the State's ability to use the funds
for
its own purposes was not equivalent to "title." Some definitions
of
"earned" use the term to simply mean "received." See Webster's
Third
New International Dictionary (unabridged version 1971). To read
the use
of the term "earned" in the regulations as excluding the funds at
issue
here would not be reasonable, for the following reasons:
o Section 455(a) of the Act contains no such limitation,
and
the State has cited to nothing in the legislative history
of
that provision to support a narrow reading of the
provision.
The provision refers to "income resulting from services
provided
under the [IV-D] plan." The State did not deny that the
funds
at issue here resulted from IV-D program activities; but for
its
operation of the program, the State would not have been
holding
the collections transferred to the UPS.
o While the term "earned income" is sometimes used to refer
to
remuneration for labor or services (as distinct from
investment
income), applying this limitation in the context of
deciding
what is income to a state simply does not make sense.
Moreover,
the program regulation at 45 C.F.R. 304.50 clearly uses the
term
"earned" in a broader sense since the regulation
explicitly
includes interest income, which is a type of investment
income.
o In the preamble to the final program regulation,
OCSE
responded to a comment that "earned" should be deleted from
the
regulation since it is not used in section 455(a) of the
Act.
There is no basis in the preamble discussion for reading
the
term "earned" as limiting the provision, as the State
alleged.
49 Fed. Reg. 36772 (Sept. 19, 1984). 8/
o As the Board stated in Tennessee Dept. of Human Services,
DAB
No. 1054 (1989), at page 6, the point of section 455(a) is
that
"federal funding needs should be offset by the federal share
of
funds produced through program activities." The State's
reading
of the regulations would frustrate this purpose.
The Board cases cited by the State on notice of an agency
interpretation
are not apposite here. This is not a situation where a
state
detrimentally relied on its reasonable interpretation of an
ambiguous
provision in incurring costs which the agency later
disallowed. Cf.
New York State Dept. of Social Services, DAB No. 1012
(1989); Indiana
Dept. of Public Welfare, DAB No. 970 (1988); New York State
Dept. of
Social Services, DAB No. 788 (1986). The undistributable
collections
are reasonably encompassed within the language of the statute and
the
regulation as income at the time of transfer to the UPS. The State
did
not argue that it changed its position or otherwise relied on
an
interpretation of these funds as not being income which had to be
offset
against IV-D expenditures.
The fact that OCSE's regulations governing distribution of child
support
collections do not explicitly say that such collections become
program
income after five years does not help the State. First, the key
event
here is not the mere passage of time, but the State's action
in
transferring the funds to the UPS under the UDAPA and the
resulting
change in how the State treats the funds. Moreover, the fact
that
program regulations on distribution of collections do not
contemplate
this situation means that OCSE could have reasonably taken the
position
that the State must continue to hold the funds in trust, without
ever
treating them as abandoned. Instead, OCSE has taken the
reasonable
position that the State may treat undistributable collections
as
abandoned property under State law, but must nonetheless treat the
funds
received by the UPS as program income. This position is
particularly
reasonable since OCSE would otherwise continue to receive its
share of
interest earned on the undistributed collections.
We also reject the State's argument that, in any event, the time
of
transfer to the UPS is not the appropriate point to
treat
undistributable collections as program income.
The State asserted that, even after the transfer of funds to the UPS,
it
actively seeks to live up to its obligation to distribute the funds
by
noting in its open case files the transfer of undistributable
payments
to the UPS. The State explained that its central office would
be able
to advise any payee with whom it has subsequent contact that he or
she
may be entitled to a payment. In addition, Maryland asserted that
it
has a special project to review all files relating to
undistributed
payments and to locate proper payees. As the State
locates payees, it
recalls those funds from the UPS and makes the appropriate
payments.
Maryland noted that the UPS is also mandated to initiate its
own
independent efforts to find the owners of abandoned funds. Thus,
the
State concluded that the balance of undistributable payments
continues
to fluctuate as payees are located and monies are distributed.
9/
Finally, the State argued that there is no statute of limitation
on
legitimate claims.
We think that ordinarily the State will not be likely to identify
or
locate possible claimants of IV-D collections after transfer to the
UPS
if the State has not been able to identify or locate them in the
five
years prior to transfer. 10/ While there may be a slight
possibility
that the State may have to return funds it has received under the
UDAPA
in order to meet obligations to families or absent parents who
are
subsequently located, this contingency does not provide a reason
for
exempting the undistributable collections from treatment as income
at
the time of transfer to the UPS. After transfer to the UPS, the
funds
are treated essentially like other state funds. Moreover, at
that
point, the IV-D agency is no longer treating the funds like
other
undistributed child support collections, on which it earns and
reports
interest as IV-D income.
Finally, we reject the State's argument that OCSE's position leads
to
inequitable results. OCSE conceded that, if the State ever locates
a
family or absent parent who is due funds which have been transferred
to
the UPS, the State may at that time simply make a decreasing
adjustment
to its reported program income. Agency Br., p. 10. 11/
Thus, the
State's concern that it might end up reimbursing OCSE twice for
a
percentage of the funds is unwarranted.
We also disagree with the State that it is unfair for OCSE to treat
"bad
debts" as unallowable costs yet to require the State to account
for
funds transferred to the UPS as income. OCSE's treatment of "bad
debts"
as unallowable costs is based on a longstanding cost principle (from
OMB
Circular A-87, Attachment B, Section D). The general policy behind
that
cost principle is that "bad debts" provide no benefit to a grant
program
and that a grantee is in a position generally to avoid such costs.
12/
That policy, which specifies a type of cost which is not an
allowable
grant charge, has no direct relationship with the income provisions
at
issue here, which are statutorily based and require OCSE to
offset
certain income against allowable program costs.
Conclusion
Based on the foregoing analysis, we uphold the Agency's
disallowance,
subject to reduction should the State (within 30 days of
receipt of this
decision) provide OCSE with acceptable evidence of the need
for
adjustment as discussed in notes 3 and 10 above.
Donald
F.
Garrett
Norval D.
(John)
Settle
Judith
A.
Ballard
Presiding
Board
Member
1. The $449,550 is the total amount that the Agency
maintained the
State should have deducted from the expenditures in which the
State
claimed FFP. Neither party indicated the disallowance amount,
which
would be the applicable FFP rate times $449,550. Since the amount
at
issue is subject to adjustment (for reasons discussed in the text),
we
did not ask the parties to clarify the precise amount in dispute.
2. The State characterized the child support payments
as
"undistributed," while the Agency characterized them
as
"undistributable." We use the term "undistributable" to
distinguish
those amounts the State transfers to the UPS from collections the
State
has simply not yet distributed. We recognize, however, that
the
transferred amounts are not "undistributable" in an absolute sense
since
the State may continue its efforts to distribute the collections,
even
after transfer.
3. The Baltimore City Child Support Agency was part
of the Baltimore
Department of Social Services, but is now an arm of the
State's
Department of Human Resources. State's Br., p. 3, n. 4.
4. The State alleged that approximately $168,597.74
had been
erroneously transferred to the UPS prior to the expiration of the
five
years, and the State requested an opportunity to recalculate
the
undistributable sum as of the appropriate date. The Agency agreed
that
the disallowance should be reduced to account for any amounts that
were
prematurely transferred to the UPS, when the State provides evidence
to
show that the money is returned from the UPS. Agency Br., p. 3.
5. The UPS is located within the Sales and Use Tax
Division of the
Maryland Comptroller of the Treasury.
6. Both parties focused their arguments on this section and what
it
specifically includes or excludes as "program income." While
this
section is generally applicable to Title IV-D grants, it was
not
intended as an interpretation of section 455(a), and therefore is
not
determinative of what is encompassed within that section.
7. We note that the fact that the IV-D agency may not itself
retain
the funds is not determinative. For federal grant purposes, the
state
as a whole is the entity responsible for accounting for federal
funds.
See Office of Management and Budget (OMB) Circular A-87, Attachment
A,
Paragraph A.2.a; New York State Dept. of Social Services, DAB No.
1012
(1989).
8. While the preamble does not explain why OCSE used the
term
"earned," one logical explanation is that OCSE wished to make clear
that
a state need account only for interest actually received, and not
for
imputed interest on funds held by a state but not invested. In a
prior
Board decision, the Board held that a grantor agency cannot require
a
grantee to offset imputed interest against program
expenditures.
Education Commission of the States, DAB No. 14 (1976). We
also note
that, on the quarterly expenditure report form for Title IV-D,
as
revised in 1989, there is a line for reporting "Interest Earned
and
Other Program Income Received." Agency Appeal File, Ex. 1.
9. The State also argued that this inability to calculate the
precise
amount of undistributable child support payments underscores
its
position that the money is never earned by the State. We fail to
see
how the fluctuation in amount because of the need to adjust for
later
distributions affects the characterization of the funds at the time
of
transfer. The State did not explain, moreover, how reporting
amounts
transferred to the UPS from its child support collections is
any
different from other reporting that the State is required to
do.
Indeed, the State, in its brief and in a letter to the Director of
OCSE,
proposed a different dollar amount for the period at issue,
which
indicates the State's ability to calculate an amount. See State's
Br.,
p. 11; State's Appeal File, Ex. F.
10. While the State provided an affidavit stating that $24,820 of
the
amount transferred to the UPS between 1985 and 1990 was
ultimately
distributed to claimants or returned to the IV-D agency, and that
it
requested the return of another $33,140 back from the UPS as of
December
31, 1990, this would not appear to be representative of
amounts
transferred to the UPS since the State admitted it had transferred
some
funds to the UPS after only two years.
11. The State would be entitled to such an adjustment to the
$449,550
if it can show that it returned or distributed any of this amount,
as
the State alleged it did, and that such an adjustment would not
overlap
an adjustment for amounts improperly transferred to the UPS.
The State
would also be entitled to a decreasing adjustment for a
proportional
share of the expenses related to the transfer and
subsequent
administration of these funds under the UDAPA as discussed in the
text
above.
12. The State provided several examples of "bad debt"
situations
arising in its administration of the IV-D program. See
State's Br., p.
9, n. 9; State's Reply Br., p. 4, n. 3. One of them
involved the State
intercepting a father's state tax refund on May 2, 1988
and erroneously
paying it to the mother. OCSE found that the cost to
the State of
paying the father what it could not collect from the mother was
a "bad
debt," noting that the mother had submitted a notarized statement
giving
custody to the father on March 14, 1988, so the interception was
an
error. State's Appeal File, Ex. D, unnumbered
p.