DEPARTMENT OF HEALTH AND HUMAN SERVICES
Departmental Appeals Board
Appellate Division
SUBJECT: New Mexico Human Services Department
DATE: April 16, 1992
Docket No. 91-90
Decision No. 1325
DECISION
The New Mexico Human Services Department (New Mexico) appealed a
funding
reduction imposed under section 403(h) of the Social Security Act
(Act)
by the Office of Child Support Enforcement (OCSE). Based on an
audit
for Fiscal Year 1988 of New Mexico's child support enforcement
and
paternity establishment program, OCSE determined that New Mexico
had
failed to substantially comply with the same requirements of the Act
for
a second consecutive period. Accordingly, a penalty was imposed in
the
form of a two percent reduction ($933,025) of the amount
otherwise
payable to New Mexico for Aid to Families with Dependent Children
(AFDC)
during the period April 1, 1988, to March 31, 1989 (Two
Percent
Penalty).
New Mexico challenged the imposition of the Two Percent Penalty and
the
validity and interpretation of the regulations that govern
the
disallowance.
For the reasons stated below, we uphold OCSE's decision to reduce by
two
percent New Mexico's AFDC funding for the one-year period
beginning
April 1, 1988. We conclude that:
OCSE properly applied its interpretation of the statutory
term
"substantial compliance" to the time periods at issue;
OCSE reasonably interpreted the statutory requirements for
"substantial compliance" to mean that a state must be taking
action to
provide basic child support enforcement services
(required under the
Act) in at least 75 percent of the cases
requiring those services;
OCSE reasonably interpreted and applied the requirements of
section 403(h)(3);
OCSE was not required to promulgate its statistical sampling
methodologies as a rule under the Administrative Procedure Act;
OCSE properly applied the regulations to determine the time
periods for relevant audits and the penalty at issue here; and
OCSE's implementing regulations do not call for full rather
than substantial compliance, and therefore are consistent with
the
Act.
STATUTORY AND REGULATORY PROVISIONS
Since July 1975, each state that operates an AFDC program under Title
IV-A
of the Act is required to have a child support enforcement and
paternity
establishment program under Title IV-D of the Act. Section
402(a)(27)
of the Act. OCSE has the responsibility for auditing state
Title IV-D
programs, pursuant to section 452(a)(4) of the Act, and
evaluating whether
the actual operation of these programs conforms to
statutory and regulatory
requirements. Following adoption of Title
IV-D, the participating
states were given 18 months by Congress, until
December 31, 1976, to
establish and begin operating their programs
before compliance audits
actually began. Under the applicable statute,
a state was subject to a
penalty consisting of a five percent reduction
of its Title IV-A funds if the
audit found that the state was not in
compliance. Congress, however,
continuously extended the initial
moratorium on imposition of this funding
reduction, so that no reduction
was ever imposed during the first eight years
of the program's
operation, although OCSE did continue its annual audits.
On August 16, 1984, Congress adopted the Child Support
Enforcement
Amendments of 1984, section 9 of Public Law 98-378 (1984
Amendments).
As amended, section 403(h)(1) of the Act provides that:
[If] a State's program operated under Part D is found as
a
result of a review conducted under section 452(a)(4) not to
have
complied substantially with the requirements of such part
for
any quarter beginning after September 30, 1983, and
the
Secretary determines that the State's program is not
complying
substantially with such requirements . . . . the
amounts
otherwise payable to the State under this part [A] for
such
quarter and each subsequent quarter, prior to the first
quarter
throughout which the State program is found to be in
substantial
compliance with such requirements, shall be reduced . . .
.
(Emphases added.)
The amended section then provides for graduated reductions, starting
with
a reduction of "not less than one nor more than two percent" and
increasing
to a maximum of five percent with each consecutive finding
that a state is
not complying substantially with the same Title IV-D
requirements that had
been cited in previous findings.
The 1984 Amendments provided for the continuation of compliance
audits,
which could, in appropriate cases, be scheduled as infrequently as
once
every three years for states in compliance, or annually for
states
previously determined not to be in compliance. Section 452(a)(4)
of the
Act. Rather than directing immediate imposition of a penalty on
a state
that failed an audit for the first time, the Amendments provided that
a
reduction could be suspended while the state was given an opportunity
to
bring itself into compliance through a corrective action plan
approved
by OCSE. Section 403(h)(2)(A)-(C) of the Act, as
amended. If a
follow-up review of a state's performance during the
corrective action
period showed that the state still had not achieved
substantial
compliance, a penalty of one to two percent would be
imposed. Section
403(h)(1)(A) of the Act. Continuing
noncompliance with the same
requirements would bring higher penalties.
Section 403(h)(1)(B)-(C) of
the Act.
Section 9(c) of the 1984 Amendments provides that they "shall be
effective
on and after October 1, 1983."
OCSE proposed regulations implementing the Amendments on October 5,
1984,
49 Fed. Reg. 39488 (1984), and issued final regulations on October
1,
1985. 50 Fed. Reg. 40120 (1985) (1985 Regulations). The
1985
Regulations amended parts, but not all of the audit regulations at
45
C.F.R. Part 305. 1/ Section 305.20(a)(1), as amended by the
1985
Regulations, provided that, for the fiscal year (FY) 1984 audit
period,
certain listed audit criteria (related primarily to administrative
or
fiscal matters) "must be met." Section 305.20(a)(2) also provided
that
the procedures required by nine audit criteria (related to
basic
services provided under a IV-D state plan) "must be used in 75
percent
of the cases reviewed for each criterion . . . ." Two of these
criteria
are at issue in this appeal. All the service-related audit
criteria are
based on sections of the Part 305 regulations which (with
minor
exceptions not relevant here) were originally published in 1976,
with
minor amendments in 1982 (the 1982 Regulations). The number of
audit
criteria required to be in substantial compliance increased each
year
from 1984 until 1988 at which time the states were required to
have
brought all criteria listed in the regulation into
substantial
compliance.
Thus, under the 1985 Regulations, substantial compliance for Fiscal
Year
(FY) 1984 audits was measured by audit criteria from the
1982
Regulations, but a state had to be providing the required services in
75
percent of the cases requiring them (75 percent standard). If a
state
was found not to be in substantial compliance and a penalty was
imposed,
it could appeal or offer a corrective action plan of up to one
year. If
the plan was approved by the Secretary, the penalty would be
suspended
temporarily. In follow-up reviews conducted after a
corrective action
period, OSCE would examine only the audit criteria that the
state had
previously failed or had complied with only marginally (75 percent
to 80
percent of the cases reviewed for that criterion). Sections
305.10(b)
and 305.99, as amended. Failure to achieve substantial
compliance
during the follow-up review would result in imposition of the
original
penalty. If the state had not achieved substantial compliance
in the
failed areas by the next FY audit, no further suspensions or
corrective
action plans would be permitted. Also, an increased penalty
of two to
three percent would be imposed. Section 305.99(c)(2).
BACKGROUND
OCSE's program results audit for New Mexico in FY 1984 (October 1,
1983,
through September 30, 1984) resulted in a February 25, 1987, notice
to
New Mexico that it had been found to have failed to
comply
"substantially with the requirements of Title IV-D of the Act" in
two
areas of the audit criteria, 45 C.F.R. .305.24(c)
(establishing
paternity) and 45 C.F.R. .305.33(g) (state parent locator
service).
Rather than appeal the findings, New Mexico opted to propose
a
corrective action plan which OCSE approved. The corrective
action
period ran April 1-June 23, 1987. OCSE then conducted a
follow-up
review for the July-September 1987 quarter which covered New
Mexico's
performance on the previously unmet criteria to determine the
success of
the corrective action plan. OCSE also conducted an audit of
New
Mexico's performance on all criteria for FY 1987 covering the period
of
October 1, 1986, through September 30, 1987. These review
audits
resulted in a December 2, 1988, notice of substantial noncompliance
with
the previously unmet audit criteria (1988 Notice). This finding
of
noncompliance led to the imposition by OCSE of a one percent penalty
in
the form of a funding reduction of the amount otherwise payable to
New
Mexico for AFDC during the period April 1, 1987, through March 31,
1988
(One Percent Penalty). New Mexico appealed the One Percent Penalty
to
this Board, challenging both legal and factual findings of OCSE.
On
February 6, 1991, we affirmed the one year, one percent reduction
in
funding. New Mexico Human Services Dept., DAB No. 1224 (1991)
(New
Mexico I). New Mexico then appealed that case to the United
States
District Court for the District of New Mexico, No. CIVIL 91-176
SC.
That case is currently pending.
On May 24, 1991, OCSE notified New Mexico that, based on the annual
audit
for FY 1988 (October 1, 1987 through September 30, 1988), it had
again been
found not to have complied substantially with the
requirements of Title IV-D
of the Act. Because the findings for the
audit criteria for
establishing paternity (section 305.24(c)) and state
parent locator service
(section 305.33(g)) were consecutive findings of
noncompliance for those
criteria, no corrective action period was
available. Section
305.99(f). OCSE imposed a funding reduction (the
Two Percent Penalty)
of $933,025 against New Mexico's Title IV-A program
for the period April 1,
1988, to March 31, 1989. 2/ New Mexico appealed
this decision to the
Board. 3/
For purposes of clarity in the following discussion, we have
included
below a list of the involved actions and time frames:
--Initial Audit covering FY 1984 for Oct.1, 1983 to Sept. 30,
1984.
(Interim Audit Report released Oct. 2, 1986) (Final Audit
Report
released Jan. 7, 1987) --Notice of One Percent Penalty
dated
Feb. 24, 1987 --One Percent Penalty imposed effective April
1,
1987-March 31, 1988 --Corrective Action Plan effective April
1,
1987-June 23, 1987 --Notice of Approval of Plan dated May 12,
1987
--Follow-Up Review of Plan conducted the quarter of July through
Sept.
1987 --Follow-Up Audit covering FY 1987 for Oct. 1, 1986- Sept. 30,
1987
(Final Audit Report released July 18, 1988) --Notice
of
reimposition of One Percent Penalty dated Dec. 2, 1988 --Annual
Audit
for FY 1988 conducted Oct. 1, 1987-Sept. 30, 1988 (Interim Audit
Report
released July 18, 1990) (Final Audit Report released Nov.
15,
1990) --Notice of Two Percent Penalty dated May 24, 1991
--Two
Percent Penalty imposed effective April 1, 1988-March 31, 1989
In this proceeding, New Mexico did not dispute the auditor's findings
of
failure to take the appropriate action in any specific case
involving
the two criteria at issue, and we, therefore, affirm all of
these
findings. Instead, New Mexico relied solely on six legal
issues,
primarily challenges to the validity of the 1985 Regulations.
New
Mexico advanced two new issues and has supplemented, somewhat,
its
arguments concerning four issues previously considered in New Mexico
I.
4/. In the analysis below we examine first, in Section 1, the
four
issues previously considered, followed by Sections 2 and 3, in which
we
evaluate the two new issues.
ANALYSIS
1. New Mexico's challenges to the 1985 Regulations which
were
previously considered in New Mexico I are without merit.
On appeal, New Mexico reiterated, and to some degree supplemented,
four
arguments that it had raised in New Mexico I concerning the validity
of
the 1985 Regulations. Specifically, New Mexico argued that--
o The 75 percent compliance standard in the 1985 Regulations
was
unlawfully applied retroactively to the period covered by the FY
1984
Audit, and hence, the Two Percent Penalty assessment must fail, since
it
was premised on New Mexico's failure in the FY 1984 Audit.
o The 75 percent standard in the 1985 Regulations has no
empirical
basis and, therefore, was established in an arbitrary and
capricious
manner.
o The 1985 Regulations are invalid because they do not include or
apply
a definition of "violations of a technical nature," based on
section
403(h)(3) of the Act.
o The sampling methodology applied here is invalid because it was
not
promulgated as a regulation in accordance with the
Administrative
Procedure Act (APA).
OCSE disputed New Mexico's position but has also pointed out that
the
Board is bound by all applicable laws and regulations under 45
C.F.R.
.16.14. OCSE noted that while the regulations at issue were
"effective"
on the date of final publication (October 1, 1985), section
305.20(a),
which sets out the 75 percent standard for service-related
audit
criteria, states that it is to be applied "[f]or the fiscal year
1984
audit period." The preamble to the 1985 Regulations confirmed that
OCSE
intended to apply this section to FY 1984 audits, based on the
October
1, 1983, effective date of the 1984 Amendments. 50 Fed. Reg. at
40126,
40138.
We are, of course, bound by the Department's regulations, even if
invalid
under a constitutional analysis, if those regulations are
applicable.
While some of the issues here clearly would be controlled
by 45 C.F.R.
.16.14, New Mexico's arguments also raise interrelated
questions of
applicability. We do not need to sort out these issues
precisely,
however, since we conclude that all of New Mexico's arguments
concerning the
1985 Regulations are completely without merit. 5/ Our
reasons are:
o Section 403(h)(1) of the Act, as
amended, requires reductions
for states not found to be in substantial
compliance in audits "for any
quarter beginning after September 30, 1983,"
and Congress explicitly
made the 1984 Amendments effective on October 1,
1983. The
circumstances here are, therefore, distinguishable from those
in Bowen
v. Georgetown Hospital, 488 U.S. 204 (1988) (Georgetown), where
the
agency published cost-limit rules for Medicare providers in 1984
and
attempted to apply the rules to 1981 costs, in the absence of
any
statutory authority to do so. Here, the statute expressly made
the
change in the standard retroactive. Ohio Dept. of Human Services
v.
Sullivan, No. C-2-91-212, slip op. at 17 (S.D. Ohio March 31,
1992)
(Ohio v. Sullivan).
o In support of its argument that the
statutory language setting a
1984 effective date was not an express
authorization for retroactive
rulemaking, New Mexico argued that the
legislative history of the 1984
Amendments shows that Congress intended that
OCSE's implementing 1985
Regulations would have prospective effect
only. The legislative history
on which New Mexico relied, however, does
not refer to OCSE's
implementation of the substantial compliance standard;
instead, it
refers to the expectation by Congress that OCSE would issue
new
regulations focusing on whether states were effectively
attaining
program objectives (in addition to meeting the existing state
plan
requirements). 6/ S. REP. No. 387, 98th Cong., 2d Sess. 32-33
(1984).
o The effect of the 1985 Regulations here is also
significantly
different from the effect of the cost-limit rules considered
in
Georgetown. There, Medicare providers were entitled to a specific
level
of reimbursement under the regulations in effect in 1981, and the
1984
rules would have retroactively reduced that level. Here, the
AFDC
funding reduction applies to periods after the 1985 Regulations
were
published.
o The audit criteria at issue here were
in the existing
regulations, had been in effect without substantial change
since 1976,
and were based on IV-D state plan requirements. 7/ The 75
percent
standard is more lenient than the standard in the existing
regulations,
which provided that New Mexico must "meet" the criteria.
Even if New
Mexico is correct that OCSE could not reasonably have implemented
this
by requiring action in 100 percent of the cases, and that the
existing
regulations lacked explicit statistical audit criteria to
guide
enforcement of the program requirements, the existing
regulations
clearly contemplated a compliance level greater than 75 percent.
8/
Certainly, the 1984 Amendments evidence a strong intention to
finally
hold the states accountable for providing services 9/, and we see
no
basis in their language or history to support New Mexico's
apparent
interpretation that Congress meant "substantial compliance" to
be
something less than the 75 percent standard adopted by OCSE.
See
discussion in Ohio v. Sullivan, at 32-34.
o More important, the 1985 Regulations
afforded New Mexico a
corrective action period. New Mexico had notice
of the 75 percent
standard prior to this period, and more than a year to
adjust its
administrative practices before the follow-up review period
began.
o The 1985 Regulations merely interpret the statutory
term
"substantial compliance." Obviously, the range of compliance
levels
OCSE could adopt is limited by this term, particularly when it is
read
together with section 403(h)(3) of the Act (which permits a finding
of
substantial compliance only when any noncompliance is of a
technical
nature). A level lower than 75 percent would have been
subject to
challenge as inconsistent with statutory intent.
o Since the 75 percent standard
reasonably interprets the
statutory term "substantial compliance," the
circumstances here are
distinguishable from those considered in Maryland v.
Mathews, 415 F.
Supp. 1206 (D.D.C. 1976), where the court found that
regulations setting
"tolerance levels" for AFDC eligibility determination
errors were not
reasonably related to the purposes of the statute.
Moreover, unlike the
"tolerance levels" in Maryland, the 75 percent standard
here had an
empirical basis in past performance levels measured through
OCSE's
audits. While audit results from FYs 1980 and 1981 showed that
some
states were not yet achieving 75 percent levels, other states
were
achieving 100 percent levels at that time. See Appeal Record cited
in
Mississippi Dept. of Human Services, DAB No. 1267, at 17 (1991).
OCSE
could reasonably expect all states to be achieving 75 percent levels
by
FY 1984. 10/ In addition, while New Mexico implied that this
factual
basis had to be published as an integral part of the
rulemaking
proceeding, OCSE stated in the preamble that this level was based
on its
experience with past audits. 50 Fed. Reg. at 40121.
o Even in the absence of the 1985
Regulations, we would reject New
Mexico's position that it should be found to
meet the substantial
compliance standard. The record here supports the
finding of
consecutive audits that, in a substantial number of the cases
entrusted
to it where paternity had not been established or the absent parent
had
not been located, New Mexico did not take any action to provide
these
services. Yet, establishing paternity and locating parents
are
absolutely essential to the overall child support program under
Title
IV-D of the Act. If New Mexico's argument were accepted, then a
large
number of children would not receive the assistance Congress
has
provided them, and the AFDC program would continue to bear costs
that
should be borne by the absent parent. Thus, we conclude that the
New
Mexico did not achieve substantial compliance under any
reasonable
reading of that term.
o We also reject New Mexico's arguments
based on section 403(h)(3)
of the Act. That section permits OCSE to
find substantial compliance
only where any noncompliance is "of a technical
nature which does not
adversely affect the performance of the child support
enforcement
program." OCSE implemented this provision through the 1985
Regulations,
determining that failure to meet the critical service-related
audit
criteria in these regulations is not simply technical, since
the
required activities are essential to an effective program. 50 Fed.
Reg.
at 40130; see Ohio v. Sullivan, at 33. We find that interpretation
to
be reasonable, as applied here, since the State's failures
under
service-related criteria based on consecutive audits would
adversely
affect program performance; New Mexico took no action whatsoever
to
provide basic child support services in a significant number of cases.
o New Mexico, in the current appeal,
continued to misconstrue the
meaning and effect of section 403(h)(3) of the
Act. Contrary to what
New Mexico argued in this appeal (New Mexico's
Br. at 21), section
403(h)(3) does not provide "an exception to the penalty
provisions."
Rather, section 403(h)(3) adds a restriction on the Secretary
in
determining that a state meets the substantial compliance standard.
A
state that is not in "full" compliance with the program requirement
may
be determined by the Secretary to be in substantial compliance
under
section 403(h)(3) "only if" the Secretary determines that
any
noncompliance "is of a technical nature which does not adversely
affect
the performance of the child support enforcement program."
(Emphasis
added.)
The Secretary necessarily had to take section 403(h)(3)
into
account when promulgating the compliance criteria that
permits
states to be determined to be in substantial compliance if
they
meet those criteria. Moreover, the preamble to the final
1985
Regulations specifically advised the states that: "No failure
to
meet these criteria may be construed as noncompliance of
a
technical nature." 50 Fed. Reg. at 40122.
o New Mexico asserted that the 1985
Regulations failed to address
the sampling methodology that OCSE intended to
use in program results or
follow-up audits. New Mexico argued that this
violates Section 551(4)
of the APA, because the sampling methodology was an
integral part of the
audit process. However, the sampling methodologies
used by OCSE are
general statements of policy or rules of agency procedure or
practice,
not legislative rules. The audit methodologies are complex
procedures
which integrate published governmental and professional standards
as
well as program rules and the auditor's own sound judgment. Thus,
OCSE
was not required to establish the methodology through notice and
comment
under the APA. Ohio v. Sullivan, at 20-21.
Thus, we reject New Mexico's challenges to the 1985 Regulations which
New
Mexico previously raised in New Mexico I.
2. The Two Percent Penalty is correctly based on the FY 1988
Audit.
In the first new issue raised by New Mexico for purposes of this
appeal,
New Mexico argued that, under the 1985 Regulations, the Two
Percent
Penalty could have been imposed only as a result of a finding
of
noncompliance in the FY 1989 Audit, and any penalty for that
finding
would be effective October 1, 1988, through September 30,
1989.
Therefore, New Mexico asserted that the Two Percent Penalty should
be
rescinded because it was based on the FY 1988 Audit, and was
effective
for the earlier period beginning April 1, 1988, and ending March
31,
1989.
We find that New Mexico's position is in direct conflict with
section
403(h) of the Act and lacks any support in the 1985
Regulations. The
statute and the 1985 Regulations set up a system
whereby a second
penalty shall be imposed immediately after the first penalty
when a
state, for the second consecutive time, fails to be in
substantial
compliance with the same program requirements.
Section
403(h)(2)(C)(iii) of the Act requires that the first penalty be
applied
to quarters ending after the expiration of a state's corrective
action
period when the state fails to achieve substantial compliance.
11/ As
New Mexico's corrective action period ended June 23, 1987, and
New
Mexico failed to achieve substantial compliance in its follow-up
review,
the One Percent Penalty was correctly imposed by OCSE under
this
provision beginning April 1, 1987, and ending March 31, 1988. The
April
1, 1987, quarter ended seven days after the expiration of the
corrective
action period, and thus, was the proper quarter under the statute
to
begin the One Percent Penalty.
Section 403(h)(1)(B) authorizes an increased penalty (here, the
Two
Percent Penalty), based on a finding of noncompliance "if the finding
is
the second consecutive such finding made as a result of such a
review."
New Mexico failed the same two service-related criteria in the
original
FY 1984 Audit (covering October 1, 1983, through September 30,
1984), in
the follow-up review (covering July 1 through September 30, 1987),
and
in the FY 1987 Audit (covering October 1, 1986, through September
30,
1987). New Mexico then failed to achieve substantial compliance
with
these same criteria for the second consecutive time in the FY 1988
Audit
(covering October 1, 1987, through September 30, 1988). 12/
See the
time line in the Background section at page 6. Thus, OCSE
properly
imposed the Two Percent Penalty for the period, April 1, 1988,
through
March 31, 1989, which immediately followed the period for the
One
Percent Penalty. A review of New Mexico's audit history shows that
the
Two Percent Penalty was clearly based on the "second consecutive
such
finding" of failures (as required by section 403(h)(1)(B) of the
Act).
It was properly imposed immediately subsequent to the first
penalty
period, which, in turn was triggered by the quarter ending after
the
expiration of the corrective action period as prescribed by
section
403(h)(2)(C)(iii) of the Act.
Moreover, section 305.100(a)(2) implements the foregoing provisions
by
providing for funding reductions by:
(2) Not less than two . . . percent . . . if the finding is
the
second consecutive finding as a result of an audit for a
period
beginning as of the second one-year period following
the
suspension period not to exceed one year;
Here, the suspension period preceding the One Percent Penalty ended
with
the imposition of the One Percent Penalty as of April 1, 1987, so
that
section 305.100(a)(2) required the Two Percent Penalty to be imposed
as
of the second one-year period following the end of the suspension
period
-- which is precisely the period used by OCSE. Moreover, as the
audit
history described above indicates, this penalty is based on a
"second
consecutive finding as a result of an audit." The FY 1988 Audit
serves
as such an audit. Thus, the Two Percent Penalty imposed here is
fully
consistent with the 1985 Regulations.
New Mexico incorrectly interpreted section 305.100(a)(2) to mean that
the
audit upon which the Two Percent Penalty was based had to be for a
period
beginning as of the second one-year period following the
suspension
period. The regulation, however, refers not to the timing of
the
audits, but, as discussed above, to the timing for the imposition of
the
penalty. The timing of audits is prescribed elsewhere in
the
regulations. See sections 305.10 and 305.11. Moreover, when
section
305.100(a)(2) is read alongside section 305.100(a)(1) and 305.100(d),
it
becomes clear that section 305.100(a)(2) is referring to the time
frame
(and amount) of the penalty, not to the timing of the audit.
Section
305.100(d) contemplates a continuous period of penalty following the
end
of the suspension period until the first quarter throughout which
a
state's program is in substantial compliance. Section
305.100(a)(1)
specifies a penalty of not less than one nor more than two
percent for a
period "not to exceed the one-year period following the end of
the
suspension period." Thus, when section 305.100(a)(2) refers to
"a
period beginning as of the second one-year period following
the
suspension period not to exceed one year," it would have to be
referring
to the period for the increased penalty amount in order to be
consistent
with section 305.100(a)(1) and 305.100(d). We would agree
with New
Mexico that if the subsection were read in isolation, the phrase
"for a
period beginning . . . " might ordinarily be thought to refer to
the
preceding term "audit." However, as we explained above, this
subsection
clearly cannot be so read here. Indeed, New Mexico's reading
could
cause a break in the penalty period for a state that had
continuously
failed to achieve substantial compliance, a result that was
certainly
not contemplated by the statute.
New Mexico's further confusion concerning the 1985 Regulations seems to
be
caused by the fact that section 305.100(a)(2) identifies the
beginning of the
Two Percent Penalty period by referring to a period
"following the suspension
period" but does not expressly state when the
suspension period must
expire. However, under section
403(h)(2)(C)(iii), the penalty begins
for "quarters ending after the
expiration of the [corrective action period],"
and thus, by statute, the
suspension must end with the imposition of One
Percent Penalty. 13/
New Mexico nevertheless suggested that section 305.99(d)(3) defines
the
expiration of the suspension period, and thus, for New Mexico,
the
suspension should have ended September 30, 1987. Section
305.99(d)(3)
merely provides that the initial penalty shall be suspended
until the
Secretary makes a determination that a state has implemented
its
corrective action plan but has failed to achieve substantial
compliance
with the previously unmet criteria. For a case such as this
one, the
determination must be based on the state's performance as of the
first
full three-month period after the corrective action period.
The
effective date, however, of any resulting penalty or of the
actual
expiration of the suspension is neither specified nor referred to
in
this section. Consequently, OCSE properly relied upon
section
403(h)(2)(C)(iii) of the Act to determine the beginning of the
first
penalty and, thus, the expiration of the suspension.
An example in the preamble to the 1985 Regulations is illustrative of
this
analysis. An original audit is performed on a state in spring of
1985
for FY 1984. Based on that audit, the state is found not to be
in
substantial compliance with two service-related criteria, and a
penalty
is imposed effective July 1, 1985. However, the state chooses a
10
month corrective action period from July 1, 1985, to April 30,
1986,
during which time the penalty is suspended. Based on the three
month
follow-up review, the state is still found to be in noncompliance,
and
the penalty is reinstated effective April 1, 1986 (the quarter
the
corrective action plan expired) through April 30, 1987. As the
state is
now subject to annual audits, an audit is done May 1987, for FY
1986,
and as a result of that audit, the state is found to have failed
the
same criteria for a second consecutive time. Therefore, an
increased
penalty is imposed as of May 1, 1987, the period immediately
following
the prior penalty, for a period not to exceed one year. 50
Fed. Reg.
40126.
New Mexico had also suggested that issues of fairness had caused
the
drafters of the 1985 Regulations to build "grace" periods into
the
timing of the audits because a new audit might be underway before
a
state knew its corrective action plan had failed. However, the
"grace"
periods suggested by New Mexico under its interpretation of
the
regulations would have the unfortunate result of extending penalties
for
states that had brought their programs into compliance sooner.
Also,
the compression of time periods that New Mexico experienced here,
was
due, in large part, to its short corrective action period. Had
New
Mexico chosen a longer period, it would have had more time to bring
its
program into compliance, and it would have been able to further
delay
the imposition of the One and Two Percent Penalties. It is only
because
New Mexico chose a short corrective action period, which lasted
less
than a calendar quarter, that the corrective action period began and
the
suspension period expired simultaneously under the relevant
statutory
directives.
In conclusion, we find that OCSE correctly imposed the Two Percent
Penalty
for the period April 1, 1988, through March 30, 1989, based on
the FY 1988
Audit.
3. The 1985 Regulations do not call for full compliance with
program
requirements as alleged by New Mexico.
In what may also be considered a new issue raised by New Mexico
for
purposes of this appeal, New Mexico argued that the 75 percent
standard
found in section 305.20 is inconsistent with section 403(h) of the
Act
in that it calls for full compliance by states rather than
substantial
compliance. See State Br. at 26-33. New Mexico
suggested that the 1985
Regulations alone, or in conjunction with other
program requirements,
require "full compliance" from the states. New
Mexico argued that in
imposing the 75 percent compliance standard for each
specified
service-related audit criterion, the 1985 Regulations require
full
compliance with the criteria as a whole. New Mexico argued that
there
may be many reasons why a state could fail the 75 percent standard for
a
particular criterion, and that "not every failure can be
automatically
categorized as having a significantly adverse effect on
program
performance." Id. at 32. New Mexico suggested that this
Department
should apply "judgment" and "analysis" and make ad hoc decisions
of
performance rather than automatically impose the regulatory
standards.
Finally, New Mexico argued that the 1985 Regulations never refer
to the
difference between full and substantial compliance as indicated
in
section 403(h)(3) of the Act. (This argument has already been
addressed
in section 1 above.)
New Mexico is clearly incorrect in suggesting that the 1985
Regulations
call for full rather than substantial compliance. Both the
regulations
and their preamble explicitly state that the regulations
implement the
substantial compliance standard of section 403(h) of the
Act. Thus, the
prefatory paragraph in section 305.20 provides that for
purposes of
section 403(h) of the Act, a state must meet the requirements set
out in
that section, including the 75 percent compliance standard, "in order
to
be found to have an effective program in substantial compliance with
the
requirements of title IV-D of the Act." Moreover, it is obvious
from
the very terms of the 1985 Regulations (e.g. the 75 percent
compliance
standard for service-related criteria) that these regulations
are
implementing the substantial compliance standard and do not call
for
"full" compliance. Even though a state must meet the 75
percent
standard for each specified service-related criterion, the state
is
still being evaluated on a substantial compliance standard in regard
to
specific criteria, not a full compliance standard.
Moreover, when the 1985 Regulations are considered alongside other
program
rules, such as those relating to state plan provisions in
section 454 of the
Act or to those relating to laws and procedures to
improve program
effectiveness under section 466 of the Act, it remains
apparent that the 1985
Regulations do not call for anything more than
substantial compliance with
the program requirements covered by the 1985
Regulations. Although the
1985 Regulations provide additional
incentives for states to implement and
comply with the provisions of
their state plans and to improve the
effectiveness of their programs,
the 1985 Regulations operate separately from
other statutory provisions
such as sections 454 and 466 of the Act, and
require only that states be
in "substantial compliance" with the program
requirements, including the
service-related audit criteria at issue.
Furthermore, the 1985 Regulations reasonably require states to meet the
75
percent compliance standard for each of the service-related
audit
criteria. Each of the program services identified is a
significant
element of a state's program and is independently required of
states
under state plan provisions required by section 454 and by
section
402(a)(27) of the Act. In addition, these services are
mutually
dependent, and a state's failure in one area can have broad
implications
for the overall effectiveness of its program. For example,
if, as here,
a state fails to establish paternity or fails to locate a
missing parent
in particular cases, it will be unable to proceed any further
on these
cases. Thus, it obviously will be unable to provide other
services
contemplated by the program and meet the ultimate goal of
providing
child support in the cases. New Mexico clearly did not
establish how
its failings for service-related criteria could, in any sense,
be
considered to be noncompliance of a technical nature.
In complaining of burdens imposed by the 1985 Regulations, New
Mexico
overlooks the effect of provisions such as those that permit
penalties
to be suspended while states attempt to improve their performance
by
implementing corrective action plans. When such provisions come
into
play, a state must fail a follow-up audit in addition to the
original
audit before a penalty can be imposed even at the one percent
level.
Finally, the rules at issue must be used by OCSE to evaluate the
programs
of all the states in a national program. Rather than
precluding
judgment, analysis, and ad hoc decisions, the 1985
Regulations preclude
arbitrary and capricious decisions among the
states.
Thus, we conclude that the 1985 Regulations do not call for
full
compliance and are consistent with the purposes of section 403(h) of
the
Act..CONCLUSION
For the reasons stated above, we affirm the imposition of the penalty
to
reduce by two percent New Mexico's funding for the period April 1,
1988,
to March 31, 1989.
__________________________
Judith
A. Ballard
___________________________
Norval
D. (John) Settle
___________________________
Donald
F. Garrett Presiding
Board Member
1. All further references to the regulations will omit "45
C.F.R."
unless required for clarity.
2. The notice also notified New Mexico that it had failed to
achieve
substantial compliance in seven other audit criteria, and a one
percent
penalty would be imposed for the quarter beginning April 1,
1991. The
penalty would be suspended if New Mexico submitted a
corrective action
plan for these criteria that OCSE approved. The
findings pertaining to
those criteria are not at issue here.
3. New Mexico filed a pleading entitled "Appellant's Combined
Request
for Admissions, Interrogatories and Request for Production of
Document,"
and also requested an evidentiary hearing. In its Brief, New
Mexico
stated that it had not received satisfactory responses to its
pleading
and requested the right to reserve argument and supplement the
record
until OCSE complied with certain discovery requests or the Board
ruled
on the requests. By letter dated February 18, 1992, New Mexico
waived
the hearing request and stated that the materials it received
on
February 5, 1992, from OCSE negated keeping the record open any
longer.
Therefore, no rulings are necessary on these matters.
4. Several of these issues have also been extensively considered
in
Mississippi Dept. of Human Services, DAB No. 1267 (1991); Arizona
Dept.
of Economic Security, DAB No. 1255 (1991); District of Columbia Dept.
of
Human Services, DAB No. 1228 (1991); Oklahoma Dept. of Human
Services,
DAB No. 1223 (1991); Ohio Dept. of Human Services, DAB No. 1202
(1990),
aff'd Ohio Dept. of Human Services v. Sullivan, No. C-2-91-212, slip
op.
at 17 (S.D. Ohio March 31, 1992).
5. Our conclusion here closely parallels our analysis of
virtually
identical arguments made by the parties in Board decisions on
other
Title IV-D appeals: See cases cited at n. 5, supra, and New Mexico
Human
Services Dept., DAB No. 1224 (1991).
6. The 1985 Regulations also added new performance-related
indicators.
Sections 305.20(c) and (d) and 305.98.
7. New Mexico seemed to argue that since there had previously been
no
teeth to the statute, due to the moratoria, there was no
legal
obligation for the State to improve its performance, and that
the
compliance standard was zero percent, not 100 percent. The
moratoria
only delayed imposition of the penalty, however. Congress did
not
repeal this requirement or guarantee that no penalty would ever
be
imposed. Moreover, the statute at all times required New Mexico to
have
in effect a child support enforcement plan, as a condition for
receiving
AFDC payments and as a condition for receiving funding under Title
IV-D.
Sections 402(a)(27) and 455(a) of the Act (1983).
8. The existing regulations required the states to have and be
using
written procedures detailing step by step actions to be taken.
Sections
305.1 and 305.24; 45 C.F.R. Part 303 (1983). Although no
reduction had
actually been imposed based on the existing audit criteria,
this was due
to the moratoria.
9. The Senate Finance Committee Report stated:
In view of the changes proposed . . ., the penalty provisions
of
the law will apply only in cases where States not only
fail
substantially to carry out the requirements of the law but
also
refuse to undertake the necessary changes to correct
that
situation. For this reason, the Committee cannot foresee
any
situation in which legislative action to suspend these
revised
penalties would be appropriate.
S. REP. No. 387, 98th Cong., 2d Sess. 33 (1984).
10. The percentages given in the draft analyses by OCSE of 1980
and
1981 audit results (Appeal Record cited in DAB No. 1267, at 17)
are
derived simply by dividing the number of complying sample cases by
the
total number reviewed. If OCSE had instead used the same method
for
estimating compliance levels it used in the 1984 and 1985 audits for
all
states, the compliance percentages shown on the draft analyses for
the
earlier years would have been higher. Also, in Maryland, the
Secretary
had acknowledged that some errors in making eligibility
determinations
were unavoidable due to the complex nature of the
requirements. Here,
New Mexico did not argue that the service-related
requirements were
complex or that there was any barrier to meeting those
requirements
which could not be overcome.
11. "In the case of a State whose penalty suspension ends pursuant
to
subparagraph (B)(iii) [the Secretary's determination of the failure
of
the corrective action plan], the penalty shall be applied to
all
quarters ending after the expiration of the time period specified
in
such subparagraph ["appropriate time period (as specified
in
subparagraph (A)(i)" which, in turn, refers to the time period
the
Secretary finds to be appropriate for the corrective action plan] . .
.
." Section 403(h)(2)(C)(iii) of the Act.
12. Once a state is determined not to be in substantial
compliance,
section 452(a)(4) of the Act requires audits to be performed "not
less
often than annually" until the state has brought its programs
into
substantial compliance, after which the normal triennial
audits
recommence.
13. The preamble to the 1985 Regulations makes this clear. It
first
notes that under section 305.100(d) the penalty will be effective
for
any quarter that ends after the expiration of the suspension
period. 50
Fed Reg. at 40125. Then, after an example similar to
this case, the
preamble notes that the sample state's AFDC payments will be
reduced
[i.e., the penalty] "from the beginning of the quarter in which
the
corrective action period expires." Id. at