New York State Department of Social Services, DAB No. 1336 (1992)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT:  New York State Department  of Social Services

DATE:  June 15, 1992
Docket Nos. 91-72 and 91-85
Decision No. 1336

DECISION

The New York State Department of Social Services (NYSDSS) appealed a
determination by the Regional Director of the Division of Cost
Allocation (DCA) disallowing $9,545,607 in federal financial
participation (FFP), claimed by NYSDSS under various public assistance
programs.  NYSDSS also appealed a follow-up determination by the Health
Care Financing Administration (HCFA) disallowing $4,323,996 claimed
under Title XIX (Medicaid) of the Social Security Act (Act) and included
in the amount disallowed by DCA.  The amount in dispute relates to costs
for the NYSDSS headquarters building in Albany, New York, known as the
Ten Eyck building, during the period from fiscal year (FY) 1977 through
FY 1989.  DCA disallowed claims for lease costs in excess of a use
allowance calculated by DCA and for certain payments in lieu of taxes.

    Summary

We conclude below that DCA correctly disallowed costs claimed for the
Ten Eyck building in excess of the use allowance, which is the amount
permitted under the plain terms of the applicable cost principles, and
rightly determined that interest costs for the building are unallowable.
We therefore uphold that part of the disallowance, subject to certain
adjustments in the calculation discussed below.  We also conclude that
the payments in lieu of taxes were allowable, since DCA did not
establish inconsistent treatment of such payments, and therefore, we
reverse the part of the disallowance relating to those payments..
Background

The Ten Eyck building was constructed between 1974 and 1976 by the Urban
Development Corporation (UDC), a corporate governmental agency under
state law.  N.Y. Unconsol. Law . 6254-6326 (McKinney 1991).  The
construction was financed by public bonds sold by UDC.  NYSDSS Brief
(Br.) at 3.  An agreement executed in 1974 between UDC and the State
Office of General Services (OGS) provided for semi-annual payments over
40 years from OGS to UDC to retire the construction bonds, as well as
payments to cover occupancy and maintenance expenses and payments in
lieu of taxes to the city, county, and school district of Albany, New
York.  DCA Br. at 2; NYSDSS Br. at 3: NYSDSS Exhibit (Ex.) 1.  At the
end of the 40 years, title will pass from UDC to New York State.  NYSDSS
Ex. 1, at 9, 28.

In 1976, NYSDSS began to occupy the building as its headquarters by
direction of OGS.  NYSDSS obtained a figure from OGS for the cost of
space per square foot in the building and used this figure as a basis
for calculating its claims for FFP.  NYSDSS indicated that this figure
was based on comparable fair market rental charges and included OGS
operational and maintenance costs, although no individual components of
actual costs were separately identified.  NYSDSS Br. at 4.

NYSDSS' claims for Ten Eyck costs for FYs 1984 and 1985 were reviewed
under the Single State Audit program.  The auditors questioned the use
of a comparable market rate, instead of actual costs.  NYSDSS Ex. 3;
NYSDSS Ex. 20, at 25.  DCA found that the method used by NYSDSS to
determine its cost of space was improper.  DCA determined that Ten Eyck
was a publicly owned building occupied by NYSDSS before October 1, 1980,
for which costs could be claimed only on the basis of a use allowance.
Disallowance determination (April 16, 1991).  Further, the use allowance
could be calculated only from actual, allowable costs, which did not
include any form of interest payments.  DCA also determined that, since
payments in lieu of taxes were not made on all State-owned buildings,
reimbursement of those costs in regard to Ten Eyck violated the
requirement for consistent treatment of costs set out in Office of
.Management and Budget Circular A-87 (OMB A-87). 1/  DCA extrapolated
the disallowance to cover a twelve-year period beginning with NYSDSS'
occupancy of the Ten Eyck Building, from FY 1977 through FY 1989.
NYSDSS Br. at 8.

   Analysis

I.  No FFP is authorized for space costs in Ten Eyck other than a use
allowance.

The essence of DCA's argument is that applicable regulations and cost
principles permit only one methodology for claiming federal
reimbursement for the costs of space used in a publicly owned building
under the circumstances here, i.e., a use allowance as provided in OMB
A-87, Attachment (Att.) B, C.2.d and B.11. 2/  The use allowance is a
"means of providing compensation in lieu of depreciation," must be
"based on acquisition cost," and is "computed at an annual rate not
exceeding two percent."  OMB A-87, Att. B, B.11.a, B.11.b, and B.11.d.
This Board has addressed the question of .alternative methods of
claiming publicly owned building space before, and has repeatedly
concluded that "compensation for publicly owned buildings can be only
through depreciation or use allowance."  See, e.g., Hawaii Dept. of
Social Services and Housing, DAB No. 662, at 2 (1985).  In Hawaii, as
here, the State sought to claim the comparable fair market rental costs
for space in a government building.  (The program involved was
different, but the same cost principles of OMB A-87 applied.)
Similarly, in Indiana Dept. of Public Welfare, DAB No. 230 (1981), FFP
was restricted to a use allowance for a building held by Indiana's
Office Building Commission and leased to the state Medicaid agency.  The
Board concluded that OMB A-87 required that "office space costs for
State-owned facilities should be calculated on the `use allowance' basis
and not on purported `lease' costs" and that "even if the leasehold
method was allowable, no tenant-owner relationship could exist between
the State and the State Office Building Commission."  Id. at 2 of Order
to Show Cause, incorporated into the Decision.  We thus find that DCA's
conclusion that the appropriate method for claiming public space costs
here is a use allowance is supported by the language of OMB A-87 and by
our prior decisions.

However, NYSDSS raised a variety of theories under which it sought to
justify claiming FFP in excess of the use allowance.  Some of these
theories are inconsistent with each other, or with NYSDSS' own actions.
We discuss each of the proffered bases for claiming FFP in turn below.
We conclude that NYSDSS did not show any authority under which it could
properly claim FFP for its costs in occupying Ten Eyck beyond the
permitted use allowance.

       A.  Lease purchase provision

NYSDSS argued that the cost of space set forth in the agreement between
UDC and OGS should have been allowed as a lease purchase arrangement,
under the following provision in the cost principles:

     Occupancy of space under rental-purchase or a lease with
     option-to-purchase agreement.  The cost of space procured under
     such arrangements is allowable when specifically approved by the
     Federal grantor agency.

OMB A-87, Att. B, C.2.e.  We find that this provision does not apply to
the transactions here between various components of the State.  Further,
we find that NYSDSS did not obtain the required specific approval..
i.  The provision for lease purchases in the cost principles is
inapplicable.

Since the agreement provides for title to be conveyed to the State of
New York only at the conclusion of the lease term, NYSDSS argued that
the State did not have a "material equity" in the building as if it were
a direct purchase.  NYSDSS Br. at 25.  NYSDSS described the lease as an
arm's-length transaction, and asserted that accounting principles
prescribed that such a transaction be treated as if it involved a
private party.  Further, NYSDSS argued that the lease was approved by
DCA when it approved NYSDSS' cost allocation plan (CAP) for the
building.

Contrary to NYSDSS' assertions, the State essentially owns Ten Eyck
already, because title is held by UDC, which is a component of the
State, created by State law, and funded by State bond offerings.  The
Board has often pointed out that the State as a whole is the entity
ultimately responsible under applicable regulations for accounting for
the use of federal funds. 3/  The State may not create various
components, and seek to treat them as independent entities for FFP
purposes, when the result is to inflate costs and evade the intent of
the cost principles by creating a "sham" lease obscuring the reality of
State ownership.  Such self-dealing violates the State's express
responsibility "for the efficient and effective administration" of its
grant programs.  OMB A-87, Att. A, A.2.a.  Thus in this case,
transferring federal funds from NYSDSS to OGS, and ultimately UDC, in
the guise of lease payments does not create a "cost".reimbursable by the
federal program, when all three entities are components of the grantee.
See also Maryland Dept. of Human Resources, DAB No. 1247, at 6, n.7
(1991); Louisiana Dept. of Health and Hospitals, DAB No. 1176, at 10
(1990).

The cost principles for state and local government grantees have
historically distinguished between the costs of obtaining space in
private buildings and the costs of dedicating space in public buildings
to federal program purposes. 4/  This distinction is founded in the
policy that, in determining the costs of public grantees, unlike in
paying private vendors, federal grantor agencies recognize "[n]o
provision for profit or other increment above cost."  OMB A-87, Att. A,
A.1.  Thus, treating UDC as if it were a private vendor in a lease
purchase arrangement, rather than a public entity, would permit the
State to obtain reimbursement greater than that intended.

Even if the arrangement between UDC and OGS could be treated as a lease
purchase, NYSDSS would not be authorized to claim the full amount of the
lease payment.  The HHS Grants Administration Manual (HHS-GAM) describes
two kinds of leases in which lease costs are limited: material equity
leases and less-than-arms-length leases.  Payments under such leases are
allowable only up to the amount permitted under the applicable cost
principles if title had passed to the lessee immediately.  HHS-GAM,
chapter 6-10 (April 1, 1980).  One form of material equity lease is any
lease which cannot be canceled and which provides for title to pass to
the lessee after the lease period.  Here, the State will take title
under the lease at the end of its term, and the provisions of the lease
make the rental obligation "absolute and unconditional."  NYSDSS Ex. 1,
at 28 and 32.  Therefore, only the costs allowable for a building owned
by the State, i.e., a use allowance, are permitted.

The lease is also less-than-arms-length, since "one party . . . is able
to control or substantially influence the actions of the other."
HHS-GAM, Chapter 6-10, 6-10-20.B.  Such leases include those between
"divisions of an organization."  Id.  UDC and OGS constitute two
components of the State of New York, created and controlled by State
law.  Therefore, again, the State is limited to the costs allowable if
it owned the building..NYSDSS relied on certain accounting principles to
argue that the UDC-OGS lease should be treated as a private lease
purchase.  NYSDSS Reply Br. at 7-8; NYSDSS Ex. 21. [Governmental
Accounting Standards Board, Governmental Accounting and Reporting
Standards . 2000 (1990) (GASB)].  NYSDSS based its claim that these
accounting standards govern allowability on language in OMB Circular
A-87 which makes one of the seven general factors governing the
allowability of costs that they "[b]e accorded consistent treatment
through application of generally accepted accounting principles
appropriate to the circumstances."  OMB Circular A-87, Att. A, C.1.e.
This provision would prevent a grantee from claiming costs otherwise
allowable but not treated consistently under accounting principles.  It
does not confer allowability on a cost which is treated consistently
under appropriate accounting principles but which is otherwise
unallowable.  In any case, NYSDSS did not show that GASB standards would
in fact result in treating this lease as a private transaction.  GASB
states that, where a public authority is created to finance construction
of a building to which it then takes title with an agreement to transfer
it to the state government at the end of a lease period, "it must first
be determined whether the public authority is part of the governmental
reporting entity" under criteria set forth in GASB, Section 2100.  If it
is part of the governmental reporting entity, the building should be
reported as an asset of the entity, i.e., treated as if already owned.
Otherwise, the lease agreement should be "treated in the same manner as
any other lease agreement."  GASB at L20.127.  (We note that, even were
this lease so treated, it would be subject to the specific approval
requirements discussed below.)  NYSDSS did not provide the GASB criteria
from Section 2100.  However, the regulations clearly treat the State as
a whole as the responsible entity for accounting for federal grants (see
our discussion above), and UDC is clearly a part of the State, even
though it is not part of NYSDSS or OGS. 5/.          ii.  Even if the
lease purchase provisions could have been used, the grantee did not
obtain the required specific approval.

In order to apply the lease-purchase provisions, a grantee must have
specific approval from the grantor agency.  OMB A-87, Att. B, C.2.e.
NYSDSS relied on the approval of its CAP.  However, NYSDSS cited no CAP
provision requesting permission to claim costs under the lease purchase
provision, but rather simply asserted that the CAP approval covered the
Ten Eyck lease.  NYSDSS Br. at 25-26.

NYSDSS submitted amendments to its statewide CAP dated October 23, 1980
which state that "Ten Eyck Building Rent is being allocated in the same
way that the A-87 OGS World Trade Center Rent is being allocated, i.e.,
the rent for this building is being allocated in proportion to the
number of positions . . . ."  NYSDSS Ex. 5, at 1.  The World Trade
Center entry states that its "actual rental" is allocated among agencies
by number of positions.  Nothing in either entry requests approval to
claim costs under the lease purchase provisions or any other provision
that NYSDSS now seeks to employ.  In fact, each addresses only the
method by which the State would allocate its costs among benefitting
agencies or functions, i.e., by space usage. 6/  The mere references.to
"rent" in the CAP are insufficient to charge DCA with knowledge that
NYSDSS was seeking approval for a lease purchase.  Moreover, the CAP
does not identify the Ten Eyck building as one which is not privately
owned.

NYSDSS also submitted a portion of a revised CAP dated July 27, 1984
specifically for Ten Eyck rent, which states that the building is owned
by UDC, leased to and maintained by OGS, and charged to NYSDSS in
proportion to its space usage.  The plan states that the "costs incurred
by OGS are annually identified to DSS as charges per square foot for
space occupied . . . ."  NYSDSS Ex. 6, at II.2.1.  If anything, this
description implies that OGS's actual costs are being determined, as
opposed to the representations made by NYSDSS that its claims reflected
comparable fair market rental rates.  In any case, nothing in this
language would fairly alert DCA that NYSDSS was seeking approval for a
lease purchase arrangement with a quasi-governmental entity.  If it was
intended to serve this purpose, the CAP was materially incomplete.

As DCA pointed out, its approval letter for the Ten Eyck CAP, dated
March 25, 1985 contained the following conditions:

     1.  The approval is based on information provided by the State and
     is void if the information is later found to be materially
     incomplete or inaccurate.

     2.  The costs claimed for Federal financial participation must be
     allowable under the law, the cost principles contained in OMB
     Circular A-87 and program regulations.

NYSDSS Ex. 7, at 1.  The letter further stated that "[n]othing contained
herein should be construed as approving activities not otherwise
authorized by approved program plans, or Federal legislation or
regulations."  Id. at 2.  These disclaimers make evident that no
approval by DCA could be implied, at least subsequent to March of 1985,
either for any claiming methodology not completely and accurately
presented by the State or for costs that are not allowable under OMB
A-87.  While specific approval could make a lease purchase
allowable.under OMB A-87, we have already found that the CAP disclosed
no request for such approval.  Furthermore, the Board has held in the
past that approval of otherwise unallowable interest may not be derived
from approval of a lease purchase transaction, because grantees are held
to be on notice of the specific prohibition on interest in the
regulations.  Washington Dept. of Social Health Services, DAB No. 741,
at 3 (1986).  Thus, even if the approval of the CAP were treated as
approving the lease transaction (which we find it did not), that would
not be sufficient to make interest costs arising from it allowable.

Generally, the approval of a CAP approves the method of allocating costs
but does not imply approval of the allowability of particular cost
items.  See Pennsylvania Dept. of Public Welfare, DAB No. 832, at 6
(1987).  NYSDSS cited regulations on costs allowable with approval of
the granting agency which provide that when costs are allocated pursuant
to a government-wide CAP, "acceptance of the costs as part of [the CAP]
shall constitute approval."  45 C.F.R. . 74.177 (1991) and predecessor
provisions.  Regardless of whether these CAPs are "government-wide," a
point which DCA disputed, neither CAP provided DCA with sufficient
accurate information about how the State would determine the amount of
building costs to be claimed, as opposed to how it would allocate those
costs.  Thus, we find that the CAP approval here did not serve to
approve use of the lease purchase provision.

NYSDSS argued that the approval issue was resolved in its favor by the
Regional Director, because his decision upholding DCA's determination
did not mention it.  NYSDSS Br. at 25.  We find no merit in this
argument.  The Regional Director's decision clearly did not resolve the
issue in NYSDSS' favor.  The Regional Director simply determined that
the only method under which costs could properly be claimed for the Ten
Eyck building was by a use allowance.  If any implication can be drawn
from the fact that one element of a theory advanced by the State was not
mentioned, it is that the Regional Director rejected that element when
he rejected all of the State's alternative claiming theories.  Further,
the Regional Director's determination did not have to recite every
possible basis for the disallowance.  We have required only that
agencies make their disallowance determinations clear enough to allow
grantees to understand which costs are disallowed and why and that
appellants have adequate opportunity to address any issues raised on
appeal.  See, e.g., Dallas County Community Action Committee, DAB No.
.1265, at 9-11 (1991).  NYSDSS has had ample opportunities here to
address the approval issue.

  B.  Rental cost provision

NYSDSS alternatively argued that it could claim costs for the Ten Eyck
building based on OMB A-87, Att. B, C.2.a, which provides:

     The rental cost of space in a privately-owned building is
     allowable.  Similar costs for publicly owned buildings newly
     occupied on or after October 1, 1980 are allowable where "rental
     rate" systems, or equivalent systems that adequately reflect actual
     costs, are employed.  Such charges must be determined on the basis
     of actual cost (including depreciation based on the useful life of
     the building, interest paid or accrued, operation and maintenance,
     and other allowable costs.)

This provision does not apply because Ten Eyck was publicly owned and
was occupied before October 1, 1980.   We reject NYSDSS' argument that
the coverage of rental cost equivalents for public buildings was a
remedial amendment which should be applied retroactively. Furthermore,
no evidence was introduced of a rental rate system based on actual cost
ever having been employed for Ten Eyck.

 i.  The building was publicly owned.

NYSDSS asserted that "a public building means a building owned in fee
simple by the grantee prior to the use of the facility for grantee
purposes."  NYSDSS Reply Br. at 7.  On this basis, NYSDSS argued that
the State was not the owner of Ten Eyck, despite "UDC's status as a
public authority."  Id.  NYSDSS offered no authority to support this
extremely narrow interpretation of public ownership, beyond the
accounting standards discussed above.  The drafters of OMB A-87 chose
the broad term "publicly owned," rather than "grantee-owned" or "fee
simple."  We see no reason to decline to give full effect to the
language chosen by the drafters and adopted by regulation.

     ii.  Rental costs are not available for publicly owned buildings
     occupied before October 1, 1980.

NYSDSS admitted that it had occupied the building long prior to the
regulatory deadline, but argued that the.rental cost provision should
nevertheless be applied retroactively as a "remedial" amendment.   Prior
to the 1980 revisions, this provision consisted only of the first
sentence, and no allowance was made for rental costs in public
buildings.  See 45 Fed. Reg. 27,363 (1980).  NYSDSS argued that the
distinction between public and private buildings was always an
irrational one, that the 1980 revision was intended to remedy the unfair
distinction, that the provision merely codified the rules used in the
Handbook of Public Assistance, and that the occupancy deadline included
in that revision is unreasonable and should not be given effect.  NYSDSS
Br. at 28-33. 7/

NYSDSS discussed at length considerations which might justify
retroactive application of administrative policies.  See, e.g., NYSDSS
Br. at 30-33.  None of the cases cited by NYSDSS required that a rule be
applied retroactively in the face of an explicit provision for
prospective application only.  For example, Bradley v. Richmond School
Board, 416 U.S. 696 (1974), only deals with cases pending at the time of
the enactment of a new statute.  New York Tel. Co. v. FCC, 631 F.2d
1059, 1067-68 (2d Cir. 1980), simply holds that the Federal
Communication Commission may give retroactive effect to an order on
tariffs under the circumstances of that case, including evidence that
petitioner had not greatly relied on prior rulings.  Generally,
retroactivity is not favored or implied.  Bowen v. Georgetown University
Hosp., 488 U.S. 204, 208-09 (1988) (finding no authority to issue
retroactive regulations absent express statutory authority).

In any case, NYSDSS is incorrect in its assertions that the occupancy
deadline was unreasonable and that federal.agencies did not rely on the
old rule. 8/  The establishment of a clear cut-off date for broadening
reimbursement of the costs of public buildings promoted certainty,
prevented efforts to reopen innumerable prior claims on state buildings,
avoided windfalls to states which had no reason to anticipate such
additional recovery before the revision, and encouraged states to move
operations from private to public facilities (rather than simply
mortgaging existing property).  45 Fed. Reg. 27,363 (1980).
Furthermore, the federal agencies certainly relied on the prior rule in
reviewing claims and would be burdened by an obligation to reevaluate
them under a new standard.  Clearly NYSDSS did not rely on this rule
revision in its decision to occupy Ten Eyck in 1976, since NYSDSS could
not have known then that the revision would be adopted.

     iii.  No rental rate system was actually employed at the Ten Eyck
     building.

Additional support for our finding that NYSDSS did not rely on this
provision in claiming its costs for Ten Eyck is the absence of any
evidence that a rental rate system was in fact developed or used by the
State for Ten Eyck.  Where costs for publicly owned buildings are to be
recovered based on this provision, rental rates must be employed that
reflect actual costs.  NYSDSS did not assert that its claims were based
on actual costs for the building, but rather acknowledged that the
claims were based on rent figures obtained from OGS and believed to
represent comparable fair market rental rates. 9/.                C.
Capital Expenditures

NYSDSS suggested that another alternative under which it might recover
interest costs for Ten Eyck was a provision for capital expenditures in
OMB A-87, which reads as follows, in relevant part:

     The cost of facilities . . . is allowable when such procurement is
     specifically approved by the Federal grantor agency.  When assets
     acquired with Federal grant funds are [disposed of] . . . the
     Federal grantor agency's equity in the asset will be refunded in
     the same proportion as Federal participation in its cost.

OMB A-87, Att. B, C.3.  The short answer to this proposition is the same
as in regard to lease purchases, i.e., NYSDSS never obtained, or even
sought, approval for federal participation in the purchase of Ten Eyck.
Furthermore, NYSDSS did not explain why the "cost of facilities" here
should be read to include interest, despite the explicit prohibition on
interest on borrowings in OMB A-87, Att. B, D.7.

      D.  Handbook of Public Assistance Provisions

NYSDSS further cited to section 4532.5 of the Handbook of Public
Assistance Administration (HPA) as the one source which "always allowed
interest as an actual cost of a comparable fair market rental rate."
NYSDSS Reply Br. at 10.  We find that the HPA on its face does not
support NYSDSS's claims.  In any case, we find that this portion of the
HPA is not applicable because it has been superseded to the extent it
conflicts with later regulations adopting the cost principles in OMB
A-87.

The language to which NYSDSS refers reads, in relevant part, as follows:

     Federal financial participation is available in rental charges
     based on the initial cost of construction or purchase of publicly
     owned buildings . . . ..     Ordinarily the costs of initial
     construction or purchase are spread over the life of the building.
     For purposes of Federal financial participation, however, such
     charges may be spread in relation to the comparable rental.  The
     spread of costs of construction or purchase on the basis of the
     comparable rental permits the State agency to secure the cost of
     the building at a more rapid rate than if the cost were spread on
     the basis of the life of the building.  Once the initial cost of a
     building has been liquidated in this manner, only the costs of
     service and maintenance may be charged.

 [A discussion follows of the need for adjustment to reimburse
 the federal funds received in excess or normal depreciation if
 the State agency vacates a building before the end of its useful
 life and the consequent need to set a life expectancy "prior to
 a request for participation."]

       *            *             *

 Under certain circumstances Federal financial participation is
 available in other expenses as part of the cost of a project for
 the construction or purchase of a publicly owned building.
 These expenses might include the interest on monies secured from
 private or public sources to be used in the financing of the
 building . . . .

       *            *             *

 All rental charges for the initial cost of construction or
 purchase of publicly owned buildings . . . not exceeding 75
 percent of the lowest appraisal of the comparable rental, may be
 approved by the State agency under standards in its approved
 plan providing for such approval . . . .

In summary, this provision permits acceleration of depreciation claims
up to 75 percent of comparable private rental rates, or higher with
approval.  The assumption is that the federal government will ultimately
benefit from a period of cost-free usage of the building since
depreciation will have been recouped by the state before the end of the
building's useful life.  The state collects the federal share in its
acquisition cost earlier, but does not receive a greater amount over the
life of the building than it would have under straight depreciation.
See Kentucky Dept. for Human Resources,.DAB No. 401, at 9 (1983)
(holding that the federal agency was entitled to some adjustment where
the state vacated the building earlier and then claimed rent costs for
different space).

     i.  The HPA provision does not permit the claiming method used by
     NYSDSS.

This provision is the only one cited by NYSDSS that refers to claims
based on a comparable fair market rental rate.  However, we find that
NYSDSS misinterpreted the HPA provision, which uses comparable rental
only as a benchmark for accelerating depreciation recovery.  Even if
NYSDSS could claim amounts higher than the use allowance for the early
years of its occupancy under this provision, it would have to claim
amounts in later years lower than those to which it would otherwise be
entitled.  In any case, NYSDSS made no showing that it sought to claim
depreciation, accelerated or otherwise, by a request for participation
based on a prior calculation of useful life, as contemplated by the HPA.

In addition, any claim for accelerated depreciation at a rate exceeding
75% of comparable rental can be approved by the State agency only based
on specific standards for such approval in its approved plan.  NYSDSS
stated at one point that its claim did not exceed 75%, but this
assertion conflicts with statements elsewhere that NYSDSS simply claimed
100% of the comparable rental figures it obtained from OGS.  Compare
NYSDSS Reply Br. at 10 with NYSDSS Br. at 4 and Tr. at 401-402, 415-430.
NYSDSS did not demonstrate that it obtained approval, under standards in
any approved plan, to exceed 75% of comparable rental in order to obtain
accelerated depreciation.

NYSDSS asserted that the HPA "always allowed interest as actual cost of
a comparable fair market rental rate."  NYSDSS Reply Br. at 10.  We do
not agree.  While it is true that interest costs may be embedded in the
private rental rates used as a benchmark for accelerating depreciation,
the HPA did not normally permit grantees claiming under it to recover
their interest costs.  Grantees were still limited in their total
recovery to their depreciation, except where interest was permitted in
special circumstances.  The exception for possible availability of
interest under certain circumstances does not support the claim for
interest costs here, especially since NYSDSS did not present evidence of
what circumstances have ever been found sufficient to uphold such a
claim or what special circumstances here would justify it.   Even if
such interest might have been.available under this provision in special
cases before OMB A-87, it clearly is no longer available, in the face of
explicit prohibitions in A-87.

 ii.  This portion of the HPA is no longer in effect.

Further, we find that the HPA provision has been superseded to the
extent that it conflicts with OMB A-87.  OMB A-87 was incorporated into
this Department's regulations at 45 C.F.R. Part 74 in 1973 (along with
the administrative requirements from OMB Circular A-102).  38 Fed. Reg.
26,274 (1973).  The preamble notes that program regulations are also
amended to revoke inconsistent provisions.  Id. at 26,275.  It further
points out that the content of OMB A-87 is government-wide.  Id.  OMB
A-87 itself states that part of its policy intent is to promote "a
uniform approach to the problem of determining costs."  OMB A-87, . 4.
OMB A-87 addresses, directly and in detail, the methods by which the
costs of space for use in federal programs may be claimed by state
governments.  Whatever may be the continuing viability of other portions
of the HPA, 10/ those provisions which directly conflict with later
regulations must be considered superseded.  OMB A-87 preempted the field
of cost principles for reimbursement of space in public buildings used
by state governments.

Further, to treat HPA section 4532.5 as having been continuously
available to states, despite the adoption of OMB A-87 in the
Department's regulations, would render meaningless the notice and
comment process in which OMB.engaged in deciding to broaden the rental
cost provision to cover newly occupied public buildings.  45 Fed. Reg.
27,363 (1980).  Since OMB A-87 clearly set forth a limited number of
options for claiming these costs, NYSDSS could not reasonably avoid its
restrictions by reading in another method from the HPA.

We conclude that the only method by which NYSDSS could seek FFP in its
costs for space in the Ten Eyck building was by a use allowance.

II.  Interest was not an allowable component of costs for calculating
the use allowance.

NYSDSS's main objection to DCA's insistence on a use allowance based on
actual costs is that DCA refused to include the costs of interest paid
on bonds used to finance the construction.  DCA's refusal derived from
the following provision:

     Interest on borrowings (however represented), bond discounts, cost
     of financing and refinancing operations . . . are unallowable
     except when authorized by Federal legislation and except as
     provided for in paragraph C.2.a of this Attachment.

OMB A-87, Att. B, D.7. (Paragraph C.2.a refers to the rental cost
provision as modified effective October 1, 1980, discussed elsewhere in
this decision.)  NYSDSS contended that the interest prohibition should
be applied only very narrowly, because it was borrowed from procurement
regulations and, according to NYSDSS, was construed narrowly in that
context.  Further, NYSDSS suggested that OMB was required by federal law
to treat state grantees' claims in the same way as federal agencies'
procurement practices, and therefore to permit interest in this
situation.  We find no merit in these arguments.

  A.  Breadth of the Interest Prohibition

On its face, the language of the interest prohibition aims to be
inclusive of every kind of interest cost on borrowed funds.  In fact,
this interpretation and its application to this situation is supported
by a letter from OMB submitted by NYSDSS which affirms that OMB A-87
"prohibits the payment of any interest, except for interest incurred to
finance buildings occupied on or after October 1, 1980.  The prohibition
extends to interest included in lease purchase payments."  NYSDSS Ex.
33, at 1.  Nevertheless, NYSDSS suggested that, to.the extent that OMB
itself understood the provision thus broadly, OMB erred in interpreting
language which it originally borrowed from earlier procurement sources.
See, e.g., Tr. at 220, 255 -65.  NYSDSS pressed this position despite
the fact that the reading of the interest prohibition DCA advanced here
is long-standing and has been upheld by this Board in the past.  See,
e.g., NYSDSS Ex. 34 (letter from Kevin Moley to Rep. Frank Horton);
Washington Dept. of Social and Health Services, DAB No. 741 (citing both
to procurement regulations and OMB A-87 as incorporated therein to
uphold disallowance of interest on lease purchase of equipment).

NYSDSS argued that an exhaustive review of the history of this provision
and its predecessors supports an extremely restrictive interpretation of
the forms of interest intended to be proscribed. 11/  See NYSDSS Ex. 29
(Affidavit of Gerald Townley, Jr.); NYSDSS Ex. 35 (Memorandum of
Congressional Research Service); Tr. at 26-31, 212-242.  NYSDSS argued
that the interest prohibition is only applicable to situations where the
State "acts as a contractor" to, rather than a grantee of, the federal
government, and then only to "prevent the State from receiving interest
on late payments."  Tr. at 26.  NYSDSS's interpretation of the parallel
language in the procurement rules is that "interest incurred to finance
the construction of a building under a lease-purchase contract with the
federal government" would not be disallowed.  NYSDSS Br. at 20. 12/
Rather, NYSDSS read.the prohibition on interest on borrowing in
procurement cases as limited to interest relating to equity capital of
contractors, or the analogous "spring borrowing" to raise State funds to
cover operations before revenue is realized.  Tr. at 26. 13/  Elsewhere,
NYSDSS described the scope of the procurement regulation as limited to
the kind of interest on late payments requiring sovereign immunity
waiver.  In support, NYSDSS cited several procurement decisions. 14/.The
cited cases simply do not support the position advanced by the State.
Cases under the old Federal Procurement Regulations (FPR) stand for the
proposition that interest is not allowable under cost-reimbursement type
contracts, unless the contractor was forced to borrow to finance
additional work not initially required by the contract or to finance
other extra costs incurred because of government action.  See, e.g.,
Bell v. United States, 404 U.S. 975 (Ct.Cl. 1968);  Singer Co,,
Librascope Div. v. United States, 568 F.2d 695, 698 (Ct.Cl. 1977);
Appeal of Ingalls Shipbuilding Div., Litton Systems, ABSCA No. 17579
(1978).  In Framlau Corp. v. United States, 568 F.2d 687, 694 (Ct.Cl.
1977), the court refused to extend Bell beyond the situation where a
contractor could show an actual cost of borrowing money resulting from
government delays.  See NYSDSS Br. at 17.

In American Chemical Society v. United States, 438 F.2d 597 (Ct.Cl.
1971), the contract negotiators for the government were aware of the
interest prohibition of the FPR, but at the time the cost principles of
the FPR did not govern the National Science Foundation (the contracting
agency) and were used only as a guide.  Nevertheless, at the request of
the Comptroller of the National Science Foundation, the mortgage
interest was treated in the contract as part of a fixed fee above costs,
rather than as a reimbursable cost.  Thus, the allowance of interest in
that case cannot be considered as a determination that mortgage interest
was in general an allowable cost under the FPR.

The Federal Acquisition Regulations (FAR) replaced the FPR in 1983, and
provides a specific exception to the prohibitions on interest on
borrowings. 15/  No parallel.provision existed in OMB A-87, until the
addition of the current exception for public facilities occupied on or
after October 1, 1980 (discussed above).  Any cases decided under the
FAR thus cannot reasonably be read as interpreting the interest on
borrowings provisions as narrowly as NYSDSS advocated; rather, these
cases merely evidence the effect of an exception to that prohibition
applicable only in the procurement arena.  See, e.g., Appeal of TDC
Management, DOTCAB No. 1802 (1991).

Even if procurement law did make the distinction urged by NYSDSS, we
would not be bound by procurement decisions.  As this Board stated in
Humanics Associates, DAB No. 860, at 11 (1987):

 [W]e are not bound by Board of Contract Appeals decisions, even
 though they decide issues concerning contract provisions
 containing the same wording as grants provisions; special
 considerations may apply in grants administration which do not
 apply to procurement contracts.

Our prior decisions have established that even identical language in
regulations may be construed differently, in light of the many
differences in the grant and procurement contexts. 16/  Action
for.Boston Community Development, Inc., DAB No. 349, at 8 (1982).

The state government cost principles adopted by the Department through
incorporation of OMB A-87 similarly deal with grant relationships that
are significantly different from procurement.  For example, OMB A-87
explicitly prohibits profit, which would be a normal element for a
procurement contractor.  OMB A-87, Att. A, A.1.  Procurement regulations
allow selling costs which would be inappropriate to a grant context.
See 48 C.F.R. . 31.205-38; compare OMB A-87, Att. B, B.2.  They differ
in their treatment of particular items, such as training and education
costs.  Compare 48 C.F.R. . 31.205-44 with OMB A-87, Att. B, B.26.

The federal government may reasonably have different concerns and
policies when it acts as a donor or partner with a grantee in operating
an ongoing program, than when it acts as a purchaser seeking a vendor or
contractor. 17/  It is noteworthy also that the cost principles for
state governments were prepared by OMB and adopted by the Department as
a complete set and not as an incorporation by reference or in toto of
procurement regulations.  Therefore, each principle should be viewed
primarily in connection with the total set of principles in A-87, and
not in connection with the original sources of particular provisions.
Thus, we conclude that the existence of parallel language in or a common
origin with procurement.regulations does not compel DCA to apply
language in a grant context in the same way as in a procurement context.

It is unavailing for NYSDSS to assert that "whenever the Secretary has
specifically addressed the allowability of interest," he has allowed it.
NYSDSS Reply Br. at 16.  The examples NYSDSS cited are HPA 4532.5 and 42
C.F.R. . 413.153.  The HPA provision has already been discussed.  The
cited regulation deals with Medicare cost principles for providers who
are required to be compensated on the basis of reasonable cost or
customary charges, whichever is lower.  42 C.F.R. . 413.1 (b) (1991).
In defining reasonable cost, the regulations expressly include many
items that would not be allowable in a grant, including a return on
equity capital, as well as "[n]ecessary and proper interest on both
current and capital indebtedness."  42 C.F.R. .. 413.153 (a) (1) and
413.157.  All this means is that Medicare providers are subject to
different rules from state Medicaid agencies acting in their capacity as
grantees.  In regard to state government grantees' costs of
administering public assistance programs, the Secretary has specifically
addressed the allowability of interest by adopting OMB A-87's
prohibition of it.

  B.  Uniform Treatment of States and Federal Agencies

NYSDSS also took the position that the cost principles could not
permissibly impose different treatment for state grants and for federal
procurement, because Congress expressed an intention in enacting Public
Law No. 93-400 that OMB "establish uniform rules for federal executive
agencies and states as recipients for federal grants or assistance."
NYSDSS Br. at 19, citing S. Rep. No. 692, 93rd Cong., 2d Sess, reprinted
at 1974 U.S. Code Cong. and Ad. News 4622.  The statute provides as
follows:

 With due regard to applicable laws and the program activities of
 the executive agencies administering Federal programs of grants
 or assistance, the Administrator [of the Office of Procurement
 Policy] may prescribe government-wide policies, regulations,
 procedures, and forms which the Administrator considers
 appropriate and which shall be followed by such executive
 agencies in providing for the procurement, to the extent
 required under such programs, of property or services . . . by
 recipients of Federal grants or assistance under such
 programs..41 U.S.C. . 405(i)(1). 18/  No evidence was presented
 by NYSDSS of any effort by the Administrator to exercise this
 discretionary authority to require that grants to state
 governments follow all federal procurement procedures, use the
 same forms as in procurement contracts, or otherwise be treated
 identically with executive agencies. 19/  In any case,
 procurement procedures even under grants relate to purchasing by
 grantees and address such matters as competitive bidding,.while
 cost principles govern the reimbursement of costs.  The federal
 acquisition regulations adopted under this law expressly state
 that OMB A-87 "sets forth the principles for determining the
 allowable costs" of contracts with state governments and that
 any contract with a state government that refers to the contract
 cost principles "shall be deemed to refer to, and shall have the
 allowability of costs determined . . . in accordance with" OMB
 A-87.  48 C.F.R. . 31.602 and . 31.603 (a) (1991) (adopted
 1983).  When these regulations were adopted, the prohibition on
 interest had long been in effect.  Thus, to the extent the
 Administrator has spoken on cost principles applicable to grants
 to state governments, he has adopted OMB A-87 as interpreted by
 OMB and DCA here.  Furthermore, the law admonishes the
 Administrator to act only with "due regard" to the "program
 activities" of other federal agencies. 20/

Since uniformity of treatment of cost items is not required between
federal procurement and state grants, we need not address the various
examples offered by NYSDSS of situations where federal executive
agencies pay interest.  See, e.g., NYSDSS Br. at 19-20, 22-23.

NYSDSS also challenged OMB's authority to amend OMB A-87 to change the
treatment of interest in the construction of public buildings after
October 1, 1980.  NYSDSS Br. at 23.  NYSDSS argued that since no change
in the statute occurred to make such interest allowable thereafter, OMB
could not suddenly make it allowable unless it had always been
allowable.  In this position, NYSDSS erred, because.(1) agencies may
change their interpretations of statutes which they enforce, even if the
underlying law does not change, so long as both interpretations are
reasonable and notice of the change is proper, and (2) OMB A-87 is a
legislative rule rather than an interpretation of a statute, as we have
noted above.  No question has been raised about the adequacy of notice
of the change, since it was published in the Federal Register.  We find
no basis for NYSDSS' challenge to OMB's authority to change its position
on public buildings.

In terms of the Secretary's authority to adopt these changes to OMB A-87
absent a change in the Act, DCA correctly pointed out that the Social
Security Act accords the Secretary specific authority to determine what
costs are "necessary . . . for the proper and efficient administration"
of the program in various areas.  See, e.g., Act, .1903(a)(2); DCA Br.
at 18-19.  It is not unreasonable for the Secretary to refine or change
his determination as to the necessity, propriety, or efficiency of
particular costs over time.

We conclude that FFP in interest costs relating to the Ten Eyck building
is prohibited.

III.  The uniformity principle does not preclude the payments in lieu of
taxes here.

A part of the disallowance amounting to $1,218,319 consisted of actual
costs for Ten Eyck that were attributable to payments made in lieu of
taxes.  Disallowance letter at 2.  Payments in lieu of taxes are
allowable when "the grantee agency is legally required to pay" them.
OMB A-87, Att. B, B.25.  DCA did not allege that NYSDSS was not required
to make the payments under State law, but rather contended that such
payments "are not required for all other State buildings in Albany and
other parts of the State."  Disallowance letter at 2. 21/  Therefore,
DCA asserted that "the consistency requirement is not met."  Id.  By
this, DCA referred to the requirement that, to be allowable, costs must
"be consistent with policies, regulations, and procedures that apply
uniformly to both federally assisted and other.activities of the unit of
government of which grantee is a part."  OMB A-87, Att. A, C.1.d.

We first note that New York made payments in lieu of taxes on all of the
Ten Eyck building, not only on the part of the building occupied by
NYSDSS and therefore eligible for FFP.  However, DCA interpreted the
consistency provision of OMB A-87 to mean that the State was the unit of
government of which NYSDSS was a part, and that therefore no payment in
lieu of real estate taxes by any part of the State was allowable unless
all parts of the State are legally obligated to make such payments on
all their real estate.  DCA argued that the State must make payments on
every State building in order to meet the test of consistency.  DCA's
position was that if any building or any locality was not covered by a
legal requirement to make such payments, then no payments required for
any building in any locality could meet the consistency test.  Tr. at
517, 526.  NYSDSS argued that the consistency provision meant that the
State must make payments in lieu of taxes whenever they are legally
required and must not single out federally assisted activities to bear a
disproportionate burden of such payments.  We agree with NYSDSS in
reading this provision as directed against an effort by grantees to
shift costs to the federal government by undertaking costs when federal
participation is available that are avoided when the grantee must cover
them alone.  We do not think that a rational program which requires
payments in lieu of taxes only in certain settings (for example in
cities or counties where State land use burdens the tax base) is
prohibited, so long as it is not designed to have a differential impact
on federally assisted activities.

This interpretation is supported by our prior decisions.  The Board has
found violations of the consistency principles when the federal
government has been charged at a higher rate than the state paid on
similar cost items, such as retirement benefits (State of Connecticut,
DAB No. 9, at 5 (1975)) or pension funds (Indiana Public Employees'
Retirement Fund, DAB No. 314, at 7-9 (1982)).  In Florida Dept. of
Health and Rehabilitative Services, DAB No. 821, at 16 (1987), the Board
held that the inconsistency which OMB A-87 forbids is between the
treatment of costs when federal funding is available and when only other
grantee funds are used.

Here, NYSDSS submitted a number of state laws to support its assertion
that the State provides for payments in lieu of taxes to various
localities impacted by State ownership of real estate, regardless of the
availability of federal reimbursement.  NYSDSS Exs. 25, 26 and 27;
Tr..at 522-24.  DCA did not show that these state laws made or resulted
in any distinction between programs with or without federal funding.
The laws on their face appear part of a rational program to compensate
localities disproportionately affected by state initiatives, rather than
a mere subterfuge to obtain additional federal funds.

Therefore, we conclude that the payments in lieu of taxes here are
allowable, since they were legally required and were not treated
inconsistently between funding sources.

IV.  Other Issues

NYSDSS raised a number of other contentions in its briefs and at the
hearing.  While we have considered all the material in the record, most
of these contentions need not be addressed in light of the conclusions
we have reached above.  However, several subjects must be mentioned.

       A. The Recalculation Question

NYSDSS contended that the amount of the disallowance should be
recalculated because NYSDSS was not credited with its actual operational
and maintenance cost for all of the years in question, but only for FYs
1984 and 1985.  NYSDSS Br. at 10, 38; NYSDSS Reply Br. at 20-21; NYSDSS
Ex. 12, at 8 (Affidavit of Roger Nelligan).  NYSDSS further argued that
its claims under Title XX of the Act should not have been affected
because NYSDSS did not claim administrative costs under that program and
that the amount of taxes paid to the City of Albany and other entities
was not correctly calculated.  Id.

DCA responded that it was willing to review data provided by NYSDSS to
demonstrate that it incurred allowable operation and maintenance costs
and to document that no claims were made for administrative costs under
Title XX.  DCA Br. at 29-30.

At the hearing, the parties indicated that they had reached an agreement
on a method for recalculating the amount of the disallowance.  Tr. at
6-7, 354-55.  Therefore, the part of the disallowance upheld by this
decision is subject to recalculation in accordance with the agreement
between DCA and NYSDSS.

NYSDSS also raised a question of whether the costs of interim financing
and acquisition of land should have been removed from the amount of the
disallowance.  Tr. at 7-8, 35.  However, DCA indicated that these
elements were.not components of the disallowance.  Id.  At the hearing,
NYSDSS did not substantiate whether the State in fact incurred interim
financing costs, or the amounts involved.  See Tr. at 323.  If NYSDSS
has documentation of allowable costs in this regard, DCA should review
it as part of the recalculation contemplated above.

If NYSDSS is dissatisfied with the results of the recalculation, it may
return to this Board for a review of that issue alone.  No further
review of the substantive bases for the disallowance upheld in this
decision would be permitted at that time.

     B.  The MMIS System

NYSDSS claimed that a part of the costs disallowed related to space used
in the design, development and operation of its Medicaid Management
Information System (MMIS) and was therefore eligible for reimbursement
at enhanced rates under section 1903(a)(3) of the Act.  NYSDSS Br. at
37.  NYSDSS relied on this Board's decision in New Jersey Dept. Of Human
Services, DAB No. 648 (1985), for the proposition that interest costs
were included in the "special benefits" Congress intended to extend to
the states for MMIS.

Nothing in the Act supports NYSDSS' position that unallowable costs
become eligible for FFP simply because they are expended in relation to
MMIS.  The "special benefits" extended by Congress consist only of the
higher percentage borne by the federal government for allowable costs
allocable to MMIS and attributable to its design, development,
operation, etc.  In New Jersey, the Board dealt with indirect costs
about which there was no dispute as to their allowability and
allocability to MMIS.  Id. at 1, 4.  The Board rejected a distinction
between indirect costs which were "directly attributable" to MMIS and
those which were merely "attributable."  Id. at 6.  New Jersey provides
no foundation for NYSDSS' argument that unallowable interest costs are
reimbursable because they may be attributable to MMIS.

However, to the extent that some of the allowable costs relating to the
Ten Eyck building were attributable to MMIS, they may be eligible for
reimbursement at the enhanced rates.  NYSDSS may present to DCA during
the recalculation process documentation of allocability of such costs to
development or operation of MMIS under any approved CAP applicable to
the disallowance period. .                C.  Tax Law Implications

NYSDSS submitted a supplemental brief, arguing that interest should be
allowable here because OMB A-87 contains an exception to the prohibition
on interest on borrowings "when authorized by federal legislation" and
that tax law provided such authorization.  NYSDSS Supplemental Br. at 3;
OMB A-87, Att. B, D.7.  The provision of the Internal Revenue Code of
1954 to which NYSDSS cited was section 103, Public Law No. 591, as
recodified by the Tax Reform Act of 1986, Public Law No. 99-514, 99th
Cong., 2d Sess.  This provision excludes interest paid on state and
municipal obligations from the recipients' gross income subject to
federal income tax.

NYSDSS cited cases and legislative history of the 1986 recodification
which support the proposition that section 103's exclusion from income
extends beyond bonds to interest on obligations arising from lease
purchases.  NYSDSS Supplemental Br. at 4-6, and citations therein.
While some of this material may establish that the federal government
thought it beneficial if the states could offer interest rates on its
obligations which were more attractive in competition with
non-governmental offerings because of the tax exemption, none of it
supports NYSDSS' interpretation of section 103 as an "express
encouragement of borrowing by states as a means of obtaining capital to
operate programs."  NYSDSS Supplemental Br. at 8.  We find nothing in
section 103, or its legislative history or case law, that remotely
suggests an intention to authorize a change in the unallowability of FFP
for interest on borrowings by the State as a grantee under OMB A-87.
Further, DCA correctly pointed out that the exception allowing federal
legislation to authorize FFP for interest costs contemplates a specific
provision in relevant program legislation, here the Social Security Act,
which contains no such authorization.  DCA Supplemental Submission at 2.

If anything, the material submitted by NYSDSS in relation to this issue
supports our analysis of the nature of UDC and the interest paid here.
NYSDSS asserted that the bonds sold by UDC would qualify for exclusion
under section 103, and submitted an affidavit from the general counsel
of UDC affirming this.  NYSDSS Supplemental Br. at 5; NYSDSS Ex. 36.
The fact that UDC's obligations are treated as those of the State or a
political subdivision thereof adds weight to our conclusion above that
Ten Eyck is a public building, already owned by a component of the
State, rather than in the process of being purchased.  We also note that
the Congressional reports submitted by NYSDSS state that interest paid
by governmental units."other than pursuant to exercise of their
borrowing power . . .  is not tax-exempt."  See. e.g., S. Rep. No. 313,
99th Cong., 2d Sess. (1986), at 579.  Since NYSDSS asserted that the UDC
bonds at issue here were qualified for section 103 exemptions, it
follows that their issuance was a borrowing, which supports the
application of the prohibition of "interest on borrowings."

         Conclusion

We conclude that DCA correctly disallowed FFP for the cost of space in
the Ten Eyck building beyond a use allowance and that interest is
unallowable as an element of actual costs for the building.  Therefore,
we uphold that portion of the disallowance, subject to the opportunity
for recalculation of the amount as agreed between the parties and
discussed above.   If dissatisfied with the results of the
recalculation, NYSDSS may return to this Board for review of that issue
only within 30 days of DCA's decision.

We also conclude that NYSDSS' payments in lieu of taxes in regard to the
Ten Eyck building did not violate the consistency principle.  Since DCA
did not show that they were otherwise unallowable, that portion of the
disallowance is reversed.

 

       ___________________________
       Donald F.
       Garrett

 


       ___________________________
       Norval D. (John)
       Settle

 


       ___________________________
       Judith A.
       Ballard
       Presiding Board
       Member


1.  OMB A-87 contains cost principles applicable to grants to state and
local governments and was originally issued by OMB in 1969.  In 1973,
the authority for issuing cost principles was shifted to the General
Services Administration, which reissued the circular, without altering
the text, as Federal Management Circular (FMC) 74-4.  The responsibility
was returned to OMB in 1975 and, on January 1, 1981, OMB reissued the
circular in its present form, with a change in the treatment of interest
costs for public buildings occupied after October 1, 1980.  OMB A-87 has
been made applicable to the programs of this Department by regulation
since 1973 and currently is incorporated by reference at 45 C.F.R. .
74.171.  For the sake of simplicity, we refer to the circular throughout
as OMB A-87, without distinguishing the time period when it was
denominated FMC 74-4.  We discuss the effect of the change in treatment
of public buildings where relevant below.

2.  The only alternative provided in those provisions is depreciation,
which would spread the acquisition costs over the expected life of the
building.  However, the State employed the use allowance method for
other buildings, and NYSDSS did not argue that depreciation should have
been employed here rather than a use allowance.  Tr. at 40-41, 54-56.

3.  A grantee is defined by regulation as "the government . . . entity
to which a grant is awarded and which is accountable to the Federal
Government for the use of the funds provided.  The grantee is the entire
legal entity even if only a particular component of the entity is
designated in the award document."  45 C.F.R. . 74.3.  Even where one
component is primarily responsible for administering the program, the
entity as a whole retains "accountability to the Federal Government for
the use of the funds provided."  Id.  The definition specifically
mentions "State welfare departments" as being "only components of a
legal entity."  Id.  Thus, for example, when a state as a whole gained
financially from retaining funds from the estates of Medicaid
recipients, we treated as irrelevant the circumstance that the funds
were held in a component outside the Medicaid agency.  Massachusetts
Dept. of Public Welfare, DAB No. 1288, at 13 and n.9 (1991).

4.  We discuss below the 1980 changes that allow rental costs for new
public buildings.

5.  Further, under the GASB standards, lease arrangements between states
and public authorities are subject to "related-party considerations of
FASB Statement 13, paragraph 29."  Again, NYSDSS did not provide the
referenced provisions, but the relationship between UDC, OGS, and NYSDSS
is certainly one of related parties, since they are all components of
the State.  NYSDSS also submitted an excerpt from the Audit and
Accounting Guide for Audits of State and Local Governmental Units of the
American Institute of Certified Public Accountants (AICPA Guide).
NYSDSS Ex. 31.  In its discussion of accounting for capital leases, the
AICPA Guide states that, when "the lessor is a component unit . . . .
[referring again to GASB Section 2100] such as a building authority
created by the governmental unit solely to finance construction for the
governmental unit" then the component's transactions should be
"consolidated with those of the governmental unit."  AICPA Guide at
85-86.  If anything, this guidance suggests that treating UDC's
transactions as those of the State in regard to this lease, as DCA has
done, is correct.

6.  NYSDSS also submitted an exhibit described as a state-wide CAP for
fiscal year April 1, 1979 to March 31, 1980.  NYSDSS Ex. 28.  This CAP
discusses building use charges and states that OGS identified space used
by departments providing support services and charged them based on "two
percent of total construction costs (the rate allowed by Circular 74-4
[later published as OMB A-87] as an allowable use charge in lieu of
depreciation.)"  Id. at 5 (parenthetical in original).  This
demonstrates that the State knew the correct way to claim public
building costs.

7.  To the extent that NYSDSS is suggesting that the Board should
disregard the explicit provisions of OMB A-87, which is made binding
here by regulation, DCA correctly pointed out that the Board is bound by
all applicable regulations.  45 C.F.R. . 16.14 (1991); DCA Br. at 24-26.
Therefore, NYSDSS arguments that the distinction between public and
private ownership and the October 1, 1980 cutoff are unreasonable or
inadvisable cannot prevail.  See NYSDSS Br. at 28-33.  Furthermore,
there is nothing inherently unfair about setting a cut-off date, even
though buildings occupied after the date set are treated differently
than those occupied before that date.  Cf. Folden v. Washington State
Dept. of Social and Health Services, 744 F.Supp. 1507, 1527 (W.D. Wash.
1990).

8.  NYSDSS also argued that OMB could not change its interpretation of
allowable costs for public buildings, because no statutory change
occurred to precipitate the change.  Therefore, NYSDSS concluded the
current interpretation must always have been applicable.  NYSDSS Br. at
32, n. 14.  This argument assumes that the cost principles involve
statutory interpretation by OMB rather than constituting administrative
requirements promulgated by this Department under legislative rulemaking
authority.  See, e.g., section 1102 of the Act.  Even if interpretation
is involved, however, we know of nothing which requires a statutory
change as a prerequisite to a new administrative interpretation.

9.  Since comparable fair market rental rates act as a ceiling on space
charges even when based on actual costs under OMB A-87, Att. B, C.2, it
is even possible that OGS was providing the figures to NYSDSS only so
that NYSDSS could make the required comparison.  NYSDSS provided no
documentation of how or why OGS calculated the figures provided, and its
testimony on this point was vague and ambiguous hearsay.  See, e.g., Tr.
at 401, 419-431.

10.  The State argued before us in another case that the HPA was revoked
in 1975, when HHS issued an action transmittal revoking "State letters"
which had updated the Handbook.  New York Dept. of Social Services, DAB
No. 585, at 5-8 (1984).  We rejected this conclusion, noting that the
Department had been engaged in a lengthy project of publishing portions
of the HPA in the Federal Register.  We concluded that parts that had
not been revised or revoked by some action of the Department remain
valid, even if they may have become obsolete or obscure in some
respects.  Id. at 8-9; see also Louisiana Dept. of Health and Human
Services, DAB No. 647, at 9 (1985); Washington Dept. of Social and
Health Services, DAB No. 280, at 8 (1982) (HPA is binding where no
evidence that statute or regulations superseded its standard); New
Mexico Dept. of Human Services, DAB No. 211, at 2 (1981); California
Dept. of Benefit Payments, DAB No. 160, at 3 (1981).  As discussed in
the text here, HPA section 4532.5 has been superseded by regulation.

11.  NYSDSS further pointed out that interest as a cost of construction
is not barred by sovereign immunity as is prejudgment interest absent a
waiver (i.e., compensation for federal delay in making payments).
NYSDSS Br. at 23.  However, DCA never suggested that the interest
involved here is barred by sovereign immunity considerations of kind
raised in Library of Congress v. Shaw, 478 U.S. 310 (1986) (applying
rule that interest cannot be awarded by Court against the federal
government absent express waiver).  Instead, DCA argued that mortgage
interest was made unallowable by applicable cost principles.

12.  NYSDSS' affiant (a non-lawyer) admitted that he found no "precise
definition" anywhere, but argued that the chain of development of the
language was from 19th century cases involving denial of interest for
federal government failure to make timely payments, through armed
services procurement rules aimed at excessive profits by military
contractors, to 41 C.F.R. . 1-15.205-17 (later superseded by the present
procurement rules discussed above, which include essentially the same
provision at 48 C.F.R. . 31.205-20), and thence to the original version
of OMB A-87 in 1968.  See Tr. at 224-29.  NYSDSS argued that 41 C.F.R. .
1-15.205-17 was repealed by the Prompt Payment Act of 1982, Pub. L. No.
97-177 and the Cash Management Improvement Act of 1990, Pub. L. No.
101-453, which oblige the federal government to pay interest penalties
for unreasonable delays, thereby making any prohibition of interest on
borrowings obsolete.  NYSDSS Reply Br. at 15-16; NYSDSS Ex. 29, at
unnumbered page 6.  However, since the same prohibition was continued in
the procurement regulations promulgated after the Prompt Payment Act, a
more reasonable interpretation is the phrase "interest on borrowings"
always had a reach broader than that affected by the Prompt Payment Act.

13.  NYSDSS characterized bonds as debt capital not equity capital and
emphasized that the indebtedness was incurred and the interest paid by
UDC, not OGS or NYSDSS.  NYSDSS Reply Br. at 15, n.2.  Neither
distinction makes a difference here.  OMB A-87 does not distinguish debt
and equity capital, but simply prohibits "interest on  borrowings
(however represented)."  As noted above, if such a distinction exists
elsewhere, it does not apply to grants administration under OMB A-87.
We have already held that the State as a whole must be accountable for
its grants and cannot shift costs among its components in an effort to
receive FFP that would be unallowable otherwise.

14.  Also, NYSDSS argued that interest was paid by the federal
government in a variety of circumstances and therefore was not
absolutely prohibited.  See, e.g., NYSDSS Ex. 18 (Comptroller General's
opinion permitting agencies to include in contracts provisions for
payment of interest for government delays).  This misconstrues DCA's
position.  DCA did not argue that all payment of interest by the federal
government was prohibited, but rather that cost principles prohibited
payment of interest on borrowings under grants to state governments.

15.  The relevant part reads:

     Facilities capital cost of money . . . is an imputed cost
     determined by applying a cost-of-money rate to facilities capital
     employed in contract performance.  A cost-of-money rate is
     uniformly applied to all contractors . . . .  Capital employed is
     determined without regard to whether its source is equity or
     borrowed capital.  The resulting cost of money is not a form of
     interest on borrowings (see 31.205.20).

48 C.F.R. . 31.205-10(a)(1)(i) (1991).  (The referenced section is the
one paralleling OMB A-87, Att. B, D.7.)

16.  The cases cited by NYSDSS for the proposition that the same
interpretation must be applied are inapposite.  In Northcross v. Board
of Education, 412 U.S. 427 (1972), the Court found that the use by
Congress of the same language on attorney's fees in two civil rights
laws would be a "strong indication" of parallel interpretation, since
the laws had the same purpose and raison d'etre.  Id. at 428.  The Court
did not state that such an indication could not be overcome.  Here, the
drafter of the provision in question, OMB, has made clear that its
interpretation is intended to be contrary to that advanced by the State.
Further, the procurement and grant regulations do not have the same
purpose and raison d'etre.  NYSDSS cited General Electric Co. v. United
States, 610 F.2d 730 (Ct.Cl. 1979), for the proposition that canons of
statutory interpretation apply to regulations.  However, the court
states that the "meaning of particular terms is to be derived not only
by consideration of the words themselves but also by examination of the
context, the purpose and the circumstances under which the terms are
used."  Id. at 734 (citations omitted).  The plain meaning of the
interest provision supports a broad reading and the context and purposes
are not the same as the procurement situation.

17.  While seeking as much uniformity as possible among cost principles,
the federal government has also recognized that no one set of principles
can apply to all situations.  The FAR treat commercial concerns and
educational institutions differently, in "recognition of differing
organizational characteristics," despite the overall objective that "all
organizations of similar types doing similar work will follow the same
cost principles."  48 C.F.R. . 31.101 (1991).  There is thus nothing
untoward in applying different rules to state government agencies and
commercial vendors.

18.  NYSDSS quoted from the original language of Pub. L. No. 93-400
(before a 1983 amendment) to argue that the prior version was mandatory,
not discretionary.  The original version states in part that "[t]o the
extent he considers appropriate and with due regard to the program
activities of the executive agencies, [the Administrator] . . .  shall
prescribe policies, regulations, procedures, and forms, which shall be
in accordance with applicable law and shall be followed by the executive
agencies" for procurement and in providing for grantee procurement.
Despite the use of the word "shall," the Administrator was clearly not
compelled to act except in his discretion.  In any case, either he has
acted, in that procurement regulations explicitly defer to OMB A-87 for
grants procurement, or he has failed to act, in which case, if action
was mandatorily compelled, remedy would be against the Administrator,
not by invalidating this Department's regulations incorporating OMB
A-87.  NYSDSS pointed to nothing in this language which demanded that
any policies, regulations, procedures, and forms must be uniform for
both federal procurement and federal grant situations without regard to
differences.  In fact, OMB has sought as much uniformity as possible in
cost principles, but has distinguished where necessary among categories
of grantees, such as state governments, hospitals, or nonprofits.  See
45 C.F.R. .. 74.171, 74.173, 74.174.

19.  NYSDSS rejected DCA's position that the Administrator simply never
chose to exercise his discretionary authority, on the basis that OMB
Circular A-102 was issued partly pursuant to the amended version of Pub.
L. No. 93-400 and therefore represented an exercise of the
Administrator's authority by OMB.  But as NYSDSS noted, OMB A-102
incorporated OMB A-87.  NYSDSS Reply Br. at 14.  Thus, whenever the
Administrator or OMB acted in regard to state government grants, it has
been to reaffirm the applicability of OMB A-87; OMB has never to our
knowledge acted to question or undermine the validity of its interest
prohibition or the long-standing broad application of that prohibition.

20.  NYSDSS further argued that Pub. L. No. 93-400 is the only statutory
authority for OMB A-87 and that therefore the circular must be subject
to Pub. L. No. 93-400, or else is invalid.  This argument gets NYSDSS
nowhere.  The procurement rules under Pub. L. No. 93-400 affirm the
applicability of OMB A-87.  OMB A-87 (in one of its versions) was
already in existence when Pub. L. No. 93-400 was adopted (and, of
course, when the law was amended in 1983 by Pub. L. No. 98-191).  Thus,
as NYSDSS conceded, OMB's authorization to issue OMB-87 is "a moot point
since Pub. L. 93-400 supported the 1974 and subsequent reissuances of
OMB Cir. A-87."  NYSDSS Reply Br. at 13, n.1.  Furthermore, the direct
source for applying these cost principles here is 45 C.F.R. Part 74.
Contrary to NYSDSS' statement that this incorporation could not cure any
defect in OMB's issuance of OMB A-87, the Secretary's adoption of the
cost principles was an independent act taken under the Secretary's
authority under 5 U.S.C. . 301 and the Act.

21.  At the hearing, DCA's witness raised an argument that the payments
were not "legally required," because the State had control over which
laws were passed.  Tr. at 509, 518.  DCA did not press the point, and we
find that State laws requiring payment in lieu of taxes were sufficient
to establish a legal