New York State Department of Social Services, DAB No. 1410 (1993)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT:  New York State Department  of Social Services

DATE:  May 13, 1993
Docket Nos. A-93-35 A-93-102 A-93-136
Decision No.    1410

DECISION

The New York State Department of Social Services (New York) appealed
three determinations by component agencies of the Department of Health
and Human Services (Department) disallowing claims for federal financial
participation (FFP) related to the costs of conducting New York's 1991
fiscal year single state audit.  The Department based the disallowances
on findings that, in charging the costs of the single audit to various
federally supported programs, New York had claimed the single audit
costs at higher percentages of FFP than authorized by the programs.  New
York originally had claimed FFP from each of the programs at a rate of
100 percent for the single audit costs allotted to each program, but in
the course of the appeals lowered the rates of FFP at which it was
claiming the audit costs for each of the programs, so that the amount of
FFP at issue in these appeals is now $16,768.

While New York lowered the rates of FFP it was claiming for the audit
costs, the Department maintained that even those reduced rates exceeded
the FFP allowable under the various programs.  For the reasons discussed
below, we uphold the Department's finding that New York's claims for the
audit costs were excessive and accordingly affirm the disallowances.

Background

In support of the disallowances, the Department relied on provisions of
the Social Security Act as setting the level of FFP for general
administrative costs for each of the programs involved in these appeals:
section 1903(a)(7) (Medicaid); section 455(a)(2)(C) (Title IV-D); and
section 474(a) (Title IV-E).  New York's position is based on the
argument that the provisions of the Single Audit Act should be
controlling here.

The Single Audit Act of 1984 (Act), Pub. L. No. 98-502, 31 U.S.C. . 7501
et seq., requires state or local governments to have a single audit
performed for any year in which they receive $100,000 or more in federal
funds.  The Act directed the Office of Management and Budget (OMB) to
prescribe policies, procedures, and guidelines to implement the Act,
with each federal agency promulgating "such amendments to its
regulations as may be necessary to conform such regulations" to the
Act's requirements and the policies, procedures, and guidelines.  31
U.S.C. . 7505(a).  The Act called for the policies, procedures, and
guidelines to include criteria that would determine "the appropriate
charges to programs of Federal financial assistance for the cost of
audits" and that would prohibit a state or local government from
charging to any program "more than a reasonably proportionate share of
the cost" of a single audit.  31 U.S.C. . 7505(b)(1).  The Act stated
that the criteria --

     shall not, in the absence of documentation
     demonstrating a higher actual cost, permit (A) theratio of (i) the
     total charges by a government to Federal financial assistance
     programs for the cost of audits performed pursuant to this chapter,
     to (ii) the total cost of such audits, to exceed (B) the ratio of
     (i) total Federal financial assistance expended by such government
     during the applicable fiscal year or years, to (ii) such
     government's total expenditures during such fiscal years or
 years.

31 U.S.C. . 7505(b)(2).

In accord with the Act, OMB subsequently issued Circular A-128, entitled
"Audits of State and Local Governments." In August 1985, the Department
promulgated regulations incorporating OMB Circular A-128.  See 45 C.F.R.
. 74.62(a)(2), incorporating Circular A-128 as Appendix J to 45 C.F.R.
Part 74.

OMB Circular A-128 provides in relevant part:

 Generally, the percentage of costs charged to federal assistance
 programs for a single audit shall not exceed the percentage that
 Federal funds expended represent of total funds expended by the
 recipient during the fiscal year.  The percentage may be
 exceeded, however, if appropriate documentation demonstrates
 higher actual cost.

Section 16(b).

Discussion

The sole issue in these appeals is at what rates of FFP for each of the
programs involved New York can claim the costs of the single audit.

New York asserted that it was entitled to claim FFP for the costs
associated with the single audit at rates higher than those for
administrative activities under the programs.  New York argued that the
proper interpretation of section 7505(b)(2) of the Act requires that
single audit costs be reimbursed at the overall FFP rates for the
programs involved in these appeals.  New York argued that an overall FFP
rate for each program could be determined by dividing the federal
contribution for a fiscal year by the total dollar amount (federal and
state) expended for that program in that year.  See, e.g., New York
Exhibit 1 in Docket No. A-93-35.  The overall rate thus would encompass
expenditures for specific activities funded at enhanced rates along with
all other activities funded at the general FFP rate.  New York claimed
that its overall FFP rates were as follows:  Medicaid, 66 percent; IV-D
program, 70.61 percent; and IV-E program, 61.98 percent.  According to
New York, it is entitled to claim the costs of single audit at these
enhanced rates.

New York referred to the Act's legislative history to support its
position:

 [T]he Federal Government's share of the payment for a single
 audit could not exceed the ratio of total Federal assistance
 spent by the recipient during the year being audited to the
 recipient's total expenditures for the year.  In other words, if
 expenditures of Federal assistance represented one-fourth of the
 recipient's total expenditures, then Federal funds could not be
 used to pay more than one-fourth of the audit costs. . . .
 [T]his limit may be exceeded if a State or local government can
 document that the actual cost of auditing Federal programs
 exceeds the amount allowed by the cap.

1984 U.S.C.C.A.N. 3955, 3968.

New York contended that this language demonstrates Congress' intent to
provide enhanced levels of FFP for single audits.  New York further
argued that both HCFA and ACF have failed to follow the Act's directive
to amend their regulations to conform to the Act's requirements.  New
York pointed out that the various regulations cited by HCFA and ACF to
support their disallowance determinations, e.g., 42 C.F.R. . 433.15,
predate the Act and have not been amended to conform to the Act.

The Department's position was that the Act does not provide authority
for reimbursement of single audit costs at an enhanced rate.  According
to the Department, while the costs of the single audit are clearly an
allowable cost, they are to be reimbursed at only the FFP rate
authorized by the Social Security Act for unspecified administrative
activities associated with each particular program:  Medicaid, 50
percent; Title IV-D, 66 percent; and Title IV-E, 50 percent.  According
to the Department, while certain specified administrative activities
qualify for enhanced FFP, costs of the single audit are considered
general administrative expenditures that do not merit FFP at an enhanced
rate.

The Department argued that implementing regulations for each of the
federal-state programs at issue here clearly establish the percentage of
FFP a state is entitled to receive for its administration of the
particular program.  For example, FFP rates for administrative costs
associated with the Medicaid program are set forth at 42 C.F.R. .
433.15.  These regulations set enhanced rates of FFP for certain
specified activities such as the administration of family planning
services and the development of mechanized claims processing systems.
"All other activities" for the proper and efficient administration of
the State Medicaid plan, however, are to be reimbursed at a FFP rate of
50 percent.  42 C.F.R. . 433.15(b)(7), implementing 42 U.S.C .
1396b(a)(7).  According to the Department, these regulations therefore
do not allow for any FFP rate higher than 50 percent for the costs
associated with the single audit or any other type of audit.

Similarly, the Department continued, the amounts a state expends for the
operation of the Title IV-D program are reimbursable at a statutory
limit of 66 percent FFP.  See  42 U.S.C. . 655(a)(2)(C).  The Title IV-E
program sets a limit of 50 percent FFP for administrative expenditures
necessary for the proper and efficient administration of the Title IV-E
State plan.  See 45 C.F.R. . 1356.60(c).

New York's rationale for enhanced reimbursement is faulty because the
subject of section 7505(b) is the initial allocation of single audit
costs among benefitting programs, rather than the splitting of those
costs between state and federal partners in those programs.  The purpose
of this section is to prevent state and local governments, which likely
have some non-federal programs that are included in the single audit,
from charging federal programs more than their proportionate share of
the costs of a single audit.  The Act's legislative history confirms
this.  Congress wanted to be sure that audit costs were proportionately
shared by all benefitting programs unless a state or local government
could document that auditing federal programs in particular was actually
more expensive.  This section has no bearing on the allocation of costs
between the federal government and state partners in these programs once
the proper allocation among programs is made.  In these cases, the
Department did not question New York's allocation of costs to the
programs or rely on this provision as setting the levels of FFP.
Consequently, this provision is not relevant here.

Thus, while New York is correct that the formula it used to determine
the applicable rate of FFP is essentially the same as the formula
specified in this section of the Act and the corresponding provisions in
the OMB Circular, this formula does not determine the rate at which a
state is entitled to be reimbursed.  Contrary to New York's arguments,
this provision simply does not mandate a rate of reimbursement for
single audit costs.  Our review of the rest of the Act revealed no other
provisions setting a reimbursement rate.  As explained below, we
conclude that, in the absence of a provision for an enhanced rate of
reimbursement for single audits, New York was entitled to be reimbursed
only at the rates provided by the program statutes and regulations for
administrative costs.

As indicated previously, the program statutes and regulations specify
the rates of FFP in administrative costs of the programs.  Although the
single audit costs are administrative costs, New York is seeking funding
of these costs at enhanced levels of FFP, at rates above those
specifically provided for administrative costs.  We have held before
that eligibility for enhanced funding is "special," must be provided for
specifically by statute or regulation, and is available only when the
state meets all the qualifications for enhanced funding.  New York State
Dept. of Social Services, DAB No. 1405, at 16-17 (1993); Pennsylvania
Dept. of Public Welfare, DAB No. 996, at 3 (1988); Missouri Dept. of
Social Services, DAB No. 395, at 6 (1983).  As discussed above, the Act
did not mandate enhanced funding for the costs of a single audit.
Moreover, there is nothing in the program regulations which specifically
authorizes enhanced FFP for single audit costs.  While New York
correctly noted that the regulations setting the rate for general
administrative costs predate the Act, Congress has subsequently included
in the Social Security Act explicit provisions requiring enhanced
funding for certain administrative activities.  See, e.g., 42 U.S.C. .
1396b(a)(3)(D).  Single audit costs are not included among those
"special" activities.  This reinforces our view that the costs of the
single audit are properly reimbursable at the FFP rates set by the
regulations implementing the Social Security Act.

We also do not find persuasive New York's argument that its
interpretation should be adopted because the Department and its
constituent agencies failed to enact or amend regulations to comply with
the Act.  The Act did not mandate that agencies adopt any particular
rate as their reimbursement rate for single audit costs.  The Department
did incorporate OMB Circular A-128 into its regulations at Appendix J to
45 C.F.R. Part 74.  Furthermore, while the Act required each federal
agency to "promulgate such amendments to its regulations as may be
necessary to conform such regulations" to the Act (31 U.S.C. . 7505(a)
(emphasis added)), the Department already had in place a mechanism which
could be used to reimburse the audit costs.  Thus, there was no need by
the Department to amend its regulations to comply with the Act.

Conclusion

For the reasons discussed above, we sustain the three disallowances in
their full amount.

    ___________________________ Donald F. Garrett

    ___________________________ Norval D. (John)
     Settle Presiding Board Member

     ___________________________ M. Terry Johnson
      Presiding Board Member