Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: New York State Department of Social Services
Docket No. A-96-61
Decision No. 1590
Date: July 18, 1996
DECISION
The New York State Department of Social Services (NYSDSS)
appealed the decision of the Regional Director, Region II,
Department of Health and Human Services (HHS), disallowing
$592,586 in federal financial participation (FFP) claimed by
NYSDSS under several federal grant programs. 1/ This decision
affirmed the determination of the Division of Cost Allocation
(DCA), from which NYSDSS appealed pursuant to 45 C.F.R. Part 75.
The disallowed costs related to the lease of the Ten Eyck
building in Albany, New York, which was occupied by NYSDSS, for
the period April 1, 1994 to March 31, 1995. The amount
disallowed represented the difference in FFP between lease costs
claimed by NYSDSS, which included amounts attributable to
interest costs, and a use allowance to which DCA determined
NYSDSS was entitled.
In New York State Dept. of Social Services, DAB No. 1336 (1992),
and in subsequent summary decisions, the Board upheld the
disallowance of the same type of costs claimed by NYSDSS for
earlier quarters. 2/ The Board concluded that interest costs
for the Ten Eyck building were unallowable under the plain terms
of Office of Management and Budget (OMB) Circular A-87 and that
only a use allowance was permissible for the costs of space in
that building. During the period covered by the claims at issue
in those decisions, OMB Circular A-87 provided that interest
costs were unallowable, except that the rental cost of space
(which includes interest) in publicly owned buildings newly
occupied on or after October 1, 1980 was allowable if certain
conditions were met. See OMB Circular A-87, Attachment B, D.7
and C.2.a. 3/ The effect of the cited provisions was to make
the interest claimed unallowable since the Ten Eyck building was
occupied prior to October 1, 1980.
As discussed below, we conclude that NYSDSS has not raised any
arguments which warrant a different conclusion in this case,
except with respect to the calculation of the amount of the
disallowance. NYSDSS asserted, and HHS did not dispute, that
$51,879 of the amount disallowed represented costs which were not
actually claimed by New York. NYSDSS Ex. 9 (Affidavit of
Stephanie O'Connell dated 5/1/96). Accordingly, we reverse the
disallowance in the amount of $51,879 and uphold the disallowance
of the remaining amount.
In addition to relying on the same arguments it made in the prior
cases, 4/ NYSDSS argued here that the disallowance should be
reversed based on "the spirit" of revisions to OMB Circular A-87
made in 1995. Effective for the governmental fiscal year
beginning on or after September 1, 1995, the provision on the
allowability of interest costs was revised to read:
a. Costs incurred for interest on borrowed capital
or the use of a governmental unit's own funds, however
represented, are unallowable except as specifically
provided in subsection b. or authorized by Federal
legislation.
b. Financing costs (including interest) paid or
incurred on or after the effective date of this Circular
associated with the otherwise allowable costs of
building acquisition, construction, or fabrication,
reconstruction or remodeling completed on or after
October 1, 1980 is allowable, subject to the conditions
in (1)-(4). Financing costs (including interest) paid
or incurred on or after the effective date of this
Circular associated with otherwise allowable costs of
equipment is allowable, subject to the conditions in
(1)-(4).
OMB Circular A-87, Attachment B, 26 (published at 60 Fed. Reg.
26484, 26499 (May 17, 1995)).
This revision changes the prior rule allowing interest for
buildings "occupied" on or after October 1, 1980, providing
instead that interest for buildings "acquired, constructed,
fabricated, reconstructed or remodeled" on or after October 1,
1980 is allowable. The revised Circular also makes allowable
interest costs incurred on or after its effective date for
existing or newly-acquired equipment. New York did not allege
that the interest in question was allowable under the provision
of the revised Circular concerning interest on buildings. 5/
However, NYSDSS argued that it was clear from the fact that
interest on equipment was allowable without limitation that OMB
had determined that interest was a reasonable and necessary cost
of federal grant programs. In NYSDSS' view, once interest is
determined to be a reasonable and necessary cost, OMB may not
properly limit the circumstances under which it is allowable.
NYSDSS asserted that OMB improperly limited allowable interest
costs by making the date a building was occupied determinative of
whether interest is allowable. 6/ According to NYSDSS, this
limitation is arbitrary and capricious since OMB did not give a
rational basis for distinguishing between interest on equipment
and interest on buildings. 7/ NYSDSS took the position that
the reasons given by OMB for not removing the restriction on
interest on buildings--that it would "provide a windfall
recovery, and might drive up overhead costs of federally assisted
programs"--have no basis in fact. 8/ In addition, NYSDSS noted
that, in response to its Freedom of Information Act request, OMB
indicated that it did not perform any type of cost analysis in
formulating the revised rule on interest but merely considered
the public comments in response to the proposed rule. See NYSDSS
Ex. 8 (1/22/96 letter from OMB to NYSDSS). NYSDSS also noted
that, in response to its discovery request, HHS acknowledged that
it has no documents addressing the reasonableness or necessity of
interest costs, but rather relied solely on OMB's determination.
See NYSDSS Ex. 4 (HHS letter dated 4/16/96, at 1).
New York's arguments are unavailing. The Board is bound by all
applicable laws and regulations. 45 C.F.R. § 16.14. There is no
dispute that the interest costs are unallowable under OMB
Circular A-87 (both the version in effect during the period
covered by this disallowance as well as the 1995 revision).
Moreover, there is no dispute that the Circular was applicable to
the grant programs in question. Accordingly, we are compelled to
find that HHS properly disallowed the interest component of the
lease costs.
In any event, we are not persuaded that, simply because HHS
(based on the OMB Circular provisions) deemed interest costs on
equipment allowable, all other interest costs incurred by a
state, even if a cost of doing business, should be allowable. As
the Board has previously stated:
[T]he allowability of a particular administrative cost
is a matter within the federal government's discretion.
As New York itself pointed out, the Social Security Act
programs under which some of the costs in question here
were claimed typically vest the Secretary of HHS with
the authority to determine what costs are "necessary"
for the proper and efficient administration of the
program. . . .
DAB No. 1537, at 6. Thus, a state is entitled to federal funding
only for those administrative costs which HHS deems necessary for
the proper and efficient administration of the programs in
question. Noting that the authorizing statutes for all of the
programs at issue here contained similar provisions, NYSDSS
argued that "in the absence of any determination by the Secretary
finding that the State's interest costs are unnecessary, the
interest costs are allowable." NYSDSS Reply Br. at 2. However,
this reverses the process required by the statutes, under which
only those costs specifically deemed necessary are determined to
be allowable.
Moreover, we see no reason why OMB, and thus HHS, could not take
into account, in determining whether interest costs on buildings
occupied prior to October 1, 1980 were necessary for the proper
and efficient administration of grant programs, factors such as
whether there would be a windfall to states, which did not rely
on the availability of federal funding for interest costs, and
the impact on the federal fisc. We do not agree with NYSDSS that
OMB was mistaken that there was no reliance and that federal
costs would be increased. Although NYSDSS asserted that it
expected to be reimbursed for the interest in question, that
expectation was hardly justified in view of OMB's longstanding
policy not to pay such interest costs. In any event, NYSDSS did
not make any showing that its budget actually included federal
funding for these costs. NYSDSS also asserted that OMB was
incorrect that a wholesale allowance of interest on buildings
would result in increased costs to the federal government.
According to NYSDSS, any increased cost would be offset by the
decreased costs associated with the conversion from rental space
to government-owned space. However, any such offset is
speculative.
Furthermore, even if OMB's explanation of its decision to treat
other interest costs differently does not address every possible
ramification, that does not mean that the prohibition on interest
for buildings occupied prior to October 1, 1980 is invalid. As
the Board also stated in DAB No. 1537, "[w]e know of no
requirement that an agency have reasons justifying its rules from
every conceivable perspective or differing application." DAB No.
1537, at 8.
Conclusion
For the foregoing reasons, we uphold the disallowance in the
amount of $540,707 and reverse the disallowance in the amount of
$51,879.
________________________
Cecilia Sparks Ford
_________________________
Norval D. (John) Settle
_________________________
Donald F. Garrett
Presiding Board Member
* * * Footnotes * * *
1. The costs claimed were allocated among the federal
programs (listed in the attachment to the 9/11/95 letter from
Bamundo to Wing) in accordance with New York's approved cost
allocation plan. HHS is the cognizant federal agency for
purposes of approving New York's cost allocation plan and
determining whether costs are properly charged in accordance with
that plan. While this decision primarily involves programs
administered by HHS, it also covers programs administered by
other federal agencies.
2. The summary decisions are: DAB No. 1343 (1992); DAB
No. 1360 (1992); DAB No. 1377 (1993); DAB No. 1417 (1993); DAB
No. 1445 (1993); and DAB No. 1506 (1994). At NYSDSS's request,
the records for these decisions, as well as DAB No. 1336, are
incorporated in the record for this case.
3. OMB Circular A-87 was issued by OMB for use by
federal agencies. The Circular's cost principles for state and
local governments were adopted by HHS as part of its general
grant regulations. 38 Fed. Reg. 26274 (September 19, 1973); 45
Fed. Reg 34272 (May 22, 1980) (adopting revisions to the
Circular). Prior to the 1980 revisions to the Circular, the
Circular did not contain any exception to the prohibition on
interest costs.
4. To the extent that NYSDSS merely incorporated its
arguments in the prior cases without explaining why the analysis
in the Board's decisions was wrong, we do not address the
arguments here but rather rely on our earlier analysis.
5. New York also did not contend that the revised
Circular applied retroactively, which it does not. See New York
State Dept. of Social Services, DAB No. 1557, at 5-7 (1995)
(citing DAB No. 1336).
6. Even though New York purported to be relying on the
"spirit" of the revised Circular, it continued to refer to the
occupancy criterion in the earlier Circular.
7. NYSDSS also argued that OMB did not give a rational
basis for treating state governments subject to the Circular
differently than commercial contractors, who are reimbursed for
interest costs under the Federal Acquisition Regulations. This
argument was considered and rejected by the Board in DAB No. 1336
at 22-24. See also, New York State Dept. of Social Services, DAB
No. 1537, at 7-8 (1995) (upholding disallowance of interest on
equipment incurred prior to the 1995 revision of OMB Circular A-
87). NYSDSS did not challenge the Board's analysis other than to
dispute the applicability of a regulation the Board cited in a
footnote (n.10) in DAB No. 1537, but which was not dispositive.
Thus, we do not consider this argument further here.
8. OMB proffered these reasons in the preamble to the
1980 Circular, which first permitted interest on buildings
occupied on or after October 1, 1980, and cited the same reasons
in the preamble to the revised Circular. See 60 Fed. Reg. 26484,
26486 (May 17, 1995).
(..continued)