Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: California Department of Finance
Docket No. A-96-5
Control No. A-09-92-00116
Decision No. 1592
DATE: July 26, 1996
DECISION
The California Department of Finance appealed a decision
by the Division of Cost Allocation (DCA) disallowing
$121,721,902 in federal financial participation (FFP)
California claimed as contributions to its Public
Employees Retirement System (PERS) during the fiscal
years ending June 30, 1992 and 1993 (FYs 92 and 93), and
$19,158,773 attributable to interest earned on that
amount. Based on a report of the Office of Inspector
General (OIG), DCA determined that California claimed FFP
in amounts California identified as its employer
contributions to PERS, but which were made by
transferring to PERS funds from accounts consisting of
earnings on PERS contributions made by state employees.
DCA also determined that California owed a credit to the
federal government for the interest earned. DCA
calculated this amount using the rate of interest earned
on PERS funds.
The record in this appeal consists of the parties'
written submissions, and the transcript of an oral
argument conducted by telephone on April 11, 1996. For
the reasons explained below, we conclude that California
improperly claimed FFP in contributions to PERS that were
made with the earnings on employee contributions. We
also hold that DCA is entitled to recover, as part of the
disallowance, an amount of FFP determined by treating as
a credit interest earned by federal funds improperly
claimed. Accordingly, we sustain the disallowance in
full. 1/
Background
A state's employer contributions to pension plans for
employees who work on federally funded programs are
allowable as employee benefits under Office of Management
and Budget (OMB) Circular A-87, Attachment (Att.) B,
B.13.b. Such benefits must be granted under approved
plans and be distributed equitably to grant programs and
to other activities, and are subject to basic
requirements affecting allowability of costs set out in
the Circular. "Cost" is defined as cost determined on a
cash, accrual, or other basis acceptable to the federal
grantor agency as a discharge of the grantee's
accountability for federal funds. Att. A, B.3. To be
allowable, costs must be necessary and reasonable for the
proper and efficient administration of the grant program;
be net of all applicable credits; be consistent with
policies, regulations and procedures that apply uniformly
to both federally assisted and other activities, and be
accorded consistent treatment through application of
generally accepted accounting principles. 2/ Att. A,
C.1.a, d, e, g. The federal government
participates in a state's pension contributions for
employees working on federally funded programs, pursuant
to a cost allocation plan approved by the Department of
Health and Human Services. See Att. A, J.
PERS, California's pension system for state employees, is
a statutorily created body which administers and pays
retirement benefits; its membership is composed of state
employees, nonteaching school employees, and employees of
various local agencies. Participating employees
contribute to PERS at a fixed rate, while California's
employer contributions, in which the federal government
participates, vary as necessary to assure the financial
soundness of the pension system. These contributions are
determined by actuaries. In determining the amount of
contributions, the actuaries consider factors such as
what the rate of return on the pension plan's assets is
expected to be. The actuaries also consider how much is
necessary to cover the pension plan's liability for
benefits earned by participating employees, prior to the
creation of the pension plan, which exceeds the plan's
assets, the so-called unfunded actuarial liability (UAL).
See Declaration of Ronald L. Solomon, DCA Exhibit (Ex.)
4, 11-15.
Employee contributions to PERS are maintained in
individual employee accounts and are credited with an
annual rate of return determined based on expected
earnings, the so-called actuarial rate of return. The
employer contributions, which are paid by California, are
credited with interest based on the actual earnings of
the PERS fund. The federal government shares in the cost
of California's employer pension contributions through
payments made under federal grants and contracts
administered by state and local agencies.
Because of market conditions, the employee contributions
to PERS when invested earned a rate of return higher than
the fixed rates with which the employees' accounts were
credited. These "excess earnings" on employee
contributions were placed in two distinct accounts, the
Investment Dividend Disbursement Account (IDDA),
beginning in 1982, and then into the Extraordinary
Performance Dividend Account (EPDA), beginning in 1988.
The IDDA/EPDA accounts were used to pay additional
benefits to retirees based on the cost of living, and
therefore the additional benefits did not result in
increased claims for FFP. 3/
DCA asserted that generally accepted actuarial principles
applicable to PERS called for the excess earnings on
employee contributions, also referred to as actuarial
gains, to be applied to reduce the pension fund's UAL.
By using the actuarial gains to instead create the
IDDA/EPDA accounts, DCA argued, California was required
to make larger employer contributions (and claimed more
FFP) to amortize the UAL, and thus incurred costs which
were not "necessary and reasonable" as required by
applicable cost principles. DCA stated that it did not
object, however, because California was using the
actuarial gains to fund supplemental benefits which, had
they been paid from PERS, would have resulted in higher
state employer contributions and thus more FFP. DCA said
that the effects on FFP "conceptually offset" each other.
DCA Brief (Br.) at 14.
In 1991, faced with a significant budget shortfall, the
California legislature eliminated the additional benefit
programs that had been funded by the IDDA/EPDA accounts,
and directed that the funds in the accounts be used to
reduce employer contributions to PERS until depleted.
Subsequent legislation specified that, for California
employer contributions to PERS, the IDDA/EPDA funds would
be used to reduce only contributions required of state
agencies that would otherwise be paid from General Fund
appropriations. DCA Br. at 9-10, citing California
Assembly Bills 702 and 1922. 4/
DCA asserted that the effect of the legislation
restricting the IDDA/EPDA funds to reducing only
contributions paid from California's General Fund was to
deny a comparable reduction in the portion of employer
contributions made with federal funds. An OIG Audit
Report determined that, of some $2 billion in the
IDDA/EPDA accounts, approximately $816 million was used
to pay PERS pension costs that would otherwise have been
paid from the state's General Fund. California Ex. 1.
OIG determined that California claimed FFP in employer
contributions paid with the IDDA/EPDA funds. 5/
DCA argued that once the supplemental benefits paid by
the IDDA/EPDA funds (and in which no FFP had been
claimed) were eliminated, the "conceptual offset"
rationale that had caused DCA to "tolerate" the diversion
of actuarial gains from amortizing the UAL disappeared.
DCA determined that California was not eligible for FFP
in employer contributions to PERS covered by IDDA/EPDA
funds. OIG Audit Report at 6-8. DCA asserted that the
federal government, as a PERS funding source, should have
shared in the reduction of contributions to PERS realized
through the use of the IDDA/EPDA funds. DCA argued that
the IDDA/EPDA funds were "applicable credits" which
should have been deducted from total employer
contributions claimed for FFP, and that California
received an overpayment of FFP in the amount of the
federal match provided for employer contributions made
with those funds. OIG calculated the disallowance by
multiplying the total IDDA/EPDA funds "reverted for state
agencies" each year by the "federal share percentage,"
the portion of total state and federal expenditures
represented by federal funds. Memorandum from OIG Office
of Audit Services, September 7, 1994, California Ex. 2.
California did not dispute OIG's calculations. 6/
Transcript at 35-36.
California disagreed, primarily arguing that the
IDDA/EPDA funds were not earnings on federal funds, and
that the elimination of the supplemental benefit programs
funded by the IDDA/EPDA accounts and their use to cover
employer contributions had been challenged and upheld in
court. California also questioned the amount of the
disallowance because a third of the IDDA/EPDA funds
transferred to PERS were used to amortize the UAL, and
because the state's Special Funds did not receive an
offset from the IDDA/EPDA funds. Transcript at 35-36.
Analysis
1. California could not claim FFP in PERS contributions
paid for with IDDA/EPDA funds.
The cost principles in the version of OMB Circular A-87
in effect during the period relevant to this disallowance
require that total allowable costs claimed under a grant
program "(b)e net of all applicable credits." Att. A,
C.1.g; see also Att. A, D.1. "Applicable credits"
refer simply to "those receipts or reduction of
expenditure-type transactions which offset or reduce
expense items allocable to grants as direct or indirect
costs." Examples of such transactions are: purchase
discounts; rebates or allowances, recoveries or
indemnities on losses; sale of publications, equipment,
and scrap; income from personal or incidental services;
and adjustments of overpayments or erroneous charges.
OMB Circular A-87, Att. A, C.3.a. A state that has
received an applicable credit but not reduced its
allowable costs claimed under the federal grant program
has received an overpayment of FFP. North Carolina Dept.
of Human Resources, DAB No. 361 (1982), aff'd, 584 F.
Supp. 179 (E.D.N.C. 1984). A common theme in applicable
credit cases, and in the examples of applicable credits
in OMB Circular A-87, is the receipt of monies (or
reductions of expenditures) by a state related to its
federally funded program which, if unaccounted for in the
program, would result in a savings or gain to the state
alone. There must also be a nexus between the questioned
receipts and the federally funded program. Oregon Dept.
of Human Resources, DAB No. 1298, at 10-11 (1992), citing
Hawaii Dept. of Social Services and Housing, DAB No. 779,
at 6 (1986). In each of the applicable credit examples,
there is a direct relationship between a grant-related
cost and some form of discount or credit. New York State
Dept. of Social Services, DAB No. 1536 (1995).
California first argued that the IDDA/EPDA funds were not
applicable credits because they consisted of interest
earned solely on contributions from employees and not on
federal funds, and that a Board decision cited by DCA,
Pennsylvania Office of the Budget, DAB No. 1234 (1991),
involved interest earned on federal investments in a
self-insurance fund and was thus not applicable.
California's argument overlooks the fact that the
IDDA/EPDA funds were also not interest earned on state
monies, and were not earned on California's employer
contributions paid with state funds. Since they were not
state funds, their transfer from the IDDA/EPDA accounts
to PERS offset or reduced California's expenditures for
its employer contributions to the PERS system in which
FFP was claimed and was thus a "receipt" of funds by
California. There was also a nexus between the IDDA/EPDA
funds and the PERS system in which the federal government
participates because the funds arose directly out of the
operation of California's PERS system. Since the federal
government shares in the costs of the program, it is
entitled to share in any savings resulting from the
operation of the program, such as resulted when
California used the IDDA/EPDA funds to reduce employer
contributions. Any entitlement California has to the
funds is in its role as the employer, which made higher
contributions in the past than would have been necessary
had the excess earnings on the employee contributions
been used to reduce the UAL. In other words,
California's claim to the excess earnings could be
considered as arising from past overpayments of employer
contributions. Alternatively, by using the funds to
cover amounts that otherwise would have been paid as
employer contributions, California in effect received a
discount on its PERS expenses. Either way, the monies
fall squarely within the definition of applicable
credits. Under the cited cost principles, California was
required to share this discount with the federal
government, which shares in the cost of the PERS program,
either as an expenditure reduction or a cash refund.
By failing to lower its claim for FFP, California in
effect created a disparity in the rates at which
California and the federal government contribute to PERS.
In this respect, this case is analogous to West Virginia
Dept. of Administration, DAB No. 1465 (1994), where West
Virginia made employer contributions to its PERS system
at a lower percentage-of-payroll rate than that charged
to the federal government, resulting in an overpayment of
federal funds. 7/
That the IDDA/EPDA funds were not comprised of interest
on federal funds also did not prevent them from being
applicable credits that had to be applied to California's
claim for FFP in its employer contributions to PERS.
Maryland Dept. of Human Resources, DAB No. 412 (1983),
concerned the application of funds raised through a fee
assessed on sums collected by county courts, including
child support collections. The Board held that Maryland
had to deduct such collections from its claim for FFP in
its expenditures for its federally funded child support
enforcement program. The Board noted that the fees were
derived from activities for which federal funds were
claimed and stated that receipts arising from activities
supported by federal funds were required to be deducted
from claims for FFP, both under regulations specific to
the child support program, and under the applicable
credits provision of the general cost principles for
federal grant programs.
Absent a nexus between the receipts and the federally
funded program, state receipts need not be considered
applicable credits. The Board has noted that
characterizing state funds raised through fees or taxes
of general applicability as applicable credits would
render meaningless a state's ability to raise revenues,
as all monies received by a state through the power of
taxation would potentially be applicable credits. Oregon
at 14-15. Oregon concerned monies raised through fees on
drivers licenses used to cover Oregon's share of the
costs of treating Medicaid recipients injured in motor
vehicle accidents. The Board ruled that those fees were
not applicable credits because they did not arise out of
the operation of Oregon's Medicaid program nor from the
receipt of federal funds by Oregon. In this case, by
contrast, the IDDA/EPDA funds were generated directly as
a result of the operation of PERS, and not from
California's general authority to raise revenue, such as
through fees or taxes of general applicability.
Consequently, their use here resulted in a savings or
gain related to PERS costs, and thus an applicable
credit.
California next argued that the elimination of the
supplemental benefits and the use of the IDDA/EPDA funds
to reduce General Fund employer contributions had been
challenged and upheld in Claypool v. Wilson, 4
Cal.App.4th 646, 6 Cal.Rptr.2d 77 (1992). California
argued that the court there considered actuarial evidence
that use of the IDDA/EPDA funds to offset the employer
contributions paid from General Funds did not threaten
the actuarial soundness of PERS.
Our review of the Claypool decision indicates that it
does not support California's argument as applied to this
disallowance. Claypool was an action brought by state
employees and PERS beneficiaries challenging the repeal
of the supplemental cost-of-living benefits that had been
paid to retirees with the IDDA/EPDA funds. The court
focused on whether the PERS fund's ability to pay pension
amounts had been jeopardized by California's transfer of
the funds. This department was not a party to that
litigation, and Claypool did not consider whether federal
interests were affected by California's claiming FFP in
General Fund employer contributions paid with the
IDDA/EPDA funds. While Claypool did not concern the
applicable credits provision of OMB Circular A-87, we
note that the court there stated, in language cited by
California, that the IDDA/EPDA funds "may be applied to
offset the employer contributions that would otherwise be
required" [to back the actuarial soundness of PERS]. 4
Cal.App.4th at 671; 6 Cal.Rptr.2d at 92; California Br.
at 3. As DCA pointed out, "offset" falls within the
definition of applicable credits. Viewing California's
employer contributions in FYs 92 and 93 as having been
offset or reduced by the IDDA/EPDA funds effectively
meant that California did not have outlays in those
amounts for which it could properly claim FFP.
California also disputed DCA's description of generally
accepted actuarial principles. We find, however, that
DCA reasonably demonstrated that under generally accepted
actuarial principles all earnings of PERS funds,
including the excess earnings on employee contributions,
should have been applied to reduce the UAL. The
actuarial principles support DCA's position that PERS
costs that should have been covered by the excess
earnings in the IDDA/EPDA accounts were not necessary and
reasonable costs as required by OMB Circular A-87. 8/
DCA provided a declaration of an actuary employed by the
Health Care Financing Administration concerning
disposition of the IDDA/EPDA funds. The actuary stated
that, according to generally accepted actuarial
principles, under the actuarial cost method utilized by
PERS, actuarial gains such as earnings of pension funds
should be used as they occur to reduce a pension plan's
UAL. 9/ Declaration of Ronald L. Solomon, DCA Ex. 4,
11, 12. DCA also provided a copy of
Recommendations for Measuring Pension Obligations,
Interim Actuarial Standards Board, American Academy of
Actuaries, which states that for the entry age normal
actuarial cost method, "the Actuarial Gains (Losses), as
they occur, reduce (increase) the Unfunded Actuarial
Accrued Liability." 10/ DCA Ex. 2. It was not
disputed that "actuarial gains" as applied in this case
meant the earnings on employee contributions in excess of
the fixed rate of return that was credited to the
employees' PERS accounts.
California did not present any actuarial evidence in this
appeal to counter the declaration of the HCFA actuary
offered by DCA. Instead, California argued that the
Claypool v. Wilson decision reflected the determination
of a PERS actuary that the creation of the IDDA/EPDA
funds was not contrary to actuarial principles.
Transcript at 59-60. However, the actuarial testimony
cited in the decision concerned only whether elimination
of the funds would jeopardize the actuarial soundness or
health of the PERS system, and the decision did not
address whether actuarial principles called for IDDA/EPDA
funds to be used to amortize the UAL.
In addition, California's argument that one-third of the
IDDA/EPDA funds used as the state's employer contribution
were used to amortize the PERS UAL misses the point. The
particular disposition of the IDDA/EPDA funds within PERS
once they were transferred out of the IDDA/EPDA accounts
is irrelevant. Use of IDDA/EPDA funds in place of
employer contributions represented a savings to
California which it was required to deduct from its claim
for FFP, regardless of whether the funds were later
applied to amortize the UAL or applied for other purposes
to PERS. This disallowance resulted not from California
using the IDDA/EPDA funds in place of its contribution to
PERS, but from claiming FFP as though it had made
unreduced employer contributions.
California argued hypothetically that if it had used
Special Funds of state origin, other than IDDA/EPDA
funds, to offset its employer contributions, it could
properly have claimed FFP in those contributions.
Transcript at 42. This argument is also unavailing. To
the extent that California's Special Funds are state
funds, their use to pay the employer contribution would
not have been an offset that would have lowered
California's expenditure and its entitlement to FFP.
However, if California had transferred the IDDA/EPDA
funds to its General Funds and paid its employer
contributions out of Special Funds, it still would have
received an offset, and thus an applicable credit, in the
amount of the IDDA/EPDA funds. This principle is not
dependent on which particular account or division within
a state's financial system is used to pay state
obligations or to receive non-state funds, such as the
IDDA/EPDA funds.
Accordingly, when California, in its capacity as the
employer, received an offset or reduction in its PERS
contribution through the IDDA/EPDA funds, the federal
government should have shared in that reduction. The
fact that the state's Special Funds did not receive a
reduction through the IDDA/EPDA funds, as California
argued, is irrelevant, since the state overall, as a
single entity, received a reduction in its contribution
which it did not share with its non-state partner in
employer contributions, the federal government. The
Board has held that a state as a whole must be viewed as
a single unit responsible for the administration of grant
funds, and that the character of recovered funds must be
assessed at the point that they are received by the
state, and not when eventually applied to the federally
funded program. Louisiana Dept. of Health and Hospitals,
DAB No. 1176, at 10 (1990); Oregon, at 11, citing North
Carolina. 11/
2. California is liable for interest earned on
overcharges of FFP.
California also challenged the recovery of $19,158,773 in
the amount of interest earned by the IDDA/EPDA funds
after they were transferred into PERS in lieu of
California's employer contribution. The interest was
calculated based on the rates earned by PERS funds, and
accrued from the time that funds were transferred, in
stages, to PERS until February 28, 1995, the date of the
final determination letter from the Regional Director of
DCA. 12/ The amount of interest allocable to the
federal government was determined by multiplying the
total interest earned by the IDDA/EPDA funds once
transferred to PERS by the average FFP share of 0.1352.
California Ex. 3, Att. 1.
California argued that DCA could not charge interest
prior to the issuance of DCA's final determination letter
because the claims collection regulations of the
Department of Health and Human Services (HHS) (and
similar provisions in the Treasury Financial Manual)
provide for the assessment of interest on a disallowance
only 30 days after a notice is sent to the debtor
informing it of the claim and affording an opportunity to
dispute the debt. 45 C.F.R. § 30.12. California further
argued that a June 27, 1991 letter from the DCA Regional
Director to PERS asserting a federal interest in the
IDDA/EPDA funds was not sufficient notice under the
claims collection regulations to trigger the assessment
of interest. California Ex. 3, Att. 2. That
correspondence was further deficient, California argued,
because DCA had acquiesced in the use of the excess
earnings for purposes other than amortizing the UAL.
The Board has previously held that a state is liable for
the amount of the interest earned on the amounts
representing overcharges of FFP. In West Virginia, the
state overcharged the federal government by claiming FFP
in contributions to its PERS at the required employer
contribution rate of 9.5% of payroll, but contributed
only 1.68%. The Board found that the interest income
that the state earned on the overcharges fell within the
plain meaning of "applicable credit," since earnings
derived from federal funds are clearly receipts which
offset grant costs. OMB Circular A-87, Att. A, C.3.a.
Similarly, the Board has held in decisions involving
interest earned on Medicaid funds withheld from state
providers that interest is an applicable credit within
the meaning of OMB Circular A-87. See, e.g., New York
State Dept. of Social Services, DAB No. 588 (1984); North
Carolina. 13/ The Board has also held that interest
generated on recoveries held for grant programs is
program income which must be credited to the federal
government. Indiana Dept. of Public Welfare, DAB No. 859
(1987); North Carolina.
The situation in West Virginia is strikingly similar to
the instant case. California effectively lowered the
contribution rate at which it made its employer
contributions by paying for those contributions with the
earnings of employee contributions, but did not
accordingly lower the amount for which it claimed FFP.
The Board stated in West Virginia that "[i]t is only
logical that interest earned on unallowable charges
should be given back to the federal government.
Otherwise, West Virginia would profit from overcharging
the federal government." West Virginia, at 4. The same
principle applies here.
The Board also pointed out in West Virginia that the
Supreme Court, in U.S. v. Texas, 507 U.S. 529, 113 S.Ct.
1631 (1993), held that the Debt Collection Act did not
abrogate federal common law principles that the federal
government can collect interest on debts owed by states.
Since the HHS claims collection regulations on which
California relies were promulgated pursuant to the Debt
Collection Act, we find that they do not bar recovery of
interest earned on the federal funds that California
received by claiming FFP in employer contributions to
PERS that were paid for with the IDDA/EPDA funds.
Furthermore, here the federal government is determining
the proper amount of California's net expenditures in
which it may claim FFP. California should have treated
the interest earned here as an applicable credit to be
deducted from costs in which California claimed FFP.
Thus, we find that the amount in question here is not a
charge for interest on a debt owed to the federal
government, but rather part of the debt owed to the
federal government when California's net expenditures are
properly calculated under the program requirements. OMB
Circular A-87, Att. A, C.1.g.
Even if we considered this a dispute over prejudgment
interest (which we do not), we would not agree with
California's arguments about the equities here. While
not denying that Texas stood for the principle that
states may be liable for prejudgment interest on debts
owed to the federal government, California argued that
Texas did not provide for the automatic assessment of
interest but required a balancing of state and federal
interests. As interests in its favor, California cited:
DCA's apparent acquiescence in the creation of the
IDDA/EPDA funds and its lack of notice that such
acquiescence would end upon termination of the
supplemental benefit programs; DCA's failure to notify
the state (as opposed to PERS) of its position that there
was a federal interest in those funds; and, the fact that
this was a matter of first impression involving the
application of unclear actuarial principles. California
also argued that the federal government would receive a
windfall through the recovery of the IDDA/EPDA funds to
which it did not contribute, and this windfall should not
be augmented through the recovery of interest.
We find that the state interests California cited are not
applicable here. As indicated in DCA's submissions,
DCA's acquiescence in California's use of the IDDA/EPDA
funds to pay supplemental retirement benefits was
premised entirely on the fact that this use offset costs
that otherwise would have resulted in additional claims
for FFP. California has failed to indicate how
California could reasonably conclude that such
acquiescence would continue once California decided to
discontinue those benefits, use the remaining IDDA/EPDA
funds for a different purpose (to offset employer
contributions to PERS), and begin to claim FFP as though
such an offset had not occurred. Since the treatment of
the interest here was not based on a reversal of any
position that DCA may have adopted to the state's
benefit, the sufficiency of notice of a change in that
position is not relevant to DCA's ability to disallow the
resulting overpayments of FFP. We also note that DCA is
not calculating the interest earned (and therefore to be
applied as an applicable credit) back to the time that
California first used the actuarial earnings of employee
contributions to create the IDDA/EPDA funds, so DCA's
failure to have objected to the creation of those funds
provides no support for California's position here.
Moreover, California's arguments that this is a case of
first impression involving unclear actuarial concepts
does not address DCA's basic point that California
claimed FFP in contributions which it did not pay, but
which were made with the IDDA/EPDA funds. Additionally,
our decision upholds the disallowance of expenditures to
which interest should have been applied as an applicable
credit only to the extent that interest was earned on
federal funds. The ability of the government to disallow
such earnings on the basis that they are applicable
credits is well-settled. 14/ See, e.g., West
Virginia, New York, DAB No. 588; North Carolina.
Finally, the recovery of interest that California
realized on the FFP claimed in contributions paid with
the IDDA/EPDA funds does not amount to a windfall to the
federal government. DCA is not recovering the IDDA/EPDA
funds, as California asserted, but only FFP that
California improperly claimed because it did not properly
take applicable credits into account in determining its
net expenditures. It is the state that would experience
a windfall if permitted to claim FFP in expenditures
which are not net of applicable credits. The
disallowance here puts California in the same position as
if it had never claimed the FFP, and accordingly,
California is not adversely affected by any lack of
notice of the interpretation of the relevant requirements
as applied here. 15/
We thus conclude that California should have reduced its
net expenditures to account for interest earned on funds
California held because it claimed FFP in PERS
contributions paid for with IDDA/EPDA funds. DCA
calculated the interest based on the rates that were
earned by PERS funds during the periods in which the
IDDA/EPDA funds were transferred to PERS in lieu of
California's employer contribution. The fact that DCA
calculated the earnings on federal funds using the PERS
funds rates does not mean that this FFP went into PERS.
However, while other rates of return arguably could have
applied to the federal funds that were improperly drawn
down, California did not argue that the amounts
calculated at the PERS rates exceeded amounts that the
state earned on funds it would otherwise not have had if
it had not claimed FFP in PERS contributions made with
IDDA/EPDA funds. California did not deny that it had
held funds that were earning interest during this period.
3. There is no basis to overturn the imposition of
interest on the disallowance subsequent to DCA's
final determination letter.
California also challenged the imposition of interest on
the total $140,880,675 disallowance accruing 30 days
subsequent to the February 28, 1995 final determination
of the DCA Regional Director, which sustained the OIG's
recommendation that California refund the disallowed
amount. The interest was imposed pursuant to the claims
collection regulations at 45 C.F.R. Part 30, which
provide that interest, at a rate fixed by the Secretary
of the Treasury, will accrue on all debts from the date
that notice of the debt and interest requirements is
mailed to the debtor, if the debt is not paid within 30
days of such notice. 45 C.F.R. § 30.13; see also Social
Security Act, § 1903(d)(2).
The Board Chair has previously ruled that the Board lacks
jurisdiction to consider whether interest may be assessed
on a disallowance. The rulings noted that there is no
general right to review by the Board, the assessment of
post-disallowance interest is not a type of dispute for
which Board review is available under 45 C.F.R Part 16,
Appendix A, and there is no program regulation or
memorandum of understanding which gives the Board
jurisdiction to review the assessment of post-
disallowance interest. See, e.g., New York State Dept.
of Social Services, Docket No. A-94-112 (Rejection of
Appeal, June 23, 1994); Pennsylvania Dept. of Public
Welfare, Docket No. A-93-195 (Ruling on Jurisdiction, May
27, 1994). Therefore, the Chair concluded that opinions
of the agencies within HHS that the Board lacked
jurisdiction to resolve this type of issue were not
clearly erroneous. Although the parties here presented
arguments concerning the applicability of the claims
collection regulations under these circumstances, neither
party presented arguments concerning whether the issue
was within our scope of review. Based on the analyses in
the prior rulings, we conclude that this issue is outside
the scope of our review. 16/
Conclusion
Based on the above analysis, we sustain the disallowance
in full.
Judith A. Ballard
Donald F. Garrett
M. Terry Johnson
Presiding Board Member
* * * Footnotes * * *
1. California also appealed the assessment of
interest on the total amount of the disallowance accruing
beginning 30 days after the February 28, 1995 final
determination of the DCA Regional Director, and imposed
pursuant to the claims collection regulations at 45
C.F.R. Part 30. As explained below, we conclude that
this argument is beyond the scope of the Board's review.
2. The provisions of OMB Circular A-87 apply to
all federal agencies responsible for administering
programs that involve grants and contracts with state and
local governments. 46 Fed. Reg. 9548 (1981).
Regulations at 45 C.F.R. § 74.171(a) make the cost
principles of OMB Circular A-87 applicable to programs
administered by the Department of Health and Human
Services; other federal agencies have similar
regulations. A revised version of OMB Circular A-87 was
published in the Federal Register on May 17, 1995 (60
Fed. Reg. 26,484). Citations in this decision are to the
earlier version, published in 1981 at 46 Fed. Reg. 9548.
3. The history and operation of PERS is
described more fully in Claypool v. Wilson, 4 Cal.App.4th
646, 6 Cal.Rptr.2d 77 (1992)
4. California state operations utilize three
funds -- General, Special, and Federal. Special
Funds comprise revenues of taxes, licenses and fees
restricted by law for particular activities or functions
of government, such as fish and game funds. General
Funds contain revenues not specifically designated, such
as revenues from personal income taxes, sales taxes, and
bank and corporation taxes. Federal Funds include all
funds received directly from an agency of the federal
government. California Br. 3-4.
5. California initially asserted that while it
did use the IDDA/EPDA funds to offset its General Fund
contributions, it did not then charge the federal
government for FFP in those very same costs. California
Br. at 7. However, California did not contest the
Presiding Board Member's statement, during the oral
argument in this appeal, that DCA had disallowed the
federal share of California's PERS contributions that
were paid with IDDA/EPDA funds, and California also
argued in its reply brief that the portion of the
employer contribution paid with IDDA/EPDA funds qualified
as an expenditure for which FFP could be claimed.
Transcript at 6; California Reply Br. at 7.
6. California stated in its brief that the
federal funds were deposited into PERS. California Br.
at 14. However, OIG's disallowance calculations, which
California did not dispute, applied the federal share
percentage to IDDA/EPDA funds transferred to PERS. This
indicates that the federal funds were not placed directly
into PERS, but rather claimed against the transferred
IDDA/EPDA funds which comprised the employer contribution
to PERS.
7. This case is not analogous to New York, DAB
No. 1536, as California asserted. New York addressed
specific regulations in the Medicaid program requiring
states to credit to the federal government amounts
previously claimed in overpayments to Medicaid providers
at the time the overpayment is identified, even if the
state has not recovered the overpayment from the
provider. The Board held that neither the overpayment
regulation nor the applicable credit provision gave
notice that a state would be liable for imputed interest
on what the agency admitted were state funds, in the
amounts of unrecovered overpayments which should have
been credited to the federal government under the
overpayment regulation, but were not. This case is
distinguishable from New York because here California has
either in effect recovered excess amounts of employer
contributions previously paid into PERS, or improperly
drawn down federal funds where it had no net expenditure.
Thus, this case is analogous to earlier decisions in
which the Board held that interest earned on federal
funds must be applied as a credit to the federal
government. See, e.g., New York State Dept. of Social
Services, DAB No. 1049 (1989)
8. It was not disputed that financial decisions
regarding PERS are made with the involvement of
actuaries, and that an actuary performs such functions as
valuing the liabilities and assets of PERS, adopting the
annual interest rate and the actuarial interest rate, and
determining the employer contribution rates. See, e.g.,
Claypool v. Wilson. It was thus appropriate for DCA to
consider actuarial principles and standards in
determining whether expenses for PERS charged to federal
funding were necessary and reasonable under the
applicable cost principles.
9. The actuary reported that PERS utilizes the
"entry age normal" actuarial cost method, which
California did not dispute.
10. DCA reported that the cited
recommendations were subsequently reformatted as
Actuarial Standard of Practice No. 4.
11. In the Medicaid program, for example, the
Board has rejected the argument that interest earned on
recoveries from providers did not offset or reduce
expenditures because it was part of the state's general
fund and beyond the reach of the state Medicaid agency.
That the state credited the interest to its general fund
instead of the Medicaid program did not relieve it of the
obligation to credit this income to the program that
generated it. North Carolina.
12. DCA reported that the rate of interest
assessed was the rate realized by PERS funds, except for
the period July 1, 1994 - February 28, 1994, when the
rate from FY 1993-94 was used because the actual rate was
not available from PERS. The rates ranged from 9.97% for
the period January 1, 1992 - June 30, 1992 to 7.68% for
the periods July 1, 1993 - February 28, 1995. California
Ex. 3, Att. 1.
13. In North Carolina, the court upheld the
Board's analysis that interest on overpayments of FFP
that the state received and earned interest on were not
subject to provisions of the Intergovernmental
Cooperation Act (ICA) permitting states to retain
interest on federal funds drawn and held pending
disbursement for program purposes. 584 F. Supp. 179,
185-86, citing 31 U.S.C. § 6503(a). We note that the
Cash Management Improvement Act of 1990, Public Law 101-
453, amended this portion of the ICA so that now even
states have to account for interest earned on advances of
federal funds.
14. DCA cited two theories supporting this
disallowance: one, that California's use of actuarial
earnings of employee contributions to fund supplemental
benefits instead of to reduce the UAL increased its
employer contributions (and thus its FFP) in past years,
and, two, that California received overpayments of FFP in
FYs 92 and 93 because its employer contributions in those
years were offset by receipt of the IDDA/EPDA funds.
However, DCA relied on the latter theory in determining
the amount of the disallowance, and it is on that basis
that we hold that DCA was entitled to recover the
earnings realized by federal funds claimed for employer
contributions as though they had not been covered by the
IDDA/EPDA funds. See, e.g., DCA Br. 27-28.
15. California did not argue here that it did
not in fact earn interest as a result of its actions, nor
did California argue that it somehow changed its position
in reliance on any reasonable interpretation of the
regulations under which California would not have to
account for such interest.
16. We note in any event that California's
arguments against the imposition of interest subsequent
to DCA's final determination are all directed at the
validity of the claims collection regulations. See,
e.g., Transcript at 61-62 (California conceded that it
considers the claims collection regulations invalid, to
the extent that they purport to be applicable to debts
owed by states). The Board is bound by all applicable
regulations and will ordinarily not consider arguments
that a regulation is invalid. 45 C.F.R. § 16.14.
Accordingly, California's arguments would provide no
substantive basis for the Board to reverse DCA's
imposition of interest on the disallowance subsequent to
the notice of DCA's determination.
(..continued)