SUBJECT: New Mexico General Services Department

DECISION

By letter dated April 13, 2001, the New Mexico General Services Department (New Mexico, GSD) appealed the March 13, 2001 determination of Merle M. Schmidt, Central States Field Office Director of the Division of Cost Allocation (DCA), disallowing $5,239,972 in federal funds for billings in excess of costs for central computer services provided in fiscal years (FYs) 1995, 1996, and 1997. By letter dated May 4, 2001, New Mexico also appealed a further disallowance determination covering $3,135,133 in federal funds for FYs 1998 and 1999. After lengthy proceedings, including settlement efforts and a scheduled hearing, the amount in dispute under both docket numbers was reduced by agreement of the parties to $1 million. The parties agreed that the only remaining issue was whether that amount must be refunded to the federal government or whether it could be satisfied by offsetting or netting alleged undercharges in some internal services accounts against the overcharge amount deriving from other such accounts. The parties also agreed that no hearing should be held. Based on the record before us and for the reasons explained below, we conclude that the "netting" sought by New Mexico is not permissible under the circumstances here. New Mexico's position would improperly permit costs that were never billed to state agencies or claimed from federal programs to be used to offset the debt incurred as a result of admitted overbilling of costs. Such an approach would result in costs being charged against funds due to the federal government while evading required tests for reasonableness, allowability, allocability and timeliness which would normally apply during the claims process. In the present posture of this matter, the only option for New Mexico to discharge the overpayment is through cash repayment. We therefore sustain the disallowance of the remaining $1 million.

Factual and procedural background ⁽¹⁾

DCA disallowed the federal share of billings in excess of costs for computer services provided to federal programs by the State's central GSD. As noted, the two disallowances at issue between them included overcharges for FYs 1995 through 1999. DCA Exs. 1 and 2. New Mexico did not dispute the existence of overcharges, but initially challenged the basis for DCA's calculations of the amounts, the proper allowance for permissible reserves, and the interest rate used. The interest rate is no longer at issue. Joint Motion to Vacate Hearing and To Submit Case for Decision Without Further Pleadings, December 30, 2002 (Joint Motion). Disputes about the amount of the overcharges and the reserves have also been resolved by agreement of the parties. Id.

New Mexico contended, however, that, rather than repay directly the amount by which it now admits it overcharged the federal government, it should be permitted to use as offsets against that debt certain undercharges it alleges occurred during the same period. The undercharges at issue involved GSD information technology (IT) services as did the overcharges, but arose from different funding categories in which the costs of providing services exceeded the revenues. The computer services provided by GSD are divided into more than 30 "rate services" categories which are set out as part of the approved statewide cost allocation plan. ⁽²⁾ Affidavit of E. Foster Dowell (Director of the Information Services Division -- ISD), New Mexico Ex. 4, �� 6, 7.

The parties dispute whether the undercharges are "substantiated" and whether the use of such undercharges to "offset" a debt based on overcharges in other categories is allowed under applicable grant law provisions. The parties' joint motion of December 30, 2002, sought to vacate the hearing which had been scheduled for February 2003 and to submit the case "for a decision based upon the present record without any additional pleadings." Joint Motion at 1. That motion is hereby granted, except to the extent that the Board requested and received some additional information after December 30, 2002 which will also be considered part of the record for decision.

Applicable legal standards

The allowability of costs claimed by state governments under federal grants is governed by Office of Management and Budget (OMB) Circular A-87. 45 C.F.R. �� 74.27(a) and 92.22(b). In order to be allowable, a cost must be necessary and reasonable for proper and efficient performance and administration of a federal award and allocable to the award. OMB Circular A-87, Attachment (Att.) A, � C.1. A cost is allocable to a particular cost objective if the goods or services involved are chargeable or assignable to such cost objective in accordance with relative benefits received. OMB Circular A-87, Att. A, � C.3.a.

The funds at issue here related to New Mexico's central services costs, which were distributed among state and federal programs under New Mexico's CAP. The moneys that a state collects from its agencies through billings for centralized services and goods pursuant to its CAP are typically deposited into an "internal service fund" (ISF), which the state uses to finance those services and goods. Because ISFs are typically funded through periodic billing cycles, the cost principles permit them to maintain a working capital reserve to enable payment of expenses as they arise. OMB Circular A-87 permits an ISF to maintain a working capital reserve as part of its retained earnings sufficient to cover up to 60 days cash expenses for normal operating purposes. OMB Circular A-87, Att. C, � G.2.

When the revenue collected for billed central service costs exceeds the allowable costs of providing the services and goods (including an amount sufficient to maintain an ICF reserve of up to 60 days cash expenses for normal operating purposes), an adjustment must be made for the difference, so that federally-funded programs are not overcharged. OMB Circular A-87, Att. C., � G.4. The allowance for a working capital reserve, and its recognition of reserve contributions as allowable costs, is a deliberate exception to the general policy that federal grantees are not allowed to make a profit by charging the federal grant more than the cost of the services. Id.; ASMB C-10, � 1.6, Question 1-4. ⁽³⁾ As part of the CAP, a state government must provide specific documentation about ISFs, including a fiscal year-end reconciliation schedule showing the revenues, costs, and year-end balance. OMB Circular A-87, Att. C, �� E.3.b(1), G.4; ASMB C-10, � 4.8, Question 4-7. ⁽⁴⁾

The parties relied on different general provisions of OMB Circular A-87 as support for their positions on netting or offsetting. New Mexico emphasized that the Circular states that its "principles are designed to provide that Federal awards bear their fair share of costs recognized under these principles except where restricted or prohibited by law." OMB Circular A-87, Att. A, � A.1; see New Mexico Br. at 2, 8. DCA referred to Att. A, � C.3.a:

Any cost allocable to a particular grant or cost objective under the principles provided for in this Circular may not be shifted to other federal grant programs to overcome fund deficiencies, avoid restrictions imposed by law, or grant agreements, or for other reasons.

DCA Reply Br. at 3. Both parties argued about the proper interpretation of the more specific provision in the Circular on alternative methods of recovery of overcharges, which we quote in full in the analysis section of this decision.

Issue Presented

As noted, the parties represented that the dollar amount in dispute was narrowed by agreement to $1 million, but they made no representation as to how that amount was derived or how the parties allocated it across the disallowed amounts. The parties further agreed that "the sole legal issue to be determined . . .

is that of netting as set forth in the parties' briefs." Id.

New Mexico framed the "netting" issue in its brief as "whether OMB Circular A-87 does or does not allow for netting or offset when federal programs are both unintentionally overcharged some rates for computer and information technology services and undercharged on others." New Mexico Br. at 2.

DCA framed the issue as whether "the 'netting' of unsubstantiated undercharges against established overcharges by State customer agency is a valid method of calculating the amount owed to the federal government." DCA Br. at 2.

1. It is appropriate for us to resolve the legal issue given the factual context and based on the record before us.

We accept for purposes of this decision the parties' implicit agreement as to the dollar amount that depends on our resolution of the question of whether, under the circumstances here, undercharges in some categories can be offset against overcharges in others. Therefore, we do not reach the question of the precise amount of alleged undercharges in particular categories but assume that, were we to find the proposed offsetting or "netting" permissible in the circumstances here, this would fully account for the $1 million disallowance. The remaining issue before us, then, is essentially a legal one. ⁽⁵⁾ To some extent, the correct application of the law here is tied to an understanding of the circumstances presented. Hence, we first set out what the record shows as to the factual context in which this dispute arose.

According to New Mexico, specific services in each of the 30 rate services categories were charged to the client agencies in different ways, such as an hourly rate for data processing or a per-page rate for printing. ⁽⁶⁾ Dowell Affidavit at � 6. It appears, based on all the affidavits and the other evidence in the record, that some significant changes occurred that affected New Mexico's internal services claiming in FYs 1993-1994. Mr. Dowell explained that these charges had been arrived at by looking at historical usage, agency need projections, and other information. Mr. Dowell asserted that "in the past up until fiscal year 1994," the state had netted services that under-recovered their costs against those that over-recovered. Id. at � 5. Specifically, he explained that GSD took "those thirty different items and netted either a plus or a minus figure." Id. at � 6. ISD projected rates for these services for budget purposes two years ahead of actual usage and then evaluated historical data to determine actual usage. Id. This description implied, though it did not clearly explain, that such internal inter-rate netting to balance under- and over-recovered rate categories ceased after 1994. Changes in New Mexico's billing system were evidently triggered in part by the return of the largest State user of information systems (and the largest State recipient of federal grant funds), which had used other mechanisms for obtaining such services for a time. Affidavit of Bob Peters (Executive Budget Analyst, New Mexico Dept. of Finance and Administration), New Mexico Ex. 6, at  �5. In response to this and other developments, a meeting was held with DCA staff and New Mexico hired a consultant, David M. Griffith, to begin a gradual process of "setting and monitoring cost based rates." Id. at ��5,8.

The resulting system has not been fully developed on the record before us. Mr. Dowell described the rate-setting process as follows:

We have the utilization process, where we take historical information and send it to our customers. We ask them to project what they will do for the next budget year. . . . Then we take a look at what was projected which always means the rate services are set to zero. Then we take the actuals and see how far off they are because that is going to be plus or minus on any specific services. Then we realign the rates based on that. That is what we did last fiscal year. Customers were not thrilled about it, but it gives us reliable information for that fiscal year. In seven years we have reduced the rate structure on an average of 81%. From 1998, we had 24% reduction, in 1999 we had 27% reduction, in 2000 we had a 29% reduction.

New Mexico Ex. 4, at �8; see also New Mexico Ex. 14. It is clear that the change to a cost-based system in which "profit and loss" are analyzed "by service during and at the end of a fiscal year" has been gradual, with the consultant projecting in 1994 that the transition would take five years. Peters Affidavit at �8.

At any rate, it is undisputed that during the fiscal years at issue, some of the billing rates resulted in net profits and others in net losses.

2. The asserted undercharges were not properly substantiated and claimed.

New Mexico strongly disputed DCA's position that the undercharges were "unsubstantiated." According to New Mexico, the same data and methods DCA used to calculate the overcharges would also provide the amount of the undercharges. New Mexico Reply Br. at 2. New Mexico stressed the parallel between how DCA determined the overcharge amounts and how New Mexico would identify undercharge amounts in other categories, arguing that if the overcharges are substantiated then the undercharges must also be. We find that DCA is correct that, while superficially appealing, the attempted parallel does not hold.

DCA conceded that the charges which New Mexico would like to use as offsetting were included in the same worksheets and calculated in the same way as the overcharges. DCA Supplemental Br. at 5. However, as DCA argued, the submission of these worksheets to DCA as part of its review of central services billing rates is not equivalent to the submission of claims to the federal grantor agencies. The internal services costs at issue here were not claimed directly by GSD under any federal grant, but instead were billed to various state agencies that receive federal grants. The amounts now asserted to be undercharges were amounts that were not billed to the state agencies but which New Mexico now calculates could have been so billed. Only belatedly when DCA questioned the admitted excess profits in some areas did GSD re-evaluate its billing and assert that other areas could legitimately have been billed at a higher rate. ⁽⁷⁾

Such a re-evaluation may sometimes be appropriate, depending on the circumstances and the terms of the state's CAP, but the disallowance now before us is not the right place to determine that. If GSD billed inadequately for some of its services, its remedy would be to adjust its billing to the state agencies for the past periods. Those agencies could then verify whether the bills reflect necessary costs for services actually ordered and delivered and allocate the correct amounts to any participating federal programs in accordance with the CAP and the rules applicable to those program grants. See generally DAB No. 1822, at 9-10 (CAP review process provides important scrutiny). Those agencies might be able to file claims for reimbursement to the appropriate federal programs if the claim adjustments were still timely under the applicable regulations. ⁽⁸⁾ The federal programs would then be in a position to review the claims for allocability and allowability, including timeliness and grant-specific requirements. ⁽⁹⁾ None of these processes are part of the evaluation normally done by DCA in its review of the bases for the internal service fund amounts. Yet, New Mexico expressly stated that it did not propose "to go back into prior years and charge federal programs that were undercharged." New Mexico Br. at 8.

The difference between offsetting unbilled costs in different internal services rate categories against overcharges actually billed to federal programs in prior fiscal years, as opposed to filing timely claims for federal grant funds in the first instance, is clearly not one of mere form. To allow the former maneuver would be to open a back door to claims evading timely filing requirements which would leave federal budget outlays uncertain indefinitely. What is more, to use the unbilled undercharges to offset repayment of improperly claimed federal funds would mean the additional charges would never pass through the normal claiming process at all. The normal claiming processes at the grantor federal agencies are critical mechanisms that assure that expenditures are proper under the particular federal grants involved. We therefore decline to allow these late and speculative undercharge amounts to offset the documented, and uncontested, overcharges.

3. The issue is not whether GSD could have handled its rate-setting among categories differently but whether it can now offset potential claims against the present disallowance.

New Mexico pointed out that it could have had different numbers of rate categories and that no federal requirement specified that internal services must be broken out in any particular way. See Peters Affidavit at �� 6,7. Other states, according to Mr. Peters, may have ten rates, while New Mexico happens to have used greater detail yielding more than 30. Id. New Mexico would have us infer that what it could have done prospectively, it should be allowed to do in effect by recalculating the disallowed overcharges.

It is not relevant now, however, that GSD could have made different choices in how it structured its service rate categories. Certainly, if GSD had grouped services in different ways, the profit and loss resulting in the categories from that grouping relative to each other would have been different. A different amount of claims to various federal programs might have been supported by such a different billing category structure. Individual ISFs are dedicated to specific services functions and identified and approved that way as part of a CAP. See DAB No. 1822, at 10. New Mexico had the flexibility prospectively in setting up its internal services system, designing its billing rate mechanisms, and developing its CAP to select among many permissible alternatives. New Mexico pointed to no provision in any of its approved CAPs during the relevant period that established any methodology to handle overcharges by netting across ISFs as it now seeks to do. See DCA Exs. 24-30. Having made its elections, New Mexico may not now complain that it might have chosen a different way that hindsight suggests could have increased its federal funding.

Furthermore, as Mr. Peters acknowledged, the rate structure chosen must be approved by the federal government, precisely because the states' flexibility is limited by the need to comply with requirements of OMB Circular A-87 restricting charges to federal programs to the benefits received. Peters Affidavit at � 7. The obvious concern would be exactly that identified by Mr. Peters, that is, "if you have too few rates they [federal officials] may see it as a way for states to shift costs between federal programs or to under-recover in non federal programs while over-recovering in federal programs." Id. New Mexico denied that the mechanism it argued for would actually shift costs between federal programs, on the grounds that the different services rates are charged to state agencies which then pass on costs indirectly to various federal programs under their approved CAP methodologies. New Mexico Br. at 6. It is impossible to determine from the information provided by New Mexico whether this representation would in fact prove true since it cannot be ascertained what costs would actually be reassigned from the $1 million, or how that would play out in practice.

We need not make this determination, in any case, because we find it impermissible for New Mexico to use the amounts it describes as undercharges in the manner it suggested. First, we have concluded that the undercharges are unsubstantiated, were never charged to any federal programs, and cannot now be claimed through contesting the DCA disallowance. Second, we found that all alternatives to cash repayment of the overcharges have become unavailable, either due to the amount at issue, the passage of time, and/or the present status of the undercharges. We address the second point next.

4. New Mexico must make repayment in cash.

DCA argued that the only option presently available to New Mexico to account for the sums by which federal programs were overcharged for the profit-making services is cash repayment. DCA cited the following provision of OMB Circular A-87 relating to alternatives for dealing with federal overcharges, for the proposition that New Mexico could not use the alleged undercharges as a means of adjusting for the admitted overcharges:

4. Adjustments of billed central services. Billing rates used to charge Federal awards shall be based on the estimated costs of providing the services, including an estimate of the allocable central service costs. A comparison of the revenue generated by each billed service (including total revenues whether or not billed or collected) to the actual allowable costs of the service will be made at least annually, and an adjustment will be made for the difference between the revenue and the allowable costs. These adjustments will be made through one of the following adjustment methods: (a) a cash refund to the Federal Government for the Federal share of the adjustment, (b) credits to the amounts charged to the individual programs, (c) adjustments to future billing rates, or (d) adjustments to allocated central service costs. Adjustments to allocated central services will not be permitted where the total amount of the adjustment for a particular service (Federal share and non-Federal) share exceeds $500,000.

OMB Circular A-87, Att. C, �G.4 (emphasis added); see DCA Supp. Submission at 9-12. DCA argued that nothing in this section allowed overcharges for one service to be offset by undercharges in another service and that the time for adjustments by means other than cash repayment ended long ago. Id.

It is not contested that New Mexico could have adjusted its billing rates itself to correct for over- and under-billing using the alternatives set out above. DCA Branch Chief Terry D. Hill, who supervised the review of New Mexico's billing rates, provided an affidavit stating that one goal was to "determine which rates could be considered as having been adjusted during the five year period so that revenue in excess of costs in one year were eliminated by cost in excess of revenue in subsequent years or vice versa." DCA Ex. 5, at 2. He viewed these adjustments as the responsibility of New Mexico to have made on its own, but found that rates "needing significant adjustments for 1995 went unadjusted for most, if not all, of the five-year period." Id., at 4; see also DCA Exs. 11, 12. Mr. Hill concluded that New Mexico had not taken appropriate adjustments despite having received correspondence from DCA in 1993 that should have clarified that such adjustments are to be made by the state by individual billing rate. DCA Ex. 5, at 1, 3; see also DCA Exs. 17, 18. Having determined that New Mexico had failed to make the requisite adjustments, Mr. Hill indicated that DCA next considered the alternatives for making the appropriate adjustments for the years involved. DCA Ex. 5, at 1-3. Given the time that had passed, DCA concluded that the only viable option remaining was a cash repayment.

In reaching this conclusion, DCA also pointed to ASMB C-10, which provides additional discussion of the Circular provision at issue in a question-and-answer format.

4-12 Attachment C, paragraph G.4 establishes four methods for adjusting internal service funds (billed central services) for profits or losses realized from operations. Alternative (b) allows credits to amounts charged to the individual programs. This method would only cover profits. If losses occur, why can't individual programs be debited? [Att. C, � G.4]

Effectively, alternative (b) is correcting billed costs in the current year, whereas alternative (c) is carrying forward the profit/loss into the next open fiscal period.

The failure of the Circular to note how losses are to be treated in alternative (b) is an editing error. For consistency purposes, both alternative (b) and (c) cover profit and loss situations. However, only one method can be used in a given fiscal year.

ASMB C-10, Part 4, � 4.8, Question 4-27 (emphasis in original); see DCA Supp. Submission at 12-15. While this response does show that a state could make timely adjustments in either direction in billing rates, it also highlights the time-sensitive nature of the alternatives. Thus, had New Mexico been reconciling each billing rate category annually as required, the alternatives open to it for making adjustments to reflect excess profits and losses in each would have been the same. It did not do so. The alternatives available to correct for the over-billed amounts have been narrowed now, because alternatives (b) and (c) (current credits or future rate changes) are time-limited. The first action would have had to be taken effective the fiscal year in which the revenues exceeded costs and the second would have had to be taken the next open fiscal period. New Mexico did not dispute that those time frames have long passed. Since the amounts involved make alternative (d) unavailable, it follows that the only option remaining is a cash repayment. In any case, the Board has recognized in prior cases that DCA has discretion in determining to seek a cash refund rather than allow one of the alternative methods of adjustment. Colorado Dept. of Personnel and Admin., DAB No. 1872, at n.3 (2003); Michigan Dept. of Management and Budget, DAB No. 1811 (2002).

New Mexico argued that the options set out at OMB Circular A-87, Attachment C, � G.4.a-d, address only ways to "handle" billing rates when over- or undercharges have occurred but that the Circular does not deal with "how to calculate" such over- or undercharges in the first place. New Mexico Reply Br. at 1. On this point, according to New Mexico, OMB Circular A-87 is silent.

This argument misses the point. The provision addresses ways for the grantee to correct billing rates to avoid accruing overcharges and undercharges as New Mexico did here. Had the overcharges come to light earlier, New Mexico might have had additional alternatives to make the needed corrections. But there is no question of calculation before us. The amounts involved are settled by agreement of the parties. The undercharge amounts are not part of "calculating" the overcharges. For the reasons we have discussed above, neither can they serve the role of retrospectively reducing the overcharges.

5. New Mexico's equitable arguments cannot entitle it to federal funds.

Much of New Mexico's argument depended on a general position that some unfairness inhered in disallowing the overcharges in billing rate service categories with excess revenues when New Mexico cannot somehow go back and retrospectively recover additional funds in categories with excess costs. See, e.g., New Mexico Submission in Response to July 3^rd Teleconference at 3-4. New Mexico contended that the effect is to force it to "subsidize federal programs by millions of dollars," when New Mexico has "aggressively reduced rates and increased CPU utilization." New Mexico Br. at 8-9. New Mexico argued that this result violated its understanding of the intent of OMB Circular A-87 that "federal programs should bear their fair share of costs." Id. at 8.

New Mexico's fairness argument overlooks several important points. First, the reason that New Mexico may be unable to recover undercharges in some rate categories is that it did not take timely steps to reconcile and adjust those billing rates. Second, the costs of which OMB Circular A-87 speaks in saying that the federal programs should bear a fair share are expressly limited to those "recognized under these principles." The undercharges New Mexico seeks to substitute for amounts admittedly overbilled to federal programs do not meet the requirements to be recognized as allowable and allocable claims.

New Mexico also suggested that, though DCA asserted that it had not authorized any other state to offset overcharges as New Mexico sought to do here, such "netting" may have been "passively allowed" by DCA's "failing to issue determinations against other states engaged in the same practice." New Mexico Reply Br. at 2. It is not entirely clear what New Mexico seeks to establish by this point. We find no relevance in it to the single question before us. Other states may have grouped their internal services in a wide variety of ways, as noted elsewhere, and may have made timely adjustments to their rates in various permissible ways. New Mexico has proffered nothing to demonstrate that any other state is in a position analogous to that presented here. Even if it had, DCA's inaction against another state that made improper claims could do nothing to establish the propriety of New Mexico's claims. ⁽¹¹⁾

Finally, New Mexico interpreted DCA's actions and comments as treating it "like it was some deadbeat parent failing to pay child support or a tax evader," when New Mexico insisted it "behaved in good faith." New Mexico Br. at 9. We make no finding that New Mexico acted in anything other than good faith. Nor does it appear that DCA is seeking to impose any penalty on New Mexico. New Mexico is simply required to repay what it overcharged. This obligation implies no misconduct.

Conclusion

For the reasons set out in detail above, we sustain DCA's determination and uphold the disallowance in full.

Donald F. Garrett

Cecilia Sparks Ford

Marc R. Hillson
Presiding Board Member

1. This section provides an overview of the posture of the matter as it now stands. We provide more discussion of the factual details in the analysis section.

2. A central service (or statewide) cost allocation plan (CAP) is a method of identifying central service costs and assigning them to benefitting federal and state programs and activities on a reasonable and consistent basis. OMB Circular A-87, Att. C, ��  A.1, B.4; see Idaho Division of Financial Management, DAB No. 1822 (2002). "In essence, the CAP identifies the central support services that qualify for federal financial participation and describes how central support agencies allocate the costs." Alabama v. Shalala, 124 F. Supp. 2d 1250, at 1253 (M.D. Ala. 2000).

3. The Implementation Guide for OMB Circular A-87 for State, Local and Indian Tribal Governments, ASMB C-10, entitled "Cost Principles and Procedures for Developing Cost Allocation Plans and Indirect Cost Rates for Agreements with the Federal Government," replaced "A Guide for State and Local Government Agencies," OASC-10 (Dec. 1976), effective April 8, 1997. Hence, each applied during part of the time at issue. We cite to ASMB C-10 since neither party identified any significant difference.

4. For more general discussion of internal service funds, see Idaho Division of Financial Management, DAB No. 1822 (2002).

5. We do not view our decision as advisory since the disposition of a concrete sum depends directly on the resolution of the remaining issue. To the extent the parties sought to have the Board resolve some more generalized conceptual question of when "netting" is permissible, rather than whether the asserted undercharges here may be offset against the payment due from New Mexico as a result of the documented overcharges, we decline the invitation. The Board's regulations limit Board review to final written decisions in disputes, including those involving cost allocation plans and disallowance decisions denying payment of an amount claimed under an award, or requiring return or set-off of funds already received. 45 C.F.R. Part 16, App. A, �� B, C.a.1, D; OMB Circular A-87, Att. C., �� D.1, F.1. General and prospective guidance, such as the scope of "netting" in principle or the permissible structuring of future claims, do not involve such final determinations.

6. The actual number of specific rate categories is not entirely clear on the record before us. Other affidavits refer to 36 cost centers, for example. See New Mexico Ex. 17 (Peters Supp. Affidavit); compare New Mexico Ex. 8. The number and nature of categories used in any particular years is not relevant to the analysis here, so we need not sort out these specifics.

7. Mr. Peters admitted as much when he stated:

If the state had made the billing adjustments to the billable services with losses during the fiscal years covered by this claim, those adjustments would have been allowed by OMB Circular A-87. It is those very same adjustments that the state is now asking to be considered in any calculation of overcharges to federal programs.

Peters Supplemental Affidavit, New Mexico Ex. 17, at � 5. The fact remains, thus, that the state did not make any timely billing adjustments.

8. For discussion of the kinds of timely claims issues that might be implicated, see generally New York State Department of Health, DAB No. 1867 (2003) (Medicaid); Minnesota Department of Human Services, DAB No. 1791 (2001)(Medicaid); Florida Department of Children and Families, DAB No. 1777 (2001) (foster care).

9. The various steps in this cycle are graphically illustrated at DCA Ex. 21.

10. Much of the documentation submitted by New Mexico seems to address whether it was permissible for New Mexico to adjust its billing rates in the different categories prospectively to correct for experience. See, e.g., Affidavit of Lynn Scheller, New Mexico Ex. 5, at ��7, 8; Dowell Affidavit at �9. As explained in the text, the methods of setting billing rates and adjusting them to avoid excess profit or loss are not in dispute.

11. Generally, the Board has held that an agency's alleged inaction or tolerance in other situations cannot be used as a defense to an otherwise supported finding of impropriety in the case at bar. See Edison Medical Laboratories, Inc., DAB No. 1713 (1999); Beverly Health and Rehabilitation--Spring Hill, DAB No. 1696 (1999); Rural Day Care Ass'n, DAB No. 1489, at 94-115 (1994), aff'd Rural Day Care Ass'n v. Shalala, Civ. No. 2:94-CV-40-BO (E.D.N.C.1995).