GAB Decision 344
September 29, 1982 Maryland Department of Human Resources; Docket No.
82-44-MD-HD Seattle, Norval, Teitz, Alexander Ford, Cecilia
The Maryland Department of Human Resources (State, DHR) appealed the
disallowance by the Office of Human Development Services (OHDS, Agency)
of $207,350 in federal financial participation (FFP) claimed under Title
XX of the Social Security Act. The disallowance was based on an audit
report (Audit Control No. 03-10550) reviewing the State's Title XX
training program for the period October 1, 1975 to September 30, 1978.
The Agency concluded that DHR had not maintained adequate control of the
funds used for stipend payments to students, as required by the
regulations, and disallowed $99,579 and $107,771 for fiscal years 1977
and 1978, respectively.
The major issues presented are: whether the Omnibus Reconciliation
Act of 1981, which established the Title XX social services block grant
program, affects the Agency's authority to disallow and recover misspent
funds claimed under the prior Title XX provisions; whether the State
exercised the required supervision and control over Title XX stipend
payments to students; and whether the amount of the disallowance is
consistent with the stated basis for the disallowance. For reasons
stated below, we find that the Agency is not precluded from taking
administrative action to disallow and recover these misspent funds;
that the State did fail to adequately monitor the program so that the
funds in question were in fact misspent; and that the Agency's
calculation of the amount of the disallowance is reasonable.
There are no material issues of fact in dispute. We have determined,
therefore, to proceed to decision based on the appeal file, the parties'
initial briefs, the State's reply brief, and the parties' summaries of
their positions as discussed in a conference call.
Regulatory Background
Title XX of the Social Security Act authorized the states to
implement programs providing social services to low income individuals
and familites. /1/ The Title XX program is administered at the federal
(2) level by the Office of Human Development Services, but states have
the primary responsibility for the overall supervision, control, and
oversight of Title XX activities. 45 CFR 228.6(e)(10)(1977).
Subpart H of 45 CFR 228 contains regulations for personnel training
costs, which, if directly related to the provision of Title XX services,
are eligible for FFP at a 75 percent rate. The training may include
in-service training and short-and long-term training at educational
institutions. 45 CFR 228.80. FFP is available for the costs of
training persons preparing for employment in a state agency if they are:
(1) Selected by the State agency and acceptec by the school;
(ii) Pursuing educational programs approved by the agency; and
(iii) Legally committed to work for the State agency for a period of
time at least equal to the period for which financial assistance is
granted if employment if offered within 6 months after training is
completed. If not employed by the State agency, such persons shall keep
the agency informed of their employment status for one year. 45 CFR
228.83(a)(2) (1977).
The state agency, in turn, must:
(1) Offer employment to the individuail preparing for employment in
the State agency during the 6 months following completion of the
training, unless precluded by Merit System requirements, legislative
cuts, position freezes, or other circumstances beyond the agency's
control; and
(2) Evaluate the training programs. 45 CFR 228.83(b) (1977).
Prior to January 31, 1977 the regulations additionally provided that
an adjustment in FFP for expenditures for financial assistance to
students would occur if more than 10 percent of the students required to
report to the state agency for employment either failed to do so, or,
alternatively, if they failed to secure employment with a public agency
in the state providing Title XX services or with the Title XX agency in
another state. 45 CFR 228.83(b) (1976). /2/
(3) Statement of the Case
The HHS Audit Agency reviewed expenditures of $4,184,375 under
training grants awarded by the State to four Maryland colleges during
fiscal years 1976, 1977, and 1978. During fiscal years 1977 and 1978,
the colleges paid Title XX stipends to 228 students. The audit
disclosed that these students were selected for the stipends by the
participating schools, not by DHR. The audit found that 153 of the 228
students did not obtain Title XX approved employment, either because
they did not attempt to do so or because DHR did not hire them. The
audit report recommended a financial adjustment of $207,350 for the
federal share of the stipends awarded to the 153 students who did not
obtain employment. The audit also found that the State had awarded
contracts to the four colleges without first determining either what
DHR's future manpower needs would be or whether the contracts were the
most economical and efficient way of providing training under Title XX.
The audit report concluded that "DHR's management information system and
its monitoring activities did not provide the information needed to make
a valid needs assessment" (p. 16) and that "(by) delegating its
authority to the educational institutions, DHR lost control of the
stipends awards." (p. 21) /3/
(4) I. The Availability of Agency Action to Disallow and Recover
Misspent Funds
The State contended that there are no administrative actions
available to the Agency to disallow and recover these funds. The State
argued that prior to October 1, 1981 the authority for withholding
funds, claimed under Title XX, as a result of a disallowance was
contained in sections 2002(b)(2) and 1116(d) of the Social Security Act.
According to the State, the Omnibus Budget Reconciliation Act of 1981
repealed section 2002(b)(2), the reference to Title XX in section
116(d), and all other provisions of former Title xx in creating a new
block grant for social services. /4/ The new section 2006(b) of the
Social Security Act provides both that states shall repay amounts
misspent under "this title" and that the Secretary may offset such
amounts against any other amount to which a state is entitled under
"this title." The State reasoned that under the new Title XX there
is,
therefore, no statutory authority for the enforcement of this
disallowance. Because the State no longer receives Title XX training
funds, the State argued, there is no remedy for misspent funds under the
program from which the disallowance arose. The State contended,
"Withholding under the disallowance would in effect constitute a set off
of funds to which the State is now entitled under the new Title XX for a
debt owed under another program." (State's Brief, p. 9) The State also
contended that "no sanction can be imposed on another program as a
result of a Title XX violation." (State's August 9, 1982 submission, p.
2) In the absence of any current statutory or regulatory authority for
the disallowance and withholding of funds by the Agency, the State
contended, the Agency's action is illegal. The State maintained
further, citing State of New Jersesy, Dept. of Education v. Hufstedler,
662 F.2d 208 (3rd Cir. 1981), that the Agency's only remedy to recover
misspent funds is by way of judicial action.
The notification of disallowance had directed the State to report the
amount of the disallowance on its quarterly statement of expenditures
for the quarter ending March 31, 1982.However, the Agency later stated
that it was not proposing to recover the disallowance through a
reduction in the amount of future awards to the State under the Title XX
block grant. (Agency's Brief, p. 4) ($5) The Agency argued that how the
Agency would recover the funds is not within the Board's jurisdiction
and that the Board's inquiry should be limited to determined the
validity of the disallowance. According to the Agency, the Board need
not concern itself with recovery since, should the Board uphold the
disallowance, this is a matter between the Agency and the State.
(Agency's August 4, 1982 submission, p. 1)
The State contended that the preliminary question before the Board is
whether or not Agency sanctions are within the Board's jurisdiction.
The State argued that the Board must reach the question of sanctions if
the Board does not accept that the funds were properly claimed under
Title XX. The State's position is that no sanctions can be imposed
against the State and that therefore the Board should reverse the
disallowance even if the Board finds against the State on the merits
because "to uphold the disallowance when no sanction can be imposed
would make the decision an entirely advisory opinion, and indeed a
futile act." (State's August 9, 1982 submission, p. 3)
While we agree with the Agency that the method of recovering
disallowed funds is generally within the Agency's province, we believe
that we have jurisdiction to examine any issues raised by the State's
challenge to the disallowance. /5/
Assuming that the disallowance is justified on the merits, we must
determine whether the State's debt would be extinguished because the
State is no longer receiving funds under the former Title XX. The funds
in question here were authorized and expended under the former Title XX.
Authority to disallow and recover funds under the former Title XX was
given in sections 2002(b)(2) and 1116(d) of the Social Security Act.
The State has not pointed to anything that indicates Congress intended
to abrogate the Secretary's authority concerning the disallowance of old
Title XX funds, when it passed the Omnibus Budget Reconciliation Act of
1981. Especially since State claims for the last quarter of fiscal year
1981 under the former Title XX would not even have been filed by October
1, 1981, we do not believe that it was the intention of Congress to
foreclose, effective on that date, all of the Agency's administrative
actions to account for funds, whether properly or improperly expended,
under the old Title XX. The authority to disallow claims arising under
the old Title XX was not specifically removed by the passage of the
Omnibus Budget Reconciliation Act. We therefore conclude that the
Agency did not exceed its authority when it issued this disallowance.
(6) Having decided this, we must address the State's claim that the
Agency has no available remedies to recover any misspent funds, thus
rendering the substantive question of the allowability of the State's
claim to the funds moot.
It is initially clear that the Agency is not completely without
remedies to recover any misspent funds. In citing Hufstedler, supra,
the State recognized that the Agency could take judicial action to
recover the funds. Moreover, we do not agree with the State that no
remedies, short of judicial action, exist to recover funds misspent
under the former Title XX. For example, we do not know if the State has
any outstanding claims arising under the former Title XX and not yet
paid, but, if it did, the Agency certainly could offset this
disallowance against those claims.
As to other possible administrative actions, it is unclear precisely
what effect the new provision at section 2006(b) has. While the
regulations implementing the new Title XX establish enforcement and
hearing procedures and methods for the repayment or offsetting of
misspent block grant funds, they do not necessarily preclude a broader
statutory interpretation allowing for an offset of former Title XX
funds. The Agency could arguably determine that the reference in
section 2006(b) to amounts "found not to have been expended in
accordance with this title" includes misspent funds claimed under old
Title XX.
We are also convinced that Hufstedler does not have the far-reaching
effect claimed by the State. The Board examined the Hufstedler decision
in Maryland Department of Human Resources, Decision No. 246, January 18,
1982. Nothing the State has presented in this case leads us to depart
from the Board's conclusion there that Hufstedler is not dispositive of
issues arising under the Social Security Act. /6/
The record does not show how the Agency proposes to recover the
funds, should the Board sustain it on substantive grounds. Moreover,
the State has not provided us with any convincing arguments that the
Agency is foreclosed from utilizing any administrative remedy to (7)
recover the funds, and, indeed, does not deny that a judicial remedy
would be available. Accordingly, we conclude that the amendments to
Title XX relied on by the State do not render the substantive issues
moot.
II. The Rationale for the Disallowance
The substantive issues in this appeal are whether the State failed to
exercise the required supervision, control, and oversight of the stipend
payments to students, and, if not, whether the amount of the
disallowance is consistent with the stated basis for the disallowance.
The notification of disallowance, citing the audit report, stated
that DHR did not maintain adequate control of stipends awarded to
students as required by 45 CFR 228.6(e)(10) and 228.83. The State
contended that the actual basis for the disallowance was the failure of
the 153 students to secure Title XX approved employment and that the
basis for the disallowance given by the Agency was inconsistent with the
audit findings. The State then argued that its failure to hire all the
students was excused under the regulations so that a disallowance was
unwarranted.
In support of this position the State pointed to the fact that the
amount disallowed, $207,350, was the exact figure mentioned in the audit
report as the federal share of the stipends for the 153 students. The
State argued, "There is no logical or financial nexus between 'lack of
control over selection of the students' and a disallowance equal to the
cost of the students who did not obtain employment." (State's August 9,
1982 submission, p. 2) The State added that, if the Agency's rationale
for the disallowance was correct, "the auditors would have disallowed
the whole Title XX grant." (Id.) (It is unclear whether the State refers
to the total of the stipend payments or to the total amount of the
grants awarded to the colleges.) The State contended that it did not
hire all the stipend students either because many could not be hired
under merit system hiring standards or because of a hiring freeze
imposed by the Governor of Maryland from June 1977 through August 1978.
According to the State, the students' inability to obtain employment
because of a hiring freeze or merit system standard requirements is
specifically excused in 45 CFR 228.83(b)(1). The State also argued that
no stipend payments for the period prior to January 31, 1977 could be
disallowed because there was no evidence (8) in the audit report that 90
percent of the students required to report for employment failed to do
so. /7/
The Agency maintained its position that the disallowance arose
because of the State's failure to exercise control over the selection of
students to participate in the program. While conceding that the amount
of the disallowance represents FFP for the stipends of the 153 students
who did not obtain Title XX approved employment, the Agency contended
that, instead of imposing the "draconian measure" of disallowing all
FFP
for the State's expenditures, it disallowed FFP "only in those
expenditures which, in fact, did not benefit the program." (Agency
Response, p. 3) The Agency continued, "This reduction in the permissible
disallowance does not, however, transform it into a disallowance based
on the failure of 153 students to obtain Title XX employment." (id.)
From an examination of the record we are convinced that the Agency is
correct that the State failed to monitor the Title XX program adequately
and that the disallowance was justified. The preamble to Part 228, in
describing Subpart H, stated that training funds would be available for
students preparing for state agency employment "only under closely
controlled conditions requiring active State agency involvement in the
development of programs and selection of students . . ." (40 Fed. Reg.
27354, June 27, 1975) (emphasis added) The regulatory requirements for
state agency control, including state agency selection of the students,
must be read in light of this statement. The audit report disclosed
that students participating in the Title XX program were selected by the
schools, not by DHR. The State admitted that the students were selected
by the schools, but argued that the schools used DHR-approved criteria
for the awarding of scholarships involving State funds. The use of
these criteria in the selection of the students, the State argued,
satisfied, in effect, the requirement of 45 CFR 228.83(a)(2)(i). The
State argued further that the schools were required to maintain complete
records of the students, reports and monitoring procedures which were
made available to DHR. The DHR also performed ongoing evaluations of the
program at each school. In these ways, the State argued, DHR maintained
overall suprvision, control, and oversight of the programs.
(9) We do not consider the use of DHR-approved criteria for the
selection of students and DHR's remote monitoring of the schools'
programs to be the "active State agency involvement" specific in the
preamble to 45 CFR Part 228. The State's claim that it exercised
effective control over the Title XX training program, moreover, is
contradicted by other findings in the audit report. The audit report
disclosed that stipends were given to students in numbers far exceeding
DHR's future manpower needs. No overall assessment was performed to
determine the actual need for college graduates to fill entry level
positions in the Title XX programs. The audit report indicated that
there was no need for graduates to fill at least two of DHR's entry
levels and that in 1978 there was already a 23 and 38-year supply of
candidates available to fill, respectively, the social work associate
and social worker entry level positions. (Audit Report, p. 17) The
State has not presented anything to show that these findings were
incorrect.We believe that it is reasonable to conclude that if DHR, more
aware of its future manpower needs than the schools, had selected the
students and exercised greater control over the training programs, fewer
stipends would have been awarded.
Additionally, we note that the State's primary rationale for the
failure of the students to secure employment was the hiring freeze. It
is apparent from the above figures, however, that even if there had not
been a hiring freeze in effect, the State would not have been able to
offer employment to the majority of the students.
We conclude that the stated basis for the disallowance is amply
supported in the audit report. /8/ In responding to the State's comments
on the audit findings, the auditors stated:
While the State Agency had no control over the merit pay systems or
State hiring freezes, it was required by Title XX regulations to control
the stipend program. The control was delegated to the participating
schools and, as shown in our report, the payoff to the Title XX program
in terms of prospective employees was poor. An internal State Agency
memorandum points out a basic problem -- the stipends were awarded by
the schools on the basis of financial needs exclusively. The students
who received them generally scored lower on merit exams and, therefore,
(10) could not be hired by the State. Had the State Agency selected the
students, potential employability as well as financial need could have
been considered and the number of students passing the merit exams would
have been higher. (p. 21)
The auditors then specifically concluded that the State had
"relinquished most program controls." (p. 21)
We conclude that the State not so much delegated its authority to the
schools for the selection of the students and overall control of the
program, but, rather, ignored its responsibility that the Title XX
training program be administered cost efficiently. Thus, we find that a
disallowance was warranted under these circumstances. In addition, we
believe that the Agency acted reasonably in disallowing only those costs
which it determined actually failed to benefit the program. The cost of
the stipends for the 153 students was an accurate and fair method for
calculating what part of the grant did not benefit the program.n9
(11) Conclusion
For the reasons stated above, we sustain the disallowance in the full
amount of $207,350. /1/ Effective October 1, 1981 the provisions of
Title XX at issue here were replaced by provisions establishing
a new Title XX social services block grant program. Omnibus Budget
Reconciliation Act of 1981 (P.L. 97-35). /2/ Subpart H was
revised at 42 Fed. Reg. 5848, January 31, 1977. Except for section
228.83(b) (1976), which was not included in the revised regulations, we
cite to the revised regulations since the substantive requirements
relevant here are the same and they applied during most of the time
period in question. /3/ Although the auditors recommended a financial
adjustment only for stipend payments, they were, in general,
highly critical of the State's award and administration of the training
grants. The auditors found that the grants were awarded without a
determination that they were necessary "for the effective administration
of the Title XX program." (p. 6) The auditors questioned one award for
fiscal year 1978 which was contrary to the recommendations in a State
report and noted for all the awards that "the cost per Title XX
identified student was enormous" since many classes paid for by Title XX
funds were attended by few or no Title XX students. (p. 6) Further, the
auditors found: DHR's management information and monitoring system
could not provide information as basic as the number of college students
involved in Title XX training, the number of such students who had
graduated, and the number hired by an approved Title XX agency. Without
that information and consideration of factors such as available manpower
pools, manpower resources expected to be available exclusive of Title XX
training contracts, positions authorized, and estimated annual
vacancies, it was virtually impossible for DHR to administer its
training program effectively. (p. 6) /4/ The Social Services
Block Grant Act (Act), Subtitle C of Title XXIII of P.L. 97-35, amends
Title XX of the Social Security Act to replace the former Title XX
social services provisions with the social services block grant program
provisions and to strike the reference to Title XX in section 1116(d).
The Act uses the term "repeal" for certain changes to the Social
Security Act, such as the repeal of section 1003(c) by section 2353(e)(
2) of the Act. The term "repeal" is not used with regard to the
amendments pertinent here. The State's characterization is,
accordingly, incorrect. /5/ In the vast majority of cases before
the Board where the Board has sustained a disallowance, the Board has
not directed how the Agency should recover the funds. That does not
mean, however, that the method used by the Agency to recover
disallowances would be beyond Board scrutiny. /6/ We also
believe that Hufstedler can be distinguished from this case on the
following additional grounds: 1) Hufstedler concerned an order
directing states to refund certain fundsk, while this case involves a
notification of disallowance denying the State's claim to federal funds;
(2) We agree with the concurring opinion in Hufstedler that the court's
discussion of the availability of a government agency's common-law right
of setoff, 662 F.2d 208, at 216-18, is dictum, and, therefore, we
conclude that the court's analysis is not controlling here. /7/
This argument is apparently based on a misreading of 45 CFR
228.83(b)(1976). This regulation was no longer in effect after January
31, 1977. It required the disallowance of FFP when more than 10 percent
of the students required to report failed to do so, not when 90 percent
failed to report. The regulation provided that: The FFP to be
disallowed will be based on the difference between the percentage of
students reporting and the 90 percent required to report. . . . /8/ The
State argued that the audit report was "binding" on the Agency and
a
"prerequisite" to a disallowance. (State's August 6, 1982 submission,
p. 2) Since we conclude that the Agency's basis for the disallowance is
consistent with the audit findings, we do not need to consider whether
the audit findings were binding on the Agency. We note, however, that
audit recommendations are generally considered advisory, not mandatory.
/9/ Since the basis for the disallowance is the State's lack of control
over the program and not the employment status of the students, we do
not believe that 45 CFR 228.83(b) (1976) requires a different
calculation for a portion of the amount disallowed. Section 228.83(b)
of 45 CFR was in effect during the first few months of fiscal year 1977.
The regulations always accorded a student six months from completion of
an educational program to report for employment. Consequently, the
revised regulation, which did not contain this provision, would have
been in effect when any student receiving stipend payments during the
first few months of fiscal year 1977 could have completed an educational
program and, after the passage of six months, have failed to honor the
employment obligation. Moreover, 228.83(b) provided for the
disallowance of FFP in financial assistance, which included costs other
than stipend payments (45 CFR 228.84(b) (1976)). This regulations stated
the method for calculating a disallowance simply where more than 10
percent of those required to report for employment failed to do so, even
if a state had in general maintained adequate control over its stipend
program. Here the Agency's finding related to the State's obligation
for overall supervision, control, and oversight of Title XX activities.
As indicated above, we consider the Agency's disallowance of stipend
payments which it determined did not benefit the Title XX program
reasonable under the circumstances of this case.
OCTOBER 22, 1983