Maryland Department of Human Resources, DAB No. 412 (1983)

GAB Decision 412
Docket No. 82-211

April 29, 1983

Maryland Department of Human Resources;
Ford, Cecilia; Teitz, Alexander Settle, Norval


The Maryland Department of Human Resources (State) appealed a
decision of the Office of Child Support Enforcement (Agency) disallowing
$21,152 in federal financial participation (FFP) that the State claimed
under Title IV-D of the Social Security Act. The disallowance was for
the quarter ending June 30, 1981, and concerned fees imposed by courts
in two of the State's counties for processing court orders for support
payments. The Agency determined that the fees produced income which,
under Agency regulations, should have been deducted from the State's
total expenditures before the State could claim FFP in the remaining
expenditures. The State argued that the fees fell within an exception
in the regulations for revenues raised under a state's governing powers.

Based on the analysis below, we uphold the disallowance.

The regulations and how they apply.

The applicable regulations governing program income were published at
45 CFR Part 74, Subpart F (1980).

Section 74.41(a) defined the term "program income" as follows:

Except as explained in paragraphs (b) and (c) of this section,
program income means gross income earned by a recipient from activities
part or all of the cost of which is either borne as a direct cost by a
grant or counted as a direct cost towards meeting a cost sharing or
matching requirement of a grant. It includes but is not limited to such
income in the form of fees for services performed during the grant or
subgrant period....

The parties agreed that the issue here was whether or not the fees
involved fell within the ambit of section 74.41. The dispute arose (2)
because of an exception in section 74.41(c) (the other exception, in
section 74.41(b), is not relevant here). Section 74.41(c) stated:

The following shall not be considered program income:

(1) Revenues raised by a government recipient under its governing
powers, such as taxes, special assessments, levies, and fines.
(However, the receipt and expenditure of such revenues shall be recorded
as a part of grant or subgrant project transactions when such revenues
are specifically earmarked for the project in accordance with the terms
of the grant or subgrant.)....

The State argued essentially that the fees involved in this appeal
were revenues raised by the grantee under its governing powers, and thus
fell within the exception.

The regulations also contained a somewhat duplicative definition of
another term, "general program income," which was "... all program
income accruing to a grantee during the period of grant support...
other than (certain special categories of income not relevant here)."
Section 74.42(a). This provision described "general" program income, as
distinguished from other kinds of program income such as proceeds from
sale of real property, royalties, etc., described in sections 74.43
through 74.47. "General program income" was "program income" within the
meaning of section 74.41(a), and thus was also subject to the exception
in section 74.41(c)(1).

Certain program regulations applicable to the child support
enforcement program in particular are discussed below. The provisions
in Part 74 are the uniform administrative requirements for HHS grant
programs. With certain exceptions not relevant here, the applicability
of Part 74 to the child support enforcement program was recognized in 45
CFR 304.10 (1980).

A description of the fees.

The following facts were not disputed:

The fees in question were assessed by the State's Circuit Courts of
Montgomery and Anne Arundel Counties. A State statute required these
courts to retain three percent of all sums the courts collected (the
authority apparently was not restricted only to support and alimony
collections). In Anne Arundel County, there also was a local ordinance
which required the circuit court there to collect (3) an additional two
percent in child support, parent support and alimony cases "for the
purpose of defraying expenses." State's Brief, p. 2.

The parties' arguments.

In its disallowance letter, the Agency characterized the fees as
"reimbursement of the costs involved in the determination and processing
of court orders for child support payments as performed by the courts
through cooperative agreements with the State." The Agency maintained
that the courts were fully reimbursed for child support enforcement
costs which the State then claimed as program expenditures for FFP;
thus, argued the Agency, the reimbursement plus the fees meant the
courts were getting more than 100% of costs. The Agency said the fees
were not revenues exempt under section 74.41(c)(1) because "these fees
are imposed at the discretion of the court for the specific purposes of
cost reimbursement." Later, in its argument to the Board, the Agency
added the argument that the disallowance was "consistent" with a program
regulation (45 CFR 304.23(e) (1980)) which prohibited FFP in "any
expenditures which have been reimbursed by fees collected as required
by" 45 CFR Chapter III. The Agency argued that it had interpreted this
regulation (albeit in guidance subsequent to this dispute) to apply to
all fees collected in relation to Title IV-D activities. Agency's
Brief, p. 3.

The State argued that the courts were required by Maryland law to
collect the fees, rebutting the Agency's observation that the fees were
discretionary. The State also argued that there were no "specific
purposes" for which the collected funds were earmarked, and that even if
such purposes were read into the statute and ordinance, the revenues
were not "specifically earmarked for the project in accordance with the
terms of the grant" as stated in section 74.41(c)(1). The State did not
dispute that the disallowance might be valid under current law and
guidance (there has been a statutory amendment since the time in
question, discussed below), but the State argued that the Agency's
position on what its program regulation meant would, if accepted, make
the current Agency approach a redundancy.

Discussion.

45 CFR 74.41 and 74.42 essentially established a general rule that
grantees ought to account for income attributable to federally-supported
activities: if a grantee made money from activities which it paid for
with funds which Congress appropriated to support those activities, then
the federal government ought to share the benefit. This rule
represented no more than common sense, and (4) was reflected in both a
program regulation /1/ and the Department's cost principles. /2/ The
general rule was subject to an exception which, although it was more
ambiguous than might be ideal, was equally a matter of common sense and
fairness: merely because a grantee raised funds through means such as
general taxation which were then coincidently spent to meet the goals of
the federally-supported project, did not mean that the State should have
to treat the sums as program income (unless the grant agreement
specifically required it). In a way, the issue concerns how close the
nexus was between the "income" and the project: taxes and similarly
general revenue collections were not treated as program income, but
narrower categories of revenues related directly to the
federally-supported project, such as related "fees for services," were
program income. One may speculate that the two ideas could overlap in
some circumstance which would make it difficult to (5) determine whether
funds were program income or not, but we do not find that to be the
situation here. There was no dispute that the fees involved here
derived from activities for which federal funds were claimed and indeed
the county ordinance specified fees for precisely the type of support
orders which the Agency's program contemplated.

Given the general rule, and the nature of the exception, the State
had to show how an element of what would otherwise be program income
qualified for exceptional treatment. The State's argument essentially
was that the court fees were governmental in nature because they were
mandated by law, /3/ and we think that this is insufficient to come
within the exception. The general regulation specifically included as
program income "fees for services," and the court fees reasonably were
categorized as such fees. Under the State's approach one could argue
that any fee would qualify for the exception as long as it was imposed
by statute, or even, perhaps, official administrative regulation.
Further, under the same logic, one could argue that a fee imposed by any
State action would qualify because it would be imposed under the State's
"governmental" authority. Any money-producing actions of the State
could thus be shielded as "governmental," insofar as taken under color
of State law. /4/ Such analyses would have rendered the general rule in
section 74.41 meaningless. We think that on the face of the regulation,
the fairer reading was that the provision exempted general
government-wide assessments such as taxes which were only incidently
related to a federally-supported program; the provision did not exempt
fees, like those here, which at least in substantial part clearly were
associated closely with the precise activities for which scarce federal
funds were provided.

(6) Since we have decided that the fees did not fall within the
exception, we need not go further to determine whether the funds were
"specifically earmarked" for the project, as this provision of section
74.41(c)(1) established, in effect, an exception to the exception. That
is, we read the provision to mean that even if a revenue item was raised
through general governmental action not specific to a precise program
activity, it still would have to be determined in figuring FFP if the
sum was "specifically earmarked" for the project under the grant
agreement (e.g., presumably, a matching share drawn from general
revenues).

The subsequent amendment to the Act.

Section 455 of the Social Security Act (42 USC 655) sets forth
various levels of FFP in state expenditures for child and spousal
support enforcement activities. Section 2333(c) of the Omnibus Budget
Reconciliation Act of 1981 (Pub. L. 97-35) amended this section /5/ by
adding at the end the following sentence:

In determining the total amounts expended by any State during a
quarter, for purposes of this subsection, there shall be excluded an
amount equal to the total of any fees collected or other income
resulting from services provided under the plan approved under this
part.


The Agency implemented this provision (which was not effective until
after the period in question here) in a guidance document published in
September, 1982 (OCSE-AT-82-8). The Agency argued that while the
amendment was not applicable to this case, the guidance document, while
in part implementing the amendment, also discussed "the state of the law
before the amendment" when it said that 45 CFR 304.23(e) prohibited FFP
in all expenditures reimbursed by fees. Agency's Brief, p. 3. We
touched on his Agency interpretation in footnote 1. The State argued
that Agency reliance on the guidance document would, in effect, render
the guidance document a redundancy (State's Brief, p. 4). It is not
entirely clear what the State meant by this argument, but, to the extent
that State was arguing that the amendment to Section 455(a) and the
implementing guidance should not be treated as mere surplusage, we
agree, based on general principles of construction. Nevertheless, it
was not (7) necessarily redundant of Congress to mandate treatment of
fees in a way that earlier had only been done essentially voluntarily by
Agency rulemaking (and even then not completely, from the appearance of
specific program regulations; note discussion in footnote 1).
Furthermore, the amendment appears to have had a broader impact than the
narrow issue in this case, as evidenced by the contents of OSCE-AT-82-8,
which implements the amendment by extending the collection concept to
application fees and other matters (see, Attachment to State's Brief, p.
2).

Conclusion.

Based on the foregoing, we uphold the disallowance. /1/ 45 CFR
304.23(e) (1980), quoted above. However, this provision was not
dispositive support for the Agency's position. The provision prohibited
FFP in expenditures covered by fees "collected as required" in 45 CFR
Chapter III. The Agency did not cite any provisions of Chapter III
which "required" the collection of the fees in question here, and we
have not found any which do. Chapter III contained the following
provisions on fees: Section 302.33(b) said that a State plan "may"
provide for a fee for support collecltion or paternity determination
services for persons who want to use the services but were not eligible
to use them. Section 302.34 said that cooperative agreements with
courts and law enforcement officials "may" include provisions for
reimbursement.The only place collection of fees was mandated was in
sections 302.35(e) and 302.70(e), which required fees for certain parent
location services provided by states or the federal government. Thus,
on its face, section 304.23(e) prohibited FFP only in fees collected as
"required" in sections 302.35(e) and 302.70(e), and it is unclear how
those sections related to the the activities in question here.
/2/ Cost principles applicable to state and local governments (see 45
CFR 74.171(a) (1980)) stated that the total cost of a grantt program
consisted of the allowable direct costs and allocable indirect costs,
"less applicable credits." Federal Management Circular 74-4, Attachment
A, paragraph D.1. "Applicable Credits" were grantee receipts which
reduced direct or indirect costs of the grant. Id., Paragraph C.3.a. It
was not clear from the record in this case to what precise extent the
fees actually would have reduced costs of the IV-D grant, but one may
reasonably infer that the fees defrayed costs of services of the type
supported in the IV-D program (The State, in any event, did not deny the
Agency's allegation that its claim for FFP was duplicative of expenses
which the fees had covered). /3/ We agree with the State that
the Agency may have been incorrect in describing the fees as
discretionary; the statute and ordinance appear to have required the
courts to collect the fees. However, we do not see what difference it
would make; whether or not the fees were mandatory does not seem to
bear definitively on the issue of whether the fees represented general
governmental action. /4/ There was some speculation during the
telephone conference held in this case that the regulation could be
explained in terms of a state acting in a "proprietary" as opposed to a
"governmental" role, but there was no development of this idea, and in
any event this approach would appear merely to beg the question of how
the fees here should be characterized, leaving us essentially where we
started. /5/ Section 2333(c) originally stated, apparently in
error, that section 453(a) was amended. This was corrected by section
171(b)(2) of the Tax Equity and Fiscal Responsibility Act of 1982 (Pub.
L. 97-248), which amended section 2333(c) of Pub. L. 97-35 by striking
out reference to section 453(a) and substituting reference to section
455(a).

JULY 07, 1984