GAB Decision 468
Docket No. 83-110
September 30, 1983
Missouri Department of Social Services;
Garrett, Donald; Teitz, Alexander Settle, Norval
The Missouri Department of Social Services (State) appealed the
decision of the Commissioner, Social Security Administration (Agency)
which upheld the disallowance of $10,270 in federal financial
participation (FFP) that the State had claimed under Title IV-A of the
Social Security Act. The Agency said that the State did not capitalize
and depreciate the cost of non-expendable personal property charged to a
cost pool and having a cost of $300 or more as required by 45 CFR
205.160(a)(3).
The State contended that the costs at issue are direct costs and,
therefore, section 205.160(a)(1) should be applied. In accordance with
that section, the State maintained that it was justified in claiming FFP
in full at the time of acquisition the cost of non-expendable personal
property costing less than $5,000. The State in applying section
205.160(a)(1) to the property in question computed the proper
disallowance as $3,241.80. Agency Ex. 4, p. 3.
As explained below, we do not accept the State's interpretation of
the applicable regulation. Therefore, we uphold the Agency's
disallowance of $10,270.
I. Background
The State submitted a quarterly report of expenditures for costs
incurred under Title IV-A, for the quarter ended September 30, 1981,
which included $10,270 FFP for direct costs spent for non-expendable
personal property costing between $300 and $5,000. In accordance with
the State's approved cost allocation plan, the State charged these costs
to cost pool "12.A, State and Local Training - I.M.". The costs were
subsequently allocated to the respective benefitting programs based on
the results of an income maintenance time study. See, Agency Ex. 5.
The Agency disallowed the costs since the State charged the costs to a
pool but did not capitalize and depreciate them. Id.
(2) II. The Regulations
The Agency relied on 45 CFR 205.160(a)(3) which provides that:
Non-expendable personal property acquired by a State and assigned for
use to organizational elements of a single State agency . . . which are
treated as indirect cost centers or pools in an SRS cost allocation plan
shall be capitalized and depreciated . . . when it has an acquisition
cost of $300 or more . . . . (Emphasis added)
The State maintained that the general rule stated in section
205.160(a)(1) should apply to these costs. That section provides that:
Amounts expended for non-expendable personal property costing less
than $5,000 may be subject to Federal financial participation in full at
the time of acquisition at the option of the State agency. . . .
III. The Parties' Arguments
The State contended that the distinction in the treatment of
non-expendable personal property contained in the regulation is whether
the items were charged directly or indirectly not whether "one or
another accounting entity (e.g., pools, areas, cost objectives, or
centers) were employed." Agency Ex. 6, p. 1. The State asserted that
this distinction makes sense in that it encourages the direct use for a
program of equipment costing between $300 and $5,000 by requiring
capitalization and depreciation only when an item costs over $5,000,
while offering less incentive for indirect expenditures (e.g, requiring
capitalization and depreciation when an item costs over $300). Id. The
State concluded that since the items of personal property in question
were direct costs of the Title IV-A program the costs were subject to
the general rule contained in section 205.160(a)(1) and could be subject
to FFP in full at time of acquisition if the acquisition cost was less
than $5,000.
The Agency argued that since these costs were charged to a pool,
regardless of whether they were direct or indirect costs to the pool,
the costs were subject to the provisions of section 205.160(a)(3). See,
Agency Ex. 7.
(3) The State referred to the language in section 205.160(a)(3),
specifically "indirect cost centers or pools", and argued that the
modifier "indirect" can reasonably be read to modify both "cost
centers"
and "pools". Agency Ex. 6, p. 2. The State contended that regulatory
prose requires only one adjective when two nouns similar in meaning are
being modified. Id. The State concluded that since "cost centers"
and
"pools" are approximately the same cost accumulation device, the
modifier "indirect" was intended to describe both and, therefore,
only
indirect costs are subject to section 205.160(a)(3).
The Agency rejected the State's interpretation of the regulation.
The Agency referred to language contained in 45 CFR 205.160(c)(1) which
the Agency argued makes it clear that, for purposes of applying section
205.160(a), direct costs are those costs of non-expendable personal
property exclusively used for a program or activity and are subject to
treatment under (a)(1). The Agency stated further that section
205.160(c)(1)(i) provides that amounts expended for property not
exclusively used for one program are to be allocated using cost centers
or pools and are subject to treatment under (a)(3).
The State did not dispute that these costs did not exclusively
benefit the Title IV-A program and, therefore, in accordance with
section 205.160(c)(1)(i), the costs must be placed in a pool and
distributed to the benefitting programs. However, the State argued that
section 205.160(c)(1)(i) is not limited to indirect costs but also
applies to the allocation of direct costs that are pooled and
distributed. Therefore, the State argued that this section is not
dispositive of the issue involved in this case.
IV. Analysis
The Board concludes that the Agency reasonably interpreted the
regulations to prohibit FFP for claims for personal property which was
included in a pool but not capitalized and depreciated.
The State asks us to interpret "indirect cost centers or pools"
to
mean that only indirect costs in a pool fall within the meaning 45 CFR
205.160(a)(3). While the (4) State's argument is not patently
unreasonable, the State has not shown why its interpretation should be
adopted instead of the Agency's, or that the Agency's interpretation is
unreasonable in the overall context of the regulation. As the Board has
said in past decisions, where the Agency's interpretation is reasonable,
the Board will not overrule the Agency based on some alternate
interpretation which the Agency might have adopted. See, e. g.,
Colorado Department of Social Services, Decision No. 169, April 30,
1981. *
Section 205.160 is a rule reflecting an Agency policy decision. The
State acknowledged that the rule makes "a good deal of sense" and
is
"reasonable" in that the rule encourages the direct use of equipment
for
a particular program. However, this purpose would be frustrated if the
State's interpretation of it were accepted.
The State argued that the distinction between sections (a)(1) and
(a)(3) lies in the classification of costs as either direct or indirect.
It is important to keep in mind the nature of the distinction between
direct and indirect costs. By definition, indirect costs are those
incurred for a common purpose benefitting more than one cost objective,
and not assignable to those benefitting cost objectives "without effort
disproportionate to the results achieved." See, e.g., OASC-10, p. 10.
On the other hand, direct costs are those which can be specifically
identified with a particular cost objective. Id. at pp. 9-10. Like
indirect costs, however, direct costs may benefit more than one program.
The real distinction between them lies not so much in their definitions
as in a grantee's decision to expend time and effort to ascribe a
particular cost to a specific cost objective.
(5) Hypothetically, all costs may be directly charged if enough time
is given to track the benefitting cost objectives. But, when the cost
effectiveness of that tracking effort diminishes, the regulations
effectively provide for allocating the costs via an indirect cost rate.
Therefore, depending on the level of sophistication of their respective
accounting systems, a particular cost might reasonably be treated as an
indirect cost by one grantee while treated as a direct cost by another.
To accept the State's position would subject the regulation to
varying applications and possible manipulation based on the equivocal
terms "direct costs" and "indirect costs." A grantee could
qualify costs
for treatment under the more generous provision, section (a)(1), by
merely accounting in a more precise manner for the ultimate
beneficiaries of the costs and thereby treating the costs as direct
costs. The State's argument would take an otherwise laudable activity -
more precise accounting for costs which would otherwise be indirectly
accounted for - and make that the activity at which the regulation is
directed. It is not. The purpose of the regulation is to encourage the
use of equipment for a particular program. The State's implicit linkage
of the two goals, more precise accounting and encouraging the use of
equipment, is an unreasonable interpretation within the context of the
entire regulation. The regulation was designed to encourage the use of
equipment for a particular program; it is not the means by which the
Agency has set standards for accounting for direct and indirect costs.
(For the latter, see, Federal Management Circular 74-4, Attachment A.)
The Agency's interpretation is bolstered by 45 CFR 205.160(c)(1).
Although we agree with the State's assertion that this section is not
dispositive of the issue in this case, it is supportive of the Agency's
interpretation of the regulation in that:
Section (c)(1) is consistent with the purpose of the regulation, to
encourage the direct use of equipment for a program, in that it
characterizes direct costs as those used exclusively for a program.
Section (c)(1) requires that all costs not exclusively used for a
program, both direct and indirect, be allocated to the respective
benefitting (6) programs by use of cost centers or pools. Although,
unlike section (a)(3), section (c)(1) does not use the modifier
"indirect" in describing cost centers, section (c)(1)'s requirement
that
certain direct costs be allocated by use of either cost centers or pools
is consistent with the Agency's interpretation of section (a)(3) that
direct costs be considered included in the interpretation of the word
"pools" within the regulation.
Therefore, in the overall context of this regulation, we find that
the Agency's interpretation of this regulation is reasonable, and
clearly more reasonable than the State's.
V. Conclusion
Based on the reasons stated above, the Board upholds and Agency's
disallowance of $10,270 FFP which the State claimed under Title IV-A for
certain costs incurred in the quarter ended September 30, 1981. * We do
not specifically address the State's argument that regulatory prose
requires only one modifier in this situation. The State provided no
citation for its argument and the rules governing correct grammatical
usage do not provide an unequivocal answer to this question. As stated
more fully above, we find that within the context of the entire
regulation the Agency's interpretation of this section is the more
reasonable interpretation.
NOVEMBER 14, 1984