DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: West Virginia Division of Vocational Rehabilitation
Docket No. 86-247
Audit Control No. 03-65015
Decision No. 869
DATE: May 14, 1987
DECISION
The West Virginia Division of Vocational Rehabilitation (DVR) appealed
a
determination by the Commissioner of the Social Security
Administration
(SSA) that DVR must credit SSA with $61,206 of interest earned
by DVR on
federal funds advanced by SSA. The funds were advanced for
the
operations of the Disability Determination Service (DDS). SSA based
the
determination upon an audit which found that, during the period
from
October 1, 1977 to September 30, 1982, DVR deposited federal
funds
advanced for DDS expenses in accounts which were invested by the
state
treasury in interest-bearing securities and held those funds
for
significant time periods prior to disbursement. For the
reasons
discussed below, we uphold the disallowance.
DVR did not deny the underlying factual findings upon which
this
disallowance was based. Specifically, DVR admitted that federal
funds
for the DDS program were deposited in the West Virginia state
treasury
prior to disbursement, and that all funds in the state treasury
were
invested and earned interest. DVR stated that the federal fund
balances
were maintained only to comply with state laws requiring that the
DDS
program have a sufficient account balance to cover all invoices
and
payroll liabilities before warrants can be issued. In most cases,
DVR
asserted, the balances covered invoices which had already been
submitted
and were being processed by the State fiscal system.
Applicable Regulations
The interest in dispute was earned on federal funds advanced under
a
negotiated agreement for the period up to June 1, 1981, and
thereafter
under regulations codified at 20 CFR 404.1601 et seq. and 416.1001
et
seq. 1/ The federal government agreed to reimburse West
Virginia for
the full costs of the DDS program. SSA asserted that the
relationship
under either the negotiated agreement or the regulations was
essentially
contractual, and that this dispute is governed by the
Federal
Procurement Regulations at 41 CFR Chapter 1. See 20 CFR
404.1626(a) and
20 CFR 416.1026(a) DVR did not dispute these points. 2/
In a subpart specifically addressing cost principles applicable
to
contracts with state governments, the Federal Procurement
Regulations
preclude reimbursement for "profit or any other increment above
cost."
41 CFR 1-15.701-1. This subpart further requires that costs
allowable
under contracts must be net of all "applicable credits." Id.
at
1-15.703-1(g). Applicable credits are defined as "receipts or
reduction
of expenditure-type transactions which offset or reduce expense
items
allocable . . . as direct or indirect costs." Id. at
1-15.703-3(a). 3/
In the context of various grant programs, the Board has construed the
same
language to find that interest earned on program funds is an
applicable
credit and must be offset against expenditures. See, e.g.,
North
Carolina Department of Human Resources, Decision No. 361, November
30, 1982;
New York State Department of Social Services, Decision No.
588, October 31,
1984. The Board determined that interest, which would
not have been
earned by a state but for principal sums attributable to a
specific program,
must be treated as an applicable credit, even if
investment of funds is not a
program requirement. New York, pp. 6-7.
Moreover, the rule concerning advances of federal funds to contractors
in
the regulations states that "interest will be charged on the
unliquidated
balance of all advance payments. . . ." 41 CFR 1-30.403.
This provision
sets out certain circumstances in which interest-free
advance payments may be
authorized, but none of those circum- stances
fits the facts in this
case. Here, however, SSA is not seeking to
charge interest, as it
apparently could, but is merely seeking to
receive credit for interest
actually earned by the state treasury on
federal advances.
Discussion
1. Interest earned on advances must be credited to the
federal
government even if the advances were
reasonable.
DVR challenged the auditors' finding that account balances in the
DDS
program were "excessive" and that DVR violated the requirements of
31
CFR 205.4 by not limiting cash advances to "the minimum amounts
needed"
for "actual, immediate cash requirements" timed "as close as
is
administratively feasible to the actual disbursements . . . for
direct
program costs and . . . any allowable indirect costs." DVR
asserted
that the maintenance of substantial account balances in the DDS
program
was reasonable under the accounting system required by state law,
and
that it would be unfair to require DVR to credit the federal
government
with interest it could not prevent the state treasury from
earning. 4/
Even if we accept DVR's contention that the account balances
were
reasonable, DVR is still required to account for interest earned
under
the regulations at 41 CFR 1-15.703. SSA did not rely on the
auditors'
finding that the account balances were excessive for the
monetary
disallowance at issue. The regulations do not distinguish
between
interest earned on fund balances which are "excessive" and that
earned
on fund balances which are "reasonable." The regulations are
not
fault-based, but appear to be designed primarily to prevent
contractors
from reaping a windfall profit and abusing the privilege of
advance
payments. These rules are consistent with the general policy
against
allowing any "provision for profit or other increment above
cost." 41
CFR 1-15.701-1. Clearly, in the present case West Virginia
derived a
benefit above any costs from holding advance payments
in
interest-bearing accounts. DVR presented no reason why West
Virginia
should be allowed to retain those benefits.
The mere fact that state law may have required DVR to maintain
substantial
account balances is not material to the issue of whether
West Virginia may
retain interest earned on advance payments. A state
has much
flexibility in selecting a system which reasonably controls and
accounts for
receipts and disbursements, but it must ultimately be
responsible for any
deficiencies in that system. See New York
Department of Social
Services, Decision No. 794, September 30, 1986, pp.
12-13. It would be
unreasonable to make the federal government bear the
burden for West
Virginia's adoption of particular requirements governing
account balances and
West Virginia's delays in processing disbursements.
In sum, we conclude that the regulations unambiguously require that
DVR
account for interest earned on federal funds held for the DDS
program,
whether or not the maintenance of substantial account balances
was
reasonable. We reject DVR's argument that it should be excused
from
these requirements because West Virginia may have been reasonable
in
holding the funds, or because state law required maintenance
of
substantial account balances.
2. DVR must account for interest earned on federal funds invested
by
the state treasury.
DVR argued that it should not be required to credit SSA with the
interest
earned because the DDS program did not earn the interest. DVR
asserted
that, under state law, the interest was earned as an
independent function of
the state treasury, which did not remit any
interest to the DDS program
account. SSA argued that DVR must be held
accountable for interest
earned by the state treasury because both DVR
and the state treasury were
acting on behalf of the state of West
Virginia. SSA Letter to DVR,
dated November 24, 1986.
During most of the period at issue, the DDS program was operated by
DVR
under a negotiated agreement between SSA and the state of West
Virginia.
This agreement was authorized in Section 221(b) of the Act, as
amended
in 1964, which provided that SSA shall
enter into an agreement with each State which is
willing to make
such an agreement under which the
State agency or agencies
administering the State
plan approved under the Vocational
Rehabilitation
Act, or any other appropriate State agency or
agencies, or both, will make the [disability] determination . . .
After June 1, 1981, the Act was amended to provide that states which
wish
to perform disability determinations must adhere to standards and
criteria in
regulations and other written guidelines issued by SSA.
Pub. L. 96-265, Sec.
304. West Virginia, apparently, exercised the
option to perform
disability determinations and agreed to abide by
federal standards.
Under either the negotiated agreement or the regulations, SSA
contracted
with the state of West Virginia, not with DVR. When West
Virginia
delegated operational responsi- bilities to DVR, DVR acted as an
agent
for West Virginia. DVR is thus bound to comply with all
federal
requirements which West Virginia accepted as a direct obligation of
the
contractual agreement to operate the DDS program. This
includes
requirements to account for interest earned on federal funds.
While we understand that DVR did not actually receive any interest on
the
funds from the state treasury, the interest was earned on behalf of
the state
of West Virginia. Since West Virginia is required to account
for that
interest, SSA may properly require DVR, to which West Virginia
delegated
responsibility over the DDS program, to account for the
interest.
Whether or not DVR ultimately recovers the interest from the
state treasury,
DVR must repay SSA, since it acted as the agent of the
state. SSA
should not be required to wait for DVR to recover the
interest; SSA is not
responsible for ensuring appropriate interagency
cooperation on the state
level.
The key factor that DVR seems to have forgotten is that the funds
in
question are federal funds and remain so until disbursed for
program
purposes. Although DVR apparently commingled these funds with
state
funds, we have held in the past that the funds retain their character
as
federal funds, even if commingled, and interest earnings can be
traced
to them. See, e.g., Utah Department of Social Services, Decision
No.
750, April 30, 1986.
3. The work of the joint state/federal task force does not affect
this
dispute.
DVR argued that assessment of interest violated an agreement of a
joint
state/federal task force on intergovernmental cash management
policies.
Although DVR submitted only a newsletter summarizing certain
activities
of the task force, the Board discussed the work of the task force,
at
length, in Indiana Department of Public Welfare, Decision No. 859,
April
13, 1987. In that case, the Board determined that the task force
had,
thus far, agreed merely to propose jointly certain changes to
statutory
and regulatory authority to implement new policies bearing on
accounting
for interest on advances of federal funds. No actual changes
in the
governing statutes and regulations have yet been made. Thus, the
Board
did not find a basis to reverse the disallowance.
The Board also considered, in Indiana, a memorandum from employees of
the
federal Department of the Treasury and the Office of Management and
Budget,
which requested that independent interest initiatives by
individual agencies
should be set aside. The Board found that this
memorandum did not
preclude the Department of Health and Human Services
(HHS) from pursuing that
disallowance because there was no evidence that
the authors had authority to
bind HHS, because the memorandum was
phrased as a request and not as a
mandatory directive, and because it
was not clear whether the memorandum
would apply to a disallowance based
on existing regulations when the interest
was earned and questioned
prior to the issuance of the memorandum.
This same rationale applies in this case, and we incorporate it here
by
reference. DVR's argument was not as forceful as the
appellant's
argument in Indiana, since DVR did not provide supporting
documentary
evidence. The newsletter submitted by DVR, describing the
task force's
work, does not suggest that the reform proposals are currently
binding
with respect to interest on federal contracts, or that the
proposals
permit contractors to ignore valid regulatory requirements.
Thus, we
find no effect on the current dispute from the task force's
work.
4. SSA's calculation of interest earned was reasonable.
DVR objected to SSA's calculation of the amount of interest earned on
DDS
federal fund balances. The auditors multiplied average
month-end
balances for each year by the average yearly interest rates
prescribed
in the Monthly Statement of the Public Debt of the United
States. DVR
asserted that, because the funds were commingled with other
funds,
interest could not be accurately calculated.
In the Board's prior cases, the Board accepted reasonable estimates
of
interest earned on commingled funds, subject to revision if
the
appellant provided more accurate information to determine the amount
of
interest actually earned. Cf. Utah, supra, p. 11. Although the
Board
found that interest could not be imputed without a reasonable basis,
it
placed the burden on the recipient of federal funds to establish
that
the audit calculation was not reasonable and to justify substituting
one
method of calculation for another. Id. The Board stated in
Utah, "[i]t
is reasonable to conclude that the State bears a burden of
justifying
its determination of how much interest was or was not earned in
a
commingled account, since it chose to use that mechanism and
thereby
complicated the accountability question." Id., p. 12.
Although DVR generally contested the auditors' calculation of
interest,
DVR did not establish that the calculation was unreasonable, and
did not
provide an alternative basis for calculating interest. DVR
submitted no
evidence comparable to that accepted in other cases, which might
have
shown that interest was earned at a different rate than the rate used
by
the auditors, or that the average month-end balance did not
fairly
represent average balances. In fact, DVR submitted a letter from
an
employee of the state treasury which indicated that the interest
earned
could not be readily calculated in any alternative manner. In
light of
DVR's failure to justify an alternative calculation of interest, we
must
reject its challenge to the auditors' calculation.
Conclusion
For the reasons described above, we uphold SSA's determination that
DVR
must credit SSA with $61,206 of interest earned on advances of
federal
funds for the DDS program.
________________________________ Donald F. Garrett
________________________________ Norval D. (John) Settle
________________________________ Alexander G. Teitz Presiding
Board
Member
1. The Board has jurisdiction over the dispute pursuant to 20
CFR
404.1627(b) and 20 CFR 416.1027(b).
2. Even if the relationship was a grant relationship, the result
would
be the same. The general rule applicable to grants is that
interest on
grant funds must be offset against expenditures. 45 CFR
74.47(b).
Also, the provisions of Office of Management and Budget Circular
A-87,
applicable to grants, are identical to the Federal
Procurement
Regulations provisions concerning applicable credits upon which
we rely.
We agree with SSA's argument that DDS funds were not within
the
exception to this rule afforded by the Intergovernmental
Cooperation
Act, 31 U.S.C. 6501 et seq., because the payment was a "complete
reim-
bursement for costs incurred in paying benefits or providing services
to
persons entitled to them under a law of the United States." 31
U.S.C.
6501(4)(C)(vii).
3. This subpart was patterned after Office of Management and
Budget
Circular A-87 and its predecessor, Federal Management Circular
74-4. 41
CFR 1-15.701-3. Both documents were originally written
for applicati on
to grants.
4. We do not decide the abstract issue of whether DDS account
balances
were excessive. That issue is not ripe for Board review
because there
is no disallowance directly resulting from the audit
finding. If a
fiscal sanction is imposed, West Virginia may seek Board
review to the
extent that the dispute is within Board jurisdiction. See
20 CFR
404.1627(b) and 20 CFR 416.1027(b)