DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: New York State
Department of Social Services
Docket No. 87-48
Audit Control No. 02-66155
Decision No. 910
DATE: October 16, 1987
DECISION
The New York State Department of Social Services (State) appealed
a
determination by the Social Security Administration (SSA or
Agency)
disallowing $1,896,586 in federal funds claimed by the State
in
connection with its Disability Determination Program (DDP).
The
disallowance resulted from an audit covering the period April 1,
1980
through September 30, 1983.
The disallowance had two unrelated parts. First, the Agency
alleged
that New York had followed improper letter of credit drawdown
procedures
whereby the State had retained control of excessive federal funds
before
expending the funds for program purposes. SSA assessed imputed
interest
to the State in the amount of $1,864,431 for the period the
State had
allegedly retained the excessive funds. The Agency also
alleged that
the State made two inappropriate personnel transfers to the DDP,
which
did not benefit the program, thereby incurring $32,155 in
improper
personnel costs. 1/
New York argued in response that its letter of credit drawdown
procedures
were proper and that, in any event, the Agency did not have
the authority to
disallow funds by imputing interest to the State.
Additionally, the State
contended that the personnel transfers cited by
the Agency did benefit the
DDP so that the resulting costs should be
allowed. For the reasons
stated below we reverse the disallowance in
full. While we conclude that SSA
had a reasonable basis for determining
that New York's letter of credit
drawdown procedures were improper, we
find that there is no evidence that any
interest was in fact earned by
the State on the funds drawn down, and in the
absence of such evidence,
no authority to assess interest. SSA is not,
however, precluded from
investigating this matter further to verify whether
the State may in
fact have earned interest on the funds in question. We
also find that
the Agency lacked any reasonable basis to disallow the
personnel costs.
Analysis
I. The Letter of Credit Drawdown Procedures
The auditors found that during the period in issue the State drew
down
federal funds under its letter of credit system to cover
certain
"intrastate charges" prior to "actual cash disbursement by
the
centralized State department." File Ex. 1, p. 3. Consequently,
the
State often had federal funds on hand "considerably in excess of
those
reported on the quarterly financial accountability statements."
The
auditors maintained that this practice was in direct violation
of
applicable program guidelines and recommended that $1,864,431 in
imputed
interest (calculated at a 10% rate for 3 1/2 years) be assessed
against
New York. Id. at 5-6. 2/
The State in response raised two defenses. The State argued that
its
drawdown procedures were proper and that, therefore, no excessive
funds
had been retained by the State before disbursement for program
purposes.
The State argued in the alternative that even if its procedures
were
improper, no interest had actually been earned on the funds drawn
down
and the Agency lacked authority to base a disallowance on
imputed
interest.
A. Were the State's drawdown procedures proper?
The State contended in its appeal brief that the funds in question
were
obligated for program use at the time the State drew the funds
down.
The essential issue, according to the State, was "when the
obligation
for the charges was incurred by the State, not when the funds
were
actually disbursed for program purposes." New York Brief, p.
4.
The Agency argued in its response that the State's position
conflicts
directly with the applicable program guidelines, and the State in
its
reply brief never refuted that argument.
Section 439.44 of the Disability Insurance State Manual (DISM)
provides
that--
At no time should cash be drawn to cover
unliquidated
obligations until the time approaches at
which
disbursements are made to liquidate these obligations.
This provision clearly indicates that the time between a state's
drawdown
of federal funds and the actual payment of a corresponding
obligation should
be kept to a minimum. The making of an obligation
alone is not a
sufficient basis to draw down funds if a substantial
amount of time will
transpire between the obligation and the
disbursement of the funds.
Here, although the State neglected to
describe what specifically transpired
after it drew down the funds, the
record suggests that fringe benefit
obligations were not liquidated
until the funds reached the State Comptroller
(the billing agent).
Funds drawn down and retained by the State for excessive
periods before
the State disbursed the funds to liquidate program
obligations,
therefore, were not properly drawn down in accordance with the
cited
DISM provision.
New York also appeared to be arguing in its reply brief that it had
in
fact "disbursed" funds within the meaning of the DISM when it made
a
journal transfer of funds between State agencies through the use
of
vouchers. New York noted that section 441.24 of the DISM
defines
"disbursement" as follows:
A disbursement is the liquidation of an obligation by
the
issuance of a check or a warrant or the payment of cash.
This provision supports the Agency's position, not the State's. It
defines
"disbursement" to be the liquidation of an obligation by the
payment of cash
or the issuance of a warrant for payment. An interagency
transfer by means of
a voucher must liquidate a program obligation in
order to qualify as a
disbursement under this definition. Thus, in the
instant case, if the
State transferred funds by voucher to the
Comptroller (billing agent), the
transfer would not qualify as a
disbursement if no program obligation
was thereby liquidated. The
disbursement would take place when the
Comptroller used the funds to
liquidate program obligations.
Thus, we find that to the extent that New York drew down
funds
substantially in advance of their disbursement, such drawdowns
were
improper under Agency guidelines.
B. May the Agency impose a disallowance by charging for interest in
the
absence of evidence that interest was earned?
The State argued that even if its drawdown procedures were improper,
the
Agency had no statutory or regulatory authority to impose a
disallowance
by charging for interest on funds it drew down. Rather,
the State
argued that, as set out in the notification of grant award, the
only
potential sanction for failure to follow federal procedures was
a
revocation of the unobligated portion of the letter of credit.
Further,
the State contended that under the Intergovernmental Cooperation
Act, at
31 U.S.C. 6503(a), a state may not be held accountable for
interest
earned on grant money pending disbursement for program purposes.
New
York Brief, pp. 4-5.
At the outset, we find that the Intergovernmental Cooperation Act does
not
bar the State from being held accountable for interest under
the
circumstances here. This Board has previously found that funding
for
disability determinations does not fall within the
Intergovernmental
Cooperation Act's definition of a "grant," and falls
instead under the
exclusion at 31 U.S.C. 6501(4)(C)(vii) for funds paid
as complete
reimbursement for costs incurred in paying benefits or
providing
services to entitled individuals under a law of the United
States. See
West Virginia Division of Vocational Rehabilitation,
Decision No. 869,
May 14, 1987, p. 2, n. 2.
Even though the State may not avail itself of the protection of
the
Intergovernmental Cooperative Act, we still find that the Agency may
not
impose a disallowance based on interest charges for excessive
drawdowns
where there is no evidence that the State did in fact earn any
interest.
The Agency here initially argued that the State earned interest
because
the State had not disputed that it had earned interest. The
State in
its reply brief, however, did formally dispute that it had
earned
interest:
. . .[T]he State did not earn interest
on the funds transferred
to its
Comptroller. . . . No interest was actually earned -
the
Agency merely imputed interest at a
rate of ten per cent. 3/
New York Reply Brief, p. 3.
The Agency did not subsequently attempt to refute this statement,
nor
point to any State law which required the State to invest funds
drawn
down under these circumstances. In other Board cases involving
the
question of earned interest, the Agency has specifically pointed
to
evidence in the record or state laws that supported the conclusion
that
interest had been earned. See West Virginia, supra; Indiana
University,
Decision No. 774, August 15, 1986. Accordingly, we find
that there is
no basis in the record to conclude that the State in fact
earned
interest on the excessive drawdowns.
The only provision cited by the Agency in support of the position
that
interest can be charged even where a state did not in fact earn
the
interest is 41 CFR 1-30.403. 4/ The scope of subpart 1-30.4 is set
out
at section 1-30.400 which specifically provides at paragraph (a):
"This
subpart covers policies and procedures for advance payments on
prime
contracts. . . ." Section 1-30.403 provides:
(a) Interest will be charged on
the unliquidated balance of all
advance payments at the rate established by the Secretary of
the
Treasury pursuant to Pub. L.
92-41. . . .
We find, however, that this provision would not support the
instant
disallowance for several reasons.
o There is no evidence that the
circumstances of this appeal
arise from
an advance payment on a prime contract. Thus,
section
1-30.403 on its face does not
apply to the situation presented.
It
covers interest that may be charged on advance payments
for
prime contracts covering procurement
of services and property.
The
arrangements for disability determinations are dictated
not
by contracts per se but by the
statute and regulations. Thus,
there is
no basis to conclude that section 1-30.403 would
apply
to these arrangements and, indeed,
the Agency provided no
explanation
whatsoever as to why this section would
be
applicable.
o The program regulations
prescribing procedures for disability
determinations (20 CFR 404.1626(e)) state specifically which
cost
principles shall apply in
determining whether a state has used
federal funds properly. The regulations provide that a
state's
program will be audited to see
if it conforms with cost
principles at
41 CFR 1-15.7. No reference is made to
subpart
1-30.4. Thus, section
1-30.403 does not apply.
o While the Board referred to
section 1-30.403 in the West
Virginia
decision as a possible authority for charging
interest,
the provision was not in fact
applied in that case, since the
State
there did earn interest. Moreover, the disallowance
period
in West Virginia almost entirely
preceded the effective date of
the
statute and regulations that altered the nature of
the
disability program by eliminating
the use of agreements between
the Agency
and the states and that identified specifically
the
cost principles that would apply in
program audits-- subpart
1-15.7.
Accordingly, we find that the Agency has shown no regulatory
authority
which permits interest to be charged for excessive drawdowns
without
reference to whether the State actually earned the interest
charged.
Since there is no basis in the record to conclude that the State in
fact
earned interest for the excessive drawdowns, we must reverse this
part
of the disallowance. Nevertheless, in view of the fact that
neither
party provided any evidence, much less conclusive evidence,
concerning
whether interest was earned, the Agency is not precluded from
reviewing
this issue further and imposing a new disallowance if it finds
that
interest was in fact earned by the State during the period where
it
retained excessive drawdowns.
II. SSA's Disallowance of Personnel Costs for Two
Employees
SSA disallowed $32,155 in personnel costs for two individuals
transferred
to the DDP immediately after the announcement of State
employment
cutbacks. The auditors questioned the cost effectiveness of
these
transfers since one of the employees was transferred out of DDP
after three
months and the other retired in six months. The auditors
took the
position that these transfers were not cost effective and did
not benefit the
DDP to the extent necessary to justify the individuals'
salaries. File
Ex. 1, pp. 6-7. In adopting the auditors' findings, the
Agency placed
great reliance on the timing of the transfers and the fact
that these were
"management-type employees" with provisional
appointments. The Agency
did not allege that these positions had been
created for these
employees. In fact, SSA conceded that these employees
may have been
technically qualified for their positions, but argued that
the provisional
nature of their appointments was evidence that the
transfers were merely for
the convenience of the employees and not for
the benefit of the DDP. SSA
Brief, pp. 7-9.
The sole rationale behind SSA's position is the fact that
these
individuals were employed by the DDP for relatively brief periods
of
time. The Agency does not dispute that these individuals were
qualified
for the positions that they filled. Further, there is no
evidence that
these individuals were not performing responsibly in their
positions,
regardless of the duration of their employment. In fact, New
York
provided a detailed description of the employees' duties
and
responsibilities showing a direct relationship to DDP. File Ex.
3. In
view of the evidence, and given that the Agency gauged
these
individuals' value to the program entirely on their length of
service,
the Agency's action seems arbitrary. The mere fact that
these
individuals were employed only for short periods does not
necessarily
lead to the conclusion that they did not perform their assigned
tasks
and thereby benefit the program. While such a transfer of
personnel
coinciding with an announced employment cutback may merit more
than
casual scrutiny, the Agency must still establish a reasonable basis
for
a disallowance of these personnel costs. Here, the record does not
lead
us to conclude that the Agency had a reasonable basis for this aspect
of
the disallowance. Accordingly, we reverse the disallowance of
$32,155
in personnel costs.
Conclusion
For the reasons discussed above, we find that although SSA
properly
determined that New York's letter of credit drawdown procedures
were
improper, SSA's decision to disallow $1,864,431 in interest charged
was
not supported by either a finding that interest was earned or
by
applicable program regulations. The Agency is not precluded
from
reviewing this issue further and imposing a new disallowance to
the
extent that interest was in fact earned by the State during the
period
where it retained excessive drawdowns. Additionally, we find
that SSA
did not have a reasonable basis for disallowing $32,155 in
personnel
costs. Accordingly, we reverse the disallowance in its
entirety.
________________________________ Norval
D.
(John) Settle
________________________________
Alexander
G. Teitz
________________________________ Donald
F.
Garrett Presiding Board Member
1. SSA originally alleged that New York had
improperly transferred
eight individuals into the DDP and disallowed $76,608
based on that
finding. The Agency, however, subsequently reduced the
disallowance
regarding inappropriate personnel transfers to $32,155 for
two
individuals. SSA also originally disallowed $520,000 based on a
finding
that the State had rented excessive space for the DDP. SSA
subsequently
withdrew that finding altogether. SSA Brief, p. 2.
2. Neither the State nor the Agency gave the Board a
detailed
description of the State's drawdown procedures or even identified
the
specific agencies in the State that held the funds until they
were
actually disbursed to cover program obligations.
3. The auditors did not find that any interest was in
fact earned;
they merely calculated interest by applying a 10% rate to the
State's
cash on hand for the number of days between each significant
intrastate
invoice and related disbursement. File Ex. 1, p. 5.
4. It is well-established that where a state in fact
earns interest
on grant funds, claimed costs equal to the amount of interest
earned may
be disallowed based on applicable cost principles. See,
e.g., Utah
Department of Social Services, Decision No. 759, April 30, 1986;
Indiana
Department of Public Welfare, Decision No. 859, April 13, 1987.
The
regulations concerning the disability determination program authorize
a
disallowance for earned interest as an "applicable credit" under
these
circumstances. 20 CFR 404.1626(e); 41 CFR 1-15.703-3(a); see
West
Virginia, supra. Thus, New York's assertion that SSA's sole remedy
was
to revoke the unobligated portion of the State's letter of credit
is