DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: South Carolina Department of Social Services
Docket No. 87-130
Audit Control No. SC-86-OA3
Decision No. 926
DATE: December 14, 1987
DECISION
The South Carolina Department of Social Services (South Carolina)
appealed
a determination by the Office of Child Support Enforcement
(OCSE) disallowing
$777,746 in claims for federal financial
participation (FFP) under Title IV-D
(Child Support and Establishment of
Paternity) of the Social Security Act
(Act). OCSE's determination was
based on an audit report which found
that South Carolina did not credit
these programs with interest earned on
collected child support payments
held by South Carolina during the period
from October 1, 1981 through
June 30, 1986.
We uphold the disallowance because we conclude that South Carolina
is
required by federal law, as a condition of the Title IV-D grant
program,
to credit the federal government with interest actually earned on
the
federal share of child support collections pending their
distribution.
As the Board has held in a series of cases, crediting of
interest earned
is required under section 455(a) of the Act, the cost
principles at 45
C.F.R Part 74, and guidance documents issued by OCSE and the
Office of
Management and Budget (OMB). See, e.g., Utah Dept. of Social
Services,
DGAB No. 750 (1986); New York Dept. of Social Services, DGAB No.
794
(1986). We incorporate here the reasoning of these decisions, which
we
summarize below as we discuss new arguments raised by South Carolina.
Background
The Child Support Enforcement Program was established, under Title IV-D
of
the Act, to enforce child and spousal support obligations.
Basic
program functions include locating absent parents,
determining
paternity, establishing the amount of the child support
obligation, and
collecting support payments. See generally section 451
of the Act.
Title IV-D authorizes grant funding for the costs of operating the
State's
program. In order to obtain FFP, the State must operate the
program in
accordance with a federally approved state plan and all
applicable federal
regulations. Some of the funds collected under Title
IV-D are collected
on behalf of families which received assistance under
the Title IV-A program,
Aid to Families with Dependent Children (AFDC).
Under section 457 of the Act,
child support collections on behalf of
these families are not distributed in
full to the recipient families;
funds are withheld to reimburse the
governmental entities which
contributed to the AFDC payments. The child
support payments are
distributed from Title IV-D program accounts according
to a formula
which requires that the federal share of the funds withheld are
credited
to the federal government by the Title IV-A agency. See 45
C.F.R.
302.51.
Discussion
The auditors found that South Carolina earned interest on child
support
collections obtained by the South Carolina Department of Social
Services
in the operation of a program under Title IV-D of the Act, and
held
pending distribution according to the requirements of that
program. The
auditors relied primarily on section 455(a) of the Act, as
amended by
the Omnibus Budget Reconciliation Act of 1981, P.L. 97-35,
section
2333(c). Section 455(a) of the Act contains a formula for
determining
the amount of FFP in a state's Title IV-D program under an
approved
state plan. The section states that, in applying the formula,
"there
shall be excluded an amount equal to the total of any fees collected
or
other income resulting from services provided under the plan."
South Carolina did not dispute the audit findings, conceding that
the
interest was actually earned on child support collections and was
not
subsequently used to offset program expenditures or otherwise credit
the
federal government with a share of the interest. Appendix
to
Appellant's Brief (App.) C, p. 3. South Carolina did not contest
the
amount which the auditors found was earned.
Instead, South Carolina argued that interest was not within the ambit
of
section 455(a) of the Act because that section should be limited
to
income from fees collected for providing services for families who
do
not receive Aid to Families with Dependent Children (AFDC) under
Title
IV-A. South Carolina further argued that the interest did not
result
from "services provided under the [Title IV-D] plan," but
from
independent investment activities of the State Treasurer of
South
Carolina, a separate state agency which was not required under state
law
to credit the Title IV-D program with interest. Thus, South
Carolina
asserted, interest should not be attributed to the Title IV-D
program.
Finally, South Carolina argued that the disallowance was unfair
because
OCSE had not cited any problems with the treatment of interest income
in
two earlier audits of portions of the disallowance period.
In several recent cases, the Board upheld similar OCSE determinations
that
interest on child support collections is "income" for purposes of
section
455(a) of the Act. See, e.g., Utah Dept. of Social Services,
DGAB No. 750
(1986), pp. 1-7; New York Dept. of Social Services, DGAB
No. 794 (1986), pp.
5-8. In summary, the Board reasoned that the phrase
"other income" in
the statute is broad enough to include income from
interest earned on
deposited funds. The Board also found that the
interest income results
directly from services under the Title IV-D
program even though the program
does not require investment of dormant
funds, because the accumulation of
principal balances is a direct result
of Title IV-D collection
services. Id.
Although South Carolina was aware of the Board's prior cases, it
raised
the same basic issues addressed in those cases. We reject
those
arguments again and generally incorporate the reasoning of those
prior
decisions here; but we consider some new points raised by
South
Carolina. South Carolina argued that the legislative and
administrative
background of section 455(a) indicates that the provision was
intended
to apply only to fees collected for providing services for
non-AFDC
families. South Carolina submitted a letter from the current
Secretary
of Health and Human Services, which mentions only those fees
in
summarizing the draft bill which became P.L. 97-35. App. E. We
find
that this letter did not purport to be a detailed or precise
explication
of the statutory language, and its interpretation of the
proposed
section is not consistent with the final language of section 455(a)
of
the Act as it was passed by Congress. If Congress had intended to
limit
the section to fees only, no reference to "other income" would have
been
necessary.
South Carolina asserted that, in construing the term "other income"
in
section 455(a), it is relevant that Office of Management and
Budget
(OMB) Circular A-87, Attachment A, para. C (3) (made applicable
to
grants under the Title IV-D program by 45 C.F.R. 74.171) does not
refer
to interest in defining and giving examples of "applicable
credits."
South Carolina argued that Congress could not have intended
the
definition of "other income" in section 455(a) to extend beyond
the
reach of the pre-existing definition of "applicable credits." In
light
of its allegation that interest was not within the scope of
the
definition of an "applicable credit," South Carolina concluded
that
interest should not be included as "other income."
We reject this argument for two reasons: South Carolina offered
no
evidence from the legislative history of section 455(a) to suggest
that
Congress considered the definitions in OMB Circular A-87 in drafting
the
section, and, even if Congress had considered those definitions, we
find
that Congress could reasonably have concluded that interest is,
indeed,
within the definition of applicable credits. In North Carolina
Dept. of
Human Resources, DGAB No. 361 (1982), the Board found that interest
is
an applicable credit within the scope of a regulatory
provision
identical to the provision in OMB Circular A-87. There, the Board
found
that, although interest is not explicitly cited as an example of
an
applicable credit, interest is within the broad category of
examples
which involve income generated out of the normal operation of a
program.
The Board relied on the fact that the principal sums were
directly
generated by the program involved to conclude that the interest
earned
must be credited against program expenses as an applicable credit
and
that, under general accounting rules, this result was required even
if
the interest arises from investment activities carried on by another
arm
of the grantee. South Carolina provided no basis to conclude
otherwise
in this case, or any evidence that Congress might have
concluded
otherwise. Thus, we agree with the respondent that, since
interest is
an applicable credit, it is reasonably included within the scope
of the
term "other income."
Indeed, in the Utah and New York cases cited above, the Board found
that
the applicable credit provisions were an alternate basis for
the
disallowance of interest income on undistributed funds, as well as
the
regulations concerning program income at 45 CFR Part 74.40 et
seq.
Since interest is within the scope of the definition of
applicable
credits, we affirm the findings in our prior cases that the
applicable
credit provisions are an alternate basis for the disallowance
of
interest income on undistributed program funds. Similarly, we
find
that, since this interest would constitute "program income,"
the
disallowance is further supported by these regulations.
In sum, we find no basis to conclude that interest income is not
within
the scope of section 455(a). Since the statute is clear and we
also
find that the pre-existing regulations and applicable credit
provisions
are an alternative basis for the disallowance, we reject
South
Carolina's arguments that it lacked notice of OCSE's "interpretation"
of
the statute. Although OCSE issued an Action Transmittal, OCSE
AT-82-8,
in September, 1982, which explained the requirements of section
455(a)
and specifically stated that interest earned on Title IV-D
collections
must be treated as income, we find that South Carolina had
adequate
notice from the statutory language itself, and from the
regulatory
requirements in OMB Circular A-87 regarding applicable credits, of
its
obligation to offset interest income from undistributed child
support
collections against Title IV-D program expenditures. In issuing
OCSE
AT-82-8, OCSE was not applying retroactively any new requirement,
nor
was it changing a previously held policy. Thus, this case
is
distinguished from Daughters of the Miriam Center for the Aged
v.
Matthews, 590 F. 2d 1240 (3rd Cir. 1978); there the issue
was
retroactive application of an interpretive rule which imposed
conditions
not in the statute itself and changed prior agency policy.
In that
case, the appellants could reasonably have relied on the earlier
policy.
In this case, by contrast, South Carolina demonstrated no
reasonable
basis in the statute or regulations for an alternative reading of
the
requirements.
South Carolina further argued that the interest was earned by
the
independent investment activities of the State Treasurer, a
separate
state agency which had no legal obligation under state law to
return
interest earned to the agency administering the Title IV-D
program. In
North Carolina, cited above, the Board addressed a similar
argument and
concluded that, even if the interest earnings were used for
unrelated
purposes, this did not relieve a state of the obligation to account
for
that income in reporting expenditures.
South Carolina also alleged that it was within a temporary "exception"
to
the section 455(a) obligation which had been created by OCSE, in
Action
Transmittal OCSE AT-82-8. The Action Transmittal provided a
temporary
exception to requirements to reduce claimed expenditures by
interest income
for state agencies which demonstrate that they could not
comply by reason of
state law, until the first month after the close of
the first session of a
State's legislature ending on or after October 1,
1981. This arguably
would reduce, but not eliminate the disallowance,
since the disallowance
period was from the quarter ended December 31,
1981 until the quarter ended
June 30, 1986.
After examining the record, we must conclude that South Carolina has
not
demonstrated that it could not comply by reason of state law.
South
Carolina submitted provisions of state law which indicate that all
funds
received by any state agency must be deposited in "appropriate"
accounts
in the State Treasury, that the State Treasurer has full authority
to
invest those funds, and that all earnings of "general deposit"
accounts
shall become part of the State's General Fund. App. D.
But those state
law provisions also permit the State Budget and Control Board
to
authorize other types of banking arrangements for funds which can not
be
properly consolidated. App. D; S.C. Code Ann. 11-13-40, 11-13-125
(Law.
Co-op 1976). South Carolina provided no evidence that it had
requested
special treatment of Title IV-D funds. Thus, South Carolina
did not
demonstrate that it could not comply with interest
reporting
requirements by reason of state law, and the "exception" in OCSE
AT-82-8
does not apply.
South Carolina further asserted that under the funding system for
Titles
IV-A and IV-D, the federal government is credited with its share
of
child support collections, prior to the time the funds are
actually
collected or held in Title IV-D accounts, by a reduction of the
State's
quarterly claims for advances of federal funds under Title IV-A
by
estimated child support collections during the quarter. According
to
South Carolina, since the federal share had already been credited,
the
interest was earned on state-only funds. In the New York case the
Board
directly addressed this contention, finding that the reduction in
the
estimated claim merely ensured that advances of federal funds
reflected
actual cash flow requirements, but did not credit the federal
government
with its share of the collections. The Board emphasized that
it is the
responsibility of the State to establish proper accounting
techniques to
distribute funds promptly and credit the federal government
with a share
of all program income. South Carolina provided no evidence
that it had
distributed the child support collections or credited program
income to
the federal government at any time earlier than the auditors
identified.
South Carolina's final argument was that the disallowance was
unfair
because two prior OCSE audits covering portions of the
disallowance
period failed to identify errors in treatment of interest
income. OCSE
did not deny that these audits failed to identify errors
in accounting
for interest. South Carolina provided no authority,
however, which
would support its contention that these audits precluded
further review
by OCSE. In Pennsylvania Dept. of Public Welfare,
DGAB No. 451 (1983),
the Board addressed a similar argument, and concluded
that the failure
to question costs in one audit did not preclude later review
of those
costs, at least when, in the prior audit, the auditors had made
no
affirmative judgment that the questioned costs were allowable and
no
final agency determination regarding allowable costs had been made.
The
Board reasoned that audit findings are not final agency
determinations,
but rather are simply recommendations to the agency.
Thus, a state
would not be justified in placing undue reliance on those
findings, and
those findings would not rise to the level of affirmative
misconduct
which could possibly preclude the agency from further
review. We
believe that this same reasoning is applicable to this
case.
Even if South Carolina in good faith misunderstood the requirements
of
section 455(a) and OMB Circular A-87, and relied on the
alleged
assurances given in the earlier audits, we note that South Carolina
has
not shown that it suffered any detriment from that reliance.
The
misunderstanding resulted in South Carolina having the use of
the
federal share of interest earnings for several years before
OCSE
instituted this action to recover its share of those earnings.
South
Carolina benefitted from the misunderstanding by reaping a
temporary
windfall and is now being asked to return the federal share.
Thus we
must also reject South Carolina's assertion that the disallowance
is
unfair because we find that there was no detriment from
its
misunderstanding of the responsibility to account for program
income
earned as interest on undistributed child support collections.
Conclusion
For the reasons discussed above, we uphold the disallowance of $777,746
in
claims for FFP under Title IV-D based on South Carolina's failure to
properly
account for interest earned on undistributed child support
collections.
________________________________
Cecilia
Sparks Ford
________________________________ Alexander
G.
Teitz
________________________________ Norval
D.
(John) Settle Presiding Board Member