DAB Decision 76
January 31, 1980 Michigan Department of Social Services; Docket Nos.
78-70-MI-CS, 79-159-MI-CS; Decision No. 76 Kelly, Bernard E.; Malone,
Thomas Mason, Malcolm S.
SUMMARY
(The following summary is prepared on the responsibility of the
Executive Secretary of the Board as a convenience to the interested
public. It is not an official part of the decision and has not been
reviewed by the Panel. Similar official summaries of earlier cases
appear in 45 CFR Part 16, Appendix.)
The State of Michigan had claimed FFP at the rate of 75% of the full
value of non-expendable personal property which was purchased as part of
an indirect cost pool and allocated in part to the Office of Child
Support Enforcement (OCSE). Under 45 CFR 304.24(a) (3), OCSE determined
that in such circumstances, the value of the property must first be
capitalized and depreciated before the FFP rate is applied.
Section 455(a) of the Social Security Act provides that the Secretary
shall pay 75% of the total amounts expended by a state during a quarter
for the operation of the State plan. The Board held that 45 CFR
304.24(a) did not contradict the wording of Section 455(a). In
identifying the amount expended during a quarter for the State plan with
the depreciation expense and not the whole initial cost, the regulations
impose a common sense method for payment of the appropriate Federal
share of costs for non-expendable personal property. The disallowances
were affirmed.
DECISION
These are appeals that are being considered jointly because they emanate
from the same HEW agency and involve the same issue - whether the State
may receive Federal financial participation (FFP) at the rate of 75% of
the full value of non-expendable personal property which is purchased as
part of an indirect cost pool and allocated in part to the Office of
Child Support Enforcement (0CSE) or whether the value of the property
must first be capitalized and depreciated. Although the dollar amounts
involved are small, the issue is a substantial one.
Procedural Background
By letters dated June 22, 1978, (78-70-MI-CS) and June 28, 1979
(79-159-MI-CS), the Regional Representative, OCSE, notified the Michigan
Department of Social Services (055) of disallowances of $820
(78-70-MI-CS) and $1,255.42 (79-159-MI-CS) for the cost of equipment and
furnishings in excess of $300 per unit purchased under Title IV-D of the
Social Security Act for the quarters ended March 31, 1977 (78-70-MI-CS)
and December 31, 1978 (79-159-MI-CS). The 055 filed applications for
review on July 20, 1978 (78-70-MI-CS) and July 26, 1979 (79-159-MI-CS).
Since there had not been requests for reconsideration before March 6,
1978, the disallowances having been made after that date, the appeals
proceeded under 45 CFR Part 16 (1978).
An Order to Show Cause was issued on August 20, 1979 in 78-70-MI-CS, and
it and the responses were incorporated into both files, without
objections from the parties.
Relevant Statutory and Regulatory Provisions
Title IV-D of the Social Security Act (Section 451 et al.), effective
August 1, 1975, established the program for enforcing the support
obligations owed by absent parents to their children. Section 455(a) (1)
states:
From the sums appropriated therefor, the Secretary shall pay to
each State for each quarter... an amount (1) equal to 75 percent
of total amounts expended by such State during such quarter for
the operation of the plan approved under section 454.
'(Page 02 - 76 - 01/31/80)'
The implementing regulations for the Office of Child Support Enforcement
can be found at 45 CFR 301 et al. (October 1, 1976). Section 304.24
addresses the treatment of non-expendable personal property. 45 CFR
304.24(a) (1) states that items of non-expendable personal property
costing less than $5000 per unit may be subject to FFP of 75% at the
option of the IV-D agency in the State. This is subject to an exception
in Section 304.24(a)(3) which concerns the treatment of property
acquired by organizational elements treated as indirect cost centers or
pools in a departmental indirect cost rate or in a department-wide cost
allocation plan. In these situations, non-expendable personal property
costing over $300 must first be capitalized and depreciated. The
grantee receives FFP at a rate equal to 75% of the depreciation expense.
45 CFR 74.132 defines non-expendable personal property as:
"tangible personal property having a useful life of more than one
year and an acquisition cost of $300 or more per unit..."
45 CFR 304.10 states that 45 CFR Part 74, except for Subparts G
(Matching and Cost Sharing) and I (Financial Reporting), is applicable
to all OCSE grants.
Issues Raised by the Parties
The State asserts (Application for Review, p. 2) that 45 CFR 304.24(a)
(3) contradicts Section 455 of the Social Security Act and is therefore
invalid. It points to the wording of the statute which states that the
Secretary shall pay 75% of the "total amounts expended," while the
regulations require capitalization and depreciation of non-expendable
personal property bought to operate the program.
Section 455(a) of the Social Security Act provides that a state will be
reimbursed for a percentage of the total amounts expended during a
quarter for the operation of the state plan. If a state buys a piece of
equipment with a useful life of 10 years and uses it for 10 years, nine
years of the cost was not expended in Year 1 for the operation of the
state plan in that year, but only one year of the cost, so only 1/ 10 of
the cost of the item would appear to be a cost for the first year's
program. The expenditure incurred during a quarter for the operation of
the plan would therefore appear to be not the whole initial cost but the
depreciation expense.
Capitalization and depreciation of non-expendable personal property is
in accord with normal accounting practices.
By those accustomed to reading the language of accounting, a
depreciation charge is understood as meaning the appropriate
contribution for that year to the amount required Co make
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good the cost of the plant which ultimately must be retired.
(Justice Brandeis in his dissenting opinion in United Railways v.
West, 280 U.S. 234, 268 (1930), disagreeing with the Court on a
basic question of utility law but for a reason not relevant to
this discussion)
Justice Clark, in the opinion of the Court in Massey Motors v. United
States, 364 U.S. 92, 104 (1964) states:
It is the primary purpose of depreciation accounting to further
the integrity of periodic income statements by making a meaningful
allocation of the cost entailed in the use (excluding maintenance
expense) of the asset to the periods to which it contributes.
In an "Issue Paper" submitted along with its application for review,
the
State argues that it is in effect financing the federal share of the
asset costs pending the write-off of costs by depreciation. Its argument
is accompanied by the following example which compares how much a state
would receive from the Federal government if it purchased $1 million in
non-expendable personal property each year for 10 years and if it
received a flat FFP rate of 50% of the initial cost in the year expended
(column 2) as compared with 50% of the depreciation payment (column 3).
Column 4 is the result of subtracting column 3 from column 2 which the
State claims is the added cost to a state if it does not receive a flat
FFP rate:
"Comparison of Federal Match Received from a 'Normal
Payback' Versus 'Depreciation Payback'"
"Fiscal Normal Depreciation Variance Year Payback
(1) Payback (2)
1977 $500,000 $ 50,000 $ 450,000 1978
500,000 100,000 400,000 1979 500,000
150,000 350,000 1980 500,000 200,000
300,000 1981 500,000 250,000 250,000 1982
500,000 300,000 200,000 1983 500,000
350,000 150,000 1984 500,000 400,000
100,000 1985 500,000 450,000 50,000 1986
500,000 500,000 -0- Total Variance (3)
$2,250,000"
'(Page 04 - 76 - 01/31/80)"
"Notes
(1) Assumes a flat 50% FFP and annual equipment expenditures of
$1 million. The normal FFP rate is normally higher. (2) Assumes
a 10-year-life for all equipment. In actual practice it will
vary by type of equipment from 5 to 20 years. (3) The variance
represents the added costs to the state agency during the first
ten years if 45 CFR 205.160 is not withdrawn." (45 CFR 205.160 is
the comparable regulation for the Social and Rehabilitation
Service)
The example above is incomplete, however, because it shows only part of
the depreciation expenses for the ten years of purchases; for instance,
the equipment purchased in 1978 would continue to be available for a
depreciation payback through 1987, and 1986 purchases would continue to
be available for a depreciation payback through 1995. The example
should therefore be continued in the following manner:
Fiscal 50% Payback Depreciation Variance Year
Payback
1987 0 450,000 - 450,000 1988
0 400,000 - 400,000 1989 0
350,000 - 350,000 1990 0 300,000
- 300,000 1991 0 250,000 - 250,000
1992 0 200,000 - 200,000 1993
0 150,000 - 150,000 1994 0
100,000 - 100,000 1995 0 50,000
- 50,000 Total Variance (1987-95) -2,250,000 Total Variance
(1977-95) 0
Thus, at the end of a 19 year period, there would be no added costs for
a state if it were to receive a depreciation payback rather than an FFP
rate on the whole initial outlay.
In the simpler and more plausible case of a major capital investment of
$1 million in the first year of a program only, the variance would also
be zero at the end of the estimated useful life of the equipment. Of
course, in both the more complicated and the simpler case, the delay in
recovery has a financial impact on the State.
In its Issue Paper (page 2), the Skate characterizes the welfare program
as a partnership and argues that in such an arrangement, one of the
partners would not be expected to finance at its own expense the costs
'(Page 05 - 76 - 01/31/80)'
attributable to the business. All partners would ultimately share in
the cost of the assets through depreciation accounting and interest
charges. The State argues that since interest and other financial costs
are not allowable for reimbursement (see 45 CFR Part 74, Appendix C,
Part II, 0.7), the depreciation method is harsh. Such a partnership
arrangement, however, does not mean that all burdens must be divided
equally. The State would surely not support such an argument across the
board since it now only pays 25% of most of the costs of the child
support enforcement program.
The Board has previously noted that federal grants are not made to
reimburse grantees for all expenses but in general will reimburse all
costs less an element of cost sharing or local share. "That the rules
impose a burden on the grantee does not make the result inequitable
provided the burden is consistent with the intent of the program and the
stated rules" (Action for Boston Community Development, Inc., Board
Decision No. 32, Docket No. 76-4, January 31, 1977, page 3). Cf. LEGIS
50/The Center for Legislative Improvement, Board Decision No. 48, Docket
No. 76-17, September 26, 1978, page 7.
The regulation requires FFP for only those costs which the Secretary
determines as being proper (45 CFR 304.20(b)). The Secretary has broad
rulemaking authority under Section 1102 of the Social 'Security Act to
"make and publish such rules and regulations, not inconsistent with this
Act, as may be necessary to the efficient administration of the
functions with which (he) is charged under this act."
The cost of non-expendable personal property is reimbursed at the full
75 percent rate; the Secretary has determined that only a certain
amount of the cost may be attributed to certain quarters. Section 455(
a) (1) of the Social Security Act does not preclude the Secretary from
determining under reasonable rules which costs are properly attributable
to which quarters.
Under National Welfare Rights Organization v. Mathews, 533 F.2d 637 (D.
C. Cir. 1976), 45 CFR 304.24 is valid if it does not conflict with the
Act and is reasonably related to its purpose. When a purchase is made
directly by the IV-D agency, there is a built-in assurance that the
property will be used for the purpose for which it was intended. When
the property is allocated between different organizational elements as
part of an indirect cost pool, there is less guarantee that the property
will be used for its intended purpose during its entire useful life.
Requiring depreciation allows the Federal government to be assured that
the property will continue to serve its intended purpose for its entire
useful life; this assurance is a sound goal, and the regulation is a
rational method by which to achieve the goal.
'(Page 06 - 76 - 01/31/80)'
The State mentions in its application for review that it had been
attempting to persuade HEW not to implement the regulation involved in
this case and that it appeared that its efforts were meeting with some
success. New regulations were promulgated by the Office of Human
Development Services on April 5, 1979 on the subject of non-expendable
personal property, but they do not amend 45 CFR 304.24 (see 44 FR
20430).
Conclusion
In view of the foregoing discussion, it is our opinion that 45 CFR
304.24 (a) (3) does not contradict the wording of Section 455(a) of the
Social Security Act and that the regulation imposes a common sense
method for payment of the appropriate federal share of costs for
non-expendable personal property.
Accordingly, we deny the appeals and affirm the disallowances of $820
and $1,255.42. This decision constitutes the final administrative
action on this matter. D11 May 15, 1992