DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: New York State Department DATE: June 23, 1989 of Social
Services Docket No. 88-49 Audit No. A-02-86-60252
Decision No. 1063
DECISION
The New York State Department of Social Services (State) appealed a
disallowance by the Family Support Administration (FSA) of $12,083,943
in federal financial participation (FFP) claimed under Title IV-A (Aid
to Families with Dependent Children or AFDC) of the Social Security Act
for the period July 1, 1982 to September 30, 1985. The disallowance was
based on FSA's finding that costs of 17 organizational units related to
New York City's public assistance programs had been improperly included
in an Eligibility/Income Maintenance (E/IM) cost pool allocated in part
to AFDC. FSA said that the units' functions could be specifically
identified with other state or federal-state programs. The State
conceded that three of these units, related to adult residential
services, had been improperly included in the E/IM cost pool. Costs of
14 units remained in dispute before the Board.
For the reasons we discuss below, we uphold the disallowance of FFP in
amounts allocated to AFDC associated with the City's Office of Treatment
Monitoring (reporting code XEC2). We reverse the amount associated with
two quality control units (reporting codes 6AA2, 6AA4). On the grounds
pursued by FSA in this appeal, we reverse the amount associated with six
employment-related units and with five housing-related units (reporting
codes DPX2, EXG4, EXG5, PWP5, 1121, 1086, XPK2, XPK3, XPK5, XPK6, and
XPK7). But we return for further examination by FSA the issue of
whether the costs of the latter eleven units were substantively
allowable costs to AFDC.
Background
The disputed costs were incurred by the New York City Human Resources
Administration (HRA or City), which administers the AFDC program in New
York City. HRA also administers other public assistance programs,
including wholly State-funded programs, and performs functions such as
eligibility determination jointly for the various programs. HRA used a
cost-pooling method as a basis for distributing costs associated with
eligibility and income maintenance functions to each of the programs.
Under HRA's accounting system, each organizational unit was identified
with a reporting code; costs of approximately 140 units related to
eligibility and income maintenance were accumulated in the E/IM cost
pool. HRA then distributed the E/IM cost pool among four federal-state
and state-only public assistance programs based on the relative numbers
of open cases under each program. Thus, approximately 65% of the
overall E/IM cost pool was allocated to AFDC. There is no dispute over
the validity of this distribution percentage; the dispute solely
concerns whether these costs were properly included in the pool.
Here is a schematic drawing of the overall cost collection/distribution
system:
140 New York City HRA organizational units
³ ³ ³ ³ ³ ³ ³ ³ V V V V V V V V
ÉÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍ»
º
º º Eligibility/Income º º Maintenance (E/IM)
º º Cost Pool º º
º ÈÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍÍͼ
Typical Case Count
Distribution (May fluctuate slightly on a quarterly
basis) 65% 34.5% .17% .08% ³ ³ ³
³ ³ ³ ³ ³ ³ ³
³ ³ V V V V AFDC
HR EAF EAA (Aid to (Home (Emergency
(Emergency Families Relief) Aid to Aid to With
Families) Adults) Dependent Children)
One result of this system is that 65% of the cost of a predominantly
non-AFDC work unit, when included in the cost pool, was distributed to
AFDC -- the precise situation that FSA complained about in the 14 units
disputed here. But that circumstance does not, by itself, compel a
simple resolution of the case against the State; rather it compels
further investigation. This is because the cost-pooling concept implies
that any given cost item in a cost pool may actually -- indeed, probably
will -- have more or less "real" benefit to a given program than the
benefit described by the percentages used to distribute the costs in the
pool. The assumption behind cost pooling is that these individual
disparities even out in the larger pool of grouped costs.
The State's Bulletin 143b contained the approved cost allocation plan
(CAP). During most of the 1982-1985 period at issue, Bulletin 143b
required that localities, including the City, pool all administrative
costs related to the E/IM function. On June 18, 1981, the HHS Division
of Cost Allocation (DCA) had issued a draft review report which
recommended that the State revise Bulletin 143b to provide for directly
charging those administrative costs benefitting only one specific
program. The remainder of the costs that provided benefit to multiple
programs would continue to be charged under the pool concept. In its
response to the draft report, the State agreed to revise Bulletin 143b
by September 30, 1982 to permit direct charging of either specific
functions or the entire cost pool, if appropriate, unless "certain items
within a pool can be directly identified, but other items cannot . . .
." FSA Ex. 1, p. 42, Appendix III. DCA's final report was issued on
June 18, 1982.
The State did not actually revise Bulletin 143b until December 13, 1984,
effective for local administering agencies October 1, 1984. State
Exhibit (Ex.) 2. The change was not approved by DCA until May 4, 1988,
but was approved to be effective July 1, 1982. FSA Hearing Ex. 2. The
State's Transmittal No. 84 MB-32 revised Bulletin 143b to read:
Total E/IM costs are either direct charged to a specific
category or are allocated to the categories based upon the
proportion of total public assistance cases open in each
category for the immediately preceding calendar quarter.
State Ex. 2 (emphasis added).
In a review of the E/IM cost pool for the period October 1, 1980 through
September 30, 1985, auditors from the Office of the Inspector General
found that the City had improperly charged the AFDC program with the
costs of certain eligibility and income maintenance functions after July
1, 1982. The auditors identified 17 units whose costs were included but
allegedly served only recipients of public assistance programs other
than AFDC. The auditors concluded that the costs of these units should
have been directly charged to the benefitting programs and had been
improperly included in the cost pool allocated in part to AFDC. The
auditors relied both on applicable cost principles and on the final DCA
report discussed above.
Discussion
1. The effect of the approved cost allocation plan.
FSA asserted that the State's approved CAP "specifically mandates"
local
administering agencies to directly charge to benefitted programs costs
which can be specifically identified with those programs, instead of
using a cost pool method. FSA Brief, p. 23. This assertion overstates
the facts. Prior to 1984, local administering agencies were required to
include in the E/IM cost pool all costs relating to the E/IM function.
The plain language of the 1984 CAP amendment allows local administering
agencies to either directly charge costs to a particular program or
include costs in an E/IM cost pool so long as that pool is equitably
distributed to the benefitted programs. State Ex. 2, p. 8-1. It does
not by its terms require direct charging of all specifically
identifiable costs. In 1988, DCA approved this change with an effective
date of July 1, 1982, and stated that the approval was conditioned on
the State placing a burden on local administering agencies to support
each decision to either direct charge or pool an individual cost center.
FSA Hearing Ex. 2. While, as we discuss below, this placed a burden to
justify its actions on the State, even this condition does not amount to
a "mandate" that costs must be directly charged if possible.
In prior cases involving cost allocation, the Board has stated that
approval of a CAP by DCA gives rise to a presumption that the approved
allocation methods are valid. FSA argued that there should be no
presumption of validity for the allocation methods here because the
approved CAP must be read in light of the DCA 1982 review report which
recommended that the State amend its CAP to require direct charging of
costs identifiable with particular programs. FSA added that the 1984
amendments were not entirely responsive to the DCA review report, which
was the reason for the conditional approval in 1988, requiring that
decisions to pool or direct charge cost centers must be justified by
local administering agencies. See FSA Hearing Ex. 2.
We affirm the general principle that there is a presumption of validity
when an approved CAP clearly requires a particular method of allocation.
But when the approved CAP does not specify a particular method and
allows flexibility within a choice of methods, that presumption does not
extend with the same force to the choice of the particular method to be
used in a given accounting system in a specific context. This is
particularly true here, since DCA, in approving the CAP, clearly placed
the State on notice that the decision whether or not to direct charge
E/IM costs should be clearly justified and would be subject to
challenge. It is reasonable, in that circumstance, to place a burden
on the grantee to justify the particular method it selected when
presented with a reasonable challenge to the equity of the distribution.
We examine below whether the cost pool method was appropriate for the
costs here: first, whether the use of the cost pool method for costs
which could be specifically identified with a particular program was
contrary to applicable cost principles, and, second, whether the cost
pool method resulted in a distribution which was either inaccurate or
inequitable with respect to the particular units at issue.
2. How the cost principles deal with pooling direct costs and how
the Board analyzes the fairness of an allocation method.
FSA argued that none of the costs of the 14 units should have been
included in the E/IM cost pool because they could be identified with
specific non-AFDC programs. FSA asserted that these costs must, under
applicable cost principles, be charged directly to the benefitted
program because the cost pool is an indirect method appropriate only for
indirect costs. The issue presented is whether it is ever appropriate
to include in a cost pool the costs of units which can be specifically
identified with a particular program.
OMB Circular A-87 permits grantees, when appropriate, to use indirect
methods which are more cost effective and do not sacrifice significant
accuracy. Direct costs may be charged either directly to a grant or
other program, or to "cost objectives used for the accumulation of costs
[i.e., a pool] pending distribution in due course to grants and other
ultimate cost objectives." OMB Circ. A-87, Attachment A, para. E.1.
Cost pool methods may be used for both direct and indirect costs under
the applicable rules in OMB Circular A-87.
Nevertheless, just because a cost pool method is permitted does not
necessarily mean that a particular cost pool method was reasonable in a
particular circumstance. A cost pool method, if it is based on an
equitable distribution formula, should achieve the effect of allocating
to a particular program only that proportion of the overall cost pool
which reasonably approximates those costs which were allowable to, and
benefitted, that program. A cost pool itself may contain individual
costs which are not allowable or do not benefit a particular program
among those to which the cost pool is distributed, as long as the
distribution process accounts for those costs and does not demonstrably
burden any particular program with costs unallowable to it. See
Minnesota Dept. of Public Welfare, DAB No. 466 (1983); District of
Columbia Dept. of Human Services, DAB No. 1005 (1988).
While in application cost-pooling can get complicated, the fundamental
principle is both simple and practical. The paramount concern is for
fair distribution of costs, notwithstanding that costs can be pooled for
expediency. While an approved CAP, as we discussed above, creates a
presumption that the distribution was fair, this presumption does not
foreclose all inquiry. Otherwise, there is the potential that grantees
may "launder" direct costs through a cost pool to diffuse their
allocation among programs.
In this circumstance, where the State was placed on notice that the cost
pool method must be justified, and FSA has come forward with evidence
that calls for further inquiry, we find that the State bears a burden to
establish that the costs were equitably distributed in the context of
the overall cost pool. Assigning the State the burden to develop the
facts concerning the equity of the cost pool does not appear
overwhelming. For example, here the State presented evidence that the
number of reporting codes in the E/IM cost pool was 140. Transcript
(Tr.), pp. 177, 210. It does not seem unreasonable in a large program
to examine 140 units to determine whether the costs of these units were
equitably distributed via the cost pool or should be directly charged to
a particular program. Furthermore, a State witness testified that many
of the units had similar functions--for example, he stated that there
were approximately 40 reporting codes which were related to error
accountability. Id. at 178. Thus, the number of units which would have
to be individually considered would be significantly less than 140.
We reject the State's assertion that a cost pool method, even if
demonstrably inaccurate, can be justified by the sheer size of the
programs involved. During the hearing held in this case, the State
presented witnesses who testified generally that the programs involved
were large and that it was not reasonable with existing resources to
individually identify and allocate the costs incurred by each unit.
The gross size of the programs, if anything, calls for greater care in
properly assigning costs, since small errors or incorrect assignment of
units can involve large sums of money. This does not necessarily mean
that New York City had to devise a separate allocation method for each
unit; we find simply that the State bears the burden of justifying why a
particular unit was included in the cost pool and whether it would be
more accurate and not significantly more costly to examine each unit to
see if its costs can be easily charged directly to a single benefitted
program.
Below, we address whether the costs of the particular units could be
equitably distributed by the cost pool distribution method here.
3. Do the facts support a finding that the cost pool method did not
distribute costs accurately or equitably?
There are two components to our analysis in this section: first, we make
findings of fact related to the nature of the units, and then we apply
cost allocation principles to determine whether use of the cost pool was
equitable. FSA argued that the Board should uphold the auditors'
factual findings on each unit as long as the findings were consistent
with the record before the auditors. Since the auditors based many of
their findings on summary descriptions (provided by the City) of each
unit included in the cost pool, FSA was essentially asserting that the
State should be barred from submitting new evidence and denying the
validity of the information it had previously provided to the auditors.
The State, on the other hand, argued that the auditors' findings were
flawed because the auditors had not made an attempt to verify
superficial information, had relied on telephone and other oral
contacts, had not fully considered the comments received in response to
the draft report, and had looked only at portions of the cost pool. The
State argued that during the audit process the auditors had asked for
information which had not been readily available, and asserted that the
summary descriptions of units had been hastily assembled and did not
represent an accurate description of each units' functions. Moreover,
the State asserted that the auditors had never fully explained the
issues they were examining. Thus, the State would have us reverse the
disallowance because of the nature of the audit process.
We are not persuaded by either party. While the State did not persuade
us that it was justified in providing inaccurate information to the
auditors and then using that circumstance to impeach the audit, neither
did FSA persuade us that the Board should, in the circumstances here,
consider only the information given to the auditors when substantially
more accurate information was and is available. Even though the
auditors may have acted properly in using the information presented to
them, it does not appear that FSA relied to its detriment on the
information in the sense of the traditional elements of estoppel. See
Tennessee Dept. of Human Services, DAB No. 1054 (1989). On the other
hand, the State provided no reason why alleged mistakes in the audit
process would be a basis for reversing the disallowance if the auditors
reached the correct result. Even if the auditors used incomplete
information to initiate the disallowance inquiry, the State has had
ample opportunity to present complete and reliable information before
the Board.
In short, we see no basis to limit Board review to the audit record.
Certainly, the fact that the State had previously provided inconsistent
information draws into some question the credibility of its witnesses,
but such credibility assessments are within the scope of the Board's
review. Similarly, the Board also considered arguments developed by FSA
during the appeal which were not raised by the auditors. New York
suffered no prejudice because it had a full opportunity to respond to
these arguments in the course of Board proceedings. In light of this,
we consider the full record in our examination of the individual units
below.
XEC2 Office of Treatment Monitoring
The City submitted a summary description of this unit to the auditors
which stated that this office maintains a computerized registry of
employable addicts and alcoholics receiving public assistance, verifies
treatment attendance through field contacts and other methods, and pays
residential treatment programs for care and maintenance of these
clients. The auditors determined that the unit only served HR
recipients and recipients of Supplemental Security Income (SSI), under
Title XVI of the Act, and that the costs of the unit should, therefore,
have been charged only to those programs.
The State presented testimony, by the City's Deputy Director of Income
Maintenance operations and by the City's Director of the Bureau of
Claims and Reimbursement, that this unit handled some AFDC cases, and
that approximately 8-10 percent of the clients were AFDC recipients.
Tr., pp. 159, 165, 192. However, this testimony was contradicted by the
State's own claims for federal reimbursement. FSA submitted a letter
from New York City to the Social Security Administration, dated November
18, 1983, in which the City claimed reimbursement for services provided
to SSI recipients. FSA Hearing Ex. 4. This letter represented that,
for the quarter from July 1, 1983 through September 30, 1983, the total
population served by this unit was made up of either HR or SSI
recipients. The letter did not mention any AFDC recipients in the
client population. This letter was signed by the Acting Director of the
unit itself, and we found this letter to be a more credible source of
information with respect to this unit than the witnesses the State
presented, who had no ties to the actual operational XEC2 unit.
In view of the fact that the City claimed SSI reimbursement without
indicating any AFDC clients of the unit, we find that the testimony by
State witnesses that the unit served some AFDC clients not credible.
Even if we were to assume some small percentage of the unit's clients
did receive AFDC benefits, the percentage of the costs were so small
that the benefit to AFDC appears to be merely incidental. Moreover, the
fact that the unit may have had some AFDC clients does not mean that the
administrative costs associated with this unit were allowable costs to
the AFDC program (or, indeed, to any other program to which the cost
pool was allocated) or were of a type which could be allowable. The
State provided no program regulations or State plan provisions to
support its contention that the costs were allowable under AFDC nor, as
we discuss below, did it provide any evidence that the allocation method
accounted for the fact that the costs were unallowable to AFDC.
The State argued that the use of the cost pool was equitable for this
unit even if the Board were to find that XEC2 unit provided no benefit
to the AFDC program, because there were also units in the cost pool
which primarily benefitted AFDC. The Board specifically requested
further information on this point at the hearing, and permitted the
State post-hearing opportunities to submit evidence. The State
submitted some worksheets with summary information which purported to
show that approximately 50 units in the cost pool primarily served
persons receiving AFDC benefits.
While there may be merit to the State's position in theory, we find that
the State never presented hard evidence to support its contention that
including this unit's costs in the E/IM pool was equitable. The State's
evidence did not provide enough information to demonstrate that the
overall cost pool was balanced. The worksheets and the accompanying
affidavits provided no information about the nature of the units which
allegedly primarily served the AFDC program, or the impact of these
units on the overall cost pool. Furthermore, the State's evidence
focused on the clients each unit served, and not on whether the activity
was allowable under the AFDC program or accomplished a common
administrative task (for example, as we noted above, even if the XEC2
unit primarily served AFDC recipients, its activities may still not be
allowable within the scope of AFDC).
As a result, the Board has insufficient information to conclude that
other units which the State alleged primarily served AFDC actually
compensated for the XEC2 unit. The other units could already have been
counterbalancing units with similar functions (for example, as the AFDC
error accountability units discussed above balanced similar HR error
accountability units). Nor is there sufficient information to indicate
whether there was a rough proportional balance between the various units
providing unique services to particular programs, such as the XEC2 unit
(or other factors which would demonstrate that the cost pool was
equitably distributed overall).
In sum, we uphold the disallowance representing this unit because we
find no convincing evidence that this unit served any AFDC clients or
that the costs were allowable to AFDC, and the testimony of the State's
own witnesses indicated no basis for concluding that the cost pool
method here would equitably distribute the costs of this unit.
Quality Control Units:
6AA2 Validation and Quality Control 6AA4 Validation and Quality
Control
FSA based the disallowance for these units on a summary description the
City provided to the auditors which stated that these units performed
eligibility functions for applicants for Home Relief (HR), a
State-funded income maintenance program, at its Jay Street and Waverly
Employment Centers. FSA Hearing Ex. 3. FSA argued that these units
should be charged directly to the HR program. During the hearing in
this case, the State presented supplemental evidence which contradicted
the earlier summary description in part.
The State presented undisputed testimony that these units did not
actually handle only HR cases. Tr., pp. 154-158. This testimony
indicated that the units were located at centers which specialized in HR
clients, but which also handled other clients. Apparently, after an
initial screening, individuals seeking assistance were sent to complete
their application for assistance at either a center which specialized in
either HR or AFDC, to the extent that it was possible to determine what
type of assistance would be available. Tr., p. 152-53. The testimony
indicated that this division was not absolute because, once assigned to
a particular center, a case was never shifted--even when the case was
assigned in error or when the status of the client changed. In sum,
there was credible evidence that each type of center handled some cases
from both programs.
Moreover, the State presented uncontested evidence that these units were
the same type as other error accountability units included in the cost
pool which were located at AFDC centers and which handled primarily AFDC
cases. Tr., pp. 236-38. The State argued that it was reasonable to
treat all such units similarly, since the case count method would
operate to assign to each program only its share of the total error
accountability costs. The State argued that to remove HR center units
from the cost pool, and then allocate remaining centers by case count,
would distribute an unfair proportion of costs to HR since the remaining
costs in the cost pool would be primarily for AFDC cases.
FSA conceded that it would be reasonable to treat all such units
similarly, but argued that the appropriate treatment would be to remove
and direct charge all error accountability units. See Tr., pp. 281-82.
This might be a good idea if we were starting from zero, but FSA
provided no compelling basis to disrupt the cost pooling method in
effect here. FSA pointed to nothing in particular which was wrong with
the overall amounts ultimately distributed to each program under the
approved CAP method. There is no evidence that FSA's method would be
substantially more accurate than the method used under the approved CAP.
FSA's method, for example, would not account for the fact that units
located at HR centers worked with some percentage of AFDC cases, and
vice versa. The State argued, and FSA did not rebut, that the case
count method of distribution would equitably distribute the entire range
of error accountability units included in the E/IM cost pool.
To require that the State charge all quality control units separately
from the cost pool, to the program primarily served, would be
second-guessing the State's choice under the CAP to use a cost pool
method, in the absence of evidence that the costs were inequitably
distributed by that method. Thus, we reverse the disallowance of the
6AA2 and 6AA4 units.
Employment-Related Units:
DPX2 I.M. Central Employment Unit EXG4 Employment Coordination
for P.A. Programs EXG5 Private Sector Job Development Program
PWP5 Job Placement Unit 1121 Employment Coordination for P.A.
Programs 1086 Private Sector Job Development Program
Housing-Related Units
XPK2 Special Housing-SRO Services XPK3 Special Housing-Family
Program XPK5 CIS [Crisis Intervention
Services]-CrisisServices XPK6 CIS-Management Support XPK7 CIS
Administrative Support
We consider these two groups of units together because we find that both
require further development to determine whether the costs were
allowable to the AFDC program. As we discuss below, the State rebutted
FSA's contention that the units did not serve AFDC clients but this does
not answer the underlying question of whether the costs were allowable
to the AFDC program or, indeed, to any of the federal-state programs to
which the cost pool was distributed.
The summary descriptions of the employment-related units the City
provided to the auditors stated that the units served the HR program and
HR recipients. The auditors noted that the categorization of the units'
costs had changed as a result of organizational changes within the
administering agency. From July 1982 until September 1984, the units'
costs were charged to the Overall Overhead function and distributed to
each remaining function, including E/IM, based on the percentages of
staff assigned to each function (unit 1086 was eliminated and did not
incur costs after November 1982). Effective in September 1984, the
units were charged in full to the E/IM cost pool. Effective in March
1985, the City began to charge four of the units (EXG4, EXG5, PWP5 and
1121) directly to the HR program. Based on the summary descriptions and
this change in allocation practices, the auditors determined that the
costs benefitted only the HR program and should have been charged
directly to that program.
The State argued that these employment-related units in fact handled
some AFDC recipients. The State presented a witness who explained that
the caseload of unit DPX2 had changed over the period but was, at a
minimum, 20 percent AFDC (July 1982 to April 1983) and later went to 100
percent AFDC (after May 1985). Tr., p. 194. He stated that the shift
in the caseload was because of organizational changes. Id. Similarly,
he stated that from July 1982 to September 1985, EXG4 had a 10 percent
AFDC caseload, EXG5 had a 30 percent AFDC caseload, PWP5 and 1121 had a
10 percent AFDC caseload, and 1086 had a 30 percent AFDC caseload (all
figures were listed as approximate). Id., p. 202. The State also noted
that, despite the fact that for a brief period the City had charged
these units directly to the HR program, the City abandoned that method
after the cost allocation personnel learned that the units served AFDC
clients as well. After October 1985, the City separately distributed
these units between the HR and AFDC programs based on the relative case
counts for these units alone. Id., pp. 203-04. The testimony was
credible and not specifically rebutted by FSA.
With respect to the housing-related units, the auditors determined that
the costs of these units benefitted only the Emergency Assistance to
Adults (EAA) program, a State-funded program, and the Emergency
Assistance to Families (EAF) program, a federal-state program, based on
the summary descriptions of the units provided by the City. The
auditors asserted that the costs should have been directly charged to
those programs. The auditors also determined that the costs provided no
benefit to the AFDC program. The State argued that these units also
served a significant number of AFDC recipients, without providing
specific numbers. The State presented testimony that the families
served by the XPK3 unit were predominantly AFDC recipients. Tr., pp.
160-62, 208-09. The State also presented testimony that the XPK5 unit
served some AFDC clients. Id., p. 160. The record shows that the XPK6
and XPK7 units were general management and administrative support for
these units, as well as others, and thus served AFDC clients as well.
FSA Ex. 3, Tr., pp. 206-07. The testimony was credible and not
specifically rebutted by FSA.
The parties developed the record for this part of the disallowance only
on the narrow issue of whether cost allocation was appropriate in light
of the clients served by the units, and we reverse the disallowance on
that issue because New York rebutted FSA's evidence related to the
client mix. Overall, the testimony presented to the Board demonstrated
that both the employment and the housing units served a significant
number of AFDC clients. Although the mix of clients served by these
units may not have been the same as the overall case count used as a
distribution base for the cost pool (the overall case count was
approximately 65 percent AFDC and 35 percent HR), this is not
necessarily wrong. As we stated above, it is not necessary that every
unit in the cost pool reflects the overall distribution base. See p. 8
above.
We return for further examination by FSA, however, the issue of the
substantive allowability of the units of AFDC, and the equity of the
allocation method in light of that. This issue had been raised but was
never pursued by FSA. The initial disallowance letter, dated September
23, 1987, alleged that the activities of the XPK5, XPK6 and XPK7 housing
units were social services rather than eligibility-related, and should
have been charged to programs under Title XX of the Act (Social
Services), but FSA did not pursue this issue (either in the initial
appeal to the Administrator or during this proceeding in its brief or at
the hearing). Similarly, at the hearing the auditor suggested that
employment-related activities were allowable only under the WIN program,
but neither he nor FSA further developed this issue. Tr., pp. 37-38.
Although the State rebutted FSA's allegation that no AFDC clients were
served by the units, that does not answer either the preliminary
question of whether the costs were substantively allowable to the AFDC
program or the second question of whether the costs were equitably
distributed to the AFDC program by the allocation method. Clearly, AFDC
recipients may receive services involving administrative costs for which
federal financial participation is not available under the AFDC program.
The question not developed in this record is whether including these
units in the E/IM cost pool resulted in an unfair allocation because the
costs were of a type unallowable to AFDC and because the case allocation
count method did not account for this fact. To answer this question,
FSA should examine more closely the actual functions and costs (not just
the client mix) of the disputed units to determine if the costs were, in
fact, substantively unallowable to AFDC. Only then does it make sense
to examine the costs in the context of the overall cost pool to see if
the allocation method operated to allocate to AFDC only allowable costs.
In a similar case involving an E/IM cost pool in New York's Onondaga
County, Docket No. 88-247, FSA raised issues relating to whether certain
housing-related and employment-related costs were substantively
allowable and, if so, whether the cost pool there equitably distributed
the costs. In that case, FSA argued that employment-related units could
only be charged to the WIN program (and were not allowable under the
AFDC program) and that housing-related units were social services
under Title XX of the Act for which section 403(a)(3) of the Act
precludes FFP under Title IV-A. The record in the other case was
developed after the close of the hearing in this case and may represent
a more sophisticated analysis by FSA. Whatever the case, nothing here
precludes FSA from further examining the employment-related and
housing-related costs in light of the matters discussed above.
Conclusion
In sum, we uphold the disallowance of FFP in amounts allocated to AFDC
associated with the City's Office of Treatment Monitoring (reporting
codes XEC2). We reverse the amount associated with two quality control
units (reporting codes 6AA2, 6AA4). On the grounds pursued by FSA, we
reverse the amount associated with six employment-related units and with
five housing-related units (reporting codes DPX2, EXG4, EXG5, PWP5,
1121, 1086, XPK2, XPK3, XPK5, XPK6, and XPK7). But we return for
further consideration by FSA the issue of whether the costs of the
latter eleven units were substantively allowable costs to the AFDC
program.
________________________________ Cecilia Sparks Ford
________________________________ Donald F. Garrett
________________________________ Norval D. (John) Settle
Presiding Board