DEPARTMENTAL APPEALS BOARD
Department of Health and Human Services
SUBJECT: New York State DATE: September 20, 1989
Department of Social Services Docket No. 88-193 Decision No.
1102
DECISION
The New York State Department of Social Services (State) appealed a
determination by the Family Support Administration (FSA) disallowing
federal financial participation (FFP) in the amount of $1,078,232
claimed by the State for the period November 1980 through February 1984
under title IV-A of the Social Security Act (Act). Title IV-A
authorizes a program of Aid to Families With Dependent Children (AFDC).
The costs in question were the administrative costs of a review
conducted by selected staff of the New York City Human Resources
Administration, referred to by the State as the "specialized review
staff," to determine whether individuals currently on the AFDC rolls
could be reclassified as AFDC-eligible for prior periods. The State had
made general assistance payments for these prior periods under a
State-funded program known as Home Relief (HR). The same financial
standards of need were used to determine eligibility for both the AFDC
and the HR programs. Applicants who met these standards but did not
meet certain other standards for the AFDC program were automatically
eligible for HR benefits. The costs of the specialized review were
allocated to AFDC and HR pursuant to the State's cost allocation plan as
part of the "eligibility/income maintenance" (E/IM) cost pool.
FSA argued that the review duplicated the State's regular eligibility
determination process, for which FFP was paid. The disallowance was
taken on the ground that the cost of the review was therefore not
"necessary . . . for the proper and efficient administration of the
State plan," as required by section 403(a)(3) of the Act. In addition,
FSA relied on a similar requirement in the cost principles at Office of
Management and Budget (OMB) Circular A-87, Attachment A, section C.2.
(made applicable to title IV-A by 45 C.F.R. 74.171 (1982)), that, to be
allowable, a cost must be "necessary and reasonable for the proper and
efficient administration of the grant program . . . ." FSA also cited
the provision of the cost principles which states that "[a] cost is
allocable to a particular cost objective to the extent of benefits
received by such objective . . . ." OMB Circular A-87, Attachment A,
section c.2.a.
For the reasons discussed below, we find that the specialized review did
not duplicate the regular eligibility determination process. FSA did
not show that there was any other specific basis for finding that the
State exceeded the scope of its discretion to manage its programs. We
conclude that the costs of the review were "necessary and reasonable"
costs based on our analysis of this standard and the facts of this case.
We further conclude that the AFDC program as well as the HR program
received "benefits" from the review in the accounting sense required
by
OMB Circular A-87. Accordingly, we reverse the disallowance. However,
nothing in this decision precludes FSA from making a further
determination that the costs of the specialized review should have been
allocated between the AFDC and HR programs in a different manner than
that employed here.
Whether the costs were duplicative
The State argued that the specialized review did not duplicate the
regular eligibility determination process. It conceded that the
specialized review staff reviewed the same documents which existed when
the initial eligibility determinations and any subsequent
redeterminations were made. May 22, 1989 telephone conference call,
tape. However, the State asserted that the regular eligibility
determination process was not designed to identify prior periods of AFDC
eligibility. According to the State, the income maintenance center
specialists (caseworkers) involved in this process were not trained to
determine whether an applicant was eligible for AFDC other than on a
prospective basis, and a retrospective review was not in fact a part of
their job. This training was instead provided to the specialized review
staff, who "were higher qualified, college graduates with a supervisory
level of authority" and "did not have the burden and pressure of day
to
day case management. . . ." Letter from Bergman and Pardo to Settle,
dated 5/5/89, p. 3. The State thus took the position that the
eligibility determination function was divided between the caseworkers,
who made eligibility determinations which were implemented
prospectively, and the specialized review staff, who made determinations
concerning whether retrospective months also qualified for FFP.
We conclude that the specialized review did not in fact duplicate the
regular eligibility determination process. FSA did not challenge the
State's assertions concerning the different functions of the caseworkers
and the specialized review staff. Moreover, the record indicates that
information establishing AFDC eligibility which was provided by a
recipient following a caseworker's determination that the recipient was
eligible for HR and not AFDC was not immediately processed. Instead,
the information was channeled through caseworkers at three levels: after
being received by a receptionist, the information was passed on to a
"quick service worker," and went from there to a "processing
worker."
When the processing was finally completed, the case was converted to the
AFDC rolls on a prospective basis without any consideration of whether
this could be done as of an earlier date. Thus, there was no prior
review of an AFDC recipient's retroactive eligibility which was
duplicated by the specialized review.
We note, however, that the record does not support the State's assertion
that the failure to identify prior period AFDC eligibility was due to an
intentional division of the eligibility determination function by the
State. A State witness testified that the original function of the
specialized review staff was to reclassify as HR those cases erroneously
claimed as AFDC, and that the State later determined that it could also
appropriately review its caseload to determine whether cases ought to be
reclassified from HR to AFDC. Transcript of 2/14/84 hearing in Docket
Nos. 82-227, 83-80, and 83-102, pp. 183-184. Moreover, New York City
regulations establishing the eligibility determination process, as
described by both the State and FSA, do not provide for the kind of
review in question here. Agency's letter dated 5/3/89, p. 1, citing
NYCRR Title 18, section 351.3 and 351.20; see also, State's brief dated
11/30/88, p. 6. Thus, it appears that the specialized review was
undertaken on an ad hoc basis when the State realized that it had
underclaimed FFP available under title IV-A. Even if the specialized
review was designed to correct a deficiency in the regular eligibility
determination process, however, the fact remains that the specialized
review did not duplicate this process.
The State also asserted that another purpose of the review was to verify
that FFP was in fact claimed for the period for which the recipient had
been determined eligible for AFDC. According to the State, FFP might
not have been claimed as of that date because, for example, the
paperwork was delayed. The State asserted that this provided a basis of
allowability for the review which was "separate and independent of the
eligibility process." Letter from Bergman and Pardo to Settle dated
5/5/89, p. 1, note. Since the process of verifying that cases were
claimed as AFDC when determined eligible did not require any
determination regarding the recipient's AFDC eligibility, it seems clear
that this part of the specialized review did not duplicate the regular
eligibility determination process.
Whether the costs were "necessary and reasonable"
FSA's determination that the costs of the specialized review were not
necessary and reasonable was predicated on its finding that the review
was duplicative. Although the record does not support that finding, the
question remains whether OHDS's determination that the costs were not
necessary and reasonable is justified on some other basis. We conclude
that it was not.
We note at the outset that, although necessity and reasonableness are
coupled in the cost principles, they can be viewed as discrete concepts,
with necessity referring to the purpose for which a cost is incurred and
reasonableness referring to the amount. FSA took the position that the
cost of the specialized review should have not been incurred at all, not
that it was excessive in amount. Thus, the question here is, more
precisely, whether the cost of the specialized review was necessary. In
New York State Dept. of Social Services, DAB No. 1072 (1989), the Board
elaborated on the meaning of the requirement that a cost be necessary,
stating--
In State of Oregon Mass Transit Assessment, DAB No.
402-Supplementary (1983), the Board referred to the term
"necessary" as "'essential' so that the grant programs could
not
be run properly and efficiently without it." This does not mean
that the program could not survive without the expense, for few
cost items, examined in a vacuum, would meet that test; rather,
the term restricts federal reimbursement to costs which fairly
can be said to be integral to overall efficient program
operation.
DAB No. 1072, p. 6.
We conclude that the specialized review was integral to the overall
operation of the AFDC program. As noted previously, the purpose of the
specialized review was to identify prior periods of AFDC eligibility.
FSA took the position that this was not a legitimate purpose since it
merely enabled the State to maximize the amount of FFP it received for
AFDC, and did not affect the beneficiaries, who had already been paid
under the State's HR program. One can sympathize with federal
discomfort with what might be described, pejoratively, as New York's
attempt to offload costs of its HR program onto AFDC. Nevertheless, the
following truism applies: there is nothing wrong with a state doing its
best to have AFDC pay all costs which are AFDC-eligible (just as there
is nothing wrong with FSA being aggressive in assessing allowability).
The states have an entitlement to certain costs under law. In examining
the necessity of a cost item, we must avoid coloring our judgment based
on the fact that the cost arose because the state was actively seeking
to maximize its lawful recovery of federal funds while minimizing the
impact on its own treasury. Accordingly, it was equally valid for the
State to identify an AFDC eligible after making a payment as before
making a payment, even if the beneficiary was not affected.
There is a further question, however, whether the specialized review was
"integral to overall efficient program operation," i.e., whether further
procedures like the specialized review were required in order to
identify prior periods of eligibility or whether this function could
have been performed during the State's regular eligibility determination
process. In addressing this question, it must be recognized that a
state has a certain amount of managerial discretion to structure its
program in the way it considers most workable. OMB Circular A-87
specifically provides in this respect that--
[e]ach grantee or contractor organization, in recognition of its
own unique combination of staff facilities and experience, will
have the primary responsibility for employing whatever form of
organization and management techniques may be necessary to
assure proper and efficient administration.
Attachment A, A.2.c. The fact that the AFDC program is a cooperative
federal-state program is another basis for inferring that a state, by
virtue of its responsibility for the hands-on management of the program,
has some discretion in determining what costs are necessary. FSA too
has discretion to determine and set limits on what kind of costs are
necessary. These overlapping elements of discretion must be considered
in assessing whether the specialized review represents a necessary cost.
In this circumstance, an important consideration is the retroactive
nature of FSA's determination. FSA appears to have considerable
discretion to prohibit a state from claiming FFP where FSA announces
prospectively that certain costs are unnecessary. However, FSA's power
to do so retroactively, based on only the general principle of
necessity, must be tempered by recognition of a state's right to some
leeway in exercising its management prerogatives. Thus, FSA's ability
to second-guess a state's management choices retroactively is more
limited; in this situation, some deference is due to the state, which is
charged with the day-to-day administration of a complex federal/state
program.
Applying these principles here, we conclude that FSA's after-the-fact
determination that the costs of the specialized review were not
necessary must be reversed. The State asserted and FSA did not dispute
that caseworkers did not have the training or education to identify
prior periods of AFDC eligibility at the same time that they
reclassified cases as AFDC-eligible on a prospective basis. The State
further asserted without dispute that the caseworkers did not have the
time to perform this task. Thus, it was simply not feasible to
properly identify all periods of AFDC eligibility through the State's
regular eligibility determination process as it existed during the
period in question. FSA arguably would have had discretion to require
in advance that the State have structured its eligibility determination
process differently so that further comprehensive procedures to identify
prior periods of eligibility (such as the specialized review) would be
unnecessary. However, FSA provided no valid reason for questioning the
State's judgment in this matter on a retroactive basis (other than its
unsupported finding that the review was duplicative). Accordingly, we
conclude that FSA was not justified in refusing to pay for the cost of
the specialized review on the ground that it was unnecessary.
Whether the costs benefitted the AFDC program
FSA contended that, even if the cost of the specialized review was
necessary and reasonable, it was unallowable because the specialized
review did not "benefit" the AFDC program. It took the position that
HR, not AFDC, benefitted from the review because the review resulted in
a reduction of the amount of HR payments.
In our view, however, benefit cannot be determined based simply on a
positive or negative effect on claims for FFP, an approach which makes
it impossible to determine whether an activity is allowable or
unallowable, except in hindsight. Instead, the concept of benefit
requires that there be an equitable relationship between the cost and
the program or programs to which it is charged. Cf. TRW Systems Group
of TRW, Inc., ASBCA 11499, 68-2 BCA Para. 7117 (1968) (Board of Contract
Appeals stated that, under the Armed Services Procurement Regulations,
it must be found that costs benefitted government contracts or
"otherwise bore an equitable relationship to such contracts. . . .").
Here, the specialized review staff reviewed prior claims for AFDC to
determine whether FFP was claimed as of the correct date. In each case,
prior period eligibility was dependent on the same factors which
resulted in the case's current AFDC status. Thus, the specialized
review was related to the AFDC program in the same sense as was the
original eligibility determination process. Accordingly, we conclude
that the cost of the specialized review was properly charged to AFDC as
well as to HR.
While we find that there was an equitable relationship between the
specialized review and the AFDC program, there was of course a similar
relationship between the specialized review and the HR program, since
the two programs were administered in tandem by the State. As indicated
previously, the cost of the review was allocated to both programs as
part of the eligibility/income maintenance (E/IM) cost pool established
by the State's cost allocation plan. However, there is a substantial
question not addressed by the parties as to whether the cost of the
review was properly included in this cost pool since the review was not
a part of the State's regular eligibility determination process.
Furthermore, there may be some question whether an allocation
methodology which distributed as much as 65% of the review costs to AFDC
was inequitable. (Cf. California Dept. of Social Services, DAB No. 855
(1987) (Board found cost allocation plan not rigidly contractual in
nature and "does not automatically lock HHS into a certain rate of
reimbursement notwithstanding any later occurrences which clearly modify
the substance and reasonableness of the calculation"). Accordingly,
although we reverse the disallowance in full, nothing in this decision
precludes FSA from determining that the costs should have been allocated
between HR and AFDC on a different basis. Any new disallowance which
results from such a determination may be appealed to the Board pursuant
to 45 C.F.R. Part 16.
Conclusion
For the foregoing reasons, we conclude that FSA was unreasonable in its
retroactive determination that the costs were not necessary or
reasonable for proper and efficient administration of the State's title
IV-A plan. Accordingly, we reverse the disallowance, but without
prejudice to FSA's ability to consider further the propriety of the cost
pooling used or the equity of the amount actually charged to AFDC.
_____________________________ Cecilia
Sparks Ford
_____________________________ Donald F.
Garrett
_____________________________ Norval D.
(John) Settle Presiding Board