Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Pennsylvania Office of the Budget
DATE: March 8, 1991
Docket No. 90-149
Decision No. 1234
DECISION
The Pennsylvania Office of the Budget (Pennsylvania or State) appealed
a
decision by the Regional Director, Region III, Department of Health
and
Human Services (Agency). The Regional Director had affirmed
the
determination by the Director, Division of Cost Allocation (DCA),
Region
III, that the State was required to return $1,412,000 in federal
funds.
The DCA Director had determined that surpluses from
self-insurance
accounts, established by Pennsylvania and partially funded
with federal
grant funds, had been invested in interest-bearing
securities. The DCA
Director found that the earned interest was being
credited to
Pennsylvania's General Fund rather than the self-insurance
accounts.
Citing cost principles incorporated in federal regulations, the
DCA
Director found that the earned interest constituted applicable
credits
and that the portion of the interest generated by federal funds in
the
self-insurance accounts should be refunded to the Federal Government.
The central issues presented in this appeal are whether the
self-insurance
accounts did, in fact, generate interest, and, if so,
whether the Federal
Government is entitled to recover the amount of any
interest earned through
investment of the self-insurance accounts. For
the reasons discussed
below, we find that the accounts did generate
interest and that a statutory
exception to the general rule that the
Federal Government is entitled to the
interest generated by federal
funds is not applicable here.
Background
Pennsylvania established self-insurance funds to cover certain
contingent
fringe benefits for its employees, including workers'
compensation and
employee health benefits. Self-insurance is the
practice of undertaking
to absorb casualty and disaster losses
internally, without buying insurance
for such losses from an outside
source. Because of their nature, these
self-insurance funds require
that a reasonable fund balance be carried over
from year to year. The
accounts for workers' compensation and health
benefits were funded
through a combination of State funds and federal monies
advanced by
various federal agencies. 1/ Pennsylvania retains the
self-insurance
funds as part of the State's General Fund balance. While
there is no
actual segregation of the self-insurance funds from other General
Fund
monies, books are maintained to record accounts for line-item
balances
and expenditures.
In order to achieve optimum financial benefit from the General
Fund
balance, Pennsylvania routinely invested portions of the balance
in
various investments. These investments resulted in increased
revenues,
reducing, according to the State, the need for additional State
tax
dollars and federal grant funds. Pennsylvania alleged that its
policy
of self-insurance and investment of General Fund monies has resulted
in
substantial cost savings to the State and its programs, with a share
of
these cost savings passed on to the Federal Government. 2/ DCA
found,
however, that Pennsylvania was not returning the interest earned
from
the self-insurance accounts to the accounts, but rather placing
the
interest in the State's General Fund. DCA calculated that, for
the
State's 1988 fiscal year (FY), July 1, 1987 through June 30, 1988,
the
federal share of the interest earned by the self-insurance
funds
amounted to $1,412,000. Agency Exhibit (A.Ex.) A-2. 3/
The parties' arguments
Office of Management and Budget (OMB) Circular A-87 sets forth
cost
principles that apply to grants to state and local
governments.
Regulations, at 45 C.F.R. 74.171, provide that the principles to
be used
in determining the allowable costs of governments are contained in
OMB
A-87. OMB A-87 provides that, in order for a cost to be allowable
under
a grant program, it must be net of all applicable credits.
Section
C.1.g. Applicable credits are --
those receipts or reduction of expenditure-type
transactions
which offset or reduce expense items allocable to grants
as
direct or indirect costs. Examples of such transactions
are:
purchase discounts; rebates or allowances, recoveries
or
indemnities on losses; sale of publications, equipment,
and
scrap; income from personal or incidental services;
and
adjustments of overpayments or erroneous charges.
Section C.3.a. This is not an all-inclusive list, but only examples
of
what an applicable credit may be.
It is the Agency's position that interest earned on grant funds
clearly
falls within the scope of an applicable credit. Under the
Agency's
reasoning, earned interest reduces the need for further infusion
of
federal funds for the grant project. The Agency contended that
the
State should have deposited any interest earned from the
self-insurance
accounts back into the self-insurance accounts rather than
into the
State's General Fund. Depositing the earned interest back into
the
self-insurance accounts, according to the Agency, would have
lessened
later federal contributions to the accounts. The Agency
reasoned that
because the State did not apply the interest to the
self-insurance
accounts, thereby resulting in greater than necessary
federal
contributions to the accounts, the State, in effect, received
an
overpayment of federal funds. Since Pennsylvania instead placed
the
interest in its General Fund, where it could be used for
purposes
unrelated to federal grant objectives, the Agency argued that it
was
entitled to recover an amount equal to that portion of the
interest
attributable to the federal contribution.
Pennsylvania disputed the fact that any interest was in fact earned on
the
federal portion of the self-insurance funds. Even if it were found
that
interest was earned, the State argued, federal law, regulations,
and policy
mandate that no portion of that interest should be credited
to the Federal
Government.
I. The self-insurance funds did generate interest.
Pennsylvania claimed that the Agency did not produce any evidence that
the
federal share of the self-insurance funds produced interest. The
State
contended that when it receives grant funds from federal agencies,
it credits
those funds to the General Treasury. While these funds are
credited on
paper to self-insurance reserves for State employees working
in programs that
are in whole or in part federally funded, there is no
actual segregation of
these funds in the State's Treasury. The State
claimed that while some
interest is periodically credited to the General
Fund, at other times the
General Fund shows negative cash balances.
Pennsylvania contended that during
these negative cash flow periods
there is obviously no interest earned, and
that, therefore, there is no
clear evidence that interest was actually earned
specific to the
self-insurance funds. According to Pennsylvania, there
is no way,
therefore, for the Agency to impute interest to those funds
and claim a
credit.
We find the State's line of reasoning on this matter unpersuasive.
First,
it is undisputed that federal grant funds were used to help
establish and
supply the self-insurance reserves. It is also undisputed
that the
State, by not segregating the self-insurance reserves in its
General Fund,
thus commingled federal and state funds. While there is
no explicit
prohibition against this practice, the Board has held, "It
is reasonable to
conclude that the State bears a burden of justifying
its determination of how
much interest was or was not earned in a
commingled account, since it chose
to use that mechanism and thereby
complicated the accountability
question." Utah Dept. of Social
Services, DAB No. 750 (1986) at
12. See also West Virginia Division of
Vocational Rehabilitation, DAB
No. 869 (1987) at 7. We find that
Pennsylvania, in merely asserting
that at times the General Fund earned
interest and at other times did not,
has not met its burden of showing
the extent of any interest earned on the
self-insurance funds.
The Agency, of course, cannot impute interest without any factual
basis.
See, e.g., New York State Dept. of Social Services, DAB No. 910
(1987)
at 5. Yet here the Agency pointed to evidence in the State's
own
records in supporting its calculation of the amount of interest
earned
on the self-insurance funds. A.Ex. A-1. These records
clearly indicate
that during FY 1988, while the employees' health benefits
self-insurance
fund did have estimated negative reserve fund balances for 11
of the 12
months, these "losses" were more than offset by the much larger
positive
estimated monthly balances maintained in the workers' compensation
fund.
The State did not refute the Agency's interpretation of the
submitted
State records, nor did it question the Agency's calculations in
arriving
at the disallowance amount. We find it disingenuous for
Pennsylvania to
use the premise that its General Fund occasionally incurred
negative
balances as a basis for concluding that there was no evidence that
the
self-insurance funds earned interest when the State's own
records
clearly show otherwise. The issue before us is not whether the
General
Fund as a whole earned interest, but whether that discrete portion
of
the General Fund attributable to the self-insurance reserves,
consisting
in part of federal grant funds, earned interest. We find
that it did,
and that the Agency reasonably established the amount.
II. There are no applicable exceptions here to the general rule
that
such earned interest is an applicable credit which must be refunded
to
the Federal Government. Having found that the self-insurance
funds did
earn interest, we turn to the question whether Pennsylvania is
required
to return to the Agency that portion of the interest attributable
to
federal funds.
This Board has upheld on numerous occasions the general principle that
the
Agency is entitled to be credited with a share of any interest
earned on
federal grant funds held by a state. See, e.g., North
Carolina Dept. of
Human Resources, DAB No. 361 (1982), aff'd, 584
F.Supp. 179 (E.D. N.C. 1984);
New Jersey Dept. of Human Services, DAB
No. 480 (1983), aff'd, Civil No.
84-2771 (N.J. Nov. 13, 1986); New York
State Dept. of Social Services, DAB
No. 588 (1984); and Wisconsin Dept.
of Health and Social Services, DAB No.
623 (1985).
Pennsylvania sought to distinguish its appeal from the above cases
by
arguing that in those cases the interest arose from overpayments
of
federal funds the states had received to which they were not
entitled.
In those cases, Pennsylvania contended, states had received
interest on
federal funds improperly drawn down or on refunds of
disbursements not
credited to the Agency. Pennsylvania argued that in
its case there has
been no allegation by the Agency that the interest sought
by the Agency
is attributable to federal grant funds wrongfully paid out or
that
Pennsylvania had use of funds to which it was not entitled.
Rather, the State contended, the self-insurance reserves were
maintained
pending their disbursement for program purposes. As such,
Pennsylvania
argued that, under the provisions of the Intergovernmental
Cooperation
Act, it is not accountable for any interest on the federal grant
money
component of the self-insurance funds.
The Intergovernmental Cooperation Act (ICA) 4/, in providing that a
state
is not accountable for interest earned on grant money pending
its
disbursement for program purposes, is an exception to the general
rule,
established in Comptroller General decisions and set forth in 45
C.F.R.
Part 74 regulations, that interest earned on grant funds must
be
remitted in all circumstances to the Federal Government. 45
C.F.R.
74.47(a).
Section 203 of the ICA specifically provides:
Consistent with program purposes and regulations of
the
Secretary of the Treasury, the head of an executive
agency
carrying out a grant program shall schedule the transfer
of
grant money to minimize the time elapsing between the
transfer
of the money from the Treasury and the disbursement by a
State,
whether disbursement occurs before or after the transfer.
A
State is not accountable for interest earned on grant
money
pending its disbursement for program purposes.
31 U.S.C. 6503(a) (emphasis added).
Arguing that the funds in the self-insurance reserves were held
pending
workers' compensation and health benefits claims being filed against
the
State, thus pending disbursement, the State argued that any
interest
earned by the funds clearly fell within this ICA exemption. In
support
of its position, Pennsylvania cited a recently enacted law, the
Cash
Management Improvement Act of 1990 (CMIA), Public Law 101-453,
which
amends the ICA. According to the State, one of the aims of the
CMIA was
to eliminate any confusion generated by the ICA over the
responsibility
for interest earned on grant funds. The CMIA provides
that both the
Federal Government and the states will pay each other interest
based on
its new provisions and on regulations issued by the Secretary of
the
Treasury which are to take effect in October 1992. Pennsylvania
argued
that the report which accompanied the CMIA unquestionably shows
how
Congress interpreted the ICA:
Under current law [the ICA], the States need not account to
the
Federal Government for interest earned on Federal
funds
disbursed to the States prior to payment to
program
beneficiaries.
H.R. REP. No. 696, 101st Cong., 2d Sess. 3 (1990).
The report continues:
Currently, the Intergovernmental Cooperation Act permits a
State
to retain for its own purposes any interest earned on
Federal
grant funds transferred to the States "pending its
disbursement
for program purposes." Thus, where a State draws
down Federal
funds in advance of payment to program beneficiaries, the
state
may invest the funds to earn income for the use of the State.
Id. at 5 (emphasis supplied by the State).
Pennsylvania contended that this report represents indisputable
evidence
of Congressional intent that no federal agency is to seek interest
from
a state where that interest is earned on funds pending disbursement
of
those funds for program purposes. Pennsylvania concluded that,
unless
there is convincing evidence that any interest was earned on funds
other
than those pending disbursement for program purposes, the Agency
should
cease its efforts to collect the federal share of the interest
earned
from the self-insurance reserves.
Pennsylvania's position in this appeal therefore essentially rests on
the
premise that the funds in the self-insurance reserves were held
"pending
disbursement," with any interest earned on the funds falling
under the
exemption for accountability created by the ICA.
We conclude that the ICA does not apply as readily to the facts of
this
appeal as the State suggested. Unquestionably, all monies
held by any
governmental entity are held pending their ultimate disbursement
for
some particular purpose. Government bodies such as Pennsylvania are
not
profit-making entities. Any revenue they accumulate, whether from
taxes
or federal grant assistance or any other source, is expected to
be
expended for the benefit of their citizens. The question before us
is
whether the funds in these particular self-insurance reserves were
funds
held "pending disbursement for program purposes" within the meaning
of
the ICA.
In North Carolina, supra, the Board put limits on what the phrase
"pending
disbursement" meant. There, the Board rejected North
Carolina's
argument that Medicaid overpayments (recovered from providers
and placed in
an account which earned interest) were held "pending
disbursement for program
purposes" within the ICA exception because the
funds would later be used a
second time for Medicaid program purposes.
In Attorney General of Texas, DAB No. 1048 (1989), the Board stated,
"The
ICA provision excusing states from accounting for interest operates
as a
narrow exception to the general rule." Texas at 12. The
Board
noted that the exception was not in the original version of the
ICA
passed by the House of Representatives, but that the
Conference
Committee followed the Senate version which did. A
representative
explained:
The House bill held that States should be accountable
for
interest earned on deposited grant-in-aid funds pending
their
disbursement for program purposes. We were persuaded that
under
the new letter-of-credit procedure interest accumulated would
be
so small that it would make the accounting for this interest
an
unnecessary burden and agreed with the Senate to waive
this
requirement.
114 Cong. Rec. 28861 (1968); see also S. REP.
No. 1456, 90th
Cong., 2d Sess. 15 (1968).
The Board concluded, "The rationale behind the ICA exception was that
the
letter of credit mechanism and other federal/state cooperative
arrangements
would so diminish the time between release of the federal
funds from the
Federal treasury and state disbursement for program
purposes, that interest
would be negligible." Texas at 13.
The language in section 203 of the ICA exempting interest earned on
funds
pending disbursement should therefore be read in the context of
the other
language of that section: "[T]he head of an executive agency
. . .
shall schedule the transfer of grant money to minimize the time
elapsing
between the transfer of the money . . . and the disbursement .
. . ."
(emphasis added) From this language we find that it is
reasonable
to conclude that the question of timing is a critical factor
in determining
whether funds are, in fact, held "pending disbursement."
Pennsylvania objected to the Agency's characterization of the ICA
as
calling for an "immediate disbursement." While it is true that the
word
"immediate" does not appear in section 203 of the ICA, it is
evident
from the other language of section 203 -- "to minimize the time
elapsing
between the transfer . . . and the disbursement . . ." -- that
prompt
action is anticipated in the disbursement of the program funds.
That
was not the situation here, where the self-insurance funds remain
in
place until needed. The self-insurance funds are, in
essence,
contingency funds to be tapped, or disbursed, only when claims are
filed
against them and paid by the State. Congress was convinced that
any
interest earned on most grant funds between their transfer and
their
disbursement would be so minimal that it would not be worth the
effort
to account for the interest. Here, however, because of the way
the
self-insurance funds operated, the federal share of the interest in
only
one year amounted to over $1.4 million, hardly an insignificant
amount.
We consider it doubtful that Congress intended the ICA to be the
vehicle
for such a large amount of federally generated interest to
be
transferred to the State.
Unlike other accounts for benefits to be paid under federally
assisted
programs such as Medicaid and Aid to Families with Dependent
Children
(AFDC), the self-insurance accounts maintained fund balances from
year
to year. 5/ The accounts existed in such amounts and for such a
length
of time that they were able to generate large amounts of
interest. This
certainly distinguishes the self-insurance accounts from
program
accounts where, if the programs are properly administered, the
interval
between transfer and disbursement of grant funds should be minimal
with
little interest accruing.
Additionally, it could be reasonably stated that the self-insurance
funds
were not utilized here for "program purposes" as required by the
ICA.
When the various federal agencies made their contributions to the
funds for
those State employees who worked on federal grant projects, it
is reasonable
to assume that those agencies expected their contributions
to be used for the
funds' purposes, that is, to pay for benefits
provided to those
employees. Any interest that the funds might generate
accordingly would
be expected to be used for those same purposes. Yet
here the State
diverted that interest to non-program related purposes.
Thus, the State's
action in applying the interest to non-program related
activities calls into
question the reasonableness and necessity of the
assessments against the
federal agencies for ongoing contributions to
the funds. Those
assessments would have been less if the funds had been
credited with the
interest,
We therefore find that the self-insurance accounts were not grant
funds
held "pending disbursement" within the meaning of section 203 of
the
ICA. 6/ Pennsylvania is therefore accountable to the Federal
Government
for the amount of any interest that might have been earned on
the
federal contribution to the self-insurance accounts.
This result is in no way incompatible with the provisions of OMB A-87.
The
State argued that a proposed revision to OMB A-87, 53 Fed. Reg.
40,367 (Oct.
14, 1988), would for the first time impose specific limits
on the
allowability of certain costs of self-insurance programs. The
State
inferred from this proposed change that the current version of OMB
A-87 has
no limits on the allowability of such costs. Att. B,
section
C.4.c. But as we stated above, the current version of OMB
A-87
requires a grantee to account for any applicable credits.
Moreover,
under both versions of OMB A-87, all costs are subject to the
general
principles that they be reasonable and necessary costs of the
program.
OMB A-87, Att. A, section C.1.a. If the State had credited the
interest
to the self-insurance funds, it would not have had to charge
federal
funds as much in order to pay the employee benefits. The excess
amounts
paid for fringe benefits (over what would have been needed for
the
fringe benefits if the interest had been credited to the
self-insurance
funds) were not reasonable and necessary costs of the federal
programs.
Nor will our upholding here of the Agency's right to share in effect
in
the interest earned by the self-insurance funds act, as
Pennsylvania
argued, as a disincentive for it and other states to develop
and
implement cost-saving programs such as the self-insurance funds. 7/
The
self-insurance funds were not established for the sole benefit of
saving
the Federal Government money. Pennsylvania's own records (S.Ex.
A)
indicate that Pennsylvania saved $180 million in its own money over
five
years from the creation of the self-insurance funds. The fact that
the
funds and other cost-saving measures will have the Federal Government
as
an incidental beneficiary should not dissuade states from utilizing
them
if they are a benefit to the states.
Conclusion
For the reasons stated above, we sustain the Agency's determination
that
Pennsylvania is required to refund to the Federal Government the
federal
share of the amount of the interest earned on the self-insurance
funds.
___________________________
Judith A. Ballard
___________________________ Alexander
G.
Teitz
___________________________
Norval D.
(John) Settle
Presiding Board Member.1.
The funds sought by the Agency
here
represent interest
allocable to all
federal
programs administered by the
State, not just those of the Department
of
Health and Human Services
(DHHS). DHHS is
the
cognizant federal agency
responsible
for the
negotiation, approval, and
audit
of a cost allocation
plan (CAP) submitted
by the
State; in this capacity, DHHS
acts
on behalf of all other
federal agencies.
Office of
Management and Budget
Circular
A-87, Attachment A,
paragraph J.4. A CAP
specifies the allocation of
central
service costs to the
various State
agencies
administering federal
programs.
Costs for
employees' fringe benefits
such
as workers'
compensation and employees'
health benefits are prime examples of costs
covered by a CAP where the
time and expense of identifying the precise
benefit of each cost to
particular programs would be disproportionate to the
additional accuracy
achieved.
2. Pennsylvania claimed that its self-insurance funds had
resulted,
over a five-year period, in savings of $238,110,000, with the
federal
share of that figure amounting to $58,408,382. State Exhibit
(S.Ex.) A.
3. DCA arrived at this amount from figures supplied by
Pennsylvania.
DCA took the average monthly balance in the self-insurance
accounts in
FY 1988 to determine the amount of interest earned ($6,406,310),
and
then multiplied that amount by the federal financial percentage
rate
(22.04%). Pennsylvania did not specifically contest this
calculation.
4. The ICA, 31 U.S.C. 6501 et seq., was originally enacted in
1968 by
Public Law 90-577. The 1982 amendment to the ICA, Public Law
97-258,
did not significantly alter the language of the ICA provision at
issue
here, 31 U.S.C 6503(a).
5. Programs like Medicaid and AFDC are funded as follows: a
state
files an estimated quarterly expenditure report, based on its
past
program experiences and anticipated expenses, with the relevant
Agency
component, which then issues a letter-of-credit, from which the
state
draws down federal funds in advance for the purposes of the
program.
6. An alternative analysis is that the federal funds drawn down
here
were disbursed for program purposes when they were credited to
the
self-insurance accounts. The self-insurance accounts, however, may
then
be viewed as held in trust for purposes of paying fringe benefits,
so
that the interest should also be held in such trust, reducing
the
amounts which need to be paid in to meet employee needs on an
ongoing
basis.
7. The State also initially argued that it was being
treated
differently from other states, asserting that another Agency
regional
office had not questioned the allowability of interest earned by
an
unnamed state on advanced federal funds deposited in that
state's
treasury. In denying this allegation, the Agency asked for
specific
information about this state. As Pennsylvania failed to
provide any
information to back up this claim, we consider this particular
argument