GAB Decision 141
January 5, 1981 Montana Department of Social and Rehabilitation
Services; Docket Nos. 79-73-MT-HC, 79-149-MT-SSFord, Cecilia;
Garrett, Donald Settle, Norval
As the result of an audit report (Audit Control No. 08-80258), dated
October 31, 1977, issued by the HEW Audit Agency, Region VIII, a
notification of disallowance was sent to the Montana Department of
Social and Rehabilitation Services (State) on January 24, 1979 by the,
Director, Medicaid Bureau, Health Care Financing Administration (HCFA).
The notification stated that $19,639 that had been claimed by the State
in Title XIX Federal financial participation (FFP) for salaries of
county commissioners as administrative costs for the period July 1, 1972
through December 31, 1975 had been disallowed on the basis of 45 CFR
Part 74, Appendix C, Part II, D.8.
The notification of disallowance also informed the State that it had
thirty days to appeal the disallowance to the Departmental Grant Appeals
Board. In a letter dated February 20, 1979 the State formally requested
reconsideration of the disallowance under Section 1116(d) of the Social
Security Act, but addressed this reconsideration request to the
Director, Medicaid Bureau. By memorandum dated April 12, 1979 the
Assistant Director, Office of Financial Management, HCFA, forwarded the
State's request to the Executive Secretary of the Departmental Grant
Appeals Board. On June 21, 1979 the Executive Secretary informed the
State that the Chairman of the Board had accepted jurisdiction over the
State's request for reconsideration. The case was assigned Board Docket
No. 79-73-MT-HC.
Based on the smae audit report, the Office of the Regional
Commissioner, Social Security Administration, Region VIII, issued a
notification of disallowance on March 27, 1979 to the State. Included
in the disallowance was $26,650 in Aid to Families with Dependent
Children (AFDC) maintenance assistance administrative funds. In a July
11, 1979 letter the State sought review of the disallowed $26,650, an
amount claimed by the State as a portion of the salaries of the county
commissioners. This second case was assigned Board Docket No.
79-149-MT-SS.
Inasmuch as the two disallowances were based on the same audit
report, the two cases both involve the allowability of the salaries of
the county commissioners, and the two federal agencies involved are
being represented by the same counsel (Agency), the Board will consider
the cases jointly with a combined amount of $46,289 in dispute.
The record on which this decision is based includes the applications
for review; the Agency's responses thereto; a November 21, 1979
memorandum from the Director, Office of Grant and Contract Financial
Management, DHEW; the parties' responses to a February 5, 1980 Board
inquiry concerning this memorandum; and a December 22, 1980 submission
by the State in response to a December 12, 1980 telephone conference
among the parties and a Board staff member. The Agency was given the
opportunity to respond to the State's submission, but did not elect to
do so.
Statement of the Case
Both notifications of disallowance, in denying the State's claim for
FFP for the county commissioners' salaries, cited 45 CFR Part 74,
Appendix C, Part II, D.8, based on Federal Management Circular (FMC)
74-4, as the grounds for the disallowances. This subsection states:
Legislative expenses. Salaries and other expenses of the State
legislature or similar local governmental bodies such as county
supervisors, city councils, school boards, etc., whether incurred for
purposes of legislative or executive direction, are unallowable. *
The basis for the State's contention that FFP is allowable for the
commissioners' salaries is its assertion that the activities of the
county commissioners during their service on the county welfare boards
do not fall under the "legislation or executive direction" cost
prohibitions of Part 74, Subsection D.8, but rather are administrative
in nature. Referring to certain State statutes, the State maintains
that each county is statutorily required to establish a county board of
public welfare (Sec. 53-2-301, MCA) and that this county welfare board
shall consist of the county commissioners (Sec. 53-2-302, MCA). While
the compensation of county commissioners for their regular duties is
fixed at either an annual or a per diem rate, depending on the size of
the county (Sec. 7-4-2107, MCA), any additional time that they spend in
their capacity as a county welfare board on public assistance matters
will be compensated separately on the same basis as their services as
county commissioners (Sec. 53-2-302, MCA).
The State asserts that the disallowed $46,289 was for compensation
for additional "administrative direction" within the scope of Sec.
53-2-302. The State indicates that it did not claim additional FFP for
the occasional "executive direction" activities undertaken by the
commissioners while sitting as a county welfare board. (State's letter
of 2/20/79, p.2, P3).
In response the Agency considers any attempt by the State to draw a
distinction between compensation for "legislative or executive
direction" prohibited in Part 74 and for administrative activities to be
unsupportable. The Agency contends that the rule set forth in Part 74,
Subsection D.8, is all encompassing concerning the salaries of
government bodies and permits no exceptions by interpretation. The
Agency argues additionally that the term "executive direction" includes
the normal administrative duties of officials.
Discussion
On February 5, 1980 the Board asked the parties to comment on a
November 21, 1979 memorandum from Henry G. Kirschenmann, Director,
Office of Grant and Contract Financial Management, DHEW, circulated to
all Regional Directors, Division of Cost Allocation. This memorandum
reads as follows:
This transmittal is intended to clarify the allowability of costs of
elected or appointed officials. Federal Management Circular 74-4 is
silent with respect to elected or appointed officials. It is specific
however, in disallowing costs of general government, such as the
salaries and expenses of the Office of the Governor of a State, the
chief executive of a political subdivision and State legislature or
similar local government bodies. Also, State and local judicial bodies
are normally construed as a general expense required to carry out the
overall responsibilities of State or local governments, and therefore
unallowable.
Our policy will be to recognize as allowable costs, the costs of
services performed by individuals, based on their benefit to programs,
irrespective of their status as elected or appointed officials, except
where those costs are specifically excluded by the Circular because they
are considered a cost of general State or local government. However,
the portion of salaries and expenses directly attributable to managing
and operating Federal programs within general State or local
organizational units is allowable.
The parties were asked whether the policy enunciated in the
Kirschenmann memorandum was applicable to the facts of these cases, and
if so, if the State should supply adequate documentation to substantiate
its claim for FFP for the salaries of the county commissioners, whether
the disallowances could be withdrawn.
In a reply dated March 6, 1980 the State argued that the Kirschenmann
memorandum further supported its position. The State cited several
Montana laws requiring the county board of public welfare, composed of
the county commissioners, to determine the eligibility of individuals
for public assistance and the type and amount of assistance to be
received. According to the State, the determination of eligibility
specifically for Title XIX Medicaid assistance and for Title IV AFDC
program participation is to be determined by the county welfare board.
In its March 17, 1980 response the Agency contended that the
applicable regulations of 45 CFR Part 74 specifically exclude the
expenses of certain state and local officials and that "the Kirschenman
memorandum was addressed to the expenses of other officials, such as a
city controllers and county auditors, who perform completely
administrative functions but whose positions may be elective or
appointive by local tradition." The Agency argued that irrespective of
what the county commissioners may call themselves, they still remain
elected officials performing one of the normal functions of local
government. Hence, the Agency reasons, their salaries are unallowable
under the cost principles set forth in FMC 74-4 and 45 CFR Part 74.
We have concluded that the State's claim of FFP for salaries of the
county commissioners should be upheld if the State can show by adequate
documentation that the salaries are directly related to the
administration of the Medicaid and AFDC programs.
The particular facts of these cases, regardless of the effect of the
Kirschenmann memorandum, support the State's position. The Agency's
interpretation of FMC 74-4, the basis of 45 CFR Part 74, that the
salaries and other expenses of local government bodies are at all times
unallowable is unreasonable when the local elected officials are
required to spend a considerable amount of their time in the
administration of federally assisted programs. These costs, in the form
of salaries, are directly related to the practical execution of these
programs and would be accepted as reasonable by the Agency if the
functions represented by the salaries were to be performed by persons
other than local government officials. In fact, 45 CFR Part 74,
Appendix C, Part II, B.10 specifically allows salary costs if the
compensation is reasonable for the services rendered.
The presumable purpose behind the exclusion of government salaries in
FMC 74-4 is that the federal government should not be required to
participate in the general costs of local government by sharing in the
payment of salaries of officials whose time would be completely occupied
with the performance of their offices irrespective of any possible
involvement with federal programs. While this proposition may be
plausible for officials who receive a set annual salary and are unable
to adequately document the amount of time they spend working solely on
federally assisted programs, it loses its validity in the case of
officials such as the State's county commissioners, some of whom are
paid on a per diem basis, whose work as members of the county welfare
boards in administering the Medicaid and AFDC programs is
distinguishable from their work on purely county matters as the county
commissioners. In the case of commissioners paid on a per diem basis,
for example, it is arguable that the commissioners on some days would
not have had any office responsibilities except for the administration
of the federal programs; to deny the State a federal share for some
portion of the compensation on those days is inequitable.
We therefore believe the State has made a valid point in
distinguishing between the administrative nature of the commissioners'
work on the welfare boards and the "legislative or executive direction"
prohibited by FMC 74-4. The Kirschenmann memorandum's interpretation of
FMC 74-4 further supports this distinction. The last sentence of the
memorandum states that "the portion of salaries and expenses directly
attributable to managing and operating Federal programs within general
state or local organization units is allowable." The task of the county
commissioners in deciding eligibility in the Medicaid and AFDC programs
is an action directly attributable to managing and operating those
programs. The Agency's interpretation of the memorandum would restrict
FFP to the salaries of officials who perform solely administrative
functions. Yet under that interpretation if the county commissioners
had hired or appointed personnel to perform the same administrative
tasks of determining eligibility as they themselves did while acting as
a county welfare board, the salaries of those personnel would qualify
for FFP. The salaries of the persons directly administering and
operating a federal program should be considered an allowable cost to
the program, regardless of whether the persons are elected officials or
not.
In agreeing with the arguments presented by the State, we note that
the State may need to provide documentation to support its claim of FFP
for a portion of the salaries of the county commissioners. Accordingly
we direct the agencies involved in these cases to determine what
documentation by the State is needed to show that the commissioners did,
indeed, spend time directly managing the federal programs; to request
that documentation from the State; and, if the State should then
provide documentation satisfactory to the Agencies, to withdraw the
disallowances in whole or in part.
Conclusion
For the reasons stated above, we hold that the portion of the
salaries of the county commissioners directly attributable to the
commissioners' administration of federal assistance programs is an
allowable cost. This matter may be reopened for further action by the
Board if the State and the agencies do not agree on the proper amount of
FFP to be paid to the State. * It should be noted that 45 CFR Part 74
was not promulgated until September 19, 1973. The costs claimed by the
State herein are for the period July 1, 1972 through December 31, 1975.
The cost prohibitions of Appendix C, Part II, D., are identical to the
provisions set forth in the HEW publication OASC-6, "A Guide for State
Government Agencies -- Establishing Cost Allocation Plans and Indirect
Cost Rates for Grants and Contracts with the Department of Health,
Education, and Welfare," March 1969, based on Bureau of the Budget
Circular A-87, that had governed Medicaid and other public assistance
programs prior to the promulgation of Part 74.