Illinois Department of Children and Family Services, DAB No. 1462 (1994)

Department of Health and Human Services

DEPARTMENTAL APPEALS BOARD

Appellate Division

SUBJECT: Illinois Department of Children and Family Services

DATE: February 8, 1994
Docket No. A-93-10
Decision No. 1462

DECISION

The Illinois Department of Children and Family Services (Illinois)
appealed a determination by the Administration for Children and Families
(ACF) disallowing $6,116,102 in federal financial participation (FFP)
claimed under title IV-E of the Social Security Act (Act). The
disallowed FFP represented claims for reimbursement for title IV-E
administrative costs for the period July 1, 1982 through June 30, 1984.
The claims were based on the retroactive application of a random moment
sample (RMS) methodology to determine the amount of administrative costs
allocable to title IV-E. ACF disallowed Illinois' claims on the grounds
that Illinois lacked an approved cost allocation plan (CAP) for the
period at issue, and that the claims in any event impermissibly relied
on RMS data for a later period.

For the reasons discussed below, we are remanding this appeal to ACF so
that it can obtain a formal written decision from this Department's
Division of Cost Allocation (DCA) on whether a CAP proposal from
Illinois can be approved for the period at issue. There is no evidence
in the record that DCA has ever made a decision either approving or
disapproving a CAP for this particular period, which happened to cover
the first two years of Illinois' participation in the IV-E program. In
considering a CAP proposal for this period, DCA is not limited to
approving a methodology which uses RMS data and would require
backcasting this data to an earlier period. If DCA determines that a
CAP proposal that uses RMS data would not be appropriate under prior
Board precedent and the special circumstances of this particular appeal,
DCA may approve another methodology, such as an eligibility case count
ratio methodology, that does not rely on RMS data. Following DCA's
decision, ACF may then take whatever further action is appropriate with
respect to these claims, and may, if necessary, reinstitute part or all
of the subject disallowance.

Statutory and Regulatory Background

A. The IV-E Program

Title IV-E of the Act, enacted as part of the Adoption Assistance and
Child Welfare Act of 1980 (Pub. L. No. 96-272, 42 U.S.C.  670-79),
provides for maintenance payments for children in foster care and
adoption assistance for special needs children. Title IV-E funds are
made available for states which have submitted, and had approved by ACF,
state plans meeting federal requirements. Section 471 of the Act. FFP
is available, under an approved state plan, for foster care maintenance
payments or adoption assistance for children who meet specified
eligibility requirements. Sections 472, 473 of the Act. In addition,
states may receive 50% FFP for administrative expenditures "found
necessary . . . for the proper and efficient administration of the State
plan." Section 474(a)(3) of the Act.

ACF regulations implementing title IV-E are codified at 45 C.F.R. Parts
1355 and 1356. The regulations pertaining to the fiscal requirements
applicable to title IV-E, 45 C.F.R. Part 1356, were promulgated in final
form on July 15, 1982. 47 Fed. Reg. 30,922. Section 1356.60(c), which
governs administrative costs other than training, states that "[t]he
State's cost allocation plan shall identify which costs are allocated
and claimed under [title IV-E]." It is uncontested that the claims at
issue here are for administrative costs related to the IV-E program that
would be allowable except for the absence of a CAP.

B. The Cost Allocation Plan process

ACF based its determination that Illinois' claims for FFP should be
disallowed on Illinois' failure to have an approved CAP for the period
in question. The submission, approval, and amendment of a CAP are
governed by 45 C.F.R. Part 95, Subpart E. 1/

A state participating in public assistance programs under the Act,
including title IV-E, is required to determine what part of commonly
incurred expenditures, such as staff salaries, is allocable to each
program the state administers. A state is required to submit a plan for
cost allocation to the Director, DCA, in the appropriate HHS regional
office. 45 C.F.R.  95.507(a). A CAP is defined as "a narrative
description of the procedures that the State agency will use in
identifying, measuring, and allocating all State agency costs incurred
in support of all programs administered or supervised by the State
agency." 45 C.F.R.  95.505. The CAP must contain sufficient
information to permit the DCA Director to make an informed judgment on
the correctness and fairness of the state's procedures for identifying,
measuring, and allocating all costs to each of the programs administered
by the state agency. 45 C.F.R.  95.507(a)(4). The Director notifies a
state in writing of the approval or disapproval of a CAP and the state
may request reconsideration of a disapproval determination. 45 C.F.R.
 95.511 and 95.513.

A state may amend its CAP for various reasons, including the discovery
of a material defect in the CAP or a change which makes the allocation
basis or procedures in the approved CAP invalid. 45 C.F.R.  95.509(a).
The effective date of a CAP amendment is covered by 45 C.F.R.  95.515,
which provides in pertinent part:

As a general rule, the effective date of a cost allocation plan
amendment shall be the first day of the calendar quarter following the
date of the event that required the amendment . . . . However, the
effective date of the amendment may be earlier or later under the
following conditions:

(a) An earlier date is needed to avoid a significant inequity to
either the State or the Federal Government.

A state must claim FFP for costs associated with a program only in
accordance with its approved CAP. 45 C.F.R.  95.517. If costs are not
claimed in accordance with an approved CAP, the improperly claimed costs
will be disallowed. 45 C.F.R.  95.519.

Factual Background

Pursuant to the creation of the IV-E program, Illinois submitted on
March 30, 1982 a IV-E State plan which was approved on June 18, 1982,
with an effective date of January 1, 1982. Illinois Exhibit (Ill. Ex.)
47.

During the period of time at issue here, July 1, 1982 through June 30,
1984, Illinois submitted IV-E claims for only the direct costs of foster
care maintenance and adoption assistance payments and for indirect costs
based on those direct costs. Illinois did not submit any claims for
IV-E administrative costs during this period, however, because it did
not yet have available what it believed to be an acceptable method for
allocating those costs. Illinois was in the process of developing an
allocation plan employing a RMS methodology while it sought federal
guidance concerning acceptable CAP methodology and employed outside
consultants to assist it. First Affidavit of Francis L. Kauzlarich,
Ill. Ex. 36,  4. For this period, however, Illinois did have personnel
and other administrative costs of the Department of Children and Family
Services totalling approximately $70 million for servicing a caseload of
which approximately 37 percent at a minimum was IV-E eligible. Ill.
Ex. 51; Transcript of Closing Argument (Tr.II), at 8.

In July 1984 Illinois submitted to DCA a proposed RMS methodology for
claiming its IV-E administrative costs. Ill. Ex. 9. 2/ Illinois stated
that the RMS methodology was then approved by DCA with an effective date
of July 1, 1984. This constituted Illinois' approved CAP for subsequent
quarters. 3/

Illinois then used caseworker data gathered from its RMS system in the
quarter July-September 1984 to develop and submit a series of prior
period adjustments or supplemental claims for administrative costs for
each of the calendar quarters ending September 30, 1982 through June 30,
1984; each such quarterly statement of expenditures was accompanied by a
set of recalculations in support of the claim. 4/ In arriving at the
amount of the claim for each of these quarters, Illinois used the RMS
data collected in the July-September 1984 quarter in conjunction with a
IV-E eligibility percentage based on client and case counts from the
actual quarters at issue to calculate an allocation ratio. This ratio
was then applied to the total administrative costs actually incurred in
each quarter. Once Illinois determined total IV-E direct administrative
costs for each quarter at issue, it multiplied those amounts by the
indirect cost rate it had negotiated with ACF to determine indirect
administrative costs. Its claim for each quarter in question therefore
involved a direct and an indirect administrative cost component. Each
of these prior period adjustments, which were filed in 1984 and 1985,
met the timely filing requirements of section 1132(a) of the Act: that
is, each of the quarterly adjustments was filed within two years from
the end of the quarter for which the costs were claimed.

In the period 1984-88 following the approval of the July 1984 CAP,
Illinois and ACF officials exchanged correspondence and met several
times concerning modifications in Illinois' indirect cost rate and the
prior period adjustments in the claims for IV-E administrative costs.
See Ill. Exs. 21-33; First Kauzlarich Aff.  24-35. The primary
Illinois official involved in the negotiations alleged that at least by
the summer of 1988 Illinois "understood from Region V" that the
information submitted in support of the backcasted claims was
"sufficient" and that ACF never requested additional information or
identified problems with the information submitted. First Kauzlarich
Aff.  36; Hearing Transcript (Tr.) at 76-79.

On September 21, 1992, approximately eight years after Illinois
submitted its first supplemental claim involving IV-E administrative
costs, ACF issued its final determination disallowing all of Illinois'
claims for IV-E administrative costs (both direct and indirect) for the
time period at issue. ACF stated that Illinois' RMS methodology for
claiming IV-E administrative costs had been approved by DCA with an
effective date of July 1, 1984, and that claims for periods prior to
that date must be disallowed under 45 C.F.R.  95.515 and 95.517 since
the RMS methodology was not in effect during those periods. ACF directed
Illinois to make a decreasing adjustment of $6,116,102 on its next
quarterly expenditure report.

Parties' Arguments

Illinois rejected ACF's contention that Illinois lacked a CAP and was
thus precluded from receiving reimbursement for its IV-E administrative
costs during the period in question. First, citing section 474(a)(3) of
the Act, Illinois insisted that it had a statutory right, regardless of
the effective date of its CAP, to reimbursement of any administrative
costs that were necessary for the proper and efficient administration of
its IV-E program. Illinois contended that there had been no
determination that the costs claimed were unnecessary or unreasonable
for implementation of its IV-E State plan.

Illinois noted that it was undisputed that Illinois actually incurred
very substantial administrative costs for its IV-E program during the
period in question, so it was patently unreasonable for ACF to deny
Illinois' claims in their entirety solely on the ground that there was
no approved CAP in place. Illinois argued that if it had computed
administrative costs using an eligibility case count methodology, it
could have claimed approximately two or two and a half times the amount
of claims that are at issue here. (The minimum quarterly percentage of
IV-E eligibles (37 percent) multiplied by the total amount of
administrative costs for servicing the entire caseload (or $70 million)
would have resulted in a IV-E allocation of $26 million, when Illinois
only claimed approximately $12 million ($6 million in FFP) for IV-E
administrative costs under its modified RMS approach.)

Illinois argued that once its July 1984 CAP had been approved, the CAP
should have been given, under 45 C.F.R.  95.515, an earlier effective
date to avoid a substantial inequity to Illinois. According to
Illinois, the discussions it had with ACF from 1984 to 1986 concerned
what adjustments to the CAP were necessary to give it an earlier
effective date.

In the course of this appeal, ACF raised an additional reason, in
addition to Illinois' alleged failure to have an approved CAP during the
period in question, for denying Illinois' claims. ACF contended that,
even if it were to concede that the July 1984 CAP was entitled to an
effective date of July 1, 1982, Illinois' claims still would not qualify
for FFP because the CAP called for a RMS that generated contemporaneous
data and Illinois had not used contemporaneous data for the quarters at
issue. 5/ Rather, Illinois used the results of its RMS for the quarter
ending September 30, 1984 and applied it to the earlier quarters, using
actual caseload statistics and administrative costs for those earlier
quarters. According to ACF, such "backcasting" of data is permissible
only if Illinois demonstrated that the conditions surrounding the
expenditures it made on behalf of the IV-E program during each of the
prior quarters in question resembled the conditions surrounding the IV-E
expenditures it made in the quarter ending September 30, 1984. ACF
contended that Illinois had failed to meet this burden.

Illinois labelled the backcasting issue raised by ACF a red herring
because the record demonstrated that its use of the RMS data from the
quarter ending September 30, 1984 actually served to substantially limit
its claims for the earlier quarters at issue. Illinois also argued that
it has produced persuasive evidence demonstrating a substantial
similarity between the quarter ending September 30, 1984 and the earlier
quarters and would have been able to produce even more data to show such
a similarity had ACF not taken over eight years to reach a decision and
state its reasons. Illinois claimed that the passage of time prejudiced
its ability to provide valid additional information. Illinois argued
that the evidence demonstrated that its claims were almost certainly
understated because its title IV-E caseload dropped steadily from the
first quarter in question to the ninth quarter when the RMS data was
produced. Since substantially fewer children were eligible in the ninth
quarter than the preceding eight quarters, Illinois argued it is likely
that the caseworkers registered fewer IV-E activity responses in the RMS
for the ninth quarter than they would have for earlier quarters if they
had been sampled. Thus, according to Illinois, use of the ninth quarter
data prejudiced Illinois, not the federal government.

Analysis

Section 474(a)(1) provides that a state "shall" be entitled to a payment
equal to one-half of the total amount expended during such quarter as
found necessary by the Secretary for the proper and efficient
administration of the title IV-E state plan. ACF has never disputed
that the costs at issue here, if allocable to the IV-E program under an
approved CAP, were necessary for the proper and efficient administration
of the state plan. The only stumbling block has been the absence of an
approved CAP for the first two years Illinois participated in the then
newly enacted IV-E program.

Under 45 C.F.R.  95.511, the Director, DCA, after consulting with the
affected "Operating Division" (here ACF) has the authority to approve
cost allocation plans submitted by states. The record contains no
evidence that DCA ever approved or disapproved a proposed CAP for the
two years in question. The regulations are crystal clear that the
ultimate allowability of these claims depends on an approved CAP that
allocates the amounts claimed to the IV-E program. On the other hand,
the statute provides that a state "shall" be reimbursed for an amount
found necessary for the proper and efficient administration of the State
plan, and there is no question that but for the absence of an approved
CAP that allocated the claimed amounts to the IV-E program, the statute
would require that these claims be reimbursed. ACF has provided the
Board with no reason why Illinois should not at least receive a
determination on a proposed CAP from DCA for the period at issue.
Accordingly, we remand this appeal to ACF so that it can obtain a formal
written decision from DCA on the approvability of a CAP proposal from
Illinois for the two years beginning July 1, 1982.

In particular, DCA's involvement at this juncture could be helpful in
several respects:

o ACF's primary concern regarding the allowability of these claims
stems from the fact that Illinois used data from the July-September 1984
quarter to "backcast" what its reimbursement should be for the prior
eight quarters. However, Illinois argued, and ACF did not dispute, that
it could also support its claims with a methodology using eligibility
case count ratios that would not require any backcasting. Policy
Announcements of the IV-E program specifically authorize case count
methodologies for allocating IV-E administrative costs. 6/ Thus, DCA
could consider approving for this limited period a methodology, such as
one using eligibility count ratios, which would completely avoid the
"backcasting" stumbling block. The backcasting issue has prevented this
case from being resolved during at least eight years of negotiations
between the parties and of deliberations within ACF. The record here
demonstrates that if Illinois used an eligibility count ratio for the
two years in question, it may be able to allocate to the IV-E program as
much as two and a half times what it in fact claimed. However, Illinois
is now limited by timely claims restrictions from increasing its claims,
and it need only demonstrate that an approved CAP would at a minimum
support the amounts claimed in 1984 and 1985.

o This case is not in the same posture as prior cases considered by the
Board (and relied upon by ACF) where states had approved CAPs but wanted
to amend their CAP methodologies retroactively. See, e.g., Kansas.
Those states were already entitled to an amount allocated to their IV-E
program under their approved CAPs and were attempting to adjust their
claims upward for a prior period based on the retroactive amendment of
the approved CAP methodology. Here, since the period in question
occurred at the inception of the title IV-E program, Illinois was unable
to develop a methodology for allocating administrative costs to IV-E in
time to submit a CAP for approval on a prospective basis. Thus, unless a
CAP is approved on a retroactive basis, Illinois must forego any funding
for IV-E administrative costs for the two years in question even though
Illinois had $70 million in administrative costs for servicing a
caseload approximately 37 percent of which was IV-E eligible. While the
regulations were designed to ensure that states receive reimbursement
only for costs that are properly allocated to particular assistance
programs, they do not appear to be designed to obstruct reimbursement
altogether simply because no decision has ever been made by DCA on an
approvable CAP.

o We know of no authorities that would now preclude DCA from
considering approval of a CAP proposal for the years in question. The
regulation which the parties discussed extensively in their briefs, 45
C.F.R.  95.515, plainly applies only to the effective date of CAP
amendments. No equivalent provision addresses (and thereby precludes)
retroactive approval of a CAP proposal where a state may have reasonably
delayed in submitting a proposal in the initial days of the program. 7/

o Although DCA retains the discretion to consider a methodology that
did not rely on backcasting, the Board has never definitively ruled out
methodologies that rely on backcasting. In Ohio Dept. of Human Services,
DAB No. 900 (1987), the Board stated:

While sampling in its purest form envisions samples from the same
period in question, common sense would dictate that samples from another
period may be used if it can be established that no substantial change
has occurred so as to invalidate the procedure.

At 11. In Missouri Dept. of Social Services, DAB No. 1021 (1989), the
Board stated:

The Board's analysis therefore permits sample results from one
period to be used to support claims from contiguous periods when no
better documentation is available, provided that it can be shown that
there are no significant differences between the periods. The Board has
recognized this approach as an expedient tool, particularly when the
parties are in agreement on the need to establish a claim amount. The
party asserting the use of data from unsampled periods has the burden of
showing that circumstances relating to the sampled and unsampled periods
are such that the data can be used for the unsampled period. We are not
prepared to state what degree of similarity in circumstances is
necessary to support the retroactive application of sampling results or
other data; each case must be judged by its particular circumstances.

At 14.

Thus, DCA may consider whether the unique circumstances raised here may
justify approving a modified RMS methodology involving the limited type
of backcasting suggested by Illinois.

Illinois gave at least two reasons, and supported those reasons with
evidence in the record, why its claims computation if anything
understated what contemporaneous RMS data would have indicated and what
another reasonable alternative methodology would have indicated. The
only factor Illinois backcasted in the claims computation at issue was
the RMS quarterly data concerning the specific program activity a
caseworker was administering at the particular moment sampled. All
other information necessary for computing the claims for each of the
quarters in question specifically related to the particular quarters.

As we discussed above, Illinois demonstrated that the number of IV-E
eligibles decreased steadily from the first quarter at issue to the
ninth quarter (ending September 30, 1984), the quarter the data used for
backcasting was collected. At the same time, the number of non-IV-E
eligibles increased steadily. Ill. Exs. 49-53. Thus, it is highly
possible that the RMS data for the ninth quarter understates the
involvement of caseworkers in the IV-E program for the prior eight
quarters. The caseworkers' opportunities for servicing IV-E eligibles
had clearly diminished in the ninth quarter in relation to the earlier
quarters. Even ACF's statistical expert conceded at the hearing held in
this appeal that graphs he presented concerning variations in program
statistics may tend to show a greater likelihood of an underclaim. Tr.
at 152; ACF Ex. 9. Illinois, moreover, produced additional evidence
demonstrating that the foster care programs administered by Illinois had
otherwise remained stable during the nine quarters at issue. See, e.g.,
Second Kauzlarich Aff., Ill. Ex. 39,  6; Tr. at 64-73. DCA would of
course be free to consider whether there were any countervailing factors
that may undercut the possibility that the use of data for the ninth
quarter would understate the involvement of caseworkers.

Illinois also argued that a comparison of its backcasting methodology
with other reasonable methodologies that could have been used, such as
an eligibility count ratio methodology, suggests that the backcasting
methodology very substantially understated its claim. See Ill. Ex. 51
and Tr. II at 12, 34.

Thus, based on the record before us, DCA might well conclude that the
modified backcasting methodology Illinois used here fully protected the
federal government from funding an overstated claim for title IV-E
administrative costs.

Conclusion

For the reasons discussed above, we remand this case to ACF to obtain a
formal written decision from DCA on a CAP proposal from Illinois for the
two years at issue here. Following DCA's decision, ACF may then take
whatever further action is appropriate with respect to these claims, and
may, if necessary, reinstitute part or all of


the subject disallowance. Illinois would then have the opportunity to
submit an appeal of any such disallowance to this Board pursuant to 45
C.F.R. Part 16.

____________________________ M. Terry
Johnson

____________________________ Norval D.
(John) Settle

____________________________ Donald F.
Garrett Presiding Board Member

1. These regulations concerning CAPs were promulgated April 23, 1982,
as an interim final rule to become effective May 24, 1982. 47 Fed. Reg.
17,506.


2. Illinois has represented to us in these proceedings that this
document was in fact a CAP. ACF has disputed only the effective date of
this document, and not the fact that this document setting forth a RMS
methodology was in fact a CAP. Furthermore, in its disallowance
determination, ACF specifically referred to this document as a CAP
amendment. However, this document does not actually refer to itself as
a "cost allocation plan." Its first page bears the title, "ADVISORY
REPORT TO THE DIVISION OF MANAGEMENT AND BUDGET DIRECT-CHARGING
METHODOLOGIES FOR PROGRAMS AUTHORIZED UNDER TITLE IV-E OF THE SOCIAL
SECURITY ACT." The parties were unable to provide the Board with a
cover letter to this document, and there is no other evidence in the
record as to what effective date Illinois requested.

3. Neither party has been able to produce any type of document
indicating that DCA formally approved or disapproved the allocation
methodology submitted by Illinois in July 1984. However, ACF has
apparently reimbursed Illinois for claims for administrative IV-E costs
for activities subsequent to July 1, 1984, based on the RMS methodology
contained in the July 1984 submission, and, as noted above, ACF stated
in its disallowance determination that DCA had approved the RMS
methodology as a CAP. Thus, we assume that DCA approved the July 1984
RMS methodology for prospective use, although a formal written approval
notice is now unavailable.

4. Under a RMS system, randomly selected case workers are questioned
at randomly selected times as to what work the case worker is performing
at that time. These activities are coded, the information is gathered
and compiled with the information of all surveyed workers, and the
results are used to determine activity percentages as bases for
allocating costs among benefitting federal and state programs. See
Kansas Dept. of Social and Rehabilitation Services, DAB No. 1349, at 4,
n. 2 (1992).

5. The Board does not follow strict pleading procedures and ordinarily
allows a party to present new arguments during the regular briefing
process. In the case of agency parties, a new argument may include what
is in effect an alternative basis for the disallowance. The Board
always ensures that the opposing party has a full opportunity to respond
to any new argument. Here, once ACF raised this alternative ground for
the disallowance, the Board afforded Illinois the opportunity to seek
discovery of relevant documents and allowed Illinois to brief this issue
and to address it at the hearing held in this proceeding.

6. ACYF-PA-87-05 (Ill. Ex. 37) states, in pertinent part:

The allocations [among title IV-E, state foster care and other
state/federal programs] may be determined by case count of title
IV-E-eligible children in relation to all children in foster care under
the responsibility of the State title IV-E/IV-B agency or on some other
equitable basis."

ACYF-PA-90-01 (Ill. Ex. 38) repeats the foregoing language.


7. Even the regulation concerning the effective date for CAP
amendments permits retroactive effective dates to avoid a "significant
inequity" to the state or the federal government or when the prior plan
is found to be "materially