GAB Decision 160
March 31, 1981 California Department of Benefit Payments; Docket Nos.
78-75-CA-SS, 78-76-CA-SS, 78-77-CA-SS, 78-78-CA-SS, 78-79-CA-SS,
78-80-CA-SS, 78-81-CA-SS, 78-82-CA-SS, 78-83-CA-SS, 79-97-CA-SS Ford,
Cecilia; Garrett, Donald Settle, Norval
These 10 appeals by the California Department of Benefit Payments
(hereafter, California or State) are being considered together, by
agreement of the parties, because they present common factual and legal
questions. The Board considered these cases under the procedures at 45
CFR Part 16, in accordance with the State's request.
The case docketed as 79-97-CA-SS involves an appeal dated May 16,
1979, of a September 10, 1974 disallowance by the Administrator, Social
and Rehabilitation Service, of $3,279,520 of Federal financial
participation (FFP) claimed for administrative costs. The Board is
deciding this appeal pursuant to an April 20, 1979 court order,
effectuating a stipulation of the parties, in California v. Secretary of
Health, Education, and Welfare, No. C-74-2647, United States District
Court for the State of California. The other nine cases, docketed as
78-75-CA-SS through 78-83-CA-SS, involve requests for reconsideration of
the July 31, 1978 decisions by the Acting Commissioner of Social
Security affirming disallowances of a total of $5,006,214 FFP for
administrative costs.
The dispute here concerns the Department of Health, Education, and
Welfare (HEW, now HHS) Audit Agency findings that the State's method of
allocating costs resulted in charges of unallowable food assistance
administrative costs to federally aided public assistance programs under
Titles I, IV, X, XIV, and XIX of the Social Security Act for audit
periods ranging from January 1967 through June 1974. /1/
(2) For the reasons stated below, we conclude that these
disallowances should be upheld.This decision is based on the submissions
of the parties and the conference which the Board held on December 17,
1980.
Background
The State's Department of Benefit Payments (formerly Department of
Social Services) which administrated State and federally aided public
assistance programs, also administered the United States Department of
Agriculture (USDA) food assistance programs which were operated at the
county level. USDA did not provide federal funds for the administrative
costs of the food assistance programs during the periods at issue here.
The USDA Food Stamp Program operated through various county welfare
departments which were responsible for authorizing, handling, and
issuing food coupons to public assistance and non-assistance households.
Many of the counties contracted with banks and other fiscal agents to
perform the functions involved in handling and issuing food coupons.
The counties reported the bank and other fiscal agent charges on their
expense report in the section for "Purchases of Services," under the
caption, "All Other." The counties also participated in the USDA Food
Surplus Distribution Program, and had the responsibility for storing,
packaging, and distributing food to individuals whom the welfare
department determined were eligible. The expenses for services and
handling incident to obtaining surplus foods for distribution
(principally, incoming freight charges) were reported in the "Operating
Costs" section, under the caption, "All Other." See e.g., Audit
Report
No. 20144-09, pp. 10, 13.
Prior to 1968, California claimed FFP based on a "direct allocation"
method whereby each item of expense was identified and directly
allocated to the program for which it was incurred. A study of
California's accounting methods, conducted by HEW in 1966, concluded the
the direct allocation method was too complex. The study recommended,
among other things, that the State adopt a "cost pool" method of
claiming costs. In 1968 the State adopted a new accounting approach
whereby the costs of administration for the county welfare department
were placed in a cost pool and allocated to the federal and non-federal
programs participating in the pool by use of apportionment formulas
based on time and salary studies of the county welfare workers. Some of
the administrative costs were still charged directly to the programs for
which the costs were incurred.
HEW audits of the State's Expenditure Reports for county
administrative costs concluded that the costs of issuing and handling
food coupons and the costs of acquiring, storing, and distributing
surplus food should have been allocated directly to the Food Stamp and
Surplus Food Distribution Programs, because including them in the cost
pool resulted in the allocation of these costs to the federally aided
public assistance (3) programs. As a result, the Agency requested that
California revise its cost allocation plan, return a total of
$8,285,734, and review county records to identify unallowable food
assistance costs not discovered by the auditors. See Audits Numbered;
ACN 20144-09, ACN 50250-09, ACN 50262-09, ACN 50263-09, ACN 50264-09,
ACN 50266-09, ACN 50267-09, ACN 50268-09, ACN 50271-09, ACN 50274-09.
The State has since revised its cost plan to direct charge food
assistance administrative costs.
Relevant Provisions
Handbook of Public Assistance Administration, (HPA), Part V, Sec.
4810: /2/
Federal Financial Participation
For the purpose of this section, the term, public assistance
recipients, means applicants for or recipients of assistance under the
federally aided State public assistance programs, including medical
assistance for the aged.
A. Federal financial participation is available for matching State
and local welfare agency expenditures of the initial certification and
recertification of households as eligible (1) to obtain coupon
allotments under the food stamp program or (2) to receive foods under
the direct distribution program of the Agriculture Marketing Service,
when one or more members of the household are public assistance
recipients.
B. Federal financial participation is not available for matching
State or local welfare agency expenditures for the certification of
households in which no members are public assistance recipients.
C. Federal financial participation is not available for matching the
State and local welfare agency expenditures for costs incident to the
acceptance, storage, protection, issuance of, and accountability for,
food coupons; nor for the costs of storage, packaging, and distribution
of foods under the surplus food program. (emphasis added)
(4) HPA, Part V, Sec. 4820:
Cost Allocation Plan
If the State agency and/or one or more local agencies makes
expenditures of the kind described in V-4810, items A, B and C, above,
the cost allocation plan must indicate how such costs are to be handled
in making the Federal claim . . . The cost allocation plan must be
amended, if necessary, to give effect to this intent and to exclude from
the Federal claim all costs identified under V-4810, items B and C.
(emphasis added)
HPA Part V, Sec. 4031.1 (deleted and replaced by 45 CFR 205.150,
February 27, 1971, 36 FR 3862):
Direct charges shall be made for expenses of special projects that
are not a cost of the administration of old-age assistance, aid to
dependent children, or aid to the blind -- such as expenses incurred for
. . . storage and distribution of commodities. (emphasis added)
Discussion
I. Whether the State's Method of Allocating Costs Resulted In
Charging Unallowable Food Assistance Costs to Public Assistance
Programs.
With the limited exception of certain costs to be discussed later,
the State admits that the costs at issue were not eligible for FFP. See
e.g., Application for Review in 79-97-CA-SS, (hereafter Application)
Exhibit 1, p.3, and Conference Transcript, (hereafter Tr.) p. 70.
The State contends, however, that it is incorrect to assume that the
State claimed reimbursement for food program costs simply because those
costs were included in the cost pool which was allocated in part to
public assistance programs. Application, Exhibit 6, p. 9. The State
explains that the concept of the cost pool method is to place all costs
of a similar nature in a pool and select a base from which to develop a
formula which would equitably distribute costs to the programs
participating in the pool. According to the State, the food assistance
costs can be placed in the pool of administrative costs because through
the use of the apportionment formula based on county welfare worker
salary and time studies, the costs at issue were charged, not to any
federal public assistance program account but to a "county only
programs" (5) account for which FFP was not claimed. The State
maintains that the Agency auditors never challenged the use of the
salary and time studies to fairly apportion the State's administrative
costs.
The State claims that the food assistance costs could be included in
the pool even though the time studies did not reflect the activities of
the bank and fiscal agent employees because the cost of writing warrants
for the Title IV-A program are of a similar nature and were included in
the cost pool without objection by the Agency. Tr., pp. 19, 22. The
State also argues that if it is theoretically wrong to apportion any
costs attributable to purchased services, then all such services must be
removed from cost pools and directly charged. State's post-conference
brief, p. 16.
Further, the State claims that once costs are placed in the pool they
lose their identity and should not be singled out for direct charging
because they appear to be unallowable or directly allocable. The State
asserts that the Agency can not remove from the cost pool those items
which it determined could be identified as directly allocable to a
program function in which there was no FFP, without also removing from
the cost pool those items for which there was FFP. The State argues tht
by requiring the direct charging of these food assistance costs, the
Agency is improperly treating some expenses as though the State was
claiming under a direct allocation method, and other expenses under a
cost pool accounting system, resulting in an unsound mixture of
accounting methods.See Application, Exhibit 5, p. 22. In addition, the
State claims that even if the Agency were correct in its contention that
the apportionment formula is incorrect in this case, the remedy is
wrong. The State argues that if the formula is wrong, then the Agency
should point out the error in the formula and propose adjustments based
on using a corrected formula.
The Agency argues that the costs at issue were disallowed because
they should have been claimed as direct costs of the counties' food
assistance programs. The Agency claims that including these food
assistance costs in the pool which distributed administrative costs to
public assistance programs by this formula resulted in unallowable
charges to those programs. The Agency asserts that HPA Secs. 4810 and
4820 prohibited claims for FFP for these costs, and that these costs
were not allocable by means of the formula based on county employee time
studies. In addition, the Agency asserts that HPA Sec. 4031.1 required
the State to direct charge the costs of storing and distributing food
commodities.
(6) The Agency argues that since the bulk of the unallowable food
assistance costs were generated by employees of banks and institutions
with whom the State had contracted to provide services under the food
stamp program, a formula based on the time studies of welfare employees
incorrectly apportioned the costs in the pool to the programs involved.
Agency's Memorandum in Support of Disallowances (hereafter Agency
Memorandum), p. 21.
The Agency argues, in addition, that the inclusion of these
unallowable costs increased the total amount of the pool, and
consequently, when the apportionment formula was applied, the charges to
public assistance programs were proportionately increased. The Agency
explains that it therefore removed these costs from the pool to be
direct charged to the county so as to correctly reflect the amount of
unallowable costs that were charged to the public assistance programs
without disturbing the claims for other costs, as follows:
We identified the amount of unallowable costs in the particular cost
pool. We then computed the percentage of those unallowable costs to the
total costs in the cost pool.We then applied that percentage to the
total amount which had been allocated to the public assistance programs
from the cost pool to arrive at the amount by which the public
assistance programs had been improperly charged. Finally we determined
the federal share of that amount by the use of ratios computed by the
counties for claiming costs at 75 per cent and 50 per cent.
Agency Memorandum, Attachment C, pp. 3-4.
The Board concludes that the Agency was not unreasonable in requiring
the State to eliminate from the pool costs which are unallowable to any
federal program because the State had not shown that its method of
allocating costs excluded the unallowable costs from claims for FFP.
It is a basic principle of grants law that to be allowable under a
grant program, costs must be necessary and reasonable for proper and
efficient administration of the grant progran, be allocable to the
program, and conform to any limitation or exclusion set forth in federal
laws or other governing limitations as to types or amounts of cost
items. A cost is allocable to a particular cost objective to the extent
of benefits received by such objective. See e.g. Office of Management
and Budget (OMB) Circular No. A-87, Attachment A, Section C. 1 and 2.
(7) The HPA specifically requires that the State's cost allocation
plans indicate how the unallowable food assistance costs are to be
handled in making a federal claim, and directs that the plans be
amended, if necessary, to insure that these costs are excluded from
federal claims. See HPA Secs. 4810, 4820.
While the State claims that its allocation formula "factored out"
these unallowable costs and charged them to an account which does not
receive federal funds, the State has not presented persuasive evidence
to support this position. Since the HPA required the State to insure
that no FFP was claimed for these unallowable costs, and there is no
clear relationship between the county welfare employee time study and
the costs of storing, issuing, distributing and accounting for food and
food stamps, the State had the burden of showing that its method of
allocation did not result in claims for FFP. The State has not shown
how a method of allocation, based only on county employee salary and
time studies, excluded the unallowable cost, such as bank charges and
freight costs, from claims to the public assistance programs which
participated in the pool.
Rather than explain how its allocation method excluded these charges
from programs not benefitted by the costs, and from claims for FFP, the
State relies on its argument that costs cannot be removed from the cost
pool (and direct charged) without destroying the cost pool concept.
This argument implies that all of the other administrative costs of the
programs participating in the pool were charged through the cost pool.
Such is not the case.
The State in Circular Letters instructing the counties on how to
charge administrative expenses, required certain types of costs be
directly charged rather than pooled, particularly where a higher rate of
FFP was available for a cost. See e.g. Application, Exhibit 7D,
Circular Letter No. 2272, pp. 9-10, 15, 19, 20, 22, 23, 25. In
addition, the State's Circulars explain that there are two types of
costs -- "(those) that can be segregated and allocated to program
according to the regular cost accounting plan, and those of such a
special nature that allocation is not practical and would result in
program inequities or erroneous governmental participation." See
Application, Exhibit 7B, Circular 2199, p. 1 and Exhibit 7D, Circular
2272, p. 4.
In addition, for those purchased service costs charged through the
pool after the effective date of 45 CFR 205.150, as amended, on
September 26, 1973, the regulation governing cost allocation
specifically provides that purchased services should be excluded from
cost allocation. See 38 FR 26804.
(8) The State argues that, rather than requiring the direct charging
of these costs, the Agency should point out an error in the formula and
propose adjustments based on using a corrected formula. This argument
ignores the fact tht HPA Sec. 4031.1 required the direct charging of the
costs of distributing the food commodities, and that the State's method
of allocation recognizes that there are costs "of such a special nature
that allocation is not practical and would result in program inequities
or erroneous government participation." Since the Agency has explained
how it removed the costs from the pool in a manner which did not disturb
the claims for other costs in the pool, the Board concludes that the
Agency's decision to require the State to direct charge unallowable food
assistance costs is not unsound or inconsistent with the State's method
of allocating costs. The State may be correct in its claim that the
Title IV-A warrant writing or other costs of purchased services are also
directly allocable; however, we do not here make a ruling with respect
to costs which are not at issue before the Board. This decision does
not preclude the exclusion from the pool, and direct charging, of those
costs which the apportionment formula does not allocate to the proper
programs.
II. Whether These Disallowances Constitute Retroactive Disapproval
of the State's Cost Allocation Plan.
The State claims the costs at issue were claimed pursuant to an
approved cost allocation plan and, therefore, the disallowances amount
to a retroactive disapproval of the plan. According to the State, its
new cost allocation plan was formalized in the form of instructions on
claiming costs, in Circular Letters (Numbered 2199, 2272, 2236) sent to
the counties on September 27, 1968, March 14, 1969, and August 15, 1969,
respectively.
In support of its cliam that the plan was approved, the State asserts
that Agency and State representatives worked together closely to develop
this cost allocation plan and the State received tacit, if not actual,
approval of its method of allocating costs, because in the numerous
communications with HEW with respect to the plan, the Agency never
disapproved this method. The State further claims that the fiscal
representative for HEW, Region IX, "was aware that food stamp handling
and issuance costs and surplus food distribution costs were included in
the cost pool. (We) specifically discussed including these costs in the
cost pool. (He) either specifically or tacitly approved of these costs
being included in the cost pool since there was an allocation base to
distribute costs to programs." State's post-conference brief, p. 5. The
State presents, as further evidence of approval, the fact that when the
Regional Commissioner was sent copies of Circular Letters 2199 and 2272,
he commented on several matters unrelated to these cases but did not
question the inclusion of food stamp issuance costs in the pool, and
that he did not respond when he was sent a copy of Circular 2328. The
State claims the Circulars were sent to HEW for approval.
(9) It is the State's position that once the plan was approved, the
retroactive reduction of the grant award based on a determination that
the plan is not acceptable is a clear violation of the Congressional
mandate that HEW will participate financially in the costs incurred by a
state in operation of federal programs in accordance with an approved
State plan, citing the "Payments to the States" sections of Titles
I,
IV, X, XIV, and XIX of the Act, and 45 CFR 205.150. See Application,
Exhibit 1, p. 7 and Exhibit 5, p. 18.
The Agency denies that it approved the Circulars for incorporation
into the State's plan. The Agency explains that in 1966 it approved for
incorporation into that State's plan Fiscal Manual Section F-860.50
(Submittal No. 712), which provided for the direct charging of the food
assistance costs at issue. In addition, the Agency states that in April
1969, it approved Submittal No. 803 which amended certain provisions in
the plan but did not alter the direct charging practice for the costs at
issue.
The Agency asserts that the State never submitted the Circulars for
approval as plan material to replace the previous provision for direct
charging these costs. As evidence, the Agency submits letters dated
October 7, 1968, March 18, 1969 and August 19, 1969 in which the State
wrote: "The following which have been sent to you should be classified
as information." The three Circulars at issue were included on the list
of items "classified as information." Agency Memorandum, Attachment
A,
pp. 3-4.
The Agency asserts that since the Circular Letters were not submitted
for approval as part of the State plan, the Agency had no duty to
approve or reject them, and its comments were merely advisory. Further,
the Agency argues that:
(the) State's intent to supersede the provisions of its approved
State plan for the direct charging of food program costs by its new cost
allocation method and to treat food program costs through pooling and
allocation on the new time-study basis is so obscure in the Circular
Letters, that the Regional Commissioner could not reasonably have been
expected to comment on the treatment of food program costs. Under such
circumstances the Regional Commissioner's comments cannot be viewed as
in any sense a formal or informal approval of this revised treatment of
food program costs.
Agency Memorandum, p. 10.
(10) The Board concludes, based on the evidence in the record, that
the State has not shown that the Agency approved the inclusion of
unallowable food assistance costs in the pool for allocation. The State
plan required the direct charging of the costs at issue; we conclude
that the State did not receive actual or tacit approval for altering the
plan based on the Agency's lack of comment on the inclusion of
unallowable food costs in the pool and informal conversations with
regional personnel. While the Agency was required by federal statute
and regulations to make a determination when the State submitted a State
plan for approval, the evidence in the record does not indicate that the
State submitted the Circulars for incorporation into the State plan.
The State has not shown that the Agency had an affirmative legal
obligation to respond to Circular Letters sent to the Agency for
information purposes.
Further, the State's argument that approval for allocating the food
assistance administrative costs through the pool could be inferred
because the Agency did not question the treatment of these costs,
incorrectly implies that the Circulars clearly indicate that these costs
would be allocated through the pool. We conclude that the Agency was
not on notice of, and did not approve by silence, the State's alteration
of its practice of direct charging these costs simply because they were
not on a list of items excluded from the pool. Such a finding would be
particularly unreasonable in light of the HPA provision requiring the
State to identify how it will handle these types of food assistance
costs. HPA Sec. 4820.
The Agency cannot reasonably be required to operate under a system in
which documents submitted for information (rather than for required
approval) and informal discussions with Agency personnel would somehow
bind the Agency to a course of action merely because the Agency did not
formally or explicitly express disapproval of the course of action.
There is no principle of law which would place the Agency at such an
extreme and constant risk. It is unreasonable to impose on the Agency
the burden of carefully scrutinizing all papers submitted by the State
and others to determine whethr some buried sentence might result in
claims for otherwise clearly unallowable costs, and it is similarly
unreasonable to suggest that substantial sums become obligated based on
informal oral conversations. In that context, the Board finds that the
State has presented no substantial evidence of actual or tacit approval
by the Agency for including these unallowable costs in the pool.
III. Whether Costs Related to the Issuance of Authorizations to
Purchase (ATPs) Food Stamps are Allowable Certification Costs.
The State argues that even if the Board upholds the determination
that unallowable food assistance costs were allocated to the public
assistance (11) programs through the cost pool, the costs related to
issuing ATPs are allowable as certification costs for which FFP is
available pursuant to HPA Sec. 4810. An ATP is a form, issued monthly,
which states the amount of food stamps a recipient is eligible to
receive, and the amount the recipient must pay for them. The State's
position is that ATPs are "a gray area . . . in between the
certification and . .. the issuance . . . part and parcel of both," but
argues that ATPs are certification costs because a client is not
eligible to receive food stamps until the client receives the ATP. Tr.,
pp. 75-76. In support, the State asserts that Agency does not cite any
federal regulation which identifies the ATP process as an issuance cost,
and notes that ATPs are treated as a part of the certification process
in its State plan for county and administrative expenditures and in a
federally approved State handbook. The State's Fiscal Manual Section
860.50 provides tht the "certification process ceases after issuance of
the certification and authorization to purchase food stamps." See e.g.,
Tr. pp. 72, 85, 95-96, and Agency Memorandum, Attachment A, p. 3.
The Agency admits that FFP is available for certification costs but
argues that certification is limited to he process of determining an
applicant's eligibility for the food stamp program. The Agency argues
that after the determination is made that an applicant is eligible, the
issuance process begins, and ATPs are an integral part of the issuance
process because without them, recipients cannot purchase food stamps.
Agency Memorandum, p. 29.
The Agency asserts that after a recipient is certified as eligible to
receive food stamps, ATPs are issued each month to enable recipients to
purchase the food coupons. Therefore, the Agency concludes tht
providing ATPs to recipients is a monthly issuance function which allows
food stamps to be distributed in a convenient manner, rather than a
function connected with certification. The Agency argues, "to accept
the State's premise that the issuance of an ATP is part of the
certification process ignores the reality that most ATPs are issued at a
time other than the time of certification." Agency post-conference
brief, pp. 3-4.
With respect to the provision in the State handbook which states that
certification ceases after the issuance of ATPs, the Agency responds
that "to the extent that the work required to prepare the ATP is
incident to the determination of eligibility for public assistance, the
language of the State Handbook is correct." The Agency explains that
when the same worker who has determined public assistance eligibility
prepares the ATP, the costs are incident to the determination process
and eligible for FFP. The Agency maintains that any other
interpretation would make the provision contrary to the HPA, and the
(12) State's handbook is binding only to the extent that its provisions
are not contrary to any federal law or regulations. Agency
post-conference brief, pp. 3-6.
The Board upholds the disallowance of costs related to the issuance
of ATPs based on a finding that they are not certification costs for
which FFP is available. The HPA provides that FFP is available for the
costs of certifying and recertifiying households as eligible to receive
food stamps but specifies that FFP is not available for costs incident
to the issuance of food stamps. HPA Sec. 4810. We find that the ATP
costs at issue are costs incident to the issuance of food stamps rather
than costs of certification.
The State relies on the fact that a recipient cannot receive food
coupons without an ATP as evidence that it is part of the certification
process, but that fact can also serve as evidence that ATPs are incident
to the issuance of food stamps. The Stae admits that the recipient is
probably notified of eligibility to receive food stamps by some other
form prior to the issuance of ATPs. See Tr. pp. 75-76.
Rather than being a part of the determination of eligibility, the
ATPs are issued to eligible recipients to show the face value of the
coupon allotment the recipient is entitled to receie on presentation of
the document and the amount to be paid for such allotment. See USDA
regulations at 7 CFR 270.2(f) and Agency's post-conference brief, pp.
3-5. In addition, the Agency persuasively argues that the issuance of
ATPs is not connected to the process of determining eligibility to
receive coupons since ATPs are issued to recipients each month and
recertification occurs only every six months; the State has not argued
tht the certification process is repeated each month.
The State reliance on the provision in its handbook which states that
the "certification process ceases after the issuance of the
certification and authorization to purchase food stamps" does not
necessarily support its claim that ATPs are part of the certification
process. The provision read literally is inconsistent on its face.
First, it provides that certification ceases after certification and
some other activity. In addition, it provides that the certification
process ceases after the issuance of the certification and authorization
to purchase. To interpret this section as tying certification with the
issuance of ATPs would require a determination that the certification
process never ceases, since the ATPs are issued each month.
Given the incongruities of the State's handbook provision, the Board
finds that on balance, the Agency's interepretation that the handbook
(13) provision applies only to situations where ATPs are prepared
coincidently with issuance of the certification is more reasonable.
Conclusion
For the reasons stated above, these appeals are denied.
The State has claimed that P.L. 95-291 applies to a portion of the
costs disallowed here. The Act authorizes an appropriation to reimburse
certain expenditures for social services (and related administrative
costs) provided by the states under an approved State plan, prior to
October 1, 1975, under Titles I, IV-A, VI, X, XIV, and XVI of the Social
Security Act, and precludes recovery of any amount paid to a State prior
to April 1, 1977 for such social services. The Agency has agreed to
review the disallowances to determine what amounts, if any, represent
social services and adjust the disallowances to reflect that amount.
See Agency Memorandum, p. 33. If the State does not accept the Agency's
determination with respect to the amount of social service costs
involved, the State may appeal such determination to the Board. /1/ The
Social Security Administration (the Agency) is representing the
various constituent agencies of HHS which administer the public
assistance programs under the titles at issue here. /2/ The Acting
Commissioner of Social Security's disallowance determinations of July
31, 1978 include as "conclusions of law," that, although HPA provisions
are not regulations, they have the force and effect of regulations,
citing King v. Smith, 392 U.S. 309, 317 (1968). The State questioned
the validity of the HPA in proceedings prior to the Acting
Commissioner's decisions, but has not presented such arguments before
the Board. See Tr., p. 90.
OCTOBER 22, 1983