DATE: March 30, 1998

SUBJECT: Illinois Department of Children and Family Services

Docket No. A-97-119
Control No. A-05-96-00013
Decision No. 1654

DECISION

The Illinois Department of Children and Family Services (Illinois) appealed a determination of the Administration for Children and Families (ACF) disallowing $6,000,404 claimed by Illinois for foster care training costs incurred during the period January 1, 1992 through December 31, 1994. The costs were claimed at the enhanced federal financial participation (FFP) rate of 75% under title IV-E of the Social Security Act (Act). As discussed below, we uphold this disallowance in principle and remand the case to ACF to consider Illinois' arguments that an error was made in calculating the disallowance.

The disallowance was based on ACF's determination that the foster care training costs benefitted not only the title IV-E foster care program to which they were charged but also the State foster care program. ACF further determined that, pursuant to the cost principles in Office of Management and Budget Circular A-87 (OMB A-87), only those costs allocable to IV-E were properly chargeable to IV-E. To determine the amount allocable to IV-E, ACF applied eligibility ratios based on the percentage of IV-E cases in Illinois' foster care caseload.

ACF's determination also relied on Illinois Dept. of Children and Family Services, DAB No. 1530 (1997). In that decision, the Board upheld the disapproval by the Department of Health and Human Services Division of Cost Allocation (DCA) of Illinois' proposed cost allocation plan (CAP) for the allocation of foster care training costs. DCA disapproved the proposed CAP on the ground that it did not provide for the allocation of the training costs to programs (in addition to the IV-E foster care program) that benefitted from the costs. The Board also upheld in principle the disallowance of training costs claimed for the quarter ended September 30, 1994, and remanded the appeal to ACF to recalculate the disallowance consistent with the decision. ACF subsequently disallowed foster care training costs claimed for the period April 1, 1989 through June 30, 1995 (recalculating the disallowance for the quarter at issue in DAB No. 1530). In DAB No. 1645 (1998), the Board upheld this disallowance in full, finding that most of the issues raised were fully resolved in ACF's favor by the prior decision and that the appeal was in effect an untimely request for reconsideration.

Proceedings in the instant case were stayed, with the consent of the parties, pending the issuance of DAB No. 1645. Following the issuance of that decision, the Board ordered the parties to show cause why the Board should not issue a summary decision upholding the disallowance based on the rationale in DAB No. 1645. The order to show cause noted that, although the appeal had raised a question as to whether an error was made in calculating the disallowance, this may be a matter which could be resolved by the parties.

In response, ACF indicated that issuance of a summary decision was appropriate. Illinois conceded that "the issue in [this case] of whether Title IV-E training costs must be allocated between Title IV-E and other programs is addressed in DAB No. 1645," but argued that a summary decision was not appropriate since there are "important points of departure between the cases." Illinois response dated 3/6/98, at 1-2. In particular, Illinois argued that the rationale in DAB No. 1645 "goes further than what ACF or the auditors have said in the present case." Id. According to Illinois, DAB No. 1645 "interprets OMB A-87 to require that direct costs be allocated in accordance with relative benefits received," whereas ACF here determined that "joint" costs--which Illinois said meant indirect costs--were required to be so allocated. Id. Illinois took the position that this disallowance cannot properly be sustained based on DAB No. 1645 because "[a]n administrative agency acts arbitrarily when it attempts to affirm prior action on grounds different from those previously relied on." Id. at 3-4. Illinois also took the position that ACF made no effort to determine whether the costs were indirect or direct, so that the disallowance cannot properly be sustained based on what Illinois characterized as ACF's determination that indirect training costs must be allocated among all benefitting programs.

We conclude that Illinois' argument has no merit and that the disallowance is properly sustained based on the rationale in DAB No. 1645. As it did in the proceedings leading to DAB No. 1645, Illinois here attempts to relitigate an issue already resolved in DAB No. 1530. Illinois argued in the former proceedings that ACF improperly modified OMB A-87 when it required the allocation of the training costs to all benefitting programs. In evaluating this argument, the Board stated:

This argument was in effect resolved by the holding in DAB No. 1530 that there is authority in the Circular [OMB A-87] for requiring the allocation of costs to all programs that benefit from those costs. See DAB No. 1530, at 17-18. Illinois' reading of the Circular's provisions on allocation as applying only to indirect costs reflects a fundamental misunderstanding of the nature of direct and indirect costs. [Footnote omitted.] Costs are charged indirectly because they cannot be allocated readily through normal accounting methods, and are therefore allocated based on a ratio. Indirect costs are distributed among benefitting cost objectives by applying the indirect cost rate to a direct cost base for that cost objective. Direct costs can sometimes be identified wholly with a particular cost objective (such as title IV-E), but that does not mean that they cannot sometimes be identified with more than one cost objective and allocated using techniques other than an indirect cost rate. The allocation of direct costs among several benefitting cost objectives is required by the Circular's directive to charge costs in accordance with relative benefits. OMB Circular A-87, Att. A, C.2.a. (1981). Thus, the requirement for allocating direct training costs did not modify the provisions of the Circular . . . .DAB No. 1645, at 8-9. It is therefore clearly established that the requirement for allocating costs among all benefitting programs does not depend on a distinction between indirect and direct costs. Moreover, there is nothing in the ACF determination appealed here that indicates that ACF intended to limit to indirect costs the "joint" costs which it said should be allocated among all benefitting programs. Accordingly, contrary to what Illinois argued, ACF's determination is consistent with the rationale in DAB No. 1645.

As indicated above, Illinois also argued that ACF erred in calculating the disallowance here. Illinois noted specifically that this disallowance "appears to be greater than the adjustments appealed in [DAB No. 1645] for the same time period by a significant amount." Illinois response dated 3/6/98, at 2. Illinois also asserted that "[t]he amount of the disallowance, to the extent that that amount represents an amount that ACF requires be paid back to ACF, is substantially incorrect because [Illinois] never received payment on a substantial amount of its training claims for the audit period . . . in particular for the quarters ending 9/93 and 9/94." Id. However, Illinois did not offer any reason why these matters could not be addressed by the parties on remand, as suggested by the Board's order to show cause.

Conclusion

For the foregoing reasons, we uphold the disallowance in principle and remand the case to ACF to consider Illinois' arguments that ACF erred in calculating the disallowance. After considering such arguments, ACF should issue a written determination affirming or modifying the disallowance amount. If Illinois disagrees with this determination, it may appeal to the Board pursuant to 45 C.F.R. Part 16 on this limited issue only.

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Judith A. Ballard

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M. Terry Johnson

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Cecilia Sparks Ford
Presiding Board Member