Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
DATE: July 22, 1998
SUBJECT: New York State Department of Social Services
Docket Nos. A-97-56, A-97-123, A-97-130, A-98-40, and A-98-62
Decision No. 1666
DECISION
The New York State Department of Social Services (New York, Department) appealed five determinations of the Administration for Children and Families (ACF) disallowing costs claimed under title IV-E of the Social Security Act (Act). New York claimed the costs in question at the 75% rate of federal financial participation (FFP) available under title IV-E for training on the federal foster care and adoption assistance program. ACF determined that these costs were not reimbursable as training but were instead other administrative expenditures that were reimbursable at 50% FFP. ACF therefore disallowed the difference between the amount claimable at the 75% rate of FFP and the amount claimable at the 50% rate of FFP.
Our findings as to the several categories of costs comprising the disallowance are as follows:
Below, we first set out the relevant statutory and regulatory provisions and relevant Board decisions. We then discuss each of the categories of costs disallowed and the rationale for our disposition. Finally, we address the parties' arguments regarding the applicability of prior Board decisions and other cross-cutting arguments.
BACKGROUND
Relevant statutory and regulatory provisions and Board decisions
Since 1989, section 474(a)(3) of the Act has provided that a state which has an approved title IV-E plan is entitled to FFP at the enhanced rate of 75% for amounts expended for the training of personnel employed or preparing for employment by the State agency or by the local agency administering the title IV-E plan, or of current or prospective foster or adoptive parents, or staff of child care institutions. Prior to its amendment in 1989, this section of the Act provided for 75% FFP in the costs of training personnel employed or preparing for employment by the State or local agency administering the title IV-E plan and only 50% FFP in the costs of training current or prospective foster or adoptive parents, or staff of child care institutions.
Implementing this statutory provision, section 1356.60(b) of 45 C.F.R. states in pertinent part:
(b) Federal matching funds for State and local training for foster care and adoption assistance under title IV-E. (1) Federal financial participation is available at the rate of seventy-five percent (75%) in the costs of training personnel employed or preparing for employment by the State or local agency administering the plan.
3) Short and long term training at educational institutions and in-service training may be provided in accordance with the provisions of ..235.63 through 235.66(a) of this title.
Section 235.64, captioned "FFP rates, and activities and costs matchable as training expenditures," states in relevant part:
. . . FFP is available . . . for the following costs:
(a) Salaries, fringe benefits, travel and per diem for:
(1) Staff development personnel (including support staff) assigned full time to training functions and;
(2) Staff development personnel assigned part time to training functions to the extent time is spent performing such functions.
(b) For agency training sessions, FFP is available for:
(3) Salaries, fringe benefits, travel and per diem for experts outside the agency engaged to develop or conduct special programs; and
(4) Costs of space, postage, teaching supplies, purchase or development of teaching material and equipment, and costs of maintaining and operating the agency library as an essential resource to the agency's training program.
Section 235.65, captioned "Activities and costs not matchable as training expenditures," provides in pertinent part:
FFP is not available for the following expenditures as training costs; however, the expenditures described in this section may be matched as administrative costs, if conditions for such matching are met:
(a) Salaries of supervisors (day-to-day supervision of staff is not a training activity) . . . .
Under section 474(a)(3)(E) of the Act and 45 C.F.R. 1356.60(c), other state and local administrative expenditures for foster care and adoption assistance under title IV-E are reimbursable at 50% FFP.
The Board has addressed questions regarding the interpretation of 45 C.F.R. . 235.64 ("section 235.64") in several decisions. Illinois Dept. of Children and Family Services, DAB Nos. 1422 (1993); Illinois Dept. of Children and Family Services, DAB No. 1463 (1994); Illinois Dept. of Children and Family Services, DAB No. 1530 (1995); Illinois Dept. of Children and Family Services, DAB No. 1645 (1998); and Illinois Dept. of Children and Family Services, DAB No. 1654 (1998). In these decisions, the Board held that a claim for indirect costs incurred by the state agency for training activities was not reimbursable at 75% FFP where the claim was based on direct cost rates developed using cost pools containing costs that are not among those of the type specified in section 235.64. The Board found that this regulation on its face limits the types of costs that may be reimbursed as training expenditures to the costs that are specified there.
The Board also found in these decisions that, consistent with Office of Management and Budget (OMB) Circular A-87 (the cost principles for state and local governments), ACF had allowed all of the indirect costs as charges to the title IV-E program, although it allowed them at the 50% rate of FFP applicable to all other IV-E administrative expenditures rather than at the enhanced rate of 75% FFP. The Board noted that, in any event, the regulations limiting the types of costs that may be charged at 75% FFP take precedence over the general principles in OMB Circular A-87. In DAB No. 1654, the Board also held that the same rationale applied to indirect costs incurred by institutions of higher education under training contracts with the state agency. The Board found no basis for Illinois' concern that the limitation of the FFP rate would preclude the institutions from recovering indirect costs derived from their federally approved indirect cost rates, noting that, regardless of the rate at which Illinois was reimbursed, the institutions were entitled to reimbursement of their indirect costs by Illinois in accordance with the terms of their contracts. The Board also rejected Illinois' argument that the indirect costs of the universities were reimbursable at 75% FFP as part of the total costs charged to Illinois under the training contracts. The Board stated that a cost that is not of a type specified in the regulations is not reimbursable as a training cost at 75% FFP regardless of whether it is charged as a direct or an indirect cost.
ANALYSIS
Contractors' indirect costs
New York provides most of the training for its state and local social services personnel through contracts. Most of the contract expenditures are incurred under contracts with educational institutions (including public universities) with federally approved indirect cost rates. There is a contract for each training project which states the payment amount for the performance of the project. There is also a fiscal budget for each training project that identifies all costs used to arrive at the contract price, including costs derived from indirect cost rates. These rates are developed in accordance with OMB Circular A-21, the cost principles for institutions of higher education. Training contract costs are charged to the various program accounts set forth in New York's federally approved cost allocation plan. New York allocated some of the contract costs to its Title IV-E Foster Care Training and Adoption Assistance Training program accounts and claimed these costs under title IV-E at the 75% FFP rate.
ACF took the position that the indirect costs incurred by the training contractors were not reimbursable at 75% FFP. ACF asserted, and New York did not dispute, that the cost pools used to calculate the indirect cost rates "contain elements unrelated to training." ACF Br. at 18. In ACF's view, in order to be reimbursable at the 75% rate, all costs--whether direct or indirect--must be the types of costs specified as training costs in the applicable regulations.
As noted above, the Board has previously held that section 235.64 provides that only costs of the type specified in that section are reimbursable at 75% FFP as training costs. Since New York did not assert that there were contractors' indirect costs which were derived solely from costs of the type specified in section 235.64 or that it could separately identify any such costs, ACF properly disallowed New York's claims for 75% FFP in the contractors' indirect costs.
New York argued, however, that a policy guidance issued by ACF's central office to its regional offices in 1982 authorized 75% FFP in all indirect costs incurred by training contractors. The policy guidance included the following question and answer:
QUESTION 3: May allowable costs include State agency costs for preparation and supervision of the contract . . . and costs for the contractor to administer the contract and conduct the training . . . .
ANSWER: Taking into account the response to question 1 [concerning foster parent training], all of the items identified in question 3 are allowable FFP costs. 45 CFR 1356.60(b), 45 CFR 235.64(a) and section 474(a)(3)(A) of the Act clearly establish that these kinds of costs are reimbursable. Again, foster parent training expenses are to be treated as administrative costs. Therefore, 45 CFR Part 235 is not applicable to such costs.
New York Ex. 45, ACYF-PIQ-82-17 (October 14, 1982).
We are not persuaded that the PIQ provides for 75% FFP in all indirect costs incurred by training contractors. As the Board observed in DAB No. 1645, while the PIQ indicates that such costs are allowable FFP costs, it does not identify the rate of FFP at which the costs are reimbursable. (The PIQ refers to a training contractor's costs to administer and conduct training rather than to indirect costs; however, some of the former costs could be charged as indirect costs.) Instead, the PIQ refers to the applicable regulatory and statutory provisions. There is nothing in those provisions that authorizes 75% FFP in all indirect costs incurred by training contractors regardless of the type of cost.
New York asserted that the PIQ distinguishes contractors' indirect costs (as well as state agency costs incurred in preparing and processing training contracts) from foster parent training expenses, which are clearly reimbursable at only 50% FFP. See New York Br. at 30. However, this distinction is by no means clear from the language of the PIQ. Indeed, such a distinction may not be possible since contractors may provide training for foster parents, in which case only 50% FFP would have been available for all of the contract costs at the time this PIQ was issued. Thus, the better reading of the PIQ is that contractors' costs to administer and conduct training (and state agency costs incurred in preparing and processing training contracts) are reimbursable as training functions in accordance with the applicable regulations.
OHRD Training Contract Preparation and Processing Costs
The costs in question were incurred for the Office of Human Resources Development (OHRD), the dedicated training unit of the New York State Department of Social Services. OHRD's function is to plan, coordinate and implement the Department's annual training program. Specifically, New York described OHRD's activities as "assessing training needs, establishing training goals, developing effective curriculum and training materials, preparing and publishing requests [for] proposals (RFPs) for training programs, working with and supervising training contractors to ensure that training programs are of the highest quality, working with local social services district training staff, and evaluating the training programs . . . ." New York Ex. 2, at 2. Of the 47 professional and support staff assigned to OHRD during the July - September 1994 quarter, approximately the equivalent of three full-time employees were involved with preparation and processing of training contracts and contract payment vouchers. New York claimed the costs of these personnel at 75% FFP.
ACF determined that the contract processing and preparation functions performed by OHRD staff were not training activities and thus were not properly claimed at 75% FFP. ACF reasoned that these functions are required for any type of contract and do not contribute directly to actual training.
We find that the functions in question constituted training activities.
ACYF-PIQ-82-17, quoted above, provides that State agency costs for preparation and supervision of a training contract are reimbursable and refers to regulations that "establish that these kinds of costs are reimbursable." The regulations referred to include section 235.64(a)(1). That section specifies that salaries, fringe benefits, travel and per diem for staff development personnel, including support staff, assigned to "training functions" are reimbursable at 75% FFP. The term "training functions" reasonably encompasses the work of staff in a dedicated training unit, regardless of the capacity in which they work. There is nothing in the language of section 235.64(a)(1) that suggests a need to more finely parse the activities of such staff in order to determine if they fall within the ambit of this provision. Thus, the costs claimed for the OHRD personnel engaged in preparing and processing training contracts and contract payment vouchers are reimbursable at 75% FFP.
State central office administrative support overhead allocation
The State central office administrative support allocation consisted of costs incurred for activities such as payroll, travel and supply accounting, and the processing of training contractor payments. These costs were incurred by administrative support organizational units that serviced the entire Department. ACF did not dispute that the disallowed costs were allocable to OHRD, but took the position that the costs were not reimbursable at 75% FFP. In ACF's view, although the activities involved contributed to training in the sense that they supported the offices and staff who deliver and attend training, the activities were only remotely related to the training itself. New York took the position that the activities "directly relate to the ability of OHRD staff to develop, conduct, and supervise a comprehensive training program." New York Br. at 7; see also id. at 8.
We disagree with ACF that none of the State central office administrative support allocation was incurred for activities that were properly considered training. As indicated earlier in this decision, all of the OHRD staff members were engaged in training functions. Thus, the costs allocated to OHRD for State central office administrative support were directly related to training because they were necessary to carry out training functions.
However, as discussed above, under section 235.64, only costs of the type specified there are reimbursable at 75% FFP as training costs. The record does not show what types of costs were included in the State central office administrative support allocation. Accordingly, we remand this portion of the appeal to ACF to determine what costs included in the allocation were the types of costs specified in section 235.64 as training costs reimbursable at 75% FFP.
State central office local district support allocation
The State central office local district support allocation consisted of costs incurred by organizational units within the Department whose staff were engaged in activities that support the operations of local social services districts (SSDs). According to New York, the staff assigned to the local SSD administrative support overhead account "assess the operational impact of program policy changes, develop regular communication channels with SSDs, review SSD claims, develop and communicate fiscal policies, provide organizational and staffing consultation, and assist with and coordinate the design and development of management reports used by SSDs and the Department." New York Br. at 8. New York also stated that this staff spent "part of their time interacting with Local SSD training staff to provide technical support to identify SSD training needs, assist in development of targeted curriculum to improve SSD operations, and monitor the effectiveness of the training being provided . . . ." New York Br. at 57.
Before the Board, ACF took the position that the State central office local district support allocation was not reimbursable at 75% FFP because the activities that generated the costs were only remotely related to training. New York argued that the activities were necessary to carry out its training function.
We disagree with ACF that the State central office local district support overhead allocation was not for activities that were properly considered training. New York asserted, and ACF did not dispute, that the costs were allocated to title IV-E training pursuant to New York's cost allocation plan (CAP), approved by the Division of Cost Allocation (DCA) of the Department of Health and Human Services. A state agency claiming title IV-E funds must submit to the DCA Director in the appropriate regional office a proposed CAP that describes the procedures used to identify, measure and allocate all costs to each of the programs operated by the agency. See 45 C.F.R. . 95.507(a)(1). The proposed CAP must--
[c]ontain sufficient information in such detail to permit the Director, Division of Cost Allocation, after consulting with the Operating Divisions, 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 operated by the State agency.
45 C.F.R. . 95.507(a)(4). Thus, the authority to determine whether costs are allocable to a particular program or part of a program (such as IV-E training) is vested by regulation in DCA. Since DCA, by approving New York's proposed CAP, determined that the activities in question were properly allocated to IV-E training, ACF may not second-guess that determination.
Accordingly, we conclude that the costs of State central office staff who provided support to the SSDs were incurred for training activities. However, the record does not show what types of costs were included in the State central office local district support allocation. Accordingly, we remand this portion of the appeal to ACF to determine what costs included in the allocation were the types of costs specified in section 235.64 as training costs reimbursable at 75% FFP.
Local social services district overhead costs
According to New York's brief, local social services district overhead costs consisted of "overhead costs in support of the activities of dedicated District training staff personnel . . . ." New York Reply Br. at 21. These activities were conducting annual assessments of SSD training needs, providing input into curriculum development of training projects offered to its staff and maintaining ongoing contact with OHRD staff regarding the annual training plans. The only overhead costs identified by New York were salaries and fringe benefits of local SSD training supervisors. See New York Br. at 10. ACF indicated that there may have been other overhead costs, but did not identify any other overhead costs. See ACF Br. at 22.
ACF took the position that salaries and fringe benefits of local SSD training supervisors were not reimbursable at 75% FFP under 45 C.F.R. . 235.65(a), which states that "[d]ay-to-day supervision of staff is not a training activity." ACF also maintained that some of the overhead costs may have been allocated to non-training activities. ACF stated that since it was not clear how much time local SSD staff spent on training and whether the overhead costs were allocable solely to training staff activities, New York could not properly be reimbursed at 75% FFP for these costs.
We are not persuaded that section 235.65 precludes 75% FFP in the salaries and fringe benefits of local district training supervisors. To the extent that the supervisors were supervising staff engaged in training activities, the supervisors were clearly also engaged in training activities. The regulation appears merely to preclude the costs of supervisors who supervise non-training staff and whose supervision might arguably be viewed as training, absent section 235.65.
New York asserted, moreover, that the supervisors were training unit rather than program unit supervisors, apparently meaning that they supervised training staff. ACF did not provide any basis for questioning that the staff supervised was engaged solely in training other than to point out that curriculum development is a training activity only if it directly contributes to training. There is nothing in the record that suggests that the activities claimed as curriculum development did not directly contribute to training, however.
Accordingly, we conclude that the local district overhead costs, consisting of the salaries and fringe benefits of training supervisors, were allowable. This conclusion does not preclude ACF from requiring New York to provide additional documentation for the local social services district overhead costs or from taking a new disallowance of any costs other than salaries and fringe benefits of training supervisors that ACF identifies.
Countywide A-87 costs
The countywide A-87 costs are not clearly described in the record. New York stated that these costs were "allocated to the [SSD] training cost objective pursuant to the prescribed A-87 cost allocation principles." New York Reply Br. at 21. ACF stated only that these costs were apparently "indirect costs deemed to be allowable pursuant to Office of Management and Budget (OMB) Circular A-87." ACF Br. at 24. ACF noted that not all of the cost items that are specified in A-87 as allowable costs are reimbursable at 75% FFP, either because they are not the type of costs specified in section 235.64 or because they do not arise from training activities. ACF asserted that New York had not provided sufficient information regarding the countywide A-87 costs to determine whether they were reimbursable at 75% FFP.
The countywide A-87 costs are analogous to indirect costs of training, which we have already concluded are reimbursable at 75% FFP only to the extent that they are derived solely from costs of the type specified in section 235.64. Thus, information regarding the types of costs that comprised the countywide A-87 costs is necessary to determine the extent to which these costs are reimbursable at 75% FFP.
Notwithstanding ACF's assertion that there was insufficient information about these costs to document their allowability at 75% FFP, New York provided no information concerning the countywide A-87 costs for the record in these appeals. The Board held in DAB No. 1214 that--
. . . the burden is on the State to establish that the activities constituted training. It is a fundamental principle of grants administration that the grantee has the burden of documenting its claim for federal funds. Florida Dept. of Health and Rehabilitative Services, DAB No. 1031 (1989); 45 C.F.R. Part 74, Subpart H. Moreover, . . . title IV-E activities other than training are reimbursed at the rate of 50%. Since the 75% rate is a special, enhanced rate, it is appropriate to require that a state affirmatively show that activities constituted training in order to qualify for reimbursement at that rate.
DAB No. 1214, at 10. New York clearly failed to meet this burden with respect to the countywide A-87 costs. Accordingly, we conclude that ACF properly disallowed the countywide A-87 costs.
That the costs were claimed pursuant to an approved cost allocation plan is not a basis for distinguishing the instant appeals from the Board's prior decisions regarding the interpretation of section 235.64.
New York argued that the decisions in which the Board held that only costs of the type specified in section 235.64 are reimbursable at 75% FFP were distinguishable from the appeals in question here on the ground that those decisions involved costs claimed pursuant to indirect cost rates while these appeals involve costs allocated in accordance with a CAP. Specifically, New York argued that, when DCA approved New York's CAP providing for allocation of the types of costs in question to training, it approved the reimbursement of those costs at 75% FFP rate.
This argument has no merit. DCA's letter approving New York's 1989 central office and local CAPs stated that the approval was subject to the condition that "[t]he costs claimed for Federal financial participation must be allowable under the law, the cost principles contained in OMB Circular A-87 and program regulations." New York Ex. 4, letter dated 6/30/89, at 2. Thus, by its own terms, the approval of the CAP did not constitute a determination that all costs allocated pursuant to the CAP were allowable in accordance with program regulations authorizing a higher rate of FFP for certain expenditures.
Moreover, even in the absence of such a condition, the Board has held that the approval of the state's CAP was not a determination that the costs in question were also allowable. See, e.g., New Jersey Dept. of Human Services, DAB No. 1306 (1992). Similarly, the Board has held that the approval by DCA of the State's indirect cost rate had no bearing on whether indirect costs related to training activities were reimbursable at 50% or 75% FFP. See DAB No. 1530. By way of explanation of its holding in New Jersey, the Board stated that DCA "has no programmatic responsibility and is not necessarily knowledgeable about whether a particular cost is allowable or not." At 13. By the same token, DCA is not necessarily knowledgeable about the rate of FFP applicable to costs that have been allocated to training. (By contrast, as already discussed, DCA is charged by regulation with determining how costs should be allocated; thus, ACF has no basis for maintaining that costs allocated to IV-E training pursuant to New York's approved CAP were not incurred for training activities.) Accordingly, we conclude that the approval of New York's CAP is not a basis for distinguishing this case from the Board's prior decisions.
The Board's failure to discuss the history of section 235.64 does not invalidate the Board's prior interpretation of section 235.64.
New York also argued that the interpretation in the prior Board decisions of section 235.64 was erroneous because the decisions failed to take into account the history of section 235.64. In particular, New York contended that this regulation was derived from section 3400 of the Handbook of Public Assistance Administration. That section provided for 75% FFP in certain costs of a "staff development program." New York cited section 3400.1, captioned "State and local staff development personnel," which specifies as an eligible cost "[p]ayment of personal services for staff development personnel, including clerical and other staff, and all other expenses, e.g., travel, per diem, rent, postage, communications, equipment, etc." (Emphasis added.) In addition, New York cited section 3400.2, captioned "Agency session planned to train staff in content dealing with public assistance," which includes in a list of eligible costs "[p]ayment to outside experts employed to conduct special courses, including personal services, travel, and per diem" as well as "[p]ayment for purchase and development of necessary teaching materials and equipment: e.g. , books, audio-visual aids, and technical devices." (Emphasis added.) In New York's view, these provisions encompassed all costs incurred to provide IV-E training, not just the costs specified in these provisions. Moreover, according to New York, "[t]he training policies expressed in the Handbook were fully adopted in regulation 45 C.F.R. .205.202 (1971) and have not been expressly revoked or rescinded." New York Reply Br. at 7-8.
However, in response to an argument which relied on the "all other expenses" language in section 3400.1 as authorizing state agency indirect costs, the Board stated in DAB No. 1645:
. . . the provisions in question here have been superseded and are no longer valid. In 1977, SRS proposed to revise the training policies applicable to title IV-A. . . . [The proposed revision contained] roughly the same language as the disputed language in the current regulations. The preamble to this proposed rule stated that it contained "substantive changes aimed at improving the management and effectiveness of public assistance State and local training programs." [citation omitted] Specifically, the revision was intended "[t]o clarify the conditions under which State agencies administering or supervising the administration of these programs can receive Federal matching for training expenditures." Id. The preamble further stated that "[g]reater clarity would be achieved by . . . [s]pecific listing of costs and activities matchable as training expenditures and those matchable as administrative expenditures. . . ." Id. The proposed changes were finally adopted by the Social Security Administration, then responsible for administration of title IV-A, in 1980. [citation omitted] The preamble to these regulations noted that numerous commenters had "opposed the changes in the Federal reimbursement for expenditures in providing in-service training."
[citation omitted]
We conclude from the foregoing that the elimination of the phrase "all other expenses" was part of a substantive change intended to limit the types of costs which could be reimbursed as training. Accordingly, if, as Illinois argued, "all other expenses" encompasses all costs of training whether charged directly or indirectly, then the regulation without this phrase cannot reasonably be read as broadly (i.e., costs not specifically listed cannot be charged at the higher rate whether charged directly or indirectly). That there may have been some confusion within ACF regarding whether indirect costs are reimbursable at the 75% rate as training costs does not change the meaning of the regulation as illuminated by its history.
DAB No. 1645, at 14-15. Similarly, the elimination of the indications in section 3400.2 that the costs specified there were merely examples of allowable training costs reflects an intent to limit the types of costs that are reimbursable as training. Thus, the Board's holding that reimbursement of training costs at 75% FFP is limited to the costs specified in section 235.64 is not invalidated by these Handbook provisions.
GAO/HRD-94-7 is not inconsistent with the Board's prior interpretation of section 235.64.
Another basis on which New York challenged the Board's decisions was that the Board did not discuss the significance of a GAO report, HRD-94-7 (New York Ex. 49). That report addresses the issue of whether ACF properly required states to allocate training costs among all benefitting programs. At issue here is the Board's unrelated holding that costs allocated to title IV-E are reimbursable at 75% FFP only if they are the type of costs specified in section 235.64. Thus, the report was not relevant to this holding. Even if, as New York asserted, the report articulates a general principle that the Secretary may not require state-only funded programs to pay costs provided for under title IV-E, the report does not specify what these costs are.
The existence of draft regulations that provided for reimbursement of all training indirect costs at 75% FFP does not undermine the Board's prior interpretation of section 235.64.
New York also argued that the Board's decisions were undermined by the fact that ACF at one point prepared a draft notice of proposed rulemaking that included indirect costs of all state and local child welfare training activities as costs reimbursable as training at 75% FFP. See New York Ex. 48. According to New York, these draft regulations were prepared pursuant to an opinion of the Office of General Counsel dated November 20, 1990 indicating that there was legal support for reimbursing indirect costs related to training at either 50% or 75% FFP. Neither a notice of proposed rulemaking nor a final rule adopting the interpretation of section 235.64 for which New York argued was ever published, however. The fact that ACF considered adopting a different rule regarding expenditures reimbursable at 75% FFP does not mean that the Board's reading of the existing regulation is incorrect. Indeed, it supports the Board's conclusion regarding the regulation promulgated by the Secretary (in whom the authority to regulate is vested), which does not specifically provide for 75% FFP in indirect costs.
The disallowances were not based on an invalid Agency policy statement.
New York argued that the disallowances were based merely on a regional policy issued by the Region IV ACF office in an August 22, 1994 letter to New York. That letter, which was cited in the disallowance letters, stated in a section captioned "Indirect Costs Associated with Title IV-E Training Activities:"
Regardless of the training delivery mechanism a State may employ with regard to its title IV-E program, what constitutes indirect costs which are allowable as training are those which are calculated using the costs listed in 45 CFR 235.64. Thus, if a State contracts with a university or other entity to perform training activities, the cost pools used to determine the contractors indirect cost rate must only include costs which are listed in this section of the regulations. If they do not, then expenditures for indirect costs must be properly claimed at the 50 percent FFP rate.
ACF's August 22, 1994 letter to New York also stated, in a section captioned "Activities Reimbursable as Training:"
Salaries of employees meeting the definition of staff development personnel are cited at 235.64(a) as allowable training expenditures. Staff development personnel functions include development and/or conduct of training. Training development includes new curriculum design or enhancement of existing training materials. Delivery of training includes necessary preparations and actual conduct of classroom or field instruction . . . . Consistent with long standing regulations and policy, activities such as processing, monitoring and managing contracts for the development or delivery of training are not eligible for title IV-E reimbursement as training. These costs are reflective of standard administrative activities. To the extent that such costs are applicable to the IV-E program through a cost allocation methodology, they shall be claimed as administrative costs at the 50 percent FFP rate.
New York Ex. 12, at 2. New York asserted that, in response to its discovery requests, ACF was unable to furnish any correspondence from its central office or any other ACF regional office which imposed the same policy regarding reimbursement of training costs. New York argued that the disallowances could not properly be based on a policy applied only to one state. Moreover, New York argued that the August 22, 1994 letter was not a proper basis for disallowance on the ground that it was a legislative rule that was not promulgated pursuant to notice and comment rulemaking, as required by section 553 of the Administrative Procedure Act.
We agree with New York that the August 22, 1994 letter was not a proper basis for disallowing the OHRD contract preparation and processing costs. As discussed above, a reasonable reading of the applicable regulations permits the salaries, fringe benefits and travel costs of OHRD staff engaged in contract preparation and processing to be reimbursed as training activities at 75% FFP. If ACF wished to adopt a different interpretation of the regulations, it needed to do so through an official issuance, not simply through a letter from a regional office to a state. Although ACF asserted that some other states had received similar communications, ACF did not point to any national policy guidance that clarified the interpretation of the regulations in question.
We reject New York's arguments with respect to the remaining costs at issue here, however. Even assuming that no other states received similar correspondence, ACF's August 22, 1994 letter did not impose a new policy that was applied only to New York. Instead, as indicated above, the letter articulated a policy--of limiting reimbursement of costs at 75% FFP to costs of the type specified in section 235.64--that was already required by that regulation. Moreover, since the August 22, 1994 letter merely restated what was required by the regulations, it was not a legislative rule within the meaning of the Administrative Procedure Act. See Pennsylvania Dept. of Public Welfare, DAB No. 1634, at 8-9 (1997) ("it is generally agreed that when an agency is exercising its rule-making power in order to interpret or clarify an existing statute or regulation, the agency is considered to be engaged in interpretive rulemaking," whereas "when an agency acts to create new law, rights, or duties in what amounts to a legislative act, it is engaged in legislative rulemaking").
In any event, ACF need not have relied on the August 22, 1994 letter since the applicable regulations provided authority for the disallowances. The fact that the disallowance letters referred to the August 22, 1994 letter rather than to the applicable regulatory authority does not preclude the Board from upholding the disallowance based on this regulatory authority. Indeed, the Board is bound by applicable regulations. Moreover, the Board has held that the Agency may raise new grounds for a disallowance after a disallowance letter is issued as long as the appellant is afforded an opportunity to respond. See, e.g., Pennsylvania Dept. of Public Welfare, DAB No. 1278 (1991). ACF's brief, to which New York responded, clearly indicated that ACF's position was derived from the regulations at 45 C.F.R. . 1356.60, incorporating by reference 45 C.F.R. .. 235.64, 235.65 and 235.66. See ACF Br. at 12.
New York also pointed out that ACF's August 22, 1994 letter indicated that ACF would not enforce the limitation on allowable training costs stated in that letter until July 1, 1994. New York argued that this effective date was unreasonable because "[t]here is no way . . . New York State could have taken the . . . August 22, 1994 policies into account until State fiscal year April 1995 - March 1996, and the September, 1995 - August, 1996 training cycle." New York Reply Br. at 24. As discussed above, however, section 235.64 on its face limits the types of costs that are reimbursable at 75% FFP. Since New York was on notice of the duly published regulation, the fact that ACF did not enforce this limitation prior to July 1, 1994 in the case of New York was irrelevant.
CONCLUSION
For the reasons discussed above and summarized at the beginning of this decision, we uphold the disallowances of the contractors' indirect costs and the countywide A-87 costs, reverse the disallowances of the OHRD staff costs (and allocable rental costs) and the local social services district overhead costs, and reverse and remand the disallowances of the State central office administrative support allocation and State central office local district support allocation.
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Judith A. Ballard
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M. Terry Johnson
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Cecilia Sparks Ford
Presiding Board Member