SUBJECT: New York State Department of Family Assistance

DECISION

The New York State Department of Family Assistance (New York) appealed a determination by the Division of Cost Allocation (DCA) disallowing $1,177,598 in federal financial participation (FFP) claimed on behalf of the Onondaga County (County) Department of Social Services (Department). The disallowed funds represented the federal share of costs the County claimed, as accrued compensated absence (vacation leave) for the Department's employees, as a prior period adjustment on its September 30, 1997 quarterly expenditure report for various programs under the Social Security and Food Stamp Acts. DCA determined that the County's claim for FFP violated the consistency and allocability requirements of Office of Management and Budget (OMB) Circular A-87 and disallowed the claim.

For the reasons discussed below, we find that the County never dedicated specific funds from its own resources for its share of the accrued vacation leave of its employees at issue here. This resulted in inconsistent treatment of costs, in violation of OMB Circular A-87. Accordingly, we sustain the disallowance.

Factual Background

County employees earn vacation leave at various rates depending on the employee's length of service, ranging from 11 days per year for employees with one to five years of services to up to 22 days per year for employees with 16 years of service. Vacation leave is fully earned, accredited and available for use on the employee's anniversary date. The amount of vacation leave an employee may accumulate is limited to 30 days, with leave in excess of that amount canceled or converted to sick leave at the employee's request.

The County recognized the liability to employees for vacation leave on its books and recorded the liability once a year on its general ledger accounting system. The County reported accrued vacation leave under the "Liabilities and Fund Equity" columns in its audited financial statements as they existed at the end of each calendar year. New York Ex. 4.

The County obtained consulting services from the accounting firm KPMG to ascertain whether it could claim FFP for its liability for accrued vacation leave for its employees. KPMG examined the County's financial reports and the Department's employee records and determined that the Department's share of the County's vacation leave liability should be allocated to various federal and state programs based on the same allocation used in 1995 for salary allocation purposes. New York Ex. 2.

The disallowed amount, $1,177,598, represented the alleged federal share of the Department's $1,967,911 share of the total $9,334,324 liability for accrued vacation leave for all County employees as of the end of the fiscal year ended December 31, 1995.⁽¹⁾ DCA's February 23, 2000 disallowance notification stated that the liability amount for accrued vacation time claimed for federal programs was not an allowable cost under the cost principles set forth in OMB Circular A-87.⁽²⁾ Specifically, DCA found that the County had never made a cash contribution for its own share of the accrued liability for the vacation leave, thereby violating the consistency requirement set forth in OMB Circular A-87, Attachment A, � C.1.d.⁽³⁾ DCA also found that the County's system of liability for accrued vacation leave violated the allocability standard set forth in Attachment A, � C.1.f. of OMB Circular A-87, in that liability was being assessed for a period of 10 years prior to the 1995 fiscal year but this was the first time these costs were claimed for FFP, although the County had been recording accrued vacation leave since 1984. DCA stated that the Department's use of salaries and wages incurred during calendar year 1995 to allocate accrued vacation leave liability, approximately 95% of which was earned in years prior to 1995, likely resulted in a shifting of costs between federal and local programs. DCA stated that it could not accept the County's premise that the allocation percentages for the 1995 fiscal year were the same for the years prior to 1995.

Discussion

The parties extensively briefed the consistency and allocability issues raised in DCA's disallowance determination, along with another issue that the Board suggested might be relevant to this appeal.⁽⁴⁾ Many of these arguments, however, were not relevant to the basic issue of the allowability of the County's claim for FFP. For example, the parties disputed whether the liability for accrued vacation leave represented 10 years of accumulation of leave, as argued by DCA, or merely two years, as maintained by New York. Similarly, the parties devoted considerable energy to a discussion of the appropriateness of the County's use of a FIFO accounting method for the accrued vacation leave, with New York arguing that the FIFO method demonstrated that the accrued leave was at most two years old and DCA contending that the accounting system was irrelevant to the consideration of whether the questioned costs represented allowable costs. If the costs are not allowable under the cost principles, however, all questions relating to the year to which they are allocable become moot.

Thus, the fundamental issue is whether, in claiming FFP for the accrued vacation leave, the County complied with the consistency provisions of OMB Circular A-87. OMB Circular A-87 requires that in order for a cost to be allowable, the cost must be "consistent with policies, regulations and procedures that apply uniformly to both federally assisted and other activities of the unit of government of which the grantee is part." Under this consistency provision, DCA argued that the County has to be held to the same standard as the federal government, that is, if the federal government makes a cash contribution for the accrued vacation leave costs, which the County is seeking in its claim for FFP, then the County must make a cash contribution. DCA contended that the County failed this consistency requirement by not contributing any of its own resources to funding the vacation leave liability. In other words, DCA maintained the County was seeking over one million dollars in federal funds without providing the appropriate matching contribution.

New York argued that the County's financial statements showed it did indeed fund the liability for accrued vacation leave, as accrued compensated absences are shown under the "Liabilities and Fund Equity" columns in its financial reports. According to a letter from KPMG provided to New York at its request after the disallowance,

[T]he County did fund the entire amount of their accrued compensated absences liability. The County had excess general fund assets on hand in 1995 to pay for their outstanding general fund liabilities. . . . The County by having sufficient general fund assets on hand in 1995 to pay for their outstanding general fund liabilities did make a cash contribution to fund the entire accrued liability, not just the federal portion.

NY Ex. 1.

In evaluating the parties' positions, it is important to recognize at the outset that the programs under which the County claimed FFP for the accrued vacation leave are joint-funded programs. Under these programs, the federal government provides federal funds after a state or local government commits to expending its own funds for program purposes. See, e.g., 42 U.S.C. � 674 (Title IV-E program referencing 42 U.S.C. � 1396d for Medicaid reimbursement rates); and 7 U.S.C. � 2025(a) (Food Stamp program administrative costs). The federal government matches the local funds at various percentages depending on the particular program and the specific activities involved. A percentage of the salaries, including the costs of fringe benefits, of local employees whose time is devoted to the programs is included in the administrative costs charged to the operation of the program.

Therefore, it is critical in evaluating the County's claim for FFP to ascertain whether the County's reliance on the availability of its general fund for its share of accrued leave liability involved the actual obligation and expenditure of County funds. New York admitted that the County did not maintain a dedicated reserve or contingency fund used to account for the accrued vacation leave liability.⁽⁵⁾ Since the KPMG statement provided by New York was unclear as to how claims for accrued vacation leave were actually paid, we issued an order to develop the record (which posed questions to both parties). In our Order to Develop the Record, we stated:

It would appear that the dispositive issues here under the cost principles set forth in OMB A-87 are: whether funds were actually appropriated by the County for accrued leave, or merely earmarked for this purpose; and whether the County ever used funds from the designated reserve to pay accrued leave. If the County did appropriate its own funds to the reserve and used funds from the reserve to pay for accrued leave, some measure of FFP might be appropriate. If, however, no funds from the reserve were expended and the County was using the designated reserve as a contingency fund, it would seem that the County is seeking federal matching funds for an amount that is not an expenditure but is merely a bookkeeping entry. Such a claim would not be permissible under the OMB Circular A-87 cost principles.

Order to Develop the Record at 2.

In response to our analysis, New York reiterated its position that its recording of a liability for accrued leave was an expenditure at the time it was recorded. New York stated that there was neither a dedicated reserve nor a contingency fund used to account for compensated absences, but rather a fund balance sufficient to pay all existing compensated absences liability. As for how payment for compensated absences was actually made, New York acknowledged that the County annually makes an appropriation in the general fund for employee salary expenditures. New York Ex. 10. This appropriation includes routine payments of vacation leave as part of normal salary payments and lump sum payments when an employee retires who has unused vacation leave. Id. New York further stated that only if the yearly appropriated amount for salary and vacation leave is insufficient to cover yearly expenditures, for example, due to unforeseen retirements resulting in lump sum payments that are greater than the appropriated amount, will the County fund the shortfall through the general fund. Id.

Thus, it is evident that in its customary budgetary process, the County did not actually devote any County funds for the specific purpose of paying for accrued vacation leave from the general fund or normally anticipate even using reserves from the general fund to cover the liability for accrued vacation leave. Instead, the County relied on its annual salary appropriation for that purpose. The County apparently would tap the general fund for accrued leave purposes only in highly unusual circumstances which the County could not predict. Lump sum payments for the usual number of retirements for a given year, which are generally foreseeable, would not fall into this category of unusual circumstances. In reality, it is highly unlikely that all of the accrued vacation leave (i.e., the $9 million earmarked at the end of 1995) would ever be redeemed, as that would involve the contingency of all eligible employees leaving County service at the same time.

New York's assertion that the County had funded the accrued vacation leave because it was listed on the County's books as a liability, thus reducing the County's fund balance, is not persuasive.⁽⁶⁾ While it is true that OMB Circular A-87 supports using accrual accounting for annual leave, the history of the OMB Circular A-87 revisions culminating in the December 1995 provisions indicates federal concerns about using an accrual basis of accounting for annual leave. Compare 53 Fed. Reg. 40352, 40356 (October 14, 1988); 58 Fed. Reg. 44212, 44214, 44219 (August 19, 1995); and 60 Fed. Reg. 26484, 26485, 26494 (May 17, 1995). Some of those concerns arise from factors such as the possibility of loss of leave (which means no payment will ever be made) and the fact that an actual cash payment for accrued leave may not be made until the employee retires at some time in the future. These concerns are exacerbated for governmental entities, which treat most costs on a cash basis. Accounting adjustments can be made to recognize these factors, however. Thus, the 1995 provisions ultimately deferred to generally accepted accounting principles to address these concerns.

Another key concern, however, is basically the same concern as reflected in federal cash management provisions requiring that grantees minimize the time between drawdown of federal funds and the time they are actually paid out--if grantees do not limit drawdown to their current needs, they receive the "float" on federal funds. While this concern can be addressed in part by requiring the grantee to account for interest earned on advances of federal funds, the interest is not always easy to track. Moreover, there are other factors that make it inequitable to require the federal government to "front end" its share of potential costs if the grantee does not also do so, such as deflation of the true value of a dollar. See 45 C.F.R. �� 74.21 and 74.22. In the present case, when we asked the County if the funds earmarked for the accrued leave liability were earning interest, the County responded that the commingled cash was held in a pooled fund earning interest.

This concern that government grantees actually "fund" amounts that they treat as costs for purposes of federal claims was made explicit in the 1995 leave provisions, but has always been implicit in the consistency requirement and recognized in our previous decisions. Inconsistent treatment of the timing of funding undercuts the matching requirements. Moreover, other provisions of OMB Circular A-87, such as the definition of "cost" and the contingency fund provision, indicate that merely having funds available in a general fund is not sufficient.

New York argued here that the County made a cash contribution for the leave, relying on a letter from the accounting firm that advised the County to claim FFP in the leave liability. The basis for claiming a cash contribution is not persuasive, however. It merely indicates that the total amount available in the County general fund exceeded the total amount of the recorded liability. This is not sufficient to support a conclusion that the leave liability was "funded" by the County, especially in light of the County's admission that the amounts in question are ones outside of the amounts it includes in its own budget, based on what it expects to pay out during the year. Thus, we reject New York's contention that because costs determined on an accrual basis are permitted under OMB Circular A-87, its claim for a current infusion of federal funds for a share of what amounts to a contingency fund overrides OMB Circular A-87's requirement that County and federal funds are treated consistently.⁽⁷⁾ See OMB Circular A-87, Attachment A, � C.1.

Moreover, the County is not being unjustifiably denied FFP for vacation leave expenses as that leave is included in its annual salary expenditures, for which the County presumably makes a claim for federal assistance as part of its cost allocation plan. Rather, the issue here is whether the County can claim FFP for an amount that it does not fund, but merely records as a long-term contingent liability on its books. Under the cost principles of OMB Circular A-87, we find that this amounts to holding the County to a different standard than the federal government when it comes to the funding of the accrued vacation leave. Accordingly, we sustain the disallowance.

Conclusion

For the reasons discussed above, we sustain the disallowance.

Judith A. Ballard

Donald F. Garrett

M. Terry Johnson
Presiding Board Member

1. According to DCA, accrued vacation leave began appearing on the County's financial statements in 1984, with the accumulated liability for the vacation leave reaching $9,334,324 at the end of 1995. DCA asserted that only $466,590 of this amount represented FY 1995 accrued vacation leave costs, with the Department's share of the 1995 County-wide total being approximately $90,000.

2. The allowability of costs incurred by local governments such as the County is determined in accordance with the provisions of OMB Circular A-87. 45 C.F.R. � 74.27(a).

3. OMB Circular A-87 was revised in May 1995. The references here to the various provisions of OMB Circular A-87 are to the 1981 version of the Circular because of the time period involved.

4. In response to a Board inquiry, DCA contended that the County's claim for FFP raised the issue of whether the claim was filed within the time limitations set forth in section 1132(a) of the Social Security Act. Section 1132(a) prohibits the payment of federal funds for any expenditure that has not been claimed within two years after the end of the calendar quarter in which the state agency made the expenditure, subject to specified exceptions, none of which were applicable here. DCA argued that since the claims for FFP presented by the County represented an accrued liability rather than a current period expenditure or cost, the County's current period expenditure for vacation leave was actually $466,590, with only $90,000 relating to the Department's costs. Thus, all costs incurred prior to 1995 were obviously untimely as the claims for FFP were not filed until 1997. New York argued that for the most part all the accrued vacation leave of the County employees was earned in the prior two years and thus no timely claims issues were presented. In addition, New York noted that not all of the federal programs involved were subject to the timely claims provision.

Since we have concluded after reviewing all the submissions from the parties that the claims presented here are unallowable, we therefore need not reach the question of whether the facts of this case present timely claims issues.

5. Thus, the County retained total control of the funds allegedly set aside for the vacation leave liability, unlike a situation involving reserves for pensions, where the funds are not under from state control. For other cases involving the consistent treatment of costs principle, see, e.g., Maine Dept. of Administrative and Financial Services, DAB No. 1659 (1998); West Virginia Dept. of Administration, DAB No. 1465 (1994); and Indiana Public Employees' Retirement Fund, DAB No. 314 (1982), aff'd Board of Trustees of the Public Employees' Retirement Fund of the State of Indiana v. Sullivan, 936 F.2d 988 (7^th Cir. 1991), cert. denied, 502 U.S. 1072 (1992).

6. Likewise, New York's reliance on New York State Dept. of Social Services, DAB No. 452 (1983), is misplaced. In that decision, the Board held that certain accrued vacation costs did not have to be funded prior to reimbursement by the federal government. That case, however, concerned the manner in which such vacation costs were included in calculating per diem reimbursement rates that were paid for Medicaid services, not the allowability of a claim for FFP in program administrative costs.

7. The record does not indicate that the County sought and received from the State government the type of cash contribution it seeks here from the federal government.