SUBJECT: New Jersey Department of Human Services,

DECISION

The New Jersey Department of Human Services (New Jersey) requested Board review of a determination by the Administration for Children and Families (ACF), disallowing $263,968 in federal financial participation (FFP) claimed by New Jersey under title IV-D of the Social Security Act (Act). The disallowed amount represents the federal share of certain costs associated with New Jersey's General Assistance Automated System (GAAS) and incurred by the New Jersey's Office of Information Technology (OIT) during the period July 1, 2001 through September 30, 2002. In 2003, New Jersey reclassified the costs to a cost category associated with New Jersey's Information Systems Impact Study (ISIS) project, allocated part of the costs to title IV-D, and retroactively claimed FFP under title IV-D in the costs allocated to that program. The ACF Regional Administrator for Region II originally deferred the claims and then disallowed them.

Under federal regulations, title IV-D funding is available for costs of automated data processing systems only if those costs are approved in advance and allocated to title IV-D according to an approved methodology. New Jersey argued that the methodology it used to allocate the costs had been approved as part of an advance planning process for the ISIS project. For the reasons explained below, we conclude that the methodology was approved for allocating certain development and implementation costs that were associated with the ISIS project and that could not be directly identified with a benefitting program. We further conclude that New Jersey itself initially identified these costs as costs of operation of a system that benefitted only its State-funded General Assistance (GA) program, and that New Jersey did not meet its burden to show that the costs at issue are the types of costs approved for distribution to title IV-D as part of the ISIS project and were otherwise allowable. Accordingly, we uphold the disallowance.

Legal Background

The General Assistance (GA) program in New Jersey is a state-only benefits program in which the federal government does not participate.

Title IV-D of the Act establishes a Child Support Enforcement program and provides for FFP in program costs incurred by a state in accordance with an approved state plan and federal requirements. In general, the title IV-D program seeks to achieve the goal of ensuring that non-custodial parents provide appropriate financial support for their children through four major services: locating absent parents, establishing paternity, establishing child support and medical support obligations, and enforcing support orders. Section 451 of the Act.

Allowability of costs under title IV-D, like other public assistance programs administered at the federal level by the Department of Health and Human Services (HHS), is determined according to cost principles developed by the Office of Management and Budget (OMB). 45 C.F.R. �� 74.27; 301.15(e); see also � 92.22. States are subject to the cost principles in OMB Circular A-87. To be allowable as charges to a particular cost objective (including a program), costs must, among other things, be among the allowable types of costs, be allocable to the cost objective, be adequately documented, and conform to any limitations in governing regulations. OMB Circular A-87, Attachment (Att.) A, � C.1. A cost is "allocable to a particular cost objective if the goods or services involved are chargeable or assignable to such cost objective in accordance with relative benefits received. OMB Circular A-87, Att. A, � C.3.a. Costs that benefit more than one cost objective must generally be allocated according to an approved cost allocation plan (CAP). OMB Circular A-87, Att. A, � C.3.b.; 45 C.F.R. Part 95, Subpart E.

HHS regulations recognize that the costs of automated data processing (ADP) systems may be allowable types of costs for certain programs under the Act (including title IV-D), but provide certain conditions under which FFP will be approved, in addition to other statutory and regulatory requirements for acquisition of ADP equipment and services under the specified titles of the Act. 45 C.F.R. Part 95, Subpart F. A state must obtain prior approval when it plans to acquire ADP equipment or services with total acquisition costs of $5,000,000 or more in federal and state funds, and in other circumstances (such as when it intends to claim the "enhanced" FFP rate available under some programs). Section 95.611. The state does this through submission of an Advance Planning Document (APD). There are various types of APDs, including a planning or implementation APD (which may be combined into one document), and an APD update, which is submitted annually to report project status or to report significant changes. An implementation APD must include, among other things, a proposed budget and an "estimate of prospective cost distribution to the various state and federal funding sources and the proposed procedures for distributing costs." Section 95.605.

The regulations distinguish phases of an ADP project and include the following definitions:

Development means the definition of system requirements, detail of system and program specifications, programming and testing. This includes the use of hardware to the extent necessary for the development phase.

* * *

Implementation means design, development and installation and does not include operation.

* * *

Installation means the integrated testing of programs and subsystems, system conversion, and turnover to operation status. This includes the use of hardware to the extent necessary for the installation phase.

Operation means the automated processing of data used in the administration of State plans for titles I, IV-A, IV-B, IV-D, . . . of the Social Security Act. Operation includes the use of supplies, software, hardware, and personnel directly associated with the functioning of the mechanized system . . . .

Id. Acquisition of ADP equipment and services are subject to procurement standards specified elsewhere in HHS regulations. Section 95.612.

Under these program requirements, New Jersey had the burden to document that the costs in which it was claiming FFP were allowable, including the burden to show that the costs were approved as part of the APD process and were allocated according to an approved cost allocation methodology. See, e.g., OMB Circular A-87, Att. A, � C.1.

Case Background

In 1990, New Jersey initiated a project to develop an Information Systems Impact Study (ISIS). The purpose of the study was "to define how the objective of integrating the benefit program information systems could be accomplished, and in what environment." NJ Brief at 3. Some time in late 1990 or early 1991, New Jersey submitted an ISIS APD to various federal agencies whose programs ISIS would affect, including ACF. New Jersey also submitted to the HHS Division of Cost Allocation its proposal to amend its CAP "to identify and assign the costs incurred as part of the planning phase of ISIS." Id. at 3. The letter to the Division of Cost Allocation explained that in order to track ISIS costs it was establishing new cost centers according to function, and that ISIS costs would initially be assigned to "Function F18" and then distributed based upon the APD percentages to functions associated with particular programs, including GA. NJ Appeal File at Aa6-Aa7. The Division of Cost Allocation informed New Jersey that "approval of allocation methods covering developmental systems rests with the HHS Office of Management and Information Systems" and that the submission would be forwarded to that office. NJ Appeal File at Aa8. New Jersey subsequently obtained approval for ISIS planning costs. As a result of the planning, New Jersey determined to move to what it called a "client/server environment" (to replace its existing mainframe) and to replace or modify what it called its "legacy applications." See, e.g., NJ Appeal File at Aa31.

In January 1996, New Jersey submitted an Implementation APD (IAPD) that described four components of the ISIS project: Data Warehouse Project; Common Front End/Client Registry Project; GA Eligibility Determination and Benefit Calculation Project; and FAMIS Eligibility Determination and Benefit Calculation Project. NJ Appeal File at Aa9. Exhibit X-1 summarized the costs for each of the four projects, with a separate category for "NJ ISIS Direct Costs" that was described as including planning costs under a contract with MAXIMUS and state planning costs. NJ Appeal File at Aa10. The total project costs on this exhibit were $124,151,799. Id.

The IAPD proposed a cost allocation methodology, subject to federal approval, that "will be used to estimate the allocation of the New Jersey ISIS projects system design, development, implementation, and operation costs." NJ Appeal File at Aa11. The IAPD acknowledged that the "basic philosophy of any cost allocation is that a system developed in support of a program should have its costs assigned to one program if it benefits that program exclusively, or to a common cost pool if it benefits all programs." Id. The IAPD said the allocation methodology was based on case counts and that-

the following describes how case loads were used for each project:

• The Data Warehouse and Common Front End allocation is based on a duplicated case load count.
• FAMIS Eligibility is based on an unduplicated case load count.
• General Assistance Eligibility is a direct expense to the state and does not allocate any costs to any Federal Program.
  

NJ Appeal File at Aa11. The cost allocation summary showed 100% of the costs of the GA Eligibility component being allocated to the GA program and the "NJ ISIS Direct" costs being allocated among the various programs according to an allocation percentage for each program. NJ Appeal File at Aa12-Aa14.

After the relevant HHS agencies, including ACF, had reviewed the IAPD, the Director of ACF's Office of State Systems wrote to New Jersey. He informed New Jersey that it had approval for "total developmental cost of $47,338,803" and identified this amount as state cost estimates for the four-year development/installation phase of the project. NJ Appeal File at Aa15-Aa16. This letter referred to the allocation methodology, acknowledging that New Jersey had calculated separate allocations for each of the major projects associated with the total request and then averaged the separate allocations to establish an overall allocation for the project. Id. The letter went on, however, to state that the "State must identify the actual costs incurred for activities undertaken by the approved APD in its departmental accounting system, and assign these costs to the project cost center established in accordance with the approved [CAP and] then distribute the total costs incurred for the period being reported to each of the funding sources, up to the amount approved by each funding source, according to the methodology specified in the approved APD." NJ Appeal File at Aa17.

On June 28, 2001, New Jersey requested approval of an annual update to the APD for the ISIS, submitting related documents in July and August of that year. In a letter dated September 25, 2001, the Acting Director of ACF's Division of State Systems Policy set out reasons why approval could not be given at that time, identifying a number of concerns with the ISIS project and how it related to other systems projects. One of the reasons was that the cost allocation methodology was based on outdated statistics that were not updated annually and that crossed over different measurement periods. NJ Appeal File at Aa20. A subsequent discussion of the allocation methodology between New Jersey and federal officials was confirmed in a letter from ACF dated December 27, 2001. The letter said that-

it was decided that ISIS costs were to be direct charged to the benefiting program whenever possible. In those instances where costs were to be shared, the cost pool was to be based on the program caseload for each related year of project development, with caseload data being updated annually.

NJ Appeal File at Aa23.

On February 8, 2002, New Jersey submitted a revised annual APD update (APD/U) for federal fiscal years 1997 through 2000, including revisions to the cost allocation methodology. NJ Appeal File at Aa25. The APD/U explained how new federal legislation had resulted in changing New Jersey's priorities for information technology support and had required installation of the client/server infrastructure to accommodate the systems enhancements needed to address new requirements. NJ Appeal File at Aa30-Aa31. The APD/U also explained how New Jersey had modified the plans in its IAPD and how the need for Year 2000 compliance had further delayed the project. The APD/U stated: "[W]e are prepared to complete the replacement of our legacy applications within the architecture of our implemented open systems environment . . . by completing the remaining projects according to IAPD. The only difference will be that most of the infrastructure is already in place and will not have to be phased in with the new application functionality." NJ Appeal File at Aa31.

The APD/U summarized its revised estimate of total project costs ($135,343,965), explaining that this included a request to increase development and implementation costs from $49,088,803 to $83,666,207. ⁽¹⁾ In a chapter on cost and cost allocation methodology, the APD/U presented "actual costs incurred in FFY 1997 through FFY 2000 as well as revised cost estimates for completing the project." NJ Appeal File at Aa34. The chapter reported on the status of the four ISIS projects. While this report indicated that the other three projects had been delayed, it gave the following report on the GA-related project:

• GA Eligibility Determination and Benefit Calculation Project

  The General Assistance Automated System (GAAS) is fully developed and deployed in seventeen of the state's 21 county welfare agencies and supports 566 municipal welfare departments . . . Development concluded on behalf of GAAS on June 30, 2000. Operational responsibility/systems maintenance was turned over to the Office of Information Technology (OIT) effective July 1, 2000.

NJ Appeal File at Aa35 (emphasis in original). The APD/U requested an extension of the system development/implementation phase to FFY 2003 and stated that the operational phase would begin in FFY 2004 and continue to FFY 2006. The net budget increase for the project was described as including the request to "increase Development and Implementation costs from $49,088,803 to $83,666,207" and to decrease costs in the operational phase. NJ Appeal File at Aa38. The APD/U described specific categories of cost, and an appendix listed project tasks, indicating whether they had been completed or not. With respect to cost allocation, the APD/U stated:

The State continues to utilize the cost allocation methodology approved in the IAPD for allocation of Development and Implementation costs. The cost allocation plan is based on case load counts and has calculated separate allocations on each of the major projects associated with the total request. The separate allocations considered the direct program involvement for each project. The separate allocations were averaged to establish an overall allocation for the project.

However, beginning with January 2000, cost allocation percentages are updated on an annual basis using the prior year's case load statistics. . . . For purposes of estimating outgoing years within the ISIS project, the State is using program allocation percentages based upon the latest year for which statistics are available for all affected programs.

NJ Appeal File at Aa53.

The April 11, 2002 letter approving the February 8, 2002 revised APD/U (contingent upon certain conditions being met) stated:

Within this [APD/U] you have identified increased total project costs from $124,151,790 to $135,343,965 for project development and operations through the end of Federal fiscal year 2006. At this time, we are not approving the funding request for FFY's 2004 through 2006 as funding is intended to be incremental.

NJ Appeal File at Aa111. The yearly project totals for FFYs 1997 through 2003 (as conditionally corrected) were given in a chart, showing yearly project totals as allocated across participating programs based on the revised cost allocation methodology and total ISIS costs of $83,666,207 over that period. Id. Subsequent correspondence addressed the conditions in the April 11 letter.

On October 16, 2003, the ACF Regional Administrator for Region II notified New Jersey that ACF was deferring payment of some of its title IV-D claims submitted on the expenditure report for the quarter ended June 30, 2003. The deferral included retroactive claims totaling $263,968 in FFP charged to title IV-D for the five quarters ending September 2001 through September 2002. The deferral letter stated that New Jersey had "transferred $1,814,608 in prior period General Assistance Automated System (GAAS) costs that were originally identified as Office of Information Technology (OIT) General Assistance (GA) costs to the Information Systems Impact Study (ISIS) category" and then "allocated through the ISIS Advance Planning Document Update (APDU) cost allocation methodology to various Federal and State funding sources, inclusive of the IV-D program." NJ Appeal File at Aa127. The reasons given for deferring the claims were that the allocation methodology was authorized only for "developmental costs of projects that were approved through the ISIS APD/U process," that the APD/U had stated that "development concluded on behalf of GAAS on June 30, 2000" with responsibility for operation being turned over to OIT, and that GA operational costs may not be charged to the title IV-D program. NJ Appeal File at Aa127-Aa128. The Regional Administrator stated that New Jersey was required to demonstrate that the costs were additional developmental costs for approved ISIS projects and included in the approved APD/U budget. He requested the following:

Please identify the nature of these costs by quarter and cost category, using the budget categories in the APD/U. For personnel costs, please describe the staff activity associated with the costs in question. Provide specific information regarding the nature of this activity, the ADP project involved (within the ISIS project), and the resulting functional modifications or impact on the project. If staff were working on functional modifications that could not be successfully completed, please identify those costs as such and provide specific information regarding the nature of the activity, the ADP project involved, and the intended ADP functional modifications, as well as a brief explanation of why the project modifications could not be completed. For non-personnel costs, please provide copies of the contracts and/or purchase orders and explain how the procurements benefited the project. If any of these contracts or purchase orders were previously submitted to ACF for approval as part of the conditions of the ISIS project approval, please identify the contract or purchase order by vendor and number, without resubmitting it. If other costs are involved, please explain in detail the nature of the costs and relevance to the project.

NJ Appeal File at Aa128.

New Jersey responded that the GA Eligibility Determination and Benefit Calculation Project was one of the four primary projects approved in the IAPD and that the GAAS "is the State's initiative for that project with funding made available through the IAPD." NJ Appeal File at Aa131. New Jersey pointed out that it had received approval to extend the developmental phase of the ISIS project through FFY 2003. New Jersey concluded:

In accordance with our approved IAPD update, all project costs, including GAAS, are considered developmental and are eligible for FFP in accordance with the approved IAPD cost allocation plan until the ISIS operational phase commences. At that time, an operational cost allocation plan will be submitted for approval.

NJ Appeal File at Aa132. New Jersey did not provide any detail on or documentation of the costs involved in the claims.

In a letter dated January 27, 2004, ACF disallowed the $263,968, and New Jersey appealed this determination to the Board.

Arguments on Appeal

On appeal, New Jersey relied on four points. First, New Jersey submitted that, since the approved cost allocation percentages were developed by factoring in the GA eligibility project costs, the "allocation statistics can only have meaning if they are employed to distribute total ISIS costs, including those related to the GAAS project." NJ Brief at 20. New Jersey asserted that the federal staff who approved the methodology logically reviewed the entire APD/U and the 1996 IAPD submission and were therefore aware that operational responsibility for the GAAS project had been turned over to the OIT and that the GA Eligibility project costs were included in the calculation of the allocation percentages. Yet, New Jersey said, the federal staff (including ACF staff) who reviewed the submissions and who presumably are experienced in review and approval of APDs raised no concerns or objections. To nullify their approval, or to find that the methodology was approved in error, would in New Jersey's view, "do a great disservice to the State and bring into question the competency of the Federal staff involved in this process." NJ Brief at 24.

Second, New Jersey argued that the ISIS system is not operational. New Jersey said that it "could argue that certain aspects of the GAAS project remain in developmental mode" but that it viewed the real issue as being "at what point does the developmental phase of ISIS end and the operational phase begin." NJ Brief at 25. New Jersey disagreed with ACF's position that the costs of one of the four projects could be considered operational, even though the remaining projects were still being developed. New Jersey argued that it viewed the developmental phase as encompassing the totality of the ISIS effort, citing in support its letter responding to the deferral. New Jersey said that the definitions of "development" and "operations" in 45 C.F.R. � 95.605 make no mention of "the point in time when the developmental phase ceases and the operational phase begins for a multi-faceted system," nor is New Jersey aware of any instruction issued by the federal government which addresses this matter. Lacking such federal guidance, New Jersey said, "New Jersey's belief that all projects and costs, including those of GAAS, incurred during the developmental/implementation phase of ISIS should be considered 'development' and allocated by the approved IAPDU allocation percentages should be given deference by this Board." NJ Brief at 27.

Third, New Jersey argued that by disallowing GAAS costs, ACF was retroactively nullifying the IAPD/U allocation percentages and that this resulted in a double penalty to New Jersey. New Jersey reiterated its argument that, because of the averaging process, the allocation statistics are valid only if total ISIS incurred costs for the period are distributed by the percentages. Citing the Board's decision in Oklahoma Dept. of Human Services, DAB No. 963 (1988), New Jersey argued that the Board has ruled that an approved methodology must be given deference in the absence of any compelling basis for concluding that the approved methodology was improper and has further ruled that a federal agency cannot cause a valid methodology to be changed retroactively.

Fourth, New Jersey argued that the Board's decision in Minnesota Dept. of Human Services, DAB No. 1869 (2003) also supports its position. In that case, the Board concluded that the Centers for Medicare & Medicaid Services (CMS) had improperly disallowed some of the costs of modifications to Minnesota's Medicaid Management Information System where CMS had previously approved an APD allocating the costs in their entirety to Medicaid.

ACF responded that, contrary to New Jersey's assertions, ACF was not questioning application of approved percentages to ISIS development costs and did not retroactively adjust approved allocation percentages. ACF argued that New Jersey had accumulated ISIS project costs in the F18 cost center and had previously allocated those costs based on the ISIS approved percentages. ACF asserted that it had reimbursed the IV-D share ($559,910) of $848,349 of expenditures totaling $4,903,763 that were incurred for the GAAS through the ISIS project and retroactively claimed by New Jersey on the report for the quarter ended June 2001. ACF noted that the original cost allocations showed total GAAS costs to be only $2,996,681. ACF pointed out that the disallowed amounts were on top of the $4,903,763 in GAAS costs that already were reimbursed through the cost allocation methodology.

ACF also argued that the GAAS was a separate system developed for New Jersey's GA program and that, unlike the Common Front End and Data Warehouse projects, did not involve integration of various systems, but was a separate project that had moved to the operational phase. Moreover, ACF contested New Jersey's assertion that all project costs were developmental until the operational phase begins. ACF distinguished operational costs of an integrated system, which may require completion of all projects, and operation of an individual project like the GAAS. To lock title IV-D into paying the ongoing automation costs of the GAAS until all ISIS projects are completed would "yield grossly inequitable results," ACF said, since it "would mean that the longer the projects that benefit IV-D are not completed, the more the Title IV-D program would pay for the automation costs of the projects that do not benefit Title IV-D." ACF Brief at 9. This is not what was approved through the ISIS APD/U approval process, ACF asserted. Finally, ACF denied that the disallowance results in a double penalty to New Jersey. ⁽²⁾

In its reply, New Jersey acknowledged that the original estimate of $2,996,681 was used in calculating the weighted allocation statistics, but argued that the percentages were always intended to be applied to actual expenditures rather than estimated expenditures. According to New Jersey, it would be unfair to hold New Jersey to the original estimate since ACF had approved project funding in increased amounts. In addition, New Jersey noted that ACF had failed to recognize that the limit on title IV-D funding in the April 11, 2002 letter was a global limit based upon costs assigned to title IV-D from all components of ISIS and that ACF cannot fairly seek now to impose a limit by project component. Finally, New Jersey said that New Jersey had requested and received permission to employ overall weighted allocation percentages to distribute "total ISIS costs," so ACF cannot fairly criticize it for not direct charging the GAAS component to the GA program. NJ Reply at 9.

New Jersey is correct that, properly applied, the approved cost allocation methodology should result in an allocation to title IV-D of only those ISIS project costs that benefit title IV-D. New Jersey is also correct that an approved methodology may not be retroactively changed without a compelling reason. Contrary to what New Jersey argued, however, the disallowance here does not amount to a retroactive change in the methodology, nor is it inconsistent with federal approval of the APD/U cost allocation methodology. Instead, the disallowance is fully supportable on the basis that New Jersey failed to meet its burden to show that the costs at issue were ISIS project costs, approved for allocation using the APD/U methodology and otherwise allowable.

First, during the approval process, the parties had agreed that costs that could be directly identified with a specific program should be charged to that program in their entirety, rather than being allocated through the cost allocation methodology for "shared" costs of the ISIS project. See, e.g., NJ Appeal File at Aa21. The record shows, however, that New Jersey originally classified the disallowed costs as GAAS costs of its OIT, only later reclassifying the costs to the F18 cost center used to accumulate ISIS project costs to be distributed using the cost allocation methodology. The fact that New Jersey itself originally classified the costs to GAAS (which benefitted only the GA program), rather than to the F18 account, suggests that these were costs that could be directly identified with the GA program.

Second, New Jersey did not clearly deny that the costs at issue were costs of system operation rather than costs of system development or implementation. New Jersey's assertion that approval of the APD/U allowed New Jersey to treat costs of operation incurred during the approval period as though they were costs of development and implementation and to allocate them through the APD/U approved methodology is inconsistent with the documentation from the approval process. As set out above, the APD/U requested an increase in ISIS funding for total costs through the operational phase, but identified as included in the request an increase of development and implementation costs to $83,666,207. NJ Appeal File at Aa38. Table X-4 of the APD/U also identifies this amount as the total costs of system development/implementation, and separately identifies costs of operation. NJ Appeal File at Aa39. The letter approving the extension of funding through FFY 2003 clearly identifies $83,666,207 as the total ISIS project costs that were approved. NJ Appeal File at Aa111. Thus, New Jersey could not reasonably view the federal approval as permitting it to use the APD/U allocation methodology for costs of operation. Indeed, since New Jersey had not identified costs of operation as being included in the $83,666,207, New Jersey could not reasonably think that it had approval for federal participation in any costs of operation, however allocated.

Contrary to what New Jersey appeared to argue, the spreadsheets in Appendix L of the June 2001 APD/U do not indicate that GAAS costs were among the costs to be allocated using the approved methodology, even after the GA project component was completed. Instead, they indicate merely that the allocation of common ISIS project costs included allocation of a percentage of the costs to the GA program. Continued allocation of some ISIS project costs to the GA program in the later years would be appropriate even if the GA component was complete and the program did not benefit from the activities in those years. The methodology would have likely resulted in distribution of GA costs to other programs in the early project years, since New Jersey delayed the projects benefitting those programs, but moved forward with the project benefitting only the GA program. Thus, contrary to what New Jersey argued, the result here is not inequitable.

We also reject New Jersey's claim that it lacked guidance sufficient to determine at what point development would end and operations begin. First, the terms are defined in the federal regulations set out above, and New Jersey did not point to any specific way in which it had trouble applying those definitions to its activities. Second, New Jersey's argument is belied by the detailed task lists contained in Appendix E of the APD/U, which relate tasks to particular project phases. For example, the list for the "Eligibility Determination/Benefit Calculation" project includes tasks related to operations support, expected to occur in the period 11/10/03 through 5/9/04. ⁽³⁾ NJ Appeal File at Aa71-Aa79. Yet, New Jersey provided no information to relate the costs here to ISIS project tasks it expected would occur during the development and implementation phase for which federal funding was approved.

We note that, while the APD/U stated that "[d]evelopment concluded on behalf of GAAS on June 30, 2000" with operational responsibility turned over to the OIT effective July 1, 2000, it also described implementation as having occurred in "seventeen of the state's 21 county welfare agencies." NJ Appeal File at Aa35. Thus, there arguably were some remaining implementation tasks for the GA Eligibility Determination and Benefit Calculation project, the costs of which may have been included in the approved budget total of $83,666,207 through FFY 2003. The problem is that New Jersey provided no information based on which we could conclude that the costs at issue fall within that category.

The mere fact that estimated costs of operation were included in the estimated total costs of each ISIS project used to determine allocation percentages is insufficient to establish that the costs of operating the GAAS must be allocated using those percentages. First, any inference that might otherwise arise from including costs of operation in the estimated total costs used to calculate the percentages is fully overcome by evidence in the record showing that federal approval of the methodology was limited to its application to ISIS project development and implementation costs incurred through FFY 2003, and was given with the understanding that costs identifiable with a specific program would be direct charged to that program. Second, the purpose of using estimated total costs, weighted by case counts, was merely to estimate relative benefit to the various programs of ISIS project costs. Approval of the use of the resulting percentages to allocate only ISIS development and implementation costs indicates that the methodology was nonetheless considered a fair measure of the relative benefit of those costs to the affected programs. ⁽⁴⁾

In sum, ACF is correct that its determination to disallow the costs at issue here does not somehow retroactively change the allocation method or approval, and is therefore distinguishable from the situations in the Board cases relied on by New Jersey.

Moreover, New Jersey did not meet its burden to document that the costs were allowable ISIS project costs. The mere fact that the costs are somehow associated with the GAAS is insufficient, for many reasons, including the following:

• Nowhere in the record does the ISIS project documentation equate the GA Eligibility Determination and Benefit Calculation project with the GAAS as a whole. The general purpose of the ISIS project was to transition to a client/server architecture and to replace legacy applications with new applications or modify them to be more conducive to systems integration, in order to ultimately reduce costs and improve efficiencies. New Jersey did not explain how costs associated with operation of GAAS as a separate system would support these ISIS project goals.
  
  
• Absent identification of the individual cost items, there is no assurance that the costs are allowable types of costs, for which New Jersey obtained any required approval and met any other requirements for charges to federal funds.
  
  
• Absent identification of the individual cost items, there is no assurance that the costs have not already been charged to another project. ⁽⁵⁾

New Jersey's complete failure to document these costs, in spite of the specific and detailed request for documentation in the deferral letter, would by itself be a sufficient basis for disallowing the costs as charges to federal funds.

Conclusion

For the reasons stated above, we uphold the disallowance in its entirety.

Cecilia Sparks Ford

Donald F. Garrett

Judith A. Ballard
Presiding Board Member

1. The $49,088,803 appears to be the total of the planning costs ($1,750,000) and the previously approved costs for development and implementation ($47,338,803).

2. ACF asserted that New Jersey actually underpaid its share of costs for FFYs 1997 to 2002. ACF pointed out that the allocation schedules each show and use the total ISIS costs estimated to be incurred over the life of the project, not the ISIS costs for the respective years. ACF Brief at 11, citing NJ Appeal File at Aa108, Aa109, and Aa13. According to ACF, if the estimated project cost of $2,996,681 that was used in the calculations were replaced with the actual GAAS reimbursed costs of $4,903,763, this would have yielded a higher percentage of costs to be covered with State-only funds and a lower percentage to be covered with title IV-D funds. As New Jersey pointed out, however, the ACF methodology is flawed because, in recalculating the percentages, ACF updated only the GA component, leaving intact the original estimates for the other components.

3. ACF identified this as the project originally related to the FAMIS system, rather than to the GA Eligibility Determination and Benefit Calculation project, and submitted the four task lists from the IAPD in comparison. ACF Appeal File at Ra11-Ra26. New Jersey did not disagree. Even if the task list in the APD/U related to the GA project, however, and could be considered as evidence that tasks related to application design, development, testing, and implementation had not been completed and were approved tasks, this evidence would be insufficient as a basis for reversing the disallowance since New Jersey provided no evidence that the GAAS costs at issue related to any of the listed activities.

4. Distribution bases used to determine allocation percentages are not necessarily equivalent with the costs that are to be distributed. For example, total direct costs that are identifiable with particular cost objectives are often used as a distribution base to calculate percentages used to allocate indirect costs (that is, costs that cannot be identified with any particular cost objective) among objectives. Here, as New Jersey recognized, the total costs used were only estimates, not actual costs, and therefore were not a precise measure of relative benefit in any event.

5. This is a concern since the record indicates that New Jersey had several ongoing projects that potentially overlapped with the ISIS project. For example, with respect to some PCs purchased as part of the ISIS project, HHS sought assurance that the PCs had not been charged to a different project, called the ACSES project. NJ Appeal File at Aa21.