GAB Decision 211
August 31, 1981 New Mexico Department of Human Services; Docket No.
78-154-NM-SS Settle, Norval; Teitz, Alexander Garrett, Donald
The New Mexico Department of Human Services (Grantee) filed an
application for review of a November 14, 1978 decision by the
Commissioner of Social Security. In that decision, the Commissioner
affirmed the decision of the Regional Commissioner, Region VI, Social
and Rehabilitation Service (SRS) to disallow $781,149 in Federal
financial participation (FFP) claimed for costs to operate the Grantee's
food assistance program for the period July 1, 1968 through June 30,
1973. /1/
There are no material issues of fact in dispute. We have, therefore,
determined to proceed to decision based on the written record, which
consists of: the reconsideration record developed pursuant to 45 CFR
201.14, the Grantee's application for review, the relevant Audit Report
(Audit Control No. 06-50021), pertinent correspondence between the
parties, the Grantee's application for review, the relevant Audit Report
(Audit Control No. 06-50021), pertinent correspondence between the
parties, the Grantee's response to an Order to Show Cause issued by the
Board Chair, and the parties' responses to the Board's request for
additional information. For the reasons stated below, we conclude that
the decision of the Commissioner should be upheld.
Statement of the Case
Auditors assigned to the Department of Health, Education, and Welfare
(now HHS) Region VI Audit Agency conducted an audit of the Indirect Cost
Proposal (ICP) submitted by the Grantee for the fiscal year ended June
30, 1973. The purpose of the audit was to determine if the costs
included in the ICP were allowable under the criteria set forth in
Office of Management and Budget Circular No. A-87 (effective July 1,
1969) and if the methodology and procedures followed in accumulating and
distributing the costs were in accordance with sound accounting
principles.
(2) During the review of the Income Maintenance account included in
the ICP, the auditors determined that the Grantee had incorrectly
charged public assistance programs under the Social Security Act with
certain unallowable direct and indirect costs of its food assistance
program. These costs included charges related to the certification of
households in which no members were public assistance recipients, the
distribution of food, and other services provided to recipients of the
food assistance programs. Due to the significance of the amount alleged
to be incorrectly charged, the review was expanded to include the period
July 1, 1968 through June 30, 1972. The Audit Report dated May 1, 1975
concluded that the total unallowable cost amounted to $781,149 for this
expanded period of time.
The Grantee made a financial adjustment in Quarter II FY '74 of
$112,760 leaving a balance due of $668,389, but continues to dispute the
entire $781,149 disallowance.
Authority
The Grantee and HHS jointly fund public assistance programs; however,
the extent of HHS's financial participation in the food assistance
programs is limited. The allowability of these costs was set out in
Part V of the Handbook of Public Assistance Administration (HPA),
effective July 28, 1965. /2/
Handbook of Public Assistance Administration, (HPA), Part V, Sec.
4810:
Federal Financial Participation
For the purpose of this section, the term, "public assistance
recipients," means applicants for or recipients of assistance under the
federally aided State public assistance programs, including medical
assistance for the aged.
(3) Federal financial participation is available for matching State
and local welfare agency expenditures for the initial certification and
recertification of households as eligible (1) to obtain coupon
allotments under the food stamp program or (2) to receive foods under
the direct distribution program of the Agriculture Marketing Service,
when one or more members of the household are public assistance
recipients.
B. Federal financial participation is not available for matching
State or local welfare agency expenditures for the certification of
households in which no members are public assistance recipients.
C. Federal financial participation is not available for matching the
State and local welfare agency expenditures for costs incident to the
acceptance, storage, protection, issuance of, and accountability for,
food coupons; nor for the costs of storage, packaging, and distribution
of foods under the surplus food program. (emphasis added)
HPA, Part V, Sec. 4820:
Cost Allocation Plan
If the State agency and/or one or more local agencies makes
expenditures of the kind described in V-4810, items A, B, and C, above,
the cost allocation plan must indicate how such costs are to be handled
in making the Federal claim. . . The cost allocation plan must be
amended, if necessary, to give effect to this intent and to exclude from
the Federal claim all costs identified under V-4810, items B and C.
(emphasis added)
Discussion
Issue #1. Whether the Limitations on Reimbursement in HPA Sec. 4810
Are Contrary to the Social Security Act
Grantee contends that HHS is authorized to pay for not only the costs
of certification and recertification of public assistance households as
eligible for food coupons, but also other associated costs of the food
assistance programs. Grantee's Memorandum, May 11, 1981, p. 2. Grantee
argues that the food assistance activities stem from the same
legislative provision and, therefore, any distinction by HHS between
these costs in providing FFP under HPA Sec. 4810 is "purely artificial."
Id. at p. 3.
(4) In support of its argument, the Grantee argues that HHS's
authorization to participate in the costs of administering the food
stamp program comes not from the Food Stamp Act, but from the Social
Security Act and, therefore, any restrictions on that participation must
be found in the Social Security Act. Grantee cites as statutory
authority for HPA Sec. 4810 sections 1, 401, 1001, 1401, and 1601 of the
Social Security Act. Grantee notes that the following language is
contained in each of those sections:
For the purpose of enabling each State to furnish financial
assistance, as far a practicable under the conditions in such State . .
. to furnish rehabilitation and other serices . . . there is hereby
authorized to be appropriated for each fiscal year a sum sufficient to
carry out the purposes of this part.
Grantee agrees that each of the titles provides for the provision of
services to individuals who meet certain eligibility requirements.
Grantee further argues that certification and recertification is only
one step in the provision of the service, and that it must necessarily
include the costs of receiving, storing, distributing and accounting for
food coupons. Therefore, since all these activities stem from the same
legislative provision, any distinction made under HPA Sec. 4810 becomes
"arbitrary and capricious." Id.
The Agency argues that HPA Sec. 4810 is authorized by the
"Appropriation" sections of Titles I, IV, X, and XIV of the Social
Security Act. Agency's Memorandum, May 8, 1981, p. 1. The Agency
contends, however, that the justification for paying the costs of
certification and recertification of a public assistance applicant's
eligibility for food stamps cannot be extended to include the costs at
issue here. The Agency argues that the determination of eligibility for
the food assistance program for these households is "inextricably
enmeshed" in the determination of eligibility for the public assistance
program so that few, if any, additional costs result. Id. at p. 2. The
Agency states further that the fact that the food assistance program so
that few, if any, additional costs result. Id. at p. 2. The Agency
states further that the fact that the food assistance statutes do not
authorize the United States Department of Agriculture (USDA) to match
the costs of certifying public assistance households, there is an
implied recognition "that certification could be accomplished without
additional cost in the determination of public assistance eligibility."
Id. For these reasons the Agency can provide FFP for these activities.
The Agency argues that the food assistance costs are not intermingled
in public assistance programs, but are separate. Therefore, the Agency
asserts that "(unlike) the costs associated with certification and
recertification of public assistance households, there is no
justification for matching these food assistance program costs." Id. at
p. 3.
(5) The Board rejects the Grantee's argument that HHS is authorized
to pay for all the costs of the food assistance program. Sections 1,
401, 1001, 1401, and 1601 of the Social Security Act authorized
appropriations only for the public assistance titles. Costs incurred in
the administration of programs other than the public assistance programs
are not subject to FFP under the public assistance titles of the Act.
See, California Department of Benefit Payments, Decision No. 160, March
31, 1981.
The Secretary of HHS determined that FFP was available under the
public assistance titles for the initial certification and
recertification of public assistance households as eligible for food
coupons. HPA Sec. 4810A. In light of the Secretary's duty under the
public assistance titles to furnish assistance and other services
consistent with the provisions of the individual titles, it was not
unreasonable for the Secretary to have determined that FFP would be
available in the limited situations prescribed in HPA Sec. 4810A. See,
Connecticut Department of Social Services, Decision No. 183, May 29,
1981. Such a provision recognizes that certification under the
prescribed circumstances benefits the public assistance programs while
incurring little, if any, additional costs for either the food
assistance or public assistance programs. The provision is not
inconsistent with the relevant sections of the Social Security Act and
furthers the efficient administration of the functions with which the
Secretary is charged under the Act. Section 1102 of the Act.
The disallowed costs in this case were direct and indirect costs
associated with certifying non-public assistance recipients for the food
stamp program, distributing food, and other services provided to
non-public assistance recipients of the food assistance program. These
costs were incurred in the administration of food programs and are
outside the scope of the public assistance programs. Congress
established these food programs in legislation apart from the public
assistance titles of the Social Security Act and provided for their
administration at the Federal level by the USDA, and not HHS which
administers the public assistance titles. Therefore, there is no
justification for HHS's participation in the payment of the costs
incurred solely in the administration of those food programs.
Issue #2. Whether the Disallowance Constitutes a Retroactive
disapproval of the State's Cost Allocation Plan.
The Grantee argues that HHS had the opportunity to review and approve
the ICP's for the fiscal years 1969-1973 and did eventually approve
them, thus causing the Grantee to rely on the approval and to proceed
with what is now termed an unallowable practice.
(6) The identical page, page 16, was included in the Grantee's ICP to
describe the cost allocation in the Food Assistance section for the
years 1969 through 1972. Page 16 contained the following language:
4. Food Assistance Section: Direct expenses with allocated State
Office administrative costs will be distributed to the Food Distribution
Program, the Food Stamp Program and the Federal Food Distribution
Program on the percentage distribution of employees in these programs at
the end of each quarter.
Costs chargeable to the Food Distribution Program and the Food Stamp
Program will be distributed to the Public Assistance Program AABD and
AFDC and to non-financial assistance food program (categories 29 and 39)
based on participation data compiled by the Statistical Analysis
Section. 50% Federal Financial Participation will be claimed on costs
charged to AABD and AFDC.
Grantee in its March 16, 1981 Memorandum in Response to the Order to
Show Cause disputes the tentative finding of the Board that the
disallowance constitutes a disapproval of costs rather than a
retroactive disapproval of the Cost Allocation Plan (CAP). While the
Grantee tentatively agrees with the Board's assessment of the second
paragraph cited above, /3/ Grantee contends that the fair import of the
first cited paragraph has been overlooked by both the Board, in the
Order to Show Cause, and the Agency on four separate occasions, November
15, 1968, January 7, 1970, April 19, 1971, August 2, 1972, when the
Grantee submitted its ICP to HHS's Division of Grants Administration
Policy. Exhibit 12 of the Reconsideration Record. Grantee argues that
this paragraph "states in a straightforward manner that direct expenses
will be allocated to the various food programs," thereby sufficiently
putting the Agency on notice of the Grantee's practice of charging
indirect food assistance costs to the public assistance Income
Maintenance account. Grantee's Memorandum, March 16, 1981, p. 2.
The Agency, in its May 8, 1981 response to the Board's Request for
Additional Information, contends that there was no actual Agency
approval of the Grantee's ICPs for 1969-1972 upon which the Grantee
could rely.
(7) Although the Agency agrees with the Grantee's claim that the ICPs
were submitted on four separate occasions, the Agency argues that the
ICPs were not approved following those submissions. In addition, the
Agency asserts that there was no tacit approval of the Grantee's
unallowable practice. The Agency agrees with the Grantee that the first
full paragraph on Page 16 "states in a straightforward manner that
direct expenses will be allocated to the various food programs."
Grantee's Memorandum, March 16, 1981, p. 1-2. The Agency contends,
however, that such a statement "cannot be construed as giving the Agency
notice that the State would be charging unallowable food assistance
costs to the Income Maintenance account for public assistance." Agency's
Memorandum, May 8, 1981, p. 2.
The Agency argues further that if the Grantee had followed the
provisions of its CAP the food assistance costs would be directly
charged to the proper program or set aside as unallowable before the
allocation process was initiated. Therefore, the CAP was read by the
Agency as assuring that the State was charging only allowable costs.
The Board concludes, based on the evidence in the record, that the
Grantee has now shown that the Agency actually or tacitly approved the
charging of unallowable food assistance costs to the public assistance
Income Maintenance account.
Grantee argues that the ICPs were submitted annually for the years
1969-1973 and the Agency had the opportunity to review and approve the
plans and eventually did so. However, Grantee has submitted no evidence
indicating when the plans were eventually approved. /4/ The record does
show that the revised ICPs for 1969-1972 were submitted for retroactive
approval on August 2, 1972. Exhibit 12 of the Reconsideration Record.
In this context, the Board finds that the Grantee has presented no
evidence of actual approval by the Agency upon which it could rely for
charging these unallowable food assistance costs to the public
assistance programs.
Further, the Grantee's argument that approval for charging the
unallowable food assistance costs to the public assistance programs
could be inferred, because the Agency did not question the treatment of
these costs, incorrectly implies that the ICPs for the years 1969-1973
clearly indicate that these costs would be treated in this fashion. In
reading the two paragraphs, the Board finds that neither can be
interpreted as describing a practice (8) of charging unallowable costs.
The first paragraph simply states that direct expenses will be allocated
to the various food programs. The second paragraph, as the Board has
previously stated and the Grantee has agreed (Grantee's Memorandum,
March 16, 1981, p. 1) is a description of a general method of
allocation, and not a description of individual costs to be charged.
Neither paragraph contains language which would have put the Agency on
notice of the Grantee's unallowable practice. This is especially so
when the paragraphs are read in light of other provisions of the CAP
describing treatment of direct charges (section 5320.1) and
certification that indirect costs are in accordance with statutory
restrictions. Certification page of CAP. It was, therefore, reasonable
for the Agency to have assumed that the Grantee, in participating in the
public assistance program, was complying with the provisions of the HPA.
Accordingly, the fact that these improper costs were not detected by the
Agency does not constitute a tacit approval of Grantee's practice of
charging the public assistance program with food assistance program
costs. Therefore, we conclude that the Agency was not on notice of, and
did not approve by silence, Grantee's practice of charging food
assistance costs to the public assistance programs. Such a finding
would be particularly unreasonable in light of the HPA provision
requiring Grantee to identify how it will handle these types of food
assistance costs. HPA Sec. 4820.
In view of the Board's findings above, the Grantee's second argument
of retroactive disapproval is not persuasive. The above-quoted portion
on page 16 of the Grantee's CAP was not being disapproved; only the
improper charges were disapproved. Costs of certification and
recertification of households as elibible for food stamps, allowable
under the HOPA, are properly chargeable under this section of the ICP,
but other costs of food coupons, as set forth in Sec. 4810(C) of the
HPA, are not.
Issue #3. Whether the Indirect Costs are Allowable
The Grantee argues that all of the "indirect costs FFP" ($169,096)
represented in the $781,149 disallowance was properly chargeable to HHS.
Grantee alleges that the Federal auditors did not completely follow the
CAP, which provided for the distribution of indirect costs on a "step
down basis", to the final step but instead disallowed the costs at the
food program level. The Board stated at its November 26, 1980 Order to
Show Cause that the Grantee's argument, if documented and accepted,
might require an adjustment to some of the disallowed costs.
(9) The Grantee submitted a Justification Paper dated January 26,
1981 which purports to explain the disallowed indirect costs. The
Grantee states that:
(The) disallowed direct costs benefited the Financial Assistance
Programs OAA, AFDC, ANB and AOTD and were distributed based on commodity
certification and Food Stamp Participation . . . In our view, the above
disallowed indirect costs were necessary and reasonable for the proper
and efficient administration of the Financial Assistance programs and
are proper charges as allowed under Section 4810(A) of the HPA.
The Agency has argued that it is irrelevant whether the indirect
costs were necessary and reasonable; they are unallowable under the HPA
except for certification and recertification costs. In addition, the
Agency contends that its auditors followed the Grantee's ICP completely
and that the step-down process did not eliminate unallowable costs.
The board concludes that the Agency was reasonable in requiring the
State to eliminate from the pool unallowable food assistance costs
because the Grantee has not shown that it step-down method of allocating
costs excluded the unallowable costs from claims for FFP.
It is a basic principle of grants law that to be allowable under a
grant program, costs must be necessary and reasonable for proper and
efficient administration of the grant program, be allocable to that
program, and conform to any limitation or exclusion set forth in federal
laws or other governing limitations as to types or amounts of cost
items.A cost is allocable to a particular cost objective to the extent
of benefits received by such objective. See, e.g., Office of Management
and Budget (OMB) Circular No. A-87, Attachment A, Section C. 1 and 2.
The HPA specifically requires that the Grantee's cost allocation
plans indicate how the unallowable food assistance costs are to be
handled in making a federal claim, and directs that the plans be
amended, if necessary, to insure that these costs are excluded from
federal claims. See, HPA Sec. 4810, 4820.
While the Grantee claims that its allocation formula "pulled out"
the
unallowable food assistance costs and charged them to an account which
does not receive federal funds, the Grantee has not presented any
persuasive evidence to support this position.Since the HPA required (10)
the Grantee to ensure that no FFP was claimed for these costs, and there
is no relationship in this instance between the necessity and
reasonableness of the costs and the allowability of the costs under the
HPA, the Grantee has the burden of showing that its method of allocation
did not result in improper claims for FFP. See, California Department
of Benefit Payments, Decision No. 160, March 31, 1981. The Grantee has
not shown how its method of allocation excluded the unallowable food
assistance costs from claims to the public assistance programs.
Issues #4. Whether Time Limitations Precluded the Auditing of this
Period
The Grantee has argued that HHS is precluded from auditing any
records dating prior to three years preceding the audit pursuant to 45
CFR Part 74 and 45 CFR 205.145. Grantee asserts that these regulations
operate as a three year statute of limitations on federal government
review of Grantee records, thus prohibiting an audit of program years
1968 and 1969.
The Grantee states that 45 CFR 205.145 was revised "to bring it into
compliance with Office of Management and Budget Circular A-102 dated
October 19, 1971 which directed that no later than July 1, 1972 all
federal agencies reduce the record retention period to three years
unless there were unresolved audit findings." Grantee's Memorandum,
March 16, 1981, p. 4. The Grantee contends that although the effective
date of the amendment is July 1, 1972, "(no) place in the regulation is
there a statement to the effect that it is inapplicable to periods prior
to July 1, 1972." Id.
The normal rule is for legislation and regulations to be applied
prospectively to events and agreements which occur later. See, e.g.,
Greene v. United States, 376 U.S. 149, 159-160 (1964). Since there is
no clear intention that these regulations should operate
retrospectively, the Board will follow the normal rule and apply them
prospectively. This is especially true here where a retrospective
application of the regulations would effectively cut off substantive
rights of the Agency which it had at the time the grants were awarded.
The regulations relied on by the Grantee were not in effect until
1972 for Part 205 and 1974 for Part 74. They, therefore, do not apply
to the program years 1968 and 1969.
(11) During the period in question, the retention of record provison
in effect was contained in the HPA at Sec. 3411.1(6). It provided that:
All records relating to the State's accountability for expenditures
made pursuant to Titles I, IV, X XIV and XVI of the Social Security Act
must be kept for a sufficient period of time to permit examination by
the administration through the Federal fiscal audit, the administrative
review, and the personnel review, or for 3 years, whichever is later. .
. . (emphasis added)
Although this provision was superceded in 1971 by SRS Program
Regulation 10-11, later to become 45 CFR 205.60, it is controlling for
the relevant time period.
It is apparent from a reading of this provision that the burden was
on the Grantee to retain the records for a minimum of three years or
until the federal government has had an opportunity to audit them, as is
the situation in the present case. There is no corresponding duty
placed on the Agency to conduct the audit within a specified time.
Therefore, the Grantee's argument is without merit.
Conclusion
For the reasons stated above, we sustain the disallowance of FFP in
the full amount of $781,149. /1/ The Social Security Administration
(Agency) is the successor agency to the Social and
Rehabilitation Service (SRS) for purposes of cash assistance programs
previously administered by SRS. /2/ The Acting Commissioner of Social
Security's November 14, 1978 decision to uphold the disallowance
determination includes as "conclusions of law" that, although HPA
provisions are not regulations, they have the force and effect of
regulations, citing King v. Smith, 392 U.S. 309, 317 (1968). The
Grantee questioned the continuing validity of the HPA in its application
for review, but did not present any supporting arguments in response to
the Board's Order to Show cause which tentatively found the HPA binding
on the parties. /3/ The Board found tentatively in the Order to
Show Cause that the second paragraph appeared "to describe a general
method of allocation and not a description of individual costs to be
charged." /4/ The Agency states that it has been unable to
locate any evidence of such approval in its records. Agency's
Memorandum, May 8, 1981, p. 4.
OCTOBER 22, 1983