GAB Decision 314
June 24, 1982 Indiana Public Employees' Retirement Fund; Docket No.
81-141 Ford, Cecilia; Settle, NorvalTeitz, Alexander
The State of Indiana Public Employees Retirement Fund (appellant)
appealed the decision of William C. Moran, Hearing Officer, /1/
regarding contributions to the Public Employees' Retirement Fund (PERF)
for the years 1972 through 1978.
In dispute is $6,025,681 which includes the following items: (1)
$5,049,837 that the Indiana Employment Security Division (IESD)
contributed to PERF; and, (2) $975,844 paid by other federally
supported programs to PERF. Appellant raised a number of legal and
factual arguments in support of its appeal, as noted below, but not all
of the arguments pertain to both parts of the disallowance.
For reasons discussed below, we sustain the Hearing Officer's
decision. Our decision is based on briefing and documents submitted by
the appellant and the respondent, and the transcript of a hearing
conducted by the Board in this case. Neither party wished to file
post-hearing briefs.
I. Background
PERF was established in 1945 as both a retirement fund and an agency
in accordance with Indiana law. Four different types of organizations
contribute to PERF:
(1) State departments financed solely by State funds;
(2) State departments financed partially by federal funds and
partially by State funds;
(2) (3) One department financed solely by federal funds (IESD); and,
(4) Municipalities and other State political subdivisions.
IESD's operations are 100 percent federally financed. Prior to 1972,
IESD contributed to PERF at the same rate as the other State agencies.
However the State contribution level to PERF on behalf of the other
State agencies was at an artificially low level as determined by the
State legislature because the State's appropriation was not in
accordance with actuarially determined figures. Since IESD contributed
at the same rate as other State agencies did under the appropriation,
IESD, as well as the other State agencies, faced a serious shortage of
funds and it became evident that the retirement account would be
depleted in a short period of time. Because of actuarial factors, IESD
would deplete its account more rapidly than others. /2/
To avoid this occurrence, appellant informed IESD that subsequent to
1972 IESD was to begin funding its PERF liability in accordance with an
actuarially computed rate. The rate was developed using a 15 year
amortization period which resulted in a significant increase in IESD's
contribution to PERF. During the same period, the other State agencies
continued to contribute to PERF based on State Legislature
appropriations, not actuarially computed amounts.
Federal audits conducted on various State agencies disclosed that the
federal government was contributing through IESD at an actuarial rate
that was higher than the amounts appropriated by the State legislature.
Therefore the Department of Health and Human Services as the lead audit
agency conducted an audit of the entire PERF agency. The audit covered
the period from July, 1971 through June 30, 1978.
Pursuant to the audit report (JAF, pp. 42-77) the Agency determined
that federal contributions on behalf of IESD to PERF at the actuarial
rate exceeded by $5,049,837 the amount that would have been contributed
if the State appropriation rate had been used. In addition, the Agency
determined that federal contributions on behalf of other federal
employees working in State departments were excessive in the amount of
$975,844.
(3) The Agency's determination was based on the provisions of Federal
Management Circular (FMC) 74-4, Section C.1.d. /3/ Those provisions
provide that:
1. Factors affecting allowability of costs:
to be allowable under a grant program, costs must meet the following
general criteria:
d. 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 a part.
The Agency determined that appellant's computation of IESD's rate of
contribution to PERF in accordance with an actuarial study was
inconsistent with the State's appropriation method of contributing to
PERF and therefore represented inconsistent treatment of
federally-funded and non-federally-funded activities. /4/
II. Discussion
A. Whether the federal contributions were consistent with State
contributions
Appellant did not contest that the provisions of FMC 74-4, Section
C.1.d. apply to this dispute or that a separate rate was used in
calculating IESD's contribution to PERF. Appellant contended, however,
that its (4) use of a separate rate for IESD was appropriate under the
circumstances as they existed. Appellant advanced two arguments in
support of its position.
Appellant first contended that IESD was recognized as a separate
legal entity for retirement fund purposes. Appellant is apparently
arguing that the consistency of treatment requirement of FMC 74-4 has no
application to IESD, as a separate entity, since IESD's unfunded
liability could not be compared against that of another entity. /5/
Appellant asserted that as far back as 1959 the federal government
recognized the separate entity status of IESD. Appellant Brief, p. 4.
Appellant cited portions of a July 30, 1959 memorandum which discussed
the treatment of IESD in relation to the other members of PERF, JAF pp.
16-19 and contended that the memorandum confirmed the appellant's
position that IESD is a separate individual retirement system.
Appellant cited the following excerpt from the memorandum to support its
position.
We agree with the position taken in the 1945 Borus letter, that the
ES agency liability be calculated separately from all other units. We
recommended that this be continued. . . . Consequently, the FS account
will in fact remain a separate individual retirement system which is
part of a statewide system only for administrative purposes. This will
assure that funds granted by the Federal Bureau of Employment Security
for payment of the ES agency's retirement costs will be used solely for
that purpose.
JAF, p. 19. (5) Respondent asserted that finding IESD as a separate
entity would not be dispositive of this case. Tr., pp. 17-18.
Respondent argued that IESD would still have to conform to the
consistency requirements of FMC 74-4. Id. at p. 18.
Respondent contended, however, that even if a finding of IESD as a
separate legal entity would be dispositive of this case, that is not the
situation here. Respondent disputed appellant's interpretation of the
1959 memorandum. Respondent contended that the memorandum, when read in
its entirety, stood for the proposition that if you compute IESD's
unfunded liability separately, then you must calculate the liability of
all other components of PERF separately to accord consistent treatment.
Respondent Brief, p. 2; see also, Tr., p. 120. Respondent argued that
one rate was used for IESD and only one rate for all other State
agencies and, therefore, appellant did not comply with the terms of the
memorandum. Id.
Respondent also contended that IESD's contributions to PERF became
part of a homogeneous fund.Respondent argued that this indicated that
the State recognized IESD as part of PERF, and not as a separate entity.
The present Assistant Executive Secretary of PERF, Steven Meno,
testified that IESD's contribution to PERF did not become part of a
homogeneous fund, but instead was segregated. Tr., p. 74. He stated
that:
Separate ledger sheets are (kept) showing all revenue and expenditure
items for the Employment Security Division.
Id. at pp. 74-75.
He stated that the funds were commingled for investment purposes
only. Id. at p. 75.
On cross-examination Mr. Meno conceded, however, that the additional
interest earned from the infusion of federal dollars as a result of the
higher contribution rate of IESD benefited all of the participants of
PERS, not just IESD. Id. at p. 84.
The Board finds that appellant's argument that IESD was a separate
legal entity is not supported by the record. The testimony of both the
former and present Assistant Executive Secretaries was that the only
real differences between IESD and other State agencies was the fact that
IESD was 100 percent federally funded. See, Tr., pp. 32, 82.
(6) The former Assistant Executive Secretary acknowledged on
cross-examination that IESD employees received their paychecks from the
State of Indiana, received the same vacation benefits, same paid
holidays, same sick benefits, and same pension benefits as State
employees, and were subject to the same FICA withholding. See, Tr., pp.
29-31. These factors, although not dispositive of this issue are
persuasive indicia of IESD being an agency of the State. Furthermore,
there is no evidence in the record to show that IESD's employees are
treated differently from State employees.
We also do not agree with the appellant's argument that the 1959
memorandum recognized IESD as a separate legal entity. On its face, the
section of the memorandum cited by appellant, see, p. 3 of decision,
indeed appears to recognize the separate entity status of IESD.
However, a complete reading of the 1959 memorandum makes it abundantly
clear that appellant's reliance on this single section is misplaced as
it is taken completely out of context.
The purpose of the memorandum was to look at methods of calculating
IESD's equitable share of its retirement liability to be paid to PERF.
See, JAF, p. 16. The final recommendation given in the memorandum was
that IESD should be accorded separate treatment for calculation purposes
in determining its liability to PERF. However, this does not mean that
IESD was to be separate and distinct in comparison to the other
contributors to PERF. On the contrary, it is clear that the intent of
the memorandum was to assure that IESD was treated equitably vis a vis
the other members of PERF. This can be seen in the recognition that
under the method of calculation adopted for IESD in the memorandum an
adjustment would have to be made to assure equal contributions of the
PERF components. The memorandum states that:
Under this set-up, it is also necessary to increase or decrease the
funded portion of the (IESD) liability to the level of the other State
departments.
JAF, p. 19.
As stated in the audit report, and not contested by appellant, an
adjustment was made to IESD's contribution to assure that it was equal
in amount to that of the other State departments, regardless of
actuarial differences. See, JAF, p. 52. Ironically, it was the
underfunding of the State departments and IESD's funding at that same
level that precipitated IESD's funding shortage.
(7) In conclusion, we find that the 1959 memorandum recognized that
IESD's liability should be calculated separately, but IESD is not a
separate legal entity. In addition, there is no other evidence in the
record to support the conclusion that IESD is sufficiently separated as
a legal entity to justify inconsistent treatment under the cost
principles. On the contrary, the evidence shows that for all practical
purposes IESD was a State department. Therefore, we find that IESD was
not a separate legal entity.
B. Whether the State complied with the consistency requirements of
FMC 74-4
Appellant contended that the "consistency" requirement in FMC 74-4,
Section C.1.d. should be interpreted as requiring that:
a uniform 'procedure' be applied across the spectrum of public
employment to determine the potential retirement liability.
Appellant Brief, p. 7.
Appellant contended that, with regard to the funding levels of PERF,
a uniform procedure was used in determining the contribution rates of
the different components of PERF.
Appellant asserted that separate actuarial rates were computed for
the individual components of PERF. Mr. Meno testified that a formula
(see, JAF, p. 41) for computing the contribution rate of an employer is
devised and applied to all components of PERF. Tr., p. 67. Mr. Meno
described the process of developing the formula as follows:
(You) are looking at each and every individual employee, their date
of hire, their salary, their current age, how many years they
potentially could work, and from this, using a consistent procedure of a
uniform cost method, which we are required to follow by statute, we
develop what the accrued liability is.
Id.
Mr. Meno testified that the application of this formula from year to
year to a given department can result in a different contribution rate.
Id. He stated, for example, that in 1971 IEDS's contribution rate was
13.77%, while in 1981 it was 7.25%. Id. at p. 68. He stated this is
because certain actuarial assumptions are reviewed and revised on a
yearly basis. Id. He stated that, for example, salaries and interest
may require adjusting so that "your target is reached so that in this
case the liability is funded at the end of the period." Id.
(8) Appellant contended that the higher contribution rate of IESD as
compared to other State departments was the result of a lower turnover
rate among IESD's employees and the corresponding longevity of its
employees. Appellant submitted a series of charts and graphs which
allegedly show a substantial difference in the turnover rates between
IESD and other State departments. See, JAF, pp. 33-40. Appellant
argued, and the respondent does not contest, that the lower turnover
rate results in a higher liability for retirement fund purposes.
Appellant Brief, p. 8. To meet this increased liability, appellant
contended that it was necessary to fund IESD on a shorter amortization
period.
Respondent contended that the State's treatment of IESD was
inconsistent with its treatment of other State agencies. Respondent
argued that while IESD's unfunded liability was determined on an
actuarially calculated basis over a 15 year period, all other State
agencies were amortized over a 30 year period and actually contributed
based on an appropriation from the State legislature. Respondent Brief,
p. 3. This appropriation was consistently below the amount needed to
fund the retirement program. Respondent argued that the use of
different amortization periods is inconsistent treatment.
Respondent did not take issue with the lower turnover problem of
IESD, which resulted in higher retirement costs, but stated simply that:
The point, however, is that the same procedures were not used for
IESD as were used for all other departments. . . .
Respondent Brief, p. 3.
Appellant contended that IESD's amortization period of 15 years is
not unique as municipalities within the State were also on a 15 year
amortization period. Apparently, appellant was arguing that IESD could
be compared to municipalities for purposes of the "consistency"
requirement.
Respondent argued that IESD did not meet the definition of a
political subdivision as defined in the State of Indiana code and,
therefore, IESD could not be compared to State municipalities for
purposes of meeting the FMC 74-4 consistency requirement. See,
Respondent Brief, p. 1.
We agree with respondent that appellant did not use the same
procedures in determining the contribution rates of the various
components of PERF. Appellant has producded a great deal of evidence
showing how actuarial formulas are developed and applied to the
components of PERF. This presentation would be persuasive except for
the fact that while the (9) actuarial rate was applied to IESD, it was
ignored for the other State agencies. The State agencies continued to
pay at a rate arbitrarily determined by the State legislature's
appropriation process. In fact, Mr. Meno testified that the State
agencies did not begin paying at the actuarially determined rate until
July 1, 1981, a full 10 years after IESD. Tr., p. 78.
From 1972 on, IESD's contribution rate was computed based on an
actuarially computed rate amortized over 15 years. On the other hand,
the State agencies contributed, not on an actuarially determined rate,
but on what the State legislature happened to appropriate. It is
irrelevant that the same procedure of determining an actuarial rate is
used when in fact that rate is ignored for the State agencies but
applied to IESD. Consistency of treatment requires not only the use of
the same procedures in determining the contribution rate, i.e., an
actuarial determination, but also, the actual contribution in accordance
with the actuarial determination. To require less would render the
consistency requirement meaningless in its application.
We likewise find appellant's arguments concerning the low turnover
rate of IESD unpersuasive. It was undisputed that this lower turnover
rate results in somewhat higher retirement costs. However, while the
loser turnover rate contributed to IESD's funding problems, the major
cause of IESD's problems was the consistent underfunding of its
retirement liability prior to 1972 by paying at the same rate as the
other State departments. It was not disputed that PERF's response to
IESD's funding problems was actuarially sound. However, it was
disparate treatment. While IESD began paying at an actuarially
determined rate, the State agencies continued to pay at an appropriated
rate that was far below the actuarial rate.
We find unpersuasive appellant's argument that IESD's 15 year
amortization period is consistent with that of the State municipalities.
/6/ As respondent argued, and appellant did not contest, IESD clearly
does not meet the definition of a political subdivision as set out in
the Indiana code. More imortantly, except for the fact that IESD is 100
percent federally funded, IESD has all the indicia of a State agency.
Since appellant has been unable to produce any evidence to distinguish
IESD from other State agencies within PERF, we find that IESD's
contribution should be compared to those State agencies. As discussed
above, those contributions were computed differently than that of IESD
and, therefore, were inconsistent.
(10) C. Additional Arguments
Appellant raised two technical legal arguments which pertained to
both parts of the disallowance.
(1) The Timeliness of the Audit
Appellant contended that the audit of other federally supported
programs went back six years -- double the three year period appellant
was required to keep financial records and documents under FMC 74-7.
Appellant argued that it was prejudiced by the lateness of the audit.
Appellant asserted that an example of such prejudice is that it could
not recover a letter from the U.S. Labor Department which approved its
1972 budget. Appellant Brief, p. 12. Appellant contended that this
budget approval letter operated as an approval of the costs in question.
Id. at p. 11.
Appellant also argued that the lateness of the audit hampered its
collection of indirect costs which could have offset the amount of the
disallowance. Id. at p. 12. Appellant later conceded that this issue
is not appropriately before the Board. Tr., p. 11.
Respondent contended that federal regulations do not restrict the
government's right to audit to the three year record retention period.
Respondent Brief, p. 5. Respondent argued that, to the contrary, 45 CFR
74.24(d) provides that the right of access "shall last as long as the
records are retained." Id.
Respondent argued that appellant was not prejudiced by its inability
to retrieve the Labor Department's 1972 budget approval letter because:
approval of a budget by the Federal government does not mean prior
approval of costs claimed in a manner that is not in accordance with the
Federal regulation.
Id.
In addition, the Agency argued that there is nothing in the record to
indicate that the Labor Department was aware of the change in IESD's
amortization rate which resulted in its increased contributed rate.
Tr., p. 121. Therefore, any approval of the budget would not operate as
an approval of IESD's higher contribution rate. Id.
FMC 74-7 states that a grantee must maintain its records for a
minimum of three years. There is no corresponding obligation placed on
the federal government to conduct its audit within the three year
period.
(11) In the absence of any prejudice shown by appellant by the
lateness of this audit, we find that respondent was justified in
auditing beyond the three year retention period.
We find unpersuasive appellant's argument that it was prejudiced by
its inability to locate its 1972 budget approval letter from the U.S.
Labor Department. Appellant did not allege that Labor Department
officials were aware of the change in procedures used to calculate
IESD's contribution rate to PERF, nor does the record reflect such
knowledge. In the absence of such information, we find that the Labor
Department did not give prior approval to the increased contribution
rate of IESD and, therefore, appellant was not prejudiced by its
inability to produce the 1972 budget approval letter. Since appellant
has produced no other evidence of prejudice from the late audit, we
conclude that the Agency was not precluded from auditing back beyond the
three year record retention period.
(2) Whether the Hearing Officer's Authority Had Expired
Appellant argued that the Hearing Officier's decision was not
effective because he did not effectively complete his delegated duty
prior to the expiration of the Acting Principal Regional Official's
authority. Appellant, Brief, p. 13. Appellant argued that the postmark
date of the decision, August 3, 1981, was the effective date of the
decision. Id. Appellant asserted that the Principal Regional Official
assumed office on August 1, 1981. Therefore, appellant argued that
although the decision was signed on July 31, 1981 it was not effective
because it was mailed after the assumption of office by the New
Principal Regional Official. Id. at p. 14. Appellant contended that
its argument is supported by various federal regulations which use the
postmarked date as the effective date.Appellant cited 45 CFR 75.5 as an
example. Id.
The Agency contended that the Federal regulations cited by appellant
use the postmark date to "establish a convenient verifiable reference
point . . . ." Agency Brief, p. 6. The Agency argued that the use of
the postmark date in this manner had no effect on the authority of the
Hearing Officer. Id. In addition, the Agency alleged that the signed
decision was forwarded to the Agency's mailroom on July 31, 1981 for
transmittal to appellant. Id.
We reject appellant's argument that the Hearing Officer did not
effectively complete his delegated duty. The Hearing Officer's duty was
to render his decision. His decision was officially completed upon his
signature on July 31, 1981. Since the new Principal Regional Official
did not (12) assume office until August 1, 1981, the Hearing Officer
successfully completed his duties during the delegator's (the Acting
Principal Regional Official) term of office. /7/
In rejecting appellant's argument, we find unpersuasive its
contention that the postmark date is the effective date of the decision.
We agree with the Agency that the postmark date is used as a means of
verification, and not as determining the effective date of the decision.
Conclusion
For the reasons stated above, we find that appellant calculated
federal and State contributions to PERF inconsistently. We also find
that appellant was not prejudiced by the lateness of the federal audit
and that the Hearing Officer's decision was rendered prior to the
expiration of his authority. We therefore sustain the Agency's
disallowance of $6,025,681. /1/ The Hearing Officer was designated by
the Acting Principal Regional Official of HHS to review
appellant's appeal pursuant to 45 CFR Part 75 from the determination of
the Director, Division of Cost Allocation, Region V. Section 75.6(d) of
Title 45 CFR provides for review by the Regional Director (formerly the
Principal Regional Official) or his delegate. When we refer to the
"respondent" or Agency in this decision, we mean any of the following:
the Regional Director of Region V; the Director, Division of Cost
Allocation; or the Hearing Officer. /2/ The audit report states
that the fund would have been depleted in approximately three years, six
months. Joint Appeal File (JAF), p. 53. The present Assistant Executive
of PERF, Steven Meno, testified that IESD's account would have been
depleted n one and one-half years. Transcript (Tr.) p. 69. /3/
The U.S. Department of Health, Education, and Welfare (HHS' predecessor)
published this provision as a regulation. 45 CFR Part 74, Appendix C,
Part I.C.1.d. first published on September 19, 1973, 38 Fed. Reg. 26275.
/4/ The Agency later argued that "consistency" under FMC 74-4 also
actually requires the same rate of contribution, versus the same
procedures used in determining the rate, be charged to the federal
government. See, Tr., pp. 14-16. The Agency contended that two
previous Board decisions, State of Connecticut, Decision No. 8,
February 7, 1975 and State of Rhode Island, Decision No. 29, December 6,
1976, support such an interpretation. Id. Because of the way in which
the Board decides this case, it is not necessary for the Board to decide
the question of whether "consistency" under FMC 74-4 necessarily
requires the same rate be used for federal programs. /5/ This argument
of the State, and to a substantial extent the response to the
argument by the Agency, appear to reflect an assumption that treating
IESD as a separate entity would somehow ipso facto lead to the
conclusion that associated costs would escape the problem of consistency
argued by the Agency here. Presumably, this assumption reflects a view
that the scope of the area within which there must be consistency would
be constrained by the limits of the "separate entity." On its face,
we
do not necessarily agree. It appears that there still would be a
question of whether the costs of the "separate entity" needed to be
treated consistently with similar costs of other "separate entities"
within the State. The parties gave little attention to this issue, and
given that we conclude that IESD was not a separate entity as the State
would have it be considered, we need not develop this issue. /6/
Even if we were to accept the appellant's argument, the record suggests
that least for the years prior to 1972 there was inconsistent treatment
between IESD and the municipalities. /7/ While it does not
appear that a delegation of authority of this type is necessarily
extinguished simply because the acting official is replaced by the
individual actually appointed to the position in question, we find it
unnecessary to decide this question here since we consider the Hearing
Officer's decision to be effective upon its issuance on July 31, 1981.
OCTOBER 22, 1983