GAB Decision 316
June 28, 1982 California Department of Social Services; Docket No.
81-221-CA-CS Garrett, Donald; Settle, Norval Ford, Cecilia
The California Department of Social Services (State or Grantee)
appealed a $34,904 disallowance, by the Office of Child Support
Enforcement (Agency), of federal financial participation (FFP) in costs
claimed uner Title IV-D of the Social Security Act (the Act) for
automatic data processing (ADP) services, for the period July 1, 1975
through June 30, 1977.
The issue presented is whether the disallowance should be sustained
on the basis that the Grantee did not obtain prior approval for the
costs of the services, or that the costs were unnecessary because the
ADP system was "partially ineffective."
For reasons stated below, the Board has determined that there was no
applicable prior approval requirement, and that a statement in a federal
audit report that the ADP system was partially ineffective was not a
sufficient basis on which to disallow. This decision is based on the
written record.
Background
The Fresno County Welfare Department (Fresno Welfare) had an ADP
system approved under Title IV-A of the Act. Fresno Welfare provided
ADP services to the Fresno County District Attorney's Office (District
Attorney) for use in the IV-D proram. The ADP services consisted of
monthly cmputerized summaries of child support payments for Aid to
Families with Dependent Children (AFDC) recipients and copies of
computer generated changes to AFDC case file data. The computerized
summaries, however, did not provide enough information to determine
certain federal incentive payments due to Fresno County under Title
IV-D. Therefore, Fresno Welfare made manual changes to the summaries to
add this information.
The auditors questioned the ADP services costs, concluding that the
State "did not adequately monitor . . . claims for administrative costs
to ensure that prior Federal approval had been obtained by counties
claiming reimbursement for Automatic Data Processing (ADP costs." (Audit
Report, p. 5)
(2) The auditors characterized the ADP services provided by Fresno
Welfare to the District Attorney as "partially ineffective" because
they
did not provide the necessary federal incentive payment information.
Additionally, the auditors found that Part V of the Handbook of the
Public Assistance Administration (Handbook) required that approval for
FFP in the purchase of ADP services shall be given only after the
grantor agency has determined that certain requirements have been met.
/1/ (Audit Report, p. 52)
The Agency's Regional Representative disallowed the Grantee's claim
for the costs of ADP services. The Agency had determined that, since
the services were "partially ineffective", the expenditures were not
necessary in accordance with 45 CFR 304.20, which provides for FFP at a
75% rate for "necessary" expenditures, and that the Grantee had not
obtained required prior approval. In accordance with the Regional
Representative's letter of September 26, 1980, the State sought further
review of this disallowance by the Director of the Agency. (Grantee's
Appeal File, Exhibits G and I)
In the Director's disallowance letter, dated November 18, 1981, the
Agency based its disallowance on the Grantee's failure to obtain prior
approval, citing 45 CFR Part 74, Appendix C, Part II, C.1. as its
authority, and on its conclusion that the expenditures were not
necessary because the system was not effective. (Grantee's Appeal File,
Exhibit D) /2/
(3) In its arguments before the Board the Agency, while noting that
these services were "ineffective," relied on the provision at 45 CFR
Part 74, Appendix C, Part II, C.1. /3/ The Agency argued that this
provision applied to the ADP services at issue here, and that these
costs were allowable only with the prior approval of the grantor agency.
State's argument
The Grantee submitted an extensive brief in support of its claim, but
its arguments can be summarized into four major points:
1) The ADP services for which FFP was claimed were necessary. The
State had an effective IV-D plan in place in Fresno County and there is
no authority in the regulations to deny a IV-D claim on basis that the
claimed services were "partially ineffective."
2) Prior approval was not required for ADP services of the type
involed in this claim and, if approval was required, retroactive
approval is permitted and should be granted.
3) If funding is not allowed at 75%, federal funding is permitted at
50% where an approved IV-A ADP system is involved.
4) Even if there exists the authority to deny a part of the claim
where the services provided were ineffective, it was improper to deny
the entire claim.
(4) Analysis
1. Whether prior approval was required.
Both parties cite 45 CFR Part 74, Appendix C, Part II, C.1. as the
governing regulation, and apply it in this case. However, the Agency
and the State disagree as to how this regulation should be interpreted.
Section C.1. states, in part,
The cost of data processing services to grant programs is allowable.
. . . The acquistition of equipment . . . is allowable only upon
specific prior approval of the grantor Federal agency . . .
The Agency argued, based on the heading at 45 CFR Part 74, Appendix
C, C. entitled "Costs Allowable With Approval Of Grantor Agency,"
that
ADP services as well as equipment acquisition required prior approval.
The Grantee, however, argued that, even though prior approval for
equipment acquisition was required, prior approval of ADP services was
not required.
We disagree with the Agency, and conclude that prior approval was not
required by 45 CFR Part 74, Appendix C, Part II, c.1. for purchase of
ADP services. This conclusion is based on the language of the
regulation as a whole. The word "approval" means "documentation
evidencing consent prior to incurring specific cost." Appendix C. Part
I, B.1. Thus, it cannot be implied from the mention of "specific prior
approval" with respect to ADP equipment costs that some lesser form of
approval was required for costs of ADP services simply because such
costs were mentioned in this section. It is clearly stated in the
regulation when approval is required.
Section C.1. encompasses all allowable ADP costs. The provision
begins by stating that "the cost of data processing services to grant
programs is allowable," and then proceeds to encompass other standards
and areas of ADP costs where approval is required. This pattern is
repeated for other types of costs included under the same heading.
Thus, the Agency's reliance on the heading "Costs Allowable With
Approval of Grantor Agency" is misplaced, in view of the specific
wording of Section C.1. and the context in which it appears.
Although 45 CFR Part 74, Appendix C, Part II, C.1. did not require
that the State obtain prior approval for ADP services, the costs of
these services were still subject to the reasonableness and allocability
requirements within the regulation. See 45 CFR Part 74, Appendix C,
Part I, C.1., and C.2. The Agency, however, made no (5) argument that
the ADP services costs were unreasonable or not allocable to the IV-D
program. /4/
2. Whether the costs were necessary
The auditors stated that the ADP services were "partially
ineffective" on the basis that manual additions and deletions had to be
made to the computerized summaries provided by the Fresno Welfare.
The Agency, in earlier determinatiions made in this case, relied
partly on the provisions of 45 CFR 304.20, which provides for FFP at 75%
for necessary expenditures, to make the finding that the ADP services
were unnecessary.
We find that the auditors made no determination that the information
provided by the computerized summaries was ineffective or unnecessary.
Further, we conclude that the finding by the auditors that the ADP
system was "partially ineffective" is not tantamount to a conclusion
that the costs of the ADP services provided were unnecessary.
The Agency did not point to any regulation that stipulated that
before the costs of ADP services could be allowable that they must be a
part of a computerized system free of all imperfections. Further,
absent clear support in a regulation, the Board will not impose a
standard on the computerized system that does not allow for any
imperfection. We find that the imperfection in the computerized system
here was not sufficient to indicate that the costs were not necessary,
without a showing that the information provided could have been easily
obtained in a more cost-effective manner. We note that neither the
auditors nor the Agency alleged that the information provided by the
computerized system did not benefit the IV-D program. Additionally, the
State's argument that the services provided were necessary to the
operation of its IV-D program was unrebutted by the Agency.
In view of the determination made in this case, and in light of the
fact that the IV-A program is not under review, we do not reach the
State's argument that if funding was not allowed at 75%, it should be
permitted at 50%.
(6) Conclusion
Based on the foregoing analysis, we conclude that the Agency
incorrectly disallowed the FFP claimed for ADP services. Therefore, the
disallowance of $34,904 by the Office of Child Support Enforcement is
reversed. /1/ Prt V, section 4252.2A of the Handbook provides, inter
alia, that before approval for FFP in the purchase of ADP services shall
be given the grantor agency must determine that -- . . . processing
requirements and provisions for adequate staff have been considered and
that the evaluation of the ADP system has established a reasonable
expectancy that the services to be purchased can be successfully and
advantageously applied to meet these requirements . . . /2/ In
the Agency's allowance letter of November 18, 1981, the Agency quoted
statements made by the Grantee in a February 1979 submission which state
that "the manual system in operation today has developed many
deficiencies" and further noted that the development of an automated
system was undertaken "in response to the many problems with the manual
system." The Agency used these statements as support for its conclusion
that the ADP system was not effective. The Grantee, in its notice of
appeal, stated that the Agency improperly interpreted Grantee's
statements about a manual system used after the audit period to relate
to the automated system used during the audit period. The Agency made
no attempt to rebut the Grantee's statement. /3/ Since the
Agency did not ultimately rely on the Handbook as a basis for the
disallowance, we do not reach the issue of the effect of 45 CFR Part 74
on the Handbook provision. We note, however, that it is arguable that
since the Handbook was not a statute or regulation it was superceded by
45 CFR Part 74.Section 74.170 of 45 CFR, Subpart Q states, in part, This
subpart establishes the principles to be used (except to the extent
inconsistent with an applicable Federal statute or regulation) in
determining costs applicable to HEW grants . . . /4/ Although the
Agency did issue a notice of proposed rulemaking, dated February
24, 1976, at 41 Fed. Reg. 8065, which required prior approval for ADP
services, this rule was not promulgated until September 29, 1978 at 45
CFR Part 95. The Agency appeared to have relied on this requirement
before it was promulgated. See Grantee's Appeal File, Exhibit K.
OCTOBER 22, 1983