GAB Decision 580
Docket Nos. 83-227 and 83-228
October 22, 1984
Louisiana Department of Health and Human Resources;
Ballard, Judith; Garrett, Donald Ford, Cecilia
The Louisiana Department of Health and Human Resources (State)
appealed disallowances of $699,022 (No. 83-227) and $316,800 (No.
83-228) in federal financial participation (FFP) under Title IV-A of the
Social Security Act (Act) claimed for federal fiscal years (FY) 1978,
1979, and 1980. Section 408 of Title IV-A authorized federal assistance
for foster care (FC) as part of the program of Aid to Families with
Dependent Children (AFDC). The Office of Human Development Services
(Agency) disallowed these amounts based on audit reports where the
amount of erroneous AFDC-FC payments was estimated by extrapolating from
a statistical sample. /1/
We conclude that, for the periods in question here, the Agency was
bound to abide by its policy, as previously found by the Board, to
disallow only for individually identified AFDC-FC eligibility errors,
notwithstanding a policy adopted in 1983 providing for use of
extrapolations from statistical samples to calculate disallowances. We
further find that the State failed to prove that certain sample cases
were improperly considered erroneous payments; thus, the disallowance
may include these sample cases. Accordingly, we reverse the
disallowances to the extent based on extrapolation from a sample. We
uphold the disallowance for the 62 sample cases; we remand this matter,
in part, to permit the parties to use an error rate based on the 62
erroneous payments to calculate (2) the disallowance for the time
periods not audited because Louisiana had no auditable computerized
records.
We cannot emphasize too strongly that we find nothing wrong with the
Department's general policy of using extrapolations from statistical
samples to produce disallowances. Neither do we presume to thwart the
Agency's responsibility to discourage error-ridden program
implementation. But this case is not really about sampling or the
incontrovertible concern for error reduction. At heart, the practical
issue in this case is whether the Agency effectively promoted something
which amounts to a rough surrogate for an error-tolerance policy: a
functional commitment to hold states accountable only for individually
identified errors, that covers the periods in question here. We find
from the record that this is what the Agency did.
As we explain in this decision, the record here persuades us --
(1) that as a culmination of historical developments, including a
failed rulemaking on error tolerance and a court decision, the Agency,
perhaps in part inadvertently, ended up with a policy stance which
assured states that only individually identified errors would be held
against them;
(2) that for the periods in question here, a contrary policy was
never clearly articulated; and
(3) that the states have made a persuasive showing that the
retroactive imposition of a changed policy would be unfair, primarily
because the states had no opportunity to decide whether to shift
resources to reduce an error rate which the Agency had, in effect,
agreed to tolerate.
Part I of the Analysis concerns the policy that applies to the
reduction of federal matching payments for certain errors in the AFDC-FC
program. Part II concerns the issues particular to these disallowances.
This decision is based on the parties' submissions and on the transcript
of a conference held in July 1984. /2/
(3) Background
The Audit Agency issued audit reports covering the State's
expenditures under the AFDC-FC program for the period October 1, 1977
through September 30, 1980. /3/
For FY 1979 and FY 1980, the auditors took a sample of 200 from a
universe of 2295 active cases submitted by the State; they found 62 of
the 200 did not meet the requirements for FFP. The payments in the 62
cases totalled $102,897. The auditors extrapolated a sample based error
rate to the universe of claims and recommended a financial adjustment of
$802,406 (federal share $558,475).
By letters dated September 28, 1983, the Agency disallowed AFDC-FC
payments based on the auditors' extrapolation from the sample cases.
The Agency disallowed $558,475 FFP for the 22 months covered in the
sample. Louisiana did not have auditable computerized records for two
months of FY 1979 and FY 1980 and for six months of FY 1978.
Consequently, based on the sample error rate, as recommended by the
auditors, the Agency disallowed $48,899 FFP for October 1978 and July
1979 and $316,800 for FY 1978. /4/
Analysis
I.
The principal question is whether, in light of (Social Security
Administration) Action Transmittal 82-33 as adopted by OHDS, we (4)
should conclude that Agency policy permitted the use of extrapolations
from statistical samples to calculate reductions in federal matching
payments for erroneous AFDC-FC payments that are within the scope of the
errors covered by the Agency's quality control regulation. Agency
Exhibits 2 and 3.
Action Transmittal (AT) 82-33, December 13, 1982, was adopted by OHDS
in Policy Announcement (PA) 83-03, May 4, 1983. This policy was issued
after the Louisiana audits but prior to the Agency's final
determinations to disallow. AT 82-33 stated:
(Any) recognized auditing technique including valid statistical
sampling and extrapolation to a universe may be used to determine the
amount of erroneous payments and the amount of any adjustment to or
disallowance of Federal matching funds.
The State argued that it was unreasonable for the Agency to base its
disallowance on an extrapolation from a sample, citing the Board's
holdings in California Department of Social Services, Decision No. 319,
June 30, 1982, and Reconsideration of Decision No. 319, December 30,
1982; and Pennsylvania Department of Public Welfare, Decision No. 485,
December 21, 1983.
Although recognizing that the Board's earlier decisions found the
Agency's policy precluded a disallowance for certain AFDC-FC payments
calculated using an extrapolation from a sample without any tolerance
for errors, the Agency argued that the record before us here, which
includes AT 82-33, mandates a contrary conclusion. /5/
We disagree. In essence, the Agency would have us regard these
disallowances as routine federal determinations of the amount of
unallowable costs which must be upheld so long as the audit techniques
were sound. This characterization is simply inapposite. As is evident
from the discussion below, the question here is not merely one of what
audit techniques can be used to identify erroneous payments.
(5) The Agency policy to disallow only for individually identified
errors.
The states and the Agency engaged in a lengthy painstaking
rule-making process to develop the regulations for the AFDC program
which permitted the reduction of matching payments where the states
exceeded certain empirically based tolerance levels for errors. The
Agency's historical practice was to disallow for individually identified
erroneous AFDC payments. Concern over the level of erroneous assistance
payments in AFDC had prompted the imposition of quality control
requirements. Although the quality control system was first used for
managerial purposes, regulations were promulgated during the 1970's to
provide for the use of error rates developed from the quality control
samples to reduce FFP. (Waiver of a disallowance was possible under
appropriate circumstances.)
AFDC-FC payments, although within the scope of the regulations, were
not among those payments sampled for purposes of applying the fiscal
disallowance policy. The AFDC-FC program was only a small part of the
Title IV-A AFDC program, a cooperative federal-state program;
approximately 2-1/2% of the total AFDC expenditures were for AFDC-FC.
Tr., p. 44. The Board's earlier decisions thus concluded that the
disallowance policy for AFDC-FC errors within the scope of the quality
control regulation remained as it had always been, one of disallowing
only for individually identified erroneous payments.
In Decision No. 319 and its reconsideration, the Board examined the
complex background of the quality control program which applied to AFDC
eligibility determinations, the revocation of the regulation providing
for disallowances under the quality control program (45 CFR 205.41), and
the language in the action transmittals issued to explain the AFDC
disallowance policy after the revocation. Although the Agency argued
that the scope and intent of the policy conceivably could have been
interpreted narrowly to cover only erroneous cases identified in the
quality control process and not cases identified in a federal audit, the
Board concluded that a broader interpretation including errors from all
sources was the more reasonable interpretation. The Board also
concluded that, even if the policy issuances were interpreted narrowly,
it would have been unreasonable under the circumstances to disallow
based on extrapolation from a sample only in AFDC-FC. There was no
basis for concluding that the Agency used its discretion to provide for
disallowing all AFDC-FC errors with no tolerance; thus, we concluded
that the Agency (6) was bound by its acknowledged policy of disallowing
only for individually identified AFDC-FC errors. /6/
Significant factors supporting this conclusion are:
* The Department recognized that "a requirement . . . that states
eliminate all erroneous payments, with a resultant disallowance of
Federal financial participation in any erroneous payments is
unrealistic." 40 Fed. Reg. 21737, May 19, 1975.
* The Department developed a fiscal disallowance policy for AFDC
eligibility and overpayment errors through notice and comment rulemaking
to use samples taken according to specific methods and to disallow based
on extrapolation of the results of these samples for errors above
prescribed tolerance levels.
* Following litigation which struck down the tolerance levels
promulgated in 1975 as arbitrarily established, the Department revoked
its regulations and in an accompanying notice stated that, in the
absence of tolerances, the policy for disallowing erroneous payments for
AFDC eligibility determinations would be for "individually identified"
errors. Maryland v. Mathews, 415 F. Supp. 1206 (D.D.C., 1976); 42 Fed.
Reg. 14717, March 16, 1977. As we noted in our reconsideration, p. 3,
in the historical context this clearly meant error identification not
based on extrapolation from a sample.
(7) * AT 77-30 had forwarded the revocation notice to the states.
Both the action transmittal and the revocation notice cite 45 CFR
233.10(b)(1) as mandating the disallowance of all "individual improper
payments identified" not all improper payments in the universe of
claims.
* The revocation notice specifically committed the Agency to take "no
disallowances . . . for any periods pursuant to the . . . provisions
that are being revoked"--necessarily implying that disallowances would
not be taken based on program-wide samples.
* AT 77-55 described the revocation policy as the policy which always
applied to cases, like AFDC-FC cases, that were excluded from the
quality control universe. Thus, it was reasonable to conclude that
since no other disallowance policy had been developed which affected
AFDC-FC payments, Agency policy concerning AFDC-FC eligibility
determination errors remained as disallowance only of individually
identified errors.
Effect of AT 82-33.
The stated purpose of AT 82-33 was "to give the background relevant
to the issuance" of certain action transmittals (which were considered
in Decision No. 319) "in order to clarify their purpose and meaning."
This action transmittal concludes that payments such as foster care that
were excluded from the quality control universe have always been subject
to any recognized auditing technique to determine amounts to be
disallowed. AT 82-33 was issued just prior to the Board's
reconsideration of Decision No. 319 and simply restated the arguments
presented to the Board as the Agency's position in the request for
reconsideration.
In adopting this policy, OHDS stated "that for title IVA - Foster
Care . . . it is the policy of the Department to use sampling as the
basis for determining expenditures ineligible for Federal matching."
OHDS described AT 82-33 as an explanation of "the policy that has been
and continues to be in effect" on the "(use) of sampling in reviews
(including audits) as the basis for disallowances." PA 83-03.
Clearly, the Agency is responsible for establishing policy for its
programs. Nevertheless, in determining what policy applies to AFDC-FC
disallowances, the Board cannot merely accept the Agency's (8)
after-the-fact view of what its policy was. Simply reissuing as an
action transmittal the arguments which the Board earlier found to be
unpersuasive does not give the Agency's position on what its policy was
greater force. The Board found support for not accepting the Agency's
view of what certain Agency issuancs did, not only in their plain
language, but also in the absence of any evidence to show a policy of
sampling for AFDC-FC eligibility errors. The Board further found the
Agency's alleged policy unreasonable given the circumstances surrounding
the development of the AFDC fiscal disallowance policy. Thus, our
opinion that it was the Agency's policy for certain erroneous AFDC-FC
payments to disallow only individually identified errors remains
unchanged.
Retroactive application of AT 82-33.
We must now consider whether the policy stated in AT 82-33 and
adopted in PA 83-03 may be retroactively applied to disallow for
erroneous AFDC-FC payments even though within the scope of the quality
control regulations.
The Agency said that AT 82-33 was an interpretive rule. /7/ Even
accepting that characterization, the action transmittal represents a
change in the fiscal disallowance policy applicable to the AFDC-FC
program. Retroactive application of an interpretive rule is subject to
strict scrutiny. Daughters of Miriam Center for the Aged v. Mathews,
590 F.2d 1250 (3rd Cir. 1970). The Board has previously discussed the
factors used to determine whether retroactive application would be
appropriate. See, Kentucky Department for Human Resources, Decision No.
401, March 30, 1983. Retroactive application is in essence a fairness
question which is resolved by balancing the potential burden on the
grantee against the government's interest supporting retroactive
application. Both parties argued that the factors governing
retroactivity supported their position. Tr., pp. 36-43, 92-94, and
97-112.
We conclude that the use of statistical sampling and extrapolation
does not further a "statutory design" of ensuring proper application
of
eligibility criteria for AFDC-FC and of federal reimbursement (9) only
for benefits provided to eligible individuals. As the Board has noted
in earlier decisions, the Social Security Act does not prohibit the
Secretary from establishing tolerance levels for erroneous payments,
although it does not require FFP in all erroneous payments. See,
California Department of Health Services, Decision No. 170, April 30,
1981; California Department of Social Services, Decision No. 235,
January 7, 1982; Maryland Department of Human Resources, Decision No.
246, January 18, 1982; Decision No. 319, supra. In the AFDC program,
the Secretary, recognizing that total elimination of eligibility
determination or overpayment errors was unrealistic, provided for such
tolerances where disallowances are taken based on quality control
samples. Congress later indicated approval of permitting tolerances
and, while encouraging states to take corrective action to reduce
errors, also providd for waiving disallowances for errors in appropriate
circumstances.See 42 U.S.C. 603; and section 201 of H.R. 4389 (FY 1980
Labor-HEW Appropriation Bill), incorporated by reference into Pub. L.
96-123. A policy of disallowing only individually identified errors for
cases outside the quality control system, where its safeguards do not
apply, is consistent with this recognition, particularly for AFDC-FC
errors which may arise from the same difficult process of applying AFDC
eligibility requirements as errors in the basic program and are, in
general, within the scope of the errors covered by the regulations.
Tr., p. 75.
While it is arguable that the use of sampling promotes the reduction
of errors and this furthers the statutory design, the possibility that
sampling might be used could have the effect of causing a state to take
corrective action to reduce its error rate only where the state could
have known of that possibility. It cannot further a statutory design of
reducing errors to retroactively impose on the state a policy of
sampling.
Moreover, this is not a situation where there was no policy and the
Agency acted reasonably to fill that void. Rather, the Agency made a
major change in the policy in effect at the time the State made the
payments. Under those circumstances, retroactive application of the
policy would not be curative, in the sense of curing an inadvertent gap
in program policy.
We also question whether the Agency has presented a rational basis
for retroactive application of the policy here. AT 82-33, as we have
noted, simply restated the arguments which failed to persuade the Board
in Decision No. 319 and its reconsideration. Although the Agency has
now explained why it excluded AFDC-FC cases from the quality control
universe, it has yet to explain why a wholly different sampling and
fiscal disallowance policy (without the (10) safeguards of tolerance
levels or waivers) should apply to AFDC-FC cases. /8/
The Agency also contended that the financial burden to the States is
not significant. However, we think that financial burden need not be
measured only in dollars. Given the history of the quality control
disallowance provisions and their use as an incentive to corrective
action, we are persuaded that the states would have devoted more
resources to correcting errors in AFDC-FC cases and, in fact, would have
acted differently if they had known the Agency would use program-wide
sampling to determine disallowance amounts for AFDC-FC cases. /9/ Tr.,
pp. 92-94 and 109.
(11) The action transmittal itself is not a thoughtful statement of
reasons for the policy it stated or its retroactive application. It is
almost disingenuous of the Agency to argue that its disallowance policy
is properly based simply on a reiteration of the points the Board
previously found to be unpersuasive. Moreover, the Board determined in
Decision No. 319 and its reconsideration that the disallowance of other
than individually identified AFDC-FC errors was unreasonable in th
historical context.
Development of a comprehensive program-wide sampling based
disallowance policy for AFDC was accomplished through notice and comment
rulemaking. /10/ As the States argued, the Agency's policy now stated
as having applied to AFDC is based neither on a duly promulgated
regulation nor intervening legislative action mandating retroactive
application. Tr., p. 102. The Agency recognized the impossibility of
an error-free program. We consider the States to have justifiably
relied on the application of the old rule where the parties were
concentrating on reducing erroneous payments within the quality control
universe and there was no contemporaneous indication that routine audit
techniques would be applied to disallow AFDC-FC erroneous payments
within the scope of the types of payments covered by the quality control
regulation. The result urged by the Agency is harsh in that the States
had no practical opportunity to devote resources to try to reduce
erroneous AFDC-FC payments. In addition, the Agency's policy does not
provide for consideration of whether, in context, the States' total AFDC
error rate (including AFDC-FC errors) was not excessive or whether
reasonable grounds for waiver might exist. The Act was held to
contemplate matching in some erroneous payments. In this context, (12)
the Agency cannot reasonably apply retroactively a policy which in
essence provides for a zero tolerance level for errors. /11/
II
Whether Louisiana agreed to statistical sampling and extrapolation.
The Agency contended that the State agreed to the use of statistical
sampling, citing a December 8, 1981 letter from the head of the State
department to the Regional Audit Director. State Exhibit 8.
(13) In Decision No. 319, the Board acknowledged that a state might
agree to the use of sampling and thus "to the application of a different
policy than would otherwise apply."
In a November 30, 1981 letter, the Regional Audit Director proposed
using the error rate based on the FY 1979-FY 1980 audit to calculate the
unallowable costs for FY 1978. This letter noted that without
computerized data for six months of FY 1978, "We cannot apply customary
audit techniques to the costs for this period, and any detailed audit
work would require a prolonged effort at your Department." State Exhibit
8. The Audit Director described his proposal as "an alternative method"
and gave the State the option of suggesting "any other method that you
or your staff may believe to be more equitable." In reply, the State
acknowledged in the letter of December 8, 1981 that "without the
necessary computerized data, any detailed audit work would require a
prolonged effort by (audit) staff" and agreed that use of the error rate
"would provide a conservative basis for establishing the unallowable
costs for 1978." However, the State's letter further pointed out that
the error rate was "subject to adjustment pending final resolution of .
. . audit findings for 1979 and 1980."
We consider the December 8 letter to simply consent to the use of an
error rate for FY 1978 derived from the final resolution of the audit
findings for FY 1979 and FY 1980. There is no indication that the State
knowingly waived the application of Agency policy disallowing only
individually identified eligibility errors. In fact, in a letter dated
April 19, 1982, which the State sent after receiving the final audit
recommendations for FY 1979 and FY 1980, the State took the position
that the overpayment and ineligible payment tolerance regulation should
be applied and advised the Agency that until certain questions about the
audit were resolved, the State would agree "to pay only the actual
amount of the sample cases found in error." State Exhibit 7. To
construe the State's actions as consent to a disallowance calculated by
extrapolation from a sample is simply too extreme. The most reasonable
interpretation requires the application of the legally sustainable basis
for a disallowance for FY 1979 and FY 1980 to FY 1978. The December 8,
1981 letter is quite short and neither accorded finality to the FY 1979
and FY 1980 audit findings nor expressed an intent to waive any legal
challenges to those findings.
Time periods for which there were no auditable computerized records.
In its December 8, 1981 letter the State agreed to the use of an
error rate for FY 1978 derived from the Agency's audit of FY 1979 and FY
1980. We conclude that the Agency can reasonably apply an error rate
based on the individual errors found in the audit of 22 (14) months in
FYs 1979-1980 to FY 1978 and to October 1978 and July 1979. The State
did not have computerized data for these periods and did not suggest a
more equitable method when given the opportunity. State Exhibit 8. For
FY 1978, the State did not dispute this on appeal and indicated it would
agree to use of an error rate based not on extrapolation from a sample
but on individually identified errors. See State Brief, p. 7; Reply
Brief, p. 4. Furthermore, we do not agree that the State can avoid a
disallowance for the two months of FY 1979 and 1980 simply because those
months fall within the time period from which the sample was drawn.
State Brief, pp. 7 and 8.
The State did not document eligibility in five challenged cases.
The State contended that the Agency erred in disallowing payments in
five sample cases where State Form 25-A certifying eligibility was not
on file. These cases were included in the 11 cases where the auditors
determined that eligibility redeterminations had not been made. The
State did not dispute that there had to be a finding of eligibility but
asserted that eligibility was documented in the case files. State
Brief, p. 9.
The State instructed its assistance payments workers to use Form 25-A
"to certify . . . as to the eligibility of a child for AFDC-FC." State
Brief, p. 9; State Exhibit 1. Also, the State admitted that its AFDC
Program Policy Manual directs that payments shall not be made for a
child in AFDC-FC unless there is a current Form 25-A on file. State
Brief, p. 10; State Exhibit 2.
Nevertheless, the State alleged that "in some cases" the absence
of a
Form 25-A has not prevented payments from being made and contended that
the State Manual in its entirety showed that "many other forms and
procedures are involved in the process of determining eligibility,
certifying the client, and disbursing the payments." State Brief, p.
10. It noted that its Manual directed that one of these forms, No.
51-F, be used to certify a child for AFDC-FC (1) "when the child was not
previously included in an AFDC grant" and (2) "(w)hen the AFDC money
payment is to be continued to the family."
The audit report did point to the absence of a Form 25-A in the five
files in question. In response to the auditor's findings, the State
described Form 25-A as "a routine information transmittal form" between
State agencies which "does not affect a child's eligibility" for
AFDC-FC. The auditors had also stated that "there must be 25-A's or
some form of eligibility documentation" (emphasis added). Results of
Review and Decision in Case No. 588, Appendix III, p. 15, State Exhibit
6. In addition, the auditors noted the (15) following specifically with
respect to all five cases (plus the six others not disputed by the
State):
These cases were questioned because required redeterminations were
not made during our audit period. DHHR agreed that no redeterminations
were made but did not agree that a financial adjustment was appropriate.
DHHR contended that retroactive eligibility could be established for
these cases. Documents to evidence eligibility were not presented;
therefore, these cases were included in our recommended financial
adjustment. (Emphasis added.)
State Exhibit 6, Appendix III, p. 33.
The burden was on the State to establish that the children for whom
it made AFDC-FC payments were eligible for such payments. Leaving aside
the dispute over the necessity of Form 25-A, the record does not show
that the children were eligible. /12/ It is not enough that the State
argued that it could establish eligibility, where it did not take
advantage of various opportunities to present its documentation. /13/
After receiving the State's reply brief, the Board asked whether the
State wanted a conference or hearing to discuss the State's allegation
and the State declined. Board letter of April 13, 1984. Under these
circumstances, we find that the State did not meet its burden and we
uphold the disallowance of the five cases.
The validity of the sampling and extrapolation.
The State also challenged the validity of the auditors' sampling and
extrapolation methodology. The State provided no concrete (16) evidence
to support its general disagreement with how the sample was drawn and
extrapolated. Given our conclusion in Part I, above, it is unnecessary
for us to specifically decide this question. We note, however, that the
Agency relied on the auditors' use of "normal audit practice" to
establish the validity of the methodology. State letter of April 19,
1982 and Agency response of June 29, 1982. State Brief, pp. 3-5;
Agency Brief, p. 8.
Conclusion
For reasons set forth above, we uphold the disallowance in part and
reverse it in part. We uphold the disallowance of the five cases where
the State did not meet its burden of establishing eligibility. We
uphold the disallowances for FY 1978 and October 1978 and July 1979 to
the extent that they are based on use of an error rate derived from
individually identified errors in FY 1979-1980. We uphold the
disallowance for 22 months of FYs 1979-1980 to the extent that it is
based on individually identified errors and reverse it to the extent
that it is based on extrapolation from a sample. /1/ Over the years,
various components of the Department of Health and Human
Services administered the AFDC program. In 1981 the Office of Human
Development Services (OHDS) became responsible for AFDC-FC under section
408 of the Act. OHDS issued the disallowances appealed here. In
general, we use the term Agency to refer to actions by OHDS or its
predecessor agencies. /2/ Louisiana, Michigan, Montana,
Pennsylvania, and the District of Columbia all have pending appeals
raising the same policy issue. These appellants and OHDS participated
in a conference to respond to questions from the Board about the
Agency's policy for disallowing erroneous payments in the AFDC-FC
program. /3/ Audit Report No. 06-20250 for FY 1979 and FY 1980
was issued February 22, 1982. State Exhibit 6. Audit Report No.
06-20550 for FY 1978 was issued April 30, 1982 and recommended an
adjustment to FY 1978 costs based on the error rate for FY 1979 and FY
1980. State Exhibit 8. In part, the audit implemented Pub. L. 96-272
which imposed a ceiling on foster care reimbursements for FYs 1981-1984,
using reimbursements for FY 1978 as a base amount for determining the
yearly allotments. Although at the conference the parties briefly
addressed the effect of the Board's decisions about disallowances for FY
1978 on later State allotments, this question is not directly before us
so we do not address it further. Transcript of Conference (Tr.), pp.
40-42 and 156-158. /4/ Docket No. 83-227 is the disallowance for
FY 1979 and FY 1980. The Agency also disallowed $91,648 FFP for
payments on behalf of children residing in private profit-making
institutions. This last amount was not based on the sample
extrapolation and is not disputed.State Brief, p. 11. The amount
actually at issue for FY 1979 and FY 1980 is $607,374 ($699,022 -
$91,648). /5/ Decision No. 319 covered a time period through
June 30, 1979; the Louisiana appeal covered a time period through
September 30, 1980. The Agency did not argue that Louisiana could be
distinguished because of the later time period covered. /6/ We
again affirm our position that extrapolation from a statistical sample
may be reliable evidence of the amount of unallowable costs in a
universe of claims, even though a grantee had no prior notice that it
would be used. University of California--General Purpose Equipment,
Decision No. 118, September 29, 1980. This principle is simply not
controlling in this case and indeed presents somewhat of a red herring.
A statistical sample based extrapolation can be regarded as a method of
identifying, within certain ranges of accuracy, the total amount of
erroneous payments in a universe of claims. Nevertheless, from the main
discussion, it is clear that the audit technique used to calculate the
disallowance itself is basically irrelevant; what is precluded is a
program-wide disallowance for certain AFDC-FC errors. /7/ The
Agency argued that "(action) transmittals . . . have long been
recognized as interpretive rules" and cited case law and Board authority
to support its view. Tr., pp. 29-31. We note that Board cases have
addressed the question only of whether certain specific provisions of
action transmittals were interpretive rules; it does not necessarily
follow that all AT provisions are interpretive rules. /8/ At the
conference the Agency introduced an affidavit from an Agency
official who was involved in the initial design and development of the
AFDC quality control system. Agency Conference Exhibit 2. The
affidavit states that the Agency's concern was with "cash payments to
individuals" and that Inclusion of Foster Care in the QC system would
have diverted limited QC resources (both State and Federal) . . . (and
due to the different eligibility requirements for AFDC-FC and its social
services aspect) Inclusion of Foster Care . . . would have required
separate QC sample selection and reviews, different QC forms and
different QC instruction. All this effort would have required resources
to be diverted . . . . . . it would not have been cost effective . . . .
/9/ We cannot conclude that the AFDC-FC program is a wholly separate
program component for all administrative purposes. Agency Brief, p. 6.
The Agency did not argue that the appeals currently before the Board
should be distinguished from Decision No. 319 based on the types of
erroneous AFDC-FC payments. There is no question that AFDC-FC
eligibility and overpayment errors are within the scope of the quality
control regulation (45 CFR 205.40) and that some types of AFDC-FC errors
are precisely the kind of error actually covered by the quality control
system as implemented by the Agency's Manual. Tr., pp. 44-47, 74-79,
and 163. /10/ It is worthy of note that the Department published
a proposed rule at 37 FR 25853, December 5, 1972, which "prohibited
Federal financial participation in any erroneous payments to individuals
under the AFDC program." 39 FR 29935, August 19, 1974. This regulation
was never made final. The Agency and the States then embarked on a
lengthy collaborative process to develop the fiscal disallowance policy
for AFDC. We concluded earlier that upon revocation of the fiscal
disallowance provisions struck down by Maryland v. Mathews the Agency
simply returned to its general policy for AFDC eligibility errors--to
disallow for individually identified errors. /11/ Section 552(
a)(1) of 5 U.S.C. requires an Agency to publish in the Federal Register
"substantive rules of general applicability . . . statements of general
policy or interpretations of general applicability." Matter required to
be published cannot be applied by the Agency, if adverse, unless the
affected party had "actual and timely notice." The Agency here proposes
to apply the policy stated in AT 82-33 to disallow payments made by the
states before the states had "actual" notice of AT 82-33. The Agency
would urge us to conclude that the States are not adversely affected
simply by the recovery of erroneous AFDC-FC payments. Nevertheless, had
we concluded that there was some support for applying the policy
retroactively, we would also have to decide whether the Agency would
have violated the actual notice requirements of 5 U.S.C. 552(a)(1).
Section 553 of 5 U.S.C. mandates notice and comment rulemaking for
substantive agency rules. In 1971, the Department chose to follow these
procedures. 36 Fed. Reg. 2532, February 5, 1971. Given our conclusion
concerning retroactive application of the policy, it is unnecessary for
us to address whether the Agency would have been obliged to adopt this
policy using notice and comment rulemaking. We note however that the
Agency did use notice and comment rulemaking to develop the policy which
was applied to AFDC payments in the quality control universe. The
Agency has now provided some reasons why AFDC-FC payments were not
included in the universe. Agency Conference Exhibit 2. Other than the
Agency's assertion that AFDC-FC is a separate program, there would be no
reason to conclude that the general findings concerning disallowance of
AFDC eligibility or overpayment errors and the rationale behind the
development of the fiscal disallowance policy did not apply to all AFDC
payments, not just those in the quality control universe. It is at
least facially inconsistent for the Agency to develop a fiscal
disallowance policy for the vast majority of AFDC payments using notice
and comment rulemaking but to establish a contrary policy, without using
those procedures, for the remaining payments. /12/ The Agency
argued that the Form 25-A was necessary to show compliance with the
requirement for a "prior (or simultaneous) authorization of award."
Section 5214 of Part IV of the Handbook of Public Assistance
Administration, August 5, 1963. We do not find it necessary to reach
this issue here. We note, however, that the question of the continued
validity of this section of the Handbook during the 1970's is directly
presented in a pending appeal, New York Department of Social Services,
Docket No. 83-80. /13/ As noted in the quote from the audit
report above, the State contended at the time of the audit that
retroactive eligibility could be established, but did not document its
assertion. Similarly, in its brief on appeal and again in its reply
brief it made the same assertion but did not submit any documentation or
other proof. State Brief, p. 11; Reply Brief, p. 6.
MARCH 19, 1985