DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Oklahoma Department of Human Services
Docket No. 87-73
Audit Control No. 06-60253
Decision No. 963
DATE: June 15, 1988
DECISION
The Oklahoma Department of Human Services (State) appealed a decision
of
the Administration of Children, Youth and Families (Agency)
disallowing
$2,107,366 in claims for federal financial participation (FFP)
under
Title IV-E (Foster Care and Adoption Assistance) of the Social
Security
Act. The disallowed claims were for direct costs (and
associated
indirect costs) allocated to the Title IV-E program for the
period
October 1, 1982 through June 30, 1986. Three categories of
direct costs
are at issue: (1) costs incurred at the county level for
recruiting and
approving foster care and adoptive homes; (2) costs incurred
at the
state level by the foster care unit and the adoption assistance unit
of
the Division of Child Welfare (DCW); and (3) costs of other DCW
central
office activities which federal auditors found were unallowable
"social
services costs." During the course of this proceeding, the
Agency
conceded that the disallowance had been overstated by $12,751 due to
an
error in calculating the third category of costs.
The State alleged that the costs had been allocated to Title IV-E in
full
accordance with a federally-approved cost allocation plan (CAP).
The Agency
did not dispute this, but argued that the cost allocation
plan was not
dispositive because the costs were not allowable and
allocable to Title IV-E
under Office of Management and Budget (OMB)
Circular A-87 and applicable
program regulations. The Agency based
these assertions principally on
its view that the Circular required a
pro rata allocation of the disputed
costs between the various federal
programs involved.
.For the reasons set forth below, we uphold the disallowance in part,
and
reverse it in part, as follows:
o Recruitment and approval
costs: we reverse the
disallowance
for costs
incurred prior to October 1, 1984 (based mainly
on
the existence of
the approved CAP, which we conclude did
not
violate OMB
Circular A-87) and uphold the disallowance
for
subsequent costs,
subject to consideration by the Agency
of
alternate caseload
statistics to calculate the amount.
o State-level foster care and
adoption units: we uphold
the
disallowance to
the extent that the State allocated costs
to
Title IV-E which
provided no benefit to that program.
o DCW central office costs: we
uphold the disallowance
subject
to
reexamination in light of the analysis set forth in
this
decision.
Our decision was sent in draft form to the parties for comment. The
Agency
did not dispute the correctness of the Board's analysis, but
requested
several clarifications, which we have made. The State
challenged part
of the Board's analysis on the third general category of
direct costs.
We have amended that analysis in several respects, but
have determined that
the result we reached in our draft decision was the
correct one.
Below, we first set out some general background information and
the
principles which guide our analysis. We then discuss issues related
to
each of the three general categories of direct costs, and explain
what
effect our decision on these direct costs has on the associated
indirect
costs and several other miscellaneous cost items.
General Background and Principles
I. The Title IV-E program
The Adoption Assistance and Child Welfare Act of 1980, Public Law
96-272,
amended the Social Security Act to create Title IV-E. Title IV-E
authorized a
new program for foster care maintenance payments,
previously funded under
Title IV-A of the Act (Aid to Families with
Dependent Children), and a
federally-aided adoption .assistance program
for special needs
children. Title IV-E assistance is available for
children who would
otherwise be eligible for Title IV-A assistance or,
in the case of adoption
assistance, for children eligible for
Supplemental Security Income.
Under Title IV-E, FFP is available (to each state with an approved
state
plan) in three types of expenditures: foster care maintenance
payments,
adoption assistance payments, and expenditures necessary for the
proper
and efficient administration of the state plan. See section
474(a) of
the Act.
Title IV-E is part of a set of federally assisted programs available
to
aid foster children. For foster children not eligible for Title
IV-E
assistance, limited maintenance funds are available under Title IV-B
of
the Act (Child Welfare Services). Title IV-B funds are also
available
for other child welfare activities, including social
services. In
addition, states may use funds available under Title XX of
the Act
(Social Services) to provide social services to Title IV-E
recipients.
Some social service activities, which had been unallowable
as
administrative costs when the foster care program was under Title
IV-A,
are allowable under Title IV-E; unlike Title IV-A, Title IV-E
contains
no general prohibition on claims for any activity which may be
funded
under Title XX.
The three categories of disputed costs were general administrative
costs
for foster care and adoption activities. The State had allocated
these
to the Title IV-E program pursuant to a cost allocation plan
amendment
which the HHS Division of Cost Allocation had approved to be
effective
October 1, 1982. Federal auditors found that the State had
allocated to
Title IV-E all costs of county-level recruitment and approval
activities
and State-level foster care and adoption units; the auditors
asserted
that the State should have allocated to Title IV-E only a pro rata
share
of these costs, based on the proportion of IV-E children in
the
caseload. The auditors also asserted that the State should have
removed
all costs attributable to direction of social services from the
DCW
central office cost center, before distributing any of these costs
to
Title IV-E.
II. Are the costs allowable under Office of Management and
Budget
Circular A-87?
The Agency argued that the costs at issue were unallowable charges to
the
Title IV-E program primarily because OMB Circular A-87 precluded the
State
from allocating more than a pro rata share of the disputed costs
to Title
IV-E when other activities also benefitted from the costs.
With the exception
of the third category of costs (discussed separately
below), the Agency
raised no other issues relating to allowability, and
did not deny that the
costs were of the types considered "necessary and
reasonable for proper and
efficient administration" of Title IV-E.
Thus, in general, the issue of
"allowability" is no more and no less
than the issue of whether the costs
were allocated in accordance with
the requirements of OMB Circular A-87.
The Agency relied primarily on the provision governing allocation of
costs
to federal grant programs contained in OMB Circular A- 87, at
Attachment A,
section C.2. (The Circular is made applicable to HHS
grants to states
by 45 C.F.R. 74.171.) The provision states:
(a) A cost is allocable to a
particular cost objective to the
extent
of benefits received by such objective.
(b) Any cost allocable to a
particular grant or cost objective
under
the principles provided for in this Circular may not
be
shifted to other Federal grant
programs to overcome fund
deficiencies,
avoid restrictions imposed by law or
grant
agreements, or for other
reasons.
(c) Where an allocation of joint
costs will ultimately result in
charges
to a grant program, an allocation plan will be
required.
. . .
These provisions do not explicitly require any particular proportionate
or
pro rata allocation of joint costs, as long as the costs are
allocated in an
equitable manner to programs which actually benefit from
the costs and the
State follows the allocation methodology set out in
the approved cost
allocation plan. While a grantee may not allocate
costs to a program in
excess of the amount from which the program
benefitted, the Circular does not
specifically preclude a grantee from
allocating costs which substantially
benefitted one program to that
.program, even if a second program may also
have benefitted from the
same costs. The Circular provisions do
contemplate some equitable
determination of relative benefits among several
programs to which costs
may be assigned, but the provisions are at best
ambiguous when costs are
as easily and generally assignable in whole or
substantial part to one
program as another. Stated another way, the
provisions might reasonably
be read to require that costs of services used in
part by each program,
such as the costs of a telephone system, should be
distributed among
those programs on something like a pro rata basis. On
the other hand,
the provisions appear to provide less guidance (and therefore
more
federal agency discretion) concerning costs which reasonably could
be
deemed fully assignable to each one of several programs, such as
the
costs of eligibility determinations required by each program. In
the
latter situation, it would appear that an agency has
considerable
discretion to determine which of a wide range of methodologies
would be
"equitable," including a pro rata distribution as well as assignment
of
the costs exclusively to one of the fully benefitting programs.
As
discussed below, the costs in this case are generally of the
latter
kind.
Thus, in light of the plain language of the Circular, we conclude that
the
Circular does not generally require a pro rata allocation of costs
(although
it would allow an agency to establish such an allocation
requirement in a
cost allocation plan). We note that the Circular
applies
government-wide to many different programs and federal agencies.
To interpret
the provisions as narrowly as the Agency suggested would
unduly restrict the
federal government's discretion in approving
equitable allocation methods in
a wide variety of circumstances. 1/
Having concluded that OMB Circular A-87 may permit but does not
require
the pro rata allocation methodology, the issue becomes
essentially
whether the Agency may retroactively impose its preferred pro
rata
methodology now, long after federal approval of Oklahoma's
cost
allocation plan containing a different methodology. We next
discuss the
effect of an approved cost allocation plan.
III. The effect of an approved cost allocation plan
A cost allocation plan (CAP) is "a narrative description of the
procedures
that the State agency will use in identifying, measuring, and
allocating all
State agency costs incurred in support of all programs
administered or
supervised by the State agency." 45 C.F.R. 95.505. An
approved
CAP is not a rigid, unalterable "contract" binding the parties,
and approval
of a CAP cannot make a cost allowable or allocable contrary
to statute or
regulation. See California Dept. of Social Services, DGAB
No. 855
(1987). Approval of a CAP does not constitute approval of any
specific
costs claimed. See State's Exhibit (Ex.) 6.
Under 45 C.F.R. Part 95, the Director, Division of Cost Allocation
(DCA),
in the appropriate HHS Regional Office is responsible for
reviewing and
approving or disapproving CAPs and CAP amendments for many
HHS programs,
including those involved here. The programs involved here
have no
separate requirements for CAP approval by program officials,
although DCA is
to consult with affected operating divisions of the
Department before
approving a CAP. See 45 C.F.R. 95.511.
Based on its analysis of CAP approval requirements, the Board
has
concluded it would not uphold an allocation method which was
clearly
inequitable, which had been approved based on incorrect,
inconsistent,
or incomplete data submitted to DCA, or which was prohibited by
statute
or regulation. See, e.g., California, supra; Oregon Dept. of
Human
Resources, DGAB No. 729 (1986), p. 15-16; Massachusetts Dept. of
Public
Welfare, DGAB No. 335 (1982).
This does not render approval of a CAP meaningless. Approval of a
CAP
by DCA gives rise to a presumption that the approved allocation
methods
are valid. DCA is the division to which the Secretary has
delegated
authority to review CAPs, and the Board will defer to its
.expertise,
absent a compelling basis for concluding that the approved plan
was
improper. See 45 C.F.R. 95.501 et seq.; Michigan Dept. of
Social
Services, DGAB No. 224 (1981).
This standard of deference to DCA determinations is supported by
the
regulations establishing the process for amending a state CAP.
45
C.F.R. 95.509; 45 C.F.R. 95.515. In some cases, an amendment may
apply
retroactively, such as when an earlier date is needed to
avoid
"significant inequity," or when approval was based on faulty
information
or was contrary to a federal statute or regulation. 45
C.F.R. 95.515.
Although the Agency asserted that its position here did not call
for
disapproval or amendment of Oklahoma's CAP, the Agency's
position
clearly would require the State to claim costs in a manner
different
from the allocation methods set out in the CAP approved by
DCA. See
Agency Letter dated February 26, 1988. The Agency argued
that it "took
a reasonable and appropriate method to allocate those costs
among the
benefitting programs . . . ." Hearing Transcript (Tr.), p.
15. Given
the existence of the State's approved CAP, however, whether
the Agency's
method was reasonable and appropriate is not dispositive by
itself; the
issue here is whether there are circumstances sufficiently
compelling to
warrant retroactively changing the CAP methodology. Our
analysis of this
issue is set forth below in the context of each of the three
categories
of costs involved.
Specific Disputed Costs
I. County-level costs of recruitment and approval of foster
and
adoptive homes
The State claimed FFP under the Title IV-E program in the
total
county-level costs of recruitment and approval of foster and
adoptive
homes. Title IV-E regulations clearly identify recruitment and
approval
expenditures as allowable costs necessary for the administration of
the
program. 45 C.F.R. 1356.60(c)(2)(vii). 2/ The
State alleged that all
of the costs were both necessary and allocable to
Title IV-E, and, thus,
that the CAP allocation was reasonable and
permissible. The State
provided evidence to show that recruitment of
the largest possible
number of homes was required to meet IV-E objectives and
that virtually
all homes served IV-E children eventually. The State
also argued that
Title IV-E required it to apply approval standards to
non-IV-E children
and that the CAP allocation was within the scope of
flexibility provided
by Agency regulations.
The Agency found that recruited and approved homes were used both
for
children receiving Title IV-E assistance (IV-E children) and
for
children not receiving Title IV-E assistance (non-IV-E children),
at
least some of whom were eligible for assistance under Title IV-B.
3/
The Agency conceded that the costs had been allocated in
accordance
with the State's approved CAP, but contended nonetheless that some
of
the costs were improperly allocated to Title IV-E. The Agency
argued
that the IV-E program benefitted only in proportion to the percentage
of
children who received Title IV-E assistance compared to all
children
placed in the homes. 4/ Thus, the disallowance
calculation substituted
an allocation methodology based on the relative
caseload counts of IV-E
and non-IV-E children.
.Based on the principles discussed above and further below, we reverse
the
disallowance in part, because we find no substantial basis to
overturn the
approved CAP retroactively for recruitment and approval
costs for the period
October 1, 1982 through October 1, 1984. However,
although we find that
the CAP methodology was within the discretion of
DCA to approve, we find also
that the Agency had the discretion to
require allocation by a caseload method
on a prospective basis. We,
therefore, uphold the disallowance for
subsequent time periods, based on
evidence in the record that, in response to
a request by the Agency, the
State agreed to revise its CAP effective October
1, 1984. Our decision
permits the State an opportunity to show that the
disallowance for this
period should be recalculated, using more accurate
caseload statistics.
a. Allocation of recruitment and approval costs
In light of the nature and extent of the benefit which Title IV-E
receives
from these costs, we conclude that it was within the discretion
of DCA to
approve the methodology in the CAP here. We rely in
particular on the
State's evidence that the entire pool of recruited and
approved homes served
to fulfill Title IV-E program requirements and
that virtually every home was
used by a IV-E child at some time. The
Agency did not contest this
evidence. Thus, we find that the total
costs could reasonably be
considered as providing a benefit to Title
IV-E, and that the nature of the
costs did not make it inequitable to
charge that program for the costs.
We find no other basis to justify retroactively substituting
an
alternative choice of methods for that of DCA. We find the
following
factors persuasive in our determination that the CAP allocation
was
within DCA's discretion to approve but that the Agency
could
prospectively require a change:
o The Act supports the State's
position that allocation to
Title
IV-E was
permissible. Section 471(a)(10) of Title
IV-E
requires that
states apply Title IV-E standards to
foster
homes used by
both Title IV-E and Title IV-B recipients.
The
section does not
specify to which program costs should
be
charged.
Generally, activities required by the
statute
authorizing a
grant program are considered necessary for
the
administration of
the program and can be
appropriately
allocated to that program, absent a specific preclusion.
See
Joint
Consideration: Reimbursement of Foster Care
Services,
DGAB No. 337
(1982). Placement of the requirement in
Title
IV-E is not
necessarily dispositive, however, since
the
activities related
to both Title IV-E and Title IV-B
children.
Thus, we do
not think it precludes the Agency
from
prospectively
requiring some type of pro rata allocation
of
the costs between
the two programs.
o Similarly, the Agency's
regulatory policies provide
some
support for the
State's view that its original CAP
methodology
was
permissible, but do not preclude the Agency
from
prospectively
requiring pro rata allocation. The preamble
to
proposed Title IV-E
regulations indicated that the
Agency
contemplated
that states would have "flexibility to
choose
which program
to charge these costs and the method used
for
charging and
claiming costs . . . ," and the
proposed
regulation
stated: "To the extent that . . . activities
may
also be claimed
under another federally-assisted program,
the
State may decide
in which program costs for such
activities
will be
claimed." 45 Fed. Reg. 86817, 86841 (Dec. 31,
1980)
(proposed 45
C.F.R. 1356.80(c)). As the Agency pointed
out,
however, this
"flexibility" was tempered by a requirement
in
the proposed rule
for a CAP which would "allocate
costs
applicable to
children not covered under Title IV-E to
the
appropriate
program." 45 Fed. Reg. 86841-42. 5/ While
the
flexibility
language in the preamble to the proposed rule
was
clearly not a
blanket grant of authority to states to
charge
costs of IV-B
children to IV-E, it is relevant that the
Agency
recognized that
states would have some choices with respect
to
some costs
benefitting both programs, so long as that
choice
was exercised
in an approved CAP.
o Nothing in the final regulations
or Agency guidance
prohibits
the
allocation of the costs to Title IV-E; moreover, as
we
noted above, the
Agency stated that it did not challenge
the
CAP approval
itself. 6/ The Agency issued a
policy
announcement in
1985 which indicated that certain
other
allowable costs,
not in issue here, should be
allocated
between
programs using a caseload or similar pro rata
method.
Hearing Ex. K
(PA-ACYF-85-01, November 18, 1985). While
the
Agency provided in
a policy announcement issued October
11,
1987 that states
would be required to use a case count
or
other equitable
basis to allocate recruitment and
approval
costs among
programs, this announcement was made
effective
only
prospectively, on the advice of counsel. Hearing Ex.
J.
(PA-ACYF-87-05);
Tr., p. 59.
After the State received notice of the Agency's objection to
the
allocation methodology, however, the State could not continue to rely
on
CAP approval. On July 25, 1984 the Agency notified the State of
its
objection to the allocation of the total recruitment and approval
costs
to Title IV-E, sending a policy memorandum explaining .the position
with
a request that the State alter its allocation methodology. Ex.
9. On
September 18, 1984, the State responded that it disagreed with
the
policy, but stated: "ln view of the policy interpretation . . . we
agree
to revise our Cost Allocation Plan effective 10-1-84 so that these
costs
can be prorated henceforth." Ex. 10. The State did not
actually amend
its CAP until October 29, 1986, over two years later.
Disallowance
Letter, Ex. 1. 7/
The State argued before the Board that the policy memorandum did no
more
than affirm that recruitment and approval costs could be charged to
the
IV-E program only to the extent they were "necessary" IV-E costs
and
advise that costs which did not benefit the IV-E program at all
should
not be charged to that program. The State argued that this did
not
preclude allocating the costs to Title IV-E, since all of the
costs
provided some benefit to, and were necessary for, Title IV-E.
The
memorandum states specifically, however, that "States must allocate
or
prorate costs for recruiting and licensing . . . ." Ex. 9. The
State's
response shows that the State understood that this
interpretation
required it to revise its CAP.
Since the State had notice that its allocation methodology
was
unacceptable to the Agency, and had even agreed to amend its CAP,
we
find that the State could no longer rely on an outdated approved
CAP
after October 1, 1984. The State had then received notice that
approval
of the CAP would be withdrawn, had agreed to revise the CAP, and
had
sufficient time to propose a CAP revision. In promising to amend
its
CAP, the State discouraged the Agency from formal procedures requiring
a
CAP revision pursuant to 45 C.F.R. Part 95. To permit
continued
reliance on the CAP would be unwarranted under these
circumstances.
b. Calculation issues
We find that the Agency should consider the alternate caseload
statistics
which the State said it could provide to substitute for the
rough data
provided to the auditors. See Ex. 3, p. 2. While the Agency's
calculation was
reasonable in light of the data the auditors had
received from the State, the
State was never notified that it would be
precluded from submitting more
accurate data, and the State identified
various factors which may render
unreliable the rough data provided to
the auditors. Moreover, at the hearing,
the Agency agreed to consider
alternate caseload statistics if submitted in a
timely manner. Tr., p.
189. 8/
We limit the State's opportunity to propose alternate caseload
statistics
to a 45-day period following receipt of this decision, or a
longer period if
the Agency permits, because we find that the record
contains evidence that
the State has had considerable time to develop
data. See Hearing Exs. C
and D.
In sum, with respect to recruitment and approval costs, we reverse
the
disallowance with respect to the period prior to October 1, 1984,
and
uphold the disallowance for the period thereafter subject
to
consideration by the Agency of the State's alternate
caseload
statistics. The State should submit its proposals, and
supporting
documentation, within 45 days of receipt of this decision, or
such
longer period as the Agency may permit. II.
State-level DCW foster
care unit and adoption unit costs
The State claimed FFP under the Title IV-E program in the total
costs
incurred by the foster care unit and the adoption unit at the
state
level. The Agency argued that, since these units served both
IV-E
children and non-IV-E children, the CAP should not control, and
the
costs of the units should be allocated between Title IV-E and
non-IV-E
programs, for reasons similar to those asserted for recruitment
and
approval costs.
The State noted that the costs had been allocated pursuant to the
approved
CAP, and argued that an overwhelming proportion of the costs
were "necessary"
to the Title IV-E program and benefitted that program.
According to the
State, the program-wide activities of the units "would
have continued to be
necessary if the non-IV-E caseload had suddenly
disappeared." State's
Brief, p. 37. The State also pointed out that
some of the units'
activities were necessary to fulfill specific IV-E
requirements, such as
operation of a case review system. Specifically,
the State asserted
that Title IV-E benefitted from 82 to 87 percent of
the costs of the foster
care unit, and at least 85 percent of the costs
of the adoption unit
(including all the costs of the program
wide-activities of each unit).
See Ex. 2, p. 7; State's Brief, pp.
37-39. The State alleged that the
reason for allocating the total costs
to Title IV-E was for administrative
convenience.
For the reasons discussed previously, we find no substantial basis
to
disturb the approved CAP allocation method by substituting a pro
rata
allocation method. We again rely on a finding that a pro
rata
allocation was not required by applicable provisions. Furthermore,
as
noted above, the Agency stated that it did not seek disapproval of
the
CAP and did not specifically contest the State's allegation that
Title
IV-E benefitted from most of the costs.
On the other hand, we uphold the disallowance in part because we
find
that, while a pro rata allocation was not necessarily required, it
was
improper to allocate to Title IV-E substantial costs from which
the
program did not benefit at all. We do not agree with the State that
the
amount of costs which provided no benefit to Title IV-E was
so
insubstantial that allocating those costs Title IV-E can be justified
on
the basis of administrative convenience. Even accepting the
State's
allegation that .all program-wide activities of the units
benefitted
Title IV-E, the State's own figures indicate that up to 18 percent
of
the foster care unit costs and up to 15 percent of the adoption
unit
costs benefitted only non-IV-E children. Thus, the State
allocated
costs to Title IV-E in excess of the extent of benefits received by
the
program. This was a clear violation of the requirement in OMB
Circular
A-87, Attachment A, section C.2, that costs are allocable to a
program
only to the extent of the benefits received.
We conclude that the CAP methodology was inequitable and should
not
control to the extent that it permitted the State to charge
a
substantial amount of costs to Title IV-E which were clearly
not
allocable to that program. Disallowance of these costs may also
be
warranted on the basis that they were unallowable, in light of
the
State's concession that they were not "necessary" costs to Title
IV-E.
State's Brief, pp. 37-39. FFP is available only in costs which
are
"necessary" for the proper and efficient administration of the
program.
45 C.F.R. 1356.60(c); OMB Circular A-87, Att. A, sec. C(1)(a).
We
therefore uphold the disallowance to the extent that the disputed
costs
benefitted only non-IV-E children.
In light of the State's obligation to document its costs, we uphold
the
disallowance of the maximum amount which could be based on the
ranges
provided by the State (18 percent of the costs of the foster care
unit
and 15 percent of the costs of the adoption unit). The Agency
should
consider any information to increase the accuracy of the
disallowance
which the State submits to the Agency within 45 days after
receipt of
this decision, or such longer period as the Agency may permit.
III. State-level DCW central office costs
a. Issues
The Agency disallowed part of the State's Title IV-E claims for FFP
in
costs incurred, at the state level, by the central office of DCW,
during
the period September 30, 1982 through September 30, 1983 (FY
1983). The
approved CAP in effect for this period provided that the
State would
directly distribute the costs of full-time personnel who worked
on an
abuse and neglect grant to that cost objective, and distribute
remaining
costs "between Title IV-E and Title IV-B based upon the proportion
of
salaries and benefits of other Child Welfare staff distributed to
.those
programs." Ex. 5, p. 19. The State amended its CAP
for subsequent
fiscal years to allocate DCW central office costs using the
percentages
obtained from a random moment sample (RMS) of county workers'
time.
Audit Report, Ex. 4, p. 6. (For a description of the State's
RMS
system, see Exhibit 5.)
Since the amended CAP resulted in significantly less charges to
Title
IV-E, the auditors compared the two methods. The auditors noted
that
the RMS percentages for fiscal year 1984 allocated about 75 percent
of
county workers' time to Title XX. The auditors reasoned that the
State
should have removed a corresponding percentage of costs from the
central
office cost center prior to distributing any costs to Title IV-E
because
social services are unallowable under Title IV-E. The
auditors
recommended a disallowance calculated for each quarter of FY 1983
by
removing about 75 percent of the total costs from the DCW central
office
cost center and by then using the State's distribution
percentages. 9/
The auditors also recommended an adjustment to account
for the audit
findings about how the costs of the foster care and adoption
units and
recruitment and approval costs should have been allocated, as well
as
another adjustment described as "related to the use of the RMS
data
which included non-IV-E costs during the period October 1, 1983
through
December 31, 1984."
.Based on the audit findings, the Agency disallowed FFP in DCW
central
office costs charged to Title IV-E which the Agency said were related
to
unallowable social services. The Agency cited as authority 45
C.F.R.
1356.60(c)(3). That regulation provides:
Allowable administrative costs do not
include the costs of
social
services provided to the child, the child's family
or
foster family which provide
counseling or treatment to ameliorate
or
remedy personal problems, behaviors or home conditions.
The Agency reasoned that the central office supervised all child
welfare
activities in the State and, therefore, some of the central office
costs
were attributable to unallowable social services. According to
the
Agency, the RMS percentages used by the auditors corresponded to
the
percentage of central office costs of supervising these
unallowable
social service activities.
b. Analysis of disallowance of alleged social services costs
The Agency is correct that CAP approval cannot justify
charging
unallowable costs to any program. (See our discussion above.)
To
determine whether such charging occurred in the circumstances of
this
case, however, we must determine: (1) whether the cost pool did
contain
unallowable social services costs; and (2) if so, whether the
State's
allocation method resulted in charging those costs to Title IV-E in
the
amount disallowed.
The State argued that the cost pool contained no unallowable
social
service costs because the central office employees did not
provide
treatment or counseling services themselves. The State said
that social
services of the type covered by the regulation were provided
by
contractors or by county caseworkers, who are directly supervised at
the
county level. Thus, the State reasoned, the central office
functions
were primarily administrative and managerial, not treatment
and
counseling. The State noted that activities such as "case
management
and supervision" and "referral to services" are specifically
allowable
under section 1356.60(c)(2) of Title IV-E regulations, arguing that
this
supported the State's position that all central office functions
were
allowable.
The State relied primarily on an affidavit by the Chief of
Program
Services for the Division of Children and Youth .Services, who
explained
that the central office staff were "upper level managers"
establishing
"general policies," and that the staff neither supervised nor
provided
counseling or treatment services. Ex. 23.
The primary flaw in the State's argument and evidence is that it
assumes
that the relevant question is whether central office staff
were
themselves actually providing or supervising treatment and
counseling
services. The issue, however, is whether the costs of
central office
staff are in part the costs of providing such services.
As used in
grant programs, the term "costs" generally includes the types of
costs
incurred in central office functions such as budgeting and
personnel,
whether they can be readily identified with a specific cost
objective as
a direct cost or must be distributed to various objectives using
an
indirect cost rate. See OMB Circular A-87, Att. A, paras. D, E and
F.
The record shows that the DCW central office staff performed
functions
such as hiring and firing personnel, overseeing administration of
county
office Child Welfare staff, establishing policies for contracts
with
providers of services, preparing budgets, and program evaluation.
Given
the nature of these functions, we think it is logical to assume that
the
central office was performing comparable functions relative to all
of
the activities of Child Welfare staff at the county level
(including
counseling and treatment services), absent any showing by the
State to
the contrary. For example, if the central office was
responsible for
hiring all Child Welfare personnel, then the central office
would have
hired personnel providing counseling and treatment, and if the
central
office established policies for contracts with service providers,
then
those policies would have applied to contractors providing treatment
and
counseling services.
We also find it significant that the State used the RMS study of
county
workers' time in its allocation method for both FY 1983 and
subsequent
years. In our view, this indicates a recognition by the
State that
there was at least some relationship between central office
functions
and county workers' time. The State did not specifically deny
that such
a relationship existed, but argued that its original allocation
method
was based on the assumption that no such relationship existed (since
no
costs were allocated to Title XX) and that the change in method
was
adopted only under pressure from the Agency. The State .pointed
out
that, although its letter explaining the change in allocation
method
stated that the new method "more truly reflect[s] all the activities
of
the Child Welfare local staff," the State letter "nowhere says that
it
believes that the new allocation method better reflects the work
of
central office staff." State's Comments on Board Draft Decision, p.
8
(emphasis in original, footnote omitted). In our view, however,
the
validity of any cost allocation method depends on there being
some
relationship between the costs to be allocated and the distribution
base
used. Here, it is undisputed that some of the county workers
were
engaged in providing or supervising counseling and treatment
services.
Absent a showing that the central office functions were not
performed
for these workers as well as other county workers, we must reject
the
State's position that none of the central office costs were the costs
of
providing these services.
Finally, we also reject the State's argument that its CAP reflected
a
permissible interpretation of the Title IV-E regulations as
allowing
reimbursement for upper-level administrative activities arising from
the
provision of treatment and counseling services. 10/ This
argument is
based on the premise that by permitting FFP in activities such as
"case
management" and "referral to services," the regulation permits FFP
in
local costs arising from providing treatment and counseling services
and
that, therefore, it is illogical to deny FFP for the more remote
costs
of "management of the local management" by the central office.
State's
Comments on Board Draft Decision, pp. 5-6. The "case
management" and
other activities for which FFP is available under the
regulation,
however, are not local management related to actually providing
to
foster children or their families the treatment and counseling
services.
They are instead activities .specifically required as part of a
Title
IV-E state plan, which are designed to ensure that the cases of
children
receiving Title IV-E maintenance payments are well-managed
and
supervised, so that the children do not simply drift in the foster
care
system but receive any services necessary to move them out of
the
system. The preamble of the relevant regulation distinguished
these
allowable activities from unallowable "direct services." 45 Fed.
Reg.
86817, 86826 (Dec. 31, 1980). The basis of the distinction, as
the
wording of the regulation indicates, is the nature of the
activities,
not the level of government at which costs are incurred.
Central office
functions, such as those at issue here, generally support all
activities
at the local level and, thus, are properly considered costs of all
of
those activities.
Thus, we conclude that some of the costs incurred by the central
office
here were attributable to the cost objective of providing treatment
and
counseling services, and therefore were unallowable as charges to
Title
IV-E. 11/
Our conclusion that some of the costs the State included in the
DCW
central office cost center are the costs of providing unallowable
social
services is not dispositive here, however. Unlike certain types of
cost
such as bad debts or interest expenses which are prohibited under
OMB
Circular A-87 as charges to any federal program, social services
costs
may be properly charged either to Title IV-B or to Title XX,
according
to the Agency's own witness. Tr., p. 63. As this Board
explained in
Minnesota Dept. of Public Welfare, DGAB No. 466 (1983), .the
mere
inclusion in a cost pool of an expense which could not be
properly
charged to a particular program does not mean that the allocation
method
results in an improper charge. An appropriate cost allocation
method
would distribute those expenses to programs which benefit and to
which
the costs may properly be charged (here, Title IV-B or Title XX).
The
Board described removal of questioned costs from a cost pool as a
last
resort to be used only if the allocation method does not assure
proper
charging.
Thus, the issue here is whether the State's allocation method factored
out
as charges to Title IV-E the costs of unallowable social service
activities
of the DCW central office. There is no dispute here that the
RMS system
was effective in ensuring that county workers' time
attributable to
unallowable social services was not allocated to Title
IV-E. The
auditor testified that the State's distribution base for the
DCW cost center,
even for FY 1983, was based on the RMS system. Thus,
it is reasonable
to assume that the State's method effectively assured
that Title IV- E was
not charged for such services, so long as the State
in fact distributed to
IV-E only the costs representing the exact
percentage that other Child
Welfare staff salaries and benefits
attributed to IV-E bears to total other
Child Welfare staff salaries and
benefits.
The record is not clear on whether the State distributed unallowable
costs
to Title IV-E. The State itself never clearly explained precisely
its
allocation methodology; it merely alleged that the allocation was
consistent
with the terms of the CAP. The CAP provision is ambiguous,
however. The
CAP states that, after Abuse and Neglect grant costs are
directly charged,
remaining costs "will be distributed between Title
IV-E and Title IV-B based
upon the proportion of salaries and benefits
of other Child Welfare staff
distributed to those programs." Ex. 5, p.
19. The CAP provision
could be read to require allocating to Title IV-E
either the exact percentage
of total other Child Welfare staff salaries
and benefits distributed to Title
IV-E, or the relative percentage of
IV-E salaries and benefits compared to
Title IV-B salaries and benefits.
12/ Only the exact percentage method
assures that Title IV-E is not
burdened with unallowable social services
costs, and, thus, it is the
only reasonable interpretation of the CAP.
The State pointed out that the Agency did not allege that the
CAP
provision was ambiguous and that the auditor had testified that
he
understood it. We do not find these factors significant here since
the
auditor also appeared confused about what method the State actually
used
and since the CAP provision is ambiguous on its face. Given
the
ambiguity in the CAP language, and the general principle
(discussed
above) that CAP approval cannot justify charging unallowable costs
to a
program, the State's reliance on CAP approval is meaningful here only
to
the extent the State applied a CAP interpretation which did not
result
in allocating unallowable social services costs to Title IV-E.
If the State properly interpreted the CAP and applied the exact
percentage
method, then no adjustment of its claims is necessary. The
disallowance was
predicated on the assumption that the State used the
relative percentage
method, or otherwise distributed unallowable social
services costs to Title
IV-E. But the Agency provided no evidence to
support that
assumption. Even though the Board directly asked the
federal auditor
whether the State's distribution base accounted for
social services costs
(for example, by using the exact percentage method
described above), the
response was not clear. See Tr., pp. 162, 140-46;
Supplemental
Affidavit of Harley Botchlet, submitted January 15, 1988.
13/ Indeed,
the auditor's description at the hearing of the State's
distribution base
seemed to indicate that the State used the exact
percentage method (see note
7 above). If the State did so, then the
disallowance duplicates
recognition of social service costs and is
incorrect.
If the State instead used the relative percentage method, some
adjustment
is appropriate. Removal of the costs from a cost pool,
however, should
be used only as a last resort. Minnesota, supra.
Recalculating the
claims using the exact percentage method itself would
be more accurate and
consistent with the CAP. The State should have the
opportunity to show that
it used the exact percentage method and, if
not, to have the disallowance
recalculated based on the exact percentage
method. Recalculation is
warranted also because the Agency determined
the amount to remove from the
cost center based solely on the fiscal
1984 county RMS, and apparently did
not take into account the two
state-level units for foster care and adoption
assistance. The Agency
provided no rationale for this omission, and we
find that these units
should be represented in the distribution base.
We find that the State should submit information to the Agency to show
how
it calculated what percentage of the cost center to distribute to
Title
IV-E. The State should submit this information within 45 days
after
receipt of this decision, or such longer period as the Agency
permits.
c. Other adjustments
The Agency also revised the distribution percentages to reflect
reductions
in the percentages of Child Welfare employees' salaries and
benefits
distributed to Title IV-E made in the audit and discussed in
sections I and
II above (recruitment and approval activities and the two
units of DCW).
Clearly, this adjustment must be recalculated in light of our
conclusions
with respect to these disputed costs. Since this second
adjustment
would not alter the allocation methodology, but merely
substitute more
accurate figures on the distribution of salaries and
benefits required by the
approved methodology, we uphold the application
of this adjustment in
principle, with the amount to be recalculated.
The Agency also disallowed FFP in Title IV-E costs incurred during
the
five quarters ended December 31, 1984. For this period, the
Agency
asserted only that the State, in determining the percentage of
DCW
central office costs attributable to Title IV-E, erroneously
included
all recruitment and approval costs as Title IV-E costs.
In light of our conclusion that recruitment and approval costs
were
properly allocated to Title IV-E by the State until October 1, 1984,
we
uphold this adjustment only with respect to the period after October
1,
1984.
IV. Indirect Costs
The parties did not separately address the disallowance of
indirect
costs. The disputed indirect costs were calculated on the
basis of the
direct costs discussed above. Thus, the Agency should
recalculate the
disallowance of indirect costs in accordance with our
conclusions above.
Conclusion
In sum, we uphold the disallowance in part and reverse it in part,
as
follows:
o recruitment and approval
costs: we reverse the
disallowance
for costs
incurred prior to October 1, 1984 and uphold
the
disallowance for
subsequent costs, subject to consideration
by
the Agency of
alternate caseload statistics to calculate
the
amount.
o state-level foster care and
adoption units: we uphold
the
disallowance to
the extent that the State allocated costs
to
Title IV-E which
provided no benefit to that program.
. o DCW central office costs:
we uphold the disallowance
subject
to
reexamination and recalculation in light of the
analysis
set forth in
this decision.
The State will have 45 days from receipt of this decision, or such
longer
period as the Agency permits, to submit: (1) alternate caseload
statistics
regarding the recruitment and approval costs, (2)
documentation to establish
what percentage of the costs of the DCW
foster care unit and adoption unit
were necessary to the Title IV-E
program, and (3) information about the
distribution base used for DCW
central office costs.
________________________________
Cecilia
Sparks Ford
________________________________ Norval
D.
(John) Settle
________________________________ Judith
A.
Ballard Presiding Board Member
1. We note that this Department has previously permitted
costs of
applying standards to some types of service providers to be
allocated
entirely to federal programs which benefitted from those costs,
even
though persons other than program recipients were served by
the
provider. Cf. Michigan Dept. of Social Services, DGAB No. 370
(1982)
(summer camp licensing costs allocable to Title XX as long as
some
welfare recipients attend camp); Pennsylvania Dept. of Public
Welfare,
DGAB No. 277 (1982) (state licensing costs allocable in full to
federal
programs when identical to federal standards).
2. The regulation refers to foster homes only, but an Agency
policy
announcement indicates that the section applies to recruitment
and
approval of adoptive homes as well. Ex. 19 (ACYF-PA-83-1, August
11,
1983). The Agency did not attempt, in this case, to distinguish
between
foster homes and adoptive homes.
3. The Agency argued that not all non-IV-E children served by
foster
homes received maintenance payments under Title IV-B since only
limited
funds are available under that program for maintenance
payments. As the
State pointed out, however, all the non-IV-E children
were eligible for
Title IV-B funds, and, at the time of recruiting and
approving the
homes, the State did not know which payments would actually be
funded
under Title IV-B.
4. The Agency also argued that allocating costs only to Title
IV-E
effectively shifted the costs to avoid funding restrictions under
Title
IV-B. The mere presence of funding restrictions in Title IV-B is
not
conclusive evidence that impermissible shifting of costs
occurred,
particularly in light of the interrelated nature of the Title IV-B
and
IV-E programs.
5. Also, an Agency official involved in drafting the
proposed
regulations testified that the specific reference to
"flexibility"
applied only to expenditures which would have been have been
unallowable
when the foster care program was under Title IV-A (such as case
plans
under section 427 of the Act). Tr., pp. 26-27, 47-48. It is
unclear
whether such expenditures would include any recruitment and
approval
costs.
6. While emphasizing that allocation should be guided by a CAP,
the
final regulations contain examples of administrative costs
allowable
under Title IV-E. 45 C.F.R. 1356.60(c)(1-2). The first
category are
costs directly related only to Title IV-E, which are allowable
under
Title IV-E and "may not be claimed under any other section or
federal
program." Id., at (c)(1). The second category contains
other
administrative costs allowable under Title IV-E. This category
includes
recruitment and approval costs. Only the last item listed in
the second
category ("related agency overhead") specifically limits claims to
"a
proportionate share" of the total costs involved. Id. at
(c)(2)(ix).
The only other reference to allocation issues is in the
paragraph
preceding these examples of allowable costs, which states that the
CAP
shall identify costs allocated and claimed under Title IV-E. 45
C.F.R.
1356.60(c).
7. The Agency separately sent to the State, on August 23, 1984,
a
report of the results of a general financial review which did not
cite
any concern over recruitment and approval cost allocation. It is
clear
from the State's September 18, 1984 letter that the State
understood
that allocation concerns regarding recruitment and approval costs
were a
separate matter. Ex. 10.
8. In the disallowance letter, the Agency refused to
consider
alternate caseload statistics, saying generally that it could
not
reimburse claims based on estimates of costs rather than
actual
expenditures. Ex. 1. Estimation is not per se wrong when
the costs
were actually incurred, however, as long as the estimate has a
basis in
actual fact, and is as accurate and equitable as reasonably
possible
under the circumstances. Cf. New York State Dept. of Social
Services,
DGAB No. 537 (1984); New York State Dept. of Social Services, DGAB
No.
542 (1984). Nothing in this decision modifies our earlier
decisions.
The Board does not rule here on the merits of any particular
caseload
statistics submitted by the State. The Agency should consider
any such
submission and determine (if the statistics involve an estimate)
whether
the estimate meets the criteria stated in prior Board decisions.
9. When asked to explain how the State had distributed the
cost
center, the auditor described the State's process as follows: first,
the
State took the salaries and benefits of child welfare county
workers
allocated to IV-E under the RMS system; next, the State added in
the
salaries and benefits of the state-level foster care and adoption
units;
and, finally, the State divided this figure by total child
welfare
salaries and wages to determine the percentage of the cost center
which
would be allocated to IV-E. Tr., pp. 127-129. The auditor
indicated he
might need to confirm this from his workpapers; however,
his
supplemental affidavit neither confirmed nor specifically
contradicted
this description. Supplemental Affidavit of Harley
Botchlet, submitted
January 15, 1988.
10. As we discuss below, the CAP is in our view ambiguous
and does
not necessarily embody an interpretation that would allocate to
Title
IV-E costs associated with administering county activities of
providing
unallowable social services. While, as the State alleged, it
may have
been clear on the face of the CAP that the State's method was
not
charging any central office costs to Title XX, this did not
necessarily
mean that Title IV-E would be charged for a greater proportion of
the
central office costs than those associated with allowable Title
IV-E
activities at the county or State unit level.
11. This does not mean that we necessarily agree with the
Agency
about the extent to which
unallowable social services were
included in the cost center. The auditors appeared to be
using
percentages of county workers'
time attributed to any social
service by
the RMS system; the Agency's own witness
acknowledged
that some social services
could be charged to Title IV-E.
The
regulations make only certain types
of social services
unallowable as
charges to IV-E. 45 C.F.R.
1356.60(c)(3).
Moreover, the Agency did
not take into account the relationship
between the DCW central office and the foster care and
adoption
units in determining the extent
to which the DCW foster care
activities
were unallowable social services.
12. For a simple example of the difference in the two
methods, assume
that the random moment
study and the allocation of other state
Child Welfare staff indicates that 40 percent of all salaries
and
benefits were attributable to Title
IV-E, 40 percent to Title
IV-B, and 20
percent to Title XX (Social Services). Using
the
exact percentages to determine the
amount of central office costs
to be
distributed to Title IV-E would result in allocating
40
percent of those costs to Title IV-E
(with the remaining 60
percent
presumably allocated to Title IV-B). Using the
relative
percentages to distribute the
costs between Titles IV-E and IV-B
would
result in allocating 50 percent of those costs to each
of
the two programs.
13. As a result of the questions posed by the Presiding
Board Member
at the hearing in this
case, the Agency reduced the
disallowance
by $12,751. The
Agency determined that, during two quarters,
the
State had included an amount
reflecting a particular social
services
activity identified by the RMS (cost center
630,
adoption services), in calculating
the allocation to Title IV-B
under its
RMS system. The Agency conceded that this amount
had
not been charged to Title IV-E, and
should not be disallowed.
Supplemental
Affidavit of Harley