DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Illinois Department of Public Aid
Docket Nos. 87-206, 88-13, and 88-56
Decision No. 973
DATE: August 3, 1988
DECISION
The Illinois Department of Public Aid (Illinois or State) appealed
three
disallowances by the Family Support Administration (Agency or
FSA)
totaling $623,423 in federal financial participation (FFP) claimed
under
Title IV-A of the Social Security Act. The disallowed
claims
represented the federal share of costs for services provided by
a
private contractor from October 1, 1986 through December 31, 1987
to
augment the identification of overpayments in the State's
public
assistance programs. As these appeals have developed, the
central issue
before us has become whether the contract costs were allocated
among the
participating federal programs in accord with federal cost
principles
and the State's cost allocation plan (CAP). For the reasons
discussed
below, we find that the Agency reasonably determined that the
contract
costs were not so allocated, and we uphold the disallowance
in
principle. As discussed below and consistent with the
Agency's
suggestion, our ruling allows the State an opportunity to
submit
documentation to the Agency supporting alternate methods of
allocating
the costs among the federal programs (or to submit an amendment to
its
CAP).
Factual Background
In October 1985 the State executed a contract with Data
Management
Associates (DMA) to provide services to augment the identification
of
overpayments made in the State's Aid to Families with Dependent
Children
(AFDC), Medicaid and Food Stamp programs. For each of the
three
programs the State receives FFP at a rate of 50 percent
for
administrative costs, i.e., the State and the responsible federal
agency
share the administrative costs of each program on an equal
basis. FSA
is the responsible federal agency for the AFDC program under
Title IV-A
of the Social Security Act.
Under the terms of the contract, DMA was to be reimbursed on a
contingent
basis, being paid on the estimated amount of program dollars
identified as
collectible overpayments. State Ex. C, pp. 14-15. The
State
determined that DMA should primarily focus its efforts on the AFDC
and Food
Stamp programs. As a result of the reimbursement methodology
and the
overpayment cases identified, the State allocated to AFDC a much
higher
percentage of the contract costs than to the Food Stamp program.
Discussion
The parties' dispute here concerns how the costs associated with the
DMA
contract were allocated. The Agency never claimed that the purpose
of
the contract was improper or that the State's total amount of payment
to
DMA was unreasonable. The Agency nevertheless argued that the
contract
allocated the federal share of the contract costs on an
unreasonable
basis, with the amounts assigned to the AFDC program
disproportionate to
the benefits AFDC received from the contract's
performance. The Agency
contended that in order for the costs to be
allocated properly, the
State either had to change that methodology to
conform with federal cost
principles or else obtain approval of the
contract's reimbursement
methodology through amendment of the State's cost
allocation plan.
Because the State has done neither, FSA disallowed all of
the federal
share of the contract costs allocated to the AFDC program, even
though
it was uncontested that the AFDC program had benefited from the
services
performed under the contract through the identification of
AFDC
overpayments.
The State's position was that the contract's reimbursement methodology
was
permissible under its cost allocation plan, and that it has already
paid its
share of the contract costs. According to the State,
therefore, if it
should be found that AFDC's allocation of the costs
were too high, the other
participating federal program should assume
greater costs, and not the
State.
I. The contract's reimbursement methodology.
The Agency stated that the contract's reimbursement methodology
violated
the cost principles set forth in Office of Management and Budget
(OMB)
Circular A-87. The principles of OMB A-87, made applicable to
AFDC
costs by 45 C.F.R. 74.171, provide that in order for a cost to
be
allowable it must "[B]e necessary and reasonable for proper
and
efficient administration of the grant programs [and] be
allocable
thereto under these principles . . ." Attachment A, Paragraph
C.1.a.
The principles further provide that:
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.
Attachment A, Paragraph C.2.a. and b.
The Agency stated that the contract's reimbursement rate violated
these
principles because DMA was reimbursed at a higher rate for the
AFDC
overpayments identified than it was for the Food Stamp
overpayments
identified. According to the Agency, reimbursement at
unequal rates
when each program receives essentially the same services
results in a
violation of OMB A-87 cost principles.
The Agency contended that the contract's reimbursement rate was tied
to
the estimated amount of program dollars identified as
collectible
overpayments, rather than the actual cost of the effort to
identify the
overpayments. This contingent arrangement resulted,
according to FSA,
in a wide disparity in the allocation of costs to the AFDC
and Food
Stamp programs. As an example of this disparity, the Agency
pointed to
one document (Agency Ex. L) which showed DMA was reimbursed by
AFDC at a
rate of 59.4% of the contract costs for the amount of AFDC
overpayments
identified, because the amount of the identified AFDC
overpayments in
this particular instance equaled 59.4% of the total amount of
identified
overpayments; DMA, however, was reimbursed at a rate of 21.4% for
the
identification of Food Stamp overpayments because the amount of
those
overpayments equaled only 21.4% of the total identified.
Nowhere,
according to the Agency, is there any indication that it is more
costly
per se to identify an AFDC overpayment than a Food Stamp
overpayment.
This example, the Agency continued, showed that basing
DMA's
reimbursement rate on the amount of overpayment identified, rather
than
on the actual costs of identifying individual cases of
overpayment,
resulted in the AFDC program being charged with a
disproportionate
amount of the contract costs.
As the contract's methodology based DMA'S reimbursement on a percentage
of
the amounts of overpayments identified, we find that the Agency
was
reasonable in determining that such an arrangement violated
the
provisions of OMB A-87. The provisions of OMB A-87 explicitly
prohibit
the shifting of costs allocable to a particular program to
another
federal grant program. In allocating the costs between AFDC and
the
Food Stamp program, there is no correlation between the time and
effort
expended in identifying each case of an overpayment and the
costs
charged under the contract. Costs more accurately attributable to
the
Food Stamp program are shifted to AFDC if the basis for allocating
costs
is the potential amount of overpayments.
The State argued that the methodology in the contract does allocate
costs
on the basis of benefits received by each program. This is based
on the
theory that the more overpayment dollars each program has
identified, the
more dollars it will be able to collect. However, this
is highly
speculative. For example, there is an AFDC regulation which
sharply
limits a state in the amount of overpayments it can recover from
current AFDC
recipients. See 45 C.F.R. 233.20(a)(13). The amount of
the
identified overpayments therefore is not necessarily directly
related to the
amount of overpayments immediately collectible. In any
event, at the
very beginning of OMB A-87, there is stated under
"Objectives", that the
principles "are designed to provide that
federally-assisted programs bear
their fair share of costs recognized
under these principles." (Emphasis
added) The record supports the
reasonableness of the Agency's view that
the allocation by the State has
the AFDC program bearing far more than its
fair share of the costs.
Under these facts, therefore, we find that the Agency was not
unreasonable
in determining that the contract's methodology violated the
cost principles
of OMB A-87.
II. Alternatives to a complete disallowance.
In the course of these appeals the Agency modified its position as to
what
type of reimbursement methodology it would accept for the DMA
contract.
The Agency suggested an alternative to a disallowance of the
entire amount
claimed for the DMA contract costs. The Agency stated
this suggestion
as follows:
(T)he reimbursement rate for the DMA identification
function should
be related to the actual cost of
identifying the individual cases,
rather than on the basis
of the ability of the program with more
identified
collectible dollars to pay.
Agency Brief, p. 15.
This alternative, that each program bear an equitable proportion of
the
State's actual cost, seems reasonable.
If the State is interested in this alternative, then it should contact
the
Agency as soon as possible to discuss the actual details of arriving
at a
solution. The Director of Cost Allocation should also be
involved,
since any solution involves not only FSA but the Food Stamp
program.
See OMB A-87, Attachment A, par. J., and 45 C.F.R. 95.519(b)(1).
Conclusion
For the reasons given above, we find that, under the principles in
OMB
A-87, the Agency had a reasonable basis, in the facts of this case,
for
refusing to accept the payment methodology in the DMA contract.
We
accordingly sustain the disallowance in principle. We sustain the
full
amount of the disallowance provisionally, subject to an opportunity
for
the State to present evidence in support of a reduction of the
amount,
as discussed below. The State may proceed in either or both of
these
ways:
(a) If the State elects to develop an alternative method
of
reallocating the costs of the contract as discussed in the body of
this
decision, the State must initiate discussions with the Agency
within
twenty days after receiving this decision, and must submit
whatever
documentation the Agency reasonably requires within 45 days
after
receiving this decision (or such longer period as the Agency
allows).
If the State can not agree with the Agency on what documentation
is
required, then the State may return to the Board on that issue
alone,
within 30 days after the Agency's final response to the
State's
submission.
(b) Alternatively, the State may within 45 days after receiving
this
decision (or such longer period as the Agency allows) submit an
amended
CAP to DCA which will fairly allocate the costs of the DMA
contract
between AFDC and the Food Stamp program in compliance with the
cost
principles. If DCA refuses to approve such an amendment, or
refuses to
give it retroactive effect, then any appeal by the State shall
follow
the normal procedure prescribed by regulation.
If the State takes either (or both) of the actions described above
within
the time period provided, the implementation of this decision
shall be stayed
pending final disposition of the alternative(s) elected
by the State.
If the State fails to meet the applicable deadline.in (a)
or (b), then the
disallowance is upheld in the full amount of $623,423.
________________________________ Donald F. Garrett
________________________________ Norval D. (John) Settle
________________________________ Alexander G. Teitz
Presiding
Board