DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: California Department of Social Services
Docket No. 88-19
Decision No. 978
DATE: August 10, 1988
DECISION
The California Department of Social Services (State) appealed the
decision
of the Family Support Administration (FSA) disallowing
$1,559,012 in federal
financial participation (FFP) claimed by the State
for interest payments made
in accordance with orders entered against the
State in five court
cases. The issue in dispute is whether FFP in the
interest payments is
available under Title IV-A (Aid to Families with
Dependent Children or AFDC)
of the Social Security Act (Act).
For the reasons stated below, we conclude that the interest payments
in
question resulted from the State's failure to comply with federal
law
and, therefore, are unallowable either as AFDC assistance payments or
as
AFDC administrative costs. Accordingly, we uphold the disallowance.
BACKGROUND
The amounts disallowed represent the federal share of interest
payments
which the State made pursuant to court orders in five cases to which
the
State was a party, but FSA was not. In these cases, the courts
held
that certain State policies were invalid and resulted in
individuals
being wrongfully denied AFDC or being paid too little
assistance. See
State's Exs. E-J. The State made corrective AFDC
payments to the
individuals in the amounts they would have received had the
State paid
them properly. The State also paid interest to the
individuals involved
in accordance with section 3287(a) of the California
Civil Code.
California submitted claims for FFP in maintenance assistance under
Title
IV-A for both the corrective AFDC payments and the interest. FSA
paid
the claims for corrective AFDC payments but not for the interest.
FSA
disallowed the interest on the grounds that the interest did not
qualify as
an assistance payment under the Act and the California state
plan for AFDC
and that the interest was not a reasonable and necessary
cost of the program
because it resulted from the State's failure to
comply with federal
law. FSA noted that it was not a party to the court
cases involved and
that it considered the interest to be outside the
scope of the AFDC
program.
The State contested the disallowance, arguing generally that 1)
the
interest should be considered assistance because it gives the
recipient
the value to which the recipient is entitled; 2) alternatively,
the
interest should be considered a necessary administrative cost under
the
program because payment of such interest is unavoidable; and 3)
FSA
should not be able to disallow these costs without examining whether
it
had approved the state policies at issue.
We discuss these arguments below.
DISCUSSION
Whether FSA reasonably interpreted the Act to not require FFP in
interest
payments of the type here
The State argued that interest payments should be considered an
allowable
part of the "assistance" payments made to the program
recipients because
payment of interest merely ensured that the
recipients received the value of
what they would have received if the
proper payments had been made on
time.
In determining whether the federal government is obligated to provide
FFP
for the interest, we look first to congressional intent. While
the
State argued that Congress intended the federal government
to
participate in this type of interest, the State pointed to nothing
in
the statute or its legislative history specifically addressing
the
question of whether interest should be considered AFDC assistance.
On
the other hand, this Department's administrative interpretation,
since
at least 1973, has been that court-imposed interest payments
resulting
from incorrect state agency action are not allowable as
assistance
payments.
APA-PRG-10, a Title IV-A program regulation guide issued on August
10,
1973, specifically informed states that --
Federal financial participation shall not be
available for court
imposed penalty payments
(payments in addition to amounts of
assistance
provided to eligible individuals under an approved
State
plan) such as interest payments, compensatory
damages, punitive
damages, etc., resulting from
incorrect State agency action as
determined by the
court.
(Emphasis added.) The State did not deny that it had notice of
this
interpretation.
We find unpersuasive the State's argument that Congress would
have
affirmatively stated that interest was outside the scope of the
program
if it had so intended. The State provided no examples of
statutory
provisions explicitly excluding federal funding for interest
payments.
On the other hand, FSA cited to section 1903(d)(5) of the Act,
which
directs the Secretary to pay interest to the states on withheld funds
in
certain circumstances. The fact that Congress explicitly provided
for
payment of interest in at least one section of the Act suggests that
no
interest payments are otherwise provided for. 1/
FSA also persuasively argued that interest does not readily fit within
the
"conceptual framework" within which AFDC payments are made.
This
"framework" is roughly one in which (1) pursuant to section 403(a)(1)
of
the Act, the federal government provides FFP for "aid . . . under
the
State plan"; (2) pursuant to section 402 of the Act and the
implementing
regulation at 45 C.F.R. 233.20, the State plan must set forth
the
elements of cost to be included in calculating the State's "standard
of
need"; and (3) the AFDC assistance payment is the difference
between
this "standard" and the family's countable income.
California pointed to no State plan provision which specified
that
interest on underpayments would be an element used to calculate
an
assistance payment, or which otherwise required the payment of
interest.
The federal statutory and regulatory provisions make it clear that
FFP
will be available only in expenditures made in accordance .with a
state
plan. See, e.g., section 403(a)(1) of the Act; 45 C.F.R.
233.20(b)(2).
2/ The interest here was paid instead pursuant to a
separate State law
which has no apparent relationship to the federal AFDC
program and which
cannot be used as a basis for claiming FFP.
There may be some merit to California's point that interest paid
in
circumstances such as this ensures that the AFDC recipient receives
the
value of what the recipient would have received if the payment had
been
made on time. Nothing in this concept requires, however, that
the
statute must be read to provide federal funding for more than the
amount
of assistance which should have been paid originally. The
Board
considered this argument in Massachusetts Dept. of Public Welfare,
DGAB
No. 933 (1988), the Commonwealth of Massachusetts had reimbursed
certain
hospitals at rates lower than the rates established under the
approved
Medicaid state plan. The issue was whether interest a state
court
ordered the state Medicaid agency to pay on the amounts
improperly
withheld by Massachusetts constituted "medical assistance" under
Title
XIX of the Act. The Board rejected Massachusetts' argument that,
since
the interest paid simply gave the hospitals the value they should
have
received under the state plan, the interest should be
considered
"medical assistance." The Board found that, even if the
federal
government benefited from initially paying only its share of the
lower
amount, the refusal to provide federal funding for a share of
the
interest was reasonable because it promoted the congressional
and
regulatory policies requiring that states follow the rate
methodologies
set out in their state plans.
California cited nothing which distinguishes Massachusetts legally
from
this case, and we think that similar principles should apply
when
determining what constitutes assistance under the various titles of
the
Act. 3/ FSA's longstanding interpretation that no FFP is
available in
interest arising from "incorrect State agency action" is a
reasonable
one; it promotes program goals by encouraging states to comply
with
federal requirements and to correct any identified
underpayments
promptly.
In sum, the relevant statutes and regulations do not directly address
the
question, and the federal interpretation, of which the State had
notice since
1973, that assistance payments do not encompass this type
of interest is a
reasonable one which furthers federal policy.
Whether FFP is available in the interest as an administrative cost
We also reject the State's position that, even if the interest
payments
here are not within the meaning of the term "assistance," they
are
allowable administrative costs. The State argued that it is
reasonable
and necessary to pay interest on an AFDC payment which has
been
improperly withheld from a recipient in order to give the recipient
the
value of what the recipient should have received. This argument
is
flawed because it fails to recognize that the interest could have
been
avoided if the State had complied with federal requirements
initially.
The State also argued that these costs should be considered
necessary
program costs because --
o Congress agreed to provide FFP for normal
program and
administrative costs;
o Congress envisioned that payment errors
would be inevitable in
this complex program and
provided methods for correcting such
errors (citing
sections 403(i) and 402(a)(22) of the Act);
o when errors result in underpayments, the
Agency provides FFP for
the corrective payment
itself, for administrative costs incurred in
calculating the payment, and for any legal expenses incurred in
a
law suit resulting from the underpayment, and
there is no real
difference between these items and
court-ordered interest on the
retroactive payment;
and
o the State has discretion to determine what
costs are
necessary to its
program.
This rationale is also flawed. While a tolerance is provided for
errors
made by a state caseworker in determining an applicant's eligibility
for
AFDC, this does not mean that Congress undertook to participate
in
interest payments necessitated because a state had adopted a
policy,
contrary to federal law, which resulted in systematically denying
the
proper amount of benefits to recipients. Neither section 403(i) of
the
Act (which provides for a tolerance for errors identified throughout
the
AFDC quality control system) nor section 402(a)(22) (which requires
that
state plans provide for correction of underpayments) contains
any
indication that Congress intended to provide federal funding
for
interest on .underpayments or that Congress considered interest as
part
of the underpayment. The State did not cite, nor could we find,
any
indication in the legislative history or regulatory implementation
of
these provisions which supports the State's view. Indeed, it is
clear
that the State did not pay the interest to comply with federal law,
but,
rather, to comply with State law. Contrary to what the State
argued,
the need to comply with State law does not render the costs
"necessary"
for federal purposes.
Under section 403(a)(3) of the Act, FFP is available in
administrative
costs only if they are "found necessary by the Secretary for
the proper
and efficient administration of the State plan." While
states have some
discretion in establishing standards which set the amount of
an
allowable assistance payment, this discretion is exercised in a
state
plan. As mentioned above, the State did not contend that its
state plan
provided for these interest payments. With respect to
administrative
costs of operating the program, FFP is available only in costs
found
necessary for the proper administration of the plan. FSA
reasonably
found here that these costs could have been avoided if the State
was
properly administering the program.
Moreover, applicable regulations elaborate on what administrative
costs
are allowable. FSA pointed to certain provisions of OMB Circular
A-87,
made applicable to AFDC grants through 45 C.F.R. 74.171, which
support
the disallowance. The Circular, entitled "Cost Principles for
State and
Local Governments," states:
Fines and penalties. Costs resulting from
violations of, or
failure to comply with Federal,
State, and local laws and
regulations are
unallowable.
Attachment B, section D.5. California argued that this provision
was
not applicable because the interest cost at issue here was not a
"fine"
or "penalty," but an amount "paid as part of the underpayment
correction
so that the recipient receives what she was entitled to receive
under
the program." (State's Brief (Br.), p. 3)
While the interest may have been designed to compensate the recipients
for
the "value" of the money they should have received earlier, we do
not agree
that this automatically makes FFP available under the
provision.
Section D.5. of the Circular states that "costs resulting
from . . . failure
to comply with Federal . . . law . . . are
unallowable." Even if the
interest is compensatory in nature, it still
falls within this broad
language.
California appears to be interpreting the heading "fines and
penalties"
too narrowly. As discussed above, APA-PRG-10 indicated to
the states
that interest and other compensatory damages were considered a
"penalty"
in which FFP was not available. Moreover, the purpose of the
headings
in the part of the Circular containing the principles for specific
items
of cost is to serve as a means of alphabetizing the various
cost
principles so that they may be referred to more readily, not to
limit
the language of the text. Massachusetts Dept. of Public Welfare,
DGAB
No. 933 (1988).
We also note that Attachment B., section A.2. of the Circular states:
. . . Failure to mention a particular item of
cost in the
standards is not intended to imply that
it is either allowable or
unallowable, rather
determination of allowability in each case
should be
based on the treatment of standards provided for
similar
or related items of cost . . . . (Emphasis
added.)
Interest is at the very least "similar or related" to fines or
penalties
when it is a cost resulting from failure to comply with federal law
and
regulation. 4/
Thus, we conclude that interest payments resulting from a failure
to
comply with federal law are not allowable AFDC administrative costs.
Whether the interest here did result from a failure to comply with
federal
law
The State argued that the interest here could not reasonably be
considered
to have resulted from a "failure to comply with Federal law"
because (1) the
State did not "deliberately violate federal law"; and
(2) the State
regulations at issue were "approved by HHS either formally
in the 'state
plan' or informally or tacitly by regional HHS personnel."
(State's Br., p.
4)
FSA responded essentially that interest would no more "assist"
an
individual when there had been federal approval of a state policy
than
when there was no federal approval. FSA also said that there was
no
factual basis for the State's allegation of federal involvement,
only
general assertions. (Respondent's Br., note 10)
The State replied that it had provided uncontradicted evidence, in
the
form of an affidavit by a State official, to support its
assertions.
The affidavit, by the Chief, Welfare Policy Development Branch,
attests
that the State makes every attempt to operate its AFDC program
in
conformity with federal requirements, even when the State has
serious
doubts about the validity of the federal requirement, as it did in
the
case of Grimesy v. McMahon, No. C 86 0947 SW (U.S.D.C. N.D. Cal.).
The
affidavit further states:
In many instances, the requirements of federal
statutes and
regulations are not clear. As a
result, [State] personnel have
regular, on-going
contact, in writing and by telephone with
regional
federal personnel of [HHS] concerning the requirements
of
federal law . . . Thus, when welfare
recipients bring an action
challenging a state AFDC
regulation . . . , the policy set forth in
the
regulation has generally been approved by HHS, either
formally
in the "state plan" approval process or
informally or tacitly by
regional HHS personnel
during the discussions that occur on a
regular basis
between the state and federal departments.
State's Ex. L. The State acknowledged that this affidavit makes
no
reference to the five specific cases involved in this appeal,
but
asserted that it did not do so "because so much time has elapsed
since
the adoption of the State regulations at issue in those
cases."
(State's Reply Br., p. 7) The State argued that its undisputed
pattern
and practice testimony was sufficient to shift the burden to FSA
"to
produce evidence that the usual, customary practice did not occur
with
respect to any of the five cases involved in this appeal."
(Id.) The
State said:
Unless this Board is going to accept the Agency's
position that the
extent of actual Agency
involvement is irrelevant as a matter of
law, this
Board must either accept the uncontroverted testimony .
.
. or remand to the Agency to make a factual
determination as to the
extent of Agency involvement
in the adoption of the state
regulations at issue in
each of the five cases.
(Id.)
We do not here reach the issue of whether federal approval of a
state
policy would always be totally irrelevant to the issues here. In
light
of FSA's reliance on APA-PRG-10 and the Circular provision on fines
and
penalties, such approval might be relevant in determining whether
the
interest resulted from "incorrect State agency action" or a "failure
to
comply with federal law." 5/
We find, however, that the State's affidavit would be insufficient, in
any
event, to shift the burden to FSA to come forward with evidence
about the
particular state policies which led to the court orders here.
The FSA
Administrator's decision found that the courts concluded that
State policies
were contrary to federal law, relying in part on the
State's own description
of one of the court cases, Green v. Obledo, 624
P.2d 256 (1981). The
affidavit simply establishes that, where federal
policy is unclear, the State
as a matter of practice confers with the
federal government when establishing
State policies and would not
promulgate a policy unless it had at least tacit
approval from federal
personnel. The difficulty with the affidavit is
that it does not even
allege that the State followed its regular practice and
that it in fact
received some form of approval from a federal .official for
the State
policies here. The burden should not be on FSA to show that
it had
never given even tacit approval of these State policies. 6/
Moreover, it is more reasonable to assume here that, if the State
had
actually based its policies on approval by HHS officials, it would
have
come forward with evidence that it had done so. The mere passage
of
time since the State promulgated its policies is hardly a
reasonable
excuse, especially since these State policies have been the
subject of
litigation (in Green since 1975). Federal approval would have
been
relevant to the courts' consideration of the validity of the
State
policies, particularly if those policies were embodied in approved
State
plan provisions or were mandated by federal regulation. Yet,
there is
no indication in the record here that the State defended its
policies in
court by arguing that they were formally approved or even by
arguing
that they were based on consultation with federal officials.
To the contrary, the record indicates that, unlike the Grimesy case
where
the contested State policy was based on a federal regulation, the
court cases
here invalidated policies the State had adopted on its own.
The decision on
the merits in Green (included with State's Exhibit A)
reveals that the State
policy at issue was contrary to congressional
intent, as clearly expressed in
the legislative history of the relevant
provision. Previous court decisions
had invalidated similar provisions
on this basis. The court also cited
a federal regulation and an action
transmittal, finding that the State policy
was contrary to these federal
implementations of statutory .policy.
7/ Nothing in the court's
decision indicates that the State even
alleged that it had relied on any
federal interpretation in promulgating its
policy.
The State did not submit the full opinions on the merits in the other
four
court cases, but there is some discussion of the merits in the
court orders
which required payment of the interest (State's Exhibits G
to J). These
orders likewise indicate that the State policies at issue
were not based on
any federal regulation or plan approval. Indeed, in
one instance, the
federal policy was clear, but depended upon the effect
of State law (see
State's Ex. I); surely, the State could not reasonably
rely on an
interpretation of State law by federal regional personnel.
Thus, we find that the State's evidence is insufficient to support
either
a reversal of the disallowance or a remand.
CONCLUSION
Based on the analysis above, we uphold the disallowance in full.
________________________________ Donald
F.
Garrett
________________________________ Norval
D.
(John) Settle
________________________________ Judith
A.
Ballard Presiding Board Member
1. The State pointed out that FSA has taken the position that
it could
collect interest on disallowed AFDC funds pending repayment, even
though
the Social Security Act does not specifically provide for such
interest,
and that this position was inconsistent with the
disallowance. There
is, however, separate authority for imposing
interest on "debts" owed
the federal government. See Debt Collection
Act of 1982, Pub. L. 97-
365.
2. Under Department regulations at 45 C.F.R. 205(10)(b)(3), FFP
is
available in court-ordered payments "within the scope of the"
AFDC
program. FSA said that it has consistently interpreted this to
exclude
interest payments because they are not within the scope of the
program.
FSA admitted that it would participate in interest payments if it
was a
party to a lawsuit and ordered by a court to participate. The
State
argued that FSA could not logically distinguish between
court-ordered
interest payments on the basis of whether or not FSA was a
party to the
court case. We disagree. The mere fact that FSA will
comply with a
court order to pay a share of interest does not mean that FSA
is
compelled to voluntarily pay in other circumstances. Moreover, an
order
to FSA to pay may be based on a finding that FSA was in part
responsible
for the AFDC benefits being wrongfully withheld in the first
instance.
3. Contrary to what the State argued, the decision of the
Supreme
Court of California in Tripp v. Swoap, 552 P.2d (1976), does not
support
a reversal of the disallowance. While that court awarded
interest on
improperly withheld welfare benefits, the court's rationale was
that
such benefits fell within the language of California Civil Code
section
3287(a), which waived the State's sovereign immunity from liability
for
interest. The court rejected the reasoning in an earlier
California
Court of Appeals decision denying such interest, in part on
grounds that
there was no federal statute authorizing reimbursement for
such
interest, but the Supreme Court did so because it viewed
federal
reimbursement as irrelevant and the entitlement to interest "a matter
of
state policy." 552 P.2d at 759. The court also noted in that
case that
the State had said that interest was not available to recipients
who
were denied benefits but were successful in obtaining them after
an
administrative appeal. This fact is significant because it
indicates
that the State itself does not interpret provisions on
corrective
payments to require payment of interest, even though the rationale
the
State advanced here (that interest is necessary in order to
give
recipients the value to which they are entitled) would apply to
all
retroactive benefits.
4. FSA also cited (at an earlier stage of this case) OMB
Circular
A-87, Attachment B, section D.7., which provides that "interest
on
borrowings (however represented) is unallowable." California
responded
that this Board's decision in California Dept. of Social Services,
DGAB
No. 297 (1982), found that the Circular did not prohibit interest
on
retroactive salary payments made under court order. This
miscontrues
the Board's decision. Because the Board found sufficient other
support
for the disallowance, the Board did not base its decision on
the
Circular. The Board noted, however, that it was not unreasonable
to
consider such interest as interest on a constructive borrowing.
5. We note, however, that these policies clearly apply whether or
not
a state's action is a "deliberate" failure to comply with federal
law.
6. Even if we were to assume that the State followed its
regular
practice with respect to the State policies found invalid in the
five
court cases involved here, the most we could assume would be that
the
State had tacit approval from regional personnel for those
policies.
Surely this is not sufficient to support a finding that the State
was
complying with federal law, since the State could not reasonably rely
on
tacit approval. See, e.g., Heckler v. Community Health Services
of
Crawford County, Inc., 467 U.S. 51 (1984).
7. Although the action transmittal was apparently issued after
the
State adopted its policy, it was issued several years before the
court
decision; yet, the State apparently continued to
defend