GAB Decision 120
August 30, 1980 New Jersey Department of Human Services;
Docket No. 78-136-NJ-HC Coster, Clarence; Przybylinski, Donald Settle, Norval
The New Jersey Department of Human Services (State) filed with the
Board an application for review dated November 29, 1978, pursuant to 45
CFR Part 16 (as amended March 6, 1978), of the disallowance of $124,201
in Federal financial participation (FFP) claimed for expenditures for
services provided by day care centers under Title XX of the Social
Security Act. The disallowance was issued by the Acting Regional
Program Director, Administration for Public Services, on September 12,
1977 and affirmed by the Assistant Secretary for Human Development
Services (OHDS or Agency) on November 2, 1978 after reconsideration
pursuant to 45 CFR 201.14. This decision is based on the State's
appeal, the Agency's response, and a Draft Decision issued by the Board.
The Draft Decision invited comments from the parties and noted that the
board might issue a final decision in substantially the same
form.Neither party responded to the Draft Decision, and it is here
adopted as the Board's final decision.
Statement of the Case
The State of New Jersey engaged independent public accountants to
audit a number of day care programs after apparent deficiencies were
discovered by the New Jersey State Office of Fiscal Affairs. The Audit
Review Council of the New Jersey Department of Human Services reviewed
the audit recommendations of these independent public accountants and
subsequently transmitted the audits to the Office of Human Development
Services in Region II. Region II reviewed the audits to determine the
appropriateness of the expenditures and the extent to which services
were provided. The review confirmed the audit findings and resulted in
a disallowance of $1,046,392 in FFP for funds paid to the State from
1973 to 1976.
In the disallowance letter OHDS requested that a decreasing
adjustment of $1,046,392 be shown on New Jersey's next quarterly
statement of expenditures. OHDS also informed the State that if the
appropriate adjustment was not made and reconsideration was not
requested, the disallowed amount would be deducted from subsequent
grants to the State. OHDS acknowledged in the disallowance letter that
the $1,046,392 disallowance should be reduced by whatever refunds might
have been collected from the day care centers and already credited to
the Federal government.
The amount appealed in this matter, $124,201 in FFP, was expended
under the authority of Title XX of the Social Security Act. The balance
of $922,191 was expended under Title IV-A of the Social Security Act and
is not involved in this appeal.
The State's position is that the Agency should not adjust or collect
the disallowed expenditures unless and until the State has recovered or
collected the disallowed amounts from the providers. The State also
alleges that the Agency's proposed adjustment of funds will adversely
affect and result in curtailment of needed services to disadvantaged
citizens.
The Agency's position is that there is no authority either for
delaying collection of the disallowed amounts until the State has
recovered the funds from the providers or for waiving claims which
cannot be collected from the providers. The agency argues that it is
fundamental to the Federal-State relationship in grant programs that the
Federal government look to the State for recovery of inappropriately
expended funds.
Statutes
Section 2002(b) of Title XX of the Social Security Act, governing the
procedure for payments to the States under the Title XX program,
provides:
(1) Prior to the beginning of each quarter the Secretary shall
estimate the amount to which a State will be entitled under this section
for that quarter on the basis of a report filed by the State containing
its estimate of the amount to be expended during that quarter with
respect to which payment must be made under this section, together with
an explanation of the bases for that estimate.
(2) The Secretary shall then pay to the State, in such installments
as he may determine, the amount so estimated, reduced or increased to
the extent of any overpayment or underpayment which the Secretary
determines was made under this section to the State for any prior
quarter and with respect to which adjustment has not already been made
under this subsection.
Discussion
The disallowance in this case is based on a determination by the
Federal government after review of State audits and recommendations. It
is the State, not the day-care centers, which is appealing the
disallowance. The State has not disputed the audit findings, the amount
of the disallowance, or the Agency's legal right and basis for taking
the disallowance. The State has not disputed that the disallowed amount
represents an overpayment to the State within the meaning of Section
2002(b). The State challenges only the practice of implementing the
disallowance by reducing subsequent grant awards.
Section 2002(b) of Title XX of the Social Security Act provides an
explicit legal basis for the procedure the Agency has followed. The
record indicates that the majority of the audit exceptions resulted from
the State's ineffective administration of grant funds. It is not
unreasonable in such an instance to require the State to bear the burden
of replacing those funds even if many of the facilities involved may be
unable to reimburse the State.
Although it does not contest the audit determinations, the State
makes a collateral equitable argument that the reduction of subsequent
grant, if taken before State recovery from providers, will have an
unfavorable impact on the State's ability to provide services to
disadvantaged citizens. Although the Board recognizes that such a
situation would be unfortunate, the Board concludes that unauthorized
expenditures should not be excused on the basis of hardship. American
Foundation For Negro Affairs, DGAB Docket No. 79-4, Decision No. 73,
December 28, 1979, p. 3. The Board's function is to reconsider the
disallowance based on the applicable statutes and regulations. While
the adverse impact of disallowance was a factor in the decision of
Congress and the Department of Health, Education, and Welfare (HEW) to
establish a reconsideration process, that process must be governed by
adjudicative principles, which require that substantive issues be
decided on their merits.
The State has noted in correspondence with the Agency that "an
unavoidable consequence of a Federal policy which automatically assumes
full recovery could be a reticence on the part of any state to
aggressively engage in much needed audits of social service expenditures
of all kinds." This policy consideration is outweighed, however, by
other policy considerations, including the likelihood that if states are
held fully accountable for overpayments they may be more careful to
conduct their grant programs so as to ensure that grant funds are spent
in accordance with Federal requirements. Moreover, Section 74.61 of
Title 45 of the Code of Federal Regulations requires HEW grantees to
conduct audits on a continuing basis at least every two years. Thus, it
is clear that auditing is an obligation which the State assumes in
accepting the grant funds.
Conclusion
For the reasons stated, this appeal is denied. In determining the
amount of money currently owed to the Federal government, the Agency
should allow for the adjustments of Title XX funds already recovered
from the providers and credited to the Federal government by the State.
OCTOBER 04, 1983