DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human ServicesDATE: April 13, 1987
DECISION
The Indiana Department of Public Welfare (Indiana)
appealed a determination by the Acting Deputy
Assistant Secretary, Finance,
Office of the Assistant Secretary for Management and Budget (Agency)
disallowing $205,800 in federal financial participation (FFP) claimed for
programs under Titles IV-A
(Aid to Families with Dependent Children or AFDC)
and XIX (Medicaid) of the Social Security Act
(Act). The Agency
determination was based on an audit report which found that Indiana did not
credit
these programs with interest earned on collections and recoveries
made under these programs and held by
the State. The audit covered the
period from October 1, 1982 through March 31, 1983 for the Medicaid
program,
and from March 31, 1982 through March 31, 1983 for the AFDC program.
We uphold the disallowance, subject to a calculation adjustment,
because we conclude that Department of
Health and Human Services regulations
require Indiana to credit the federal government with interest
actually
earned on the federal share of collections and recoveries pending an action
which appropriately
distributes the funds pursuant to these
regulations. We find that Indiana did not demonstrate that
collections
and recoveries were effectively distributed prior to the dates used by the
auditors to calculate
the disallowance. We reject Indiana's contention
that certain memoranda of understanding (MOUs)
between the State Treasurer
and several federal agencies regarding cash management practices apply to
this case. We require adjustment of the disallowance to reflect our
finding that only 95 percent of the
funds were invested. Otherwise, we
conclude that the Agency used a reasonable method to calculate
interest
actually earned on collections and recoveries
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Case background
The disallowance was
based upon an audit reviewing Indiana's cash management practices under
Indiana's letter of credit for several grant programs. As part of this
review, the auditors examined
Indiana's practices in crediting the federal
share of collections and recoveries in the Medicaid and AFDC
programs to the
federal fund balance. The auditors concluded that the federal share had
not been
promptly credited to the Medicaid and the AFDC federal fund
balances. The federal share was, instead,
deposited into a common pool
of funds maintained by the State Treasurer and was not credited to the
federal account in state records for an average of 80 days for Medicaid
funds and 118 days for AFDC
funds. In this common pool of funds,
approximately 95 percent of the funds were invested in interest-
bearing
accounts or instruments. Applying the United States Treasury bill interest
rates to the federal
share invested by Indiana, the auditors calculated that
Indiana earned $55,300 on the federal share of the
Medicaid collections and
recoveries and $150,500 on the federal share of the AFDC collections and
recoveries. The auditors found that Indiana had not credited this
interest to the respective federal
accounts, and concluded that this
resulted in a total overpayment to Indiana of $205,800. State's Ex. E.
In its initial brief, Indiana did not contest the factual findings
in the audit, but argued principally that the
auditors had not considered
whether the overall federal fund balances showed a surplus or a deficit of
federal funds. Indiana alleged that there was an overall deficit
because of delays in the receipt of federal
funds. Indiana submitted a
"counterclaim" for interest which Indiana alleged that the federal government
had earned on "funds earmarked for the State." State's Brief, p. 15.
Indiana also asserted, generally, some
issues regarding how the interest was
calculated.l/
1/ Indiana also argued that this disallowance should
be reversed because the Health Care Financing
Administration (HCFA) withdrew
a similar disallowance in Board Docket No. 84-116. See State's Exs. N
and
0. The mere fact that HCFA, for whatever reason, chose not to pursue a
disallowance in another case
is not a basis for dismissal of a disallowance
which has not been withdrawn. The Department has
considerable
discretion in determining what cases to pursue at any particular time.
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The Agency argued that the Board lacked jurisdiction to
consider Indiana's counterclaim. The Board
Chair issued a ruling dated
November 25, 1986, in which he found that the Board has no jurisdiction over
the counterclaim as an affirmative demand for money or an argument for
reversal of the disallowance
based on an offset. The ruling
recognized, however, that some of the evidence presented by Indiana was
potentially relevant to issues within the Board's jurisdiction. The
ruling was based primarily on a finding
that Indiana was seeking funds in
its counterclaim for which it had not previously submitted a claim, and
which the Agency had not disallowed in a final written decision.
After the jurisdictional ruling was issued, the Board granted
Indiana the opportunity to submit a statement
to redirect its evidence and
argument as appropriate in light of the ruling. The statement submitted by
Indiana conceded that Indiana could not provide further specific factual
evidence to advance factual
arguments within the Board's jurisdiction.
State's Post-Ruling Submission, p.2. Indiana asserted only
that
resolution of the dispute should be based upon the MOUs between the State
Treasurer and several
federal agencies regarding cash management practices.
In a subsequent submission, however, Indiana reasserted its
arguments that the determination of interest
earned must be based on the
overall federal fund balance in each program over the entire period
examined. Indiana also asserted arguments related to the use of a
daily balance method of calculating
interest. Indiana argued that,
although the jurisdictional ruling barred consideration of these arguments to
support a counterclaim, equity requires that the arguments should be
considered as a basis for reversal of
the disallowance.
Viewing the evidence as a whole, Indiana disputed three basic
issues: 1) whether interest actually earned
on the federal share of
undistributed collections and recoveries falls within an exception to the
general
rule that grantees must credit the interest to the federal
government; 2) whether the collections and
recoveries were distributed at an
earlier date than the date the auditors used to calculate interest; and 3)
whether the methodology used by the auditors to calculate interest was
otherwise correct
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Discussion
1. Indiana must
credit interest actually earned on collections and recoveries before these funds
are
distributed.
The Agency asserted that interest earned on
collections and refunds, prior to the time these sums were
distributed
pursuant to regulations (and thus made available to reduce program expenditures)
should be
treated as an applicable credit and used to reduce claimed
expenditures. Office of Management and
Budget (OMB) Circular A-87,
Attachment A, C.3, made applicable by 45 CFR 74.171, requires that
grantees
deduct "applicable credits" from expenditures. Applicable credits are
defined to include income
generated by the normal operation of a
program. OMB Cir. A-87, Att. A, C.l. Indiana did not contest
the basic proposition that the cost principles contained in the OMB Circular
ordinarily would require
Indiana to credit the federal government with a
share of interest earned on collections and recoveries.
Indiana
argued that the general cost principles should not be applied because of funding
difficulties in the
AFDC and Medicaid programs, principles of
intergovernmental cooperation, and proposals to change
federal-state cash
management systems. Indiana argued that the principles should not apply
because
Indiana, in order to cover the overall federal share of program
expenditures, regularly had to advance
funds on which Indiana did not,
reciprocally, receive interest. Indiana also argued, generally, that it
treated collections and recoveries as advances of funds exempt from interest
obligations under the
Intergovernmental Cooperation Act. Indiana also
cited MOUs signed by the State Treasurer and several
federal officials
regarding a program to improve cash management practices in federal-state
programs.
As we discuss below, we find that the Agency may require
Indiana to credit interest actually earned on
undistributed collections and
recoveries.
a. HHS regulations require that states
credit the federal government with a share of interest income
generated by
the operation of federal-state programs.
The Board has addressed
the issue of whether interest earned on undistributed collections and recoveries
held for specific grant programs must be credited to the federal government,
in the context of both Title
XIX (Medicaid) and Title IV-D (Child Support
and Enforcement of Paternity) of the Act. In North
Carolina Department
of
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Human Resources, Decision No. 361, November 30, 1982, the
Board found that interest, which the
Agency had reasonably determined to be
actually earned on Medicaid recoveries, was program income
which must be
reported as an applicable credit and should be used to offset or reduce claimed
expenditures
pursuant to the cost principles at 45 CFR Part 74, Appendix C,
Part I, C.l(g)(1979) (now published in
OMB Circular A-87, Attachment A,
C.l(g)). The Board concluded that North Carolina's failure to deduct
from claimed expenditures the interest which it earned on identified program
accounts resulted in an
overpayment for expenditures equal to the federal
share of the interest earned. The Board's decision was
subsequently
upheld in federal court. North Carolina v. Heckler, 584 F. Supp. 179
(E.D.N.C. 1984).
In Utah Department of Social Services, Decision
No. 750, April 30, 1986, the Board generally upheld a
disallowance based on
Utah's failure to credit the Title IV-D program with the federal share of
interest
earned on child support collections prior to their distribution
pursuant to section 457 of the Act and 45
CFR 302.51. 2/ The Board's
decision was based both on the cost principles underlying the North Carolina
decision and on the language of section 455(a) of the Act, which requires
that states reduce claims for IV-
D expenditures by "the total of any fees
collected or other income resulting from services provided. . . ."
The Board
relied on both North Carolina and Utah in New York Department of Social
Services, Decision
No. 794, September 30, 1986. That case also
involved child support collections under the Title IV-D
program, but focused
primarily on issues involving the timing and method of distributing collected
funds.
3/
2/ The decision upheld the disallowance in principle,
subject to resolution of calculation issues.
3/ The
disallowance here is different from past cases because it requires Indiana to
credit the Title IV-A
AFDC program, rather than the Title IV-D program, with
interest on child support collections. Which
program is credited with
the interest is a policy question for program officials within this
Department.
Child support collections for AFDC recipients may
reasonably be attributed to either program, since the
funds are collected by
the IV-D program but reimburse the IV-A program; of course, Indiana cannot be
required to credit both programs with the same amount of interest.
(continued...)
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Indiana presented no basis to distinguish this disallowance
from the disallowances in North Carolina,
Utah, or New York. As in
North Carolina, the auditors found that Indiana deposited Medicaid and child
support collections and recoveries in interest-bearing accounts with the
State Treasurer and held these
funds for extended periods of,time before
distributing these funds by crediting the federal account.
Indiana did
not contest these basic facts. Furthermore, Indiana did not argue that
interest earned should
not be considered an applicable credit which, since
it was not properly deducted from expenditures,
resulted in an
overpayment. Indiana provided no basis for a finding that the cost
principles used in North
Carolina and Utah are not legally binding
here. Instead, Indiana's arguments concerned issues of general
fairness, intergovernmental cooperation, and calculation. We discuss
these issues later in this decision.
In sum, Indiana did not
contest the basic obligation to credit the federal share of interest income
generated
when Indiana held undistributed collections and recoveries in
interest-bearing accounts. The cost
principles establish a general
rule that the federal government should be credited with such program
income. We address below Indiana's arguments that an exception to this
general rule should apply.
b. Cash flow problems in
funding the programs do not excuse Indiana from the obligation to credit
interest actually earned on collections and recoveries.
Indiana asserted that it would be unfair to require it to credit
the federal account with interest earned on
the federal share of collections
and recoveries because Indiana did not receive interest on funds it
advanced
to the Medicaid and AFDC programs. Indiana argued that the overall federal
fund accounts in
both programs, on
3/(...continued)
This
question does not materially affect the basic obligation of Indiana to credit
the interest to one or
the other federal program. Even if it is
ultimately determined that the interest should be credited to the
IV-D
program, the amount should be at least the amount of this disallowance, which is
figured at the
lower AFDC rate of reimbursement.
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average, contained a negative balance which was covered by
State funds. Indiana explained that these
negative balances resulted
from delays in federal funding.
The Board addressed a similar
issue in Utah. Utah asserted that general cash flow problems in financing
the Title IV-A program required that Utah advance the federal .snare and
lose interest which it otherwise
would have earned. Utah asked that
the Board offset this "loss" against interest actually earned on
collections
in the Title IV-D program. Utah, p. 4. The Board found no authority
to support offsetting
positive and negative balances in the Title IV-A and
Title IV-D programs in light of the undisputed fact
that interest was
actually earned on the child support collections and the undisputed statutory
and
regulatory requirements that the interest income must be accounted for
by crediting the federal share to
the federal government. Id., p.
5. The Board pointed out that the statutory scheme provided opportunities
for states to prevent cash flow problems if states accurately estimate their
own needs. Because states are
permitted, under the Intergovernmental
Cooperation Act, to retain interest earned on direct advances of
federal
funds, any interest "lost" should be offset by interest earned on these
advances. Id.
There is no authority to credit a state with
interest when it advances funds to the federal account of a
federal-state
program. Both the AFDC and the Medicaid programs have a statutory system
under which
the federal government advances funds, based on estimated
expenditures, before a state documents actual
expenditures. Congress
apparently believed that this system would prevent cash flow problems for
states.
Indiana alleged that this system was not achieving that
purpose, because delays in receiving federal
funding were causing Indiana to
advance funds on a regular basis to cover federal obligations. Even if
this were true (although, as we discuss later, Indiana's documentation on
this point was not persuasive),
the Board can not grant a waiver from
existing laws and regulations in order to fashion a remedy. The
Board
is bound by all applicable laws and regulations. 45 CFR 16.14. If
such a problem exists, it must be
addressed by legislative and regulatory
reform (as we discuss later, this appears to be an approach that
Indiana and
several federal agencies are, in fact, pursuing).
Moreover, it is
not necessarily unfair that states do not receive interest when they advance
funds to cover
the
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federal share. 4/ These cash flow problems can
best be prevented by states themselves, through accurate
estimates of needs
and timely draws of federal funds. Although Indiana alleged here that the
federal
government was responsible for delays in the transfer of funds,
Indiana provided no evidence to support
this allegation, such as a
comparison of the dates federal funds were requested and received. The
auditors
found that the federal funds were credited to Indiana's account
"generally one day after the request." Ex.
E, p. 12. Even if we
accepted Indiana's unsupported allegation that there were some delays of "two or
three days", there is no evidence that these delays were unreasonable under
the circumstances nor that any
resulting problems could not have been
averted by more timely requests for funds by Indiana.
One
indicator that Indiana was not acting to minimize the need to advance state
funds is that Indiana
apparently did not credit collections and recoveries
to the federal account in a timely manner. The
auditors found that
Indiana apparently held the federal share of collections and recoveries for
periods as
long as 176 days before Indiana credited the funds to the federal
account. If these funds had been
promptly credited, the funds would
have been available to cover the federal share of program
expenditures. Thus, both the state and the federal governments may
have been required to advance more
cash to cover program expenditures while
Indiana earned interest pending distribution of the collections
and
recoveries.
c. The Intergovernmental Cooperation Act
does not apply to collections and recoveries.
Indiana argued
generally that the collections and recoveries should be excepted from the
regulatory
requirements because Indiana treated these funds as advances of
federal funds. Under the
Intergovernmental Cooperation Act (ICA), 31
U.S.C. 6503(a), Indiana need not credit the federal
government with interest
earned on
4/ These advances may have some significance for the
calculation of interest a state can be said to have
earned, if the state
demonstrates that the advances effectively credited the federal government with
collections and recoveries by reducing drawdowns of federal funds. As
we discuss later in this decision,
we find that Indiana did not document any
earlier effective crediting of collections and recoveries it held.
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advances of funds, held pending disbursement for program
purposes.
The ICA granted a narrow exception to the general
requirements in the cost accounting principles and
Comptroller General
decisions which stated that grantees must account for interest earned on federal
funds. The ICA exception was enacted because Congress believed that
interest earned on advances would
be minimal in comparison with the burden
of accounting for the interest, since the letter of credit funding
system
permits advances to be drawn only as needed. 114 Cong. Rec. 28861 (1968);
see Florida
Department of Health and Rehabilitative Services, Decision No.
769, July 16, 1986. The exception also
recognized that it may not
always be possible for a state to immediately disburse funds once they are
transferred to the state.
The ICA exception does not extend to
collections and recoveries. Since states receive these funds directly,
the states can best control the timing of when the funds are
distributed. Even if Indiana is correct that it is
not possible to
distribute the funds immediately, there is no reason why a state should retain
all interest
earned while the funds are held. Such a policy would only
encourage states to delay distribution of the
funds.
In prior
cases, the Board recognized that a state may convert collections and recoveries
into funds held
pending disbursement, within the scope of the ICA exception
for interest, with an action which effectively
credits the funds against
program expenditures, and reduces the state's need to draw down federal funds
under its letter of credit. New York, p. 12. As we discuss
below, Indiana cited no such action changing
the character of the funds
here. It appears that Indiana held onto these funds and derived a benefit,
in the
form of interest, from them. Rather than permit Indiana such a
windfall, fairness requires that Indiana
credit the federal government with
its share of the interest.
d. The Memoranda of
Understanding regarding cash management practices do not affect specific
program requirements here.
Indiana asserted that the
disallowance should be set aside because it is inconsistent with the policy
expressed in two MOUs between the State Treasurer and certain federal
officials, dated April 13, 1984
and November 1, 1985. These MOUs
emerged from the work of a joint federal/state task force on
intergovernmental cash management policies
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for financing federal assistance programs. In the
first MOU, Indiana agreed with the U.S. Department of
the Treasury to
participate in a pilot program to test a new system to control the timing of
federal
payments. State's Ex. I. Under this system, interest
would be credited to Indiana when Indiana advanced
funds to cover the
federal share, and Indiana would pay interest on advances of federal funds prior
to
disbursement of those funds. In the second MOU, the task force
members, including one HHS employee,
agreed that the pilot programs had been
successful and endorsed proposals to reform the statutes and
regulations to
permit the new system to be used more widely. State's Ex. J.
The interest income in this case is outside of the scope of the
first MOU. First, the interest was earned
prior to the date the pilot
program commenced. Second, the MOU was merely an information-gathering
test of a proposed system for regulating advances of funds for federal-state
programs. Indiana agreed to
collect data on the effect of a system in
which a state would be credited with interest when there was a
shortfall of
federal funds to pay the federal share, and the federal government would be
credited with
interest when a state had an excess of federal funds.
The test applied only to advances, and did not affect
obligations to credit
collections and refunds, or to account for program income. Under the MOU,
no
existing obligations were changed, since a change would require statutory
and regulatory authority. The
focus was on data collection to support
reform proposals.
Indiana did not suggest that it misunderstood
the limited scope of the pilot program. Nor did Indiana
present
evidence that other signatories to the MOU believed the pilot program covered a
wider scope.
In Utah, the Board found that the second MOU (in both
final and preliminary forms) was primarily
concerned with advances of cash
for program expenditures, not with the treatment of income identifiable
to
particular programs. The Board also found that this MOU was merely an
agreement to promote certain
basic policies.
The second MOU
clearly states that it concerns proposed changes to the system by which the
federal
government pays its share of certain programs to states. It
does not provide for any actual changes to the
requirements for states to
account for program income. Since the changes are merely proposals, we do
not
find that the MOU requires reversal of this disallowance.
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Finally, Indiana cited a memorandum dated July 30, 1986, in
support of its interpretation of the MOUs as
binding agreements that
interest should not be levied unless it was reciprocal. State's Ex. K, p.
2. That
memorandum, from employees of the Department of the Treasury
and OMB, requested that to avoid
jeopardizing "the delicate balance of trust
and mutual cooperation between the states and the federal
government," all
independent interest initiatives by individual agencies should be put aside. Id.
We find that this memorandum does not preclude the Agency from
pursuing this disallowance because
there is no evidence that the authors of
the memorandum had authority to bind the Agency, the
memorandum itself is
not phrased as a mandatory directive but merely as a suggestion, and it is not
clear
that the action here is within the scope of the memorandum. The
memorandum appears to be merely a
suggestion from participants in the task
force formulating the proposals described in the MOUs. The
memorandum
does not cite any statutory, regulatory, or executive authority which might bind
the Agency
to follow the suggestion. Furthermore, since the
disallowance here arguably was not based on any
"interest initiatives," but
on existing program regulations, this disallowance does not appear to be within
the scope of the memorandum. Here, the disallowance is similar to
other, previous disallowances. Also,
the audit process, the
disallowance notice, and the commencement of this appeal predated the
memorandum.
2. Indiana has not shown that it
distributed the collections and recoveries at an earlier date.
In
prior cases, the Board found that once collections and recoveries were
distributed and the federal
account credited with the federal share, a state
no longer had to account for interest. The Board
recognized several
methods for a state to distribute collections and recoveries. In Utah, the
Board
accepted the auditors' contention that reporting collections and
recoveries on the quarterly expenditure
report credited the federal
government by reducing estimated needs for federal funds. 5/
5/ The Board noted some questions concerning the fairness of
disallowing interest attributed to the
period between the end of the quarter
reported and the date the quarterly report was actually received by
the
federal government. Subsequent to the Board's decision in Utah, on June
10, 1986, the Office of Child
Support Enforcement (OCSE) issued a
memorandum,
(continued...)
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The Board agreed with Utah, however, that the
federal government could be considered as effectively
credited with the
funds on the date that the collections and recoveries were actually used to
redeem
warrants and substitute for funds which Utah would otherwise have
drawn under its letter of credit. In
New York, the Board recognized a
third potential method: crediting funds in an internal accounting
system
which was used to regulate drawdowns of federal funds under the letter of
credit. The Board found
that, even if New York had not reported the
collections on the quarterly expenditure report or physically
shifted the
funds to an account from which warrants were redeemed, that the federal
government was
credited as soon as New York used the amount of collections
to reduce drawdowns of federal funds.
In sum, the three potential
methods recognized in the Board's prior decisions involve: 1) reporting on the
quarterly expenditure report; 2) effective crediting through actual use of
the funds to lower needs for
federal cash; and 3) crediting of the funds in
an internal accounting system used to regulate letter of credit
drawdowns.
In this case, the auditors apparently used the third method,
relying on Indiana's own records, to determine
the date Indiana distributed
the collections and recoveries. Indiana submitted no evidence relating to
the
quarterly expenditure reports, so we do not address the first
5/(...continued)
PIQ-86-1,
stating that in light of the difficulty in requiring states to calculate
interest earned on past
collections,
[i]n those
instances where interest was not reported for periods prior to the date of this
memorandum, interest may be calculated from the date the collection is
deposited in an interest-bearing
account at the State or local level to the
end of the quarter for which the collection is reported on the IV-A
expenditure report.
Indiana did not
allege that the disallowance in this case was inconsistent with PIQ-86-1, and
provided
no information concerning the timing of quarterly reports of
expenditures, so we do not address any such
issues in this decision.
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method. As we discuss below, the evidence Indiana
presented related primarily to whether Indiana had
effectively credited the
collections and recoveries by actual use of the funds.
a. Indiana did not show that collections and
recoveries were disbursed to cover program expenditures
prior to the dates
used by the auditors.
Indiana presented evidence and arguments
which suggested that Indiana might have effectively credited
the federal
government with the collections and refunds by, in effect, using State Treasury
funds to pay
warrants issued under the AFDC and Medicaid programs, even
though the funds were not formally
transferred in state records.
Indiana's presentation, however, was not sufficient to establish that it
advanced State Treasury funds equivalent to collections and recoveries
formally recorded as balances in
State Treasury accounts to cover the
federal share of program expenditures.
Indiana introduced this
issue in the context of its argument that it advanced state funds to finance
both the
AFDC and the Medicaid programs. Indiana submitted worksheets,
prepared by a senior accountant,
which purported to report the overall
federal fund balances in the two programs on a daily basis. These
worksheets indicated that the federal fund balances were generally negative,
and that Indiana had
advanced funds to cover the negative balances to an
extent in excess of any outstanding collections and
recoveries.
Indiana requested that the Board consider this to "offset" the "interest lost"
due to these
advances against the "interest earned" on collections. In
the jurisdictional ruling issued in this case, the
Board Chair found that we
lack jurisdiction to offset the interest. Even if we had jurisdiction, we
know of
no authority which would permit such an offset.
Indiana's presentation, however, raised the possibility that the
State may have effectively credited the
federal government with collections
and recoveries prior to the dates used by the auditors. In both Utah
and New York, the Board found that collections were effectively credited to
the federal government at the
point when the collections were used to reduce
the drawdown of federal funds. New York, p. 12. Even if
the
federal account had not been formally credited in state records, the Board found
in Utah that if the
cash accounts in which the collections were deposited
were actually used to pay program expenses, then
the federal government was
effectively credited at the time the money was disbursed.
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Utah, pp. 7-13. In New York, the Board
stated that, even if the cash collected remained in separate
county or state
accounts, the federal government was effectively credited when either the county
or the
state used the collections to reduce requests for federal
funds. New York, p. 12.
After a close review of the
documentation submitted in this case, we find that Indiana did not demonstrate
that it effectively credited the federal government prior to the dates used
by the auditors in calculating the
disallowance. The information
submitted by Indiana on overall fund balances in the AFDC and Medicaid
programs does not distinguish clearly between cash balances in the accounts
and book balances based
upon the issuance of warrants (which may not have
been redeemed for some time). Additionally,
Indiana's submission does
not appear to record the actual timing of funds held for adjustments,
collections
and refunds. State's Exs. C and D. In contrast, the
auditors apparently examined records of actual cash
receipts of the state's
general fund. Dates of receipts, disbursements, collections, recoveries
and
adjustments were based upon the quietus dates from State Treasury
records. State's Exs. A and B. Dates
when collections and
recoveries were credited to the federal government were based upon entries in
Indiana's general ledger accounts showing when draws of federal funds under
the letter of credit were
reduced by the amounts collected or
recovered. State's Ex. A, p. K-l. From this information, the
auditors
were able to calculate daily cash balances for collections and
recoveries. Although Indiana alleged
generally that these cash
balances were commingled with other program accounts and disbursed to pay the
federal share of other program expenditures, Indiana did not document cash
disbursements equivalent to
collections and recoveries held.
As in Utah and New York, the commingling of funds represents a
major cause of the dispute before us. If
Indiana had kept a separate
account of its collections and recoveries, or had kept better records of the
dates funds were made available to redeem program warrants, the amount of
interest, if any, would have
been easy to determine. While states are
free to commingle program funds and use any accounting system
which will
meet reporting requirements, each state must accept the burden of ensuring that
its accounting
system provides adequate information. See, e.g., 31
U.S.C. 6503(b).
In this case, the auditors used Indiana's own
records to determine the point at which the federal account
was credited
with collections and recoveries. The burden was
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on Indiana to justify any claim that the funds
were effectively credited at an earlier date. Indiana did not
meet
that burden, and, therefore, we conclude that the disallowance was correct in
this respect.
3. Other calculation issues.
a. Indiana did not establish that the use of the daily
balance method was unreasonable.
Indiana challenged the use of the
daily balance method by the auditors to calculate the amount of interest
earned. Indiana stated that the method was unfair because child
support collections could not be
identified and distributed on a daily
basis. Indiana also asserted that Indiana could not credit collections
and recoveries on a daily basis when Indiana drew federal funds in the AFDC
program on a monthly basis
and in the Medicaid program on a weekly basis.
These arguments do not address the fundamental issue:
whether the daily balance method accurately
calculated interest actually
earned. Indiana seems to believe that it will be excused from an
obligation to
credit interest earned to the federal government if it shows
that it could not help but earn interest.
Indiana's obligation to
credit interest earned is not a punishment for earning interest which can be
excused
for such a reason. The obligation to credit interest actually
earned on federal funds is to prevent unjust
enrichment when a state profits
from holding federal funds. Indiana should be no worse off than if it had
promptly credited the funds or otherwise earned no interest at all.
Indiana did not dispute that the daily balance method reasonably
calculates interest which was, in fact,
earned. Indiana did not
dispute that the funds were available to invest on a daily basis, and that
Indiana
actually earned interest each day that the funds were available to
invest. Thus, we see no basis to reverse
or modify the disallowance on
these grounds.
b. Interest should have been calculated
only on the percentage of funds actually invested using the actual
rate of
return experienced.
The audit report states that the collections
and recoveries were deposited into a common pool of funds
maintained by the
State Treasury and that "approximately 95 percent of these funds were deposited
in
interest bearing accounts or income producing investments." Ex. E,
- 16 -
p. 5. The auditors calculated interest by
applying Treasury bill rates to 96 percent of the federal share of
the funds
held (deducting 4 percent to account for the reduction in federal funding due to
Public Law 97-
35) rather than determining the interest on 95 percent of that
reduced amount. This calculation appeared
inconsistent with the
treatment of a similar situation in North Carolina, in which the disallowance
was
calculated only upon the percentage of funds actually invested, so the
Board requested that the Agency
explain that inconsistency. The Agency
responded that the disallowance had been based on the total
amount of the
funds available for investment because the auditors felt that the funds were
different in
character from other funds available to the State
Treasurer. In particular, the Agency stated that these
funds were not
subject to any contingencies which might limit investment possibilities, while
most funds
in the State Treasury were held subject to requirements to redeem
warrants issued. The Agency also
stated that, in any event, the
interest calculations were conservative because the interest calculations did
not include any compounding of interest.
We do not agree with
the assumption by the Agency that these funds were different in character from
other funds available to the State Treasurer. We find no evidence in
the record to support this position.
While the funds may have been of
higher investable quality than some other funds available to the State
Treasurer, we have no quantitative evidence to support a distinction based
on the quality of funds, and
there is no evidence that Indiana itself made
such a distinction. In North Carolina, the Board rejected
North
Carolina's argument that only federal funds in a commingled account were used to
fill non-interest
bearing compensating balance requirements. Here, for
similar reasons, we must reject the Agency's
argument that federal funds
were used for special purposes when we have no evidence to support that
view.
With respect to the rate used to calculate interest, we
agree with the Agency that the rate was reasonable,
but that does not
provide justification for erroneously including funds not actually
invested. In any event,
we have no evidence to support the Agency's
assertion that the rates used by the auditors were lower than
the rates
actually earned by Indiana. With respect to the Agency's decision not to
calculate compounded
interest, the Agency provided no evidence that Indiana
received compounded interest and, thus, we do not
consider that as a
- 17 -
compensating factor (Indiana may have invested in
securities which do not pay interest on a daily basis).
Although
we do not consider the calculation error with respect to the percentage of funds
upon which
interest was calculated to be sufficient to reverse the entire
disallowance, we require that the Agency
adjust the disallowance to address
this concern.
Conclusion
For the reasons discussed
above, we uphold the disallowance, subject to ad to reflect our finding that
only
95 percent of the were actually invested.
________________________________
Norval
D. (John) Settle
________________________________
Alexander G. Teitz
________________________________
Judith A. Ballard
Presiding Board Member