DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Alabama Department of Human Resources
Docket No. 87-117
Decision No. 939
DATE: February 29, 1988
DECISION
The Alabama Department of Human Resources (State or Alabama) appealed
a
determination by the Family Support Administration (Agency)
disallowing
$212,317 in federal financial participation (FFP) claimed under
Title
IV-A of the Social Security Act (Aid to Families with Dependent
Children
or AFDC). At issue are the costs of a study of AFDC
recipient
characteristics, performed under contract by the University of
Alabama,
claimed as administrative costs of the AFDC program for the
period
October 1981 through October 1985. The Agency determined that
the State
had not received prior Agency approval, which was required because
the
study was a "management study." The Agency also determined that
it
would not waive the prior approval requirement because the study was
not
an allowable cost because it was not "necessary" for the
administration
of the AFDC program.
We find below that the study was a management study and that the State
did
not receive prior approval, which was required by Office of
Management and
Budget (OMB) Circular A-87, Attachment B, section C(5),
made applicable to
HHS grants to states by 45 C.F.R. 74.171. Thus, we
uphold the
disallowance. In light of the arguments in this case,
however, we
conclude that the appropriate result is to stay the effect
of this decision
to provide a limited opportunity to the parties to
consider whether
retroactive approval of all or part of the disputed
costs is warranted.
Because the Agency has discretion to grant
retroactive approval under certain
circumstances, and has not addressed
the issue in light of the record
developed before the Board, we stay the
effect of this decision for 30 days
or until the Agency considers any
request for retroactive approval submitted
within that time by the
State.
Discussion
I. Was prior approval necessary?
The Agency contended that the study was a "management study" performed
by
an "outside consultant" for which costs are allowable only with
prior
approval or authorization. The Agency relied on OMB Circular
A-87, Att.
B, sec. C(5), which states:
The cost of management studies to
improve the effectiveness and
efficiency
of grant management for ongoing programs is
allowable
except that the costs of
studies performed by agencies other than
the grantee department or outside consultants is allowable
only
when authorized by the Federal
grantor agency. (Emphasis added)
The implementing regulations, at 45 C.F.R. 74.177(b), specify that
the
required approval must be obtained in advance, and in writing, for
costs
not specified in an approved overall budget. The State did not
allege
that prior approval in writing was obtained, or that these costs
were
contained in an approved budget.
The State argued that approval was not required because the study was
not
a "management study" to improve the effectiveness of grant
management for
ongoing programs, but was instead part of the State
budgeting process.
The State explained that the study was commissioned
to aid the State
Legislature in determining the appropriate budget
priorities for the AFDC
program. 1/ The State submitted evidence of a
legislative inquiry along
with documentation and affidavits indicating
that the study was commissioned
to respond to those legislative
questions. According to the State, the study
was necessary to defend the
existence of the entire AFDC program in
Alabama. The State reasoned
that the study should be categorized as a
cost "incurred for the
development, preparation, presentation, and execution
of budgets." Such
costs are allowable without any prior approval under
OMB Circular A-87,
Att. B, sec. B(6), with the exception of costs of a
central budget
office which are not directly identifiable with the grantee
agency's
budget process. After reviewing the documents in the record
concerning
the study, we find that the study clearly fell within the concept
of a
"management study." While some aspects of the study may have
gone
beyond what would usually be encompassed by a management study,
the
evidence clearly showed that the study served management
purposes.
Thus, prior approval by the Agency was required.
The primary focus of the study appears to have been to analyze the
effect
of AFDC and other benefit programs in order to ensure that the
programs
achieve desired goals. 2/ As the summary of the proposed
research
project prepared on April 8, 1981 stated, the study was
intended to provide
information for policy making on issues such as how
large AFDC benefits
should be, which segments of the AFDC recipient
population are more
employable, whether other benefit programs may
reduce employment incentives,
and whether the program could be revised
or supplemented to strengthen family
structures and to discourage
teenage pregnancy. State's Exhibit (Ex.)
C-2. This information had
direct relevance to the management of the
program and the determination
of the benefit levels needed by AFDC
recipients. The study proposal
clearly recognized the management focus
of the study. See, e.g.,
State's Ex. C-1, Attachment, p. 1 ("In order
to enhance the efficiency
and effectiveness of this longstanding program
[AFDC], a base of data is
needed.")
While the study results might ultimately have some effect on the
State's
overall budget, the study was not the type of budgeting
cost
contemplated by OMB Circular A-87, Att. B, sec. B(6). The study
does
not purport to directly address budgetary issues or to
make
recommendations which have a direct fiscal impact. While we agree
that
the information collected in the study may have sparked reforms
in
program rules or operations which had an effect on the budget,
that
effect is a predictable result of any management study. See
State's Ex.
BB. The mere fact that there was a fiscal impact does not
mean that the
study must be characterized as a cost of developing a budget
when that
was clearly not the primary focus of the study.
Section B(6) includes as allowable only costs directly associated with
the
actual "development, preparation, presentation and execution
of
budgets." This provision is clearly limited to costs directly
related
to the actual preparation of budget requests or proposals, the
direct
presentation of those proposals to the legislature or other
authorities,
and the monitoring of compliance with budget objectives.
The plain
language of the provision indicates that it would not extend to
research
on fundamental issues only tangentially related to the
actual
preparation, presentation, or execution of a specific budget
proposal.
The scope of the study disputed here clearly indicates that it
was
fundamental research not directly related to any particular
budget
proposal.
The State seemed to be under the mistaken impression that the study
was
automatically a budget development cost because it responded, in
part,
to questions from the State Legislature which arose from a concern
over
the rising amount of State welfare expenditures. The State
Legislature
requested information to justify the continued existence of the
AFDC
program and to examine the prevalence of fraud, waste, and abuse.
See
State's Exs. A-1 to B-5. Even accepting that the legislative
inquiry
was the catalyst which initiated the study, the nature of the
study
indicates that its primary benefit was as a management tool. The
study
was commissioned by program management officials and focused on
the
development of information more relevant to management and
policy
development than to budgetary issues. See State's Exs. B-7; C-2,
p. 2.
3/ Thus, the study is more appropriately considered a management
study
and the State should have known that prior approval was required.
II. Should the Agency waive the prior approval requirement?
The State argued that the Agency should have waived prior
approval
requirements because the provision requiring prior approval
for
management studies in OMB Circular A-87 was not clear. The State
cited
as authority for its waiver request 45 C.F.R. 74.176(c), which
was
recodified as 45 C.F.R. 74.177(c) in 1982. As we explained in
Economic
Opportunity Council of Suffolk, DGAB No. 714 (1985), this
waiver
provision is intended to enable an awarding agency to waive in
advance
for a particular grantee the general requirement to obtain
prior
approval whenever incurring a cost in a category for which such
approval
is specified. See 42 Fed. Reg. 4157 (January 24, 1977); 43
Fed. Reg.
34080 (August 2, 1978). The appropriate request by the
State here would
have been a request for retroactive approval. We address
issues
regarding retroactive approval below.
Moreover, we are not persuaded by the State's arguments that
the
management study provision was unclear. The State contended that
the
provision could be read to impose the prior approval requirement only
on
studies performed by other state agencies (and not on studies
performed
either by the grantee agency itself or by outside
consultants). The
State argued that the study did not require prior
approval because the
study was performed by the University of Alabama, which
the State
considered to be an outside consultant. 4/ While the Agency
conceded
that the provision was inartfully drafted, the Agency quoted the
Board
in arguing that "the only plausible meaning is that the cost of
a
management study is allowable only with prior approval if (1) it
is
performed by an agency other than the grantee department, or (2) it
is
performed by an outside consultant." Wisconsin Dept. of Health
and
Social Services, DGAB No. 696 (1985). As the Agency explained,
"[t]he
purpose of the prior approval requirement is to determine the merits
of
a study, its allowability under enabling legislation, that it is
a
prudent application of funds from a national perspective, and that it
is
non-duplicative of other research." Disallowance Letter, State's
Ex.
F-4.
We find the State's alternative reading to be strained. The
term
"agencies" would not ordinarily refer to outside consultants, as it
does
in the State's reading. For example, in OMB Circular A-87, Att. B.
sec.
C(7), outside consultants are referred to as "individuals
or
organizations." Furthermore, the Agency's reading is supported by
a
general concern for the possibility of abuse in contracting out
studies
either to other agencies of the grantee or to outside
consultants. The
State provided no logical basis to support an
exception from prior
approval requirements for outside consultants, nor any
evidence that
State officials had been actually misled by an alternative
reading. In
short, we find that the underlying meaning of the provision
was clear
and affirm that the prior approval requirement applies to
management
studies performed by outside consultants.
Thus, we reject the State's argument that the requirement for
prior
approval should be "waived" on the basis that it was unclear.
III. Should the Agency consider granting retroactive approval?
Although we conclude above that prior approval was required for
the
disputed study, the absence of prior approval would not be
dispositive
if the Agency were to grant retroactive approval. The Department
of
Health and Human Services Grants Administration Manual (HHS
GAM)
provides that a "transaction may be approved retroactively" if,
among
other things, "the transaction would have been approved had
the
organization requested approval in advance." HHS GAM Chapter
1-105-60
B.1. 5/ See, e.g., Economic Opportunity Council of Suffolk,
Inc., DGAB
No. 714 (1985).
In its request for a waiver of prior approval requirements, the
State
raised issues which should properly have been directed at
retroactive
approval. The Agency never directly considered retroactive
approval,
and responded to the State's arguments by advancing lack of
necessity as
a basis for denying waiver of prior approval. 6/ Also, the
State raised
retroactive approval issues in contesting the determination that
the
costs were not "necessary."
In light of the State's attempts to raise issues related to
retroactive
approval, we believe we should provide the Agency an opportunity
to
consider whether to grant retroactive approval for some portion of
the
costs involved. As we explain below, we do not find in the
present
record an articulated basis, supported by the facts, for denial
of
retroactive approval.
The Agency has considerable discretion in determining whether to
grant
retroactive approval, but "may not deny retroactive approval based
on
unsubstantiated conclusions or on bases so insubstantial that
the
decision fairly can be described as capricious." Economic
Opportunity
Atlanta, Inc., DGAB No. 313 (1982). In Economic Opportunity
Atlanta,
the Board stated that retroactive approval standards are permissive
and
do not preclude the grantor agency from considering all
relevant
factors, including factors which might not have been considered if
prior
approval had been requested, such as the grantee's fiscal
management
history. But the Board also found that the grantor agency
must
articulate a substantive basis for denying retroactive approval.
Id.,
p. 3.
The Agency's finding that the study was not "necessary" would,
ordinarily,
provide a basis to conclude that retroactive approval was
not
appropriate. The Agency did not, however, provide a factual basis
to
support its finding in light of the evidence submitted by the State.
7/
In particular we find: o Although the State submitted
evidence
that the study aided in required program functions, such as
clarifying
factors in determining benefit
levels and standards of need under
45 C.F.R.
233.30(1) and (2), the Agency did not address
that
evidence. The Agency itself
conceded that the study may have been
"beneficial in establishing management priorities . . ." yet
did
not explain why that was not a "necessary"
function. See
Disallowance Letter,
State's Ex. F-4.
o The Agency asserted that the relevant information
was available
elsewhere, yet it did not
present any clear evidence of that fact.
The
Agency provided several national studies, but these were of
a
nature and scope different from the Alabama
study and, for the
most part, were not
published until well after Alabama contracted
for its study. In fact, the Agency conceded that the
Alabama
studies "may have produced beneficial
information not available in
the national
studies . . . ." Agency's Brief, p. 20. The
Agency
also provided a list of non- federal
articles dealing with
assistance programs, but
included no analysis of how any of the
articles provided the information which Alabama sought. In
fact,
the Agency conceded that the Alabama
researchers were aware of,
and made use of,
previous research on assistance programs.
Agency's Brief, p. 19; see also State's Exs. C-1, DD, EE;
Agency
Exs. A-5, A-6. This suggests that
the Alabama researchers did not
merely
duplicate research already available.
o The Agency alleged that a similar study was being
conducted
simultaneously in Florida, but
provided only an executive summary
of that
study which did not appear to answer the questions
of
Alabama program officials. Certainly, to
the extent that the
Alabama study was
duplicative of ongoing research in other
states,
the Agency could properly consider
this a factor of some weight in
determining
whether the costs of the Alabama study were
"necessary" costs. But the Agency did not provide any
detailed
information about the Florida study,
and does not seem to have
seriously considered
the State's allegation that part of the
utility of the disputed study was its direct relevance to
the
particular AFDC program and population
found in Alabama, which
Alabama noted were
different from those in other states.
State's
Exs. AA and DD. (higher black
population, high unemployment, no
unemployed
parent program, low benefit levels,
conservative
legislature, and poor tax
structure).
o The Agency may have placed too much weight on
correspondence
preceding the initiation of the
study which it alleged indicated
that the
study was not necessary for the AFDC program and that
the
State itself was unwilling to fund the
study with money earmarked
for the AFDC
program (most of the State share was donated by
the
University of Alabama). Agency's Ex.
A-1 through A-5; State's Ex.
B-5. The
evidence in the record indicates that the
objections
noted by the Agency were an
ordinary part of the State's
deliberative
process in reaching a determination on the
initial
proposal, primarily questioned the
availability of funds rather
than the need for
the study, and resulted in changes in the
final
research contract which the State
signed. See Agency's Ex. A-6.
8/
o The Agency also alleged that some parts of the study
were
focused on issues which were beyond the
scope of the AFDC program,
such as teenage
pregnancy, but did not identify whether this
reason would apply to all the papers generated by the study,
or
merely some of them. Agency's Brief,
pp. 12, 21. Since the study
produced
several discrete papers, there is clearly a basis to
find
unnecessary the costs of those papers
which were not relevant to
the AFDC
program. As we discussed above, however, the
Agency
itself acknowledged that at least some
parts of the study provided
direct benefits to
the AFDC program.
We emphasize that the Agency may validly consider a wide range of
factors
in determining whether to exercise its discretion to grant
retroactive
approval. For instance, the Agency stated concerns behind
the prior
approval requirement which might affect retroactive approval:
the prior
approval requirement provides an opportunity for Agency
involvement in the
formulation of a study protocol, and in the
determination that the research
is not duplicative and is a prudent use
of the scarce resources available for
such research. Disallowance
Letter, State's Ex. F-4. Furthermore,
the tone of the Agency
presentation indicated a concern that the costs were
not reasonable in
amount. The Agency indicated that a primary purpose of the
prior
approval requirements is to ensure oversight of items such as
management
studies that can vary widely in price and where sound discretion
must be
exercised to see that value received is in line with the amount of
money
spent. Agency's Brief, p. 14, quoting State's Brief, p. 20.
To the
extent that the costs were not reasonable in amount, approval
clearly
may be denied for the excess costs. See OMB Cir. A-87, Att. A,
sec.
C(1)(a). 9/ On the other hand, if the Agency seeks to rely on
these
grounds, or again on a finding that the study was not "necessary,"
the
Agency should consider the evidence in the record supporting approval
of
the expenditures, and should respond more specifically to the
State's
arguments and the rebuttal evidence submitted by the State. The
Agency
should also consider any supplemental evidence submitted by the
State
with any request for retroactive approval.
Conclusion
For the reasons stated above, we conclude that the disputed study was
a
management study and that prior approval was required for the costs
of
the study. Thus, we uphold the disallowance subject to consideration
by
the Agency of whether it will grant retroactive approval of all or
part
of the disputed costs, in accordance with applicable standards
and
departmental policies, if the State requests retroactive approval of
the
costs within 30 days of the receipt of this decision.
________________________________
Cecilia
Sparks Ford
________________________________ Norval
D.
(John) Settle
________________________________ Judith
A.
Ballard Presiding Board Member
1. In Alabama, the program was referred to as Aid to
Dependent
Children, or ADC, which was the name of the federal program until
1962.
Here, we refer to both the state and federal programs uniformly as
AFDC.
2. The Agency noted, in its brief at page 12, that
the State did not
allocate any of the costs to these other programs.
The State submitted
an affidavit briefly explaining why it did not allocate
any of the costs
to other programs. State's Ex. AA. Since the question
of whether the
disputed costs should properly be allocated to other programs
was not
addressed in the disallowance determination nor fully developed by
the
parties, we do not address it further in this decision.
3. The affidavits submitted by the State indicate
that the study,
while used to respond to legislative inquiries, had
substantial
management benefits by providing data "which would assist in
developing
policies..." for the AFDC program. State's Ex. CC. The
budgetary
impact of the study was indirect. See State's Ex. DD.
4. We note that the State did not explain why the
University of
Alabama is considered to be an outside consultant and not
another state
agency.
5. This statement appears in the HHS GAM chapter on
audit resolution
in the context of determinations of allowable costs.
Although this case
did not arise after an audit, it is a parallel
circumstance involving a
determination that a cost is allowable, and there is
no reason to doubt
that the Agency has the same discretionary ability to
grant retroactive
approval.
6. A large part of the discussion in the disallowance
letter of
whether the costs were "necessary" explained why it is better
to
evaluate necessity prior to funding a study, rather than addressing
why
this particular study was unnecessary.
7. We note that the Agency's finding that the study
was not
"necessary" may have relied on an overly restrictive view of that
term.
The Agency's language, "essential to the administration of the
IV-A
program," suggests that the Agency considered as allowable only
costs
without which the State could not operate the program at all.
Section
403(a)(3) of the Social Security Act, however authorizes FFP in
costs
necessary for proper and efficient administration of the
program.
Similarly, in State of Oregon Mass Transit Assessment, DGAB No.
402,
Supplementary Decision (1983), on which the Agency relied, the
Board's
language reflected the statute, stating that a "necessary" cost must
be
so essential that "the grant programs could not be run properly
and
efficiently without it." Id., p. 4 (emphasis added). As the
Board
stated in New Jersey Dept. of Human Services, DGAB No. 899 (1987), at
p.
8, "[t]his does not mean that it would be impossible to run the
grant
program without the cost item, but that the grant program would not
run
well without it." Neither the statute, nor the Board's
statements,
would limit necessary costs to only those costs essential to
the
continuing operation of the program in an absolute sense; both
recognize
some business judgment in running a program "properly and
efficiently."
The determination that costs are "necessary" is still a matter
within
the Agency's discretion; however, the Agency should give more weight
to
considering the State's evidence that the costs here were necessary
in
order to improve operations, more accurately assess recipient needs,
and
improve management focus. See also New York Dept. of Social
Services,
DGAB No. 415 (1983).
8. The Agency argued that this evidence should be
given more weight
than post-hoc affidavits submitted by the State, which the
Agency argued
were self-serving statements. While contemporaneous
documents generally
are better evidence concerning what happened in a
deliberative process,
the final decision to pursue the disputed study, and
reasons supporting
that decision, must be given greater weight than
statements made by
lower level governmental officials as part of a
predecisional,
deliberative process. These predecisional statements are
a natural
consequence of laudable frank and open discussion within the State
and
ought not be taken out of context.
9. The Agency alleged that the entire contract was an
attempt to
obtain a subsidy for the University of Alabama School of Social
Work.
There is no evidence to support this allegation in the record; in
fact,
there is evidence that the University of Alabama School of Social
Work
was, itself, making a substantial contribution to further the
research