California Department of Social Services (formerly California Department of Benefit Payments), DAB No, 245 (1982)

GAB Decision 245

January 12, 1982 California Department of Social Services (formerly
California Department of Benefit Payments); Docket No. 80-94-CA-SS
Settle, Norval; Ford, Cecilia Teitz, Alexander


Introduction

The State of California (State, Grantee) appealed the disallowance of
its claim for $2,436,615 in Federal financial participation (FFP) under
the public assistance (PA) programs for indirect administrative costs
incurred by Los Angeles County for the Cuban Refugee Program (CRP)
during the period July 1, 1970 through June 30, 1974. The original
disallowance in the same amount was by the Regional Commissioner of the
Social and Rehabilitation Service, Department of Health, Education, and
Welfare (HEW, now HHS), dated April 13, 1976. This was based on
findings and recommendations in HEW Audit Report No. 60265-09. The
State requested reconsideration under Section 1116(d) of the Social
Security Act and 45 CFR 201.14. After review (Reconsideration Record
MP-CA7604) (RR), the disallowance was affirmed by letter dated May 6,
1980. The claims for FFP were filed under differing PA programs. The
great bulk of the claim was under the Aid to Families with Dependent
Children Program (AFDC, Title IV-A of the Social Security Act), but part
of it was under the so-called Adult categories (Titles I, X, and XIV),
for the medically needy and medically indigent under Title XIX
(Medicaid), and for child welfare services under Title IV-B.

The State filed its request for reconsideration by letter dated July
28, 1980, /1/ electing to proceed under 45 CFR Part 16. This decision
is based upon the record in this case, including briefs and other
submissions of the parties, and the response of the State to the Board's
Order to Show Cause. The Agency was not required to respond to the
Order and did not do so. We have determined that there are no material
facts in dispute.


Summary

The issue in this appeal was whether California could be reimbursed
for the indirect administrative costs of administering assistance to
Cuban refugees.

(2) California sought FFP under the PA programs for its share of
these administrative costs, or in the alternative, to be paid for them
in full under the funding for the CRP. For reasons stated below, we
have concluded that the disallowed costs are not allocable to the PA
programs, and that the Agency was reasonable in denying reimbursement of
the costs under the CRP. Accordingly, we sustain the disallowance, as
reduced by an amount recognized by the Agency as due the State.

Background

In 1961 the care of the large number of refugees who had found their
way out of Cuba to the United States was becoming critical. HEW was
given the responsibility for these refugees, operating a program for
their relief under the Mutual Security Act of 1954 (as amended), and
financed under that Act.

In July 1961 President Kennedy made a recommendation to Congress for
legislation to amend the Immigration and Nationality Act, which would
include provision for the Cuban refugees. The following June Congress
passed the Migration and Refugee Assistance Act of 1962, Pub. L. 87-510
(the Act), which established specific authority to assist the Cuban
refugees and made necessary appropriations for this purpose.

It is interesting to note that nowhere in the Act do the words
"Cuban" or "Cuba" appear, although the import was clear. Funds were
appropriated to assist "refugees" in the United States whenever the
President determined that it would be in the interest of the United
States to do so. Refugees are defined in Section 2(b)(3) as:

. . . aliens who (A) because of persecution or fear of persecution on
account of race, religion, or political opinion, fled from a nation or
area of the Western Hemisphere . . .

The President was authorized to designate the head of any department
or agency to perform any functions conferred upon the President by the
Act. In addition, by so specifying, any person so designated was
authorized to redelegate any of his functions under the Act to any of
his subordinates (except for the power to waive legal requirements,
which is not at issue here).

Executive Order 11077, signed January 22, 1963, entitled
"Administration of the Migration and Refugee Assistance Act of 1962,"
designated the Secretary of HEW to perform the functions under the Act
at issue here, and also authorized him to redelegate any of his
functions under the Order to any of his subordinates.

On February 10, 1964, the Bureau of Family Services (BFS) of the HEW
Welfare Administration sent a directive to all Family Services Regional
Representatives (first attachment to October 7, 1980 letter from Agency
to this Board).

(3) The subject heading of this directive was "CUBAN REFUGEE PROGRAM
-- Reimbursement of Administrative Costs to States other than Florida."
This stated in part that "most State and local agencies have been able
to absorb the administrative costs of assisting resettled Cuban refugees
as their contribution to the national interest." However, where the
number who needed assistance was large enough to require additional
staff to handle the workload, approval had been obtained "for Federal
reimbursement of extra-identifiable staff costs" where this was
substantial and Federal funds were needed "to assure that the objectives
of the program may continue to be carried out effectively."

The test for these "extra-identifiable costs" was whether caseworkers
were assigned by a local agency to work "full time" on the CRP, and
handled at least 60 Cuban refugee cases a month. The salaries of such
caseworkers could be charged directly to the CRP, and rimbursement
claimed by adding them to the assistance payments on Form FS-2040,
"Monthly Statistical and Expenditure Report and Request for Federal
Funds for Assistance to Resettled Cuban Refugees." The contents of this
directive were set out verbatim (except for the last paragraph, not in
issue here) in a letter to the California State Director of Social
Welfare from the Regional Family Services Representative dated February
13, 1964 (second attachment to October 7 letter); the subject heading
was omitted, however. The 60 caseload per caseworker policy was again
transmitted to the State in a letter from the Acting Associate Regional
Commissioner of the Assistance Payments Administration dated May 3, 1972
(third attachment to October 7 letter). This concluded by saying that
there was "no authority to reimburse the salaries of clerical staff or
other staff performing work incident to the Cuban Refugee Program."
Neither letter mentioned any possibility of claiming under the PA
programs.

In California the State Department of Benefit Payments (SDBP) and the
various county welfare departments administered the CRP for HEW from
1961 to at least 1975. During this time California submitted claims and
received 100% reimbursement for assistance payments made under the CRP
by the Los Angeles County Department of Public Social Services (DPSS),
as well as for direct staff costs in administering the program. In
fact, Los Angeles County claimed and was paid for $3,433,602 of direct
staff costs in operating the CRP program from July 1, 1970 through June
30, 1974.

In addition, during this same period of time, DPSS claimed $4,463,101
of administrative costs under the PA programs that were incurred for the
benefit of the CRP. The HEW Audit Agency report entitled "State of
California, Los Angeles County Department of Public Social Services,
Report on Audit of the Cuban Refugee Program for the period July 1, 1970
through June 30, 1974" found that none of these administrative costs
were properly allocable and claimable under the PA programs, and
therefore the Federal share was overstated by $2,436,615, the amount of
the disallowance here on appeal. (Audit Report No. ACN 60265-09 issued
October 17, 1975, attached to October 7 letter; Tab 3, RR.)

(4) The reasons for this finding appear on p. 4 of the Audit Report.
Indirect costs of administering the CRP were allocable to that program
but not reimbursable.Federal reimbursement of state and local
administrative costs under the CRP was limited to direct staff costs for
workers assigned full time to the program. Identified direct costs and
assistance payments were reimbursed at 100 percent; there was no FFP
for other costs of the CRP.

The Audit Report went on to point out that reimbursement under the PA
programs is limited by the Social Security Act to:

those administrative costs which are reasonable and necessary for the
proper and efficient administration of the categorical aid programs for
providing income maintenance, medical assistance, and social services to
eligible persons. (Audit Report, pp. 4-5.)

Eligibility for benefits under the CRP, on the other hand, is
determined by:

the applicant's status as a Federally recognized Cuban refugee in
economic need without regard to the presence of characteristics for PA
eligibility such as age, disability and family deprivation resulting
from specified conditions. (Id., p. 5.)

The Agency concluded, therefore, that administrative costs incurred
for providing benefits under the CRP could not be shifted to the PA
programs. The Audit Report found the entire amount of $4,463,101
claimed under the PA programs to be improper, and therefore FFP share of
$2,436,615 was "overstated" and improperly paid to the State.

Not all of this amount was to be lost to the State. Included in the
claim was the sum of $690,618, on which FFP of $441,366 had been paid.
The Audit Report found that $586,027 (of the $690,618 claimed) was
eligible for 100 percent FFP under the CRP as "extra-identifiable costs
for full-time staff." (Id., p. 11.) /2/


California, expecting a disallowance of its claim for 2,436,615 as
its FFP share of administrative costs, then filed a claim for the entire
$4,463,101 under the CRP. /3/ (See letter of May 19, 1975 from Deputy
Director, SDBP to Financial Management Officer of CRP claim attached,
Tab 1, RR.)


(5) In the Order to Show Cause the Board expressed doubt whether the
claim for full reimbursement under the CRP was properly before it. /4/
This was based on the literal language of the disallowance appealed
from, which affirmed the disallowance by the Regional Commissioner of
Region IX of $2,436,615 in FFP "for administrative costs allocated to
the public assistance titles which were attributable to the Cuban
Refugee Program (CRP) for the period July 1, 1970 to June 30, 1974,
based upon HEW Audit Report ACN 60265-09." (Disallowance letter, p. 1.)
(Emphasis supplied.)


The State has, however, pointed out in its Response to the Order to
Show Cause that the Agency has treated the State claims for FFP under
the PA programs and for 100 percent reimbursement under ther CRP
together, and a disallowance of the former is necessarily a disallowance
of the latter as well. In fact, it was the Audit Report which found
that some costs claimed as indirect for FFP by the State were in fact
direct costs entitled to payment in full under the CRP. This means that
an appeal of the disallowance necessarily brings before the Board the
State's claim under the CRP as well as its claim under the PA programs.
The State has a valid argument, that if the Board should decide against
it on the PA claim, it would be absurd for the Board not to pass on the
CRP claim as well. If the Board did not do so, the State might find
itself in the position of having to demand that the Agency after all
these years issue a separate formal disallowance of the CRP claim, and
then the State would have to seek to file an appeal from that
disallowance.

The documentation submitted by the State in its Response to the Order
to Show Cause supports its argument that it was led to believe by the
Agency that the claim for reimbursement under the CRP would be a part of
this appeal. It submitted for the first time a letter dated April 14,
1976, from the Financial Management Officer of the CRP to the State
apologizing for the delay in responding to California's claim for 100
percent reimbursement under the CRP. This letter includes the following
language:

I did explain by telephone to a member of your staff that these
claims were related to an HEW Audit Report which the SRS Regional
Commissioner in San Francisco would be considering.

I understand that the Regional Commissioner's decision regarding that
audit report was released to your Department on April 2, setting forth
the position on these claims.

(6) The Agency thus linked the PA claim and the CRP claim, and
considered the decision of the Regional Commissioner to be determinative
of both. Under these circumstances the Board will consider the appeal
of California as an appeal of a disallowance of its PA claim and also an
appeal of a disallowance of its CRP claim. /5/


Discussion

It is important to understand exactly what this appeal is about.
California is not claiming reimbursement for actual financial assistance
paid out by it to Cuban refugees, nor for actual payments for medical
and social services for them. These actual out-of-pocket payments by
California were reimbursed 100 percent under the CRP. These assistance
payments were in fact "100% federally funded."

Neither are we faced here with claims for extra caseworkers required
to be hired and used full time for the CRP. These payments too, made by
California, were reimbursed 100 percent under the CRP as
"extra-identifiable" staff costs. (See letter from HEW Welfare
Administration, Bureau of Family Services, to SDSW, dated February 13,
1964). In fact, the Audit Report found that of the $690,618 claimed by
California to be expended under the PA programs for staff costs,
$586,027 could be claimed at 100 percent since it represented direct
extra staff costs under the CRP. The State was therefore entitled to
$586,027, rather than the $441,366 claimed as FFP, and was advised to
claim the larger amount directly under the CRP program. (Audit Report,
pp. 4, 5, 11-14.)

What is in dispute in this appeal is the matter of costs incurred by
the State indirectly in administering the CRP program. Stated simply,
the State said it cost money to run the CRP program for HEW, in addition
to the costs of hiring extra caseworkers; the State had many additional
clerical costs, for example, that were required because of the Cubans.
The State argues essentially that it originally never asked for 100
percent of what it cost; the State was willing to "absorb", or pay its
share of these administrative costs, the same way it paid its share of
any administrative costs under the various PA programs. That is, it
filed a claim for the ordinary FFP share it was entitled to under the PA
programs. It had approved cost allocation plans for allocating these
indirect administrative costs among the various (7) PA programs, and it
simply used the same method for allocating these costs for the Cuban
refugees among these PA programs. (See State Response to Order to Show
Cause, pp. 2-4.)

California in its response to the Order to Show Cause takes issue
with the Board's interpretation of the meaning of te word "absorb" in
the February 1964 letter, as distinguished from the use of the same word
in discussing the State's perceived argument on its claim. The Board
recognized that California, when speaking of "absorbing" administrative
costs, meant that it was willing to pay for the usual State share of
administrative costs in claiming FFP under the PA programs, but not the
total costs. We do not believe that to be the correct meaning of the
word "absorb", either in the letter or in common parlance. /6/ If the
letter had meant that the administrative costs were to be shared, or
participated in by the State and the Federal government, then those
words would have been used. The language is interesting, for it speaks
of absorbing the administrative costs by the states as "their
contribution to the national interest." If this meant that
administrative costs were eligible for FFP under the PA programs then it
is difficult to see where there was any "contribution to the national
interest." The State would, under this argument, have received 100
percent of the actual financial payments to the refugees (and 100
percent of medical payments and social services for them) plus 50
percent of the costs of administering assistance to the Cuban refugees.
But if there were no CRP, then the State would receive only the
approximately 50 percent of the financial payments plus the same 50
percent of administrative costs. /7/

The State's alternate position was that if the Agency disallowed its
claims for a share of what it cost the State to help these Cuban
refugees, then the State would want the full 100 percent of what it
cost. The State argued that (8) from the very beginning of the CRP the
Federal government kept saying that the CRP was going to be 100 percent
federally funded. The Agency turned the State down when the State was
willing to "absorb" part of these costs; now the State wants the whole
100 percent to which it argues it is entitled.

The Agency answered that it is a question of law. California is
clearly not entitled to FFP under the PA programs because FFP is not
available for costs that did not benefit those PA programs. The Cuban
refugees were not paid assistance under the PA programs, but under a
completely separate program. It is not a question of how to allocate
the costs among the various PA programs; the costs are not allowable
under the PA programs. One is not entitled to FFP for expenditures for
the Cuban refugee program under the Social Security Act provisions for
the PA programs, or under any regulatory provision for cost allocation,
because a fundamental requirement is that the costs claimed must benefit
the programs under which they are claimed.

As for the alternative claim for 100 percent payment under the CRP,
the Agency said that administrative costs, except for additional full
time caseworkers, were simply not payable out of CRP funds, and the
State was told so as long ago as 1964.

I. The FFP claim under the PA programs.

The Board considers first whether California is entitled to FFP under
the PA programs for indirect administrative services to the Cuban
refugees. The Board must therefore determine whether the indirect
administrative costs benefit the PA programs and are therefore allocable
to them. The Board has had occasion to consider the different uses of
the term "allocable" in Florida Farmworkers Council, Inc., Decision No.
202, July 31, 1981.As this decision points out, the term "allocability"
is used "similarly, but not identically, in two different contexts" (p.
5). The first use is in determining whether otherwise allowable costs
are "to be 'allocable' to the particular objects of attention involved
-- in this case, a number of Federal grants." The decision goes on to
say:

The first determination concerns whether a particular cost... is
"assignable or chargeable" to one or more of the grants in question or
to some other effort of the organization...

The Agency says these costs at issue here are not "allowable" under
the PA programs. The State says they are "allocable" to the various PA
programs. It appears that, regardless of the terminology, both parties
are referring to the first use of "allocable" in Florida Farmworkers
Council, that is, whether these costs are "assignable or chargeable" to
the various PA programs, i.e., whether they benefit these programs. We
are not here concerned with the second concept of "allocation" as
defined in Florida Farmworkers Council, that of how much of the indirect
administrative costs, if "chargeable" at all to the PA programs, are to
be distributed or "allocated" to each individual program.

(9) The first test, regardless of the terminology, must be whether
the State claim under the PA programs meets the requirements for FFP
under the several programs. If it does not, the claim is not allocable
to those programs, and cannot be paid under them. Since the Social
Security Act provisions under the various programs are substantially the
same, the Board will cite to the statute under Title IV-A for the Aid to
Families with Dependent Children program, which here encompasses the
great bulk of the FFP claims.

Section 403(a) has the following provision for payment to the state
of administrative costs:

(3) in the case of any State, an amount equal to the sum of the
following proportions of the total amounts expended during such quarter
as found necessary by the Secretary of Health, Education, and Welfare
for the proper and efficient administration of the State plan --

(A) 75 per centum. . . for the training. . .

(B) one-half of the remainder of such expenditures, . . . (Emphasis
supplied.)

We conclude that FFP would not be available under Title IV-A, or any
other of the titles for the PA programs, because the costs at issue were
not expended for the "proper and efficient administration of the State
plan" for each PA program respectively. While the various State plans
for the PA programs were used as guidelines, the administration of the
CRP was not under any State plan for any PA program.

In addition, FFP would be barred by the provisions of the Handbook of
Public Assistance, relied on in the disallowance here on appeal, namely,
Part V, Section 4030:

Financial assistance will be available in expenditures of the States
for the administration of old-age assistance, aid to dependent children,
aid to the blind, and aid to the permanently and totally disabled, if
they are:

1. Essential to the efficient administration of the particular
program; reasonably related to the provision of assistance in the
particular category; for purposes other than assistance; and not
chargeable to another program.

There is nothing in the record to indicate that the costs at issue
here were essential to the efficient administration of the particular PA
programs. The costs benefit and thus were chargeable or "allocable" to
another program, namely, the CRP.

(10) Much of the extensive briefing in this appeal was devoted to the
legal effect of the Bureau of Family Services directive in February 1964
that Federal participation in administrative costs of the CRP program
would be available only for "extra-identifiable costs." The principal
contention of the State was that the 1964 notification is invalid,
because it must yield to the general cost accounting principles of OMB
Circular A-87. /8/


The State relies mainly on the following language in Circular A-87
(Addendum to Agency Brief, October 23, 1980, Tab C):

A.1. . . . The principles . . .are designed to provide that federally
assisted programs bear their fair share of costs recognized under these
principles, except where restricted or prohibited by law . . . (p. 1.)

D.1. The total cost of a grant program is comprised of the allowable
direct cost incident to its performance, plus its allocable portion of
allowable indirect costs, less applicable credits. (p. 4.)

F.3.a. Federal grants may be subject to laws that limit the amount
of indirect cost that may be allowed . . . (p. 6.)

F.3.b. When the amount allowable under a statutory limitation is
less than the amount otherwise allocable as indirect costs under this
Circular, the amount not recoverable as indirect costs under a grant may
not be shifted to another federally sponsored grant program or contract.
(Emphasis by State.) (p. 6.)

The argument of the State is that the allowable indirect costs of
administering the CRP should under the provisions of Circular A-87 be
allocated among the PA programs unless there was a specific statutory
provision to the contrary. The State claims that the February 1964
directive on staff costs had no legal effect. Even if it could possibly
be classed as a rule, it was not a statute, and A-87 could be varied
only by a statute.

The Agency argues that the February 1964 directive was a Federal
guideline which had the force of law. By giving it the force and effect
of law, it was as effective as a "statutory" law, rather than just a
regulatory one. The Agency supported its argument by pointing out the
broad powers given to (11) the President under the Act, with the right
to delegate and redelegate these powers, which was done under Executive
Order 11077. It was clearly intended that the Secretary of HEW and his
delegates would spell out the details of administering the CRP under the
Act. Under such circumstances the 1964 guideline is a legislative rule,
and if otherwise valid, may have the same force as a statute. See K.
DAVIS, ADMINISTRATIVE LAW TREATISE, Sec. 7:8 (Second ed., Vol. 2, 1979).

The parties also devoted considerable briefing to whether the 1964
directive can be a valid rule having the force and effect of law, where
it was not published in the Federal Register with an opportunity for
comment, in accordance with the Administrative Procedure Act (APA) at 5
U.S.C. Sec. 553. Clearly this APA provision did not apply to the 1964
directive because the grants exception in section 553(a(2) was not
waived by the Secretary of HEW until February 5, 1971. The parties
differ sharply on whether the May 3, 1972 letter from HEW to the State
could be a valid rule without publication and a comment period. The
Agency claims that it was merely a restatement of the policy in the 1964
directive and therefore did not need to be published. The State claims
that it was a separate rule subject to the APA requirements. The Board
finds that the 1964 directive was a valid rule under the requirements
existing at that time, and therefore the 1972 letter is irrelevant.
There is no indication that the policy stated in 1964 and communicated
to the State was ever withdrawn or modified before its restatement in
1972. It is undisputed that California had notice of the 1964 directive
within a reasonable time after it was issued.

The answer to the State's arguments that Circular A-87 controls
because of the portions cited above can be found in other sections of
the Circular and in other parts of the same sections. The Agency refers
to the general language in A.1:

. . . The principles are for the purpose of cost determination and
are not intended to identify the circumstances or dictate the extent of
Federal and State or local participation in the financing of a
particular grant . . . (p. 1.)

The Agency also refers to the same section cited by the State, namely
A.1., for the language that the principles apply "except where
restricted or prohibited by law." The February 1964 directive has the
force of law restricting the general cost allocation provisions of A-87.

In addition, under C. Basic guidelines there is the following:

1. Factors affecting allowability of costs. To be allowable under a
grant program, costs must meet the following general criteria:

a. Be necessary and reasonable for proper and efficient
administration of the grant program. . .

(12) 2. Allocable costs.

a. A cost is allocable to a particular cost objective to the extent
of benefits received by such objective. (p. 3.)

The Board finds that the indirect administrative costs were not
"necessary and reasonable" for the proper and efficient administration
of the PA grant programs, nor did these programs benefit from such
costs, since the Cuban refugees were aided through a different program.
Instead, these costs were necessary and reasonable for the
administration of the CRP program which received benefits from them.
Even if A-87 applied, by its terms the indirect administrative costs are
not allocable to the PA programs, and should not be distributed among
them.

II. The claim for 100 percent of administrative costs under the CRP.

California contends that if it is not entitled to FFP for a share of
its indirect administrative costs under the PA programs, it is entitled
to 100 percent reimbursement for them under the CRP.

As distinguished from the claim for FFP under the PA programs, these
costs clearly benefit the CRP program and thus were "allocable" or
"chargeable" to CRP funds.The Audit Report (p. 4) stated that during the
period covered by this appeal "indirect costs were not allocated to the
Cuban Refugee Program." This resulted in shifting to the PA programs
"administrative costs which were allocable to but not reimbursable under
the Cuban Refugee Program." The position of the Agency was clearly
stated:

Identified direct costs and assistance payments are reimbursed at the
rate of 100 percent. There is no Federal participation available for
other costs of the Cuban Refugee Program. (Audit Report, p. 4.)

The basis for the Agency's position that the indirect costs are not
reimbursable under the CRP has the same underlying foundation as its
position on the PA costs. This contention is that the February 10, 1964
letter told the State that the only administrative costs it would be
paid for were the "extra-identifiable" costs of hiring extra caseworkers
who would carry 60 cases. All other administrative costs would have to
be "absorbed," or paid for by the State. The legal analysis in Part I
of the Discussion on this point applies equally as well here. The
policy set by HEW in February 1964, which had the force of law, was that
indirect administrative costs (except for the extra caseworkers) would
not be reimbursed.

The Board does not disagree with this position. There is nothing in
the Act on this point. Under the broad delegation powers of Executive
Order 11017, the Agency had wide discretion in administering the CRP
program. If the Agency thought it did not have sufficient resources to
pay all costs, that (13) is, assistance payments, extra caseworker
costs, and all administrative costs, there is nothing in the law which
prevented it from limiting its payments to exclude some of these costs.
The Board finds that it was not per se unreasonable to require the State
to pay all the indirect administrative costs connected with the CRP.
The states were not required to participate in the CRP.

California points out that the Federal government undoubtedly
"encouraged" the states to participate in the CRP. State Letter No.
465 speaks of its purpose to inform states of the program "and solicit
their cooperation, when necessary, in participating in it." But it was a
voluntary program which the states were free to participate in or not.
If they chose to do so, then they had to take the 100 percent federal
fiunding of their actual assistance outlays provided for in the CRP
funding without the right to claim reimbursement of their administrative
costs.

III. The State was not misled on the Federal funding of the CRP.

In the Agency reconsideration stage of this disallowance the State
argued that HEW's implementation of the CRP program was "misleading and
confusing." (Letter from Deputy Director, SDBP, to Administrator, SRS,
October 15, 1976, RR Tab 13, p. 6.)

In its brief of December 26, 1980 the State expanded this into a
contention that "(the) states were induced to accept Cuban Refugees
through promises of 100% Federally funding." (p. 2, I.) This is followed
with the supporting statement that "HEW continued to formally advise
states that the CRP would be fully federally funded." (p. 3, II.)

The difficulty with this argument is in the use of terms. The
difference between the parties is whether "fully federal funded" meant
that the State would be paid for all costs connected in any way with the
CRP, that is, income maintenance and medical and social services
payments, plus all administrative costs, direct and indirect. Nothing
in the record supports such a belief by the State. Even if the first
instructions from HEW were ambiguous, they were clarified long before
the period of the disallowance, 1970-1974.

The first communication to the states from HEW about the CRP was
State Letter No. 465 dated March 17, 1961. This letter does not mention
administrative costs at all. It specifically states, as the State
quotes, that:

4. Federal funds will be used to meet (a) costs of basic maintenance
and supporting services, and (b) costs of medical care. (Exhibit A to
State brief, December 26, 1980; p. 2.)

Nothing in the quoted language says in so many words that
administration expenses will also be paid from Federal funds. The State
also relies on paragraph 5 on page 5:

(14) Financing the Program. -- The cost of the Cuban Refugee Program
will be met from Federal funds. We propose that financing be on the
basis of Federal reimbursement to States for financial assistance
expenditures with respect to Cuban refugees under the conditions
outlined above.

The State cites the first sentence of the above paragraph, saying
that since the term "cost" as used in relation to federally funded
programs is a term of art, therefore it "would have been reasonable for
states to assume that its use in this context was as that term is
defined in general grant regulations (e.g. OMB Circular A-87)."

The definition of the word "cost" in OMB Circular A-87 hardly
supports such a reading:

3. Cost, as used herein, means cost as determined on a cash, accrual,
or other basis acceptable to the Federal grantor agency as a discharge
of the grantee's accountability for Federal funds. (Tab C, Addendum to
Agency brief, October 23, 1980, p. 2.)

In any event, it is certainly arguable that the specific reference to
Federal reimbursement "for financial assistance expenditures" negates
any implication that indirect administrative costs will also be
reimbursed.

The State also submits State Letter No. 470 dated April 4, 1961
(Exhibit B) and State Letter No. 553 dated February 27, 1962 (Exhibit
C). The subject of the first is a "Program for United States Citizens
Repatriated from Cuba." The second pertains to "Assistance for United
States Citizens Returned From Foreign Countries." These could not
possibly have anything to do with Cuban refugees, since under the Act
the first requirement in the definition of "refugees" is that they be
"aliens." (Pub. L. 87-510, Sec. 2(b)(3).) The State also relies on State
Letter No. 580, dated August 1, 1962 (Exhibit D to State brief) and
particularly the language that:

Federal funds will be used to meet (a) costs of basic maintenance and
supporting services and (b) costs of medical care. (p. 3.)

The cost of financial assistance for Cuban refugees will be met from
Federal funds. (p. 4.)

Separate accounts will be maintained for this program . . . The
accounts will reflect all disbursements for Cuban refugees . . . (p.
4.)

(15) This letter could be clearer but there is nothing here that
necessarily includes administrative costs. The words "costs of basic
maintenance," "costs of medical care," and "cost of financial
assistance" do not by implication have to include administrative costs.

The words "supporting services" in State Letter No. 580 standing
alone might be questioned, but a reading of the entire Exhibit D shows
that they were intended to apply to social services and not
administrative ones.

Related Social Services. -- The full range of social services
available to public assistance recipients should be furnished to
eligible Cuban refugees . . . (p. 4.)

The requirement that the accounts "will reflect all disbursements for
Cuban refugees" adds nothing. A reading of the entire State Letter No.
580 shows the intent that Cuban refugees be provided the full panoply of
money and services available to other public assistance recipients,
based on refugee status and need. It was also the intent to provide
federal reimbursement for all "disbursements" made by the State in
aiding these refugees. There is nothing to indicate that the indirect
costs of administering the program are included under "disbursements."

If there was any ambiguity in these letters as to payment of
administrative costs, it would certainly appear to be cleared up by
subsequent correspondence. On February 10, 1964, the Acting Chief of
the Division of Program Operations of the BFS sent a memorandum to all
Regional Representatives of the CRP. This was set out in the letter
from Family Service Representative to the Director of the California
State Department of Social Welfare dated Debruary 13, 1964, which
contains the following language:

In view of the small national caseload, most State and local agencies
have been able to absorb the administrative costs of assisting resettled
Cuban refugees as their contribution to the national interest . . .

In line with the Bureau's customary policy of Federal participation
insofar as pobbisle, in extra-identifiable costs attributable to Federal
programs, approval has been secured, on a limited basis, for Federal
reimbursement of extra-identifiable staff costs where this is
substantial and Federal funds are needed to assure that the objectives
of the program may be continued to be carried out effectively.

IV.The disparate treatment of Florida.

There is one important requirement for the 1964 directive to be a
valid rule binding on California, and that is that it is reasonable.
California contends that the disparate treatment of Florida is alone
enough to make the policy an irrational one.

(16) The record in this case at the time of the Order to Show Cause
contained nothing to show that Florida was in fact paid for its
administrative costs. California in its original appeal letter stated
that:

We are advised that the State of Florida was permitted to charge all
of its administrative costs (including indirect costs) to Federal funds.
(p. 3.)

The Agency in its briefing thereafter proceeded on the assumption
that even if this disparate treatment of Florida was a fact, it made no
difference to California. At the request of the Board in a telephone
conference, the Agency advised that records showed that Florida had in
fact been paid for its administrative costs out of funding for the CRP.
(See Letter of Agency attorney to the Board dated December 9, 1981.)

If the record showed that Florida was paid FFP for its administrative
costs out of PA funds, the Board may well have found that this was an
unreasonable discrimination. Such a treatment could only be based on a
finding that Florida's administrative costs were "allocable" to the PA
programs. Such a finding for Florida alone might be unreasonable, since
it would require that the Social Security Act and Federal regulation
provisions for FFP for the PA programs be interpreted to provide
different treatment for one state from another.

On the other hand the Migration and Refugee Assistance Act has no
provision in it for making any specific payments to any state in any
particular amount for assisting in administering payment of assistance
to cuban refugees. No regulation was evern promulgated in reference to
the CRP, so all we have is the Executive Order and the various letters
to the states referred to above. The question then remains whether, in
the absence of any statute or regulation to the contrary, the Agency may
discriminate in its treatment of the several states. /9/


Clearly the Federal government may treat different states differently
in the money it grants for public assistance programs, depending on
their needs. Thus, the Federal medical assistance percentage, which
determines FFP payments to the states under Medicaid, is computed using
the per capita income in each state as a factor in the formula (although
the percentage cannot be less than 50 percent nor more than 83 percent).
(Social Security Act, Section 1905(b).) No one has argued against such
an approach. California admits that Congress may treat states
differently, but not an agency. However, the powers delegated to the
President under the Act, and in turn delegated by him to the Agency (17)
under the Executive Order, are broad enough for the Agency to be able to
do what it did here, namely, to pay "extra-identifiable" administrative
costs to all states, but to pay other administrative costs only to
Florida.

It is clear that the brunt of the burden of caring for the Cuban
refugees fell on Florida. The Act itself does not refer in any way to
Florida (the Agency admitted that its first statement to that effect was
incorrect), but the legislative history does.

Senate Report 989 on H.R. 8291 (Tab A, Addendum to Agency brief,
October 23, 1980) has the following:

Federal authorities have cooperated with the State of Florida, the
city of Miami, and Dade County . . . Of the 136,000 nonnaturalized
Cubans in the United States, about 50,000 have registered as "refugees"
in Miami. The purpose of the Federal programs has been not only to aid
individual refugees but to relieve the burden upon the communities in
Florida where the refugees have been located . . .

The following statement appears in the House debate on the Act:

The fourth program is a new one so far as Congress is concerned and
will authorize assistance in connection with the Cuban refugee program
in the United States...

It is mainly for the assistance of the State of Florida that has so
many people from Cuba at the present time. (Remarks of Mr. Smith of
California, Cong. Rec., March 13, 1962, p. 3663.)

It is of course true that many of these refugees found their way
eventually to California, judging by the amount of the
"extra-identifiable" costs for extra caseworkers for which Federal
payment was made to California in full. But the initial overwhelming
impact was upon Florida, and if the Federal government wanted to pay
Florida the indirect administrative costs as well as the direct to
compensate in some way for Florida's extra burden, that should not
invalidate a different policy toward other states. In recent times we
have seen how another wave of Cuban refugees has swamped Florida.
Again, part of the burden is of course on other states but the initial
brunt is on Florida.

Congress did not spell out in so many words in the Act itself that
Florida could be favored under the CRP, but it was clearly consistent
with the legislative history for HEW to do so under its broad delegated
powers. /10/


(18) V. The hardship of the State.

The actual financial hardship on the State of California is nowhere
near as great as it might seem upon first glance. The state properly
stresses that if the Cuban refugees had been given assistance under the
various PA programs, rather than under the CRP, all administrative
costs, direct and indirect, would have been eligible for FFP without
question. This is true, but what California does not point out is that
if assistance payments had been made to the Cubans under the various PA
programs, California would have had to share in these payments with the
Federal government. California would have received perhaps 50 percent
of the indirect administrative costs here in dispute, but would have
also had to pay out some 50 percent as the State share of the assistance
payments, as well as a share of the medical payments and social
services. The amount of the actual payments to and for the refugees for
the full period of the disallowance does not appear in the record, but
it must have been very substantial, where the CRP assistance payments
during the fiscal year 1974 made by DPSS totaled approximately $11
million dollars (Audit Report, p. 1).

The State understandably wants to recover all administrative costs it
is legally entitled to recover, but if not for the CRP it would probably
have had to pay out far more as its shares of assistance payments to the
Cubans than it could recover in administrative costs. /11/


CONCLUSION

The disallowance appealed from is upheld. This does not mean,
however, that California should have to repay the full amount of
$2,436,615 in FFP. In the first place, the parties agree that the State
was entitled to $586,027 for direct staff costs out of $690,618 it had
claimed under the FFP programs, and which under the Audit were entitled
to 100 percent funding from CRP funds. As the State pointed out in its
Response to the Order to Show Cause, the Agency treated all these claims
together. It would be counterproductive to require the State now to
have to reclaim under the CRP funds for this $586,027. The State
recognizes that funds are not fungible, but the disposition seems to
require mere bookkeeping transactions on the part of the Agency.
Obviously the State may not file a separate claim for these funds
elsewhere. /12/


(19) The Agency in its Response (p. 20, n. 9) pointed out that under
the provisions of Pub. L. 95-291 it is prohibited from recouping any
amounts of the disallowance expended for social services under various
titles of the Act. It may also not be permitted to recoup IV-B payments
because of the excess entitlement of the State under that program. (See
Disallowance Letter, p. 5.)

The disallowance is therefore upheld in the sum of $1,850,588,
representing the amount of FFP incorrectly paid the State of $2,436,615
under the PA programs, minus the $586,027 due the State under the CRP
for direct staff costs. The disallowance is further to be reduced by an
amount to be computed by the Agency to comply with the provisions of
Pub. L. 95-291, and any adjustment required under Title IV-B. /1/ The
Board accepted the appeal of the State as timely filed, since it
found that the disallowance letter was not released on May 6, 1980, when
it was dated, and could not have been received by the State until after
June 17. The State claimed it did not receive the letter until June 30.
/2/ The Agency presumably did not deduct the $586,027 due the State from
the total amount of the disallowance because of the separate funding
sources for the PA programs and the CRP. The Audit recommendations
upheld by the Regional Commissioner were that California refund
$2,436,615 in FFP under the PA programs, and increases its CRP claim by
$586,027. /3/ Actually, this claim was filed almost five months
before the Audit Report disapproving the PA claim was released.
California had seen a preliminary copy of te Audit Report when it was
asked for comment and anticipated that its FFP claim would be denied.
/4/ The State's appeal letter of July 28, 1980 concluded with a request
for relief, that "the disallowance be reconsidered and, upon such
reconsideration, reversed." The sentence immediately before asks that
"(In) the alternative, it should be held that the costs in question may
be re-claimed for 100% federal reimbursement together with other CRP
costs." There is of course nothing inherently wrong with asking for
alternative relief, even if inconsistent with the primary relief sought,
and much greater in amount. /5/ The Board of course cannot
confer binding jurisdiction on itself. The Board will accept
California's position that its appeal does bring up all claims
considered upon reconsideration and disallowed, particularly since the
Agency has at no time raised any objection to such a treatment. This
procedure is also consistent with the statement in the transfer of
reconsideration functions to this Board that "no State (will) be
prejudiced by operating under the Grant Appeals Board regulations."
(Reconsideration of Disallowances under Public Assistance Programs,
Supplementary Information, Fed. Reg. March 6, 1978, p. 9264.)
/6/ Webster's Third International Dictionary defines "absorb" as "to
suck up." The last alternative given is the closest to the use of the
word here, namely, "to take over (a cost)." The example given is
"travelling expenses absorbed by the employee." There is nothing to
indicate that a cost is only partially taken over when it is absorbed.
/7/ Let us assume that in a given period the cost of actual payments to
and for the Cuban refugees was $500,000; that all Cuban refugees were
eligible under the PA programs; that the rate of FFP was a flat 50
percent for all payments and administrative costs; and that
administrative costs ran $100,000, or 20 percent of the cash outlays. If
there were no CRP the State would receive as FFP 50 percent of $500,000,
or $250,000, for its outlays, plus 50 percent of $100,000, or $50,000
for the administrative costs, for a total of $300,000. Under the CRP,
as interpreted by the Agency, the State would receive 100 percent of
$500,000, or $500,000 for the outlays with nothing for the
administrative costs. Under the State's argument, it would receive 100
percent of the $500,000 outlay plus 50 percent of the $100,000
administrative costs, for a total of $550,000. /8/ In its
original appeal letter of July 28, 1980, the State cited to former 34
CFR, Chapter II, Part 255 and Appendix A for the general principles of
allocability of indirect costs. The Agency in its brief of October 23,
1980 pointed out that these provisions of 34 CFR did not come into
effect until after the end of the disallowance period, and the correct
citation is to OMB Circular A-87. The relevant provisions are in any
event similar, and both parties thereafter cited to Circular A-87. We
also do so. /9/ California did not contend that refusing it
payment for costs paid Florida was a denial of equal protection. It did
use a due process argument in its claim that there should have been
notice and hearing before the 1964 directive. A state is not a "person"
and is therefore not entitled under the Constitution to either due
process, South Carolina v. Katzenbach, 383 U.S. 301, 323-24 (1966), or
equal protection. Pennsylvania v. New Jersey, 426 U.S. 660, 665 (1976).
/10/ Even without the broad delegation of powers under the Act, "(the)
power of an administrative agency to administer a congressionally
created and funded program necessarily requires the formulation of
policy and the making of rules to fill any gap left, implicitly or
explicitly, by Congress." Morton v. Ruiz, 415 U.S. 199, 231 (1974).
/11/ The exact amount involved here must necessarily be speculative,
since if there were no CRP many of the Cubans refugees might not have
been eligible for assistance under the various PA programs. This could
have in fact increased the State cost, since they might have been
eligible under a completely State-funded type of general assistance.
/12/ The record indicates that the State received $441,366 of the
$690,618 claimed for direct staff charges in FFP under the PA programs.
(Audit Report, p. 10.) However, it appears that the $441,366 is included
in the total of $2,436,615 FFP disallowed and upheld here. Should the
Board be in error as to the actual payments involved, the parties should
adjust the results to conform with the substance of the Board's
decision.

OCTOBER 22, 1983