GAB Decision 335
June 30, 1982 Massachusetts Department of Public Welfare; Docket No.
81-204-MA-WN Ford, Cecilia; Settle, Norval Garrett, Donald
The Massachusetts Department of Public Welfare (State) appealed the
disallowance of $614,120 in federal financial participation (FFP) for
payroll costs claimed under the Work Incentive (WIN) program of Title
IV-C of the Social Security Act (Act). The costs were disallowed based
on findings in Audit Report No. 01-10255, that the State charged the
salary costs of some employees entirely to the WIN program even though
"a substantial amount of their effort was directed at non-WIN
activities." /1/
The State did not deny that it charged these costs to WIN, but
claimed that its approved cost allocation plan allowed the State to
charge all salary costs to WIN for employees who spend more than 50% of
their time on WIN activities. The State argued that the Agency can not
disallow costs claimed in accordance with an approved cost allocation
plan.
Based on the record, the Board sustains the disallowance because the
disputed costs are not allowable for reimbursement under the WIN
program. /2/
(2) I. The administration of the WIN program.
Title IV-C of the Act created the WIN program to provide certain
recipients of aid to families with dependent children with incentives
and opportunities to receive training and employment. The Act
authorizes FFP at 90% for the costs of carrying out the program.
Section 402(a)(19) (G)(i) of the Act provides that the WIN program:
will be administered by a separate administrative unit. . . the
employees of which will, to the maximum extent feasible, perform
services only in connection with the administration of such program.
/3/
The State established separate administrative units (SAUs) as
required by the statute and regulations, but the record indicates that
SAU-WIN employees worked on non-WIN activities as well. The State
charged to WIN the entire salary (and related costs) of each employee
assigned to a SAU. The Agency disallowed those costs which its auditors
determined were not related to WIN activities.
II. The audit findings.
During the period audited, a total of 240 employees were assigned at
various times to SAU offices throughout the State. The auditors
reviewed, on a random selection basis, the functions of all 59 employees
charged to WIN at 10 SAU offices for the period from October 1, 1975 to
June 30, 1979 to determine whether the employees' efforts were devoted
to WIN. The auditors found that 45 of the 59 employees spent about 50%
of their time on WIN activities (reimbursable at 90% FFP), and spent
their remaining time on non-WIN activities for the benefit of programs
reimbursable at 50% or 75% FFP. /4/ The auditors also found that 19 (3)
of those 45 employees had no WIN activity for periods ranging from 2
months to 3.5 years. /5/ State's Appeal File, Exhibit G (Audit Report),
pp. 8, 11.
The adutiors based their findings on discussions with employees and
supervisors concerning the 59 employees and a review of work
assignments. The auditors said that they could not precisely determine
the total amount of time that all employees devoted to other programs
because the State did not require employees to record or report time
spent on different programs. The auditors recommended adjustments of
$900,000 ($810,000 FFP) and recommended that the State establish
procedures to periodically review positions charged to the WIN program
to insure that functions being performed were reimbursable under WIN.
(The auditors also said that if their sample was representative of all
employees charged to WIN, the amount of questionable costs could be as
much as $2.7 million FFP). The State concurred with the recommended
adjustments of $195,880 FFP for certain employees which the auditors
determined worked less then 50% on WIN, and appealed the remaining
$614,120 FFP.
The auditors also determined that the State did not implement
sufficient controls to insure that employees would devote their full
effort to WIN activities, and that no cost allocation procedures were
established to determine the extent to which employees worked on other
programs. (Id., p. 7.) The auditors recommended that the State restrict
the activities of employees to allowable WIN activities, or, if that was
not feasible, develop cost allocation procedures to identify
administrative costs eligible under WIN.
III. The provision for claiming cost in the State's cost allocation
plan.
The State claimed that if a SAU employee worked 50% or more on WIN,
the State was entitled to charge that employee's entire salary costs (4)
to WIN because the State's Personnel Resources and Information
Management (PRIM) System, which was incorporated into the State's cost
allocation plans; provided:
The PRIM system provides the basis for charging salaries and fringe
benefits directly to federal programs and allocating indirect costs.
The coding system enables the Department to segregate costs related to a
specific subprogram activity where it is necessary to isolate costs
reimbursable at different levels. In situations where employees' normal
workload covers several activities within a specific program, they are
coded to the program and their efforts charged to the subprogram which
absorbs the majority of their working hours. (emphsis added) (State's
Appeal File, Exhibit B, p. 23)
A clause in the PRIM manual directed:
if a person performs more than one task, code the person according to
the subfunction that he/she spends 50% or more of his/her time on.
(State's Appeal File, Exhibit C, p. 2)
The State claimed that since the Agency approved the State's cost
allocation plans, and since the State relied upon that approval, the
disallowance should be barred by estoppel.
The Agency agreed that the PRIM clauses were incorporated into the
cost allocation plans approved by the Agency, but maintained that their
application resulted in improper charges to the WIN program. The Agency
argued that even with an approved plan, the State was required to comply
with all relevant statutes and regulations. The Agency contended that
the State acted contrary to the statute and regulations which required
the SAU employees to work only on WIN to the maximum extent feasible.
The Agency further argued that the State violated the cost principle at
45 CFR Part 74, Appendix C, which provides:
C.2. Allocable costs. a. A cost is allocable to a particular cost
objective to the extent of benefits received by such objective. /6/
(5) The Agency argued that although some deviation is permitted under
the regulations, as cost allocation cannot always be precise, the method
used by the State resulted in charging WIN with costs which were
obviously related to other programs. (Agency Reponse, pp. 5-7)
The Agency also argued that it should not be estopped from
disallowing these costs because the "mere approval of a CAP (cost
allocation plan) does not guarantee that in its use and operation all
costs will be judged allowable regardless of circumstance." (Agency
Response, p. 8) The Agency argued that the State knew the costs claimed
would be subject to later review, and that, even if the Agency acted in
error, "parties dealing with the government are . . . bound by statutes
and lawfully promulgated regulations despite reliance to their pecuniary
detriment upon incorrect information received from government Agencies
or employees." Id. n7
The Agency further contended that a different clause in the cost plan
governed under these circumstances and that the State did not claim
costs in accordance with that clause. The clause provided that the plan
included procedures:
to assure that federal programs are charged only for costs assignable
to them; that any portion of the total costs assignable to programs
which are to be excluded from federal sharing are so excluded; and that
costs assignable to activities or functions having different federal
sharing rates are properly segregated. /8/
The Agency argued that by charging to WIN the costs of employees who
worked 50% on other programs, the State did not assure that the program
was charged only costs assignable to it. The Agency also argued that
the State did not properly segregate costs which have different federal
sharing rates because the State charged to WIN the costs of employees
who worked 50% on programs which were reimbursable at rates for FFP less
than the 90% rate for WIN.
(6) IV. Discussion.
It is undisputed that the State's approved cost allocation plans for
the periods involved included the PRIM method of coding and charging
employee costs to the subfunctions on which the employees spent a
majority of their time. The approval of the PRIM system did not mean,
however, that the State can claim costs in a manner that was
inconsistent with applicable statutes, program regulations, regulations
on cost allocation, and other provisions in the cost plan.
In this case, the PRIM provision must be read in conjunction with:
the clause in the cost plan which provided that the State would assure
that federal programs were charged only for the costs assignable to them
and that costs with different rates of FFP were properly segregated;
the regulation requiring allocation to the benefited program; the
statutes appropriating FFP for programs at certain rates; and the
statute and regulation which required employees of the SAUs to work only
on the WIN program to the maximum extent feasible.
We conclude that the State's method of allocating costs was not
consistent with these other provisions.
A. Whether the disputed costs were allowable charges to WIN.
It is a basic principle of grants law that to be allowable under a
grant program, costs must be reasonable and necessary for the
administration of the program and be allocable to the program. The
regulations further provide that costs are allocable to a program to the
extent they benefit the program. 45 CFR Part 74, Appendix C, Section
C.1. and C.2.a; see, also, New Mexico Department of Human Services,
Decision No. 211, August 31, 1981; California Department Of Benefit
Payments, Decision No. 160, March 31, 1981. In addition, the State's
cost allocation plan said the State would "assure" that federal programs
would be charged only with costs assignable to them.
The State did not show that its method of claiming costs satisfied
these requirements. We conclude that by charging to WIN the entire
salary costs of employees who performed numerous non-WIN functions, the
State charged to WIN costs which were in excess of their benefit to WIN
and which were not reasonable and necessary to the administration of the
WIN program.
We do not here rule that the use of PRIM is itself improper; we
conclude, however, that it resulted in improper charges as applied by
the State to the WIN program. Under ordinary circumstances, if the
costs of (7) employees who have functions benefiting several programs
were charged to the program on which they spend the majority of their
time, there would have been an equal chance that a program could be
advantaged or disadvantaged from the use of the PRIM provision.
For example, suppose that two programs are involved, one paying FFP
at 50% and one paying FFP at 90%. Suppose also that each program has
one employee who works on one program 55% of the time and 45% on the
other. Charging each employee to the program on which the employee
worked 50% or more would result in each employee being charged entirely
to one program or the other. However, it would also result in precisely
the same charge to the two programs as would occur if each employee's
time had been charged separately to each program. Each program would be
charged an amount that reflected the extent of benefit it received from
these employees' efforts (each program received 100% combined effort and
was charged for 100% of an employee's costs). Applying PRIM in the
situation described would be administratively convenient and not
inherently illegal since, on average, the results would be in accord
with the basic requirements on the allocability of costs. Illustration:
employee 1 earning $10,000 worked
55% on program A at 90% FFP = $5,500 ($4,950 FFP)
45% on program B at 50% FFP = $4,500 ($2,250 FFP)
employee 2 earning $10,000 worked
45% on program A at 90% FFP = $4,500 ($4,050 FFP)
55% on program B at 50% FFP = $5,500 ($2,750 FFP)
By applying PRIM here, program A would be charged $10,000 ($9,000
FFP) for the costs of employee 1 or, $10,000 ($9,000 FFP) for the
combined effort for program A of employee 1 and employee 2 ($4,950 +
$4,050 FFP). The same would result for program B at 50% FFP ($5,000 FFP
for employee 2, or for combined effort of both).
As applied by the State to WIN, however, PRIM did not result in a
proper allocation between WIN and the other programs benefited. The
record does not indicate that the State attempted to allocate the
disputed costs to reflect the extent to which those costs benefited WIN,
nor does it show that the State made determinations about the amount of
time SAU employees spent on WIN activities before the costs were charged
to the program. In this case all employees working on WIN were in the
SAUs, and the State charged to WIN all the costs of any employee
assigned to a SAU, regardless of the amount of time the employee devoted
to the administration of WIN. Therefore, unlike the example set out
above, the charges to WIN were not offset by any charges (8) to other
programs for the costs of any employee performing WIN functions. The
"round-off" here resulted only in charging WIN for the costs of
employees performing functions which benefited other programs. /9/
The State maintained that the cost principle which states that costs
are allocable to the extent of benefit received by the program should
not be read strictly because it would permit no deviation in allocating
costs to various programs. The State argued that the Agency agreed some
deviation in the allocation of costs was acceptable. The State claimed
that the Agency agreed that a deviation of 10% was acceptable because
after the audit the Agency had proposed a revision of the PRIM coding
system to allow the State to charge to WIN employees who worked 90% on
WIN. (See, State's Brief pp. 7-8, and Appeal File, Exhibit D) The State
said that the amount disallowed represents only 10% of the adminstrative
costs for the period, and was therefore a permissible deviation.
We agree with the Agency that the State's method of allocating costs
did not involve a reasonable deviation, as evidenced by the magnitude of
the costs at stake. The State's claim that the amount of the
disallowance represented only 10% of the total administrative costs for
the entire period is misleading because the disallowance here was based
on expenditures attributable to only 59 of the 240 employees in the
various WIN-SAU units. The auditors said that:
If the results of our sample are representative of all employees
charged to WIN, the amount of questionable administrative costs could be
as much as $3 million (2.7 million FFP) (of the approximately 5.4
million FFP the State claimed). We are not projecting the results of
our audit tests for the purposes of recommending a financial adjustment
because detailed time and effort studies are not available to support
the precision of such an estimate.
(State's Appeal File, Exhibit, G. p. 11; See, also, p. 4)
(9) We conclude therefore, that this case does not involve a de
minimis deviation, as alleged by the State. /10/
Whether the State properly segregated costs with different statutory
rates of FFP.
The costs of the WIN program are reimbursed at a 90% rate of FFP,
while costs of other programs on which the WIN-SAU employees worked are
reimbursable at 50% or 75% FFP. When the State charged WIN for all the
costs of employees who worked in the WIN units, even though they worked
in part on those other programs, the State claimed 90% reimbursement for
activities which were only eligible for 50% or 75% reimbursement. The
State did not show that any employees who where charged to programs
receiving lower rates of FFP did any work on WIN which could have
resulted in an offset to these charges.
The State's method of allocating costs must comply with federal
requirements which establish the amount of FFP available for activities
performed in the administration of different federal programs; the
State cannot use its coding method to circumvent those statutory limits.
B. Whether the disallowance should be reversed because the State
relied on Agency approval of the PRIM system.
The thrust of the State's argument in this appeal was that the State
was required to claim costs in accordance with its approved cost
allocation plan; that the Agency approved the PRIM system of allocating
costs; and that therefore, the State was entitled to charge to WIN the
costs of employees who worked 50% on WIN. /11/
However, the record indicates that the State did not administer its
program in conformance with the system, as approved.
(10) The State cannot reasonably claim to have relied on the approval
of the PRIM system when the State did not in fact code employees in the
manner specified by PRIM. The PRIM system required a determination that
employees worked at least a majority of their time on WIN in order for
the employees to be coded and charged as WIN. The State admitted,
however, that all employees assigned to the WIN-SAU unit were initially
charged to WIN, and that it was only after the Agency's auditors
identified problems that the State went back to determine how much time,
if any, an employee spent on WIN activities. The record indicates that
the State did not keep time records to determine whether employees
worked more than 50% on WIN, and did not have any other procedures to
insure that the employees were claimed in accordance with PRIM.
Nor did the State charge to another program the entire costs of any
employee who may have devoted less than 50% of his/her time on WIN.
Therefore, the State applied PRIM in a manner which could not have
resulted in a proper allocation of costs. Given the State's failure to
monitor whether employees in fact worked 50% on WIN, we will not now
speculate whether it would have resulted in a proper allocation of costs
if the State charged to WIN only those employees who worked more than
50% on WIN, and charged to other programs SAU employees who worked less
then 50% on WIN. We conclude that under these circumstances, it was
reasonable for the Agency to only disallow costs to the extent of
non-WIN activity performed by the SAU employees (rather than charging
the employees' costs entirely to another program as would be required by
PRIM).
C. Whether WIN-SAU employees worked to the maximum extent feasible
only on WIN.
The WIN statute and regulations require that SAU employees to the
maximum extent feasible perform functions only in connection with WIN.
We conclude that this places a burden on the State to show that it
insured that if any SAU employee did not work only on WIN, there were
circumstances which justified it.
The State argued that the reason SAU employees worked on non-WIN
functions was because a hiring freeze created a shortage of child
welfare workers who were needed for emergencies. We are not persuaded
by this argument. The State did not present any evidence to support
this claim. The State did not attempt to show a direct correlation
between any emergency situation (10) which may have existed and these
charges to WIN. The unsubstantiated claim is not enough to show that
over the five year period audited, the SAU employees worked only on WIN
to the maximum extent feasible. This is is especially true where the
State has not disputed audit findings that the State had no procedures
to insure that WIN employees devoted their full effort to WIN. Even if
the claim was true, it would not necessarily provide a basis for
applying the statutory exception, since the claim involved the State's
own freeze.
We are also unpersuaded by the State's claim that it satisfied the
statutory and regulatory requirements because the Agency's approval of
the PRIM provision constituted a finding that 50% effort was the
"maximum extent feasible." The State presented no evidence to support
this claim, either by reference to a provision in the plan or any other
Agency statement of intent in approving the plan. The PRIM provision of
the cost plan set out methods for coding employees for the purpose of
allocating costs; it does not govern how much time an employee must
devote to a program to satisfy other statutory and regulatory
requirements.
We therefore conclude that the State has not shown that employees in
the SAU units, to the maximum extent feasible, worked only on WIN. This
is relevant in part because the PRIM clause provides that "where
employees' normal workload covers several activities" the employees
should be coded and charged to the subprogram which absorbed a majority
of their time. Had the State scrupulously complied with the statute and
regulations which required that to the maximum extent feasible SAU
employees work only on WIN, the SAU employees' normal workload should
not ordinarily have included "several activities" and PRIM would not
have applied. Further, if SAU employees worked almost exclusively on
WIN, the State would have been able to use PRIM to allocate costs to WIN
in a manner consistent with the cost principles discussed in part IV.A.
of this decision.
IV. Conclusion
For the reasons discussed above, this disallowance is upheld. /1/
The disallowance letter was issued by the National Coordination
Committee of the WIN program of the Department of Health and Human
Services and the U.S. Derpartment of Labor. (State's Appeal File,
Exhibit I) Both Departments have responsibilities for the WIN program;
DOL provides job placement and HHS provides financial assistance and
supportive social services. The Office of Human Development Services
(Agency) is the HHS operating component now responsible for WIN, and is
the respondent in this appeal. /2/ In its notice of appeal the
State said that the Board was without authority to act because the
dispute in question did not arise under a program which uses the Boad
for dispute resolution. Appendix A to the Board's regulations at 45 CFR
Part 16 (1981) states, however, that the Board will review disallowances
under Title IV of the Social Security Act, and this dispute arises from
the administration of a program under that Title. /3/ See, also,
45 CFR 224.30(a) (1975) which states that employees in the separate
administrative units will, "to the maximum extent possible, perform
functions only in connection with the WIN program," and WIN Handbook,
Chapter II, p. 4. /4/ Although the auditors referred in their
report to some employee costs as reimbursable under Title IV-A at 51%
FFP, Sec. 403(a)(3)(B) of Title IV provides that administrative costs
are reimbursable at 50%. This distinction is not relevant to the issues
raised in this appeal. /5/ In its appeal brief the State objected to
the methodology by which the auditors determined the amount of
time certain employees devoted to WIN. The parties requested that the
Board first decide the legal issues, and agreed that if the Board upheld
the disallowance, the parties would attempt to resolve the State's
objections to the auditors' methodology. If the parties cannot resolve
that matter, the Agency should issue a written decision which explains
its position, and the State can file an appeal (limited to the
methodology issue) pursuant to the Board's procedures at 45 CFR Part 16
(1981). /6/ Section B.4. of Appendix C defines a cost objective as: "a
pool, center or area established for the accumulation of cost. Such
areas include organizational units, functions, objects or items of
expense, as well as ultimate cost objectives including specific grants,
projects, contracts, and other activities." /7/ The Agency cited
as support for this proposition: Federal Crop Insurance Corp. v.
Merrill, 332 U.S. 380 (1947); Walker-Hill Co. v. United States, 162 F.
2d 259 (7th Cir. 1947), Cert. denied 332 U.S. 717, (1947); James v.
United States, 185 F.2d 115 (4th Cir. 1950); Flamm v. Ribicoff, 203 F.
Supp. 507, 510 (S.D.N.Y. 1961). /8/ This clause appears in the
cost allocation plan effective October 1, 1978 (State's Appeal File,
Exhibit B, P. 1), but the State did not contend that these were not the
State's objectives for the entire period of the disallowance. /9/
Example: SAU employee earning $10,000 worked 55% on WIN at 90% FFP =
$5,500 ($4,950 FFP) 45% on other at 50% FFP = $4,500 ($2,250 FFP) If the
SAU employee were charged entirely to WIN at 90%, the State would
receive $9,000 FFP; if charged to reflect the benefit the employee
conferred on each program, the State would receive only $7,200 FFP
($4,950 + $2,250). Since there were no charges to other programs for
any employee working on WIN, this variation would not be offset as in
the hypothetical example discussed above. /10/ Therefore, we
need not reach the issue of whether there is an implied de minimus
deviation to the cited cost principle. /11/ The State argued
that if the disallowance was upheld the State would not receive any FFP
for costs that benefited other programs because under 45 CFR 95.11
(1981), FFP is not available for expenditures made prior to September
30, 1978 unless the State had filed for FFP within one year of the
expenditures. The question before the Board is whether these costs are
allowable as charges to the WIN program. The Board will not overturn
this disallowance based on speculation on what would occur if the State
atempted to now charge these costs of other programs.
OCTOBER 22, 1983