GAB Decision 358
November 29, 1982 Maryland Department of Human Resources; Docket No.
82-119-MD-SS Garrett, Donald; Teitz, Alexander Settle, Norval
The Maryland Department of Human Resources (State) appealed a
determination by the Commissioner of Social Security (Agency)
disallowing federal financial participation (FFP) in certain claims
under Title IV of the Social Security Act (the Act). The claims were
for erroneous assistance payments made under the Aid to Families with
Dependent Children program (AFDC), for the period March 17, 1977 through
March 31, 1979; the amount of the disallowance was $124,417.
The State did not dispute the finding that the payments were
erroneous per se; however, the State did dispute whether the Agency had
a valid basis for the disallowance and whether the Agency could validly
seek repayment of the funds. We conclude that the Agency had a valid
legal basis for the disallowance, and that the Agency may seek repayment
of the disallowed funds.
This decision is based on the written record and on oral arguments
made over the telephone on October 27, 1982.
Background
Title IV of the Social Security Act established the AFDC program,
which is a cooperative federal-state program that provides financial
assistance to certain financially-needy dependent children and the
relatives who take care of the children.
States submit to the Agency their Quarterly Expenditure Reports, on
which the states account for AFDC program expenditures, claim federal
funds due for these expenditures, and report credits which are the
result of overpayments of other errors made under the program.
Generally, these credits are applied to the claims made for FFP. See 45
CFR 201.6(a)(3).
The AFDC program in Maryland is supervised by the State but is
administered by local welfare offices. The Department of Health and
Human Services' Audit Agency audited the State's program in 1980 by
reviewing working papers and accounting records available at the State
level and at three local welfare offices. The primary purpose of the
audit was to evaluate the policies and procedures for identifying and
refunding credits to the federal government for the period October 1,
1976 through September 30, 1979. Audit Report, ACN 03-10253, p. 3. The
(2) auditors found that the State credited the federal government by
adjusting the claims to account for many overpayments and other errors.
The auditors also found that the State did not credit the federal
government for overpayments which had been made due to local agency
error. The auditors based their findings of erroneous payments on
errors identified through a quality control (QC) sample conducted by the
State, and through overpayment reports prepared as a result of case
workers' identification of erroneous payments. The disallowance
represents actual identified individual errors only. The auditors noted
in their report that Agency policies, stated in three Action
Transmittals, required adjustments in FFP for these types of errors.
Audit Report, pp. 6-7.
The State questioned the validity of the Action Transmittals as a
basis for repayment of the funds, and continued to do so even after the
Regional Commissioner's letter of disallowance, dated September 11,
1981, stated that the Action Transmittals were not the basis of the
disallowance but merely notified the states that the quality control
regulation, 45 CFR 205.41, was revoked on March 16, 1977, and that the
provisions of 45 CFR 233.10(b)(1) would, therefore, apply to all
erroneous payments.
The Social Security Commissioner affirmed the disallowance, and it is
the Commissioner's determination which is appealed here. The
Commissioner's letter, dated June 14, 1982, stated that the Action
Transmittals did not establish new policy, but were official Agency
interpretations of applicable federal regulations, including 45 CFR
233.10(b)(1) and (5).
History of Agency Policy on Erroneous Payments in the AFDC Program
The history of the Agency's policy on erroneous payments made under
the AFDC program has been detailed in previous Board decisions.
California Department of Health Services, Decision No. 170, April 30,
1981; California Department of Social Services, Decision No. 235,
January 7, 1982; California Department of Social Services, Decision No.
319, June 30, 1982. We provide here a brief summary of the salient
points.
* 45 CFR 233.10(b)(1) was promulgated in 1971, 36 Fed. Reg. 3866,
February 27, 1971, and amended in 1973, 38 Fed. Reg. 8744, April 6,
1973. This regulation, as amended, provided that State plan provisions
on need, amount of assistance, and eligibility determine the limits of
FFP.
* Efforts to reduce errors in the AFDC program resulted in the
evolution of "quality control," a system of sampling assistance cases
to
assess the accuracy of eligibility determinations and calculation of
payment amounts. This resulted in the issuance of regulations providing
for the quality control system. 45 CFR 205.40, 36 Fed. Reg. 3866,
February 27, 1971.
(3) * Beginning in the early 1970's the Agency proposed a series of
rules using extrapolation from QC samples as a means of determining the
amount of erroneous payments made by a state for its entire AFDC
caseload during the sampling period, and proposed to base disallowances
on that extrapolation. These proposed rules were highly controversial.
* Regulations were issued in 1975 which provided for application of
certain statistical sampling methods to determine the number of errors,
and then "tolerating" errors within 3% for eligibility errors and
5% for
overpayment errors by disallowing only those errors above the 3% and 5%
levels. 45 CFR 205.41. The Agency stated that the use of tolerance
levels was due to a recognition that, under administrative structures
then existing in most states, requiring elimination of all errors "with
a resultant disallowance of Federal financial participation in any
erroneous payment is unrealistic." 40 Fed. Reg. 21737, May 19, 1975.
* The District Court for the District of Columbia concluded that the
tolerance levels set out in section 205.41 were arbitrarily established
and that section 205.41 was therefore invalid. Maryland v. Mathews, 415
F. Supp. 1206 (D.D.C. 1976).
* The Agency retroactively revoked section 205.41 and published a
statement to that effect. In that statement the Agency pointed out that
the revocation of section 205.41 resulted in states being held fiscally
accountable for individually identified payments to ineligibles and
overpayments made after the date of the publication of the revocation.
The Agency cited the requirements of 45 CFR 233.10(b)( 1). 42 Fed. Reg.
14717, March 16, 1977.
* AT-77-30, March 16, 1977, transmitted that publication to the
states.
* AT-77-55, May 17, 1977, notified states that they were required to
adjust their claims to exclude the federal share of all identified
individual payments to ineligibles and overpayments made after March 16,
1977. The Action Transmittal stated that the adjustment was in
accordance with 45 CFR 233.10(b)(1) and 233.10(b)(5).
(4) * SSA-AT-78-16, May 4, 1978, clarified the specific circumstances
under which fiscal adjustments were required for erroneous payments.
Discussion
The State argued that the disallowance should be reversed because its
basis was the three Action Transmittals (AT-77-30, AT-77-55, and
SSA-AT-78-16). The State asserted that these Action Transmittals
imposed new legal requirements and were, therefore, invalid unless
promulgated in accordance with the Administrative Procedure Act (APA), 5
U.S.C. 553.
The State also argued that the Social Security Act does not authorize
disallowances for "quality control" errors within a tolerated error
rate. The State argued that the audit findings do not support a
disallowance for the identified errors because the audit did not find
that the errors were above a valid error rate by relating the errors to
the entire program.
1. The Basis for the Disallowance
The State has consistently asserted that the basis for the
disallowance is the Action Transmittals noted above. The State pointed
to the fact that two of the Action Transmittals contained mandatory
terms for financial adjustments. Reply Brief, p. 2. The State asserted
that the regulations do not address financial adjustments and that the
State can only be required to repay funds if a regulation sets out how
the repayment must be accomplished. Oral Argument, October 27, 1982.
Although the Audit Report discussed the Action Transmittals'
interpretation of the governing policy, both disallowance letters
(letter from Regional Commissioner, dated September 11, 1981, and letter
from Commissioner of Social Security, dated June 14, 1982) stated that
the basis for the disallowance was 45 CFR 233.10(b)(1). The letter
explained that the Action Transmittals merely notified the states that
45 CFR 205.41 was revoked and that the Agency policy manifested by 45
CFR 233.10(b)(1) was reinstated with regard to erroneous payments for
AFDC, as a result of the revocation. The disallowance letter of
September 11, 1981, p. 2, stated:
The disallowance in this case is based on published regulations and
not on Action Transmittals.
A method of repayment is not a substantive basis for a disallowance,
but is merely an administrative measure taken to recover misspent funds.
See the discussion at p. 5 of Maryland Department of Human Resources,
Decision No. 344, September 29, 1982. The court in Maryland v. Mathews,
supra, concluded that section 403(a)(1) of the Act meant that payments
which are not properly made under an approved plan are not to be matched
(5) by federal funds. Id. at 1212. The regulations at 45 CFR
233.10(b)(1) and 233.20(b)(1) are Agency statements implementing the
statutory provision and, along with the statute, can provide a
substantive basis for a disallowance. See also Decision No. 235,
supra, p. 2. We conclude that the substantive basis for the
disallowance is the statute and 45 CFR 233.10(b)(1) rather than the
Action Transmittals. As indicated below, the Action Transmittals
interpreted the manner in which states must repay an amount disallowed
under the statute and regulation.
II. The Method of Repayment
The State asserted that it can only be required to repay funds if a
valid regulation sets out how the repayment must be accomplished, and
that the Action Transmittals are not valid regulations because they were
not promulgated in accordance with APA, 5 U.S.C. 553. Furthermore, the
State asserted that even if the Action Transmittals were interpretative
rules not subject to the APA, interpretative rules do not have the
"force of law," and, therefore, are not binding on the State.
The APA, 5 U.S.C. 553, requires notice of a proposed rulemaking and
an opportunity to comment thereon. The requirement does not apply to
interpretative rules or general statements of policy. 5 U.S.C. 553(b)
(A).
The Agency asserted that the Action Transmittals notified the states
of the applicable regulatory provisions and how the provisions would be
implemented. Therefore, the Agency argued, the Action Transmittals were
nothing more than interpretations of the Agency's regulations.
The State argued that the test of whether the APA should apply is
whether the Action Transmittals purported to create legal obliations
and, thus, "affect substantial individual rights and obligations."
Morton v. Ruiz, 415 U.S. 199, 232 (1974), and other cases cited in the
Brief, pp. 4-5. Here, the State claimed, the Action Transmittals
created an obligation on states to make adjustments in their claims for
overpayments or payments to ineligibles. The State claimed that it had
no such obligation absent the Action Transmittals.
We do not agree. Section 403(b)(2)(A) of the Act authorizes the
Secretary to reduce or increase the amount paid to a state -- /1/
by any sum which the Secretary... finds that his estimate for any
prior quarter was greater (6) or less than the amount which should have
been paid to the State for such quarter,....
Thus, an obligation is specified in the statute for the Secretary to
make adjustments in the amounts paid to the states, based on what
"should have been paid." The Secretary's administrative implementation
of the statute provided for quarterly statements of expenditures to be
submitted by states, and provided that those statements must reflect
adjustments, recoupments, and other changes in the amounts being paid to
the states. 45 CFR 201.6(a)(3).
We think that the State has mischaracterized the obligation to repay
a disallowance as one which affects substantial individual rights. The
individual beneficiaries of the AFDC program are not affected since they
were not entitled to the overpayments made in error by the local welfare
offices. The rights the State is referring to are obviously those of
the State itself. Repayment of misspent funds, however, is not
necessarily a question of substantive rights. If the substantive basis
for a disallowance is valid, then the State must repay the funds. The
question is merely what method should be used. The Secretary has
provided for a method which calls for adjusting the claims made on the
quarterly expenditure forms, as discussed above. The State has not
argued that the method of repayment affects its rights any more than any
other method.
The Secretary's interpretation requiring financial adjustment of
claims is intertwined with the "manifest purpose and requirements"
of
the statute, and regulations such as 45 CFR 233.10(b)(1), and there is
nothing "surprising or controversial in the interpretation to merit the
safeguards of notice and comment rulemaking independent of the APA."
Nason v. Kennebec County CETA, 646 F.2d 10, 18-19 (1st Cir. 1981).
Therefore, we conclude that the Agency was not required to follow notice
(7) and comment rulemaking to implement the policy outlined in the
Action Transmittals. /2/
The State also argued that, if the Action Transmittals are
interpretative rules not subject to the APA, they do not have the "force
of law." Aiken v. Obledo, 442 F. Supp. 628, 653 (E.D. Cal. 1977);
National Nutritional Foods Ass'n v. Weinberger, 512 F.2d 688 (2nd Cir.
1975); National Ass'n of Ins. Agents, Inc. v. Board of Governors of
Federal Reserve System, 489 F.2d 1268, 1270 (D.C. Cir. 1974).
We think the State has misinterpreted what the courts meant by the
"force of law." The term means that interpretative rules do not have
the
legal effect of a statute, that is, a reviewing court need not be
restricted to reviewing the rule's validity under the standards of 5 U.
S.C. 706, but may substitute its own judgment on the subject matter
addressed by the rule. Until such time as a court may invalidate an
interpretative rule, however, the rule is binding on those to whom it
applies if it has been published, or if they have had actual and timely
notice. Hogg v. United States, 428 F.2d 274, 280 (6th Cir. 1970), cert.
denied, 401 U.S. 910 (1971). The State has not argued that it did not
have such notice. /3/
Thus, in summary, we conclude that the substantive basis for the
disallowance was 45 CFR 233.10(b)(1) and that the Action Transmittals
addressing the method of repayment were interpretative rules which need
not have been promulgated under 5 U.S.C. 553, and which were binding on
the State.
III. The Validity of the Substantive Basis of the Disallowance
The State argued that the Social Security Act does not authorize
disallowances for "quality control" errors /4/ within a "rationally
(8)
established" error rate. Brief, p. 8. The State asserted that since
the auditors did not find that the identified errors which are the
subject of this disallowance were above a valid error rate, there could
not be a disallowance.
Maryland v. Mathews, supra, concluded that section 403(a)(1) of the
Act, which provided for payment to states of amounts expended under
state plans, meant that erroneous payments (those payments not made
properly under the plan) are not to be matched by federal funds. The
court stated that section 403(b)(2), providing for adjustments to
reflect amounts "which should have been paid," supported that
interpretation. The court also concluded that the Secretary, under his
rulemaking power to ensure the efficient administration of the Act,
section 1102, may determine that states may make erroneous payments up
to a certain level and still be in compliance with the Act. Id. at
1212. Using the court's rationale, this Board has previously stated
that the Act does not directly provide for a tolerance level, and that
the Act does not require FFP in erroneous payments up to a reasonable
tolerance level. Decision 170, supra; Maryland Department of Human
Resources, Decision No. 246, January 18, 1982; and Decision No. 319,
supra.
Errors identified through a QC sample and a policy disallowing for
errors above a tolerance level are not inextricably linked. The basic
policy limiting FFP to payments made within the standards set by the
state plan was put into effect in 1971. 45 CFR 233.10(b)(1). The
Agency created the quality control system for tracking errors at about
the same time. The Agency did not implement its policy for disallowing
errors above established tolerance levels until 1975 (see History
supra). The Agency has previously articulated its rationale for
applying tolerance levels to errors in the AFDC program which were
identified through QC samples as based, in part, on the use of
extrapolation of the errors found in samples to the entire universe of
AFDC cases in a state. Decision No. 319, supra, p. 7. Here, the
disallowance involved only specific errors noted in the sample. The
Agency did not base the disallowance upon extrapolation of those errors.
Thus, this disallowance does not represent the type of disallowance to
which tolerance levels should be applied. When the particular tolerance
levels the Agency had set were invalidated by the court in Maryland v.
Mathews, supra, the Agency notified the states that it would apply a
policy of disallowing for all individually-identified errors on the
basis of 45 CFR 233.10(b)(1). Under the rationale expressed by the
court in Maryland v. Mathews, the Agency was free to use such a policy,
in the absence of a validly established error rate, since the statute
does not require the use of tolerance levels. We recognize that the
Secretary had previously acknowledged that elimination of all erroneous
payments is "unrealistic." 40 Fed. Reg. 21737, May 19, 1975. However,
this disallowance does not represent all erroneous payments in the State
as might be determined by extrapolation from a sample but merely those
individually identified through review of a portion of the AFDC payments
made in the State.
(9) Thus, we affirm our previous decisions on this point and conclude
that the Agency can disallow individually-identified erroneous payments
made in the AFDC program during the period March 16, 1977 through March
31, 1979 without using a tolerance level.
Conclusion
We conclude that the Agency's basis for the disallowance is 45 CFR
233.10(b)(1), that its policy for adjustment of claims to account for
erroneous payments is authorized by the statute and regulations and is
binding on the states, and that the Action Transmittals notifying the
states of the policy need not have been promulgated in accordance with
the APA. We further conclude that the Agency's use of a policy which
disallows for individually-identified errors without benefit of a
tolerance level is valid. /1/ The State briefly asserted that New
Jersey Dept. of Education v. Hufstedler, 662 F.2d 808 (3rd Cir.
1981), petition for cert. pending sub nom. Bell v. New Jersey, No.
81-2125, required a reversal of the disallowance. That case interpreted
Title I of the Elementary and Secondary Education Act of 1965 as
amended. The court held that an administrative agency may not order
repayment of funds unless Congress provided the Agency with statutory
authority to use such a remedy. This Board has previously stated that
New Jersey Dept. of Education does not dispose of issues arising under
the Social Security Act and, furthermore, that adjustment of improper
payments is specifically authorized by section 403(b) of the Act.
Maryland Department of Human Resources, Decision No. 246, January 18,
1982; see also Maryland Department of Human Resources, Decision No.
344, September 29, 1982. /2/ We also note that the notice
published in the Federal Register, 42 Fed. Reg. 14717, March 16, 1977,
stated that the Agency found good cause to dispense with notice and
comment rulemaking concerning the revocation of 45 CFR 205.41 and the
applicability of 45 CFR 233.10(b)(1), in part, to permit immediate
publication of the Agency policy. Such actions are permissible under 5
U.S.C. 533(b)(B). /3/ In fact, the Audit Report noted that the
State had been adjusting its claims to reflect other types of
overpayments and payments to ineligibles. See p. 2 supra. /4/
We presume that the State is referring to errors of the type defined by
the quality control regulation, 45 CFR 205.40(a)(2), identifiable
through quality control samples.
SEPTEMBER 22, 1983