State of Oregon Mass Transit Assessment, DAB No. 402 (1983)

GAB Decision 402
Docket No. 82-135

March 29, 1983

State of Oregon Mass Transit Assessment;
Garrett, Donald; Settle, Norval Teitz, Alexander


The State of Oregon (State) appealed the final determination of the
Regional Director, Region X, Department of Health and Human Services
(HHS, Agency), that payment of a mass transit assessment by Oregon state
agencies participating in federal grant programs did not constitute
allowable costs under the cost principles in OMB Circular A-87. The
decision of the Regional Director upheld a similar determination by the
Regional Director of Cost Allocation (DCA).

The appeal is before the Board under 45 CFR Part 16, Appendix A,
Subpart D, since HHS is the cognizant federal agency which disapproved
the proposed addition of the mass transit assessment to Oregon's
statewide cost allocation plan (CAP). The amount involved is
approximately $960.000. Based on the record, including oral argument
presented during a telephone conference, the Board overturns the Agency
determination. However, as discussed below, the Board does not reach
further issues in the case. The Agency was quite specific in developing
only one relatively narrow issue before this Board--i.e., whether the
transit assessment was a tax or payment in lieu of a tax and therefore
allowable. The Agency thereby effectively restricted the record in this
case in a manner which we believe does not leave the Board free to
pursue two other issues which are unresolved here: the reasonability of
the assessment even if it fairly may be called a tax or payment in lieu
of a tax, and the allocability of the costs involved.

The Tax Issue

The sole issue is whether the mass transit assessment is an
"allowable" cost under the statewide cost allocation plan. The DCA in
his original determination did state that there was a question of
"allocability" as well as allowability; that is, assuming the cost was
allowable, there was still a problem in the methodology by which the
cost might be allocated among the several federal programs. However, in
upholding the DCA, the Regional Director removed this phase of the
problem from consideration by this Board in this appeal.

(2) The issue of allocation methodology is not relevant unless the
cost is otherwise allowable.... However, if such costs should become
allowable in the future, the Division of Cost Allocation believes that
an acceptable allocation formula could be devised at little cost to the
State. (Exhibit 3, July 2, 1982, p. 3)

The only question before the Board, based upon the parties' briefing
and oral argument, is whether the mass transit assessment provided for
in the Oregon statute is a "tax" or a "payment in lieu of a tax" within
the language of the cost principles in A-87. If so, it is allowable.

The Facts

In Oregon there are statutory provisions for "mass transit" and "mass
transportation" districts. (Chapter 267, Oregon Revised Statutes (ORS))
These districts may raise money in one of three ways, or in a
combination of any of them. The first is by levying an ordinary
property tax, known as an "ad valorem" tax; the second is an income
tax; and the third is a tax on payrolls of employers.

In 1981 the Oregon legislature enacted a statute commonly known as
House Bill 2048 (hereafter "the Act"). Section 1 of the Act is set out
in full, together with relevant parts of section 2, as an attachment to
this decision.

The decision of the DCA, upheld by the Regional Director, was that
the assessment against the State agencies (which administered federal
grant funds) authorized by the Act was not an allowable cost for FFP and
was therefore not properly includable in the statewide CAP.

The Positions of the Parties

The State has contended from the beginning that the assessment under
the Act was allowable under paragraph 25 of Attachment B of the cost
principles in A-87:

Taxes. In general, taxes or payments in lieu of taxes which the
grantee agency is legally required to pay are allowable.

The position of the Agency in reply was that the State agencies were
not legally required to pay the mass transit assessment and therefore it
did not come within the definition of a tax.

(3) The Agency originally also gave three additional reasons why the
assessment was not an allowable cost:

(1) Maintenance of a basic public transportation system is a cost of
general government and not allowable under section C.l.a. of Attachment
A of OMB Circular A-87.

(2) Mass transit assessments are not necessary and reasonable for the
proper and efficient administration of federal grant programs as
required for allowability under the same section.

(3) Employee commuting costs are considered the responsibility of the
employees and should not be subsidized by federal grant programs. (See
Exhibits 3 and 5)

In addition, the Agency claimed that the Act was nothing more than an
impermissible attempt to tap federal funds. Reference was made to the
legislative history which showed that when the statute was being
considered, it was pointed out that there should be available for mass
transit one million dollars from federal funds to six million dollars of
state funds.

The State in reply, in addition to the tax argument, also claimed
that the standards in A-87 were too imprecise to give grantees
sufficient notice of the criteria by which they would be judged in
administration of their grants.

Eventually the confrontation of the parties centered on whether the
mass transit assessment was a mandatory tax or payment in lieu of tax
under the provisions of the cost principles. The respondent agreed that
if the mass transit assessment was a "tax" or payment in lieu of tax,
within the meaning of the cost principles, assessments made under the
Act were allowable costs.

The parties agreed that to be allowable, a tax must be one which the
grantee is legally required to pay. There was sharp disagreement
between the parties as to whether the payments by the State agencies
under the Act are mandatory.The respondent's position is that the Act
"allows" the Executive Department to assess the "tax" on other
components of the State government; it is therefore not mandatory.

The appellant's position is that, while the Executive Department is
given discretion whether to make the assessment on the various (4) State
departments and agencies, these branches of State government have no
discretion as far as paying the assessment. It is a levy of a
percentage of the payroll for each branch of State government the same
way, for example, as a tax on state agencies as employers for
unemployment compensation, or for health benefits, both of which would
be allowable as taxes.

The appellant furnished legislative history and various opinions of
the Attorney General in explaining why the mass transit assessment was
enacted in the particular form. There were certain "dedicated" funds in
the State, whose income could not be used for any purpose other than
that specified, such as education. An attempt to levy a tax on these
funds could lead to constitutional problems. By giving the Executive
Department discretion in attempting to collect from these funds this
constitutional confrontation could be avoided.

The respondent persisted in claiming that the mass transit assessment
was not a tax by referring to the language of the Act and contrasting it
with the provisions for taxation by the mass transit districts. The Act
does not use the word "tax" anywhere. There is no mention of any
enforcement method to be used, if a state body should refuse to pay its
assessment.

The respondent points out that the legislature could have
accomplished its purpose by waiving State immunity and authorizing the
mass transit districts already in existence to levy a payroll tax on
State agencies the same way these districts may do with private
employers.

The State gives various possibilities why the Act set up the
assessments the way it did, such as having chosen the less expensive
mode of enlisting the administrative machinery of the Executive
Department to collect and remit the assessments. However, the State
contends this makes no difference since the effect of the Act is the
same as if the taxing authority had been directly delegated to the local
transit districts by the legislature.

The State argues that the lack of enforcement machinery makes no
difference in the mandatory nature of the assessment, since as a
practical matter a State body is not going to refuse to pay an
assessment by the Executive Department acting under the express
authorization of the legislature.

ANALYSIS

I. THE MASS TRANSIT ASSESSMENT IS A TAX OR PAYMENT IN LIEU OF A TAX
WITHIN THE MEANING OF THE COST PRINCIPLE.

(5) The parties have in effect reduced the issues in this appeal to
just one, namely, whether the mass transit assessment in the Act is a
"tax" or a payment "in lieu of a tax" within the meaning of the cost
principle.

A. The word "tax".

The word "tax" does not appear in the Act nor, in fact, in the
legislative history. However, it would be elevating form over substance
to find that the mass transit assessment was not a tax simply because
that magic word "tax" was not used. If it has all the required
characteristics of a tax, it can certainly be treated as one without
being called one.

The use of the words "payment in lieu of tax" in the cost principle
shows that the word "tax" is not essential to the allowability of an
assessment which is otherwise equivalent to a tax. We therefore find
that the omission of the word "tax" is not decisive.

The parties discussed at length the case law definition of a "tax."
It is not necessary to consider these authorities in detail since it is
clear that what is a "tax" depends on how the term is used in a
particular statute. However, the cost principle limits the allowability
of taxes to those "which the grantee agency is legally required to pay."
A voluntary payment by a grantee is not an allowable cost.

The requirement of the cost principle, that the payment of a tax be
mandatory, is the same as that of the cases. The Supreme Court gave
such a definition many years ago.

A tax is an enforced contribution for the payment of public
expenses....

Houck v. Little River Drainage District, 239 U.S. 254, 265 (1915)

B. The mandatory nature of the assessment.

The major premise of the respondent's argument is that the mass
transit assessment cannot be a tax (or a payment in lieu of a tax) under
the cost principles because it is not mandatory.

The respondent first argued that the mass transit assessment was not
mandatory because under the Act the Executive Department was
specifically given discretion in imposing the tax. Sections 1 and 2 of
the Act "allow" the Executive Department to assess the (6) State
agencies, and subsection 3 of section 1 provides what that Department
shall do if it "elects" to pay money to the mass transit districts.

This argument is defective, as the State pointed out, because the
assessment is imposed on the State agencies and not on the Executive
Department.

The respondent argued that even as to the State agencies there is no
enforcement mechanism in the Act to require payment. The State points
out, that since the payment by a State agency is a ministerial act not
requiring any discretion, mandamus could be used to compel payment. The
State also refers to the power of removal of State agency heads for
failure to carry out their duties, such as paying the assessment.

The words in the Act that allow the Executive Department to assess
State agencies (section 1(1)) and empower it to "direct the assessment
against the payrolls of subject agencies" (section 1(6)) are definitely
compatible with a requirement that the various State agencies pay the
assessment. The provision of the State statute which provides for a
payroll tax on private employers by mass transit districts uses the
words "may... impose an excise tax on every employer." (ORS 267.385)

We find that as far as the State agencies, which are the grantee
agencies here, the mass transit assessment is a mandatory levy which
they are required to pay.

II. THE MASS TRANSIT ASSESSMENT IS NOT AN IMPERMISSIBLE TAP ON FEDERAL
FUNDS.

The mass transit assessment, if allowable in the cost allocation
plan, will clearly reach federal funds. From a State appropriation of
some six million dollars, the mass transit districts will receive this
money plus approximately one million dollars more in federal funds. In
and of itself there is nothing improper about such an arrangement. If
the State had waived its immunity and had given the mass transit
districts the power to levy a tax on State as well as private payrolls
in their districts, the effect would be the same as far as federal grant
programs are concerned. The tax would be, as the assessment is here, on
the payrolls of State employees who work in the mass transit districts.
The payrolls reached would be those for State employees whose salaries
are all State funded, all federally funded, and partly State and partly
federal funded. The tax would clearly reach federal funds, but it would
not seriously be argued that such a tax could not properly be levied on
State as well as private payrolls.

(7) If the State of Oregon has worked out a way to reach federal
funds for local mass transit purposes without having to waive its
immunity from taxation by the local districts, then this Board cannot
say that this is an improper way of supporting mass transit.

III. APPLICATION OF OTHER COST PRINCIPLES.

The Board finds that, as presented to it, the mass transit assessment
under the Act is an allowable cost under the State CAP because it is a
tax or a payment in lieu of a tax under the specific cost principle in
Attachment B of A-87.

The Board does not reach the issue whether the assessment meets other
general principles of Attachment A of A-87. It makes no finding on this
point since the presentation of the appeal precludes the Board from
doing so. The DCA and the Regional Director referred to the alternative
grounds of the general principles, after concluding that the assessment
was not a tax, and took the position that the assessment did not qualify
under the general principles.

The appeal was not briefed that way to the Board. In oral argument,
the Agency clearly stated that it was relying on the ground that the
assessment was not a tax.

Nevertheless, the record here raises a question in our mind whether
the mass transit assessment could properly qualify under the Basic
Guidelines in Attachment A:

C.1. Factors affecting allowability of costs.

* * *

a. Be necessary and reasonable for proper and efficient
administration of the grant programs, be allocable thereto under these
principles, and except as specifically provided herein, not be a general
expense required to carry out the overall responsibilities of State...
governments. *

* * *

(8) d. Be consistent with policies, regulations and procedures that
apply uniformly to both federally assisted and other activities of the
unit of government of which the grantee is a part.


A document offered by the Agency makes it appear that the mass
transit assessment is not "necessary or reasonable for proper and
efficient administration of the grant programs."

Exhibit B is an opinion of the Oregon Attorney General addressed to
the Executive Assistant to the Governor. The opinion itself is on the
constitutionality of HB 2048, as originally proposed, as it applied to
State agencies operating with so-called dedicated funds. The portions
of the opinion of particular interest to us are not as to the dedicated
funds, but the Attorney General's views on the proposed assessment as a
whole. After stating that mass transportation is a legitimate and
necessary administrative expense even of dedicated funds, he goes on to
say that the defect in the assessment is not in its purpose but in its
scope.

Benefits derived from the measure will not inure solely to state
agencies, in closely approximate proportion to their payrolls, but to
all inhabitants and all employers in the district. But the assessment
is only against state agency employers. The measure does not provide
for a similar assessment upon the salaries of all other employes who
work in the district, including private and other public employes.
Consequently, as written, the measure authorizes an assessment against
state agency employes' salaries, the moneys from which will also
potentially be used to provide mass transit for persons working in the
district who are not employes of any state agency.... (p. 4)

A burden is imposed by the measure upon each state agency as an
employer, not likewise imposed upon other employers in the district, not
for the benefit of state employers or particular agencies as such but
for the general benefit of the transportation district. (p. 5)

The Attorney General does eventually suggest a way to get around the
problem of the dedicated funds, by suggesting a General Fund
appropriation to pay the assessments attributed to the employees'
salaries. But for our purposes, the opinion of the highest legal
officer of the State appears to support the Agency's original (9)
position that the mass transit assessment could cause federally-assisted
programs to bear more than their fair share of costs (Attachment A,
A.1.), and consequently may not be necessary and reasonable for proper
and efficient administration of the grant programs (Attachment A,
C.l.a.).

CONCLUSION

As presented to us, the Board finds that the Oregon mass transit
assessment under the Act is an allowable cost in the cost allocation
plan insofar as it comes under the provision for a tax or a payment in
lieu of a tax under Attachment B of A-87.

However, we do not reach the question whether the assessment is
otherwise allowable and allocable, even if it is a tax or a payment in
lieu of a tax, under the requirements of the general principles of
Attachment A of A-87.

We therefore do not reach the issue of whether the Agency may
disallow the mass transit assessment for reasons other than those it has
argued before this Board.

(10) ATTACHMENT

Section 1. (1) This section and section 2 of this Act allow the
Executive Department to assess state agencies and to provide moneys from
the assessments to mass transit districts, established under ORS 267.010
to 267.390, and transportation districts, established under ORS 267.510
to 267.650, as reimbursement for the benefit that state government
receives from the districts.

(2) State agencies subject to assessment under this section include
every state officer, board, commission, department, institution, branch
or agency of the state whose costs are paid wholly or in part from funds
held in the state Treasury, and include the Legislative Assembly, the
state courts and their officers and committees.

(3) If the Executive Department elects to pay moneys to districts
under this section and section 2 of this Act, the department shall do
the following:

(a) Determine what services performed for subject state agencies will
be subject to assessment under this section;

(b) Determine which subject agencies have employees within each
district who are performing the subject services;

(c) Determine the amount of wages paid to the agency employees for
performing the subject services within each district; and

(d) Establish a rate of assessment of not more than six-tenths of one
percent of the total amount of the wages determined under this
subsection.

(4) Notwithstanding any other provision of this section, the
Executive Department shall not establish rates or impose assessments
under this section that exceed the following:

(a) The Executive Department shall not assess more from an agency
than the Legislative Assembly provides the agency for purposes of this
section, either directly or indirectly through its approval of budgets
or through the Emergency Board, if the agency budget is approved by the
Legislative Assembly from General Fund moneys.

(11) (b) If an agency is an agency other than one described in
papagraph (a) of this subsection, the Executive Department shall not
assess moneys from the agency at a greater rate than the rate applicable
to an agency described in paragraph (a) of the subsection.

(5) At any time it determines appropriate, the Executive Department
may:

(a) Redetermine any factors necessary to perform its duties under
this section; or

(b) Vary the rate under this section within the limits established
under this section.

(6) After making determinations and establishing a rate under this
section, the Executive Department may direct the assessment against the
payrolls of subject agencies at the rate established by the department.
All moneys assessed under this section shall be promptly forwarded to
the Executive Department. Assessments under this section are
administrative expenses of an agency, as defined in ORS 291.305.

(7) The Executive Department shall pay any moneys it receives under
this section to the State Treasurer for deposit in the account
established under section 2 of this Act for use as provided in that
section.

Section 2. (1) The Mass Transit Assistance Account is established in
the General Fund of the State Treasury. The account shall consist of
moneys deposited in the account under section 1 of this Act and as
otherwise provided by law. The moneys in the account are continuously
appropriated to the Executive Department to be used as provided in this
section.

(2) The Executive Department shall distribute moneys from the account
established under this section to districts described in section 1 of
this Act on the last day of each calendar quarter. Subject to the
limitations in this section, the amount distributed to each district
shall be equal to the total assessments received by the department
during the immediate preceding three months under section 1 of this Act
from agencies with employees performing subject services within that
district.

(12) (6) In exchange for payments authorized under this section to
transit districts, the State of Oregon and its agencies shall be exempt
from any parking code requirements for existing state-owned buildings,
construction of new state buildings or the renovation of existing state
buildings, which have been or may be established by any political
subdivision within the boundaries of a transit district receiving such
payments.

(13) DECISION NO. 402 - SUPPLEMENTARY DECISION

Procedural Background

The Director of Cost Allocation of Region X requested the Board to
reconsider Board Decision No. 402 in order that the Board "may address
remaining unresolved issues critical to the case."

In Decision No. 402 the Board determined that an Oregon mass transit
assessment on State agencies participating in federal grant programs was
a "tax" or "payment in lieu of a tax", and therefore an allowable cost
under a specific provision of the cost principles in Office of
Management and Budget Circular A-87. Attachment B, B.25. Because of
the way Region X had presented the case to the Board, we specifically
declined to reach further issues of allowability under the cost
principles.

Region X had originally determined that payment of the transit
assessment, in addition to not qualifying as a tax, was not "necessary
and reasonable for the proper and efficient administration of the grant
programs," as required by A-87, Attachment A, C.l.a. The Region also
determined that maintenance of a public transportation system was a cost
of general government and therefore also not allowable under Attachment
A, C.l.a. An additional ground for disapproval of the mass transit
assessment was that commuting costs were the responsibility of the
employees and should not be borne in part by federal grant programs.

Later, in its presentation to the Board, Region X chose to develop
only the tax issue, so that the Board considered itself constrained to a
determination on that issue alone, based on the record before it. We
noted, however, that we questioned whether the assessment met the
"necessary and reasonable" requirement (Decision No. 402, p. 7)
anticipating that the Agency might issue a new or modified disallowance
if it intended to pursue the matter. Id., p. 9. Instead, the Director
sought reconsideration, asking the Board to reopen the case to examine
the "necessary and reasonable" issue and the other requirements of
Attachment A, C.l.a. The Director did not request reconsideration of
our determination on the tax issue.

Thus, while it is questionable whether this process should properly
be characterized as a reconsideration, the Board determined that it (14)
would be economical and efficient to take the additional substantive
issues under consideration in response to the reconsideration request.
We therefore proceeded to reopen the case to consider the general
guidelines of Attachment A of A-87, particularly the necessary and
reasonable requirement of C.l.a., offering the State a full opportunity
to brief.

Based upon the briefs of the parties and a telephone conference, we
uphold the Agency's original determination that payment of the mass
transit assessment was not an allowable cost under the cost principles
in A-87, because the assessment was not "necessary and reasonable for
the proper and efficient administration of the grant programs." A-87,
Attachment A, C.l.a.

Whether the Board Should Consider the Issues Unresolved in Decision No.
402

The State of Oregon objected to review of the issues previously not
considered primarily because the Agency had not alleged a clear error of
law, since the respondent "neither asserted nor briefed the issue of
whether, and how, Attachment A might have impacted upon the subject of
this appeal." State memorandum in opposition to request for
reconsideration, p. 2.

In reopening the record to allow further briefing on the unresolved
issues, we too pointed out that the Agency had not alleged "a clear
error of fact or law," under 45 CFR 16.13. We called attention,
however, to other language in 45 CFR 16.13 which authorized the Board
"to take any other action necessary to resolve disputes in accordance
with the objectives of these procedures." We stated it would be
elevating form above substance if we required the Agency to proceed
differently where it was clear what relief the Agency sought. Board
response to reconsideration request, May 11, 1983, p. 2, note.

The Board recently commented on allowing reconsideration on a new
ground. McLean Hospital, Decision No. 288, April 30, 1982, Reconsidered
Decision, April 29, 1983.

(We) do not see why the Board's decision may not turn on new issues
raised by the Agency as long as the appellant has an adequate
opportunity in proceedings before the Board to address to those issues.
(Citations of Board decisions omitted; p. 15)

The Board in McLean Hospital also addressed an argument similar to
that made here, that an administrative agency is bound by the reasons
given in its decision. We said on this point:

(15) The federal district court and courts of appeals decisions cited
by the hospital for the proposition that an administrative agency is
bound by the reasons articulated in its decision are clearly
distinguishable from the instant case on the ground that a decision
issued by the Board is the decision of the Department. Since the Board
thus occupies the position of an administrative agency in relation to a
reviewing court, whatever considerations militate against the hearing of
new Agency arguments by a reviewing court are not relevant here. (p.
16)

Moreover, in this case the grounds which we did not resolve in
Decision No. 402 were hardly new to the State. The Agency based its
original determination by the Director of Cost Allocation on the very
same grounds that it argued in reconsideration. The Regional Director,
in affirming the Director of Cost Allocation, adopted the same grounds.
The State therefore had the opportunity to address them in its opening
brief as appellant, but did not do so. The State in its original brief
had only two assignments of error: first, that the assessment was a tax
under Attachment B; second, that the standards prescribed by A-87 are
too imprecise to be enforced. The State did not have to address the
general cost principles in its oral argument because the Agency stated
it was not relying on them. However, the State has had additional
opportunity to brief these general cost principles on our reopening of
the case. The State has now had the full opportunity to answer these
same arguments made by the Agency when this dispute first arose.
Therefore it is not unfair to the State for the Board to consider the
issues under the general cost principles not resolved in Decision No.
402.

The Specific Issues under the Cost Principles

The finding in Decision No. 402 that the mass transit assessment was
a tax or payment in lieu of tax under Attachment B of A-87 does not
answer the question whether it is allowable under Attachment A.
Attachment B specifically states at the beginning that the allowability
of the selected items of cost is "subject to the general policies and
principles stated in Attachment A of this Circular." Attachment B, A-87,
A.2. Therefore, if the assessment does not meet those requirements in
Attachment A, it is not allowable even though it is a tax under the
language of Attachment B.

The Cost Principles in Attachment A

Below, we consider whether under the cost principles in Attachment A
payment of the mass transit assessment is necessary and (16) reasonable
for the proper and efficient administration of the federal grant
programs. In this connection we consider whether commuting expenses are
the personal responsibility of employees. Because of our decision, we
do not need to reach the question whether maintenance of a basic public
transportation system is an expense of general government. We consider
also whether the mass transit assessment discriminates against federally
assisted programs, but conclude that this is irrelevant since the
assessment does not meet the necessary and reasonable requirement.

1. Whether the Mass Transit Assessment is Necessary

Basic Guideline, C.l.a., requires that to be allowable, costs must:

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

While no definition or explanation of "necessary" appears in the
Circular, we see no reason why we cannot accept the ordinary everyday
use of the term, as something "essential", so that the grant programs
could not be run properly and efficiently without it. /1/ So the
question becomes: Is the cost of a local mass transit system essential
to the proper and efficient administration of the various federally
assisted grant programs administered by the State? For instance, does
Oregon need to pay an assessment for a mass transit system for the State
to run its Medicaid program properly and efficiently?


The State did not provide convincing arguments as to why the State
employees who work on the federally funded programs in Oregon are so
benefited by a mass transit system that the cost should be allowable.
/2/ It may be faster and more economical for the State employees to get
to work if they use mass transit, but that does not equate to
necessity.The State did not contend, nor do we believe it reasonable to
contend, that State employees working on federally funded grants could
not get their work done properly and efficiently without a mass transit
system. Moreover, as we discuss in greater detail below, commuting
costs are not (17) considered a necessary cost of running a grant
program. Accordingly, we find that the assessment clearly does not meet
the "necessary and reasonable" requirement of the cost principles.


2. Whether the Mass Transit Assessment Discriminates against
Federally Assisted Programs

In Decision No. 402 the Board first found that the mass transit
assessment was a tax under the language of Attachment B of A-87. We
then observed that an opinion of the Attorney General of Oregon (Exhibit
B) appeared to say that the mass transit assessment could cause
federally assisted programs to bear more than their fair share of costs
(Attachment A, A.l.). The Attorney General's opinion was based on the
fact that in some of the mass transit districts there was no equivalent
tax levied on all private employers in the district.

The State devoted a substantial part of its brief on reconsideration
attempting to answer this concern of the Board. The State pointed out
that in two mass transit districts, Portland and Eugene, there was a
payroll tax by the districts on all private employers in the district,
which corresponded in nature and amount with the mass transit assessment
on the State as employer in those districts. Therefore, argued the
State, in those districts the mass transit assessments did not cause the
federal programs to bear more than their fair share of the tax burden.

In other areas of the State mass transit funding is based on ad
valorem property taxes. The State admitted in its brief on
reconsideration that "(Costs) associated with state workers in other
districts, however, cannot as faithfully be matched with the tax burdens
undertaken by the general citizenry of these other districts." State
brief, p. 6.

The State argued that the issue with regard to assessments in these
other districts is whether the transit assessments "bear such an
insufficient nexus to the local tax district's tax contribution to the
transit program that an unfair extra burden is imposed upon federal
funds." Id.

The State further argued that the wording of the cost principle
provides no guidance as to its application because any "reasonableness"
standard is so broad that "formulation of a test of general
'reasonableness' approaches the impossible." Id. We discuss this issue
separately below on page 8.

The State also argued that the federal fisc is sufficiently protected
from unfair or discriminatory treatment because "(Federal) funds, in the
first instance, are only incidentally (18) involved in the assessment
program" because the estimated federal involvement was only "one-sixth
of the cost to the state." State brief on reconsideration, p. 8. We
cannot agree with such a conclusion. The cost to the federal programs
of approximately one million dollars is hardly de minimis. The State
could simply have appropriated seven million dollars to the local mass
transit districts. Instead it devised an assessment whereby it levied a
six million dollar appropriation on itself as employer, and then in
effect levied another million dollars on the federally assisted
programs. We are not prepared to say the federal involvement is only
incidental because the federal funds sought to be reached are only
one-sixth of what amounts to the State's appropriation to itself. /3/


The State may be correct in its assertion that, at least in the
Portland and Eugene districts, the mass transit assessment does not
discriminate against federal grant programs in the sense implied in the
Attorney General's letter. However, since we have found above that the
assessment does not meet the "necessary and reasonable" requirement, we
still reach the same result.

3. Allowable Taxes and Fringe Benefits

In the telephone conference on August 11, 1983, the Board asked the
Agency to identify examples of taxes levied by a state on itself as
employer which were generally accepted as allowable costs in a cost
allocation plan.The Agency specified workmen's compensation and
unemployment insurance as two such costs. The Agency said these were
routinely allowed as being a necessary cost of doing business.

A discussion then ensued as to where the line would be drawn on a
hypothetical continuum of taxes. At one end some taxes, such as
unemployment compensation, are universally recognized as allowable
costs. At the other end, an airport tax would probably not be allowed,
simply because having a modern airport might make it easier for state
employees working on federally assisted grants to travel on grant
business.

The difficulty with this approach is that the taxes mentioned by the
Agency, namely, unemployment compensation and workmen's compensation,
are listed as allowable costs in Attachment B of (19) A-87, not as costs
but as employee fringe benefits. B.13.b. Costs similar to those listed
("and the like") are presumably allowable as fringe benefits if they
meet the conditions specified in the cost principles. The principle is
still the same, however, for where the line should be drawn. Employers'
contributions to life and health insurance plans and retirement pension
plans, for example, are universally recognized as being fringe benefits,
which benefit all employees. We do not believe that subsidizing mass
transit has yet reached the same generally accepted status as a fringe
benefit.

But even if payments toward mass transit could be considered a
universal fringe benefit, there would still be the same problem as there
is with it as a tax. It may be allowable under Attachment B of A-87,
but it still has to be "reasonable and necessary" for the grant
programs, under Attachment A. We do not believe that, whether called a
tax or fringe benefit, the mass transit assessment meets the general
requirements of Attachment A.

4. Commuting Costs are Unallowable

The Agency gave as a separate ground for not allowing the mass
transit assessment as part of the statewide cost allocation plan the
reason that the costs of commuting are considered the responsibility of
the employees. /4/ Such commuting costs should therefore not be borne
in part by federal grant programs.


This reason is not a separate cost principle. It does, however,
support the position of the Agency that the mass transit assessment is
not "necessary" or "reasonable" for the federally assisted grant
programs. If the cost of commuting is not considered as (20) a
necessary expense of running a grant program, then a tax to provide more
convenient commuting is not necessary or reasonable for the grant
programs.

Since we find that the mass transit assessment is not necessary and
reasonable for the grant programs, we do not need to reach the question
whether it is an expense of general government.

The "Indefiniteness" of the Regulations

The State has contended that the cost principles are too indefinite
to be applied. It has cited many cases which state general principles
regarding the necessity of definite standards in regulations.

The cost principles are not new. They were first published in the
Federal Register as applicable to state and local government grantees of
the Department of Health, Education, and Welfare, on September 19, 1973.
38 Fed. Reg. 26274. The preamble explains that the principles had been
in use in Circular A-87 by the Department for some time before that.
They had been distributed to the states in the form of Guides, even
though never published in the Federal Register before.

The language "necessary and reasonable for the proper and efficient
administration" did not emerge full blown in the cost principles at the
whim of the Secretary of the Department (formerly HEW, now HHS). The
statutes pertaining to the various public assistance programs not only
use similar language, but empower the Secretary to determine what is
"necessary" for administration of the programs. For example, we refer
to the program of Aid to Families with Dependent Children (AFDC) in
Title IV-A of the Social Security Act (the Act). Section 403 provides
for "Payment to States" under approved state AFDC plans. Section 403(
a)(3) refers to payment of amounts expended "as found necessary by the
Secretary... for the proper and efficient administration of the State
plan." In the Medicaid program (Title XIX) under Section 1903 of the
Act, certain payment to states are based on amounts expended "as found
necessary by the Secretary for the proper and efficient administration
of the State plan." Section 1903(a)(6).

The language of the cost principles, "necessary and reasonable for
proper and efficient administration", is almost a verbatim restatement
of the statutory language, "necessary for the proper and efficient
administration" of the State plan. The only addition is the word
"reasonable." This word does not change the meaning of the cost
principle. It adds a logical addition, (21) that something has to be
"reasonable" in amount and application, as well as "necessary." /5/


Finally, we note that the principles at issue here were designed to
cover a broad range of costs under widely differing grant programs. The
terms are specific enough to set common sense limits on what is
allowable. It would be virtually impossible to provide detailed
guidelines as to what is "necessary and reasonable" for every aspect of
the programs affected. Moreover, application of the standards in the
present instance is not unpredictable or impossible as the State argued.
The relationship of the mass transit assessment to the grant programs
here is so tangential that the State should have known that there would
be a question as to whether the cost would be "necessary" for the proper
and effective administration of the programs.

Retroactive Application

The State argues that even if the Board should find that the mass
transit assessment does not comply with the cost principles, this
holding should not be applied retroactively. It argues that "equitable
principles should preclude any denial of the costs which the DCA seeks
to have disallowed retroactively." State brief on reconsideration, p.
13.

This is not a case of retroactive application of a regulation. The
Agency has not promulgated new cost principles and then attempted to
apply them to a cost allocation plan submitted before the cost
principles were adopted. The cost principles have been in effect in
substantially the same form for many years. The fact that first the
Agency and now this Board differ with the State in how these principles
are to be applied in this particular instance does not make it a
retroactive application.

The State points out that the Board's final decision will not be
issued until the Oregon legislature will have disbanded its 1983
session; therefore, there will be no opportunity to legislate "so as to
ameliorate the serious financial impact of any adverse decision."
Leaving aside that special sessions of legislatures are not uncommon,
the State's internal financial problems cannot affect the Board's
obligation to decide an appeal as it sees the issues. It is unfortunate
if the failure of the Agency to articulate all the pertinent arguments
before the Board at the first opportunity has caused unnecessary
hardship to the State. However, the State was put on notice long ago
that the Division of Cost Allocation would not allow the mass transit
assessment, and the reasons given included the reasons on which we rely.

(22) CONCLUSION

We find that the mass transit assessment does not meet the
requirements of Attachment A of the cost principles in A-87. We
therefore uphold the determination of the Regional Director that the
assessment on the federally assisted grant programs in Oregon is not an
allowable cost under the statewide cost allocation plan. * Presumably
we need not be concerned whether the assessment is an expense of general
government, since there is the proviso, "except as specifically provided
herein." If the assessment is specifically included under Attachment B,
as a tax or payment in lieu of a tax, it does not matter whether it is a
general expense of government. /1/ WEBSTER'S Third New International
Dictionary includes the following in definitions of necessary:
"ESSENTIAL, INDISPENSABLE." /2/ There also has been no argument
that the costs should be allowable because of benefit to recipients of
the grant programs from a mass transit system; we therefore do not
consider this. /3/ The federal government apparently contributed
$71 million in fiscal year 1982 to grantees in the State of Oregon
specifically for mass transit purposes, through the U.S. Department of
Transportation. See Agency Response to Petitioner's Brief in Docket No.
82-135, p. 6, n. 1. /4/ The Internal Revenue Service does not allow
commuting fares as deductible expenses, since they are not
"ordinary and necessary business expenses." See, MERTENS, Law of Federal
Income Taxation, Vol. 4A, Sec. 25.96. "How employees get themselves to
work has customarily been the responsibility and obligation of the
individual employee, who must provide his or her own transportation at
his or her own expense." Letter opinion from Senior Counsel, Oregon
Department of Justice, March 3, 1981, Exhibit 8, p. 2. "Another personal
expense everyone is familiar with is commuting. The employee is
expected to be at work; how he chooses to get there is entirely his own
business." Principles of Federal Appropriations Law, U.S. General
Accounting Office, Office of General Counsel, June 1982, p. 3-160.
/5/ The test of "reasonableness" is a common one in the law. The law of
torts uses the test of what a "reasonable" person would do under certain
circumstances.

JULY 07, 1984