Minnesota Department of Public Welfare, DAB No. 466 (1983)

GAB Decision 466
Docket No. 82-202

September 30, 1983

Minnesota Department of Public Welfare;
Settle, Norval; Teitz, Alexander Garrett, Donald


The Minnesota Department of Public Welfare (State) appealed a
disallowance of federal financial participation (FFP) claimed under
title IV-D of the Social Security Act for the administration of its
child support enforcement program. The disallowance followed an audit
by the Office of Child Support Enforcement (Agency) of the IV-D program
as administered by several counties in the State. The bulk of the
appealed disallowance concerns the allocation of costs to the IV-D
program under approved cost allocation plans. /1/


The Board's analysis in this case is divided into several sections,
which represent the costs disallowed for each of the counties involved.
Based on the analysis below, we remand for further consideration by the
parties the State's appeal of $395,611 in FFP for Ramsey County and
uphold the rest of the disallowance. /2/


I. Ramsey County.

The Agency disallowed $330,431 ($247,823 FFP) in costs claimed for
the period July 1, 1975 through September 30, 1977 for personnel whose
services the Agency determined were not related to the title IV-D
program. In addition, the Agency disallowed $527,481 ($395,611 FFP) in
other costs claimed for the period July 1, 1975 through September 30,
1978 which the (2) Agency found did not benefit the title IV-D program.
As a basis for the disallowances, the Agency relied on the requirement
at 45 CFR Part 74, Appendix C, Part I, C.1. and C.2. (1975) that a cost
must be allocable to a program in order to be allowable as a cost of
that program.

The disallowed costs were included by the county in cost pools
established in an approved cost allocation plan. That plan, as
originally approved, required that all expenses outside of certain
direct cost categories be placed in one of two cost pools: All Other
Staff and All Other Charges. /3/ All Other Staff represented personnel
overhead costs, and All Other Charges represented operating overhead
costs. The costs accumulated in these cost pools were first distributed
between two general categories (service programs and eligibility
programs) and then allocated to the programs (including IV-D)
administered by the county welfare department "on a percentage basis
determined by relative staff counts and direct staff charges." (State's
Brief, p. 9; see also, Agency's Memorandum to Explain the Audit, pp.
10-11)


The discussion below deals with these three issues concerning costs
claimed for Ramsey County:

A) whether the Agency may remove the disallowed operating overhead
cost items from the All Other Charges cost pool because it determined
that the cost items did not benefit IV-D;

B) whether the disallowed personnel costs should have been direct
charged to the "Service Only" category, instead of included in the All
Other Staff cost pool; and

C) whether the Agency should be estopped from disallowing any of
these costs because they were claimed in accordance with the State's
approved cost allocation plan.

A. Whether the Agency may remove the disallowed operating overhead
costs from the All Other Charges cost pool.

1. The Parties' Arguments

The Agency identified 20 cost items included by the State in the All
Other Charges cost pool that the Agency concluded did not benefit title
IV-D. The Agency therefore removed these costs from the cost pool in
(3) determining the amount of operating overhead costs to be allocated
to title IV-D. /4/

The State argued that 8 of the 20 challenged cost items benefited the
title IV-D program, and submitted a brief explanation of its position.
(Reply Brief, Supplemental Affidavits of James E. Abts and Robert A.
Gibbens) The Agency responded that the costs may have benefited a child
or family receiving title IV-D services, but were not necessary to
implement the title IV-D program. It also noted that the State's
position regarding benefits to the program contradicted statements made
during the course of the audit by the same State officials on whose
affidavits the State subsequently relief. (Agency's Response, pp.
18-19)

The major thrust of the State's argument was, however, that even if
those items did not benefit IV-D, the Agency should have looked at the
cost allocation pool as a whole to determine whether the allocation of
the pool to all benefiting cost centers was equitable, instead of
looking only at whether individual items within a cost pool benefited
the title IV-D program. The State asserted that "cost allocation is at
best rough justice, not an exact science," and that it was not intended
that each cost benefit every center. (State's Brief, p. 11) The State
noted that there were 81 cost items included in the All Other Charges
cost pool, benefiting 10 cost centers, and asserted that the cost and
difficulty of direct-charging the costs in question justified their
inclusion in the indirect cost pool.

In support of its assertion that, overall, costs were equitably
distributed, the State compared title IV-D charges under the cost
allocation plan as it existed during the period of the disallowance with
projected title IV-D charges for the same period using a more
sophisticated step-down allocation method later proposed by the State.
The State said this comparison showed that it undercharged for title
IV-D costs using the old cost allocation plan. (State's Brief, p. 15)
The Agency, however, disputed this conclusion, (4) arguing that it was
predicated on assumptions for which there was no basis. (Agency's
Response, p. 23)

The Agency took the position that "(while) indirect cost allocation
is intended to obviate the necessity of tracking every minute or every
cent, it does not make the program benefit of individual costs
irrelevant." (Agency's Response, pp. 19-20) The Agency maintained that,
without a showing of benefit to IV-D, the costs could not be included in
the cost pool allocated to the program under the cost principles at 45
CFR Part 74, Appendix C, Part I, C.2. and F.1., which provided,
respectively, that:

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

Indirect cost pools should be distributed to benefiting cost
objectives on bases which will produce an equitable result in
consideration of relative benefits derived.

The Agency also cited two Board decisions to support its argument
that an item cannot be included in a cost pool unless it benefits every
program to which the pool is charged. Michigan Department of Social
Services, Decision No. 370, December 28, 1982; Massachusetts Department
of Public Welfare, Decision No. 335, June 30, 1982. The Agency said
that the cost principles require a grantee to develop a sufficient
number of cost pools so that the costs in each pool would all have some
benefit to each cost objective sharing the charges in the pool.
(Agency's Response, p. 20)

2. The Board's Analysis

We are remanding this issue to the parties to determine whether the
IV-D program was charged for costs in the All Other Charges cost pool
only to the extent of benefit received, consistent with the analysis set
out below.

The Agency disallowed these costs because it determined that they did
not benefit the IV-D program and that, as a result, they could not be
included in the cost pool because each item in the pool must benefit
every program or cost objective to which the pool is distributed. /5/
We are not convinced, based on the support cited by the Agency, that the
cost principles are necessarily violated when individual items in an
indirect cost pool do not benefit one of the programs to which the pool
is allocated. For the reasons set out below, we find that the critical
(5) issue is whether the pool, as it is allocated, results in a fair
distribution of charges to the various programs.


A cost pool is an accumulation of costs that benefit more than one
program for the purpose of distributing those costs to the benefiting
programs. These costs are placed in a pool, instead of being
direct-charged to each benefiting program, because the time and expense
of identifying the precise benefit of each cost to each program are
disproportionate to the additional accuracy that would be achieved. The
cost pool concept presumes that it is possible to distribute costs to
each program only to the extent of approximate benefit received by that
program, if the State's method of allocating costs is appropriate.
Therefore, costs that benefit more than one program are included in the
pool, and each program is charged a portion of the pool with the intent
that the method of allocation will distribute the costs to the different
programs in amounts that as accurately as possible reflect the extent of
benefit received by each program. (See, 45 CFR Part 74, Appendix C,
Part I.) Thus, using the the cost pool concept should not result in
charges to a program for costs in the pool which do not benefit the
program (assuming the allocation methodology is sound and properly
used).

We do not find that the Agency's position is supported by the cost
principles and Board decisions on which it relied. Those principles
require that cost pools be distributed to benefiting cost objectives "on
bases which will produce an equitable result in consideration of the
relative benefits derived." (45 CFR Part 74, Appendix C, Part I, F. 1.)
The principles do not specifically address the situation in which an
item in the pool does not benefit one of the programs participating in
the pool, nor do they specify the items of cost that may be in a pool.
Instead, the principles require an equitable distribution of the pool as
a whole to reflect the relative benefits received by the programs being
charged through the pool. In most cases, to do as the Agency argued
would be inconsistent with the concept of pooling and distributing
indirect costs. If every program participating in a pool removed costs
that did not benefit it, there would have to be a separate cost
allocation method or rate for every program. Removal of clearly
non-benefiting cost thus appears to be a last resort, to be done only if
a non-benefited program can not be assured that the allocation process
will not burden the program with the non-benefiting costs. /6/ As we
discuss below, the record here is not complete enough to support such a
finding.


(6) We also find that the Board decisions on which the Agency relied
do not hold that to be properly allocated costs in a pool must benefit
every program to which the pool is charged. In Michigan, supra, the
Board found that the State's failure to change its method of allocating
certain administrative costs to accommodate programmatic changes
resulted in charging costs in an amount disproportionate to the benefits
received. In Massachusetts, supra, the Board found against the State
for charging directly to one program the costs of employees who devoted
substantial amounts of their efforts to other programs. Neither case
raised or addressed the issue of whether a cost must benefit every
program to which a pool is allocated.

We find that the record is incomplete concerning the issue of whether
the costs were necessarily charged to the IV-D program merely because
they were placed in the pool that was allocated in part to that program.
/7/ In addition, the record is not sufficient concerning whether the
recommended removal of costs is consistent with the plan as originally
approved, and if not, whether removal would be consistent with
Departmental policies concerning changes in the implementation of a plan
subsequent to plan approval.


There is insufficient information in the record for the Board to
decide whether the State properly allocated the costs in the pool to the
various programs benefited. The Agency has not explained why the
State's method of allocating costs could not distribute the costs in the
pool so as to factor out costs not chargeable to the IV-D program. The
Agency did not state that it determined that the total amount charged to
the IV-D program was in excess of the total amount of the pool that
benefited IV-D. The Agency simply said that individual items in the
pool did not benefit IV-D, and therefore determined that those costs
were improperly allocated to IV-D. In fact, the Agency auditors said in
a letter to the State that they were not questioning the "allocation
methodology." (See, Agency's Memorandum to Explain the Audit, Exhibit 4,
p. 3) Further, the Agency did not determine that the State's method of
allocation was inconsistent with its cost allocation plan or that any
changed circumstances rendered the plan flawed.

(7) On the other hand, the State has not presented any information
that the allocation method used did in fact achieve an equitable result.
Given that the Agency found that a large number of items in the pool did
not benefit the IV-D program, the Agency raised a valid concern about
whether the State's method of allocation actually did result in a fair
distribution of costs to the IV-D program. The State did not attempt to
show that the costs did not flow through to the IV-D program, or that
the dollar value of these costs was low in relation to the rest of the
pool, or that there were other items that benefited the IV-D program to
such a degree that they offset the inclusion of these disputed costs.
The regulations provide that the State may be asked to support its claim
for indirect costs with formal accounting records that substantiate the
propriety of the eventual charges. (See, 45 CFR Part 74, Appendix C,
Part I, J.1. and Michigan, supra, pp. 8-9)

Since the record does not show whether the IV-D program was charged
only to the extent of overall benefit received from the All Other
Charges cost pool, we are remanding this portion of the disallowance to
the parties to determine whether the the State allocated costs in a
manner which resulted in equitable charges to the IV-D program, and
whether any change in the approved plan would be consistent with
Departmental policy on plan changes.

The State should within 30 days after receiving this decision (or any
additional time which the Agency allows) present to the Agency
information to support its position. The Agency should assist the State
by responding to any State questions concerning what information the
Agency would accept as documentation that IV-D was charged only to the
extent of overall benefit received from the All Other Charges cost pool.
The Agency should then determine whether the IV-D program is bearing a
fair share of costs from the pool. If the Agency disagrees with the
State's showing, the Agency should explain in writing. If the State is
not satisfied by that Agency decision, the State may appeal to the Board
within 30 days of receiving it.

B. Whether the disallowed personnel costs should have been
direct-charged through the Service Only category.

1. The Parties' Arguments

The Agency determined that the State had improperly included in the
All Other Staff cost pool the salaries and other direct costs of 65
employees, finding that the employees were service staff whose costs
should have been directly charged to various social services programs
run by the county. The cost allocation plan included a direct charge
category, entitled Service Only, for certain full-time service workers.

(8) The Agency argued that if the employees were service staff, then
costs allocable to social services programs were improperly allocated to
title IV-D, a support program. The Agency said further that any failure
to identify service staff as such would also have rendered inaccurate
the percentages used to allocate overhead costs to all of the programs.
The State conceded that 22 of the 65 employees should have been
classified as service staff, but contended that the remaining 43
employees were either supervisory personnel or provided services that
cust across program lines. /8/ The State argued that the 43 employees
were therefore not service staff within the meaning of the cost
allocation plan, which defined service staff as "full time service
personnel (case workers and supporting clerical staff) servicing
recipients of AFDC, SSI, Child Welfare and Special Protective Services."
/9/ (State's Brief, p. 10)

The State said that it had included the supervisory personnel in the
cost pool because the nature of their positions required contact and
coordination with other programs. The State said that later on it began
direct-charging the supervisors and other service personnel costs under
the Service Only category because Ramsey County IV-D officials felt that
the IV-D program was not receiving significant benefit from the State's
method of allocating those costs. The State said that the costs should
not have been disallowed because, as soon as Ramsey County identified
the problem, it worked with the State to amend the cost allocation plan
and rectify the problem. The State argued that plan amendment, rather
than disllowance, was the proper remedy in this case. (Summary of
Telephone Conferences, pp. 3-4)

The Agency maintained that discussions with county welfare department
personnel, interviews with five of the 43 employees involved, as well as
reviews of the job descriptions of four other of the 43 employees, all
indicated that the employees did not perform duties related to title
IV-D and were in fact service staff. (Agency's Response, pp. 14-16) The
Agency argued that the cost allocation plan must be applied in a way
that is consistent with the governing cost principles, and that the cost
principles require direct-charging employees who work full time on one
program, even if they are supervisors. The Agency said that just
because the supervisors (9) had an occasional role coordinating with
other programs, did not mean that they were not working in the interests
of the service programs, just that there were times when those interests
touched upon the interests of other programs. (Summary of Telephone
Conferences, p. 4)

The Agency said that, prior to the quarter ended December 31, 1977,
the costs of these employees were charged as All Other Staff, but in the
following quarters all these same employees were reclassified as service
staff and directly charged to service programs, although there was no
apparent change in their duties or responsibilities. (Agency's
Response, p. 16)

The State also argued that while the 43 individuals "may benefit IV-D
less than the amount charged" to IV-D, there were some persons in the
All Other Staff pool who provided greater benefit to title IV-D than the
portions of their salaries charged to that program, in effect offsetting
the inclusion in the pool of persons whose work was not related to title
IV-D. (State's Brief, p. 13) It also contended that the equity of the
All Other Staff allocation was evidenced by the fact that the title IV-D
program received benefits from employees who were direct-charged to
other programs. The Agency, however, argued that an incidental benefit
to title IV-D from activities related to another program did not make
any costs of the activities allocable to title IV-D. (Agency Response,
pp. 20-21) The Agency also argued that, to the extent that costs were
exclusively related to title IV-D, they should have been direct-charged
to title IV-D, and their inclusion in the indirect cost pool could not
justify charging to title IV-D costs that were not related to that
program. (Agency's Sur-Reply, p. 2)

2. The Board's Analysis

The Board upholds the Agency's decision to remove from the All Other
Staff pool the costs of employees the Agency determined were service
staff who should have been direct-charged to the cost objective for
service programs (Service Only).

The State's argument, that the Agency should not look at specific
items in the pool but determine whether the pool as a whole equitably
treated the IV-D claims, does not support the State's claim for the All
Other Staff costs as it did for the All Other Charges costs. The issue
here is not whether the State must eliminate from the pool indirect
costs which do not benefit a particular program, but whether the
personnel costs must be eliminated from the pool because the cost
allocation plan and the governing cost principles require that this type
of cost be direct-charged.

We find that the State has not persuasively shown why the costs of
these employees should not have been direct-charged to the Service Only
category during the entire period audited. We are not persuaded by the
State's (10) claim that its cost allocation plan, as initially written,
required it to indirect-charge through the cost pool the salary costs of
all full time service personnel other than case workers and their
supporting clerical staff. We find ambiguous the provision in the plan
defining Service Only as "full time service personnel (case workers and
supporting clerical staff) serving AFDC, SSI, Child Welfare and Special
Protective Services." The State's interpretation asks us to read that
provision as "full time case workers. . . ," ignoring the reference to
"full time service personnel." We are more persuaded by the Agency's
position that the parenthetical language indicates the kind of workers
involved in the service programs and does not preclude the State from
direct charging the full-time supervisors and other full-time service
workers.

Further, as we have held in previous decisions, we must interpret the
cost allocation plan in a manner that is consistent with federal
regulations and the cost principles. (See, e.g., Massachusetts
Department of Public Welfare, Decision No. 335, June 30, 1982) We find
that the State's interpretation of the cost allocation plan is
inconsistent with the principles at Part 74, Appendix C, Part I, E.1.
and C.2.a., which provide for direct-charging costs that can be
identified specifically with a particular cost objective, and for
charging costs to programs only to the extent of benefit received.

Although the regulations allow the use of cost pools to distribute
indirect costs, the State has not shown why the disputed personnel costs
should be indirect-charged. Indirect costs are costs that benefit more
than one cost objective and are "not readily assignable to the cost
objective specifically benefited without effort disproportionate to the
results achieved." (45 CFR Part 74, Appendix C, Part I, F.) The only
rationale the State gave for indirect-charging these personnel costs was
that the nature of a supervisor's job required coordination and contact
with other programs. We find that those activities do not in any way
diminish the supervisors' status as full-time service personnel directly
chargeable to the Service Only cost objective. We conclude that the
State did not show that the disputed personnel costs benefited more than
one cost objective, nor did the State show or allege that the costs
could not have readily been direct-charged. In fact, in 1977, the State
and County, on their own initiative revised the method of allocating
costs to direct-charge these same employees.

This revision by the State also supports the Agency's claim that,
when allocated through the pool, the costs were not charged to the
programs to the extent of benefit received. The State admitted that it
reclassified the employees as service staff to be direct-charged because
County officials felt that including these employees in the All Other
Staff pool resulted in the inequitable distribution of the costs.
(Summary of Telephone Conferences, p. 4) The State did not present any
information on changed circumstances or changed job functions of the
employees that would explain why they were reclassified as Service Only
in 1977, but were properly charged through the cost pool for the earlier
period.

(11) We are not persuaded by the State's argument that the remedy
here should be prospective only, and that it is inappropriate to
disallow these costs. As we have said, the cost principles require the
State to charge costs to programs to the extent of benefits received.
Therefore, if the costs should have been claimed as direct charges
rather than through the cost pool, the State cannot rely on its previous
failure to identify correctly the costs as a defense against the
disallowance.

We do not by this decision preclude the State from reclaiming these
costs as direct charges to the appropriate social service programs or
otherwise adjusting claims under the cost pool to reflect the changed
circumstances resulting from the removal of these employees from the
pool. We note the Agency's position that the State may remove from the
pool and direct-charge any costs which benefited only title IV-D.

C. Whether the Agency Should Be Estopped From Disallowing the All Other
Staff Costs.

1. The Parties' Arguments

The State argued that, since the Department had approved the State's
cost allocation plan, the Agency should be estopped from disallowing FFP
for expenditures made pursuant to the plan. It cited in support of its
position 45 CFR 74.176(a) (1979), which provides that:

(when) costs are treated as indirect costs (or allocated pursuant to
a government-wide cost allocation plan), acceptance of the costs as part
of the indirect cost rate or cost allocation plan shall constitute
approval.

The State asserted that the plan specifically identified the costs to
be allocated and the method by which they were to be allocated.
(State's Brief, pp. 6, 10) The State further asserted that once a plan
is approved, the only remedy for the improper inclusion of costs in the
plan is a plan amendment, not a disallowance. (State's Brief, p. 14)

The Agency argued, however, that the State had not met the conditions
for estoppel, and that other regulations, including the requirement that
a cost be allocable in order to be allowable, were not rendered
inoperative by the approval of a cost allocation plan. (Agency's
Response, pp. 2, 5)

2. The Board's Analysis

We conclude that the doctrine of equitable estoppel is not applicable
here and that even if it were, the State has not carried the burden of
proof by establishing that the elements of estoppel are present. We
(12) concluded previously that the State's cost allocation plan could
reasonably be interpreted in a manner consistent with the Agency's
position here. Agency approval of the plan, therefore, would not serve
as the basis for an estoppel claim by the State.

Moreover, even if the plan definition could be interpreted to support
the State's position, the State still has not established that every
element of estoppel is present, or that the Agency's action amounted to
"affirmative misconduct." (See, e.g., Pennsylvania Department of Public
Welfare, Decision No. 451, July 29, 1982, pp. 4-5, and the cases there
cited.)

The State's reliance on 45 CFR 74.176(a) in support of its position
is misplaced. The regulation was published on August 2, 1978, and
therefore was not applicable during the period covered by the
disallowance of All Other Staff costs (July 1, 1975 to September 30,
1977). Even if the regulation were in effect during the period in
question, it would not support the State's position. While that
regulation does provide that acceptance of costs as a part of a cost
allocation plan "shall constitute approval," this language must be read
in context. The regulation as a whole relates to costs that the cost
principles provide are allowable only with the prior approval of the
granting agency. (For states, such costs are listed in 45 CFR Part 74,
Appendix C, Part II, C.) Thus, section 74.176(a) merely provides that
approval of a state's cost allocation plan satisfies any prior approval
requirements with respect to costs included in the plan.

The State also cited as authority for its position that the Agency
was estopped by its approval of the cost allocation plan, County of
Alameda, et al. v. Weinberger, 520 F.2d 344 (9th Cir. 1975). (State's
brief, p. 5) However, that decision dealt with a State plan provision
regarding rate of FFP, and thus has no bearing on the question presented
here of the effect of approval of a cost allocation plan on the
allowability of certain costs found not to benefit the program.

Based on our disposition in Section I.B. of the costs claimed through
the All Other Charges cost pool, we do not now need to address the
State's argument that the Agency should be estopped from disallowing
those costs.

II. Otter Tail County.

There are two issues concerning Otter Tail. The bulk of the
disallowance involves $9,779 ($7,334 FFP) for legal services provided
under cooperative agreements between the State and the Otter Tail County
attorney. The Agency also disallowed $3,071 ($2,303 FFP) for welfare
department costs allocated to IV-D through a cost pool. The latter
issue was also raised in connection with Big Stone County, and is
discussed in section III of this decision.

(13) A. The Cooperative Agreement.

The $9,779 disallowed includes: $8,509 for a secretary's salary
during January to November 1977 and January to March 1978, and a portion
of the billing rate for the attorney for March to June 1978 ($1,270).
During the time that the secretary's salary was charged separately to
the program, the State also charged the county attorney services at a
rate of $35 per hour; in March to June 1978 the State charged the
program the county attorney's services at $50 per hour and did not claim
costs for the secretary's salary.

The Agency said it disallowed the costs of the attorney's fees in
excess of $40 per hour because the rate was arbitrarily set and did not
conform to State Bar Association guidelines, which set an hourly rate of
$35 to $40. The Agency said that the County did not provide any
justification for the higher rate.

The Agency said that it disallowed the secretarial salary because the
State Bar rate was intended to include clerical costs and that Otter
Tail did not substantiate clerical costs justifying an amount in excess
of the hourly billing rate. Further, the Agency maintained that the
secretary's entire salary was charged to IV-D even though she did not
work exclusively on IV-D programs, and that the State did not document
the amount of time the secretary devoted to IV-D activities.

The State argued that the $50 hourly rate for the attorney was set
after consultation with the local Bar Association indicated that hourly
fees in the area ranged from $40 to $60 in 1977, and $45 to $70 in 1978.
The State explained that the legal fees were somewhat higher in the
county than statewide because the area had "long been recognized as a
center for legal services for a large rural area." (Reply Brief, pp.
10-11)

The State argued that the claim for the secretary's salary was also
proper. The State explained that, when the IV-D program was implemented
in 1975, Otter Tail had a backlog of cases needing legal action;
therefore, a full-time secretary and a full-time attorney were hired to
perform IV-D legal work. When the backlog was cleared late in 1976, the
attorney began to work part-time only (at the rate of $35 per hour).
The State said that the secretary was retained on a full-time basis
because it was understood that the secretary would need to perform
duties in addition to those normally provided a client for the IV-D
function. "The secretary was performing certain paralegal tasks, as
well as certain tasks for the resources examiner in DPW (Department of
Public Welfare)." (Id., p. 9) The State said that these tasks were in
addition to the secretarial tasks to support the attorney's legal
efforts.

(14) The State explained that it stopped charging to the Department
the secretarial salary and began paying an attorney rate of $50 in
March, 1978 because "major changes occurred" as the county attorney's
office was making a transition back to full-time (effective January
1979).

1. Board's Analysis: Hourly Rate for the County Attorney

We find that the State has not substantiated that it is entitled to
the higher rate of $50. The cost principles state that to be allowable
costs must be reasonable and necessary. (45 CFR Part 74, Appendix C,
Part I, C.1.a.) The State has not shown that $50 an hour was a
reasonable rate for the county attorney.

The State did not dispute that the State Bar rate provided for $35-40
per hour. The State provided no evidence or documentation to explain
why that rate was not reasonable for Otter Tail county. The State
instead contended that the fees were set in accordance with information
from the local bar but submitted no documentation to support its claim.
Further, the State's explanation that Otter Tail County was a "center
for legal services" was also unsubstantiated and, in any event,
insufficient to show why that status would warrant a higher rate.

Although the State Bar rates for that period are not necessarily
determinative of what were reasonable attorney fees, we find that the
Agency stated a reasonable basis for the disallowance, and that the
State did not satisfy its burden of justifying an amount in excess of
what the Agency determined was reasonable.

2. Board's Analysis: The Secretary's Salary

We find that the State has shown no basis for charging to IV-D the
entire salary of the secretary who assisted the county attorney. The
State's claim that the salary should be allowed because the secretary
performed activities other than those in support of the attorney is
inconsistent with the cost principles on allowable costs. The cost
principles are clear that the programs can be charged for activities
only to the extent of benefits received, and that the State can charge
only those costs that are reasonable and necessary for the
administration of the program. Since the State did not show how much of
the secretary's efforts were devoted to IV-D, there is no basis for
sustaining the State's claim for any part of the secretary's salary.

Even if the State had shown how much of the secretary's efforts were
devoted to IV-D activities, we would have upheld the disallowance
because the State did not show that the overhead costs (including a
secretary) for the attorney services should not be considered included
in the attorney's (15) hourly rate. Although the State is entitled to
receive funds for the attorney services and the necessary support costs,
the Agency maintained that the State Bar guidelines included overhead
costs as part of the hourly rate schedule. The State presented no
information or arguments to refute the Agency's claim.

III. Big Stone and Otter Tail Counties--Allocation Basis.

Based on an audit for the period July 1, 1975 through September 30,
1978, the Agency found that the allocation basis for certain welfare
department costs for these two counties was improperly computed. The
Agency concluded that direct charges were improperly included in the
allocation basis used to distribute the All Other Charges cost pool.
Accordingly, the Agency adjusted the allocation basis to exclude direct
charges. (Agency's Memorandum to Explain the Audit, pp. 27-34) /10/


Although the State appealed the disallowances resulting from the
change in allocation basis, it did not specifically address the issue
presented here. Absent any argument by the State regarding this issue,
we are compelled to sustain the Agency's finding that the allocation
basis was improper.

The State did argue generally that the Agency was estopped from
taking the disallowances since it had approved the State's cost
allocation plan. In approving the plan, however, the Agency approved
only a method for allocating costs and not specific costs charged under
the plan. (Id., at pp. 8-9) The State did not show or allege that the
plan actually provided for the inclusion of direct charges in the
allocation basis. Accordingly, the Agency's approval of the plan does
not preclude it from disallowing the costs in question here.

IV. Big Stone County--Composition of All Other Charges Cost Pool.

Based on the audit, the Agency also found that two cost accounts in
the All Other Charges cost pool for Big Stone County were improperly
allocated. According to the Agency, the costs in the All Other Charges
cost pool were allocated between two general categories of programs,
service and eligibility, based on relative staff counts. The costs were
then further allocated to particular programs within the two general
categories based on the proportion of each program's charges to the
total charges for the category involved.

(16) The Agency found that the Miscellaneous Administration account
consisted of social services costs and, therefore, should not have been
allocated to the eligibility category (which included the title IV-D
program). In addition, the Agency found that another cost account,
Legal -- Other Than Child Support, did not benefit title IV-D. The
Agency therefore removed these accounts from the amount of All Other
Charges that was allocated to the eligibility category. (Agency's
Memorandum to Explain the Audit, pp. 32-33)

With respect to the Miscellaneous Administration Account, we uphold
the Agency's action because there was no basis for allocating any of
these costs to the eligibility category when they benefited only the
social services programs. With respect to the Legal -- Other than Child
Support cost account, it is not clear from the record whether any
program within the eligibility category benefited from that account. If
the cost account benefited any programs within the eligibility category
other than IV-D, it is possible that the cost account could remain in
the eligibility pool, even if it did not benefit IV-D, provided that the
method of allocation properly distributed those costs. (See, discussion
in section I.B. of this decision) Although the State appealed the
disallowances resulting from this adjustment in the All Other Charges
cost pool, it failed to address this issue specifically. Since the
State has not presented any information to support its position, the
disallowance is upheld.

As with the other issues involved in the appeal as a whole, the State
argued that the Agency was estopped from disallowing the costs since it
had approved the State's cost allocation plan. However, our prior
discussion indicates that, unless the Agency was aware, based on a
specific plan provision, that these accounts would be included in the
All Other Charges cost pool and allocated to the eligibility programs,
there is no basis for further consideration of the State's estoppel
argument. There is no indication in the record that the plan included
such a provision. Therefore, we cannot reverse the disallowance on that
ground.

V. Hubbard County.

Hubbard County charged to the title IV-D program 100% of the salaries
of an account clerk and a clerk-typist for the periods July 1, 1977
through September 30, 1978 and July 1, 1975 through September 30, 1977,
respectively. The auditors found, however, that only 75% of each
individual's time was spent on title IV-D activities. Based on this
finding, the Agency disallowed 25% of the salary of each individual
($4,724, $3,543 FFP). (Agency's Memorandum Explaining the Audit, p.
34) The cost principles applicable to state and local governments
require (17) that "(amounts) charged to grant programs for personnel
services . . . will be based on payrolls . . . supported by time and
attendance or equivalent records for individual employees," and further
provide that "(salaries) and wages of employees chargeable to more than
one grant program or cost objective will be supported by appropriate
time distribution records." (45 CFR Part 74, Appendix C, Part II, B.10.
b.) This clearly contemplates that a grantee will be reimbursed only to
the extent of services rendered in connection with the program charged.
(See, also, Pennsylvania College of Podiatric Medicine, Decision No.
299, May 25, 1982, pp. 5-6; Colorado Department of Social Services,
Decision No. 200, July 31, 1981, pp. 5-6) Although the State appealed
the disallowances of these costs, it did not present any argument
regarding the issue involved.

Since the State did not dispute the audit finding that the title IV-D
program was charged for 25% of salaries not allocable to it, we must
uphold the disallowance.

VI. Conclusion.

Based on the analysis set out above, we remand for further
consideration by the parties the disallowance of $359,612 in FFP which
Ramsey County claimed through the All Other Charges cost pool (see p. 7
for details) and we uphold the disallowance of the remaining costs. /1/
The Agency disallowed $886,809 FFP, of which the State here
appealed $658,005. The State said that it was not appealing the
following: the entire amount concerning Pine County (letter to Board
dated December 21, 1982); Ramsey County disallowance of 38 employees
included in the All Other Staff pool (State's Brief, p. 10); and Ramsey
County disallowance involving security guard services included in the
All Other Charges cost pool (State's Reply Brief, p. 5, n.3). In
addition, the parties agreed that the Board would consider separately
the portion of the appeal concerning Hennepin County. (Confirmation of
Telephone Conferences, August 17, 1983) /2/ This decision is
based on the written submissions of the parties and the oral argument by
telephone conferences as summarized in a letter to the parties, dated
September 28, 1983. /3/ During the period of the disallowance,
the plan was amended to create three categories within the All Other
Staff cost pool and two categories within the All Other Charges cost
pool. (Agency's Memorandum to Explain the Audit, pp. 7-8) The basis of
our decision is not affected by these amendments. /4/ These cost items
were set out at p. 15 of the Agency's Memorandum to Explain the Audit,
p. 15: Social Services Division: Professional Services, Client
Transportation, Return of Child, Foster Parents, Outreach, Emergency
Shelter, Day Care Expenses, Day Treatment Program, Emergency Shelter -
Room & Board, Corrections, Child Protection - Comm. Corr. Income
Maintenance Division: Client Transportation, Miscellaneous Client
Expense, Unrecovered Replace. Payments, Non-WIN Training Allowance, Work
and Training, Emerg. Soc. Services Expenses, Physical Exams, Bus,
Explanation of Benefits. /5/ A cost objective is a center
established to accumulate costs. A cost objective can be the grant
program that will ultimately be charged the costs, or it can be a center
that accumulates costs under some general category for future
distribution to the programs to be charged. In this section, we will use
the terms "program" and "cost objective" interchangeably. /6/
Dealing with similar cost principles, the Armed Services Board of
Contract Appeals held that cost objectives need not be benefited by each
type of cost accumulated in an indirect cost pool in order to be
allocated a share of the pool. In American Electric Inc., ASBCA 16635,
76-2 BCA, P12,151 (1976), the Board said at 58,495, that "to break out
every indirect cost for allocation on some perfectly matched basis is
unreaslistic," and that "we know of no rule which says that every type
of indirect cost must apply to every element of the base before an
indirect expense rate can be applied." /7/ Although the record shows
that the Division of Cost Allocation (DCA) reviewed the disallowance and
agreed with it, DCA provided no explanation to support the validity of
the Agency's basis for the disallowance. (Agency's Response, Exhibit
36, Affidavit of Ralph Detloff) /8/ In the telephone conferences
the State identified the 43 employees as 25 supervisory personnel and 18
non-supervisory personnel (13 of whom did not have case loads, and 5
whose activities crossed program lines). The Agency said that if the
State showed that any of these 18 employees performed activities that
substantially crossed program lines, the Agency may reconsider its
position concerning those employees. /9/ The definition of
service staff was later changed to include supervisors as well as case
workers and supporting clerical staff. (Agency's Sur-Reply, Exhibit 38,
Memorandum dated December 7, 1977) /10/ The total amount in
dispute concerning Big Stone County, for this issue and the issue
discussed in Section V of this decision, is $1,852 ($1,390 FFP).

NOVEMBER 14, 1984