Michigan Department for Social Services, DAB No. 589 (1984)

GAB Decision 589
Docket No. 83-232

October 31, 1984

Michigan Department for Social Services;
Ballard, Judith; Ford, Cecilia Settle, Norval

The Michigan Department of Social Services (State) appealed a
determination by the Office of Human Development Services (Agency)
disallowing federal financial participation (FFP) in the amount of
$3,348,080 claimed under the Aid to Families with Dependent Children--
Foster Care (AFDC-FC) program funded by title IV-A of the Social
Security Act (Act). /1/ Based on an audit covering the period October
1, 1976 through September 30, 1980, the Agency found that the State had
claimed FFP for payments made on behalf of children not eligible for
AFDC-FC benefits. In addition, the Agency found that the State had
claimed FFP for overpayments, which the Agency identified as payments
made on behalf of children for whom foster care services had been
terminated or on behalf of children still in foster care, in excess of
the amount documented. Finally, the Agency found that the State had
claimed FFP for unallowable administrative costs under title IV-A.
During the course of the proceedings in this appeal, the State withdrew
the portion of its appeal related to the administrative costs. (Letter
from Mansour to Kaufman dated December 9, 1983, p. 1) The $1,957,462
remaining in dispute represents an extrapolation from a statistical
sample to the universe of all AFDC-FC payments claimed for the audit
period, of those payments which the Agency determined were made for
ineligible children or were overpayments.


On appeal, the State, relying on a prior Board decision, argued that
the Agency was unreasonable in disallowing the amount extrapolated from
the sample and that only (2) individually identified payments to
ineligibles or overpayments were properly disallowed in the AFDC-FC
program. The State also disputed the Agency's finding of ineligibility
with respect to eight sampled cases in which responsibility for the
child's placement and care was not assigned to the State title IV-A
agency at the time the child was removed from the home. For the reasons
discussed below, we conclude that the disallowance should not have been
based on extrapolation from a sample under the particular program
involved here. However, we affirm the Agency's finding that the eight
cases disputed by the State were ineligible for AFDC-FC benefits, and we
uphold the disallowance to the extent that it represents payments for
ineligibles and overpayments within the sample.

I. Permissibility of Disallowance Based on Extrapolation From a Sample
of AFDC-FC Payments.

The State challenged the Agency's use of extrapolation from a sample
to arrive at the disallowance -- citing the Board's conclusion in
California Department of Social Services, Decision No. 319, June 30,
1982, /2/ that--

Agency policy for AFDC-FC errors . . . was to disallow only for
individually identified errors and . . . the Agency was unreasonable .
. . in disallowing the amount extrapolated from the sample of claims.


(State's brief dated December 9, 1983, p. 1) The Agency argued in
response that after issuance of that decision and prior to the taking of
the disallowance in this case, a new policy announcement was issued
which "leaves no doubt as to the Agency's current policy on this issue."
(Agency's brief dated March 26, 1984, p. 3) The policy announcement,
ACYF-PA-83-03, dated May 4, 1983, /3/ stated that--

(3) (For) title IV-A Foster Care (IV-A FC), it is the policy of the
Department to use sampling as the basis for determining expenditures
ineligible for Federal matching.

The amount of ineligible expenditures will be extrapolated to the
universe of expenditures under review. These reviews include (but are
not limited to) those performed by ACYF or agencies or persons assisting
ACYF, by the HHS audit agency, and by the General Accounting Office.

This policy announcement applies to all disallowances that are based
on such reviews.

The State, however, contended that the policy as articulated in
ACYF-PA-83-03 was not applicable in this case since the policy
announcement was not made until after the final audit report was issued.
(State's reply brief dated April 19, 1984, p. 2)

We agree with the State that the fact that the policy announcement
was issued before the disallowance was taken is not determinative here.
As we discussed in Louisiana Department of Health and Human Resources,
Decision No. 580, October 22, 1984, the policy embodied in the policy
announcement does more than speify what audit technique will be used to
calculate disallowances. Rather, it represents a change in an Agency
policy regarding what AFDC-FC payments will be disallowed. In this
case, the State's title IV-A claim covered AFDC-FC payments made during
the period October 1, 1976 through September 30, 1980. Since the
payments were made prior to the date of the policy announcement, we
consider the issue to be one of retroactive application.

Although the Agency denied that the application of ACYF-PA-83-03
involved giving retroactive effect to a policy change, the Agency argued
in the alternative that the circumstances of this case met the criteria
set forth by the Board for doing so. The Agency relied on a Board
decision (Kentucky Department of Human Resources, Decision No. 401,
March 30, 1983) which, generally, balances the potential burden on the
grantee against the government's interest in retroactive application of
a statute or rule. /4/


(4) In the recently issued Louisiana decision, the Board, using the
same standard, considered the question of whether ACYF-PA-83-03 could be
applied retroactively. The Board concluded after lengthy analysis that
retroactive application was not appropriate. See pp. 7-12 of that
decision. /5/


The Agency raised the further argument that the standard for
retroactive application of Agency policy was met since the State,
throughout the audit process, agreed that statistical sampling was
appropriate. The Agency reasoned that the State, never having been
aware of any policy to disallow only for individually identified errors,
would not be prejudiced by enforcement of the policy which it had always
assumed existed. (Agency's brief dated March 26, 1984, p. 5) However,
the State provided evidence that it objected to extrapolation from a
sample in the AFDC-FC program as early as July 1980 (with respect to a
disallowance pertaining to the period October 1, 1972 through September
30, 1976) although it never questioned the statistical sampling
technique itself. (State's reply brief dated April 198 1984, p. 1 and
Exhibit A) Thus, the State may have been aware of an Agency policy to
disallow only for individually identified errors.

Accordingly, we conclude that the policy set forth in the policy
announcement was not the Agency's "current policy" when the payments in
this case were made, /6/ and that it does not apply retroactively.
Thus, the Board's finding in (5) Decision No. 319, affirmed in Decision
No. 580, that the Agency's policy was to disallow only for individually
identified errors in the AFDC-FC program governs here. /7/

II. Eligibility for AFDC-FC Payments Where Responsibility for Child's
Placement and Care Not Assigned to State's Title IV-A Agency.

The AFDC-FC program was established to provide foster care payments
for children who would have been eligible for AFDC payments made for
dependent children in their own homes but with respect to whom a
judicial determination has been made that continuing care in the child's
home would be contrary to the child's welfare. Section 233.110(a)(1) of
45 CFR, which tracks similar language in section 408 of the Social
Security Act, provides that AFDC-FC benefits are available for "each
otherwise eligible child"--

(i) Who was removed after April 30, 1961, from the home of a relative
specified in the AFDC plan, as a result of a judicial determination that
continuance in the home of the relative would be contrary to his
welfare, for any reason, and who has been placed in foster care as a
result of such determination; and

(ii) (a) Who, in or for the month in which that court action was
initiated, was receiving AFDC, or would have received AFDC if
application had been made, or

(6)

(b) Who lived with a relative specified in the AFDC plan within 6
months prior to the month in which that court action was initiated, and
who would have received AFDC in or for such month if in such month he
had been living with (and removed from the home of) such a relative and
application had been made for him; and

(iii) Whose placement and care are the responsibility of the State
agency administering or supervising the administration of the AFDC plan.
. . .

In the eight cases disputed by the State, the children were removed
from the home of a relative as the result of a judicial determination,
and the State claimed FFP for AFDC-FC payments made as of that time
forward. However, the responsibility for the children's placement and
care was initially retained by the juvenile court and assigned to the
State title IV-A agency anywhere from seven months to 10 years after the
judicial determination.

The Agency took the position that FFC in AFDC-FC payments was not
available unless the court assigned responsibility for a child's
placement and care to the IV-A agency within six months of the time the
child was removed from the home of a relative. (Agency's brief, pp.
7-8) In other words, unless the IV-A agency was assigned responsibility
for the child's placement and care within six months, the Agency would
participate in AFDC-FC payments only from the time such responsibility
was assigned to the IV-A agency forward. The State took the position
that FFP was available for AFDC-FC payments made after the child was
removed from the home of a relative regardless of when responsibility
was assigned to the IV-A agency. (State's reply brief, p. 3)

In support of its position, the Agency noted the provision in section
233.110(a)(1)(ii)(b) with respect to a child who was living with a
relative within the six-month period preceding the month in which court
action to remove the child from the home was initiated. The Agency
suggested, without specific explanation, that this provision supplied
the time frame for assigning responsibility for placement and care of
the child to the IV-A agency. (Agency's brief, p. 8) In addition, the
Agency asserted that a state could not comply with the requirement in 45
CFR 233.110(a)(2)(ii) that the state agency review the appropriateness
of the child's care and services "not less frequently than every six
months" unless the IV-A agency had assigned responsibility for the
child's placement and care within six (7) months after the child's
removal from the home. (Id.) The Agency also asserted that an Agency
issuance, PIQ 76-198, dated December 17, 1976, /8/ clearly articulated
the Agency's position. (Agency's breif, p. 6)


The State argued that the six-month requirement in section 233.110(
a)(1)(ii)(b) related only to the determination of the child's
eligibility to receive AFDC funds, and noted that there are no time
limits specified in section 233.110(a)(1)(iii) itself pertaining to
placement and care. (State's reply brief, p. 3) The State also
contended that the requirement in section 233.110(a)(2)(ii) for state
agency review every six months of the child's care and services did not
apply until the IV-A agency was in fact given responsibility for the
child's care and services. (Id.) In addition, the State claimed that
its interpretation of the regulation was supported by two recent letters
from the Acting Commissioner, Administration for Children, Youth and
Families, Office of Human Development Services. (Id.) Finally, the
State alleged that in 1978 it had requested clarification of section
233.110(a)(1)(iii) from the Regional Office, and had been advised by the
Regional Office that until such time as a ruling was received from the
Central Office, the State could continue with its current practice. A
response was not received until four years later. (State's brief, p. 2)

We agree with the Agency that the State was not entitled to receive
FFP in the eight cases in dispute here prior to the time that the IV-A
agency was given responsibility for the child's placement and care.
Although section 233.110(a)(1) (iii) itself specifies no time within
which such responsibility is to be given to the IV-A agency, the
regulation read as a whole clearly requires that placement and care must
be the responsibility of the IV-A agency when AFDC-FC payments are made
in order for those payments to qualify for FFP. Section 233.110( a)(1)
sets three concurrent conditions which must be satisfied in order for a
state to properly claim FFP for AFDC-FC payments. First, the child must
have been removed from the home and placed in foster care as a result of
court order. Second, the child (8) must, in the month in which the
court action was initiated, have received AFDC or have been eligible to
receive AFDC. (In order to determine whether the child would have been
eligible to receive AFDC, it may be assumed that the child was living
with a relative specified in the AFDC plan during the month in which the
court action was initiated, if in fact the child was living with such
relative at any time within the six months prior to that month.) Third,
the Act requires that the child's placement and care "are the
responsibility of the State agency administering or supervising the
administration of the AFDC plan. . . ." If all three of the conditions
are not met at the time AFDC-FC payments on behalf of a particular child
are made, there is no basis for granting FFP in the payments. The
Agency letters relied on by the State in fact support this
interpretation of the regulation. The letters make the point that,
while the regulation does not require as a matter of federal law that a
court assign responsibility for the child's placement and care to the
state agency at the time the child is removed from the home, AFDC-FC
payments made before the state agency is assigned such responsibility
are not eligible for FFP. (State's reply brief, Exhibits B and C) /9/


We note that PIQ 76-198, cited by the Agency, specifically states
that FFP is not available where responsibility for placement and care
has not been transferred to the IV-A agency, (although, unlike the
instant case, the facts presented there involve an initial assignment of
responsibility to another agency). However, it is questionable whether
the PIQ alone would be adequate authority for finding payments in the
eight cases ineligible for FFP since the PIQ was issued after the first
quarter for which FFP was claimed and the record does not show when the
State received notice of the PIQ.

(9) The State also argued that the Agency should in effect be
estopped from enforcing its current interpretation of the regulation
since no timely response was made to the State's 1978 request for
clarification and the State had been advised by the Regional Office
that, until clarification was received, the State could continue with
its current practice. However, the State's request for clarification
acknowledged that the Agency had interpreted the regulation as requiring
that responsibility for the child's placement and care be given to the
State agency at the time of the initial court order removing the child
from his home in order for the child to be eligible for AFDC-FC
payments. The State merely requested that the Agency "provide
clarification of the rationale and legal basis for this interpretation."
(State's Brief, Exhibit 1, Appendix, p. 3 of 8) Since the State was
aware of the Agency's interpretation, the State could not have
justifiably relied on any direction by Regional Office personnel to
continue its current practice to the extent that the State's current
practice was inconsistent with the Agency's interpretation. Absent any
reasonable reliance, one of the traditional elements of estoppel, there
is no basis for finding that the Agency is estopped from enforcing its
interpretation. (See New York State Department of Social Services,
Decision No. 449, July 29, 1983)

Conclusion

For the reasons stated above, we uphold the disallowance to the
extent that it is based on individually identified errors, and we
reverse to the extent that it exceeds the amount based on individually
identified errors, consisting of payments to ineligible children and
overpayments included in the statistical sample taken by the Agency.
/1/ The Child Welfare and Adoption Assistance Act of 1980, Pub.
L. 96-272, established a new foster care program under title IV-E of the
Act. /2/ In a Reconsideration dated December 30, 1982, the Board
affirmed Decision No. 319. /3/ This policy announcement also
incorporated Action Transmittal (AT) 82-33, dated December 13, 1982,
which stated: (Any) recognized auditing technique including valid
statistical sampling and extrapolation to a universe may be used to
determine the amount of erroneous payments and the amount of any
adjustment to or disallowance of Federal matching funds. /4/ The
State did not challenge the Agency's use of this standard. /5/
Louisiana, Michigan, Montana, Pennsylvania, the District of Columbia,
and the Agency participated in a conference held in July 1984 to respond
to questions from the Board about the Agency's policy for disallowing
erroneous payments in the AFDC-FC program. The transcript of that
conference is part of the record in the instant case as well as for
Decision No. 580. /6/ Decision No. 319 deals specifically with
the payment period through June 1979, while the period involved in the
instant case as well as Decision No. 580 ran through September 1980.
However, there is no evidence of any change in Agency policy with
respect to disallowances in AFDC-FC cases prior to the issuance of
AT-82-33 and ACYF-PA-83-03 in December 1982 and May 1983, respectively.
/7/ Decision No. 319 is by its own terms "limited to errors in
determining eligibility in the AFDC program, where those errors result
from the normal administrative processes." The Board in that decision
indicated that "in situations where a state was making erroneous
payments because of noncompliance with a federal program requirement or
a systemic failure in administration," extrapolation "might be
appropriate" because "(t)hese types of errors are arguably outside the
scope of the (quality control) disallowance policy." (Decision No. 319,
p. 12) In the instant case, the Agency did not allege that any of the
payments to ineligibles or overpayments involved either systemic
problems with the State's administration of the program or noncompliance
with a federal program requirement, which might limit the precedential
value of Decision No. 319. /8/ The PIQ was issued by the Social
and Rehabilitation Service, formerly a component of the Department of
Health, Education and Welfare. Responsibility for administration of the
AFDC-FC program was transferred to the Office of Human Development
Services in 1981. /9/ The Agency's interpretation of the
regulation, as articulated in its brief, would apparently allow FFP in
AFDC-FC payments beginning at the time of a child's removal from the
home provided that responsibility for the child's placement and care was
assigned to the IV-A agency within six months. In none of the eight
cases in dispute here was the State agency assigned responsibility for
the child's placement and care within six months.

MARCH 19, 1985