Texas Department of Human Resources, DAB No. 617 (1985)

GAB Decision 617

January 17, 1985

Texas Department of Human Resources;
Ballard, Judith A.; Settle, Norval D. Garrett, Donald F.
Docket No. 84-70


The Texas Department of Human Resources (TDHR) appealed a decision by
the Office of Family Assistance (OFA) of the Social Security
Administration disallowing $1,007,975 in claims under the 1981 Low
Income Energy Assistance Program. A portion of the disallowance in the
amount of $259,858 was settled during the course of the appeal. Of the
sum remaining in dispute, $503,747 was for administrative costs paid to
contractors relating to the winter heating program and $244,370 was for
costs related to the summer cooling program. For the reasons discussed
below, we sustain in full the remaining disallowance of $748,117.

I. Heating Program Claims

Background

In implementing the 1981 Low Income Energy Assistance Program
(LIEAP), /1/ Texas chose to enter into agreements with local entities in
most of the State's counties for the performance of administrative
functions. The State plan as originally submitted to OFA contained as
an addendum a "Contractual Agreement" between TDHR and the local
entities. Paragraph II of the Agreement provided that the local entity
"agrees to administer the public information, eligibility determination,
and referral functions of the Program. . . ." Paragraph III of the
Agreement, headed "Financial Obligations," provided:

A. ADMINISTRATIVE PAYMENTS. The Department agrees to pay the
Contractor the sum of $10.00 for each completed eligibility
determination. . . . Respondent's Supplemental Appeal File, Ex. B
(Addendum V to State Plan).


(2) Sometime near the time when OFA approved the State plan in
December 1980, TDHR changed the terms of its contracts with the local
entities. This change came at the instigation of Dallas and Harris
Counties. Those counties argued that should program participation be
substantially lower than expected, the $10 per determination rate would
not reimburse the counties for their startup and training costs. In
response, the State negotiated an amendment with Dallas and Harris
Counties which provided for reimbursement of actual costs in excess of
the $10 per determination rate, as verified by a program audit conducted
by TDHR. Id., Ex. F; Appellant's Ex. JJ (Contract for Home Energy
Assistance Program), Art. III. This additional reimbursement available
for both counties, however, contained an upper limit particular to each
county.

A State witness testified that after the State completed the
amendments with Dallas and Harris Counties, it decided that it would
have to provide equivalent amendments for the remaining local entities.
Tr. I, pp. 32-3, 37. Although one State official testified that he
thought this decision was made "sometime" in December 1980 and that the
amendments preceded January 5, 1981 "to his knowledge," the State never
firmly established when the actual amendments for the various entities
were executed and whether the State could still reasonably have depended
on the original estimates of program participation at that time. Tr. I,
pp. 107-9. The entities began taking applications in January 1981.

The contract amendment which the State negotiated with the remaining
entities provided for a guaranteed payment equivalent to 30 percent of
the State's estimated costs for administering the program is each
locality. See Respondent's Supplemental Appeal File, Ex. E. The
amendment provision, however, did not limit the additional reimbursement
to what could be verified by a program audit.

In fact, the actual degree of program participation for the 1981
heating assistance program in Texas turned out to be quite small, in
many instances between five and ten percent of the State's original
estimates. Appellant's Ex. U. Nevertheless, despite this low rate of
program participation, the State claimed the full 30 percent of the
original estimates for all of the local entities except Dallas and
Harris Counties. The State also claimed more than the $10 per
determination amount for Dallas and Harris Counties based on the
contract modifications executed with those counties.

(3) A. Costs claimed by local entities other than Dallas and Harris
Counties.

The Agency disallowed the costs claimed in excess of $10 per
determination for the local entities because the Agency concluded that
costs based on the 30 percent guaranteed floor were neither necessary
nor reasonable as a charge to the program. The Agency also argued that
the actual amendments to the agreements were "subject to Agency
approval" under Agency regulations and that although the Agency may have
known of the amendments by February, 1981, it never approved the
amendments.

The State argued that the minimum guarantee provisions were both
"necessary and reasonable." According to the State, if the "fixed cost"
modifications are viewed prospectively from the time they were arranged,
they represent a good bargain for the State, particularly considering
the short time allowed to implement the program. The State had
determined that, given the original projected number of applicants, the
cost of administering the program itself could have been $2.5 million,
rather than the $745,000 expended under the fixed cost arrangement.
Post Hearing Brief of Appellant, pp. 7-8. Appellant also noted that the
fixed cost contracts had the advantage of lower auditing costs. Opening
Brief of Appellant, p. 15.

The State further argued that, even viewing the arrangements
retrospectively, the cost per determination worked out to $30.70, which
was "comparable to what it would have cost the State to do it itself."
Post Hearing Brief of Appellant, p. 8.

Analysis

OMB Circular A-87 provides that to be allowable under a grant, an
item of cost must be "necessary and reasonable for proper and efficient
administration of grant programs. . . ." OMB Cir. A-87, section C.1
(1980). Regulations governing the LIEAP program incorporated this basic
grant principle. /2/

(4) We conclude that the State has failed to demonstrate that its
claim fo administrative costs for the local entities was "necessary and
reasonable." First, the State has never presented the Agency with
documentation from any of the local entities demonstrating that they
actually incurred costs in excess of $10 per determination in the
administration of the program. Although the agreement modification
which the State executed with the local entities did not include a
proviso limiting additional reimbursement to costs verifiable by audit,
a section of the original agreement required the local entities to
"maintain and retain records adequate to disclose the extent of the
service provided under (the) (contract) for a period of three years
after final audit questions are resolved." Respondent's Supplemental
Appeal File, Ex. B (Addendum V to State plan), Art. II, Para. F. Also,
the Agency was willing to reimburse any additional costs that could be
documented. Tr. I, pp. 24-5. In spite of the obligation imposed on the
entities to retain documentation and the Agency's willingness to
consider documentation, none has ever been forthcoming. Tr. II, p. 35.

Moreover, we conclude that the State has failed to demonstrate that
the costs were both necessary and reasonable because the final contract
agreement guaranteed payment of thirty percent of estimated costs
regardless of any justification by the contractors. The State argued
that it had to provide the contract modification for the remaining local
entities because it had provided a similar arrangement for Dallas and
Harris Counties. The State, however, never gave a creditable
explanation for why it failed to include an audit proviso for the
remaining entities as it had for Dallas and Harris Counties. With the
audit proviso, the local entities would have received only those
additional costs that could be verified through audit. Without the
proviso, the entities received a guaranteed amount based on 30 percent
of the original estimated costs whether they could verify that amount or
not. Thus, contrary to what the (5) State suggested, the modification
was not similar to the modification for Dallas and Harris Counties; it
was far more advantageous to the other local entities. Further, the
record does not show whether deletion of the proviso was necessitated by
any negotiations with the local entities or whether it came at the
State's own initiative. The primary explanation that the State gave for
the deletion was that an auditing requirement might generate excessive
administrative costs in the smaller entities. Tr. I, p. 77. While
painstaking audit requirements might indeed have generated excessive
costs, the State merely needed to limit additional claims to what
reasonably could be verified by the entities as allocable to the energy
program and could have given the entities guidance as to how to meet any
audit requirements efficiently.

Regardless of how the State arrived at the guaranteed minimum
provision, it seems clear that the decision to guarantee payment was not
the outcome of a well-considered economic judgment that such a
porovisioin was advantageous to the State. If the rate of participation
in the program fell short of projections, the State might have been
forced to incur a substantial cost without any justification from the
counties that they in fact deserved compensatioin. One rationale for a
guaranteed minimum provision might be that it would reimburse
contractors for signiicant startup costs for administering the program.
But just as the State has offered no sustantiation that any fixed costs
were actually incurred, it has also offered no evidence that at the time
the contracts were executed there was any basis on which to expect such
substantial fixed costs by the entities administering the program.

Furthermore, the State presented no evidence to the Board
demonstrating why it selected specifically a 30 percent guarantee rather
than some smaller percentage which would have subjected the State to a
lower risk in the event that program participation was very low. The 30
percent guarantee was tied to the State's original estimate of total
program administrative costs. That estimate, however, was speculative
since it assumed that the energy program would have the same rate of
participation as the food stamp program, a program with far greater
impact and public visibility. See Tr. I, p. 14. Indeed, it is not
clear from the record whether the State continued to believe in the
reliability of the original estimate of program participation at the
time it executed the modifications. We can only assume that the primary
reason modifications were needed is that the local entities doubted
whether there (6) would be enough applicants to justify startup and
training costs. Tr. I, pp. 16, 35, 81. In any event, it is clear that
the State should have been much more cautious in relying upon these
estimated participation rates.

Finally, the State missed the point when it argued that if State
officials had administered the program rather than the local entities,
administrative costs would have been higher. We accept as reasonable
the decision to delegate administrative functions to the local entities.
What we consider unreasonable is the choice of a contract arrangement
guaranteeing substantial payments regardless of the degree of program
participation or actual expenses by the entities. We regard the
guaranteed payment provision as unnecessary and unreasonable when other
alternatives were easily available to the State which would have ensured
that program expenses corresponded to the actual administrative costs of
the program, rather than permitting the possibility of a windfall for
the local entities. The "necessary and reasonable" rule in this
instance ensures that program funds will be used only for the purposes
intended and that any cost savings ultimately will revert to the
program, not to the entities administering it.

In conclusion, we uphold the disallowance for the local entities
other than Dallas and Harris Counties. Since we conclude that the
claims were neither necessary nor reasonable, we need not address
whether they may also be disallowed because the contract modification
involved was never approved by the Agency.

B. Dallas and Harris Counties.

As explained above on page 2, the contracts delegating administrative
functions to Dallas and Harris Counties provided that TDHR would audit
the Counties' programs and pay "those actual costs" in excess of the $10
per determination rate. The claims for these Counties, just as the
claims for the other local entities, must be "necessary and reasonable."

TDHR did perform a "review" of Dallas County (see Agency Hearing Ex.
4) which the Agency contends was not an actual audit but a mere
"management survey." Respondent's Post Hearing Response, p. 8. However,
we do not need to decide whether the review of Dallas County was an
"audit" within the meaning of the contract between TDHR and the County,
since the review concluded that the operations of the County were
deficient in a number of respects. We conclude, as did the Agency, that
it was not enough that an "audit" be (7) performed, but that the audit
must conclude that the costs claimed were verifiable and reasonable.
The review of Dallas County found just the opposite. The review
concluded that: (1) the County's "financial records were not maintained
to reflect cost determination" and were therefore technically deficient
(Agency Hearing Ex. 4); and (2) in any event, the reviewers' best
estimate was that average administrative cost per eligibility
determination was $16.38 per entitlement. Id. The reviewers found that
this amount was "excessive." Id.

We conclude that the review of Dallas County failed to satisfy the
intent of the audit requirement to verify actual program costs. We
therefore uphold the disallowance of costs claimed above $10 per
eligibility determination for Dallas County. Without the verification
contemplated by the contract, we have no basis on which to conclude that
these costs were both necessary and reasonable.

As to Harris County, we find that no audit was performed as intended
by the modified contract arrangement. The only verification which the
State presented pertaining to Harris County was payroll sheets listing
the wages and benefits of employees who were purportedly involved in
running the energy assistance program and a TDHR payment voucher for
those employees. Appellant's Ex. EE, II; see also Appellant's Ex. JJ.
However, no documentation was provided that these employees were
actually involved with running the program or that the compensation paid
to these employees was specifically for services provided to the
program. In sum, although we understand that the only reimbursement
claimed for Harris County was for employee wages and benefits, we are
not satisfied that the compensation to employees was actually for
services rendered to the energy assistance program. We therefore
sustain the disallowance for Harris County as well.

II. Summer Cooling Assistance Claims

The second item of the disallowance involves a claim of $244,370 for
summer cooling payments to 2572 individuals age 64. The Agency
disallowed this amount because the State plan provided that only
individuals who had attained age 65 could be eligible for cooling
assistance and program regulations limit federal reimbursement to
payments made in accordance with the State plan.

Background

The Texas State plan provided cooling assistance to individuals who
had attained age 65 and who were either (8) "categorically" or "income"
eligible. "Categorical" eligibles were individuals already receiving
assistance under other programs with a needs test. Eligibility of these
individuals for cooling assistance therefore could be determined from
the records of the other programs. "Income" eligibles were individuals
who could meet a needs test for purposes of the cooling program but who
had not already established their eligibility under another program.
The State acknowledged that a State official erroneously programmed the
State's computers to cover age 64 categorically eligible individuals and
that payments had been made to those individuals. Tr. II, pp. 56, 127.
After discovering what had happened, the State entered into informal
discussions with the Agency concerning the possibility of a retroactive
plan amendment. The State discussed with the Agency the possibility of
two different plan amendments, one covering individuals age 64 who were
categorically eligible and an alternative amendment covering both
categorical and income eligibles, but not requiring the State to perform
customary outreach activities to notify potential income eligibles about
the program. Tr. II, pp. 57, 61. /3/


(9) The Agency admitted that the State had discussed possible plan
amendments stemming from the State's unauthorized age 64 payments. Tr.
II, pp. 57-65, 112-3. The Agency witnesses testified that they
recommended that any plan amendment for age 64 individuals include
income eligibles and treat both income and categorical eligibles alike.
The Agency testified that consistent treatment of similarly situated
individuals was a critical program objective (citing 45 CFR 260.154 (g))
and would have been considered in the evaluation of any proposed plan
amendment. Tr. II, pp. 62-3, 111-3. The Agency noted that consistent
treatment in this instance involved some form of outreach campaign for
income eligibles to let them know of the availability of cooling
assistance. Id. Without such a campaign, the assistance would
effectively by withheld since the income eligibles would be prevented
from participating in the program unless they first learned of it and
applied for assistance. The Agency asserted that its position was in
accord with the statute and regulations requiring consistency of
treatment and outreach activities as part of a State plan. See section
308(b)(16) of Pub. L. 96-223; 45 CFR 260.15(o).

The State, however, seemed to have concluded that an outreach
campaign for a small number of age 64 income eligibles would not be an
effective use of program funds. In any event, the State never carried
out any form of publicity to locate potential age 64 income eligibles
and never paid any members of that group. Further, the State never
submitted a proposed plan amendment during the program year for age 64
individuals (either categorical or income) nor has it done so
subsequently.

The State's primary arguments on appeal were as follows. The State
asked the Board to approve a retroactive plan amendment which would
authorize the payments it made to the categorical eligibles. In th
alternative, the State asked the Board to waive the age 65 limitation in
the plan pursuant to waiver procedures recognized by statute and
regulations. Finally, the State argued that the payments it made were
authorized directly by the program statute and that a specific State
plan amendment was therefore unnecessary.

Analysis

The energy assistance regulations authorized federal reimbursement
for assistance payments only if those payments were made in accordance
with the State plan. 45 CFR Part 260, App. B, Para. C(8). The Board
has upheld application (10) of this rule in other energy assistance
cases. See Kentucky Department of Human Services, Decision No. 421,
April 29, 1983; Nebraska Department of Public Welfare, Decision No.
422, April 29, 1983. It is undisputed that the State's payments to age
64 categorical eligibles were not authorized by the State plan. Thus,
we conclude that the disallowance for these payments must be upheld.

This disallowance resulted directly from the State's failure to amend
its plan. The State recognized that it had made unauthorized payments
and began negotiations for a plan amendment before the program year had
ended. The State even received informal advice as to the type of
amendment the Agency would likely approve. The State, however, failed
to submit any type of plan amendment for consideration pursuant to the
requirements of 45 CFR 260.28. Tr. II, pp. 148-9. If the State had
submitted an amendment in accordance with 45 CFR 260.288 the regulation
gave the State a number of procedural protections including the right to
a hearing from a hearing officer if the amendment was initially
disapproved. Without submitting a proposed plan amendment, the State
has failed to meet even the first prerequisite of the approval process
under the regulations.

Even if the State's appeal here could be viewed as a tacit proposal
for a plan amendment, the Board's jurisdiction under the Low Income
Energy Assistance Program extends only to a review of disallowances.
Memorandum of Understanding between the Board and the Agency, dated
October 5, 1982; see 45 CFR 260.28. Thus, the Board lacks the
authority to approve any implied retroactive request for a plan
amendment.

Finally, we note that any proposed plan amendment at this point would
raise substantial legal issues. Any proposed amendment would still have
to address the issue of consistency of treatment for similarly situated
individuals and the statutory objective that the State provide for
outreach activities designed to assure that all eligible households
"particularly households with elderly . . . are aware of the assistance
available under this title . . . ." Section 308(b)(16) of Pub. L.
96-223. Moreover, as a practical matter, the 1981 cooling needs for any
group of individuals within the State can now no longer be met.
Accordingly, there is no basis on which the Board can recognize a
retroactive plan amendment covering the payments in question.

The State also argued that applicable State plan requirements could
be waived under section 308(d)(2) of Pub. L. 96-223 and 45 CFR 260.26(
a). However, as with the regulation (11) governing State plan
amendments, 45 CFR 260.26 provided a specific detailed procedure for
applying for the waiver of State plan requirements. The State never
sought a waiver under the terms of this regulation. Even if such a
request had been initiated, however, the Agency, not the Board, has the
responsibility to approve the requests under the regulations. Further,
a waiver remedy raises some of the same additional legal issues as does
a retroactive plan amendment, such as the failure of the plan, if the
age or outreach requirements were waived for particular categories of
eligibles, to treat similarly situated individuals in a consistent way.

Finally, we disagree with the State that section 308(c) of Pub. L.
96-223 provided independent authority for payment of assistance to age
64 individuals even though payment was not authorized under the State
plan. That section authorized cooling assistance payments to eligible
households "if the household establishes that such cooling is the result
of medical need pursuant to standards established by the Secretary."
This provision merely required the program to have an established
medical need standard. The Agency gave the states leeway in
establishing standards and the Agency here does not dispute that Texas
might have permitted individuals age 64 to qualify as medically needy
under its State plan. The Agency argued, however, that simply because
age 64 individuals might have been covered under the State plan is not
enough. We agree with the Agency that once a state established a
standard in its plan (within guidelines prescribed by the Secretary),
the state may be reimbursed only for payments to individuals meeting
that standard.The statute did not authorize the State to make payments
outside the scope of its plan to anyone who might have qualified under a
broader standard the State could have selected but did not. Thus,
section 308(c) does not provide an independent basis to overcome the age
65 limitation in the State plan.

Other issues

The State raised certain additional issues which also are not
availing. The State suggested that the cooling payments should be
allowed as an administrative cost since they resulted from an error in
computer programming. Appellant's Opening Brief, p. 13. As we have
already discussed at length, however, the regulations did not authorize
federal reimbursement for payments outside the scope of the State plan.
Moreover, the regulations provided no basis for viewing unauthorized
payments as administrative expenses. We also disagree with the State
that the Agency was obliged (12) to provide a "tolerance" for erroneous
payments under the reasoning in California Department of Social
Services, Decision No. 319, June 30, 1982. Appellant's Response to
Respondent's Brief, p. 2. The regulations and policies at issue in that
decision applied exclusively to a different program, the AFDC program,
whereas the applicable regulations here preclude reimbursement for
payments outside the scope of the state plan.

In conclusion, we uphold the disallowance of $244,370 for cooling
assistance payments to individuals age 64.

Conclusion

For the reasons discussed above, we sustain in full the disallowance
of $748,117. /1/ Home Energy Assistance Act of 1980, Title III of Pub.
L. 96-223, 94 Stat. 288 (1980, repealed 1981). /2/
LIEAP regulations porovided: "Costs charged to the administration of
the energy assistance program will meet the requirements set forth in 45
CFR Part 74 (Administration of grants). . . ." 45 CFR Part 260, App. B,
Para. D (1980). 45 CFR 74.171 (1980) made applicable the cost
principles contained in Federal Management Circular 74-4 (now OMB
Circular A-87), quoted in text above. Also, 45 CFR Part 74 required, at
section 74.61(f), that grantees and subgrantees must establish
procedures for determining the reasonableness, allowability and
allocability of costs in accordance with the cost principles in subpart
Q of Poart 74. Section 74.170 of subpart Q provided: "Grant funds may
be used only for allowable costs of the activities for which the grant
was awarded." /3/ The State alleged that "approximately" only
135 individuals would have established income eligibility status under
the cooling program as opposed to 2572 who received payment as age 64
categorical eligibles. Appellant's Opening Brief, p. 13. The State's
estimate, however, was not based on any direct evidence but on the
alleged analogous breakdown between categorical and income eligibles in
the 65 or over group. The Agency objected to this figure, suggesting
that the number of potential applicants might be higher. Tr. II, pp.
76, 137, 144. One of the assistance programs producing categorical
eligibles, the Supplemental Security Income (SSI) program, had an age 65
requirement for eligibility based on age. Individuals that otherwise
would have been categorically eligible at age 65 by virtue of SSI
eligibility would not be eligible for SSI at 64 and hence would fall
within the income eligible group for cooling assistance. Although the
State conceded that 20 percent of the categorical eligibles in the 65 or
over group were SSI eligibles, it did not calculate the impact of the
SSI age limitation on its original estimate. Post Hearing Brief of
Appellant, p. 12.

MARCH 19, 1985

Texas Department of Human Resources, DAB No. 617 (1985)

GAB Decision 617

January 17, 1985 Texas Department of Human Resources; Docket No. 84-70
Ballard, Judith A.; Settle, Norval D. Garrett, Donald F.


The Texas Department of Human Resources (TDHR) appealed a decision by
the Office of Family Assistance (OFA) of the Social Security
Administration disallowing $1,007,975 in claims under the 1981 Low
Income Energy Assistance Program. A portion of the disallowance in the
amount of $259,858 was settled during the course of the appeal. Of the
sum remaining in dispute, $503,747 was for administrative costs paid to
contractors relating to the winter heating program and $244,370 was for
costs related to the summer cooling program. For the reasons discussed
below, we sustain in full the remaining disallowance of $748,117.

I. Heating Program Claims

Background

In implementing the 1981 Low Income Energy Assistance Program
(LIEAP), /1/ Texas chose to enter into agreements with local entities in
most of the State's counties for the performance of administrative
functions. The State plan as originally submitted to OFA contained as
an addendum a "Contractual Agreement" between TDHR and the local
entities. Paragraph II of the Agreement provided that the local entity
"agrees to administer the public information, eligibility determination,
and referral functions of the Program. . . ." Paragraph III of the
Agreement, headed "Financial Obligations," provided:

A. ADMINISTRATIVE PAYMENTS. The Department agrees to pay the
Contractor the sum of $10.00 for each completed eligibility
determination. . . . Respondent's Supplemental Appeal File, Ex. B
(Addendum V to State Plan).


(2) Sometime near the time when OFA approved the State plan in
December 1980, TDHR changed the terms of its contracts with the local
entities. This change came at the instigation of Dallas and Harris
Counties. Those counties argued that should program participation be
substantially lower than expected, the $10 per determination rate would
not reimburse the counties for their startup and training costs. In
response, the State negotiated an amendment with Dallas and Harris
Counties which provided for reimbursement of actual costs in excess of
the $10 per determination rate, as verified by a program audit conducted
by TDHR. Id., Ex. F; Appellant's Ex. JJ (Contract for Home Energy
Assistance Program), Art. III. This additional reimbursement available
for both counties, however, contained an upper limit particular to each
county.

A State witness testified that after the State completed the
amendments with Dallas and Harris Counties, it decided that it would
have to provide equivalent amendments for the remaining local entities.
Tr. I, pp. 32-3, 37. Although one State official testified that he
thought this decision was made "sometime" in December 1980 and that the
amendments preceded January 5, 1981 "to his knowledge," the State never
firmly established when the actual amendments for the various entities
were executed and whether the State could still reasonably have depended
on the original estimates of program participation at that time. Tr. I,
pp. 107-9. The entities began taking applications in January 1981.

The contract amendment which the State negotiated with the remaining
entities provided for a guaranteed payment equivalent to 30 percent of
the State's estimated costs for administering the program is each
locality. See Respondent's Supplemental Appeal File, Ex. E. The
amendment provision, however, did not limit the additional reimbursement
to what could be verified by a program audit.

In fact, the actual degree of program participation for the 1981
heating assistance program in Texas turned out to be quite small, in
many instances between five and ten percent of the State's original
estimates. Appellant's Ex. U. Nevertheless, despite this low rate of
program participation, the State claimed the full 30 percent of the
original estimates for all of the local entities except Dallas and
Harris Counties. The State also claimed more than the $10 per
determination amount for Dallas and Harris Counties based on the
contract modifications executed with those counties.

(3) A. Costs claimed by local entities other than Dallas and Harris
Counties.

The Agency disallowed the costs claimed in excess of $10 per
determination for the local entities because the Agency concluded that
costs based on the 30 percent guaranteed floor were neither necessary
nor reasonable as a charge to the program. The Agency also argued that
the actual amendments to the agreements were "subject to Agency
approval" under Agency regulations and that although the Agency may have
known of the amendments by February, 1981, it never approved the
amendments.

The State argued that the minimum guarantee provisions were both
"necessary and reasonable." According to the State, if the "fixed cost"
modifications are viewed prospectively from the time they were arranged,
they represent a good bargain for the State, particularly considering
the short time allowed to implement the program. The State had
determined that, given the original projected number of applicants, the
cost of administering the program itself could have been $2.5 million,
rather than the $745,000 expended under the fixed cost arrangement.
Post Hearing Brief of Appellant, pp. 7-8. Appellant also noted that the
fixed cost contracts had the advantage of lower auditing costs. Opening
Brief of Appellant, p. 15.

The State further argued that, even viewing the arrangements
retrospectively, the cost per determination worked out to $30.70, which
was "comparable to what it would have cost the State to do it itself."
Post Hearing Brief of Appellant, p. 8.

Analysis

OMB Circular A-87 provides that to be allowable under a grant, an
item of cost must be "necessary and reasonable for proper and efficient
administration of grant programs. . . ." OMB Cir. A-87, section C.1
(1980). Regulations governing the LIEAP program incorporated this basic
grant principle. /2/

(4) We conclude that the State has failed to demonstrate that its
claim fo administrative costs for the local entities was "necessary and
reasonable." First, the State has never presented the Agency with
documentation from any of the local entities demonstrating that they
actually incurred costs in excess of $10 per determination in the
administration of the program. Although the agreement modification
which the State executed with the local entities did not include a
proviso limiting additional reimbursement to costs verifiable by audit,
a section of the original agreement required the local entities to
"maintain and retain records adequate to disclose the extent of the
service provided under (the) (contract) for a period of three years
after final audit questions are resolved." Respondent's Supplemental
Appeal File, Ex. B (Addendum V to State plan), Art. II, Para. F. Also,
the Agency was willing to reimburse any additional costs that could be
documented. Tr. I, pp. 24-5. In spite of the obligation imposed on the
entities to retain documentation and the Agency's willingness to
consider documentation, none has ever been forthcoming. Tr. II, p. 35.

Moreover, we conclude that the State has failed to demonstrate that
the costs were both necessary and reasonable because the final contract
agreement guaranteed payment of thirty percent of estimated costs
regardless of any justification by the contractors. The State argued
that it had to provide the contract modification for the remaining local
entities because it had provided a similar arrangement for Dallas and
Harris Counties. The State, however, never gave a creditable
explanation for why it failed to include an audit proviso for the
remaining entities as it had for Dallas and Harris Counties. With the
audit proviso, the local entities would have received only those
additional costs that could be verified through audit. Without the
proviso, the entities received a guaranteed amount based on 30 percent
of the original estimated costs whether they could verify that amount or
not. Thus, contrary to what the (5) State suggested, the modification
was not similar to the modification for Dallas and Harris Counties; it
was far more advantageous to the other local entities. Further, the
record does not show whether deletion of the proviso was necessitated by
any negotiations with the local entities or whether it came at the
State's own initiative. The primary explanation that the State gave for
the deletion was that an auditing requirement might generate excessive
administrative costs in the smaller entities. Tr. I, p. 77. While
painstaking audit requirements might indeed have generated excessive
costs, the State merely needed to limit additional claims to what
reasonably could be verified by the entities as allocable to the energy
program and could have given the entities guidance as to how to meet any
audit requirements efficiently.

Regardless of how the State arrived at the guaranteed minimum
provision, it seems clear that the decision to guarantee payment was not
the outcome of a well-considered economic judgment that such a
porovisioin was advantageous to the State. If the rate of participation
in the program fell short of projections, the State might have been
forced to incur a substantial cost without any justification from the
counties that they in fact deserved compensatioin. One rationale for a
guaranteed minimum provision might be that it would reimburse
contractors for signiicant startup costs for administering the program.
But just as the State has offered no sustantiation that any fixed costs
were actually incurred, it has also offered no evidence that at the time
the contracts were executed there was any basis on which to expect such
substantial fixed costs by the entities administering the program.

Furthermore, the State presented no evidence to the Board
demonstrating why it selected specifically a 30 percent guarantee rather
than some smaller percentage which would have subjected the State to a
lower risk in the event that program participation was very low. The 30
percent guarantee was tied to the State's original estimate of total
program administrative costs. That estimate, however, was speculative
since it assumed that the energy program would have the same rate of
participation as the food stamp program, a program with far greater
impact and public visibility. See Tr. I, p. 14. Indeed, it is not
clear from the record whether the State continued to believe in the
reliability of the original estimate of program participation at the
time it executed the modifications. We can only assume that the primary
reason modifications were needed is that the local entities doubted
whether there (6) would be enough applicants to justify startup and
training costs. Tr. I, pp. 16, 35, 81. In any event, it is clear that
the State should have been much more cautious in relying upon these
estimated participation rates.

Finally, the State missed the point when it argued that if State
officials had administered the program rather than the local entities,
administrative costs would have been higher. We accept as reasonable
the decision to delegate administrative functions to the local entities.
What we consider unreasonable is the choice of a contract arrangement
guaranteeing substantial payments regardless of the degree of program
participation or actual expenses by the entities. We regard the
guaranteed payment provision as unnecessary and unreasonable when other
alternatives were easily available to the State which would have ensured
that program expenses corresponded to the actual administrative costs of
the program, rather than permitting the possibility of a windfall for
the local entities. The "necessary and reasonable" rule in this
instance ensures that program funds will be used only for the purposes
intended and that any cost savings ultimately will revert to the
program, not to the entities administering it.

In conclusion, we uphold the disallowance for the local entities
other than Dallas and Harris Counties. Since we conclude that the
claims were neither necessary nor reasonable, we need not address
whether they may also be disallowed because the contract modification
involved was never approved by the Agency.

B. Dallas and Harris Counties.

As explained above on page 2, the contracts delegating administrative
functions to Dallas and Harris Counties provided that TDHR would audit
the Counties' programs and pay "those actual costs" in excess of the $10
per determination rate. The claims for these Counties, just as the
claims for the other local entities, must be "necessary and reasonable."

TDHR did perform a "review" of Dallas County (see Agency Hearing Ex.
4) which the Agency contends was not an actual audit but a mere
"management survey." Respondent's Post Hearing Response, p. 8. However,
we do not need to decide whether the review of Dallas County was an
"audit" within the meaning of the contract between TDHR and the County,
since the review concluded that the operations of the County were
deficient in a number of respects. We conclude, as did the Agency, that
it was not enough that an "audit" be (7) performed, but that the audit
must conclude that the costs claimed were verifiable and reasonable.
The review of Dallas County found just the opposite. The review
concluded that: (1) the County's "financial records were not maintained
to reflect cost determination" and were therefore technically deficient
(Agency Hearing Ex. 4); and (2) in any event, the reviewers' best
estimate was that average administrative cost per eligibility
determination was $16.38 per entitlement. Id. The reviewers found that
this amount was "excessive." Id.

We conclude that the review of Dallas County failed to satisfy the
intent of the audit requirement to verify actual program costs. We
therefore uphold the disallowance of costs claimed above $10 per
eligibility determination for Dallas County. Without the verification
contemplated by the contract, we have no basis on which to conclude that
these costs were both necessary and reasonable.

As to Harris County, we find that no audit was performed as intended
by the modified contract arrangement. The only verification which the
State presented pertaining to Harris County was payroll sheets listing
the wages and benefits of employees who were purportedly involved in
running the energy assistance program and a TDHR payment voucher for
those employees. Appellant's Ex. EE, II; see also Appellant's Ex. JJ.
However, no documentation was provided that these employees were
actually involved with running the program or that the compensation paid
to these employees was specifically for services provided to the
program. In sum, although we understand that the only reimbursement
claimed for Harris County was for employee wages and benefits, we are
not satisfied that the compensation to employees was actually for
services rendered to the energy assistance program. We therefore
sustain the disallowance for Harris County as well.

II. Summer Cooling Assistance Claims

The second item of the disallowance involves a claim of $244,370 for
summer cooling payments to 2572 individuals age 64. The Agency
disallowed this amount because the State plan provided that only
individuals who had attained age 65 could be eligible for cooling
assistance and program regulations limit federal reimbursement to
payments made in accordance with the State plan.

Background

The Texas State plan provided cooling assistance to individuals who
had attained age 65 and who were either (8) "categorically" or "income"
eligible. "Categorical" eligibles were individuals already receiving
assistance under other programs with a needs test. Eligibility of these
individuals for cooling assistance therefore could be determined from
the records of the other programs. "Income" eligibles were individuals
who could meet a needs test for purposes of the cooling program but who
had not already established their eligibility under another program.
The State acknowledged that a State official erroneously programmed the
State's computers to cover age 64 categorically eligible individuals and
that payments had been made to those individuals. Tr. II, pp. 56, 127.
After discovering what had happened, the State entered into informal
discussions with the Agency concerning the possibility of a retroactive
plan amendment. The State discussed with the Agency the possibility of
two different plan amendments, one covering individuals age 64 who were
categorically eligible and an alternative amendment covering both
categorical and income eligibles, but not requiring the State to perform
customary outreach activities to notify potential income eligibles about
the program. Tr. II, pp. 57, 61. /3/


(9) The Agency admitted that the State had discussed possible plan
amendments stemming from the State's unauthorized age 64 payments. Tr.
II, pp. 57-65, 112-3. The Agency witnesses testified that they
recommended that any plan amendment for age 64 individuals include
income eligibles and treat both income and categorical eligibles alike.
The Agency testified that consistent treatment of similarly situated
individuals was a critical program objective (citing 45 CFR 260.154 (g))
and would have been considered in the evaluation of any proposed plan
amendment. Tr. II, pp. 62-3, 111-3. The Agency noted that consistent
treatment in this instance involved some form of outreach campaign for
income eligibles to let them know of the availability of cooling
assistance. Id. Without such a campaign, the assistance would
effectively by withheld since the income eligibles would be prevented
from participating in the program unless they first learned of it and
applied for assistance. The Agency asserted that its position was in
accord with the statute and regulations requiring consistency of
treatment and outreach activities as part of a State plan. See section
308(b)(16) of Pub. L. 96-223; 45 CFR 260.15(o).

The State, however, seemed to have concluded that an outreach
campaign for a small number of age 64 income eligibles would not be an
effective use of program funds. In any event, the State never carried
out any form of publicity to locate potential age 64 income eligibles
and never paid any members of that group. Further, the State never
submitted a proposed plan amendment during the program year for age 64
individuals (either categorical or income) nor has it done so
subsequently.

The State's primary arguments on appeal were as follows. The State
asked the Board to approve a retroactive plan amendment which would
authorize the payments it made to the categorical eligibles. In th
alternative, the State asked the Board to waive the age 65 limitation in
the plan pursuant to waiver procedures recognized by statute and
regulations. Finally, the State argued that the payments it made were
authorized directly by the program statute and that a specific State
plan amendment was therefore unnecessary.

Analysis

The energy assistance regulations authorized federal reimbursement
for assistance payments only if those payments were made in accordance
with the State plan. 45 CFR Part 260, App. B, Para. C(8). The Board
has upheld application (10) of this rule in other energy assistance
cases. See Kentucky Department of Human Services, Decision No. 421,
April 29, 1983; Nebraska Department of Public Welfare, Decision No.
422, April 29, 1983. It is undisputed that the State's payments to age
64 categorical eligibles were not authorized by the State plan. Thus,
we conclude that the disallowance for these payments must be upheld.

This disallowance resulted directly from the State's failure to amend
its plan. The State recognized that it had made unauthorized payments
and began negotiations for a plan amendment before the program year had
ended. The State even received informal advice as to the type of
amendment the Agency would likely approve. The State, however, failed
to submit any type of plan amendment for consideration pursuant to the
requirements of 45 CFR 260.28. Tr. II, pp. 148-9. If the State had
submitted an amendment in accordance with 45 CFR 260.288 the regulation
gave the State a number of procedural protections including the right to
a hearing from a hearing officer if the amendment was initially
disapproved. Without submitting a proposed plan amendment, the State
has failed to meet even the first prerequisite of the approval process
under the regulations.

Even if the State's appeal here could be viewed as a tacit proposal
for a plan amendment, the Board's jurisdiction under the Low Income
Energy Assistance Program extends only to a review of disallowances.
Memorandum of Understanding between the Board and the Agency, dated
October 5, 1982; see 45 CFR 260.28. Thus, the Board lacks the
authority to approve any implied retroactive request for a plan
amendment.

Finally, we note that any proposed plan amendment at this point would
raise substantial legal issues. Any proposed amendment would still have
to address the issue of consistency of treatment for similarly situated
individuals and the statutory objective that the State provide for
outreach activities designed to assure that all eligible households
"particularly households with elderly . . . are aware of the assistance
available under this title . . . ." Section 308(b)(16) of Pub. L.
96-223. Moreover, as a practical matter, the 1981 cooling needs for any
group of individuals within the State can now no longer be met.
Accordingly, there is no basis on which the Board can recognize a
retroactive plan amendment covering the payments in question.

The State also argued that applicable State plan requirements could
be waived under section 308(d)(2) of Pub. L. 96-223 and 45 CFR 260.26(
a). However, as with the regulation (11) governing State plan
amendments, 45 CFR 260.26 provided a specific detailed procedure for
applying for the waiver of State plan requirements. The State never
sought a waiver under the terms of this regulation. Even if such a
request had been initiated, however, the Agency, not the Board, has the
responsibility to approve the requests under the regulations. Further,
a waiver remedy raises some of the same additional legal issues as does
a retroactive plan amendment, such as the failure of the plan, if the
age or outreach requirements were waived for particular categories of
eligibles, to treat similarly situated individuals in a consistent way.

Finally, we disagree with the State that section 308(c) of Pub. L.
96-223 provided independent authority for payment of assistance to age
64 individuals even though payment was not authorized under the State
plan. That section authorized cooling assistance payments to eligible
households "if the household establishes that such cooling is the result
of medical need pursuant to standards established by the Secretary."
This provision merely required the program to have an established
medical need standard. The Agency gave the states leeway in
establishing standards and the Agency here does not dispute that Texas
might have permitted individuals age 64 to qualify as medically needy
under its State plan. The Agency argued, however, that simply because
age 64 individuals might have been covered under the State plan is not
enough. We agree with the Agency that once a state established a
standard in its plan (within guidelines prescribed by the Secretary),
the state may be reimbursed only for payments to individuals meeting
that standard.The statute did not authorize the State to make payments
outside the scope of its plan to anyone who might have qualified under a
broader standard the State could have selected but did not. Thus,
section 308(c) does not provide an independent basis to overcome the age
65 limitation in the State plan.

Other issues

The State raised certain additional issues which also are not
availing. The State suggested that the cooling payments should be
allowed as an administrative cost since they resulted from an error in
computer programming. Appellant's Opening Brief, p. 13. As we have
already discussed at length, however, the regulations did not authorize
federal reimbursement for payments outside the scope of the State plan.
Moreover, the regulations provided no basis for viewing unauthorized
payments as administrative expenses. We also disagree with the State
that the Agency was obliged (12) to provide a "tolerance" for erroneous
payments under the reasoning in California Department of Social
Services, Decision No. 319, June 30, 1982. Appellant's Response to
Respondent's Brief, p. 2. The regulations and policies at issue in that
decision applied exclusively to a different program, the AFDC program,
whereas the applicable regulations here preclude reimbursement for
payments outside the scope of the state plan.

In conclusion, we uphold the disallowance of $244,370 for cooling
assistance payments to individuals age 64.

Conclusion

For the reasons discussed above, we sustain in full the disallowance
of $748,117. /1/ Home Energy Assistance Act of 1980, Title III of Pub.
L. 96-223, 94 Stat. 288 (1980, repealed 1981). /2/
LIEAP regulations porovided: "Costs charged to the administration of
the energy assistance program will meet the requirements set forth in 45
CFR Part 74 (Administration of grants). . . ." 45 CFR Part 260, App. B,
Para. D (1980). 45 CFR 74.171 (1980) made applicable the cost
principles contained in Federal Management Circular 74-4 (now OMB
Circular A-87), quoted in text above. Also, 45 CFR Part 74 required, at
section 74.61(f), that grantees and subgrantees must establish
procedures for determining the reasonableness, allowability and
allocability of costs in accordance with the cost principles in subpart
Q of Poart 74. Section 74.170 of subpart Q provided: "Grant funds may
be used only for allowable costs of the activities for which the grant
was awarded." /3/ The State alleged that "approximately" only
135 individuals would have established income eligibility status under
the cooling program as opposed to 2572 who received payment as age 64
categorical eligibles. Appellant's Opening Brief, p. 13. The State's
estimate, however, was not based on any direct evidence but on the
alleged analogous breakdown between categorical and income eligibles in
the 65 or over group. The Agency objected to this figure, suggesting
that the number of potential applicants might be higher. Tr. II, pp.
76, 137, 144. One of the assistance programs producing categorical
eligibles, the Supplemental Security Income (SSI) program, had an age 65
requirement for eligibility based on age. Individuals that otherwise
would have been categorically eligible at age 65 by virtue of SSI
eligibility would not be eligible for SSI at 64 and hence would fall
within the income eligible group for cooling assistance. Although the
State conceded that 20 percent of the categorical eligibles in the 65 or
over group were SSI eligibles, it did not calculate the impact of the
SSI age limitation on its original estimate. Post Hearing Brief of
Appellant, p. 12.

MARCH 19, 1985