Illinois Department of Public Aid, DAB No. 634 (1985)

GAB Decision 634

March 29, 1985 Illinois Department of Public Aid;
Ballard, Judith A.; Settle, Norval D. Garrett, Donald F.
Docket No. 83-209


The Illinois Department of Public Aid (State) appealed a disallowance
by the Social Security Administration (Agency) of $2,926,437 claimed as
federal financial participation (FFP) in the Aid to Families with
Dependent Children-Foster Care program (AFDC-FC). The disallowed amount
pertained to costs incurred from July 1, 1969 through June 30, 1975 in
aid on behalf of children in foster care facilities. The Agency found
that the State had not documented that the facilities were properly
licensed. In two separate disallowances in 1976 the Agency had
determined that over $3.8 million in claims were unallowable. The
Commissioner of Social Security reconsidered the disallowances jointly
and issued his decision in August 1983 under applicable procedures (see
preamble to amendments to 45 CFR 201.14, 44 Fed. Reg. 9264 (1978)).
During the reconsideration process, the State submitted additional
documentation which the Agency examined and used to accept all but
$2,926,437 of the disputed claims. All of the documentation in the
record before the Board had been submitted by the State during the
reconsideration process and used by the Agency to reduce the
disallowance. Based on the reasons set forth below, we uphold the
disallowance in its entirety. Statutory Background For the period in
question, FFP was available in aid to families with dependent children
under Title IV-A of the Social Security Act. Section 408(b) provided
that aid to families with dependent children included payments for
foster care provided in the foster family home of an individual or in a
child care institution. /1/ Section 408(f) defined "foster family( 2)
home" as one that

is licensed by the State in which it is situated or has been approved
by the agency of the State having responsibility for licensing homes of
this type, as meeting the standards established for such licensing.

The same section defined "child care institution" as

a nonprofit private child-care institution which is licensed by the
State in which it is situated or has been approved by the agency of the
State responsible for such licensing or approval of institutions of this
type as meeting the standards established for such licensing. If a child
is placed in a facility that does not qualify as a "foster family home"
or a "child care institution," no FFP is available for aid paid on
behalf of the child. The purpose of the statutory requirements is to
ensure that children are placed only in facilities that meet state
standards. The State here claimed FFP for aid for children in facilities
falling into three major categories:

(1) facilities that lacked a certificate of licensure but had,
according to the State, an "equitable right to a license;"

(2) facilities that lacked a license but received placements from
umbrella organizations that were licensed;

(3) out-of-state facilities that were not qualified as child care
institutions. The State argued that all the facilities at issue met the
statutory requirements and had been properly documented as meeting the
requirements. We discuss these arguments in the first three sections
that follow. In addition, the State argued that, even if the facilities
had not been properly licensed, this failure should be legally excused.
These arguments are discussed in the fourth section. 1.Equitable Right
to a License A majority of the amount disallowed involves the issue of
whether FFP could be paid on behalf of children in facilities which did
not have a certificate of licensure covering the time period in
question. The State admitted that FFP was claimed for children in
facilities during "gaps" in licensing either when a license had expired
but had not yet been renewed or when a facility was first applying for a
license but had not received a certificate of(3) licensure.
Nevertheless, the State argued that the Department of Children and
Family Services (DCFS) /2/ implemented a policy extending an "equitable
right to a license." According to the State, this right existed in
situations where (1) an application had been completed and signed by the
applicant; (2) a licensing study had been performed and reduced to
writing which indicated approval of the applicant as meeting the
licensing standards; and (3) the application had been submitted to
DCFS, along with the recommendation that a license be issued, which was
signed by the licensing representative and the supervisor but no
certificate of licensure had been issued. In all instances in this
appeal, the State argued, the facilities possessed this equitable right
to a license, and therefore met the definitions in the Social Security
Act.

The Social Security Act required that a facility either be "licensed" or
"approved." /3/ Although the State here argued that it had a policy
creating an equitable right to a license, it did not specifically
contend that a facility with an equitable right to a license was
"licensed" within the meaning of the statute. Even if we broadly
construe the State's arguments to be that a facility with an equitable
right to license should be considered licensed in spite of having no
valid certificate of licensure, we would not be persuaded to reverse the
disallowance. As discussed below, we conclude that, prior to 1976, the
State had not implemented a policy based on an equitable right to a
license and that, in any event, the State cannot prevail where it has
provided no evidence whatsoever that the facilities in question actually
met the criteria of the so-called policy.

a. Was there an equitable right to license prior to 1976? The State
asserted that DCFS had an unwritten policy from 1969 through 1975 to
extend equitable rights to licensure (Transcript of telephone conference
call (Tr.), p. 7). The State argued that the policy was evidenced by
later State law and by certain documents in the record postdating the
disallowance period.(4) For the disallowance period, the Illinois Child
Care Act says nothing which could be construed as granting an equitable
right to a license; it does say that no facility may operate "without a
license or permit issued by the Department." The use of the word
"issued" implies, at a minimum, that the Department had executed and
released some sort of official document. In addition, the Act says that
a license is valid for two years from the date it is issued. The 1983
version of the Act has a section (2215) which states:

(d) . . . When a licensee has made a timely and sufficient
application for the renewal of a license or a new license with reference
to any activity of a continuing nature, the existing license shall
continue in full force and effect for up to 30 days until the final
agency decision on the application is made. The Department may further
extend the period in which such decision must be made in individual
cases for up to 30 days, but such extension shall be only for good cause
shown.

(e) The Department may issue one 6-month permit to a newly
established facility for child care to allow that facility reasonable
time to become eligible for a full license. If the facility for child
care is a foster family home. . . the Department may issue one 2-month
permit only. The State argued that the 1983 statute is relevant to this
case because it reiterated the unwritten policy that was in effect
during the disallowance period (Tr., p. 15). A later-enacted law would
not ordinarily be evidence of what policy was before the law went into
effect. The State has provided no evidence that the 1983 amendment was
intended to codify existing practice. The law in effect for the period
required a license to be issued before a facility could operate and in
our view supports the Agency's position that a valid certificate was
required in order for a facility to be considered licensed. Even if we
could accept the State's assertion that the 1983 law is evidence of
prior policy (which we can not), section 2215(d) does not address the
situation of facilities applying for their first licenses. While it
mentions "new licenses," the provision goes only to extending an
"existing license," so only facilities already having a license of some
type (e.g., for a fewer number of children) are covered. The State
asserted that it interpreted section 2215(d) to apply to all new
facilities but admitted that finding wording in support of this
interpretation was somewhat problemmatical (Tr., pp. 15-16). In
addition, section 2215(d) allows for a maximum gap of only 60 days. The
record indicates that some of the "gaps" were two months or less, but
others lasted for up to a year (see Agency's Exhibit(5) 13, Attachment
1). /4/ The State never explained how "gaps" over 60 days would be
covered by the State policy supposedly embodied in the State law.
Finally, the State never addressed the question raised by section 2215(
e) of "permits" and what role, if any, they play in this case. The
State's description of its prior policy would not require permits to be
issued. Moreover, permits appear to be issued, under the 1983 statute,
to facilities which are not eligible for a license. At a minimum, the
federal statute requires that licensing standards be met (see Illinois
Department of Public Aid, Decision No. 378, January 31, 1983).

The second document offered as evidence of a policy is a January 28,
1976 internal DCFS memorandum from the Director of DCFS to "area
administrators, licensing coordinators and OCD" (Reply Brief, Tab 1).
Once again, the State argued that the policy stated in this memorandum
was the unwritten policy in effect during the disallowance period (Tr.,
p. 7). There is no basis for this conclusion in the wording of the
memorandum, however. The memorandum states that starting on September
29, 1975 licenses would be considered "issued" as of the date the
Director of DCFS signed the license. In addition, the memorandum states
that "based on research" DCFS had determined that an applicant had an
equitable right to a license and establishes a procedure to clarify when
a facility could operate based on an equitable right. The prerequisites
set out in the memorandum are those described in our summary of the
State's argument on page 3. The memorandum demonstrates that DCFS did
not implement a policy and procedure permitting a facility to operate
based on an equitable right to a license until 1976. /5/ In addition,
the memorandum contains a vague reference to "research;" the State never
identified the nature of that research nor explained how such a policy
would be consistent with the statutory requirements then in effect.
Finally, the State admitted that, under this memorandum, the period
during which a facility would be permitted to operate without an actual
certificate of licensure would be a rather limited period of time: from
the point that the recommendation for licensure is sent to Springfield
(the State capital) to the point that the license is actually issued
(Tr., p. 14). The State has not explained(6) how "gaps" of up to a year
in this disallowance would be covered by this policy. /6/


The third document offered by the State was never precisely identified
but appears to be a portion of some sort of State manual (Reply Brief,
Tab 2). It is dated March 1, 1977 and merely repeats and summarizes the
statements in the 1976 memorandum as to the steps that must be taken by
facilities in order to possess an equitable right to license. The State
has not shown the relevance of this document to the disallowance period
here. In summary, the State failed to provide any persuasive evidence
that there was a policy in effect during the disallowance period under
which DCFS considered facilities to be "licensed" even in the absence of
a certificate of licensure. b. Has the State shown that the facilities
actually possessed the equitable right? Even if we were to find that
there was an equitable right to a license policy in effect during the
disallowance period, the State has provided no credible evidence that
the facilities in question actually met the criteria necessary to
possess that right. The State admitted that it had not submitted to the
Agency or to the Board any evidence that the facilities in question met
the three criteria necessary for the equitable right (Tr., pp. 2, 6, 7).
The State's position was, in effect, that actual evidence was
unnecessary since the State should be presumed to have followed its own
laws and policies. Under that law, DCFS may not place children in
facilities which did not meet licensing standards. Since most of the
facilities in the disallowance were residences of children placed by
DCFS, the State would have us presume that the facilities met all
applicable standards. In other words, the State is asking the Board to
find that mere placement of a child by DCFS establishes that standards
have been met. As we explain below, we think such a conclusion is
wholly unwarranted. (7) A major part of the State's argument has been
that there is an equitable right to a license, and in order to gain that
right, a facility and DCFS must meet certain criteria (as summarized on
page 3 of the decision). Yet when the State set out to prove that the
facilities actually possessed that right, it could not produce any
evidence to show that the criteria were met. Instead, it asked us to
presume that it followed its own law and policies. We do not know of
any evidentiary principle that says that merely because it would have
been a violation of state law to place a child in an unlicensed
facility, we must ineluctably conclude that a facility meets licensing
standards. Moreover, the evidence here supports the contrary conclusion.
A document in the record calls into question the State's assertion that
DCFS did not place children in unlicensed facilities. The Agency's
audit report quotes a letter dated October 1974 from the Director of
DCFS to all area administrators:

. . . It has come to my attention that some of the facilities
providing care . . . have been erroneously advised by Department Staff
that they can accept our wards for care or for placement in foster homes
which are not licensed and that such homes will have 90 days to comply
with licensing requirements and secure a license.

. . . Please advise staff that placing children in unlicensed
facilities of any kind is against Department policy.

(Agency Exhibit 12, p. 7) The State argue that this letter does not
weaken its case and that it is not inconsistent with the principle of an
equitable right to a license. "Certainly a home which has been
inspected and extended an equitable right to a license cannot be
accurately described as 'unlicensed' during the interim period . . . "
(Reply Brief, p. 7). There may be a question as to the interpretation of
the word "license" in the letter, but whichever way it is interpreted,
the letter as a whole contradicts the State's position. If "licensing"
in the letter means the actual certificate, then the letter would
indicate that under State law, facilities must actually possess the
piece of paper before being able to operate. If "licensing" in the
letter encompasses the idea of the equitable right, then the letter can
be read as an admission that there was a problem arising from placing
children in facilities that had not met the criteria leading up to
possessing that right. No matter how one interprets the term, the
letter still indicates that there was a problem in Illinois that some
children were being placed prematurely in facilities, before all
requirements had been met.(8)$%In summary, we find that there was no
policy creating an equitable right to a license during the disallowance
period. Further, even if a policy had been in effect, the State has
provided no credible evidence that the facilities in question met
licensing standards and actually possessed that right. We therefore
uphold this part of the disallowance. 2. Facilities Receiving Placements
from Supervising Child Welfare Agencies The Agency also found that FFP
was improperly claimed for aid for children in facilities where only an
umbrella child welfare agency (CWA) was licensed. It was the Agency's
position that the State Child Welfare Act and licensing standards
required a separate license for each facility, and the State agreed.
The State also agreed that it had provided only copies of licenses for
the CWAs for the disallowance period; it did not provide evidence of
licensure of individual facilities because "DCFS maintained their
records based on the child welfare agencies, and because pursuant to
state law, there could be no placement of a child within a facility that
had not been approved and inspected by DCFS" (Tr., p. 25). The State has
provided no convincing basis for overturning this part of the
disallowance; it admitted that each facility needed a separate license
and that it had not provided evidence of licenses for the questioned
facilities. In addition, for the reasons discussed above, we reject the
State's argument that sufficient evidence of approval existed merely
because DCFS had placed children in a particular facility. This part of
the disallowance is, therefore, affirmed. 3. Out-of-State Facilities The
Agency disallowed claims for FFP relating to out-of-state facilities
because it found that they were for-profit institutions or they were not
licensed as child care institutions in the state in which they were
situated by the agency responsible for licensing child care
institutions. a. Were the facilities non-profit? On the issue of
whether the facilities were non-profit, the State's arguments were
two-fold. The first was that the original disallowances did not mention
this problem; it arose only during the reconsideration process. The
State argued that regulations and a "fundamental sense of fairness"
(Reply Brief, Tab 6, p. 7) demand that the review encompass only the
original findings. The Agency's response was that the reconsideration
was the first time that the issuecould have arisen, because it was not
until the reconsideration process that the State provided any
documentation relating to these facilities. Once the Agency examined
the licenses and other documents, it noticed the problem with the
financial status of the facilities.( 9)$%As the Agency argued, the
State's position makes little sense: the Agency cannot raise issues
that it could not possibly have raised without first having supporting
documentation from the State. The reason that the Agency lacked
knowledge was because the State had not provided the documents that
would have raised the issues. In addition, the State has had a full
opportunity to present its arguments and evidence during both the
reconsideration process and before the Board and has not shown that it
was prejudiced by the delay in raising the issue. The second part of the
State's arguments was that there is no evidence that the facilities were
other than non-profit. That argument is not supported by the record.
During the reconsideration process, the State provided materials related
to the out-of-state facilities (Agency's Exhibit 37), and the Agency
reduced the disallowance where the evidence showed non-profit status
(Agency's letter dated September 17, 1984). But there is also evidence
in those materials of for-profit status (see, e.g. documents for Abilene
Youth Center, Algonguin School and East Texas Guidance and Achievement
Center). The State bears the burden of documenting the non-profit
status of the facilities in question; it has not done so here.
Therefore, we uphold this part of the disallowance. b. Were certain
facilities child care institutions? The second issue is whether six
out-of-state facilities were child care institutions. Apparently,
earlier in the reconsideration process, a larger number of facilities
had been questioned on this basis, but based on documentation supplied
by the State (Agency's Exhibit 37), the disallowance and number of
facilities were reduced (Agency letter dated September 17, 1984). The
Agency described the problems with the remaining facilities:

(1) Institution licensed as a boarding school by the Michigan State
Board of Education. The licensing agency for child caring facility in
Michigan is the Department of Social Services.

(2) Institute is licensed as an inpatient medical care facility for
the mentally retarded, not as a child caring facility as specified in 45
CFR 233.110(b).

(3) Facility licensed as a hospital, not a child caring facility.

(4) Facility has been licensed by the Virginia State Hospital Board
as a home for the care and treatment of epileptics and mentally
deficients. The State agency for licensing child care facilities is the
Department of Public Welfare.(10)

(5) The Center was not licensed as a child caring institution, as
required by the State of Missouri where it was located.

(6) School was licensed for purchase of service under which
certification of the facility was required to provide care to children.
School requested and received exceptions to Wisconsin's Rules for
Licensing Child Care Institutions, and is not licensed. The school's
expenditures are not claimed for AFDC-FC Federal matching by Wisconsin.

(Agency's Exhibit 13, Attachment 5) The State's argument is in two
parts. First, the State argued that it had long been a State practice to
initiate out-of-state placements "on the basis of verbal assurance that
the out-of-state provider is licensed by its own State" (Reconsideration
brief, p. 21, submitted as Tab 4 of State's Reply), and that "apparently
a few States still do not formally license child-care facilities" (Id.,
p. 22). The State's argument is unresponsive to the issue. Mere
licensing is not sufficient; the facility must be licensed in a
specific way - as a facility coming within the definition of a child
care institution in the state in which it is situated. In addition, the
State has provided no proof that it received verbal approval with regard
to the facilities in question here. In any event, we doubt the
reasonableness of the State relying solely on verbal assurances for such
an important determination in licensing that foster care children
receive adequate care. The other part of the State's argument is that
there is nothing in the Social Security Act that states that facilities
such as boarding schools, facilities for the mentally retarded, or homes
for epileptics are by definition disqualified for FFP. This argument
might be correct hypothetically but it does not address the crux of the
issue in this appeal. Both parties agreed that the important fact is
how the law in the state in which the facility is located defines a
child care institution. The State has provided no evidence showing that
in each one of the six situations, the specific state law has a
definition of child care institution that would encompass these
categories of facilities. Therefore, the State's arguments do not
persuade us that this portion of the disallowance should be overturned.
4. Miscellaneous Issues As we explained above, the State has failed to
document that it met the statutory licensure requirements for the
facilities involved in this appeal. Nevertheless, the State presented
several arguments the truth of which, it argued, would legally excuse
the failure. As we indicate below,(11) however, we find all of the
State's arguments unpersuasive. /7/

Pertaining to all three categories of costs discussed previously, the
State complained that the Agency had possession of original documents
relating to licenses of facilities which it borrowed at a review exit
conference and had refused to return, making presentation of evidence
difficult. The State never argued, however, that the documentation was
in any way relevant to the issues remaining in dispute. In addition,
the Agency alleged and the record indicates that the State had provided
copies of licenses and other DCFS records during the Agency review
(Agency Exhibit 14, p. 7). Even if the State had given the Agency
original documents, it did not demonstrate that it told the Agency that
they were originals and there were no copies so that the Agency became
custodian of unique documents. In this case, the State has not shown
why it should not bear the consequences of releasing original documents.
The State also alluded to a record retention issue which pertains to all
three categories of disallowed costs. In general, regulations in effect
since 1973 provide that records shall be retained three years from the
day the grantee submits to HHS its expenditure report for the grant
period, and that, if an audit or other action has been started before
the expiration of the three year period, the records shall be retained
until completion of the audit and resolution of all issues which arise
from it. The State asserted that record retention was relevant to this
appeal because "intervening circumstances (e.g., the passage of time,
the large quantity of licensure records maintained by DCFS, the fact
that DCFS moved its headquarters and records to new premises, and the
fact DCFS has implemented a computerized system). . ." (Reply Brief, p.
9) again made presenting evidence difficult. In sum, the record
retention issue is irrelevant to this appeal. There is no indication in
the record that the time period for retaining records had expired prior
to the initiation of the Agency review and that the State had destroyed
records in recognition of the expiration of the requirement.
Furthermore, documentation does exist in the case of the out-of-state
facilities, but it supports the findings of the Agency. (See
Pennsylvania Department of Public Welfare, Decision No. 582, November 1,
1984; Community Health and Counseling Services, Decision No. 557,
August 2, 1984) With regard to the first and second categories of costs,
the State asserted that the format of the information provided to the
Agency for expenditures(12) from 1969 to 1971 was adequate to support
the claims. The lists provided by the State would permit a determination
of claimed costs by child and time period, but were not directly keyed
to providers. The State's reasons for why the pre-1971 data was
acceptable as evidence of licensure (as set forth in the State's Brief
at page 9) do not overcome the problem that there was no way for the
Agency to determine what facilities were involved and whether these
facilities possessed licenses, an essential aspect in the determination
of whether the claims were proper. Furthermore, according to the State,
given the problem with the format of the information for facilities for
the 1969-1971 period, the State and Regional personnel worked out a
method for checking licensure short of requiring evidence of actual
licenses on a provider-by-provider basis. That method was later
rejected by Regional officials. In changing its mind, the State argued,
the Agency relied on 45 CFR 233.110(b) (1971) which the State
characterized as requiring an entirely new form of fiscal documentation
and should not be applicable to prior years' costs. The licensing
requirements have been present in the Social Security Act since 1961.
As the State admitted (State Brief, p. 12), the regulations paraphrased
the Social Security Act and did not add anything to it. Since the
regulation does not say anything substantially different from the
statute on the licensing requirements, we find nothing to support the
State's allegation that new documentation requirements were being
imposed because of the regulation. Federal statute requires that all
facilities be licensed or approved; the Agency was clearly proper in
demanding evidence that the State met that requirement for each facility
in which an AFDC-FC child was placed. The State has pointed to no
reason why Regional officials could not change the methodology for
examining old records that had been worked out by lower level Agency
personnel during an "entrance review conference." Indeed, it appears
that the method was worked out solely in an attempt to accommodate the
State's own record-keeping deficiencies. Finally, with regard to the
first and second categories of costs, the State argued that Regional and
Central Agency officials agreed that the State could do a representative
sample study of the licensure status of CWA sponsored homes for the
pre-October 1971 period. The study showed that

Not less than 97% of the pre-October 1971. . .home payments. . .were
found to have been made to formerly-licensed homes or facilities. .
.Documentation reflective of another 2% indicated that two of the three
remaining homes selected for study had(13) been investigated and found
to be in compliance with DCFS standards during appropriate time periods.
. .

(State Brief, pp. 14-15) The State argued that since licensure status
for the period in question had been demonstrated, the disallowance
should be overturned. The Agency allowed the 2% claim (the Commissioner
reduced the original disallowance by $15,274), but the Agency argued,
and we agree, that the fact that a facility was previously licensed does
not enable the State to meet its own criteria necessary to show that
each facility had a right to a license. The mere fact that a facility
met licensing standards at one time is no guarantee that it continued to
meet those standards after the license had expired. Indirect Costs The
State claimed indirect costs (overhead-type costs), which were
determined as a proportion of direct costs. Since the Agency found a
certain amount of direct costs unallowable, it disallowed a proportional
share of indirect costs. Because we have found that that the
disallowance of the direct costs was proper, we uphold the disallowance
of indirect costs. Conclusion Based on the reasons set forth above, we
uphold the disallowance in its entirety. /1/ A new Title IV-E Foster
Care and Adoption Assistance Program was added by section 101(a)
(1) of Public Law 96-272, effective October 1, 1980. The AFDC-FC
program under Title IV-A was repealed by section 101(a) (2) of that law,
effective at the time a state plan under IV-E became effective, but no
later than September 30, 1982. For purposes of this decision, however,
the provisions of Title IV-A apply. /2/ DCFS was responsible for
licensing the large majority of facilities and shared, together
with certain private agencies that it also regulated, the responsibility
for placing children in facilities. /3/ The State argued generally that
we should consider the facilities to have been "approved" but
did not show that it had a process under which its actions here would
constitute approval. Moreover, the State has provided no evidence that
it had determined that the facilities here met licensing standards, so
there is no basis on which to conclude that the facilities were
approvedas meeting the licensing standards, as required. /4/ The
information we have in the file relates only to the 1969 to 1971 time
period, but we have no reason to believe that for the later period all
of the "gaps" were limited to two months or less. /5/ The
memorandum states that "the following procedure is to be instituted in
the field." The implication clearly is that there was no previous
official policy or practice in DCFS based on an equitable right to a
license. /6/ Notwithstanding the State's argument that the 1983
amendments to the Child Care Act ratified the earlier memorandum and
unwritten policy, there are significant differences between the Act and
the memorandum insofar as the Act states time limits for the "gap"
period, the Act seems to apply only to renewals of licenses, and most
important, the Act allows for a gap "until the agency decision of the
application has been made." This is significantly different from the
memorandum's policy which provides for a gap only between a positive
decision by licensing officials and the issuance of a piece of paper.
/7/ We also reiterate that in the case of facilities that allegedly had
an equitable right to a license, the State has failed to demonstrate
that the facilities would have met federal statutory requirements even
if properly documented.

JUNE 06, 1985