GAB Decision 639
April 15, 1985
Maryland Department of Human Resources;
Settle, Norval D.; Teitz, Alexander G. Garrett, Donald F.
Docket No. 84-178; Audit Report No. MD-81-AC
The Maryland Department of Human Resources (State) appealed a
decision by the Office of Child Support Enforcement (Agency) to disallow
$756,863 in federal financial participation (FFP) claimed by the State
under title IV-D of the Social Security Act (Act). The disallowance
concerned fees, imposed by courts in three jurisdictions, for collecting
and processing court-ordered child support payments for the period
October 1, 1978 through September 30, 1981. The Agency determined that
the fees were income which should have been deducted from the State's
total expenditures before the State could claim FFP for those
expenditures under the IV-D program. (Agency Disallowance Notice, State
Brief, Exhibit 6, p. 72) We agree that the fees were program income and
should have been deducted from total expenditures. Accordingly, we
uphold the disallowance. Our decision is based on the parties' briefs
and accompanying documentation and their written responses to a series
of questions posed by the Board. The State had initially requested a
hearing, but withdrew its request in its supplemental brief (January 11,
1985), after the Agency agreed to certain stipulations of fact, which we
discuss below. Background The Child Support Enforcement Program was
established to enforce child support obligations owed by absent parents
to their children. Basic program functions include locating absent
parents, determining paternity, establishing the amount of the child
support obligation, and collecting support payments. See section 451 of
the Act. In order to receive grant funding in the form of FFP, a state
must operate its IV-D program in accordance with a federally approved
state plan and applicable federal regulations. The state must designate
a single and separate organizational unit to administer the IV-D plan
(known as the "IV-D agency"). (45 CFR 302.12(a)) Further, the IV-D
agency may delegate IV-D functions to other State or local agencies and
may enter into cooperative agreements with appropriate courts to assist
the IV-D agency in administering the plan. With certain prescribed
limitations, FFP is available for court administration of child support
enforcement cases pursuant to the cooperative agreements. See 45 CFR
304.21 and 45 CFR 304.20. In Maryland, the IV-D agency entered into
agreements with (among others) the circuit courts in Montgomery and Anne
Arundel Counties and Baltimore City. Pursuant to these agreements the
courts received IV-D funding through the State IV-D agency for various
administrative functions involving IV-D cases. These functions
specifically included the collection and processing of support payments.
The courts in turn assessed fees on the parties directed to make the
support payments. These fees were a percentage of the support payment
and were over and above the payment itself. In Montgomery and Anne
Arundel Counties the State chose not to use the fees to cover the
activities that were specifically funded by the IV-D program. (State
Brief, Exhibit 2, pp. 47-48, 56-61) The State, however, did not here
allege that fees collected in Baltimore City were not used to fund the
very activities, e.g., the collection and processing of support
payments, that were also funded under the program. The Regulations on
Program Income The applicable regulations concerning program income are
contained at 45 CFR Part 74, Subpart F. Program income must be used to
offset the allowable costs of the program. See 45 CFR 74.42(b) and (c).
Section 74.41(a) defines the term "program income" as follows:
Except as explained in . . . (paragraph) (c) of this section, program
income means gross income earned by a recipient from activities part or
all of the cost of which is either borne as a direct cost by a grant or
counted as a direct cost towards meeting a cost sharing or matching
requirement of a grant. It includes but is not limited to such income
in the form of fees for services performed during the grant or subgrant
period. . . . Paragraph (c)(1) provides that the following shall not be
considered program income:
Revenues raised by a government recipient under its governing powers,
such as taxes, special assessments, levies, and fines. (However, the
receipt and expenditure of such revenues shall be recorded as a part of
a grant or subgrant project transactions when such revenues are
specifically earmarked for the project in accordance with the terms of
the grant or subgrant.) Decision No. 412 The Board previously considered
the effect of program income rules in 45 CFR Part 74, Subpart F, on fees
assessed by the State Circuit Courts in Montgomery and Anne Arundel
Counties. (Maryland Department of Human Resources, Decision No. 412,
April 29, 1983) In that case the State did not argue that the fees were
not "program income;" rather the State contended that the fees fell
within the 74.41(c)(1) exception as revenues raised by a grantee under
its governing powers. The State argued that the courts were required to
collect the fees and that the fees were not "specifically earmarked for
the project in accordance with the terms of the grant" as provided in
74.41(c)(1). (Decision No. 412, p. 3) In Decision No. 412 we
determined that 45 CFR 74.41 presented a common sense rule-- when a
grantee makes money from activities paid for with federal funds
appropriated for those activities, then the federal government should
share in that benefit. Additionally, we considered in some detail the
scope and effect of the 74.41(c) exception. See the discussion on page
5 below. Ultimately, we determined that the disputed fees were closely
associated with the precise activities for which federal funds were
provided and that they did not come under the exception of 74.41(c)
merely because they were mandated by State law. (Id. at 4-5) 1. The Fees
as Income The State's primary argument in this appeal, at least with
respect to fees collected by Montgomery and Anne Arundel Counties, is
that the fees do not meet the definition of "program income" under
45
CFR 74.41(a), since they were not used to benefit the child support
program. In defining "program income", 45 CFR 74.41(a) sets out three
critical elements. The income must be: gross income; earned by a
recipient; and derived from activities part or all of the cost of which
is borne as a direct cost by the grant. The fees in question here were
monies received by circuit courts in child support enforcement cases.
The fees were paid by parties ordered to make child support payments.
As such, the fees reasonably can be viewed as part of the gross income
of the courts involved and the State did not argue otherwise. Indeed,
the State law and the local ordinance requiring the fees clarify that
the purpose of the fees is to defray expenses of the collection process.
Also, the fees seem to fall within the one example of income identified
by the regulation - - a fee for a service, the service here being the
collection and processing of child support payments. Moreover, the fees
here were earned by a "recipient." Recipient is defined elsewhere
in
section 74.3 as a grantee or subgrantee. The definition of "grantee"
provides that even where a grant document names a component of a grantee
and assigns primary or even sole responsibility to this component for
the administration of a program, the grantee is the "entire legal
entity," not the named component; e.g., if the grant names a State
agency as grantee, the grantee nevertheless is the State itself. See 45
CFR 74.3. In response to questions posed by the Board (March 4, 1985)
the State argued that the fees imposed in Anne Arundel County were
authorized by local ordinance and should be viewed as the income of the
County, not the Circuit Court, which is a separate legal entity. (Id.
at 2) As the Agency noted, title IV-D program grants are made to States
with approved plans. See 45 CFR 301.15. Thus, the State is the
grantee. The State has not demonstrated that the Circuit Courts in
question are anything more than part of the State government. They are
still part of the State government even though they may be part of a
separate branch of the government from the IV-D agency. In any event
the courts could also be viewed as subgrantees of the IV-D agency by
virtue of the cooperative agreements. In the case of Anne Arundel
County, regardless of whether the legal authority for the fee is a State
statute or local ordinance, the entity assessing the fee is the Circuit
Court which is part of the State government. Moreover, even if the
County, not the State, ultimately receives the fees, the County is
responsible for the Circuit Court's budget and would be the beneficiary
of the IV-D funding to the Circuit Court through the cooperative
agreement. The County, therefore, would qualify as a subgrantee under 45
CFR 74.3. The third ingredient of the definition is that the fees must
be derived from activities that are at least partially funded by the
grant. The fees in question here were derived solely from child support
enforcement cases handled by the courts in the three jurisdictions. The
State does not deny that collection and processing activities relating
to these very cases were in fact funded by the IV-D program pursuant to
cooperative agreements. The State here based its primary argument on the
fact that it did not use the fees to benefit the IV-D program. The
State submitted certain stipulations of fact concerning use of the fees
which the Agency did not contest. (State Brief, Exhibit 2, pp. 56-61;
State Supplemental Brief, Exhibit A, pp. 1-3) The stipulations refer to
three letters which discuss specifically how the court systems use the
fees they collect in child support enforcement cases. The State
emphasized that none of the letters indicated that the court systems
actually used the fees for activities funded by the IV-D program.
Instead, the jurisdictions used the fees for previously unpaid costs for
various other court or county-wide government functions. The State here
asserted that the stipulated facts take the fees outside the definition
of program income. The State's argument entirely misses the point. The
proper focus is on the receipt of the funds, not how the funds were
spent. The critical requirement of the regulation is that the State must
receive income from the very activities the grant actually funded. The
definition, however, does not require the State to use the fees to
benefit the grant-funded activities or indeed to use the fees in any
particular way. The court systems could use the fees in any number of
ways under the circumstances here. In every instance, however, they
remain "income" under the definition since they were derived from
activities that the grant funded. It is also irrelevant that the State
in these jurisdictions may have sustained additional costs because it
did not collect fees in every instance it could have. The State here
creates a definition of program income that gives it effective control
over what qualifies as program income. If the State decides to use the
money to reimburse the IV-D program, it qualifies; if the States choses
to use the money for other purposes, it does not. We think such a
position is clearly contrary to the intended purpose of the cost
principle definition of program income. Accordingly, we conclude that
the third critical element of the definition of "program income" is
present in this case. 2. The Exception at 45 CFR 74.41(c) The State
argued that since these fees were collected pursuant to mandatory State
and local laws, they fell within the regulatory exception for "revenues
raised by a government recipient under its governing powers." (State
Brief, p. 5) This argument is identical to the State's position in
Decision No. 412. In that instance, we found that the mere fact that the
fees are mandated by law is insufficient to place them within the
74.41(c) exception. We indicated that under the State's approach any
fees collected pursuant to State action would fall within the exception
and render the general rule of 74.41 meaningless. We concluded that the
exception was meant to apply to general government-wide assessments such
as taxes, bearing only an incidental relationship to a program, rather
than fees which were in substantial part closely associated with the
precise activities for which federal funds were provided. (Decision No.
412, p. 5) The State has not demonstrated why the rationale of Decision
No. 412 should not apply here. Consequently, we find against the State
on this issue and incorporate by reference our analysis of this issue as
contained in Decision No. 412. We also note that the State's arguments
concerning the exception may not even apply to Baltimore City since the
fees there were assessed pursuant to court rule. 3. The Fees in
Baltimore City The fees collected in Baltimore City involved solely
child support enforcement cases of AFDC recipients. The State indicated
that it had not meant to collect fees in Baltimore City AFDC cases, but
that fees were nevertheless collected from January 1979, when the
Department of Human Resources assumed the domestic collection function
from the Division of Parole and Probation, until June 1982. The State
maintained that at least some of the monies collected as fees in
Baltimore City should in fact be considered gross support payments and
not program income. The State argued that the court rule in Baltimore
City did not provide for a fee to be added to the amount of support
ordered; rather, according to the State, it mandated a deduction of a
fee from the ordered support payment. Therefore, the State concluded,
where the full amount of the order was collected, it could be viewed as
a gross collection even if it included a fee. (State Brief, p. 7) The
State's position, to the extent that it is comprehensible, is at odds
with the terms of the very rule it cites. That rule (Rule BUI(H))
provides:
all orders . . . shall require the payment . . . of the amount deemed
appropriate . . . plus three percent of such amount, added thereto . . .
The amount fixed as . . . support and the included three percent shall
constitute the amount due and payable under the order. (our emphasis)
(State Brief, Exhibit 1, p. 36) Clearly, the rule read as a whole
distinguishes between the parent's support obligation and the surcharge
that is imposed as a court fee. Thus the State's own evidence convinces
us that the amount collected constituted the court ordered amount plus
three percent of that figure. *
Additionally, the State's request that the Board consider the fees as
gross AFDC collections is unsupportable in that the State has provided
no evidence that the fees were ultimately applied in a manner different
than that alleged by the Agency. Thus, even if these fees could have
been viewed as gross child support collections under State rules and
procedures (which they may not be), the State here in fact treated the
monies as court fees. As long as the State actually treated the monies
as fees, we see no practical distinction between the circumstances in
Baltimore City and in the other two jurisdictions. Conclusion Based on
the foregoing analysis, we uphold this disallowance in its entirety. *
As the Agency indicated, the Maryland law, which serves as the basis for
Rule BUI(H), provides: (w)hen the responsibility for collection and/or
support enforcement is excercised by a . . . circuit court: (b) any
surcharge assessed against the person required to make support payments
in order to defray the cost of collection may be retained by the local
government. Md. Ann. Code art. 88A, Sec. 59(b)(5) (iii)(b) (1979).
(our emphasis) The Agency correctly noted that while there is apparently
authority for assessing a surcharge, this law does not permit deducting
any amount from the actual court-ordered payment. The Agency suggested
that if payments in Baltimore City were actually being processed in this
manner there may have been a violation of State law. (Agency Brief, pp.
4-5, fn. 3) The State never responded to the Agency's allegations
concerning the effect of this law.
JULY 18, 1985