New York State Department of Social Services, DAB No. 910 (1987)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT:  New York State       
Department of Social Services

Docket No. 87-48
Audit Control No. 02-66155
Decision No. 910

DATE:  October 16, 1987

DECISION

The New York State Department of Social Services (State) appealed a
determination by the Social Security Administration (SSA or Agency)
disallowing $1,896,586 in federal funds claimed by the State in
connection with its Disability Determination Program (DDP).  The
disallowance resulted from an audit covering the period April 1, 1980
through September 30, 1983.

The disallowance had two unrelated parts.  First, the Agency alleged
that New York had followed improper letter of credit drawdown procedures
whereby the State had retained control of excessive federal funds before
expending the funds for program purposes.  SSA assessed imputed interest
to the State in the amount of $1,864,431  for the period the State had
allegedly retained the excessive funds.  The Agency also alleged that
the State made two inappropriate personnel transfers to the DDP, which
did not benefit the program, thereby incurring $32,155 in improper
personnel costs. 1/

New York argued in response that its letter of credit drawdown
procedures were proper and that, in any event, the Agency did not have
the authority to disallow funds by imputing interest to the State.
Additionally, the State contended that the personnel transfers cited by
the Agency did benefit the DDP so that the resulting costs should be
allowed.  For the reasons stated below we reverse the disallowance in
full. While we conclude that SSA had a reasonable basis for determining
that New York's letter of credit drawdown procedures were improper, we
find that there is no evidence that any interest was in fact earned by
the State on the funds drawn down, and in the absence of such evidence,
no authority to assess interest.  SSA is not, however, precluded from
investigating this matter further to verify whether the State may in
fact have earned interest on the funds in question.  We also find that
the Agency lacked any reasonable basis to disallow the personnel costs.

Analysis

I.  The Letter of Credit Drawdown Procedures

The auditors found that during the period in issue the State drew down
federal funds under its letter of credit system to cover certain
"intrastate charges" prior to "actual cash disbursement by the
centralized State department."  File Ex. 1, p. 3. Consequently, the
State often had federal funds on hand "considerably in excess of those
reported on the quarterly financial accountability statements."  The
auditors maintained that this practice was in direct violation of
applicable program guidelines and recommended that $1,864,431 in imputed
interest (calculated at a 10% rate for 3 1/2 years) be assessed against
New York.  Id. at 5-6. 2/

The State in response raised two defenses.  The State argued that its
drawdown procedures were proper and that, therefore, no excessive funds
had been retained by the State before disbursement for program purposes.
The State argued in the alternative that even if its procedures were
improper, no interest had actually been earned on the funds drawn down
and the Agency lacked authority to base a disallowance on imputed
interest.

A.  Were the State's drawdown procedures proper?

The State contended in its appeal brief that the funds in question were
obligated for program use at the time the State drew the funds down.
The essential issue, according to the State, was "when the obligation
for the charges was incurred by the State, not when the funds were
actually disbursed for program purposes."  New York Brief, p. 4.

The Agency argued in its response that the State's position conflicts
directly with the applicable program guidelines, and the State in its
reply brief never refuted that argument.

Section 439.44 of the Disability Insurance State Manual (DISM) provides
that--

              At no time should cash be drawn to cover unliquidated
              obligations until the time approaches at which
              disbursements are made to liquidate these obligations.

This provision clearly indicates that the time between a state's
drawdown of federal funds and the actual payment of a corresponding
obligation should be kept to a minimum.  The making of an obligation
alone is not a sufficient basis to draw down funds if a substantial
amount of time will transpire between the obligation and the
disbursement of the funds.  Here, although the State neglected to
describe what specifically transpired after it drew down the funds, the
record suggests that fringe benefit obligations were not liquidated
until the funds reached the State Comptroller (the billing agent).
Funds drawn down and retained by the State for excessive periods before
the State disbursed the funds to liquidate program obligations,
therefore, were not properly drawn down in accordance with the cited
DISM provision.

New York also appeared to be arguing in its reply brief that it had in
fact "disbursed" funds within the meaning of the DISM when it made a
journal transfer of funds between State agencies through the use of
vouchers.  New York noted that section 441.24 of the DISM defines
"disbursement" as follows:

              A disbursement is the liquidation of an obligation by the
              issuance of a check or a warrant or the payment of cash.

This provision supports the Agency's position, not the State's. It
defines "disbursement" to be the liquidation of an obligation by the
payment of cash or the issuance of a warrant for payment. An interagency
transfer by means of a voucher must liquidate a program obligation in
order to qualify as a disbursement under this definition.  Thus, in the
instant case, if the State transferred funds by voucher to the
Comptroller (billing agent), the transfer  would not qualify as a
disbursement if no program obligation was thereby liquidated.  The
disbursement would take place when the Comptroller used the funds to
liquidate program obligations.

Thus, we find that to the extent that New York drew down funds
substantially in advance of their disbursement, such drawdowns were
improper under Agency guidelines.

B.  May the Agency impose a disallowance by charging for interest in the
absence of evidence that interest was earned?

The State argued that even if its drawdown procedures were improper, the
Agency had no statutory or regulatory authority to impose a disallowance
by charging for interest on funds it drew down.  Rather, the State
argued that, as set out in the notification of grant award, the only
potential sanction for failure to follow federal procedures was a
revocation of the unobligated portion of the letter of credit.  Further,
the State contended that under the Intergovernmental Cooperation Act, at
31 U.S.C. 6503(a), a state may not be held accountable for interest
earned on grant money pending disbursement for program purposes. New
York Brief, pp. 4-5.

At the outset, we find that the Intergovernmental Cooperation Act does
not bar the State from being held accountable for interest under the
circumstances here.  This Board has previously found that funding for
disability determinations does not fall within the Intergovernmental
Cooperation Act's definition of a "grant," and falls instead under the
exclusion at 31 U.S.C.  6501(4)(C)(vii) for funds paid as complete
reimbursement for costs incurred in paying benefits or providing
services to entitled individuals under a law of the United States.  See
West Virginia Division of Vocational Rehabilitation, Decision No. 869,
May 14, 1987, p. 2, n. 2.

Even though the State may not avail itself of the protection of the
Intergovernmental Cooperative Act, we still find that the Agency may not
impose a disallowance based on interest charges for excessive drawdowns
where there is no evidence that the State did in fact earn any interest.
The Agency here initially argued that the State earned interest because
the State had not disputed that it had earned interest.  The State in
its reply brief, however, did formally dispute that it had earned
interest:

       . . .[T]he State did not earn interest on the funds transferred
       to its Comptroller. . . .  No interest was actually earned - the
       Agency merely imputed interest at a rate of ten per cent. 3/

New York Reply Brief, p. 3.

The Agency did not subsequently attempt to refute this statement, nor
point to any State law which required the State to invest funds drawn
down under these circumstances.  In other Board cases involving the
question of earned interest, the Agency has specifically pointed to
evidence in the record or state laws that supported the conclusion that
interest had been earned.  See West Virginia, supra; Indiana University,
Decision No. 774, August 15, 1986.  Accordingly, we find that there is
no basis in the record to conclude that the State in fact earned
interest on the excessive drawdowns.

The only provision cited by the Agency in support of the position that
interest can be charged even where a state did not in fact earn the
interest is 41 CFR 1-30.403. 4/  The scope of subpart 1-30.4 is set out
at section 1-30.400 which specifically provides at paragraph (a): "This
subpart covers policies and procedures for advance payments on prime
contracts. . . ."  Section 1-30.403 provides:

        (a) Interest will be charged on the unliquidated balance of all
        advance payments at the rate established by the Secretary of the
        Treasury pursuant to Pub. L. 92-41. . .  .

We find, however, that this provision would not support the instant
disallowance for several reasons.

       o  There is no evidence that the circumstances of this appeal
       arise from an advance payment on a prime contract. Thus, section
       1-30.403 on its face does not apply to the situation presented.
       It covers interest that may be charged on advance payments for
       prime contracts covering procurement of services and property.
       The arrangements for disability determinations are dictated not
       by contracts per se but by the statute and regulations. Thus,
       there is no basis to conclude that section 1-30.403 would apply
       to these arrangements and, indeed, the Agency provided no
       explanation whatsoever as to why this section would be
       applicable.

       o  The program regulations prescribing procedures for disability
       determinations (20 CFR 404.1626(e)) state specifically which cost
       principles shall apply in determining whether a state has used
       federal funds properly.  The regulations provide that a state's
       program will be audited to see if it conforms with cost
       principles at 41 CFR 1-15.7.  No reference is made to subpart
       1-30.4.  Thus, section 1-30.403 does not apply.

       o  While the Board referred to section 1-30.403 in the West
       Virginia decision as a possible authority for charging interest,
       the provision was not in fact applied in that case, since the
       State there did earn interest. Moreover, the disallowance period
       in West Virginia almost entirely preceded the effective date of
       the statute and regulations that altered the nature of the
       disability program by eliminating the use of agreements between
       the Agency and the states and that identified specifically the
       cost principles that would apply in program audits-- subpart
       1-15.7.

Accordingly, we find that the Agency has shown no regulatory authority
which permits interest to be charged for excessive drawdowns without
reference to whether the State actually earned the interest charged.
Since there is no basis in the record to conclude that the State in fact
earned interest for the excessive drawdowns, we must reverse this part
of the disallowance. Nevertheless, in view of the fact that neither
party provided any evidence, much less conclusive evidence, concerning
whether interest was earned, the Agency is not precluded from reviewing
this issue further and imposing a new disallowance if it finds that
interest was in fact earned by the State during the period where it
retained excessive drawdowns.


II.    SSA's Disallowance of Personnel Costs for Two Employees

SSA disallowed $32,155 in personnel costs for two individuals
transferred to the DDP immediately after the announcement of State
employment cutbacks.  The auditors questioned the cost effectiveness of
these transfers since one of the employees was transferred out of DDP
after three months and the other retired in six months.  The auditors
took the position that these transfers were not cost effective and did
not benefit the DDP to the extent necessary to justify the individuals'
salaries.  File Ex. 1, pp. 6-7.  In adopting the auditors' findings, the
Agency placed great reliance on the timing of the transfers and the fact
that these were "management-type employees" with provisional
appointments.  The Agency did not allege that these positions had been
created for these employees.  In fact, SSA conceded that these employees
may have been technically qualified for their positions, but argued that
the provisional nature of their appointments was evidence that the
transfers were merely for the convenience of the employees and not for
the benefit of the DDP. SSA Brief, pp. 7-9.

The sole rationale behind SSA's position is the fact that these
individuals were employed by the DDP for relatively brief periods of
time.  The Agency does not dispute that these individuals were qualified
for the positions that they filled.  Further, there is no evidence that
these individuals were not performing responsibly in their positions,
regardless of the duration of their employment.  In fact, New York
provided a detailed description of the employees' duties and
responsibilities showing a direct relationship to DDP.  File Ex. 3.  In
view of the evidence, and given that the Agency gauged these
individuals' value to the program entirely on their length of service,
the Agency's action seems arbitrary.  The mere fact that these
individuals were employed only for short periods does not necessarily
lead to the conclusion that they did not perform their assigned tasks
and thereby benefit the program.  While such a transfer of personnel
coinciding with an announced employment cutback may merit more than
casual scrutiny, the Agency must still establish a reasonable basis for
a disallowance of these personnel costs.  Here, the record does not lead
us to conclude that the Agency had a reasonable basis for this aspect of
the disallowance.  Accordingly, we reverse the disallowance of $32,155
in personnel costs.

Conclusion

For the reasons discussed above, we find that although SSA properly
determined that New York's letter of credit drawdown procedures were
improper, SSA's decision to disallow $1,864,431 in interest charged was
not supported by either a finding that interest was earned or by
applicable program regulations.  The Agency is not precluded from
reviewing this issue further and imposing a new disallowance to the
extent that interest was in fact earned by the State during the period
where it retained excessive drawdowns.  Additionally, we find that SSA
did not have a reasonable basis for disallowing $32,155 in personnel
costs. Accordingly, we reverse the disallowance in its entirety.

 


                            ________________________________ Norval D.
                            (John) Settle

 

                            ________________________________ Alexander
                            G. Teitz

 

                            ________________________________ Donald F.
                            Garrett Presiding Board Member

 


1.     SSA originally alleged that New York had improperly transferred
eight individuals into the DDP and disallowed $76,608 based on that
finding.  The Agency, however, subsequently reduced the disallowance
regarding inappropriate personnel transfers to $32,155 for two
individuals.  SSA also originally disallowed $520,000 based on a finding
that the State had rented excessive space for the DDP.  SSA subsequently
withdrew that finding altogether.  SSA Brief, p. 2.

2.     Neither the State nor the Agency gave the Board a detailed
description of the State's drawdown procedures or even identified the
specific agencies in the State that held the funds until they were
actually disbursed to cover program obligations.

3.     The auditors did not find that any interest was in fact earned;
they merely calculated interest by applying a 10% rate to the State's
cash on hand for the number of days between each significant intrastate
invoice and related disbursement.  File Ex. 1, p. 5.

4.     It is well-established that where a state in fact earns interest
on grant funds, claimed costs equal to the amount of interest earned may
be disallowed based on applicable cost principles.  See, e.g., Utah
Department of Social Services, Decision No. 759, April 30, 1986; Indiana
Department of Public Welfare, Decision No. 859, April 13, 1987.  The
regulations concerning the disability determination program authorize a
disallowance for earned interest as an "applicable credit" under these
circumstances.  20 CFR 404.1626(e); 41 CFR 1-15.703-3(a); see West
Virginia, supra.  Thus, New York's assertion that SSA's sole remedy was
to revoke the unobligated portion of the State's letter of credit is