Alabama Department of Human Resources, DAB No. 939 (1988)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT:  Alabama Department of Human Resources

Docket No. 87-117
Decision No. 939

DATE:  February 29, 1988

DECISION

The Alabama Department of Human Resources (State or Alabama) appealed a
determination by the Family Support Administration (Agency) disallowing
$212,317 in federal financial participation (FFP) claimed under Title
IV-A of the Social Security Act (Aid to Families with Dependent Children
or AFDC).  At issue are the costs of a study of AFDC recipient
characteristics, performed under contract by the University of Alabama,
claimed as administrative costs of the AFDC program for the period
October 1981 through October 1985.  The Agency determined that the State
had not received prior Agency approval, which was required because the
study was a "management study."  The Agency also determined that it
would not waive the prior approval requirement because the study was not
an allowable cost because it was not "necessary" for the administration
of the AFDC program.

We find below that the study was a management study and that the State
did not receive prior approval, which was required by Office of
Management and Budget (OMB) Circular A-87, Attachment B, section C(5),
made applicable to HHS grants to states by 45 C.F.R. 74.171.  Thus, we
uphold the disallowance.  In light of the arguments in this case,
however, we conclude that the appropriate result is to stay the effect
of this decision to provide a limited opportunity to the parties to
consider whether retroactive approval of all or part of the disputed
costs is warranted.  Because the Agency has discretion to grant
retroactive approval under certain circumstances, and has not addressed
the issue in light of the record developed before the Board, we stay the
effect of this decision for 30 days or until the Agency considers any
request for retroactive approval submitted within that time by the
State.

Discussion

I.    Was prior approval necessary?

The Agency contended that the study was a "management study" performed
by an "outside consultant" for which costs are allowable only with prior
approval or authorization.  The Agency relied on OMB Circular A-87, Att.
B, sec. C(5), which states:

       The cost of management studies to improve the effectiveness and
       efficiency of grant management for ongoing programs is allowable
       except that the costs of studies performed by agencies other than
       the grantee department or outside consultants is allowable only
       when authorized by the Federal grantor agency.  (Emphasis added)

The implementing regulations, at 45 C.F.R. 74.177(b), specify that the
required approval must be obtained in advance, and in writing, for costs
not specified in an approved overall budget. The State did not allege
that prior approval in writing was obtained, or that these costs were
contained in an approved budget.

The State argued that approval was not required because the study was
not a "management study" to improve the effectiveness of grant
management for ongoing programs, but was instead part of the State
budgeting process.  The State explained that the study was commissioned
to aid the State Legislature in determining the appropriate budget
priorities for the AFDC program. 1/  The State submitted evidence of a
legislative inquiry along with documentation and affidavits indicating
that the study was commissioned to respond to those legislative
questions. According to the State, the study was necessary to defend the
existence of the entire AFDC program in Alabama.  The State reasoned
that the study should be categorized as a cost "incurred for the
development, preparation, presentation, and execution of budgets."  Such
costs are allowable without any prior approval under OMB Circular A-87,
Att. B, sec. B(6), with the exception of costs of a central budget
office which are not directly identifiable with the grantee agency's
budget process.  After reviewing the documents in the record concerning
the study, we find that the study clearly fell within the concept of a
"management study."  While some aspects of the study may have gone
beyond what would usually be encompassed by a management study, the
evidence clearly showed that the study served management purposes.
Thus, prior approval by the Agency was required.

The primary focus of the study appears to have been to analyze the
effect of AFDC and other benefit programs in order to ensure that the
programs achieve desired goals. 2/  As the summary of the proposed
research project prepared on April 8, 1981 stated, the study was
intended to provide information for policy making on issues such as how
large AFDC benefits should be, which segments of the AFDC recipient
population are more employable, whether other benefit programs may
reduce employment incentives, and whether the program could be revised
or supplemented to strengthen family structures and to discourage
teenage pregnancy. State's Exhibit (Ex.) C-2.  This information had
direct relevance to the management of the program and the determination
of the benefit levels needed by AFDC recipients.  The study proposal
clearly recognized the management focus of the study.  See, e.g.,
State's Ex. C-1, Attachment, p. 1 ("In order to enhance the efficiency
and effectiveness of this longstanding program [AFDC], a base of data is
needed.")

While the study results might ultimately have some effect on the State's
overall budget, the study was not the type of budgeting cost
contemplated by OMB Circular A-87, Att. B, sec. B(6).  The study does
not purport to directly address budgetary issues or to make
recommendations which have a direct fiscal impact.  While we agree that
the information collected in the study may have sparked reforms in
program rules or operations which had an effect on the budget, that
effect is a predictable result of any management study.  See State's Ex.
BB.  The mere fact that there was a fiscal impact does not mean that the
study must be characterized as a cost of developing a budget when that
was clearly not the primary focus of the study.

Section B(6) includes as allowable only costs directly associated with
the actual "development, preparation, presentation and execution of
budgets."  This provision is clearly limited to costs directly related
to the actual preparation of budget requests or proposals, the direct
presentation of those proposals to the legislature or other authorities,
and the monitoring of compliance with budget objectives.  The plain
language of the provision indicates that it would not extend to research
on fundamental issues only tangentially related to the actual
preparation, presentation, or execution of a specific budget proposal.
The scope of the study disputed here clearly indicates that it was
fundamental research not directly related to any particular budget
proposal.

The State seemed to be under the mistaken impression that the study was
automatically a budget development cost because it responded, in part,
to questions from the State Legislature which arose from a concern over
the rising amount of State welfare expenditures.  The State Legislature
requested information to justify the continued existence of the AFDC
program and to examine the prevalence of fraud, waste, and abuse.  See
State's Exs. A-1 to B-5.  Even accepting that the legislative inquiry
was the catalyst which initiated the study, the nature of the study
indicates that its primary benefit was as a management tool.  The study
was commissioned by program management officials and focused on the
development of information more relevant to management and policy
development than to budgetary issues.  See State's Exs. B-7; C-2, p. 2.
3/  Thus, the study is more appropriately considered a management study
and the State should have known that prior approval was required.

II.    Should the Agency waive the prior approval   requirement?

The State argued that the Agency should have waived prior approval
requirements because the provision requiring prior approval for
management studies in OMB Circular A-87 was not clear.  The State cited
as authority for its waiver request 45 C.F.R. 74.176(c), which was
recodified as 45 C.F.R. 74.177(c) in 1982.  As we explained in Economic
Opportunity Council of Suffolk, DGAB No. 714 (1985), this waiver
provision is intended to enable an awarding agency to waive in advance
for a particular grantee the general requirement to obtain prior
approval whenever incurring a cost in a category for which such approval
is specified.  See 42 Fed. Reg. 4157 (January 24, 1977); 43 Fed.  Reg.
34080 (August 2, 1978).  The appropriate request by the State here would
have been a request for retroactive approval. We address issues
regarding retroactive approval below.

Moreover, we are not persuaded by the State's arguments that the
management study provision was unclear.  The State contended that the
provision could be read to impose the prior approval requirement only on
studies performed by other state agencies (and not on studies performed
either by the grantee agency itself or by outside consultants).  The
State argued that the study did not require prior approval because the
study was performed by the University of Alabama, which the State
considered to be an outside consultant. 4/  While the Agency conceded
that the provision was inartfully drafted, the Agency quoted the Board
in arguing that "the only plausible meaning is that the cost of a
management study is allowable only with prior approval if (1) it is
performed by an agency other than the grantee department, or (2) it is
performed by an outside consultant."  Wisconsin Dept.  of Health and
Social Services, DGAB No. 696 (1985).  As the Agency explained, "[t]he
purpose of the prior approval requirement is to determine the merits of
a study, its allowability under enabling legislation, that it is a
prudent application of funds from a national perspective, and that it is
non-duplicative of other research."  Disallowance Letter, State's Ex.
F-4.

We find the State's alternative reading to be strained.  The term
"agencies" would not ordinarily refer to outside consultants, as it does
in the State's reading.  For example, in OMB Circular A-87, Att. B. sec.
C(7), outside consultants are referred to as "individuals or
organizations."  Furthermore, the Agency's reading is supported by a
general concern for the possibility of abuse in contracting out studies
either to other agencies of the grantee or to outside consultants.  The
State provided no logical basis to support an exception from prior
approval requirements for outside consultants, nor any evidence that
State officials had been actually misled by an alternative reading.  In
short, we find that the underlying meaning of the provision was clear
and affirm that the prior approval requirement applies to management
studies performed by outside consultants.

Thus, we reject the State's argument that the requirement for prior
approval should be "waived" on the basis that it was unclear.

III.  Should the Agency consider granting retroactive approval?

Although we conclude above that prior approval was required for the
disputed study, the absence of prior approval would not be dispositive
if the Agency were to grant retroactive approval. The Department of
Health and Human Services Grants Administration Manual (HHS GAM)
provides that a "transaction may be approved retroactively" if, among
other things, "the transaction would have been approved had the
organization requested approval in advance."  HHS GAM Chapter 1-105-60
B.1. 5/  See, e.g., Economic Opportunity Council of Suffolk, Inc., DGAB
No. 714 (1985).

In its request for a waiver of prior approval requirements, the State
raised issues which should properly have been directed at retroactive
approval.  The Agency never directly considered retroactive approval,
and responded to the State's arguments by advancing lack of necessity as
a basis for denying waiver of prior approval. 6/  Also, the State raised
retroactive approval issues in contesting the determination that the
costs were not "necessary."

In light of the State's attempts to raise issues related to retroactive
approval, we believe we should provide the Agency an opportunity to
consider whether to grant retroactive approval for some portion of the
costs involved.  As we explain below, we do not find in the present
record an articulated basis, supported by the facts, for denial of
retroactive approval.

The Agency has considerable discretion in determining whether to grant
retroactive approval, but "may not deny retroactive approval based on
unsubstantiated conclusions or on bases so insubstantial that the
decision fairly can be described as capricious."  Economic Opportunity
Atlanta, Inc., DGAB No. 313 (1982).  In Economic Opportunity Atlanta,
the Board stated that retroactive approval standards are permissive and
do not preclude the grantor agency from considering all relevant
factors, including factors which might not have been considered if prior
approval had been requested, such as the grantee's fiscal management
history.  But the Board also found that the grantor agency must
articulate a substantive basis for denying retroactive approval.  Id.,
p. 3.

The Agency's finding that the study was not "necessary" would,
ordinarily, provide a basis to conclude that retroactive approval was
not appropriate.  The Agency did not, however, provide a factual basis
to support its finding in light of the evidence submitted by the State.
7/  In particular we find: o     Although the State submitted evidence
that the study aided in required program functions, such as clarifying
      factors in determining benefit levels and standards of need under
      45 C.F.R. 233.30(1) and (2), the Agency did not address that
      evidence.  The Agency itself conceded that the study may have been
      "beneficial in establishing management priorities . . ." yet did
      not explain why that was not a "necessary" function.  See
      Disallowance Letter, State's Ex. F-4.

o     The Agency asserted that the relevant information was available
      elsewhere, yet it did not present any clear evidence of that fact.
      The Agency provided several national studies, but these were of a
      nature and scope different from the Alabama study and, for the
      most part, were not published until well after Alabama contracted
      for its study.  In fact, the Agency conceded that the Alabama
      studies "may have produced beneficial information not available in
      the national studies . . . ."  Agency's Brief, p. 20.  The Agency
      also provided a list of non- federal articles dealing with
      assistance programs, but included no analysis of how any of the
      articles provided the information which Alabama sought.  In fact,
      the Agency conceded that the Alabama researchers were aware of,
      and made use of, previous research on assistance programs.
      Agency's Brief, p. 19; see also State's Exs. C-1, DD, EE; Agency
      Exs. A-5, A-6.  This suggests that the Alabama researchers did not
      merely duplicate research already available.

o     The Agency alleged that a similar study was being conducted
      simultaneously in Florida, but provided only an executive summary
      of that study which did not appear to answer the questions of
      Alabama program officials. Certainly, to the extent that the
      Alabama study was duplicative of ongoing research in other states,
      the Agency could properly consider this a factor of some weight in
      determining whether the costs of the Alabama study were
      "necessary" costs.  But the Agency did not provide any detailed
      information about the Florida study, and does not seem to have
      seriously considered the State's allegation that part of the
      utility of the disputed study was its direct relevance to the
      particular AFDC program and population found in Alabama, which
      Alabama noted were different from those in other states.  State's
      Exs. AA and DD. (higher black population, high unemployment, no
      unemployed parent program, low benefit levels, conservative
      legislature, and poor tax structure).

o     The Agency may have placed too much weight on correspondence
      preceding the initiation of the study which it alleged indicated
      that the study was not necessary for the AFDC program and that the
      State itself was unwilling to fund the study with money earmarked
      for the AFDC program (most of the State share was donated by the
      University of Alabama).  Agency's Ex. A-1 through A-5; State's Ex.
      B-5.  The evidence in the record indicates that the objections
      noted by the Agency were an ordinary part of the State's
      deliberative process in reaching a determination on the initial
      proposal, primarily questioned the availability of funds rather
      than the need for the study, and resulted in changes in the final
      research contract which the State signed.  See Agency's Ex. A-6.
      8/ o     The Agency also alleged that some parts of the study were
      focused on issues which were beyond the scope of the AFDC program,
      such as teenage pregnancy, but did not identify whether this
      reason would apply to all the papers generated by the study, or
      merely some of them.  Agency's Brief, pp. 12, 21.  Since the study
      produced several discrete papers, there is clearly a basis to find
      unnecessary the costs of those papers which were not relevant to
      the AFDC program.  As we discussed above, however, the Agency
      itself acknowledged that at least some parts of the study provided
      direct benefits to the AFDC program.

We emphasize that the Agency may validly consider a wide range of
factors in determining whether to exercise its discretion to grant
retroactive approval.  For instance, the Agency stated concerns behind
the prior approval requirement which might affect retroactive approval:
the prior approval requirement provides an opportunity for Agency
involvement in the formulation of a study protocol, and in the
determination that the research is not duplicative and is a prudent use
of the scarce resources available for such research.  Disallowance
Letter, State's Ex. F-4.  Furthermore, the tone of the Agency
presentation indicated a concern that the costs were not reasonable in
amount. The Agency indicated that a primary purpose of the prior
approval requirements is to ensure oversight of items such as management
studies that can vary widely in price and where sound discretion must be
exercised to see that value received is in line with the amount of money
spent.  Agency's Brief, p. 14, quoting State's Brief, p. 20.  To the
extent that the costs were not reasonable in amount, approval clearly
may be denied for the excess costs. See OMB Cir. A-87, Att. A, sec.
C(1)(a). 9/ On the other hand, if the Agency seeks to rely on these
grounds, or again on a finding that the study was not "necessary," the
Agency should consider the evidence in the record supporting approval of
the expenditures, and should respond more specifically to the State's
arguments and the rebuttal evidence submitted by the State.  The Agency
should also consider any supplemental evidence submitted by the State
with any request for retroactive approval.

Conclusion

For the reasons stated above, we conclude that the disputed study was a
management study and that prior approval was required for the costs of
the study.  Thus, we uphold the disallowance subject to consideration by
the Agency of whether it will grant retroactive approval of all or part
of the disputed costs, in accordance with applicable standards and
departmental policies, if the State requests retroactive approval of the
costs within 30 days of the receipt of this decision.

 


                            ________________________________ Cecilia
                            Sparks Ford

 

                            ________________________________ Norval D.
                            (John) Settle

 

                            ________________________________ Judith A.
                            Ballard Presiding Board Member

 

 

1.     In Alabama, the program was referred to as Aid to Dependent
Children, or ADC, which was the name of the federal program until 1962.
Here, we refer to both the state and federal programs uniformly as AFDC.

2.     The Agency noted, in its brief at page 12, that the State did not
allocate any of the costs to these other programs.  The State submitted
an affidavit briefly explaining why it did not allocate any of the costs
to other programs.  State's Ex. AA. Since the question of whether the
disputed costs should properly be allocated to other programs was not
addressed in the disallowance determination nor fully developed by the
parties, we do not address it further in this decision.

3.     The affidavits submitted by the State indicate that the study,
while used to respond to legislative inquiries, had substantial
management benefits by providing data "which would assist in developing
policies..." for the AFDC program.  State's Ex. CC.  The budgetary
impact of the study was indirect.  See State's Ex. DD.

4.     We note that the State did not explain why the University of
Alabama is considered to be an outside consultant and not another state
agency.

5.     This statement appears in the HHS GAM chapter on audit resolution
in the context of determinations of allowable costs. Although this case
did not arise after an audit, it is a parallel circumstance involving a
determination that a cost is allowable, and there is no reason to doubt
that the Agency has the same discretionary ability to grant retroactive
approval.

6.     A large part of the discussion in the disallowance letter of
whether the costs were "necessary" explained why it is better to
evaluate necessity prior to funding a study, rather than addressing why
this particular study was unnecessary.

7.     We note that the Agency's finding that the study was not
"necessary" may have relied on an overly restrictive view of that term.
The Agency's language, "essential to the administration of the IV-A
program," suggests that the Agency considered as allowable only costs
without which the State could not operate the program at all.  Section
403(a)(3) of the Social Security Act, however authorizes FFP in costs
necessary for proper and efficient administration of the program.
Similarly, in State of Oregon Mass Transit Assessment, DGAB No. 402,
Supplementary Decision (1983), on which the Agency relied, the Board's
language reflected the statute, stating that a "necessary" cost must be
so essential that "the grant programs could not be run properly and
efficiently without it."  Id., p. 4 (emphasis added).  As the Board
stated in New Jersey Dept. of Human Services, DGAB No. 899 (1987), at p.
8, "[t]his does not mean that it would be impossible to run the grant
program without the cost item, but that the grant program would not run
well without it."  Neither the statute, nor the Board's statements,
would limit necessary costs to only those costs essential to the
continuing operation of the program in an absolute sense; both recognize
some business judgment in running a program "properly and efficiently."
The determination that costs are "necessary" is still a matter within
the Agency's discretion; however, the Agency should give more weight to
considering the State's evidence that the costs here were necessary in
order to improve operations, more accurately assess recipient needs, and
improve management focus.  See also New York Dept. of Social Services,
DGAB No. 415 (1983).

8.     The Agency argued that this evidence should be given more weight
than post-hoc affidavits submitted by the State, which the Agency argued
were self-serving statements.  While contemporaneous documents generally
are better evidence concerning what happened in a deliberative process,
the final decision to pursue the disputed study, and reasons supporting
that decision, must be given greater weight than statements made by
lower level governmental officials as part of a predecisional,
deliberative process.  These predecisional statements are a natural
consequence of laudable frank and open discussion within the State and
ought not be taken out of context.

9.     The Agency alleged that the entire contract was an attempt to
obtain a subsidy for the University of Alabama School of Social Work.
There is no evidence to support this allegation in the record; in fact,
there is evidence that the University of Alabama School of Social Work
was, itself, making a substantial contribution to further the research