Oklahoma Department of Human Services, DAB No. 963 (1988)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT:  Oklahoma Department of Human Services

Docket No. 87-73
Audit Control No. 06-60253
Decision No. 963

DATE:  June 15, 1988


DECISION

The Oklahoma Department of Human Services (State) appealed a decision of
the Administration of Children, Youth and Families (Agency) disallowing
$2,107,366 in claims for federal financial participation (FFP) under
Title IV-E (Foster Care and Adoption Assistance) of the Social Security
Act.  The disallowed claims were for direct costs (and associated
indirect costs) allocated to the Title IV-E program for the period
October 1, 1982 through June 30, 1986.  Three categories of direct costs
are at issue: (1) costs incurred at the county level for recruiting and
approving foster care and adoptive homes; (2) costs incurred at the
state level by the foster care unit and the adoption assistance unit of
the Division of Child Welfare (DCW); and (3) costs of other DCW central
office activities which federal auditors found were unallowable "social
services costs."  During the course of this proceeding, the Agency
conceded that the disallowance had been overstated by $12,751 due to an
error in calculating the third category of costs.

The State alleged that the costs had been allocated to Title IV-E in
full accordance with a federally-approved cost allocation plan (CAP).
The Agency did not dispute this, but argued that the cost allocation
plan was not dispositive because the costs were not allowable and
allocable to Title IV-E under Office of Management and Budget (OMB)
Circular A-87 and applicable program regulations.  The Agency based
these assertions principally on its view that the Circular required a
pro rata allocation of the disputed costs between the various federal
programs involved.

.For the reasons set forth below, we uphold the disallowance in part,
and reverse it in part, as follows:

       o  Recruitment and approval costs:  we reverse the disallowance
          for costs incurred prior to October 1, 1984 (based mainly on
          the existence of the approved CAP, which we conclude did not
          violate OMB Circular A-87) and uphold the disallowance for
          subsequent costs, subject to consideration by the Agency of
          alternate caseload statistics to calculate the amount.

       o  State-level foster care and adoption units:  we uphold the
          disallowance to the extent that the State allocated costs to
          Title IV-E which provided no benefit to that program.

       o  DCW central office costs: we uphold the disallowance subject
          to reexamination in light of the analysis set forth in this
          decision.

Our decision was sent in draft form to the parties for comment. The
Agency did not dispute the correctness of the Board's analysis, but
requested several clarifications, which we have made.  The State
challenged part of the Board's analysis on the third general category of
direct costs.  We have amended that analysis in several respects, but
have determined that the result we reached in our draft decision was the
correct one.

Below, we first set out some general background information and the
principles which guide our analysis.  We then discuss issues related to
each of the three general categories of direct costs, and explain what
effect our decision on these direct costs has on the associated indirect
costs and several other miscellaneous cost items.

General Background and Principles

I.  The Title IV-E program

The Adoption Assistance and Child Welfare Act of 1980, Public Law
96-272, amended the Social Security Act to create Title IV-E. Title IV-E
authorized a new program for foster care maintenance payments,
previously funded under Title IV-A of the Act (Aid to Families with
Dependent Children), and a federally-aided adoption .assistance program
for special needs children.  Title IV-E assistance is available for
children who would otherwise be eligible for Title IV-A assistance or,
in the case of adoption assistance, for children eligible for
Supplemental Security Income.

Under Title IV-E, FFP is available (to each state with an approved state
plan) in three types of expenditures:  foster care maintenance payments,
adoption assistance payments, and expenditures necessary for the proper
and efficient administration of the state plan.  See section 474(a) of
the Act.

Title IV-E is part of a set of federally assisted programs available to
aid foster children.  For foster children not eligible for Title IV-E
assistance, limited maintenance funds are available under Title IV-B of
the Act (Child Welfare Services). Title IV-B funds are also available
for other child welfare activities, including social services.  In
addition, states may use funds available under Title XX of the Act
(Social Services) to provide social services to Title IV-E recipients.
Some social service activities, which had been unallowable as
administrative costs when the foster care program was under Title IV-A,
are allowable under Title IV-E; unlike Title IV-A, Title IV-E contains
no general prohibition on claims for any activity which may be funded
under Title XX.

The three categories of disputed costs were general administrative costs
for foster care and adoption activities. The State had allocated these
to the Title IV-E program pursuant to a cost allocation plan amendment
which the HHS Division of Cost Allocation had approved to be effective
October 1, 1982.  Federal auditors found that the State had allocated to
Title IV-E all costs of county-level recruitment and approval activities
and State-level foster care and adoption units; the auditors asserted
that the State should have allocated to Title IV-E only a pro rata share
of these costs, based on the proportion of IV-E children in the
caseload.  The auditors also asserted that the State should have removed
all costs attributable to direction of social services from the DCW
central office cost center, before distributing any of these costs to
Title IV-E.

II.    Are the costs allowable under Office of Management and Budget
       Circular A-87?

The Agency argued that the costs at issue were unallowable charges to
the Title IV-E program primarily because OMB Circular A-87 precluded the
State from allocating more than a pro rata share of the disputed costs
to Title IV-E when other activities also benefitted from the costs.
With the exception of the third category of costs (discussed separately
below), the Agency raised no other issues relating to allowability, and
did not deny that the costs were of the types considered "necessary and
reasonable for proper and efficient administration" of Title IV-E.
Thus, in general, the issue of "allowability" is no more and no less
than the issue of whether the costs were allocated in accordance with
the requirements of OMB Circular A-87.

The Agency relied primarily on the provision governing allocation of
costs to federal grant programs contained in OMB Circular A- 87, at
Attachment A, section C.2.  (The Circular is made applicable to HHS
grants to states by 45 C.F.R. 74.171.)  The provision states:

       (a)  A cost is allocable to a particular cost objective to the
       extent of benefits received by such objective.

       (b)  Any cost allocable to a particular grant or cost objective
       under the principles provided for in this Circular may not be
       shifted to other Federal grant programs to overcome fund
       deficiencies, avoid restrictions imposed by law or grant
       agreements, or for other reasons.

       (c)  Where an allocation of joint costs will ultimately result in
       charges to a grant program, an allocation plan will be required.
       . . .

These provisions do not explicitly require any particular proportionate
or pro rata allocation of joint costs, as long as the costs are
allocated in an equitable manner to programs which actually benefit from
the costs and the State follows the allocation methodology set out in
the approved cost allocation plan.  While a grantee may not allocate
costs to a program in excess of the amount from which the program
benefitted, the Circular does not specifically preclude a grantee from
allocating costs which substantially benefitted one program to that
.program, even if a second program may also have benefitted from the
same costs.  The Circular provisions do contemplate some equitable
determination of relative benefits among several programs to which costs
may be assigned, but the provisions are at best ambiguous when costs are
as easily and generally assignable in whole or substantial part to one
program as another.  Stated another way, the provisions might reasonably
be read to require that costs of services used in part by each program,
such as the costs of a telephone system, should be distributed among
those programs on something like a pro rata basis.  On the other hand,
the provisions appear to provide less guidance (and therefore more
federal agency discretion) concerning costs which reasonably could be
deemed fully assignable to each one of several programs, such as the
costs of eligibility determinations required by each program.  In the
latter situation, it would appear that an agency has considerable
discretion to determine which of a wide range of methodologies would be
"equitable," including a pro rata distribution as well as assignment of
the costs exclusively to one of the fully benefitting programs.  As
discussed below, the costs in this case are generally of the latter
kind.

Thus, in light of the plain language of the Circular, we conclude that
the Circular does not generally require a pro rata allocation of costs
(although it would allow an agency to establish such an allocation
requirement in a cost allocation plan).  We note that the Circular
applies government-wide to many different programs and federal agencies.
To interpret the provisions as narrowly as the Agency suggested would
unduly restrict the federal government's discretion in approving
equitable allocation methods in a wide variety of circumstances. 1/

Having concluded that OMB Circular A-87 may permit but does not require
the pro rata allocation methodology, the issue becomes essentially
whether the Agency may retroactively impose its preferred pro rata
methodology now, long after federal approval of Oklahoma's cost
allocation plan containing a different methodology.  We next discuss the
effect of an approved cost allocation plan.

III.  The effect of an approved cost allocation plan

A cost allocation plan (CAP) is "a narrative description of the
procedures that the State agency will use in identifying, measuring, and
allocating all State agency costs incurred in support of all programs
administered or supervised by the State agency."  45 C.F.R. 95.505.  An
approved CAP is not a rigid, unalterable "contract" binding the parties,
and approval of a CAP cannot make a cost allowable or allocable contrary
to statute or regulation.  See California Dept. of Social Services, DGAB
No.  855 (1987).  Approval of a CAP does not constitute approval of any
specific costs claimed.  See State's Exhibit (Ex.) 6.

Under 45 C.F.R. Part 95, the Director, Division of Cost Allocation
(DCA), in the appropriate HHS Regional Office is responsible for
reviewing and approving or disapproving CAPs and CAP amendments for many
HHS programs, including those involved here.  The programs involved here
have no separate requirements for CAP approval by program officials,
although DCA is to consult with affected operating divisions of the
Department before approving a CAP.  See 45 C.F.R. 95.511.

Based on its analysis of CAP approval requirements, the Board has
concluded it would not uphold an allocation method which was clearly
inequitable, which had been approved based on incorrect, inconsistent,
or incomplete data submitted to DCA, or which was prohibited by statute
or regulation.  See, e.g., California, supra; Oregon Dept. of Human
Resources, DGAB No. 729 (1986), p.  15-16; Massachusetts Dept. of Public
Welfare, DGAB No. 335 (1982).

This does not render approval of a CAP meaningless.  Approval of a CAP
by DCA gives rise to a presumption that the approved allocation methods
are valid.  DCA is the division to which the Secretary has delegated
authority to review CAPs, and the Board will defer to its .expertise,
absent a compelling basis for concluding that the approved plan was
improper.  See 45 C.F.R. 95.501 et seq.; Michigan Dept. of Social
Services, DGAB No. 224 (1981).

This standard of deference to DCA determinations is supported by the
regulations establishing the process for amending a state CAP.  45
C.F.R. 95.509; 45 C.F.R. 95.515.  In some cases, an amendment may apply
retroactively, such as when an earlier date is needed to avoid
"significant inequity," or when approval was based on faulty information
or was contrary to a federal statute or regulation.  45 C.F.R. 95.515.

Although the Agency asserted that its position here did not call for
disapproval or amendment of Oklahoma's CAP, the Agency's position
clearly would require the State to claim costs in a manner different
from the allocation methods set out in the CAP approved by DCA.  See
Agency Letter dated February 26, 1988.  The Agency argued that it "took
a reasonable and appropriate method to allocate those costs among the
benefitting programs . . . ." Hearing Transcript (Tr.), p. 15.  Given
the existence of the State's approved CAP, however, whether the Agency's
method was reasonable and appropriate is not dispositive by itself; the
issue here is whether there are circumstances sufficiently compelling to
warrant retroactively changing the CAP methodology. Our analysis of this
issue is set forth below in the context of each of the three categories
of costs involved.

Specific Disputed Costs

I.    County-level costs of recruitment and approval of foster and
      adoptive homes

The State claimed FFP under the Title IV-E program in the total
county-level costs of recruitment and approval of foster and adoptive
homes.  Title IV-E regulations clearly identify recruitment and approval
expenditures as allowable costs necessary for the administration of the
program.  45 C.F.R.  1356.60(c)(2)(vii).  2/  The State alleged that all
of the costs were both necessary and allocable to Title IV-E, and, thus,
that the CAP allocation was reasonable and permissible.  The State
provided evidence to show that recruitment of the largest possible
number of homes was required to meet IV-E objectives and that virtually
all homes served IV-E children eventually.  The State also argued that
Title IV-E required it to apply approval standards to non-IV-E children
and that the CAP allocation was within the scope of flexibility provided
by Agency regulations.

The Agency found that recruited and approved homes were used both for
children receiving Title IV-E assistance (IV-E children) and for
children not receiving Title IV-E assistance (non-IV-E children), at
least some of whom were eligible for assistance under Title IV-B.  3/
The Agency  conceded that the costs had been allocated in accordance
with the State's approved CAP, but contended nonetheless that some of
the costs were improperly allocated to Title IV-E.  The Agency argued
that the IV-E program benefitted only in proportion to the percentage of
children who received Title IV-E assistance compared to all children
placed in the homes.  4/  Thus, the disallowance calculation substituted
an allocation methodology based on the relative caseload counts of IV-E
and non-IV-E children.

.Based on the principles discussed above and further below, we reverse
the disallowance in part, because we find no substantial basis to
overturn the approved CAP retroactively for recruitment and approval
costs for the period October 1, 1982 through October 1, 1984.  However,
although we find that the CAP methodology was within the discretion of
DCA to approve, we find also that the Agency had the discretion to
require allocation by a caseload method on a prospective basis.  We,
therefore, uphold the disallowance for subsequent time periods, based on
evidence in the record that, in response to a request by the Agency, the
State agreed to revise its CAP effective October 1, 1984.  Our decision
permits the State an opportunity to show that the disallowance for this
period should be recalculated, using more accurate caseload statistics.

      a.  Allocation of recruitment and approval costs

In light of the nature and extent of the benefit which Title IV-E
receives from these costs, we conclude that it was within the discretion
of DCA to approve the methodology in the CAP here.  We rely in
particular on the State's evidence that the entire pool of recruited and
approved homes served to fulfill Title IV-E program requirements and
that virtually every home was used by a IV-E child at some time.  The
Agency did not contest this evidence.  Thus, we find that the total
costs could reasonably be considered as providing a benefit to Title
IV-E, and that the nature of the costs did not make it inequitable to
charge that program for the costs.

We find no other basis to justify retroactively  substituting an
alternative choice of methods for that of DCA.  We find the following
factors persuasive in our determination that the CAP allocation was
within DCA's discretion to approve but that the Agency could
prospectively require a change:

       o  The Act supports the State's position that allocation to Title
          IV-E was permissible.  Section 471(a)(10) of Title IV-E
          requires that states apply Title IV-E standards to foster
          homes used by both Title IV-E and Title IV-B recipients.  The
          section does not specify to which program costs should be
          charged.  Generally, activities required by the statute
          authorizing a grant program are considered necessary for the
          administration of the program and can be appropriately
          allocated to that program, absent a specific preclusion.   See
          Joint Consideration: Reimbursement of Foster Care Services,
          DGAB No. 337 (1982). Placement of the requirement in Title
          IV-E is not necessarily dispositive, however, since the
          activities related to both Title IV-E and Title IV-B children.
          Thus, we do not think it precludes the Agency from
          prospectively requiring some type of pro rata allocation of
          the costs between the two programs.

       o  Similarly, the Agency's regulatory policies provide some
          support for the State's view that its original CAP methodology
          was permissible, but do not preclude the Agency from
          prospectively requiring pro rata allocation.  The preamble to
          proposed Title IV-E regulations indicated that the Agency
          contemplated that states would have "flexibility to choose
          which program to charge these costs and the method used for
          charging and claiming costs . . . ," and the proposed
          regulation stated:  "To the extent that . . .  activities may
          also be claimed under another federally-assisted program, the
          State may decide in which program costs for such activities
          will be claimed."  45 Fed. Reg. 86817, 86841 (Dec. 31, 1980)
          (proposed 45 C.F.R. 1356.80(c)).  As the Agency pointed out,
          however, this "flexibility" was tempered by a requirement in
          the proposed rule for a CAP which would "allocate costs
          applicable to children not covered under Title IV-E to the
          appropriate program." 45 Fed. Reg. 86841-42.  5/  While the
          flexibility language in the preamble to the proposed rule was
          clearly not a blanket grant of authority to states to charge
          costs of IV-B children to IV-E, it is relevant that the Agency
          recognized that states would have some choices with respect to
          some costs benefitting both programs, so long as that choice
          was exercised in an approved CAP.

       o  Nothing in the final regulations or Agency guidance prohibits
          the allocation of the costs to Title IV-E; moreover, as we
          noted above, the Agency stated that it did not challenge the
          CAP approval itself.  6/  The Agency issued a policy
          announcement in 1985 which indicated that certain other
          allowable costs, not in issue here, should be allocated
          between programs using a caseload or similar pro rata method.
          Hearing Ex. K (PA-ACYF-85-01, November 18, 1985).  While the
          Agency provided in a policy announcement issued October 11,
          1987 that states would be required to use a case count or
          other equitable basis to allocate recruitment and approval
          costs among programs, this announcement was made effective
          only prospectively, on the advice of counsel.  Hearing Ex. J.
          (PA-ACYF-87-05); Tr., p. 59.

After the State received notice of the Agency's objection to the
allocation methodology, however, the State could not continue to rely on
CAP approval.  On July 25, 1984 the Agency notified the State of its
objection to the allocation of the total recruitment and approval costs
to Title IV-E, sending a policy memorandum explaining .the position with
a request that the State alter its allocation methodology.  Ex. 9.  On
September 18, 1984, the State responded that it disagreed with the
policy, but stated: "ln view of the policy interpretation . . . we agree
to revise our Cost Allocation Plan effective 10-1-84 so that these costs
can be prorated henceforth."  Ex. 10.  The State did not actually amend
its CAP until October 29, 1986, over two years later. Disallowance
Letter, Ex. 1.  7/

The State argued before the Board that the policy memorandum did no more
than affirm that recruitment and approval costs could be charged to the
IV-E program only to the extent they were "necessary" IV-E costs and
advise that costs which did not benefit the IV-E program at all should
not be charged to that program.  The State argued that this did not
preclude allocating the costs to Title IV-E, since all of the costs
provided some benefit to, and were necessary for, Title IV-E.  The
memorandum states specifically, however, that "States must allocate or
prorate costs for recruiting and licensing . . . ."  Ex. 9.  The State's
response shows that the State understood that this interpretation
required it to revise its CAP.

Since the State had notice that its allocation methodology was
unacceptable to the Agency, and had even agreed to amend its CAP, we
find that the State could no longer rely on an outdated approved CAP
after October 1, 1984.  The State had then received notice that approval
of the CAP would be withdrawn, had agreed to revise the CAP, and had
sufficient time to propose a CAP revision.  In promising to amend its
CAP, the State discouraged the Agency from formal procedures requiring a
CAP revision pursuant to 45 C.F.R. Part 95.  To permit continued
reliance on the CAP would be unwarranted under these circumstances.

      b.  Calculation issues

We find that the Agency should consider the alternate caseload
statistics which the State said it could provide to substitute for the
rough data provided to the auditors. See Ex. 3, p. 2. While the Agency's
calculation was reasonable in light of the data the auditors had
received from the State, the State was never notified that it would be
precluded from submitting more accurate data, and the State identified
various factors which may render unreliable the rough data provided to
the auditors. Moreover, at the hearing, the Agency agreed to consider
alternate caseload statistics if submitted in a timely manner.  Tr., p.
189.  8/

We limit the State's opportunity to propose alternate caseload
statistics to a 45-day period following receipt of this decision, or a
longer period if the Agency permits, because we find that the record
contains evidence that the State has had considerable time to develop
data.  See Hearing Exs. C and D.

In sum, with respect to recruitment and approval costs, we reverse the
disallowance with respect to the period prior to October 1, 1984, and
uphold the disallowance for the period thereafter subject to
consideration by the Agency of the State's alternate caseload
statistics.  The State should submit its proposals, and supporting
documentation, within 45 days of receipt of this decision, or such
longer period as the Agency may permit.  II.    State-level DCW foster
care unit and adoption unit costs

The State claimed FFP under the Title IV-E program in the total costs
incurred by the foster care unit and the adoption unit at the state
level.  The Agency argued that, since these units served both IV-E
children and non-IV-E children, the CAP should not control, and the
costs of the units should be allocated between Title IV-E and non-IV-E
programs, for reasons similar to those asserted for recruitment and
approval costs.

The State noted that the costs had been allocated pursuant to the
approved CAP, and argued that an overwhelming proportion of the costs
were "necessary" to the Title IV-E program and benefitted that program.
According to the State, the program-wide activities of the units "would
have continued to be necessary if the non-IV-E caseload had suddenly
disappeared."  State's Brief, p. 37.  The State also pointed out that
some of the units' activities were necessary to fulfill specific IV-E
requirements, such as operation of a case review system.  Specifically,
the State asserted that Title IV-E benefitted from 82 to 87 percent of
the costs of the foster care unit, and at least 85 percent of the costs
of the adoption unit (including all the costs of the program
wide-activities of each unit).  See Ex. 2, p. 7; State's Brief, pp.
37-39.  The State alleged that the reason for allocating the total costs
to Title IV-E was for administrative convenience.

For the reasons discussed previously, we find no substantial basis to
disturb the approved CAP allocation method by substituting a pro rata
allocation method.  We again rely on a finding that a pro rata
allocation was not required by applicable provisions.  Furthermore, as
noted above, the Agency stated that it did not seek disapproval of the
CAP and did not specifically contest the State's allegation that Title
IV-E benefitted from most of the costs.

On the other hand, we uphold the disallowance in part because we find
that, while a pro rata allocation was not necessarily required, it was
improper to allocate to Title IV-E substantial costs from which the
program did not benefit at all.  We do not agree with the State that the
amount of costs which provided no benefit to Title IV-E was so
insubstantial that allocating those costs Title IV-E can be justified on
the basis of administrative convenience.  Even accepting the State's
allegation that .all program-wide activities of the units benefitted
Title IV-E, the State's own figures indicate that up to 18 percent of
the foster care unit costs and up to 15 percent of the adoption unit
costs benefitted only non-IV-E children.  Thus, the State allocated
costs to Title IV-E in excess of the extent of benefits received by the
program.  This was a clear violation of the requirement in OMB Circular
A-87, Attachment A, section C.2, that costs are allocable to a program
only to the extent of the benefits received.

We conclude that the CAP methodology was inequitable and should not
control to the extent that it permitted the State to charge a
substantial amount of costs to Title IV-E which were clearly not
allocable to that program.  Disallowance of these costs may also be
warranted on the basis that they were unallowable, in light of the
State's concession that they were not "necessary" costs to Title IV-E.
State's Brief, pp. 37-39.  FFP is available only in costs which are
"necessary" for the proper and efficient administration of the program.
45 C.F.R. 1356.60(c); OMB Circular A-87, Att. A, sec. C(1)(a).  We
therefore uphold the disallowance to the extent that the disputed costs
benefitted only non-IV-E children.

In light of the State's obligation to document its costs, we uphold the
disallowance of the maximum amount which could be based on the ranges
provided by the State (18 percent of the costs of the foster care unit
and 15 percent of the costs of the adoption unit).  The Agency should
consider any information to increase the accuracy of the disallowance
which the State submits to the Agency within 45 days after receipt of
this decision, or such longer period as the Agency may permit.

III.  State-level DCW central office costs

       a.  Issues

The Agency disallowed part of the State's Title IV-E claims for FFP in
costs incurred, at the state level, by the central office of DCW, during
the period September 30, 1982 through September 30, 1983 (FY 1983).  The
approved CAP in effect for this period provided that the State would
directly distribute the costs of full-time personnel who worked on an
abuse and neglect grant to that cost objective, and distribute remaining
costs "between Title IV-E and Title IV-B based upon the proportion of
salaries and benefits of other Child Welfare staff distributed to .those
programs."   Ex. 5, p. 19.  The State amended its CAP for subsequent
fiscal years to allocate DCW central office costs using the percentages
obtained from a random moment sample (RMS) of county workers' time.
Audit Report, Ex. 4, p. 6.  (For a description of the State's RMS
system, see Exhibit 5.)

Since the amended CAP resulted in significantly less charges to Title
IV-E, the auditors compared the two methods.  The auditors noted that
the RMS percentages for fiscal year 1984 allocated about 75 percent of
county workers' time to Title XX.  The auditors reasoned that the State
should have removed a corresponding percentage of costs from the central
office cost center prior to distributing any costs to Title IV-E because
social services are unallowable under Title IV-E.  The auditors
recommended a disallowance calculated for each quarter of FY 1983 by
removing about 75 percent of the total costs from the DCW central office
cost center and by then using the State's distribution percentages.  9/
The auditors also recommended an adjustment to account for the audit
findings about how the costs of the foster care and adoption units and
recruitment and approval costs should have been allocated, as well as
another adjustment described as "related to the use of the RMS data
which included non-IV-E costs during the period October 1, 1983 through
December 31, 1984."

.Based on the audit findings, the Agency disallowed FFP in DCW central
office costs charged to Title IV-E which the Agency said were related to
unallowable social services.  The Agency cited as authority 45 C.F.R.
1356.60(c)(3).   That regulation provides:

       Allowable administrative costs do not include the  costs of
       social services provided to the child, the child's family or
       foster family which provide counseling or treatment to ameliorate
       or remedy  personal problems, behaviors or home conditions.

The Agency reasoned that the central office supervised all child welfare
activities in the State and, therefore, some of the central office costs
were attributable to unallowable social services.  According to the
Agency, the RMS percentages used by the auditors corresponded to the
percentage of central office costs of supervising these unallowable
social service activities.

      b.  Analysis of disallowance of alleged social services costs

The Agency is correct that CAP approval cannot justify charging
unallowable costs to any program.  (See our discussion above.) To
determine whether such charging occurred in the circumstances of this
case, however, we must determine:  (1) whether the cost pool did contain
unallowable social services costs; and (2) if so, whether the State's
allocation method resulted in charging those costs to Title IV-E in the
amount disallowed.

The State argued that the cost pool contained no unallowable social
service costs because the central office employees did not provide
treatment or counseling services themselves.  The State said that social
services of the type covered by the regulation were provided by
contractors or by county caseworkers, who are directly supervised at the
county level.  Thus, the State reasoned, the central office functions
were primarily administrative and managerial, not treatment and
counseling.  The State noted that activities such as "case management
and supervision" and "referral to services" are specifically allowable
under section 1356.60(c)(2) of Title IV-E regulations, arguing that this
supported the State's position that all central office functions were
allowable.

The State relied primarily on an affidavit by the Chief of Program
Services for the Division of Children and Youth .Services, who explained
that the central office staff were "upper level managers" establishing
"general policies," and that the staff neither supervised nor provided
counseling or treatment services.  Ex. 23.

The primary flaw in the State's argument and evidence is that it assumes
that the relevant question is whether central office staff were
themselves actually providing or supervising treatment and counseling
services.  The issue, however, is whether the costs of central office
staff are in part the costs of providing such services.  As used in
grant programs, the term "costs" generally includes the types of costs
incurred in central office functions such as budgeting and personnel,
whether they can be readily identified with a specific cost objective as
a direct cost or must be distributed to various objectives using an
indirect cost rate.  See OMB Circular A-87, Att. A, paras. D, E and F.

The record shows that the DCW central office staff performed functions
such as hiring and firing personnel, overseeing administration of county
office Child Welfare staff, establishing policies for contracts with
providers of services, preparing budgets, and program evaluation.  Given
the nature of these functions, we think it is logical to assume that the
central office was performing comparable functions relative to all of
the activities of Child Welfare staff at the county level (including
counseling and treatment services), absent any showing by the State to
the contrary.  For example, if the central office was responsible for
hiring all Child Welfare personnel, then the central office would have
hired personnel providing counseling and treatment, and if the central
office established policies for contracts with service providers, then
those policies would have applied to contractors providing treatment and
counseling services.

We also find it significant that the State used the RMS study of county
workers' time in its allocation method for both FY 1983 and subsequent
years.  In our view, this indicates a recognition by the State that
there was at least some relationship between central office functions
and county workers' time.  The State did not specifically deny that such
a relationship existed, but argued that its original allocation method
was based on the assumption that no such relationship existed (since no
costs were allocated to Title XX) and that the change in method was
adopted only under pressure from the Agency.  The State .pointed out
that, although its letter explaining the change in allocation method
stated that the new method "more truly reflect[s] all the activities of
the Child Welfare local staff," the State letter "nowhere says that it
believes that the new allocation method better reflects the work of
central office staff."  State's Comments on Board Draft Decision, p. 8
(emphasis in original, footnote omitted).  In our view, however, the
validity of any cost allocation method depends on there being some
relationship between the costs to be allocated and the distribution base
used.  Here, it is undisputed that some of the county workers were
engaged in providing or supervising counseling and treatment services.
Absent a showing that the central office functions were not performed
for these workers as well as other county workers, we must reject the
State's position that none of the central office costs were the costs of
providing these services.

Finally, we also reject the State's argument that its CAP reflected a
permissible interpretation of the Title IV-E regulations as allowing
reimbursement for upper-level administrative activities arising from the
provision of treatment and counseling services.  10/  This argument is
based on the premise that by permitting FFP in activities such as "case
management" and "referral to services," the regulation permits FFP in
local costs arising from providing treatment and counseling services and
that, therefore, it is illogical to deny FFP for the more remote costs
of "management of the local management" by the central office.  State's
Comments on Board Draft Decision, pp. 5-6.  The "case management" and
other activities for which FFP is available under the regulation,
however, are not local management related to actually providing to
foster children or their families the treatment and counseling services.
They are instead activities .specifically required as part of a Title
IV-E state plan, which are designed to ensure that the cases of children
receiving Title IV-E maintenance payments are well-managed and
supervised, so that the children do not simply drift in the foster care
system but receive any services necessary to move them out of the
system.  The preamble of the relevant regulation distinguished these
allowable activities from unallowable "direct services." 45 Fed. Reg.
86817, 86826 (Dec. 31, 1980).  The basis of the distinction, as the
wording of the regulation indicates, is the nature of the activities,
not the level of government at which costs are incurred.  Central office
functions, such as those at issue here, generally support all activities
at the local level and, thus, are properly considered costs of all of
those activities.

Thus, we conclude that some of the costs incurred by the central office
here were attributable to the cost objective of providing treatment and
counseling services, and therefore were unallowable as charges to Title
IV-E.  11/

Our conclusion that some of the costs the State included in the DCW
central office cost center are the costs of providing unallowable social
services is not dispositive here, however. Unlike certain types of cost
such as bad debts or interest expenses which are prohibited under OMB
Circular A-87 as charges to any federal program, social services costs
may be properly charged either to Title IV-B or to Title XX, according
to the Agency's own witness.  Tr., p. 63.  As this Board explained in
Minnesota Dept. of Public Welfare, DGAB No. 466 (1983), .the mere
inclusion in a cost pool of an expense which could not be properly
charged to a particular program does not mean that the allocation method
results in an improper charge.  An appropriate cost allocation method
would distribute those expenses to programs which benefit and to which
the costs may properly be charged (here, Title IV-B or Title XX).  The
Board described removal of questioned costs from a cost pool as a last
resort to be used only if the allocation method does not assure proper
charging.

Thus, the issue here is whether the State's allocation method factored
out as charges to Title IV-E the costs of unallowable social service
activities of the DCW central office.  There is no dispute here that the
RMS system was effective in ensuring that county workers' time
attributable to unallowable social services was not allocated to Title
IV-E.  The auditor testified that the State's distribution base for the
DCW cost center, even for FY 1983, was based on the RMS system.  Thus,
it is reasonable to assume that the State's method effectively assured
that Title IV- E was not charged for such services, so long as the State
in fact distributed to IV-E only the costs representing the exact
percentage that other Child Welfare staff salaries and benefits
attributed to IV-E bears to total other Child Welfare staff salaries and
benefits.

The record is not clear on whether the State distributed unallowable
costs to Title IV-E.  The State itself never clearly explained precisely
its allocation methodology; it merely alleged that the allocation was
consistent with the terms of the CAP. The CAP provision is ambiguous,
however.  The CAP states that, after Abuse and Neglect grant costs are
directly charged, remaining costs "will be distributed between Title
IV-E and Title IV-B based upon the proportion of salaries and benefits
of other Child Welfare staff distributed to those programs."  Ex. 5, p.
19.  The CAP provision could be read to require allocating to Title IV-E
either the exact percentage of total other Child Welfare staff salaries
and benefits distributed to Title IV-E, or the relative percentage of
IV-E salaries and benefits compared to Title IV-B salaries and benefits.
12/ Only the exact percentage method assures that Title IV-E is not
burdened with unallowable social services costs, and, thus, it is the
only reasonable interpretation of the CAP.

The State pointed out that the Agency did not allege that the CAP
provision was ambiguous and that the auditor had testified that he
understood it.  We do not find these factors significant here since the
auditor also appeared confused about what method the State actually used
and since the CAP provision is ambiguous on its face.  Given the
ambiguity in the CAP language, and the general principle (discussed
above) that CAP approval cannot justify charging unallowable costs to a
program, the State's reliance on CAP approval is meaningful here only to
the extent the State applied a CAP interpretation which did not result
in allocating unallowable social services costs to Title IV-E.

If the State properly interpreted the CAP and applied the exact
percentage method, then no adjustment of its claims is necessary. The
disallowance was predicated on the assumption that the State used the
relative percentage method, or otherwise distributed unallowable social
services costs to Title IV-E.  But the Agency provided no evidence to
support that assumption.  Even though the Board directly asked the
federal auditor whether the State's distribution base accounted for
social services costs (for example, by using the exact percentage method
described above), the response was not clear.  See Tr., pp. 162, 140-46;
Supplemental Affidavit of Harley Botchlet, submitted January 15, 1988.
13/  Indeed, the auditor's description at the hearing of the State's
distribution base seemed to indicate that the State used the exact
percentage method (see note 7 above).  If the State did so, then the
disallowance duplicates recognition of social service costs and is
incorrect.

If the State instead used the relative percentage method, some
adjustment is appropriate.  Removal of the costs from a cost pool,
however, should be used only as a last resort.  Minnesota, supra.
Recalculating the claims using the exact percentage method itself would
be more accurate and consistent with the CAP. The State should have the
opportunity to show that it used the exact percentage method and, if
not, to have the disallowance recalculated based on the exact percentage
method.  Recalculation is warranted also because the Agency determined
the amount to remove from the cost center based solely on the fiscal
1984 county RMS, and apparently did not take into account the two
state-level units for foster care and adoption assistance.  The Agency
provided no rationale for this omission, and we find that these units
should be represented in the distribution base.

We find that the State should submit information to the Agency to show
how it calculated what percentage of the cost center to distribute to
Title IV-E.  The State should submit this information within 45 days
after receipt of this decision, or such longer period as the Agency
permits.

      c.  Other adjustments

The Agency also revised the distribution percentages to reflect
reductions in the percentages of Child Welfare employees' salaries and
benefits distributed to Title IV-E made in the audit and discussed in
sections I and II above (recruitment and approval activities and the two
units of DCW).

Clearly, this adjustment must be recalculated in light of our
conclusions with respect to these disputed costs.  Since this second
adjustment would not alter the allocation methodology, but merely
substitute more accurate figures on the distribution of salaries and
benefits required by the approved methodology, we uphold the application
of this adjustment in principle, with the amount to be recalculated.

The Agency also disallowed FFP in Title IV-E costs incurred during the
five quarters ended December 31, 1984.  For this period, the Agency
asserted only that the State, in determining the percentage of DCW
central office costs attributable to Title IV-E, erroneously included
all recruitment and approval costs as Title IV-E costs.

In light of our conclusion that recruitment and approval costs were
properly allocated to Title IV-E by the State until October 1, 1984, we
uphold this adjustment only with respect to the period after October 1,
1984.

IV.    Indirect Costs

The parties did not separately address the disallowance of indirect
costs.  The disputed indirect costs were calculated on the basis of the
direct costs discussed above.  Thus, the Agency should recalculate the
disallowance of indirect costs in accordance with our conclusions above.

Conclusion

In sum, we uphold the disallowance in part and reverse it in part, as
follows:

       o  recruitment and approval costs:  we reverse the disallowance
          for costs incurred prior to October 1, 1984 and uphold the
          disallowance for subsequent costs, subject to consideration by
          the Agency of alternate caseload statistics to calculate the
          amount.

       o  state-level foster care and adoption units:  we uphold the
          disallowance to the extent that the State allocated costs to
          Title IV-E which provided no benefit to that program.

.       o  DCW central office costs:  we uphold the disallowance subject
          to reexamination and recalculation in light of the analysis
          set forth in this decision.

The State will have 45 days from receipt of this decision, or such
longer period as the Agency permits, to submit: (1) alternate caseload
statistics regarding the recruitment and approval costs, (2)
documentation to establish what percentage of the costs of the DCW
foster care unit and adoption unit were necessary to the Title IV-E
program, and (3) information about the distribution base used for DCW
central office costs.

 


                            ________________________________ Cecilia
                            Sparks Ford

 


                            ________________________________ Norval D.
                            (John) Settle

 


                            ________________________________ Judith A.
                            Ballard Presiding Board Member

 

 


1.   We note that this Department has previously permitted costs of
applying standards to some types of service providers to be allocated
entirely to federal programs which benefitted from those costs, even
though persons other than program recipients were served by the
provider.  Cf. Michigan Dept. of Social Services, DGAB No. 370 (1982)
(summer camp licensing costs allocable to Title XX as long as some
welfare recipients attend camp); Pennsylvania Dept. of Public Welfare,
DGAB No. 277 (1982) (state licensing costs allocable in full to federal
programs when identical to federal standards).

2.   The regulation refers to foster homes only, but an Agency policy
announcement indicates that the section applies to recruitment and
approval of adoptive homes as well.  Ex. 19 (ACYF-PA-83-1, August 11,
1983).  The Agency did not attempt, in this case, to distinguish between
foster homes and adoptive homes.

3.   The Agency argued that not all non-IV-E children served by foster
homes received maintenance payments under Title IV-B since only limited
funds are available under that program for maintenance payments.  As the
State pointed out, however, all the non-IV-E children were eligible for
Title IV-B funds, and, at the time of recruiting and approving the
homes, the State did not know which payments would actually be funded
under Title IV-B.

4.   The Agency also argued that allocating costs only to Title IV-E
effectively shifted the costs to avoid funding restrictions under Title
IV-B.  The mere presence of funding restrictions in Title IV-B is not
conclusive evidence that impermissible shifting of costs occurred,
particularly in light of the interrelated nature of the Title IV-B and
IV-E programs.

5.   Also, an Agency official involved in drafting the proposed
regulations testified that the specific reference to "flexibility"
applied only to expenditures which would have been have been unallowable
when the foster care program was under Title IV-A (such as case plans
under section 427 of the Act). Tr., pp. 26-27, 47-48.  It is unclear
whether such expenditures would include any recruitment and approval
costs.

6.   While emphasizing that allocation should be guided by a CAP, the
final regulations contain examples of administrative costs allowable
under Title IV-E.  45 C.F.R. 1356.60(c)(1-2).  The first category are
costs directly related only to Title IV-E, which are allowable under
Title IV-E and "may not be claimed under any other section or federal
program."  Id., at (c)(1). The second category contains other
administrative costs allowable under Title IV-E.  This category includes
recruitment and approval costs.  Only the last item listed in the second
category ("related agency overhead") specifically limits claims to "a
proportionate share" of the total costs involved.  Id. at (c)(2)(ix).
The only other reference to allocation issues is in the paragraph
preceding these examples of allowable costs, which states that the CAP
shall identify costs allocated and claimed under Title IV-E.  45 C.F.R.
1356.60(c).

7.   The Agency separately sent to the State, on August 23, 1984, a
report of the results of a general financial review which did not cite
any concern over recruitment and approval cost allocation.  It is clear
from the State's September 18, 1984 letter that the State understood
that allocation concerns regarding recruitment and approval costs were a
separate matter. Ex. 10.

8.   In the disallowance letter, the Agency refused to consider
alternate caseload statistics, saying generally that it could not
reimburse claims based on estimates of costs rather than actual
expenditures.  Ex. 1.  Estimation is not per se wrong when the costs
were actually incurred, however, as long as the estimate has a basis in
actual fact, and is as accurate and equitable as reasonably possible
under the circumstances.  Cf. New York State Dept. of Social Services,
DGAB No. 537 (1984); New York State Dept. of Social Services, DGAB No.
542 (1984).  Nothing in this decision modifies our earlier decisions.
The Board does not rule here on the merits of any particular caseload
statistics submitted by the State.  The Agency should consider any such
submission and determine (if the statistics involve an estimate) whether
the estimate meets the criteria stated in prior Board decisions.

9.   When asked to explain how the State had distributed the cost
center, the auditor described the State's process as follows: first, the
State took the salaries and benefits of child welfare county workers
allocated to IV-E under the RMS system; next, the State added in the
salaries and benefits of the state-level foster care and adoption units;
and, finally, the State divided this figure by total child welfare
salaries and wages to determine the percentage of the cost center which
would be allocated to IV-E.  Tr., pp. 127-129.  The auditor indicated he
might need to confirm this from his workpapers; however, his
supplemental affidavit neither confirmed nor specifically contradicted
this description.  Supplemental Affidavit of Harley Botchlet, submitted
January 15, 1988.

10.    As we discuss below, the CAP is in our view ambiguous and does
not necessarily embody an interpretation that would allocate to Title
IV-E costs associated with administering county activities of providing
unallowable social services.  While, as the State alleged, it may have
been clear on the face of the CAP that the State's method was not
charging any central office costs to Title XX, this did not necessarily
mean that Title IV-E would be charged for a greater proportion of the
central office costs than those associated with allowable Title IV-E
activities at the county or State unit level.

11.    This does not mean that we necessarily agree with the Agency
       about the extent to which unallowable social services were
       included in the cost center.  The auditors appeared to be using
       percentages of county workers' time attributed to any social
       service by the RMS system; the Agency's own witness acknowledged
       that some social services could be charged to Title IV-E.  The
       regulations make only certain types of social services
       unallowable as charges to IV-E.  45 C.F.R. 1356.60(c)(3).
       Moreover, the Agency did not take into account the relationship
       between the DCW central office and the foster care and adoption
       units in determining the extent to which the DCW foster care
       activities were unallowable social services.

12.    For a simple example of the difference in the two methods, assume
       that the random moment study and the allocation of other state
       Child Welfare staff indicates that 40 percent of all salaries and
       benefits were attributable to Title IV-E, 40 percent to Title
       IV-B, and 20 percent to Title XX (Social Services).  Using the
       exact percentages to determine the amount of central office costs
       to be distributed to Title IV-E would result in allocating 40
       percent of those costs to Title IV-E (with the remaining 60
       percent presumably allocated to Title IV-B).  Using the relative
       percentages to distribute the costs between Titles IV-E and IV-B
       would result in allocating 50 percent of those costs to each of
       the two programs.

13.    As a result of the questions posed by the Presiding Board Member
       at the hearing in this case, the Agency reduced the disallowance
       by $12,751.  The Agency determined that, during two quarters, the
       State had included an amount reflecting a particular social
       services activity identified by the RMS (cost center 630,
       adoption services), in calculating the allocation to Title IV-B
       under its RMS system.  The Agency conceded that this amount had
       not been charged to Title IV-E, and should not be disallowed.
       Supplemental Affidavit of Harley