DEPARTMENTAL GRANT APPEALS BOARD
Department of Health and Human Services
SUBJECT: Illinois Department of Public Aid
Docket No. 88-29
Decision No. 964
DATE: June 30, 1988
DECISION
The Illinois Department of Public Aid appealed a determination by
the
Office of Child Support Enforcement (OCSE) to disallow $51,140
in
federal financial participation (FFP) claimed under Title IV-D
(Child
Support and Enforcement of Paternity) of the Social Security Act
(Act).
The disputed claim was for amounts paid by the State pursuant to
a
settlement agreement in the case of Machado v. Coler, (N.D.E.D. Ill.,
83
C 5795), for the plaintiffs' attorneys' fees. OCSE found that
the
attorneys' fees were not a necessary administrative cost of the
Title
IV-D program, because the litigation involved defense of
state
procedures which were not in accordance with federal policy.
For the reasons discussed below, we uphold the disallowance.
General Background
Machado v. Coler, filed in August 1983, raised issues involving both
the
Illinois child support enforcement program, under Title IV-D of the
Act,
and the Illinois Aid to Families with Dependent Children (AFDC)
program,
under Title IV-A of the Act. The plaintiffs were a class of
AFDC
recipients who contested the distribution of child support payments
by
the Title IV-D agency and the lack of any state procedures to
enable
families to rationally choose to exclude from the AFDC assistance unit
a
child entitled to child support payments from an absent
parent
(including procedures to provide applicants with information on
child
support payments collected by the Title IV-D agency). As we
explain
below, excluding a child from the AFDC assistance unit might, in
some
cases, have resulted in greater net income to the family as a
whole.
State's Exhibit (Ex.) E.
Under section 402(a)(26) of Title IV-A, each AFDC applicant or
recipient
is required, as a condition of eligibility, to assign to the State
his
or her rights to receive child support payments while receiving AFDC.
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Under section 457(b) of Title IV-D, only the first $50 of each
collected
monthly support payment is distributed to the family; the remainder
is
distributed to the state and federal government to the extent
necessary
to provide reimbursement for AFDC assistance payments. The
family
receives a supplemental amount only if the monthly support
payment
exceeds the amount of the total monthly AFDC assistance payments.
Because the statute required that recipients of AFDC assistance lose
all
but $50 of any monthly child support payments when the support
payments
were less than the AFDC assistance payments, some families were
better
off if one or more children receiving support payments were
excluded
from the assistance unit in the AFDC application and grant.
While the
AFDC payment would decrease because there would be fewer people in
the
assistance unit, the family would retain the full child support
payment.
This would be advantageous whenever the child support payment
exceeded
$50 plus the incremental difference in the AFDC payment from
an
additional child under the assistance grant.
The process of excluding one or more related children in the
household
from the assistance unit was referred to by the parties as
"earmarking."
In 1971, a North Carolina district court held that AFDC
applicants had a
right to earmark. Gilliard v. Craig, 331 F. Supp. 587
(W.D.N.C. 1971),
aff,d mem. 409 U.S. 807 (1972), rehearing denied 409
U.S. 1119 (1973).
The district court based its holding both on an
interpretation of the
Act and on North Carolina property law and assistance
regulations.
The Machado complaint alleged that Illinois discouraged or
effectively
prohibited applicant selection of the assistance unit in
violation of
the Act and federal regulations, through the absence of
procedures to
provide information on collected child support. 1/ While the
Machado
plaintiffs did not allege that Illinois actually prohibited
earmarking,
Illinois conceded in this appeal
1/ The complaint also alleged violations of federal regulations
setting
requirements for state agency recordkeeping for the AFDC program
(45
C.F.R. 205.60(a)(1)), instruction of state agency staff on
state
policies and procedures (45 C.F.R. 205.120(a)(3)(1) and 302.10), and
the
provision of information to applicants about their rights under the
AFDC
program and about related programs (45 C.F.R. 206.10(a)(2)(i)).
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that it had no procedures to facilitate earmarking and, in
practice,
prohibited earmarking. Telephone Conference Call, June 3,
1988.
Illinois initially opposed the Machado claims, arguing that it was
not
required by federal law to permit earmarking. (Illinois stated that
it
also opposed the plaintiffs' claims because of fiscal and
administrative
concerns, as we discuss below).
In 1984, Congress amended the Social Security Act to require states
to
include in the assistance unit all siblings living in the
same
household. Deficit Reduction Act of 1984 (DEFRA), Pub. L.
98-369,
adding section 402(a)(38) to the Act. 2/ After the passage of
DEFRA,
Illinois decided to negotiate a settlement in the Machado
lawsuit.
Illinois stated in its brief that it reasoned that the DEFRA
amendment
clarified the entire issue and greatly reduced the number of
persons who
could possibly request earmarking, even under the
plaintiffs'
interpretation of the law. State's Brief, p. 5.
As part of the settlement agreement, Illinois agreed to pay
plaintiffs'
attorneys' fees. Illinois alleged that the majority of the
disputed
attorneys' fees were incurred during the settlement phase of
the
litigation. OCSE determined that the policies and procedures
Illinois
defended in the Machado case were outside of the scope of the Title
IV-D
program. Thus, OCSE found that the attorneys' fees were not
"necessary"
costs, as required by section 455(a)(1) of the Act and Office
of
Management and Budget (OMB) Circular A-87, Attachment A,
paragraph
C.l.a.
Analysis
I. Standard of Review
Illinois argued that Office of Management and Budget (OMB) Circular
A-87,
at Attachment A, paragraph B.16, provides that legal expenses are
generally
allowable, so that a heavy burden should be on OCSE to show
that any
particular expense is not "necessary" or "required." In
support of this
position, Illinois asserted that "the concept of
'necessary' is not found in
the statute but has been created by HHS in .
. . regulation and expanded upon
in an OMB Circular which has not been
published as a regulation under the
Administrative Procedures Act."
2/ The DEFRA amendments were upheld by the Supreme Court against
a
constitutional challenge. Bowen v. Gilliard, U.S. ,
107 S. Ct. 3008
(1987).
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State's Brief, p. 7. Illinois acknowledged, however, that
OCSE's
implementing regulations at 45 C.F.R. 304.20 contain the
"necessary"
standard.
Contrary to Illinois' argument, the "necessary" standard is a
well
established requirement. Section 455(a)(1) of the Act provides for
FFP
in amounts expended "for the operation of" an approved Title IV-D
state
plan. OCSE has interpreted this to permit FFP in
administrative
expenditures only if they are "determined by the Secretary to
be
necessary expenditures properly attributable to the child
support
enforcement program . . . ." 45 C.F.R. 304.20(b)(1983); see
also 45
C.F.R. 304.20(a)(1). This interpretation is a reasonable
one,
reflecting the fundamental principle of grants law that
unnecessary
costs should be avoided and federal funds conserved for costs
which
contribute to program objectives. See Cappalli, 1 Federal Grants
and
Cooperative Agreements, sec. 1:06 (1982). The "necessity"
requirement
at paragraph C.l.a. of the OMB Circular A-87 is based on
this
principle, and is a general factor to be considered in evaluating
the
allowability of any cost. The Circular has the status of a
regulation
since it was published at 46 Fed. Reg. 9549 (June 28, 1981), and
made
applicable to HHS grants to states by 45 C.F.R. 74.171. See also
45
C.F.R. 304.10.
Furthermore, the more specific provision of the Circular on which
Illinois
relied is limited to legal expenses "required in the
administration of grant
programs." OMB Circular A-87, Attachment B,
para. B.16 (emphasis
added). An unnecessary cost is certainly not a
required expense within
the ambit of this provision.
We recognize that a discretionary judgment is called for in
evaluating
whether a cost is a legal expense "necessary," or "required," for
proper
administration of a grant program. As Illinois pointed out, the
states
must exercise this judgment on a day-to-day basis, and the
grantor
agency should not be allowed to substitute an evaluation based
on
hindsight for a judgment which was reasonable at the time made.
When
the grantor agency challenges that judgment, however, the grantee has
to
show it exercised a reasonable judgment in determining that the
costs
were needed in order to administer the program in
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accordance with federal requirements. 3/ As we discuss below,
Illinois
did not do so here.
II. The necessity of these attorneys' fees
OCSE argued that FFP in the attorneys' fees paid pursuant to
Illinois'
settlement obligation is not allowable since the policies and
practices
defended in the Machado case were not within the scope of the Title
IV-D
state plan. 4/ OCSE alleged that the Machado case resulted
from
Illinois' failure to adhere to federal law and policies
permitting
earmarking. Because Illinois' actions had been beyond the
scope of the
Title IV-D program, OCSE contended, legal costs resulting from
these
practices were not a necessary or required cost of administering
the
program. 5/
In its brief in this appeal, OCSE agreed with the Machado
plaintiffs'
interpretation that section 402(a) (10) of the Act accorded
applicants
an affirmative right to earmark. Respondent's Brief, pp.
2-3,
Complaint, Ex. E, p. 12. Section 402(a) (10) requires that state
plans
for AFDC provide:
. . . that all individuals wishing to make
application for aid to
families with dependent
children shall have opportunity to do so .
. . .
3/ Grantees generally have the burden of
documenting the
allowability of claimed costs. See, e.g., Michigan
Dept. of Social
Services, DGAB No. 370 (1982); California Dept.
of Social Services,
DGAB No. 393 (1983). This burden is based on grant
recordkeeping
requirements, such as Title IV-D regulations at 45 C.F.R.
302.14.
4/ Although the Machado case involved issues
under both Title IV-D
and Title IV-A, OCSE chose not to dispute which program
should be
charged, since it argued that the costs were not allowable to
either
program. Telephone Conference Call, June 3, 1988.
5/ OCSE initially disallowed the claim stating that FFP is
allowable
in attorneys' fees for an opposing counsel only if the
federal
government was a party to the decision of the court and the
court
specifically ordered that the federal government participate, but
OCSE
withdrew that ground from the disallowance letter considered here.
See
Docket No. 87-119.
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OCSE argued that the use of the permissive term "wishing" indicates
that
application is voluntary. OCSE reasoned that this implicitly meant
that
withdrawal of an application was also voluntary, and that,
therefore,
AFDC applicants had a right to earmark by withdrawing an
application on
behalf of a particular child in the household. 6/
Illinois conceded that section 402(a)(10) generally provided
applicants
with the right to determine who would be included in the
assistance
unit. Telephone Conference Call, June 3, 1988.
Illinois stated that
its initial legal strategy was based on the premise that
section
402(a)(26), requiring assignment of support rights, had created
an
exception to this general rule in the area of child support.
Section
402(a)(26) says that the state plan must require that each
applicant:
assign the State any rights to support from any
other person such
applicant may have (i) in his own
behalf or in behalf of any other
family member for
whom the applicant is applying for or receiving
aid
. . . .
Illinois argued that, even if it is clear now that this section did
not
create an exception to section 402(a)(10), the law on the subject
had
not been clear prior to the 1984 DEFRA amendments. Illinois added
that
it had no formal notification of federal policy on
6/ The DEFRA amendments to the Act created
an exception to this
general rule, effectively adopting much of Illinois'
position in
Machado, but these amendments were not retroactive.
Moreover, the
legislative history of DEFRA added support to OCSE's contention
that the
Social Security Act previously provided applicants with the right
to
exclude family members from the assistance unit. The conference
report
stated:
There is no requirement in the present law that
parents and all
siblings be included in the AFDC
filing unit. Families applying
for assistance
may exclude from the filing unit certain family
members who have income which might reduce the family benefit.
H.R. Rep. No. 861, 98th Cong., 2d. Sess. 1407.
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earmarking in the context of child support payments. 7/ Illinois
asserted
that, since the law was not clear, its position had a
reasonable basis, even
if, ultimately, Illinois did not prevail. Thus,
Illinois claimed that
the legal expenses incurred were a required
incident of program operations,
and that Illinois is entitled under, OMB
Circular A-87, to FFP in legal
expenses incurred in operating the
program.
We find no support in the Act or judicial precedent for
Illinois'
contention that the law was unclear. Although Illinois
suggested that
section 402(a)(26) requires assignment of support rights for
every child
in the family, the plain language is more limited. Section
402(a)(26)
applies only to applicants or family members for whom the
applicant is
applying for or receiving aid. A child excluded from the
assistance
unit would be neither an applicant nor a recipient of aid and
would not
be required to assign child support payments. Nor did
Illinois present
evidence in the legislative history or prior interpretation
of section
402(a)(26) that the section was intended to affect earmarking.
Furthermore, we find that the federal policy was clearly indicated
by
judicial precedent, even if not formally articulated by the
federal
agency in an action transmittal. Illinois admitted that it had
been
aware of federal court cases such as Gilliard v. Craig, supra,
which
upheld the right of an applicant to earmark 8/ and
7/ OCSE asserted in the disallowance letter
that Illinois had been
specifically advised of OCSE's interpretation in
transmittals of federal
policy. Ex. C. OCSE cited Regional Office
Directive OFA-ROD-79-10,
dated March 22, 1979, which OCSE stated was "public
clarification of its
policy." Id. Later, however, OCSE conceded
that this directive,
although available upon request, was not routinely
distributed and that
there was no evidence that Illinois had received
it. Telephone
Conference Call, June 3, 1988. OCSE also conceded
that it was unable to
find other expressions of this policy which would have
been distributed
to Illinois. Id.
8/ In Gilliard, the district court concluded
that North Carolina
violated the Act in prohibiting earmarking. The
court found that, under
state law, the child in dispute was not needy and the
child support
payments were not (continued...)
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other cases indicating that states could not involuntarily include in
the
assistance unit persons without a legal duty of support to the
family, who
did not actually provide any support. 9/ Telephone
Conference Call, June 3,
1988. Although Illinois stated that it had
sought to distinguish these
prior cases, its explanation of how they
were distinguished was
strained. Illinois apparently relied on the fact
that the prior cases
had been decided prior to the amendment of the Act
to add section 402(a)(26),
and prior to Illinois' law implementing that
provision, ILL. REV. STAT. Ch.
23, sec. 10-1 (State's Ex. M). As we
stated above, we find
Illinois' reading of section 402(a)(26) to be
contrary to the plain language
of the statute, and find no basis to
conclude that this section affected the
right to earmark enunciated in
the prior court cases. Nor did Illinois
indicate any reason why
Illinois state laws would have affected rights to
earmark, or point to
any difference between Illinois state laws and the North
Carolina laws
considered in the Gilliard case.
We note that Illinois provided no documentary support for its
assertion
that its actions which led to the Machado complaint resulted from
a
reasoned determination that section 402(a) (26) was intended to
create
an exception to the established policy allowing earmarking, rather
than
from a simple failure on Illinois' part to comply with the
federal
requirements cited by the Machado plaintiffs.
8/(...continued) available to the family as a whole. The
court
concluded that, under the Act, the child was not appropriately
included
in a program targeted for the needy, and that the child's income
could
not be attributed to the family as a whole. Gilliard. 331 F.
Supp. 593.
9/ Other relevant cases which we note are King
v. Smith, 392 U.S.
309 (1968); Lewis v. Martin, 397 U.S. 552 (1970); and Van
Lare v.
Hurley, 421 U.S. 338 (1975). In each of these cases, the
Supreme Court
held essentially that states could not alter or deny AFDC
benefits to
children based on the presence in the household of any person
not
legally obligated to support the children, except to the extent that
the
person actually provides support. In the Omnibus Budget
Reconciliation
Act of 1981, Pub. L. 97-35, Congress created a specific
exception to
these general rules for step-parents (adding section 402(a) (31)
of the
Act) and in DEFRA, Congress added the exception for siblings
(section
402(a)(38) of the Act).
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Indeed, even if section 402(a)(26) provided a reasonable basis for
a
policy prohibiting earmarking when child support rights had
been
assigned to the State, this would not justify Illinois' apparent
failure
to provide AFDC recipients with information about child support
payments
made to the State and to have any articulated policy which would
enable
caseworkers to inform recipients about whether and how receipt of
the
payments might affect their AFDC benefits. This is particularly so
when
the effect of what Illinois was doing meant that AFDC assistance
units
were receiving less money than they would have been receiving if
they
had been able to earmark.
In sum, it is apparent from the record that Illinois adopted and
defended
policies which were unsupported by a reasonable reading of the
law and
contrary to existing legal precedent. Illinois adopted these
policies
with knowledge of the body of contrary legal precedent and
without consulting
with the federal agency. In view of these
circumstances, we find that
Illinois has established no reasonable basis
for its policy of prohibiting
earmarking or for its legal defense of
that policy. In the absence of
any reasonable basis, it is clear that
Illinois' actions were not required in
the ordinary course of the
exercise of administrative responsibilities under
Title IV-D.
This is particularly clear in this case, because the legal expenses
at
issue are costs of the opposing counsel. Such costs are not
routine
obligations, and it is reasonable to scrutinize them closely.
Illinois
alleged that some of the settlement costs were necessary costs
of
implementing new state procedures prompted by the 1984
legislative
changes rather than the Machado litigation. Illinois
pointed to no
authority, however, for the proposition that opposing counsel's
costs
would be allowable Title IV-D costs when associated with
implementing
new procedures. Moreover, as OCSE pointed out, the
particular
procedures adopted as part of the Machado settlement reflect
the
plaintiffs' concerns arising from Illinois' past practices
and,
therefore, go beyond the scope of what the legislative changes
would
have required.
We conclude that the legal expenses at issue were not allowable
because
the expenses were not required for administration of the
program.
Although Illinois argued that this conclusion can be reached only
in
hindsight and involves second-guessing the State's judgment, the
record
indicates that Illinois was seeking to second-guess the
federal
government's view of a settled issue.
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We do not disagree with Illinois' assertion that the Machado case
involved
policies implemented in the course of a good faith effort to
administer its
public assistance programs in an administratively and
fiscally advantageous
manner. Illinois stated that it had believed that
increased earmarking
would have an adverse fiscal impact, as overall
federal-state collections
would diminish. Illinois had also anticipated
a heavy administrative
burden as people added and deleted children
whenever child support was paid
or not paid. It is nonetheless clear
that Illinois, without consulting
with federal authorities, took actions
which it should have known would not
be considered within the scope of
Title IV-D. Thus, we uphold OCSE's
determination that the costs of
attorneys' fees resulting from these actions
are not legal expenses
required for program administration in the sense used
in OMB Circular
A-87.
Conclusion
Because we conclude that the policies which gave rise to the Machado
case,
and the costs of settling it, were not within the scope of the
Title IV-D
program, we uphold the disallowance in the full amount of
$51,140.
________________________________ Cecilia Sparks Ford
________________________________ Donald F. Garrett
________________________________ Judith A. Ballard
Presiding
Board