California Department of Social Services, DAB No. 978 (1988)

DEPARTMENTAL GRANT APPEALS BOARD

Department of Health and Human Services

SUBJECT:  California Department of Social Services

Docket No. 88-19
Decision No. 978

DATE:  August 10, 1988

DECISION

The California Department of Social Services (State) appealed the
decision of the Family Support Administration (FSA) disallowing
$1,559,012 in federal financial participation (FFP) claimed by the State
for interest payments made in accordance with orders entered against the
State in five court cases.  The issue in dispute is whether FFP in the
interest payments is available under Title IV-A (Aid to Families with
Dependent Children or AFDC) of the Social Security Act (Act).

For the reasons stated below, we conclude that the interest payments in
question resulted from the State's failure to comply with federal law
and, therefore, are unallowable either as AFDC assistance payments or as
AFDC administrative costs. Accordingly, we uphold the disallowance.

BACKGROUND

The amounts disallowed represent the federal share of interest payments
which the State made pursuant to court orders in five cases to which the
State was a party, but FSA was not.  In these cases, the courts held
that certain State policies were invalid and resulted in individuals
being wrongfully denied AFDC or being paid too little assistance.  See
State's Exs. E-J.  The State made corrective AFDC payments to the
individuals in the amounts they would have received had the State paid
them properly.  The State also paid interest to the individuals involved
in accordance with section 3287(a) of the California Civil Code.

California submitted claims for FFP in maintenance assistance under
Title IV-A for both the corrective AFDC payments and the interest.  FSA
paid the claims for corrective AFDC payments but not for the interest.
FSA disallowed the interest on the grounds that the interest did not
qualify as an assistance payment under the Act and the California state
plan for AFDC and that the interest was not a reasonable and necessary
cost of the program because it resulted from the State's failure to
comply with federal law.  FSA noted that it was not a party to the court
cases involved and that it considered the interest to be outside the
scope of the AFDC program.

The State contested the disallowance, arguing generally that 1) the
interest should be considered assistance because it gives the recipient
the value to which the recipient is entitled; 2) alternatively, the
interest should be considered a necessary administrative cost under the
program because payment of such interest is unavoidable; and 3) FSA
should not be able to disallow these costs without examining whether it
had approved the state policies at issue.

We discuss these arguments below.

DISCUSSION

Whether FSA reasonably interpreted the Act to not require FFP in
interest payments of the type here

The State argued that interest payments should be considered an
allowable part of the "assistance" payments made to the program
recipients because payment of interest merely ensured that the
recipients received the value of what they would have received if the
proper payments had been made on time.

In determining whether the federal government is obligated to provide
FFP for the interest, we look first to congressional intent.  While the
State argued that Congress intended the federal government to
participate in this type of interest, the State pointed to nothing in
the statute or its legislative history specifically addressing the
question of whether interest should be considered AFDC assistance.  On
the other hand, this Department's administrative interpretation, since
at least 1973, has been that court-imposed interest payments resulting
from incorrect state agency action are not allowable as assistance
payments.

APA-PRG-10, a Title IV-A program regulation guide issued on August 10,
1973, specifically informed states that --

     Federal financial participation shall not be available for court
     imposed penalty payments (payments in addition to amounts of
     assistance provided to eligible individuals under an approved State
     plan) such as interest payments, compensatory damages, punitive
     damages, etc., resulting from incorrect State agency action as
     determined by the court.

(Emphasis added.)  The State did not deny that it had notice of this
interpretation.

We find unpersuasive the State's argument that Congress would have
affirmatively stated that interest was outside the scope of the program
if it had so intended.  The State provided no examples of statutory
provisions explicitly excluding federal funding for interest payments.
On the other hand, FSA cited to section 1903(d)(5) of the Act, which
directs the Secretary to pay interest to the states on withheld funds in
certain circumstances.  The fact that Congress explicitly provided for
payment of interest in at least one section of the Act suggests that no
interest payments are otherwise provided for.  1/

FSA also persuasively argued that interest does not readily fit within
the "conceptual framework" within which AFDC payments are made.  This
"framework" is roughly one in which (1) pursuant to section 403(a)(1) of
the Act, the federal government provides FFP for "aid . . . under the
State plan"; (2) pursuant to section 402 of the Act and the implementing
regulation at 45 C.F.R. 233.20, the State plan must set forth the
elements of cost to be included in calculating the State's "standard of
need"; and (3) the AFDC assistance payment is the difference between
this "standard" and the family's countable income.

California pointed to no State plan provision which specified that
interest on underpayments would be an element used to calculate an
assistance payment, or which otherwise required the payment of interest.
The federal statutory and regulatory provisions make it clear that FFP
will be available only in expenditures made in accordance .with a state
plan.  See, e.g., section 403(a)(1) of the Act; 45 C.F.R. 233.20(b)(2).
2/  The interest here was paid instead pursuant to a separate State law
which has no apparent relationship to the federal AFDC program and which
cannot be used as a basis for claiming FFP.

There may be some merit to California's point that interest paid in
circumstances such as this ensures that the AFDC recipient receives the
value of what the recipient would have received if the payment had been
made on time.  Nothing in this concept requires, however, that the
statute must be read to provide federal funding for more than the amount
of assistance which should have been paid originally.  The Board
considered this argument in Massachusetts Dept. of Public Welfare, DGAB
No. 933 (1988), the Commonwealth of Massachusetts had reimbursed certain
hospitals at rates lower than the rates established under the approved
Medicaid state plan.  The issue was whether interest a state court
ordered the state Medicaid agency to pay on the amounts improperly
withheld by Massachusetts constituted "medical assistance" under Title
XIX of the Act.  The Board rejected Massachusetts' argument that, since
the interest paid simply gave the hospitals the value they should have
received under the state plan, the interest should be considered
"medical assistance." The Board found that, even if the federal
government benefited from initially paying only its share of the lower
amount, the refusal to provide federal funding for a share of the
interest was reasonable because it promoted the congressional and
regulatory policies requiring that states follow the rate methodologies
set out in their state plans.

California cited nothing which distinguishes Massachusetts legally from
this case, and we think that similar principles should apply when
determining what constitutes assistance under the various titles of the
Act.  3/  FSA's longstanding interpretation that no FFP is available in
interest arising from "incorrect State agency action" is a reasonable
one; it promotes program goals by encouraging states to comply with
federal requirements and to correct any identified underpayments
promptly.

In sum, the relevant statutes and regulations do not directly address
the question, and the federal interpretation, of which the State had
notice since 1973, that assistance payments do not encompass this type
of interest is a reasonable one which furthers federal policy.

Whether FFP is available in the interest as an administrative cost

We also reject the State's position that, even if the interest payments
here are not within the meaning of the term "assistance," they are
allowable administrative costs.  The State argued that it is reasonable
and necessary to pay interest on an AFDC payment which has been
improperly withheld from a recipient in order to give the recipient the
value of what the recipient should have received.  This argument is
flawed because it fails to recognize that the interest could have been
avoided if the State had complied with federal requirements initially.

The State also argued that these costs should be considered necessary
program costs because --

     o  Congress agreed to provide FFP for normal program and
     administrative costs;

     o  Congress envisioned that payment errors would be inevitable in
     this complex program and provided methods for correcting such
     errors (citing sections 403(i) and 402(a)(22) of the Act);

     o  when errors result in underpayments, the Agency provides FFP for
     the corrective payment itself, for administrative costs incurred in
     calculating the payment, and for any legal expenses incurred in a
     law suit resulting from the underpayment, and there is no real
     difference between these items and court-ordered interest on the
     retroactive payment; and

     o  the State has discretion to determine what costs     are
     necessary to its program.

This rationale is also flawed.  While a tolerance is provided for errors
made by a state caseworker in determining an applicant's eligibility for
AFDC, this does not mean that Congress undertook to participate in
interest payments necessitated because a state had adopted a policy,
contrary to federal law, which resulted in systematically denying the
proper amount of benefits to recipients.  Neither section 403(i) of the
Act (which provides for a tolerance for errors identified throughout the
AFDC quality control system) nor section 402(a)(22) (which requires that
state plans provide for correction of underpayments) contains any
indication that Congress intended to provide federal funding for
interest on .underpayments or that Congress considered interest as part
of the underpayment.  The State did not cite, nor could we find, any
indication in the legislative history or regulatory implementation of
these provisions which supports the State's view.  Indeed, it is clear
that the State did not pay the interest to comply with federal law, but,
rather, to comply with State law.  Contrary to what the State argued,
the need to comply with State law does not render the costs "necessary"
for federal purposes.

Under section 403(a)(3) of the Act, FFP is available in administrative
costs only if they are "found necessary by the Secretary for the proper
and efficient administration of the State plan."  While states have some
discretion in establishing standards which set the amount of an
allowable assistance payment, this discretion is exercised in a state
plan.  As mentioned above, the State did not contend that its state plan
provided for these interest payments.  With respect to administrative
costs of operating the program, FFP is available only in costs found
necessary for the proper administration of the plan.  FSA reasonably
found here that these costs could have been avoided if the State was
properly administering the program.

Moreover, applicable regulations elaborate on what administrative costs
are allowable.  FSA pointed to certain provisions of OMB Circular A-87,
made applicable to AFDC grants through 45 C.F.R.  74.171, which support
the disallowance.  The Circular, entitled "Cost Principles for State and
Local Governments," states:

     Fines and penalties.  Costs resulting from violations of, or
     failure to comply with Federal, State, and local laws and
     regulations are unallowable.

Attachment B, section D.5.  California argued that this provision was
not applicable because the interest cost at issue here was not a "fine"
or "penalty," but an amount "paid as part of the underpayment correction
so that the recipient receives what she was entitled to receive under
the program." (State's Brief (Br.), p. 3)

While the interest may have been designed to compensate the recipients
for the "value" of the money they should have received earlier, we do
not agree that this automatically makes FFP available under the
provision.  Section D.5. of the Circular states that "costs resulting
from . . . failure to comply with Federal . . . law . . . are
unallowable."  Even if the interest is compensatory in nature, it still
falls within this broad language.

California appears to be interpreting the heading "fines and penalties"
too narrowly.  As discussed above, APA-PRG-10 indicated to the states
that interest and other compensatory damages were considered a "penalty"
in which FFP was not available.  Moreover, the purpose of the headings
in the part of the Circular containing the principles for specific items
of cost is to serve as a means of alphabetizing the various cost
principles so that they may be referred to more readily, not to limit
the language of the text.  Massachusetts Dept. of Public Welfare, DGAB
No. 933 (1988).

We also note that Attachment B., section A.2. of the Circular states:

     . . .  Failure to mention a particular item of cost in the
     standards is not intended to imply that it is either allowable or
     unallowable, rather determination of allowability in each case
     should be based on the treatment of standards provided for similar
     or related items of cost . . . . (Emphasis added.)

Interest is at the very least "similar or related" to fines or penalties
when it is a cost resulting from failure to comply with federal law and
regulation.  4/

Thus, we conclude that interest payments resulting from a failure to
comply with federal law are not allowable AFDC administrative costs.

Whether the interest here did result from a failure to comply with
federal law

The State argued that the interest here could not reasonably be
considered to have resulted from a "failure to comply with Federal law"
because (1) the State did not "deliberately violate federal law"; and
(2) the State regulations at issue were "approved by HHS either formally
in the 'state plan' or informally or tacitly by regional HHS personnel."
(State's Br., p. 4)

FSA responded essentially that interest would no more "assist" an
individual when there had been federal approval of a state policy than
when there was no federal approval.  FSA also said that there was no
factual basis for the State's allegation of federal involvement, only
general assertions.  (Respondent's Br., note 10)

The State replied that it had provided uncontradicted evidence, in the
form of an affidavit by a State official, to support its assertions.
The affidavit, by the Chief, Welfare Policy Development Branch, attests
that the State makes every attempt to operate its AFDC program in
conformity with federal requirements, even when the State has serious
doubts about the validity of the federal requirement, as it did in the
case of Grimesy v. McMahon, No. C 86 0947 SW (U.S.D.C. N.D. Cal.).  The
affidavit further states:

     In many instances, the requirements of federal statutes and
     regulations are not clear.  As a result, [State] personnel have
     regular, on-going contact, in writing and by telephone with
     regional federal personnel of [HHS] concerning the requirements of
     federal law . . .  Thus, when welfare recipients bring an action
     challenging a state AFDC regulation . . . , the policy set forth in
     the regulation has generally been approved by HHS, either formally
     in the "state plan" approval process or informally or tacitly by
     regional HHS personnel during the discussions that occur on a
     regular basis between the state and federal departments.

State's Ex. L.  The State acknowledged that this affidavit makes no
reference to the five specific cases involved in this appeal, but
asserted that it did not do so "because so much time has elapsed since
the adoption of the State regulations at issue in those cases."
(State's Reply Br., p. 7)  The State argued that its undisputed pattern
and practice testimony was sufficient to shift the burden to FSA "to
produce evidence that the usual, customary practice did not occur with
respect to any of the five cases involved in this appeal."  (Id.)  The
State said:

     Unless this Board is going to accept the Agency's position that the
     extent of actual Agency involvement is irrelevant as a matter of
     law, this Board must either accept the uncontroverted testimony . .
     . or remand to the Agency to make a factual determination as to the
     extent of Agency involvement in the adoption of the state
     regulations at issue in each of the five cases.

(Id.)

We do not here reach the issue of whether federal approval of a state
policy would always be totally irrelevant to the issues here.  In light
of FSA's reliance on APA-PRG-10 and the Circular provision on fines and
penalties, such approval might be relevant in determining whether the
interest resulted from "incorrect State agency action" or a "failure to
comply with federal law." 5/

We find, however, that the State's affidavit would be insufficient, in
any event, to shift the burden to FSA to come forward with evidence
about the particular state policies which led to the court orders here.
The FSA Administrator's decision found that the courts concluded that
State policies were contrary to federal law, relying in part on the
State's own description of one of the court cases, Green v. Obledo, 624
P.2d 256 (1981). The affidavit simply establishes that, where federal
policy is unclear, the State as a matter of practice confers with the
federal government when establishing State policies and would not
promulgate a policy unless it had at least tacit approval from federal
personnel.  The difficulty with the affidavit is that it does not even
allege that the State followed its regular practice and that it in fact
received some form of approval from a federal .official for the State
policies here.  The burden should not be on FSA to show that it had
never given even tacit approval of these State policies.  6/

Moreover, it is more reasonable to assume here that, if the State had
actually based its policies on approval by HHS officials, it would have
come forward with evidence that it had done so.  The mere passage of
time since the State promulgated its policies is hardly a reasonable
excuse, especially since these State policies have been the subject of
litigation (in Green since 1975). Federal approval would have been
relevant to the courts' consideration of the validity of the State
policies, particularly if those policies were embodied in approved State
plan provisions or were mandated by federal regulation.  Yet, there is
no indication in the record here that the State defended its policies in
court by arguing that they were formally approved or even by arguing
that they were based on consultation with federal officials.

To the contrary, the record indicates that, unlike the Grimesy case
where the contested State policy was based on a federal regulation, the
court cases here invalidated policies the State had adopted on its own.
The decision on the merits in Green (included with State's Exhibit A)
reveals that the State policy at issue was contrary to congressional
intent, as clearly expressed in the legislative history of the relevant
provision. Previous court decisions had invalidated similar provisions
on this basis.  The court also cited a federal regulation and an action
transmittal, finding that the State policy was contrary to these federal
implementations of statutory .policy.  7/  Nothing in the court's
decision indicates that the State even alleged that it had relied on any
federal interpretation in promulgating its policy.

The State did not submit the full opinions on the merits in the other
four court cases, but there is some discussion of the merits in the
court orders which required payment of the interest (State's Exhibits G
to J).  These orders likewise indicate that the State policies at issue
were not based on any federal regulation or plan approval.  Indeed, in
one instance, the federal policy was clear, but depended upon the effect
of State law (see State's Ex. I); surely, the State could not reasonably
rely on an interpretation of State law by federal regional personnel.

Thus, we find that the State's evidence is insufficient to support
either a reversal of the disallowance or a remand.

CONCLUSION

Based on the analysis above, we uphold the disallowance in full.

 

                           ________________________________ Donald F.
                           Garrett

 

                           ________________________________ Norval D.
                           (John) Settle

 

                           ________________________________ Judith A.
                           Ballard Presiding Board Member

 


1.   The State pointed out that FSA has taken the position that it could
collect interest on disallowed AFDC funds pending repayment, even though
the Social Security Act does not specifically provide for such interest,
and that this position was inconsistent with the disallowance.  There
is, however, separate authority for imposing interest on "debts" owed
the federal government.  See Debt Collection Act of 1982, Pub. L. 97-
365.

2.   Under Department regulations at 45 C.F.R. 205(10)(b)(3), FFP is
available in court-ordered payments "within the scope of the" AFDC
program.  FSA said that it has consistently interpreted this to exclude
interest payments because they are not within the scope of the program.
FSA admitted that it would participate in interest payments if it was a
party to a lawsuit and ordered by a court to participate.  The State
argued that FSA could not logically distinguish between court-ordered
interest payments on the basis of whether or not FSA was a party to the
court case. We disagree.  The mere fact that FSA will comply with a
court order to pay a share of interest does not mean that FSA is
compelled to voluntarily pay in other circumstances.  Moreover, an order
to FSA to pay may be based on a finding that FSA was in part responsible
for the AFDC benefits being wrongfully withheld in the first instance.

3.   Contrary to what the State argued, the decision of the Supreme
Court of California in Tripp v. Swoap, 552 P.2d (1976), does not support
a reversal of the disallowance.  While that court awarded interest on
improperly withheld welfare benefits, the court's rationale was that
such benefits fell within the language of California Civil Code section
3287(a), which waived the State's sovereign immunity from liability for
interest.  The court rejected the reasoning in an earlier California
Court of Appeals decision denying such interest, in part on grounds that
there was no federal statute authorizing reimbursement for such
interest, but the Supreme Court did so because it viewed federal
reimbursement as irrelevant and the entitlement to interest "a matter of
state policy."  552 P.2d at 759.  The court also noted in that case that
the State had said that interest was not available to recipients who
were denied benefits but were successful in obtaining them after an
administrative appeal. This fact is significant because it indicates
that the State itself does not interpret provisions on corrective
payments to require payment of interest, even though the rationale the
State advanced here (that interest is necessary in order to give
recipients the value to which they are entitled) would apply to all
retroactive benefits.

4.   FSA also cited (at an earlier stage of this case) OMB Circular
A-87, Attachment B, section D.7., which provides that "interest on
borrowings (however represented) is unallowable." California responded
that this Board's decision in California Dept. of Social Services, DGAB
No. 297 (1982), found that the Circular did not prohibit interest on
retroactive salary payments made under court order.  This miscontrues
the Board's decision. Because the Board found sufficient other support
for the disallowance, the Board did not base its decision on the
Circular.  The Board noted, however, that it was not unreasonable to
consider such interest as interest on a constructive borrowing.

5.   We note, however, that these policies clearly apply whether or not
a state's action is a "deliberate" failure to comply with federal law.

6.   Even if we were to assume that the State followed its regular
practice with respect to the State policies found invalid in the five
court cases involved here, the most we could assume would be that the
State had tacit approval from regional personnel for those policies.
Surely this is not sufficient to support a finding that the State was
complying with federal law, since the State could not reasonably rely on
tacit approval. See, e.g., Heckler v. Community Health Services of
Crawford County, Inc., 467 U.S. 51 (1984).

7.   Although the action transmittal was apparently issued after the
State adopted its policy, it was issued several years before the court
decision; yet, the State apparently continued to defend