Florida Department of Health and Rehabilitative Services, DAB No. 1031 (1989)

DEPARTMENTAL APPEALS BOARD

Department of Health and Human Services

SUBJECT: Florida Department of DATE: March 27, 1989 Health and
Rehabilitative Services Docket No. 88-165
Decision No. 1031

DECISION

The Florida Department of Health and Rehabilitative Services (DHRS,
State) appealed a disallowance by the Family Support Administration
(Agency) of $112,279 claimed under the Cuban/Haitian Entrant Program
(title IV of the Immigration and Nationality Act, 8 U.S.C. section 1521
et seq.) for the period from July 1, 1983 to June 30, 1984. This amount
was identified in a DHRS audit as unallowable or unsupported job
placement costs claimed under a subcontract administered by Job Services
of Florida. The DHRS audit official examined a sample of cases and
calculated total unallowable costs by extrapolating from the sample to
the entire pool of claims by Job Services of Florida. During the course
of this appeal, the Agency made a minor adjustment downward in the
disallowance to $111,712. DHRS did not contest the amount of the
disallowance based on the actual sample ($42,383), but rather the amount
resulting from the extrapolation, which equalled $69,329.

For the reasons discussed below, we uphold in full the disallowance of
$111,712.

Background

Title IV of the Immigration and Nationality Act (Act) authorizes the
Department of Health and Human Services to provide grants to states for
refugee assistance programs. 8 U.S.C. 1521. (For the period at issue,
grants made pursuant to the Act were subject to regulations at 45 C.F.R.
Part 400, effective July 1, 1983.) Federal funding was available for
100% of the allowable costs of determining eligibility and providing
refugee assistance and services. 45 C.F.R. 400.8 provided that federal
funding under a state plan would be available under the terms and
conditions approved by the Director, Office of Refugee Resettlement.
Applicable regulations also required the grantee to establish procedures
for determining the allowability of costs in accordance with the
applicable cost principles. 45 C.F.R. 400.3 and 45 C.F.R. 74.61(f).

As part of its refugee assistance program, DHRS contracted with Job
Services of Florida, a program within the State Department of Labor and
Employment Security (DLES). Under this contract, Job Services of
Florida provided vocational evaluation and assessment, job placement,
and other job-related services to eligible Cuban and Haitian entrants.
In 1985 DHRS conducted an audit of expenditures of Job Services of
Florida for the year July 1, 1983 through June 30, 1984. In an audit of
a sample of entrant case records, the DHRS audit official found that a
substantial percentage of the job placements in the sample were not
covered by the program or could not be verified. The official
recommended a disallowance of $42,481 based on individually identified
unallowable or unsupported costs. The official also recommended a
disallowance of $69,798 based on his calculation extrapolating from the
sample to the total number of cases. State Ex. 3.

After reviewing the audit, the Florida DLES stated that it could not
make reimbursements to DHRS based on extrapolations as it was contrary
to U.S. Department of Labor policy. State Ex. 6. DLES also questioned
the audit findings in a number of individual cases. DHRS accepted the
DLES position in one case and reduced the actual unsupported costs by
$98 to a total of $42,383. DHRS required repayment of this amount from
DLES. DHRS did not recalculate the projected amount, however, stating
that:

At this point, we are no longer requesting Job Services of Florida
repay projected unallowable or unsupported costs. In the event of
a federal audit in which this department is requested to repay
projected costs associated with this contract, we will be
requesting same of the Job Services.

State Ex. 8.

The Agency disallowed both sampled and projected unallowable or
unsupported costs based on the audit performed by DHRS.

Analysis

It is important at the outset to identify what precisely is at issue in
this appeal. The issue is whether the Agency may rely on DHRS' own
audit to disallow unallowable costs identified by extrapolation from a
sample. DHRS has conceded that it is not entitled to federal funding
for individually identified unallowable or unsupported expenditures in a
sample of cases reviewed in the audit. DHRS is not objecting to the
Agency's reliance on the audit with respect to these cases. DHRS is
merely objecting to the Agency's reliance on the projections from a
sample of individually examined claimed costs to the universe of costs
claimed by Job Services.

DHRS here questioned the reliability of its own projections by arguing
that the person performing the audit lacked the requisite qualifications
to be an auditor and failed to conduct the audit in a manner consistent
with the Single Audit Act, 31 U.S.C. 7501-7507, and generally accepted
accounting practices. DHRS also argued that the audit report had not
identified a sampling plan that included a statement of: what is being
sampled, the random start, the interval calculations, the type of
sampling, the confidence interval, and the precision interval. State
Br., pp. 17-18.

The Agency responded that the State bears the burden of documenting its
costs. The Agency argued that it is neither possible nor required that
the Agency prove the validity of the projection since the necessary
information about the sampling process was in DHRS' hands. The Agency
indicated that while it had made requests for the audit workpapers, it
had never received sufficient information from the State to determine
with certainty that the projections were invalid. Agency Br., pp. 9-10.
On the other hand, the Agency felt it was able to rely on the
projections based on the work papers prepared by the audit official that
had been submitted. The Agency argued that the State is in the best
position to identify specifically why the projections would not be
reliable and has not done so. The Agency asked the Board to either
uphold the disallowance based on the projections or to give the State
additional time to provide an alternative calculation of the unallowable
costs.

We find that the Agency's position is entirely reasonable and fully
consistent with the applicable law.

The statute and regulations applicable to grants for refugee assistance
and services cited in the "background" section above provide that a
state can charge only allowable costs to federal funds and must document
the allowability of costs which are charged to federal funds. Applying
comparable standards in other Department programs, this Board has
consistently held that the grantee has the burden to document the
allowability of its expenditures. See, for example, Ohio Dept. of Human
Services, DAB No. 900 (1987), p. 7; cf. Florida Dept. of Health and
Rehabilitative Services, DAB No. 821 (1987). In view of this general
burden on a state to document its allowable costs, we find that the
Agency here could reasonably have taken the position that DHRS' entire
claim for these particular categories of expenditures had to be
disallowed until DHRS had documented what part of the universe of
expenditures represented allowable costs. DHRS' sample results raised
the unavoidable conclusion that at least a portion of the universe of
the DHRS' claim (aside from the sampled disallowed cases) is not
allowable. Here, however, the Agency has not attempted to disallow for
DHRS' entire claim but merely proposed to rely on projections to the
universe of unallowable costs that DHRS itself made during an audit.

Although DHRS has raised several technical objections to the adequacy of
the audit, it has not argued, nor has it demonstrated through
affirmative evidence, that the audit used invalid statistical methods or
that the projections were in fact unreliable under generally accepted
principles of statistical sampling. The Agency noted that DHRS, in
discussions with DLES, had decided not to rely on the projections
because of a U.S. Department of Labor policy, and not because of any
actual problem with the sampling projection. The Agency added that the
objectivity and competence with which the audit was performed is
attested to by the fact that upon challenge and review by DLES, the
findings were changed with respect to only one case, amounting to less
than $100. Further, DHRS has presented no evidence to show that the
audit official lacked objectivity in the review process, nor is there
record of any complaint by DLES concerning the objectivity of the audit.
It is also noteworthy that many if not all of the State's objections
concerning the validity of the audit would apply to the findings
concerning the individual cases in the samples. The State, however,
conceded that those findings would be the proper basis for a
disallowance even though they were the product of the same audit process
and the same auditing official.

Moreover, we find that the Cuban/Haitian Entrant program had no specific
requirements relating to what kind of audit or review would be necessary
before there could be a disallowance. DHRS cited various audit
requirements that might apply to the program in other contexts, but none
of those requirements in and of themselves had to be complied with for
purposes of an audit or review leading to a disallowance. A
disallowance could have arisen as a result of the spontaneous
identification by a State or federal program official of an erroneous
practice on the part of the State. Under these circumstances, the
projections by DHRS as part of its audit of the operations of another
State unit under contract with it would clearly be a reasonable basis on
which the Agency could base a disallowance as long as there was no
demonstration that the projections themselves were unreliable.

The Agency's position here, however, does not rely solely on the
existing projections from the audit by DHRS. The Agency is willing to
permit DHRS to perform new projections in a new audit with different
audit standards and a different auditing official. DHRS could even
perform a case-by-case review. The bottom line is that the State has
the burden to demonstrate the allowability of its claim. Since the
Agency could reasonably have disallowed the State's entire claim for the
particular categories of costs at issue pending a demonstration of the
allowability of the claim by the State, the Agency's decision to
disallow only an amount based on the State's own projections is clearly
reasonable. The State still has the opportunity, consistent with its
burden to document, to perform a different set of projections or to
perform a case-by-case review.

Conclusion

Accordingly, on the basis of the foregoing, we uphold the disallowance
in full. The State, however, will have 30 days following the receipt of
this decision to notify the Agency whether it intends to propose for the
Agency's review a recalculation of the universe of unallowable or
unsupported costs. If the State does so notify the Agency, it will have
such reasonable time as the Agency permits to perform its recalculation.

________________________________ Judith A. Ballard

________________________________ Alexander G. Teitz

________________________________ Donald F. Garrett Presiding
Board