Attorney General of Texas, DAB No. 1048 (1989)

DEPARTMENTAL APPEALS BOARD

Department of Health and Human Services

SUBJECT: Attorney General of Texas DATE: May 9, 1989 Docket Nos.
88-248 and 88-249 Decision No. 1048

DECISION

The Attorney General of Texas (Texas) appealed determinations by the
Office of Child Support Enforcement (OCSE) disallowing a total of
$687,928 in claims for federal financial participation (FFP) under Title
IV-D (Child Support and Establishment of Paternity) of the Social
Security Act (Act).

OCSE's determinations were based on (1) an OCSE audit report which found
that Texas did not credit its Title IV-D program with interest earned on
collected child support payments during the period September 1985
through September 1987, and (2) reports produced by the Texas Office of
the State Treasury and the State's Title IV-D quarterly expenditure
reports which showed that Texas did not credit its Title IV-D program
with such interest during the period October 1987 through September
1988.

For the reasons stated below, we conclude that the Act and regulations
require Texas to credit against its Title IV-D program expenses interest
actually earned on undistributed Title IV-D collections. Accordingly,
we uphold the disallowances, in the amount of the federal IV-D share of
interest credits, subject to a possible recalculation adjustment. In
accordance with our discussion below, OCSE should give Texas a
reasonable opportunity to demonstrate that it actually earned less
interest than OCSE determined.

I. Background

A. Statutory Background

Title IV-D of the Act authorizes federal financial participation in
state programs to enforce child and spousal support obligations. Basic
program functions include locating absent parents, determining
paternity, establishing the amount of child support obligations, and
collecting support payments. See generally section 451 of the Act. In
order to obtain FFP in the costs of such a program, a state must operate
its program in accordance with a federally approved state plan and all
applicable federal regulations.

The state Title IV-D agency collects child support on behalf of families
who receive assistance under the Title IV-A program, Aid to Families
with Dependent Children (AFDC), and on behalf of families who do not
receive such assistance. As to collections made for AFDC families,
section 457 of the Act provides that a portion is paid to the recipient
families but that the remainder is used to reimburse the governmental
entities which funded the AFDC payments. This reimbursement is
distributed according to a formula which requires the state Title IV-A
agency to deduct the federal share of these funds from its Title IV-A
expenses. See 45 C.F.R. 302.51. Section 458 of the Act authorizes
incentive payments to encourage efficient Title IV-D performance. A
state obtains its incentive payment by deducting it from the Title IV-A
reimbursement that the state would otherwise credit to the federal
government.

Section 455(a) of the Act requires that states exclude from Title IV-D
program expenditures "an amount equal to the total of any fees collected
or other income resulting from services provided under the [State]
plan." Since September 1982, in Transmittal 82-8, OCSE has interpreted
this provision to require states to deduct interest earned on child
support collections from child support program expenditures. In 1984,
OCSE codified this transmittal in 45 C.F.R. 304.50(b) and issued
specific guidance on how to calculate interest earned on child support
collections in a memorandum dated June 10, 1986, OCSE PIQ-86-1.

Further, Office of Management and Budget (OMB) Circular A-87, Attachment
A, paragraph C.1.g. (1981), made applicable by 45 C.F.R. 74.171,
requires that grantees deduct "applicable credits" from expenditures.
Applicable credits are defined to include receipts which offset or
reduce expense items allocable to federal awards. OMB Cir. A-87, Att.
A, C.3.a. (1981); see also 45 C.F.R. Part 74, Subpart F.

B. Factual Background

The OCSE auditor found that the Texas Title IV-D agency, the Attorney
General, deposited its child support collections into Fund 994, a State
Treasury trust and escrow account which was established in September of
1985 for IV-D collections and other revenue. The auditor also found
that this account actually earned interest and that none of that
interest was credited against Title IV-D expenses.

Docket No. 88-248 involves a disallowance of $602,407 for the period
September 1985 through June 1988. This figure represents the amount of
interest earned by Fund 994 during this period multiplied by the Title
IV-D FFP rate.

Docket No. 88-249 involves a disallowance of $85,521 for failure to
offset interest during the months July 1988 through September 1988.
Again, this figure is the interest earned by Fund 994 multiplied by the
Title IV-D FFP rate.

II. Arguments Submitted by Texas

Texas offered several arguments as to why the disallowance should be
reduced. These arguments were that (1) section 455(a) was meant to
reach only fees and income generated by Title IV-D services to non-AFDC
families, (2) OCSE cannot claim any interest earned by the principal
which represented Texas' share of AFDC reimbursements or Title IV-D
incentive payments because this principal belonged to the State; (3)
OCSE cannot claim any interest earned by principal which had no
connection with the Title IV-D program; and (4) incentive payments were
grant money held pending disbursement for program purposes within the
meaning of the Intergovernmental Cooperation Act, so that the State did
not have to account for interest earned on such funds.

Alternatively, Texas offered two arguments as to why the disallowance
should be completely reversed. They were that (1) the interest at issue
was earned by the Texas Treasury, not by the Title IV-D agency, and (2)
the interest was a result of the investment actions of the state fiscal
officers and not a result of Title IV-D services.

Texas also requested an opportunity to conduct its own accounting to
show that OCSE's calculations were incorrect.

IV. Discussion

A. Texas must credit OCSE with the federal share of interest actually
earned on undistributed Title IV-D collections.

The Board has repeatedly held that interest earned on undistributed
Title IV-D collections must be credited against Title IV-D program
expenses. The Board has based these rulings on section 455(a) of the
Act, 45 C.F.R. 304.50(b), 45 C.F.R. Part 74, and OMB Circular A-87. See
Utah Dept. of Social Services, DAB No. 750 (1986); New York State Dept.
of Social Services, DAB No. 794 (1986); South Carolina Dept. of Social
Services, DAB No. 926 (1987); North Carolina Dept. of Social Services,
DAB No. 986 (1988).

As discussed below, Texas did not present any arguments which would
cause us to modify our prior rulings on this issue.

1. Texas must credit OCSE with the federal share of interest
earned on support collections for both AFDC and non-AFDC families.

Texas argued that the scope and legislative history of section 455(a) of
the Act indicate that Congress intended only that states should account
for income generated by services to non-AFDC families. Texas noted that
section 2333(c) of the Omnibus Reconciliation Act of 1981 (OBRA), Public
Law 97-35, which amended section 455(a) of the Act to require the
exclusion of an amount equal to fees and other income from claimed
expenditures, is captioned "Costs of collection and other services for
non-AFDC families." Texas also noted that only non-AFDC families were
referenced in a letter from the Secretary of HHS transmitting to the
Speaker of the House the proposed draft bill including section 2333.
See Reply Brief, Appendix A. Texas contended that since a portion of
this principal was collected on behalf of AFDC families, the interest
earned by this principal was beyond the intended scope of section
455(a).

In its prior cases upholding OCSE's claim to interest earned by
undistributed child support collections, the Board has reasoned that the
phrase "other income resulting from services under the [state] plan" in
the statute is broad enough to include income from interest earned on
deposited funds. We affirm these prior cases because, notwithstanding
that the major thrust of section 2333 of OBRA was directed at fees for
non-AFDC families, we cannot ignore the broader sweep of the language
requiring the exclusion of an amount equal to "fees and other income"
from claimed expenditures. The plain language of a statute is always
the best evidence of the meaning of a statute, and there is no reason to
go beyond that plain language to examine other evidence of legislative
intent unless the language is unclear or ambiguous. Caminetti v. United
States, 242 U.S. 470 (1917); Chevron, U.S.A. v. Natural Resources
Defense Council, Inc., 467 U.S. 836 (1984).

The phrase "other income under the plan" is not limited by its terms to
other charges to non-AFDC families, as Texas contended. Rather, the
phrase plainly includes all income, other than fees, resulting from
program activities.

We do not find persuasive Texas's argument that we should ignore the
plain language of the provision because the section heading of the
legislative provision referenced only non-AFDC family fees. While the
legislative provision in OBRA contained several amendments to the Act
primarily directed at modifying the fees permitted for services to
non-AFDC families, the change to section 455(a) had a broader effect.
The language was not ambiguous and was consistent with pre-existing
regulatory requirements. "Section headings may not limit the plain
meaning of the text and may be utilized to interpret a statute, if at
all, only where the statute is ambiguous." Scarborough v. Office of
Personnel Management, 723 F.2d 801, 811 (11th Cir. 1984).

As we discuss below, OCSE's position that the term "income" encompasses
interest on undistributed collections is reasonable; that position was
communicated to the states as early as 1982, shortly after the amendment
of section 455(a). Furthermore, offsetting the federal share of
interest on collected funds meets the basic policy objective of section
455(a) to reduce federal funding needs. New York Dept. of Social
Services, DAB No. 794 (1986).

Finally, we would not reverse the disallowance even if we found that
Congress was referring in section 455(a) only to income related to
non-AFDC families. The Board has found that there were pre-existing
regulatory grounds to require states to account for interest earned on
program-related funds. Department-wide rules applicable to all
grantees, contained in OMB Circular A-87, require that grantees reduce
program expenditures, for which they claim FFP, by applicable credits.
The Board has previously held that interest earned by a state on
recoveries or collections must be treated as an applicable credit. See
South Carolina; North Carolina Dept. of Human Resources, DAB No. 361
(1982), aff'd, 584 F. Supp. 179 (E.D.N.C. 1984) (interest on Medicaid
collections and recoveries).

2. Texas must credit OCSE with the federal share of
interest earned on that portion of the principal which
was ultimately distributed as state Title IV-A
reimbursement or Title IV-D incentive funds.

Texas argued that, as to Fund 994, it "owns" (1) the portion of the
principal which will be disbursed to reimburse Texas for its share of
the Title IV-A expenses and (2) the portion of the principal which will
be disbursed to it as "incentive funds" for its IV-D performance. Texas
contended that OCSE has no right to the interest earned on this "state
owned" principal and can only claim interest earned by the principal
which will ultimately be disbursed as federal Title IV-A reimbursement
and as child support payments to individuals. Texas asserted that
OCSE's claim for interest earned on "state owned" principal constitutes
a taking without just compensation under the Fifth Amendment of the
United States Constitution.

We disagree. First, we find that no portion of the principal has "state
owned" identity until it is actually distributed and that OCSE is
reasonable in treating all of the interest on undistributed collections
as an applicable credit. Second, we find that treating this interest as
an applicable credit furthers important policy objectives in the Title
IV-D program. Third, we find that adoption of Texas' interpretation of
the Act would needlessly complicate the administration of Title IV-D.
Each of these reasons are discussed below.

First, and most important, section 457 of the Act plainly contemplates a
cycle of collection and distribution of child support collections. It
is the act of distribution which divests this principal of its identity
as child support collections and invests it with a specific identity
which determines its "ownership." Thus, these collections may
ultimately be distributed as federal Title IV-A reimbursement, state
Title IV-A reimbursement, support money to AFDC families, support money
to non-AFDC families, fees and recovered costs, or incentive payments to
Texas for Title IV-D performance. Until such distribution occurs, this
principal retains its character as undifferentiated Title IV-D
collections and its "ownership" is undetermined.

As to money collected on behalf of families receiving AFDC, section 457
sets forth a distribution sequence which allocates the collections
between the families, and the State and federal government for their
respective shares of the Title IV-A payments which have been made to
such families. Section 457(b)(2) provides that a portion of the
collection "shall be retained by the State to reimburse it for
assistance payments to the family during such period (with appropriate
reimbursement of the federal government to the extent of its
participation in the financing)." Thus, OCSE is reasonable in
maintaining that the act of distributing the federal share of the
collection is the means by which the state reimbursement is determined.

Under this statutory scheme, a state cannot identify a portion of the
principal as "owned" by a state until it has somehow distributed the
funds. At the point that it does this, it can claim the principal and
the consequent interest as its own. Until such distribution, the money
has no "state owned" identity.

In its reply brief, Texas repeatedly recognized that it is the act of
distribution that invests the principal with "state owned" identity.
Texas correctly argued that it has no obligation to account for this
money "after it has been distributed according the operation of the
Social Security Act." Reply Brief, unnumbered pp. 2, 7. However, Texas
did not demonstrate how money in Fund 994 has been "distributed." In
fact, OCSE alleged, and Texas did not deny, that the disallowed interest
represented the federal share of interest on undistributed collections.

Second, we find that treating interest earned on undistributed
collections as an applicable credit against the Title IV-D expenses
advances important policy objectives of the IV-D program by reducing a
state's incentive to delay distributing collections and encouraging
states to operate efficient programs. Efficient distribution of
collections benefits the recipient families by providing support
payments in a timely manner and the federal IV-A program by reducing the
rate at which states draw down the federal share of Title IV-A expenses.

Third, Texas' construction of Title IV-D interest allocation would
needlessly complicate OCSE's administrative oversight by imposing three
separate interest calculation processes on IV-D collection accounts. In
order to recoup interest under Texas' interpretation, OCSE would be
forced to retroactively identify (1) payments to AFDC families, payments
to non-AFDC families, and Title IV-D fees, to which it would apply the
Title IV-D FFP rate; (2) AFDC federal and state reimbursements to which
it would apply the Title IV-A FFP rate; and (3) incentive payments from
which it would claim no interest. The complexity of this process would
be exacerbated by the constant flow of funds through such a suspense
account.

Finally, we find that Texas' "unconstitutional taking" argument is
unfounded. The federal government has offered states financial
incentives to operate a child support collection program. This program
is designed to benefit the states and federal government by recovering a
portion of their Title IV-A expenses. In order for a state to obtain
such federal financial participation, it must agree to a range of
programmatic conditions. One condition is that, until child support
collections are distributed, a proportionate share of the interest
earned on the collections will be credited to reduce the federal
government's costs in funding the collection program. A state has
control over this distribution system; it can distribute the collections
efficiently and then retain all of the interest on its share.

3. Texas is not excused from accounting for program income
because the interest was assigned by the State to a non-IV-D State
agency.

Texas argued that OCSE could not disallow Title IV-D funds because the
Title IV-D entity, the Office of the Attorney General, did not receive
the interest. The interest was, instead, retained by the State
Treasury, which is a separate entity within the State government over
which the Attorney General's Office has no control.

The fact that Texas has chosen internally to allow the State Treasury to
retain this interest, rather than its child support program, does not
affect its overall responsibility to account for interest earned on
program funds, nor OCSE's right to recover its share of the interest
earned from the designated agency administering the Title IV-D program.

Title IV-D of the Act provides for grants to states. Its requirement of
crediting interest income cannot be circumvented by internal state
policies such as assignment of interest income to a state agency
independent of the Title IV-D agency. See South Carolina, p. 5; North
Carolina, p.5; and 45 C.F.R. 74.3 and 74.4

4. This interest is a result of Title IV-D program activities.
Texas is not excused from accounting for the interest because
State fiscal officers invested the principal.

Texas argued that the interest earned was not the result of Title IV-D
program activities, but the result of investment activities of the State
Treasury. This argument ignores the fact that the interest was earned
on principal sums accumulated through program activities. But for those
activities, the funds would not be available and the interest would not
have been earned. The actions of the State Treasury employees are
secondary. See New York, p. 6; South Carolina, p. 5; North Carolina,
pp. 5-6. The fact that states are not required by the Act to invest
this money does not excuse them from accounting for the interest if they
do invest it. South Carolina, p. 3; New York, p. 6.

Texas also argued that it incurred costs in investing this money which
should be taken into consideration in calculating any interest to be
credited. This issue was not fully briefed by the parties and we do not
need to decide it here. If it chooses, Texas may discuss with OCSE
recovery of such costs actually incurred in investing Title IV-D
collections during the disallowance period.

5. OCSE is not entitled to interest earned by principal which was
unrelated to the Title IV-D program. Texas has the burden of
proving the interest that is attributable to such principal.

Texas argued that some of the money in Fund 994 was completely
unconnected to the Title IV-D program. It characterized these funds as
"erroneously deposited" in the fund. Reply Brief, unnumbered p. 8.

Texas is correct in its position that interest earned on principal which
had no connection to the Title IV-D program is not an applicable credit
against IV-D expenses. However, Texas had the ability to set up its
collections system so that Title IV-D money and unrelated money would
not be commingled. It is now Texas' burden to identify the principal
and interest which it maintains is unrelated to IV-D collections. See
Utah, p. 12; New York, p. 13;

In accordance with discussion below, Texas may present evidence to OCSE
to show that there were erroneous deposits of amounts not related to the
IV-D program and to establish the amount of interest earned by these
erroneous deposits.

6. Title IV-D incentive payments are not grant money held pending
disbursement for program purposes under the Intergovernmental
Cooperation Act.

Texas argued that the principal in Fund 994 which was ultimately
disbursed as "incentive payments" for its Title IV-D performance
constituted grant money held pending disbursement for program purposes.
As such, Texas argued that the interest this principal earned was exempt
from the applicable credit requirement under the Intergovernmental
Cooperation Act. 31 U.S.C. 6503.

Section 458 of Title IV-D authorizes incentive payments to states to
encourage and to reward cost-effective and efficient child support
enforcement programs. The payments are deducted from collections which
would otherwise have been credited to the federal government to
reimburse it for its share of Title IV-A costs.

The regulatory provision at 45 C.F.R. 303.52(c) sets forth the method
for making the incentive payments. It requires OCSE to estimate the
total incentive payment for each state for the upcoming fiscal year.
Each state then includes one quarter of the estimate in its quarterly
collection report which will reduce the amount that would otherwise be
credited to the federal government for Title IV-A reimbursement. At the
end of the fiscal year, OCSE calculates the actual incentive payment the
state should have received and underpayments or overpayments are
adjusted by increasing or reducing the state's Title IV-A grant
accordingly. Under the incentive system, the state Title IV-D agency is
required to pass incentive payments through to its political
subdivisions operating child support enforcement programs.

The Intergovernmental Cooperation Act (ICA) provides that a state is not
accountable for interest earned on grant money pending its disbursement
for program purposes. Prior to the passage of the ICA, the general
rule, now set out in 45 C.F.R. Part 74 and other general grant
requirements, was that interest earned on grant funds must be credited
in all circumstances to the federal government. 45 C.F.R. 74.47; see
Florida Dept. of Health and Rehabilitative Services, DAB No. 769 (1986).

Title II of the ICA provides:

Consistent with program purposes and regulations of the
Secretary of the Treasury, the head of an executive agency
carrying out a grant program shall schedule the transfer of
grant money to minimize the time elapsing between the transfer
of the money from the Treasury and the disbursement by a State,
whether disbursement occurs before or after the transfer. A
State is not accountable for interest earned on grant money
pending its disbursement for program purposes.

31 U.S.C. 6503.

The ICA provision excusing states from accounting for interest operates
as a narrow exception to the general rule. The exception was not in the
version of the ICA originally passed by the House, although it was in
the Senate version. The Conference Committee followed the Senate
version. Representative Holifield explained this as follows:

The House bill held that States should be accountable for
interest earned on deposited grant-in-aid funds pending their
disbursement for program purposes. We were persuaded that under
the new letter-of-credit procedure interest accumulated would be
so small that it would make the accounting for this interest an
unnecessary burden and agreed with the Senate to waive this
requirement.

114 Cong. Rec. 28861 (1968); see also, S. REP.
No. 1456, 90th Cong., 2d Sess. 15 (1968).

The Board has previously ruled that undistributed Title IV-D collections
which are ultimately credited to the federal government as Title IV-A
reimbursement do not constitute grant money pending disbursement for
program purposes under the ICA. The Board found that the ICA does not
apply because Title IV-D collections are not paid by the federal
government and the collections do not constitute grant funds until they
are distributed and actually substituted for funds that would otherwise
be drawn down from the federal government. New York, p. 9; Tennessee,
p. 12; Indiana Dept. of Public Welfare, DAB No. 859 (1987), p. 8.

For similar reasons, we now find that incentive payments under Title
IV-D are not "grant money pending its disbursement" while they are part
of the undistributed Title IV-D collections.

First, just as undistributed collections do not have any "state owned"
identity until they are distributed, they do not have any identity as
advances of Title IV-A or incentive payments until they are distributed.
Since they have no identity as advances of grant funds, the ICA is
inapplicable. Id.; see also Florida, p.9.

Second, the ICA regulates money paid by the United States Government.
The money at issue was paid by individuals as child support. While this
money will ultimately be substituted for a federal payment, the fact
that the federal government is not in control of its disbursement
removes it from the ICA exception for an important policy reason.

The rationale behind the ICA exception was that the letter of credit
mechanism and other federal/state cooperative arrangements would so
diminish the time between release of the funds from the Federal Treasury
and state disbursement for program purposes, that interest would be
negligible. Because the money here is not being actually paid from the
Federal Treasury, that protection is not operative. Thus the State is
in control of the identification and distribution of this portion of the
collections and can delay its distribution as it chooses. Given this,
we conclude that the interest here is not within the narrow exception
provided by the ICA.

B. Texas may present evidence on actual interest earned prior to
distribution given the foregoing principles.

We do not agree with Texas that it was denied a reasonable opportunity
to respond to OCSE's audit and disallowance findings. However, in
acknowledging Texas' appeal, the Board said that Texas could defer
presenting evidence on specific calculations until the Board had
addressed the legal issues involved in doing the calculations.
Therefore, we will allow Texas a further opportunity to present evidence
to OCSE about how to calculate the appropriate amount of interest to be
credited to OCSE based on the foregoing principles. Texas has the
burden of proving the actual amount of interest and, in the absence of
such proof, OCSE's calculation will stand.

Texas is given 30 days from receipt of this decision, or such longer
period as OCSE determines appropriate, to develop and submit its
documentation to OCSE. If Texas disputes OCSE's further determination,
it may return to this Board within 30 days after receiving that
determination.

Conclusion

We uphold the disallowances in the amounts of $602,407 and $85,521,
based on OCSE's determination of the federal share of interest which
should have been credited to the Title IV-D program, subject to
reduction if the State provides evidence, consistent with this decision,
that interest actually earned was less than what OCSE determined. This
evidence must be provided to OCSE in accordance with the schedule set
out above.

________________________________ Cecilia Sparks Ford


________________________________ Norval D. (John) Settle


________________________________ Judith A. Ballard Presiding
Board