Tennessee Department of Human Services, DAB No. 1054 (1989)

DEPARTMENTAL APPEALS BOARD

Department of Health and Human Services

SUBJECT: Tennessee Department DATE: May 26, 1989 of Human Services
Docket No. 88-94 Audit Control No. TN-88-IR Decision No.
1054

DECISION

The Tennessee Department of Human Services (Tennessee) appealed a
determination by the Office of Child Support Enforcement (OCSE)
disallowing $859,036 in federal financial participation (FFP) claimed
under Title IV-D (Child Support and Establishment of Paternity) of the
Social Security Act (Act). OCSE's determination was based on an audit
report which found that Tennessee did not credit the Title IV-D program
with interest earned on child support payments collected and held by
Tennessee during the period from October 1, 1981 through December 31,
1987.

In prior Board cases, we have consistently held that states are required
by statute and regulation to account for interest income earned on
program funds. We uphold the disallowance here because we find that
Tennessee has presented nothing to persuade us that the prior cases were
wrong, or that the particular type of interest income here should not be
attributed to the Title IV-D program, or that OCSE should be estopped
from requiring Tennessee to credit the federal government with the
federal share of interest earnings on program funds.

In accordance with a request from the parties, we issued this decision
in draft form and permitted the parties an opportunity to submit
comments. The principal comments submitted by Tennessee addressed the
issue of whether OCSE should be estopped by what Tennessee alleged was a
policy of non-enforcement with respect to reporting of interest income.
Tennessee requested further discovery procedures to develop the record
on this alleged policy. We find that no further information is
necessary because, even if Tennessee's allegation were true, we would
find no basis for a state to rely on such a policy in light of the
statutory and regulatory requirements to account for program income and
applicable credits. We explain our findings and conclusions below.

Background

Title IV-D of the Act authorizes federal participation in state programs
to enforce child and spousal support obligations. Basic program
functions include locating absent parents, determining paternity,
establishing the amount of the child support obligation, 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.

This case involves child support payments collected by the State in the
operation of a program in accordance with Title IV-D. Most of these
funds were collected on behalf of families who received assistance under
the Title IV-A program, Aid to Families with Dependent Children (AFDC).
Under section 457 of the Act, child support collections on behalf of
these families are not distributed in full to the recipient families;
some funds are withheld to reimburse the governmental entities which
contributed to the AFDC payments. The child support payments are
distributed from Title IV-D program accounts according to a formula
which requires that the federal share of the funds withheld be credited
to the federal government by the Title IV-A agency. See 45 C.F.R.
302.51.

OCSE relied in this case on section 455(a) of the Act, which requires
that states exclude from program expenditures in which they claim FFP
"an amount equal to the total of any fees collected or other income
resulting from services provided under the [State] plan." OCSE
discussed this provision in Action Transmittal 82-8, issued September 3,
1982, and specifically stated that the requirement to adjust claims for
FFP to account for income resulting from Title IV-D services included a
requirement to account for interest earnings on child support
collections.

Discussion

In this case, the auditors found that child support collections,
obtained by the Tennessee Department of Human Services in the operation
of a program in accordance with Title IV-D of the Act, were deposited
into a State Treasury General Fund account pending distribution
according to program requirements. The auditors calculated that
$1,218,088 in interest was earned on the daily collection balance in
that account, and recommended disallowance of the federal share of
$859,036. The auditors relied on section 455(a) of the Act, as amended
by the Omnibus Budget Reconciliation Act of 1981, P.L. 97-35, section
2333(c).

Tennessee did not dispute the basic findings that interest was actually
earned on child support collections held pending distribution and that
Tennessee did not exclude the interest from program expenditures in
claims for FFP or otherwise credit the federal government with a share
of the interest. As we discuss below, Tennessee argued that a
disallowance was inappropriate because: 1) Section 455(a) did not
clearly apply to interest income; 2) Tennessee lacked notice that OCSE
required accounting for interest income and, in fact, Tennessee relied
on prior audit reports which found no problem in Tennessee's fiscal
management; 3) the interest income was earned by the State Treasury and
not the Title IV-D program agency; 4) the funds were within the scope of
the Intergovernmental Cooperation Act which exempts states from
accounting for interest earned on grant funds pending disbursement; and,
5) the disallowance would be a hardship for the Title IV-D agency.

1. Interest earned on funds collected under the Title IV-D program
must be offset against claimed expenditures or a share must be otherwise
credited to the federal government.

Tennessee argued that the scope and the legislative history of section
455(a) indicate that Congress intended only that states account for fees
and other charges for services paid by families which do not receive
AFDC benefits under Title IV-A of the Act (non-AFDC families).
Tennessee noted that section 2333(c) of the Omnibus Budget
Reconciliation Act of 1981 (OBRA), Pub. L. 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." Tennessee also
noted that only non-AFDC families were referenced by the pertinent
legislative reports and a letter from the Secretary of HHS transmitting
to the Speaker of the House the proposed draft bill including section
2333. See Appeal File, pp. 7-10. Tennessee contended that the caption
and the letter indicate that the exclusion was intended to apply only to
income derived from non-AFDC families, both fees and other charges for
services. Therefore, Tennessee contended that the phrase "fees and
other income" in section 455 should be limited to the fees and other
charges for services applicable to non-AFDC families. Tennessee
concluded that, since the principal sums involved in this case were
child support collected on behalf of AFDC families, the interest earned
was beyond the intended scope of section 455(a).

In several cases, the Board has upheld similar OCSE determinations that
interest on child support collections is "other income" for purposes of
section 455(a) of the Act. See, e.g., Utah Dept. of Social Services,
DAB No. 750 (1986), pp. 1-7; New York Dept. of Social Services, DAB No.
794 (1986), pp. 5-8; South Carolina Dept. of Social Services, DAB No.
926 (1987), pp. 3-5; North Carolina Dept. of Human Resources, DAB No.
986 (1988). In summary, the Board 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.
The Board found that the interest income on child support collections
results directly from services under the Title IV-D program even though
the program does not require investment of dormant funds, because the
accumulation of principal balances is a direct result of Title IV-D
collection services. The Board also found that, even if section 455(a)
did not require this result, pre-existing regulations would require
similar accounting practices.

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 can not 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 Tennessee contended. Rather,
the phrase plainly includes all income, other than fees, resulting from
program activities. Here Tennessee collected funds from absent parents
and, as a direct result of that activity, earned the interest in
question. Without the Title IV-D collection activities no interest
would be earned, since the principal balances were amassed through those
activities.

We do not find persuasive Tennessee'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, that is beside the point because the change to
section 455(a) had a broader effect. Furthermore, 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).

The legislative history does not indicate that Congress intended that
non-AFDC family fees should be treated differently than other program
income which applicable regulations already required grantees to credit
to the program so that federal obligations would be proportionately
reduced. The statutory language appears to indicate instead an intent
to incorporate already existing regulatory requirements and establish a
uniform accounting requirement for both non-AFDC family fees and other
program income (such as interest on AFDC child support collections).

Furthermore, the point of section 455(a) is that federal funding needs
should be offset by the federal share of funds produced through program
activities. Interest on collected funds meets this basic policy
objective of reducing federal funding needs. New York Dept. of Social
Services, DAB No. 794 (1986).

Even if we were to find that section 455(a) did not contain a
requirement that states account for interest earned on program-related
funds, the Board has found that there were pre-existing regulatory
grounds to require states to do so. Department-wide rules applicable to
all grantees, contained in 45 C.F.R. Part 74 and Office of Management
and Budget (OMB) Circular A-87 (made applicable to grants to states by
45 C.F.R. 74.171), require that grantees reduce program expenditures,
for which they claim FFP, by program income or applicable credits. All
gross income earned by a grant recipient from activities part or all of
the cost of which is supported by grant funds is considered program
income which must be used to fund program activities and reduce claimed
expenditures. 45 C.F.R. 74.42(c). A parallel requirement is that, to
be allowable, costs must be net of all applicable credits; applicable
credits are receipts which offset or reduce expense items allocable to
grants. OMB Circular A-87, Attachment A, Paragraphs C.l.g, C.3. The
Board has held that interest earned on program funds or as a result of
program activities is included within the ambit of program income or
applicable credits. South Carolina Dept. of Social Services, DAB No.
926 (1987); see 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).

Although Tennessee argued that the interest earned was not a "receipt"
which could be considered an applicable credit because it was earned by
the State Treasury and not the Title IV-D agency, the interest remains a
receipt for the grantee State as a whole. A grantee State's overall
responsibility to account for net program expenditures is not changed
when the State chooses to distribute benefits and responsibilities
between its constituent parts. As we discuss further below, the State
cannot evade its responsibility to account fairly for interest earned on
program funds by assigning investment responsibilities and interest
earnings to a State agency other than the Title IV-D agency.

Similarly, Tennessee argued that the interest earned could not be
considered program income because the interest was not earned as a
result of program activities, but as a result of investment activities
by the State Treasury. Tennessee noted that no part of the cost of
those investment activities is borne by federal grant funds. The
argument that program activities are only secondary fails to recognize
that interest would not have been earned if not for the collection and
accumulation of the principal sums involved. Any investment activities,
and consequent costs, are subsidiary to these collection activities.
Furthermore, the fact that Tennessee has not claimed as program
expenditures investment costs which can be specifically identified with
the Title IV-D program (or offset these costs against investment income)
does not alter the federal government's right to a share of interest
earned.

2. Tennessee had adequate notice of the requirement to account for
interest earnings on program funds.

Tennessee argued that it lacked notice of the requirement to account for
interest on child support collections because it alleged that the
requirements were based in action transmittals or additional regulations
issued to interpret or clarify section 455(a) of the Act which had not
been issued following the notice and comment procedures required for
issuing substantive rules by the Administrative Procedure Act (APA), 5
U.S.C. 552 et seq. Tennessee also argued that OCSE improperly applied
45 C.F.R. 304.50 retroactively, which specifically addresses interest on
IV-D collections, before Tennessee could have had notice by its issuance
on September 19, 1984. 49 Fed. Reg. 36772.

In light of our conclusion that there was both a statutory and a
regulatory requirement to credit the federal government with its share
of interest earned on program funds, we find that Tennessee had
sufficient notice of that requirement to be bound by it. Action
Transmittal AT-82-8 is not needed to support this disallowance. In
issuing action transmittals or additional regulations to repeat or
clarify this requirement, OCSE was not creating a new requirement. Even
before the statutory requirement was enacted or specific regulations
governing interest earned on program funds were issued (45 C.F.R.
304.50), general grant regulations, discussed above, required the same
result. These regulations were based on an underlying policy that
federal funding needs should be offset by the federal share of funds
produced through program activities. New York Dept. of Social Services,
DAB No. 794 (1986), p. 6.

While Tennessee asserted that there was no evidence that OCSE had been
requiring any other states to account for interest on child support
collections prior to the issuance of interpretive materials such as the
action transmittal and regulations, we find that the lack of any formal
policy issuance interpreting the statutory and pre-existing regulatory
requirements does not affect their application here. The requirements
themselves are sufficiently plain that they needed no interpretation to
be implemented. Nor does the failure of other states to comply with the
requirements justify Tennessee's failure here. The actions of other
states are not relevant to the issue of whether Tennessee complied with
its obligations under the statute and applicable regulations.

In sum, in this disallowance, OCSE was neither applying a new
requirement retroactively, nor changing or expanding a previously held
policy. The fact that OCSE eventually issued 45 C.F.R. 304.50, a
regulation which restated the existing statutory and regulatory
requirement, is not material; statutory requirements are often restated
in regulations and regulations are often clarified by subsequent
issuances. In sum, we find that there is no basis to consider this
disallowance a retroactive application of 45 C.F.R. 304.50.

3. OCSE is not estopped from taking this disallowance.

Tennessee asserted that it relied on a general policy of non-enforcement
of interest requirements and on the specific failure of OCSE to timely
audit and discover any problem with Tennessee's claims. Although
Tennessee pointed to no explicit statement of enforcement policy,
Tennessee alleged that further discovery procedures would produce
evidence of non-enforcement practices. Tennessee specifically cited
five prior OCSE audits covering parts of the disallowance period, which
failed to identify errors in treatment of interest income. Tennessee
argued that these factors gave rise to a basis for estoppel against
OCSE.

We find no evidence to support Tennessee's allegation of a general
policy of non-enforcement of interest requirements but, even if further
development of the record provided such evidence, we would not find a
basis for estoppel here. The doctrine of equitable estoppel precludes a
party from asserting in litigation an essential fact which that party
had misrepresented prior to litigation when the opposing party relied on
that misrepresentation to its detriment. See Lyng v. Payne, 476 U.S.
926, 935 (1986). While there may be additional requirements for
estoppel against the federal government, there can be no estoppel absent
the traditional requirements of a misrepresentation of fact, reasonable
reliance, and detriment to the opposing party. Heckler v. Community
Health Services of Crawford County, Inc., 467 U.S. 51, 59 (1984).

Tennessee has not shown even the traditional elements of estoppel here;
for example, we fail to see how the State suffered any detriment from
its opportunity to earn interest on federal funds during the period at
issue. The State's liability for interest earnings is only to account
for earnings on federal funds and should leave the State in no worse
condition than if the State had not had the use of federal funds.
Tennessee argued that if the State had been notified of the problem at
an earlier time, it would have structured its operations to minimize its
liability for interest earnings to the federal government. Even if this
were true, in that circumstance the State itself would also not have
earned as much interest on federal funds and, thus, would be no better
off overall. The amount it would owe to the federal government would
still be the same amount that it earned in interest on the federal share
of Title IV-D program funds. While Tennessee argued that divisions
between State agencies may affect how the State allocates the
liabilities at issue here, as we discuss below, this is an issue
internal to the State itself and should not affect the responsibility of
the State to the federal government to account for federal-state program
funds.

Also, even assuming that there was some detriment to Tennessee, the
State's reliance was not reasonable. "[R]eliance must have been
reasonable in that the party claiming the estoppel did not know nor
should it have known that its adversary's conduct was misleading."
Heckler v. Community Health Services, supra, p. 59. Any policy that
permitted states to retain interest earnings on federal funds would have
been contrary to the express statutory and regulatory requirements
discussed above. It would not be reasonable to rely on the opinions of
auditors or even of internal OCSE policies in light of these
requirements.

The Board has held in prior cases that the failure to question costs in
one audit does not preclude later review of those costs when the
auditors had made no affirmative judgment that the questioned costs were
allowable and there was no final agency determination regarding
allowable costs. Pennsylvania Dept. of Public Welfare, DAB No. 451
(1983). The Board reasoned that audit findings are simply
recommendations to the agency, not final agency determinations of fact.
Thus, a state would not be justified in placing undue reliance on those
findings.

Tennessee argued that this case could be distinguished from Pennsylvania
because the audits of Tennessee's program had purported to include
within their scope all aspects of the Title IV-D program, including
financial management practices, and because the audits made express
findings that Tennessee's claims were accurate. But these audits were
still no more than the results of a limited review by federal employees
who clearly did not have authority to render a final determination on
the State's claims and to bind the federal government. See Affidavit of
Doug E. Batson, pp. 2-4. Clearly, these audits did not constitute a
final federal determination that Tennessee's claims were accurate in all
respects.

In its briefs and in its comments on the draft decision, Tennessee
argued that these audits should not have been limited because
comprehensive annual federal audits were a mandatory duty under section
452(a)(4) of the Act. But that section requires audits only to
determine whether penalties under section 403(h) are appropriate (annual
audits are only required if a penalty or a corrective action plan has
been imposed; otherwise the audits must be conducted at least once every
three years). This case does not involve penalties under section
403(h), and there is no indication in section 452(a)(4) that these
audits may foreclose OCSE review of other issues. In sum, this very
authority indicates that the reviews were limited in scope and that
Tennessee should not reasonably have relied on them.

4. Tennessee is not excused from accounting for program income
because the interest was assigned by the State to a different State
agency.

Tennessee argued that OCSE could not disallow Title IV-D funds when the
Title IV-D program under the Department of Human Services did not
receive any of the interest earned. The interest earned was, instead,
retained by the State Treasury under State law. Tennessee conceded that
State law permits the State Treasurer to pay interest on funds held to
the credit of special funds "whenever the satisfactory conduct of the
State's business clearly demands it and not otherwise." Tenn. Code.
Ann. 9-4-302. But Tennessee submitted an affidavit in which the
Commissioner of the Tennessee Department of Finance and Revenue stated
that he did not consider a separate account for child support payments
to be necessary. He cited the costs of administering a separate account
and the loss of investment leverage as justification. Affidavit of
David L. Manning, dated October 26, 1988.

The fact that the State here has chosen to distribute the benefits and
the responsibilities internally in such a way that its Department of
Human Services may bear alone the burden for the State Treasury's
investment activities does not affect the State's overall responsibility
to account for interest earned on program funds, nor the federal
government's right to recover its share of interest earned from the
designated agency administering the Title IV-D program. Title IV-D of
the Act provides for grants to states and contains requirements, such as
accounting for interest income resulting from program services, which
can not be circumvented by internal State policies such as assignment of
interest income to a State agency other than the one administering the
Title IV-D program.

Moreover, as the State conceded, this allocation of benefits and
responsibilities was not required by State law. The State Treasurer had
the authority to set up a separate account for child support
collections, and the reasons why this was not done provide no
justification for altering the State's responsibilities to the federal
government. With respect to costs, Tennessee did not explain why actual
costs of maintaining a separate account for these collections would not
be allowable as administrative costs under Title IV-D. More to the
point, Tennessee did not explain why it could not use accounting methods
other than placing the funds in a separate account to ensure that
interest earned was credited to federal-state programs, such as transfer
of child support collections to Title IV-A program accounts before
interest could be earned, or an after-the-fact adjustment similar to
this disallowance.

Tennessee also 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. See New York Dept. of Social
Services, DAB No. 794 (1986). While we know of no federal requirement
that states must invest dormant funds in interest bearing accounts, the
accounting requirements in section 455(a) and prior general grant
regulations, discussed above, direct that interest earned on federal
funds must be credited to the federal government.

4. The Intergovernmental Cooperation Act does not apply.

The Intergovernmental Cooperation Act (ICA) at 31 U.S.C. 6503
(previously codified at 42 U.S.C. 4213) provides that a State is not
accountable for interest earned on grant money pending disbursement.
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. See Florida Dept. of Health and Rehabilitative
Services, DAB No. 769 (1986). The ICA operates as a narrow exception to
this general rule, and is implemented in the regulations by 45 C.F.R.
74.47(b).

As the Board has discussed in prior cases, the ICA does not apply to
child support collections because these funds were not grant funds
within the scope of the ICA. The ICA defines a grant as money or
property "paid or provided by the United States Government" to certain
types of recipients including state and local governments. 31 U.S. C.
6501(4). Child support payments were provided by absent parents and not
by the United States Government. Nor were the AFDC-related collections
held by the State pending disbursement for Title IV-D program purposes,
such as child support; the State held these collections, instead,
pending distribution to the AFDC program (to repay AFDC grants
previously extended). See New York Dept. of Social Services, DAB No.
794 (1986).

While Tennessee argued that child support collections are effectively
equivalent to AFDC grant funds because child support collections are
eventually credited to the AFDC program and are then commingled with
AFDC grant funds and used as such, this does not make them equivalent to
AFDC grant funds prior to the time that the AFDC program is credited
with the collections so that drawdowns of federal grant funds can be
reduced. See Attorney General of Texas, DAB No. 1048 (1989). There is
a policy rationale for this distinction as well; since states receive
collections directly, states can best control when collections are
distributed and should not have an incentive, such as interest earnings,
to encourage delay. See Indiana Dept. of Public Welfare, DAB No. 859
(1987), p. 9. Thus, we find no basis to apply the ICA exception in this
circumstance.

5. There is no legal basis for an exception to requirements to
account for interest earnings on federal funds based on "hardship."

Tennessee introduced substantial evidence relating to the hardship which
the Title IV-D agency would experience if it was required to account for
interest earned on federal funds. This evidence was undisputed by OCSE.

Tennessee identified, however, no legal basis for the Board to reverse
the disallowance based on potential hardship, and we are not aware of
any legal basis for such an action. This Board is bound by all
applicable laws and regulations. 45 C.F.R. 16.14. The Board has no
authority to render decisions unsupported by a legal basis, regardless
of the equitable considerations involved. Moreover, even if the Board
did have such authority, it would not be appropriate in this
circumstance. The State reaped substantial benefits over a period of
years and will, overall, suffer no hardship from this disallowance. If
the State chooses to impose the entire burden of the disallowance on the
Title IV-D agency, then the inequity is the result of that choice and
not the result of the disallowance itself.

Conclusion

For the reasons discussed above, we uphold the disallowance of $859,036
claimed under Title IV-D based on Tennessee's failure to account
properly for the federal share of interest earned on undistributed child
support collections.

_______________________________ Cecilia Sparks Ford

_______________________________ Alexander G. Teitz

_______________________________ Norval D. (John) Settle
Presiding Board