New York State Department of Social Services, DAB No. 1072 (1989)

DEPARTMENTAL APPEALS BOARD

Department of Health and Human Services

SUBJECT: New York State Department DATE: July 19, 1989
of Social Services Docket No. 88-233 Decision No. 1072

DECISION

The New York State Department of Social Services (State) appealed a
disallowance by the Family Support Administration (FSA) of $217,180 in
federal financial participation (FFP) claimed under Title IV-A (Aid to
Families with Dependent Children or AFDC) of the Social Security Act for
the period January 1, 1985 to December 31, 1985. In an administrative
cost review, FSA found that New York had erroneously identified four
audit projects as AFDC projects, because the audits were "primarily
related to review of non-AFDC costs." State's Exhibit (Ex.) 1. Each
audit project comprised several, separate, audits. FSA alleged that the
audits should have been identified as projects of the State's Home
Relief (HR) program.

In responding to FSA's findings prior to its appeal to the Board, the
State agreed to the disallowance of two audit projects. Based on
information the State provided during the course of this appeal, FSA
withdrew the disallowance of a third audit project. The amount
remaining in dispute in this appeal thus involves only one audit
project, comprising nine separate audits, and totals $180,688.
Respondent's Brief, p. 3.

Summary

We conclude that the record here does not justify allocating these costs
in full to the HR program, as FSA had initially concluded, but we return
the disallowance to FSA for further consideration in light of the
following:

o We find that two audits, which generally applied AFDC quality
control activities and focused on AFDC cases in particular counties to
recommend corrective action to improve AFDC administration, were
properly within the scope of the AFDC program and were not duplicative
of other efforts. On this record, it is unclear whether there was an
allocable benefit to the HR program in the context of the State's
overall quality control procedures. If FSA determines there was an
allocable benefit, it may negotiate an equitable allocation method. On
the record before us, however, we have no basis to distinguish these
audits from quality control activities which were apparently properly
charged wholly to the AFDC program.

o We find that the remaining seven audits (reviews of HR cases to
see if AFDC standards had been properly applied in denying AFDC
eligibility) were not duplicative but materially benefitted both the
AFDC and the HR programs. We find benefits to the AFDC program in the
form of better program monitoring and specific recommendations for
corrective action and benefits to the HR program in the form of
correction of erroneous eligibility determinations and consequent fiscal
savings. Thus, it is not reasonable to simply attribute all the costs
of the seven audits to either program. What is needed is an agreed-upon
division of these costs based on the benefits accruing to both programs.

Background

In New York, the State supervises and sets standards for public
assistance programs administered by agencies in each local social
services district (generally each county). Uniform financial standards
of need are used to determine eligibility for income maintenance
assistance under both the federal-state funded AFDC program and the
State-funded HR program. Applicants who meet these financial
eligibility standards but do not meet certain other standards for the
AFDC program are automatically eligible for benefits under HR. Joint
costs of eligibility determinations in each county are pooled and
allocated between programs by a formula not disputed here. The State's
Office of Audit and Quality Control (Audit Office) is a central unit
involved in program oversight

responsible for conducting comprehensive management and fiscal
audits of all local social service districts and providers of care
and services; performing eligibility reviews in accordance with
Federal and State mandates to determine the extent of
ineligibility and the degree of over-and-underpayment in the local
social services districts; assuring that claims are correct. . .

State Ex. 2. The unit also conducts reviews of eligibility errors, in
addition to statewide reviews mandated by quality control rules, to
monitor error rate levels of local districts.

Under the State's approved cost allocation plan (CAP), costs of the
Audit Office are allocated among benefitting programs based on the
number of man-days expended on audits identified in full or in part with
each program. State Ex. 2 (State Exhibit 3 is a proposed revision
submitted in 1987 which does not affect the basic allocation method).
FSA is not contesting the fairness of the allocation method, merely
whether the State applied that method correctly.

FSA charged that the State inaccurately identified nine audits with the
AFDC program, under the audit project code "IA-IM-005 IM [Income
Maintenance] Eligibility Review." Each audit involved a single county
program. Two types of audits were involved: audits of AFDC cases with
affirmative eligibility determinations using the same methods as
statewide quality control reviews required by regulation, and audits of
family cases in which AFDC eligibility was denied but HR benefits were
provided. We discuss each of these types of audits separately below.

Discussion

I. Audits of affirmative eligibility determinations (quality
control type audits)

In this category were two audits in which the State examined open AFDC
cases in particular counties using standard quality control methods,
such as collateral contacts to verify income and other eligibility
information, to check whether eligibility determinations had been
properly performed. FSA argued that county-specific quality control
audits were not necessary for the proper and efficient administration of
the AFDC program. Title IV-A provides for reimbursement of only those
administrative costs which are "found necessary by the Secretary [of
HHS] for the proper and efficient administration of the State [AFDC]
plan." Section 403(a)(3) of the Act. The cost principles expressed in
Office of Management and Budget (OMB) Circular A-87 (made applicable to
grants to states by 45 C.F.R. 74.171) similarly require that costs must
be "necessary and reasonable." Attachment A, para. C.1.a.

FSA's major argument was that the audits were not necessary because they
"went beyond anything required by the AFDC quality control process and,
to a large extent, duplicated that process." FSA Brief, p. 10. FSA
noted that the AFDC cases in these counties were within the universe of
AFDC cases from which the statewide AFDC quality control sample had been
drawn, and that the results of the statewide quality control review
could be traced to individual counties if the State wished data on these
counties. Id. FSA further asserted that, even if the audits were in
some ways "beneficial" to the administration of the AFDC program, they
were still not "necessary" since the program could function in the
absence of these audits and "there is a substantial question . . .
whether they promoted efficiency." FSA Brief, p. 15.

The State did not dispute that the audits were similar to statewide
quality control reviews, but asserted that the audits were not
duplicative because statewide statistics did not yield reliable
information on errors in individual counties which the State could use
to monitor the county programs and determine if corrective action to
prevent errors was necessary. The State argued that the statewide
sample contained an insufficient number of cases from these counties to
draw statistically valid conclusions about county administration of the
AFDC program. State Brief, p. 22. In sum, the State asserted, and FSA
did not rebut in any way, that the county-specific audits provided new
information not otherwise available, and that such information could be
used by the State to improve the administration of the AFDC program.

The State argued that knowledge of AFDC program operations in individual
counties was also essential to the State's ability to ensure a low
statewide error rate in quality control reviews. Id. The audits
themselves expressed that goal. The State noted that the federal
quality control regulations require that states undertake corrective
action to maintain low statewide error rates. See 42 C.F.R.
205.40(b)(iv). The State contended that these audits were part of its
program to reduce error rate levels.

Our examination of the audit reports supports the State's contention
that the audits provided new information to permit the State to
determine whether the county was properly administering the AFDC program
and whether corrective action would be appropriate for specific
problems. While the auditors may have used methods similar to those
used in the statewide quality control reviews, the audits contained a
much larger sample from the particular counties, separated the results
by types of error, and identified the stage in the eligibility
determination process at which the error was made. See State Exs. 6,
12.

Thus, we find that the record does not support FSA's contention that
these audits were duplicative. FSA itself acknowledged that the audits
were more focused than the statewide quality control reviews and that
the audits recommended specific corrective actions based on particular
problems found. FSA Brief, p. 19. Nor did FSA deny that specific
corrective actions were undertaken by the counties in response to the
audit findings.

Furthermore, our examination of the audit reports supports the State's
assertion that the audits were a reasonable and necessary part of the
State's AFDC administrative responsibilities to prevent erroneous
eligibility determinations. The audits were a focused examination of
the AFDC eligibility process in each county and contained
recommendations for corrective actions, together with an assessment of
their probable effectiveness. The counties' responses to these
recommendations was also set forth; these responses included promises to
undertake specific corrective actions. While FSA argued that corrective
action plans are required in the course of quality control reviews, as
we discussed earlier we find credible New York's assertion that this
review process did not focus on particular counties and provide
sufficient detail upon which to base recommendations for corrective
action in upstate counties. Thus, we find that these audits would,
indeed, have promoted the efficiency of the AFDC program and improved
the accuracy of AFDC eligibility determinations.

The fact that the audits were not specifically required by regulation
does not mean that the costs were not reasonable and necessary costs to
the AFDC program. In State of Oregon Mass Transit Assessment, DAB No.
402-Supplementary (1983), the Board referred to the term "necessary" as
"'essential' so that the grant programs could not be run properly and
efficiently without it." This does not mean that the program could not
survive without the expense, for few cost items, examined in a vacuum,
would meet that test; rather, the term restricts federal reimbursement
to costs which fairly can be said to be integral to overall efficient
program operation. New Jersey Dept. of Human Services, DAB No. 899
(1987). While the regulations delineate overall State responsibilities,
they are silent on many details of reasonable and necessary
administration. In the absence of any specific regulations or guidelines
concerning these audit activities, we base our conclusion that the costs
were reasonable and necessary on the State's evidence that the audits
had substantial utility to the AFDC program, which FSA did not
ultimately rebut.

Having established that the audits were a reasonable and necessary cost
to the AFDC program, there remains the separate issue of the extent to
which the costs of these audits should be treated as costs only of AFDC
or as costs of both the AFDC and the HR programs. This turns on the
extent of the "benefit" to each program.

In light of the clear benefits to the AFDC program, we find an
insufficient basis to sustain this disallowance (which would require
allocation of the entire costs to the HR program). The audits appear to
be primarily related to AFDC program administration. They were reviews
of AFDC cases to determine if AFDC standards were met, they were
conducted in the same manner as AFDC quality control reviews required by
statute and regulation, and they were for the purpose of improving the
AFDC eligibility process and reducing the State's AFDC eligibility error
rate.

It is not clear on the record here whether there was an allocable
benefit to the HR program as well. While there would appear to be some
benefit to the HR program from cases determined not eligible for AFDC
payments and eligible for HR payments, it is not clear how substantial
that benefit is or whether it would justify allocation of the costs.
Any benefit to the HR program is the same benefit which would accrue
from ordinary AFDC quality control activities, which neither party
denied were properly charged in full to the AFDC program. On the record
before us, we have no basis to meaningfully distinguish these audits
from these other AFDC quality control activities. Moreover, the mere
fact that an activity primarily related to the AFDC program might have
an incidental or ancillary impact on the HR program does not necessarily
justify the conclusion that there was an allocable benefit.

Neither party developed the record on this issue. FSA focused its
argument on the necessity issue discussed above. Thus, we do not reach
this issue and FSA may consider whether, in the context of overall
quality control activities, there is an allocable benefit to the HR
program. If so, FSA may negotiate an equitable allocation method to
quantify that benefit. If, however, FSA finds that any benefit to HR is
merely incidental to quality control activities recognized in other
contexts as proper charges to the AFDC program, then there would be no
basis to require the State to allocate the costs in part to the HR
program.

II. Audits of negative eligibility determinations (HR cases)

In these seven audits, the State examined family cases, currently
receiving HR benefits, in which AFDC eligibility had been denied. Both
parties characterized these audits essentially as expanded quality
control audits of HR cases which were AFDC negative case actions. The
audits identified cases in which AFDC eligibility had been incorrectly
denied. The audits also identified needs for corrective action to
improve the eligibility determination process, such as training needs
for workers performing AFDC eligibility determinations. FSA argued that
these audits should not have been charged to the AFDC program because
the audits were essentially audits of the HR program and not the AFDC
program. FSA raised the same general arguments asserted above: 1) that
the costs were not necessary or reasonable to the AFDC program because
the audits duplicated existing eligibility and quality control
procedures; and 2) that the audits provided a substantial benefit only
to the HR program because the sole purpose of the audits was to shift HR
recipients to AFDC and reduce HR program outlays.

For reasons similar to those discussed in the preceding section, we find
no evidence to support FSA's claim that the audits were duplicative.
Although FSA asserted that the audits duplicated initial eligibility
processes and quality control reviews of negative AFDC cases, FSA did
not rebut the State's underlying contentions 1) that the disputed audits
provided information that was not available from quality control
reviews; and 2) that statistics produced by the quality control reviews
were not sufficient to adequately monitor upstate counties.
Furthermore, FSA presented no evidence that the eligibility process and
the quality control reviews alone provided an adequate procedure for
effective program operations. Clearly there is a limit to the number of
re-reviews of the same cases which would be necessary to program
operations, but the record contains no evidence of prior similar reviews
of these particular cases apart from the original eligibility
determinations (which these audits were intended to check).

Having determined that these audits were not duplicative, we turn to the
issue of whether the costs should be allocated to the AFDC or the HR
program. FSA essentially disputed any allocation to AFDC because the
audits were of HR cases and shifted eligibles to the AFDC program. The
State essentially argued that the benefit to HR was irrelevant since
AFDC program purposes were served. Both positions are wrong.

The State presented essentially unrebutted evidence that the audits
provided a substantial benefit to the AFDC program. The State
explained, and FSA did not dispute, that the audits reviewed county
application of AFDC dependency requirements and other factors related to
categorical eligibility for AFDC benefits. The State argued that the
audits furthered AFDC goals by extending benefits to eligible recipients
and improving the eligibility determination process. The State cited
the fact that the audits contained recommendations of corrective actions
to improve ongoing eligibility determinations.

While it is uncontested that all cases reviewed involved HR recipients,
that does not mean that there was no benefit to AFDC, since the cases
also involved AFDC eligibility determinations. Since cases which meet
financial standards of need, common to both AFDC and HR, but not
additional AFDC dependency requirements are eligible for HR, erroneous
findings that an individual was ineligible for AFDC based on dependency
criteria can be found only by looking at HR cases. State Brief, p. 26.
The State also explained that this review was focused because the
auditors reviewed only HR family cases, which were those cases in which
misapplication of AFDC dependency criteria was more likely.

In view of the facts presented by the State, and our review of the audit
reports, we find no basis to require that the State allocate the total
costs of these audits to the HR program because we find substantial
benefits to the AFDC program. We reach this conclusion because 1) these
audits were narrowly focused on AFDC dependency requirements rather than
any requirements contained within the HR program itself, 2) these audits
were not overall surveys of HR cases, but focused only on that group of
HR cases which were likely to have been erroneously denied AFDC (family
cases), and 3) the audits recommended specific corrective actions
related to AFDC-only requirements and not duplicative of the results of
other quality control reviews or of the eligibility process itself.

Although the audits may have a fiscal impact on the AFDC program,
requiring more program expenditures, FSA erred in focusing on this as a
reason why there was no "benefit." In fact, the purpose of the AFDC
program is to provide aid to all eligible needy applicants. The audits
promoted the aim to provide aid as authorized by statute and regulation,
as part of an effort to minimize erroneous denials of AFDC eligibility.
Thus, in this instance, an increase in program expenditures benefitted
the AFDC program by ensuring that the AFDC program provided aid to
individuals erroneously denied AFDC eligibility. (Of course, as we
discuss below, fiscal savings to a program may be viewed as a "benefit"
when it is due to a reduction in improperly spent funds).

On the other hand, we find no basis to support New York's allocation of
the total costs of these audits to the AFDC program because FSA
presented evidence of a substantial benefit to the HR program which New
York did not persuasively rebut. New York conceded that AFDC and HR
eligibility are closely intertwined so that a "positive" AFDC
eligibility determination is a "negative" HR determination, and a denial
of AFDC benefits to an individual meeting financial standards of need is
a "positive" HR determination. Thus, particularly in considering those
requirements which demarcate the line between the two programs, there is
clearly a benefit to both programs in improving the accuracy of
essentially common determinations to determine which program should make
the necessary payments. New York apparently has recognized this
situation in requiring local programs to allocate overall eligibility
costs between all benefitting programs, including both the AFDC and HR
programs. See New York Dept. of Social Services, DAB No. 1063 (1989)
(distribution of eligibility costs in E/IM cost pool among various
benefitting programs including AFDC and HR based on case count).

Furthermore, FSA correctly pointed out that the fiscal impact provided a
clear benefit to the HR program by reducing improper HR expenditures.
Although the AFDC program can be said to have a benefit from the ongoing
extension of payments to all eligible individuals, clearly the HR
program also benefits from reviews of cases which result in lower HR
expenditures by reducing the number of recipients improperly classified
as HR cases. While AFDC payments erroneously classified initially as HR
payments may themselves may be allowable under AFDC program rules, there
is no reason why the AFDC program should be solely responsible for
finding them when the activity also benefits the HR program.

Unlike the audits considered above, these audits were not clearly within
the scope of the AFDC quality control system and it cannot be said that
the benefits to the HR program were incidental to ordinary AFDC
administration. Although there is a general AFDC quality control
requirement to look at negative case actions, 42 C.F.R. 205.40, the
regulations are not as specific about the course of action required for
negative case actions. Furthermore, here the State was looking at only
those negative case actions which involved HR cases.

In sum, in light of the facts presented to the Board in this case, we
reject the position advanced by both of the parties that the audit costs
must be charged in full to one program or the other. Instead, we return
the disallowance of the costs attributed to these seven audits to FSA so
that FSA can negotiate an equitable allocation method to distribute the
costs between the two programs.

We note that this case is distinguishable from the case the State
primarily relied on, Missouri Dept. of Social Services, DAB No. 844
(1987), because in that case the activities were clearly required by the
Title IV-E program and were not clearly required by, or even clearly
useful to, another program. Missouri, p. 9. We also reject the
argument that the disallowance effectively penalizes the State for
having a supplementary public assistance program by not providing full
FFP in costs which would be available under the AFDC program in the
absence of the HR program. The State is not being penalized; it is
merely being asked to pay for a share of costs which benefit its HR
program. Under OMB Circular A-87, costs are to be equitably allocated
to benefitted programs; if the benefits are shared between two programs,
the Agency can reasonably require an allocation of the costs between
those programs.

While we find therefore that some allocation to HR is clearly
appropriate, the parties have not presented a method to quantify that
benefit. Thus, we return this part of the disallowance to FSA for
negotiation of an allocation method to reflect that the costs did not
benefit only the AFDC program. If the parties are unable to agree on an
allocation method, the State may return to the Board after receiving an
adverse determination on a proposed method under the 45 C.F.R. Part 75
process.

Conclusion

For these reasons, we return the disallowance to FSA for further
consideration because we conclude that the record does not support a
disallowance which rests on allocating the entire amount to the HR
program. For two audits within the contested audit project, FSA should
consider whether there is an allocable benefit to the HR program at all
(and, if so, may negotiate an allocation method); for seven audits
within the contested audit project, FSA should negotiate an allocation
method consistent with the principle that the allocation should account
for the clear benefit received by both the AFDC and HR programs.


________________________________ Cecilia Sparks Ford

________________________________ Norval D. (John) Settle

________________________________ Donald F. Garrett Presiding
Board