Department of Health and Human Services
DEPARTMENTAL APPEALS BOARD
Appellate Division
SUBJECT: Nevada Department of Human Resources
DATE: April 4, 1991
Docket No. 90-131
Decision No. 1241
DECISION
The Nevada Department of Human Resources (DHR) appealed a decision by
the
Regional Director of Region IX that upheld a determination of the
Region IX
Division of Cost Allocation (DCA) of the Department of Health
and Human
Services (HHS). The DCA determination disapproved DHR's cost
allocation
plans (CAPs) distributing state-wide and department-wide
administrative costs
among DHR component agencies for State fiscal years
(FYs) 1986 and 1987, on
the grounds that they were submitted late. DCA
determined that an HHS
guide called OASC-10 1/ required submission of
state CAPs to federal
cognizant agencies (here DCA) "within six months
after the last day of the
State's fiscal year." OASC-10 at 7. The
proposed CAPs covering
State FYs ending June 30, 1986 and June 30, 1987
were submitted on September
30, 1988, i.e., twenty-one and nine months
late respectively.
DHR argued that DCA should have approved the CAPs despite the
late
submission for two main reasons. First, a distinct CAP for DHR
should
not have been necessary, because CAPs existed already at the
state-wide
level and at the level of the Welfare Division (a component of
DHR) and
because DHR was not aware that another CAP was required.
Second, DHR
was not provided adequate notice of the OASC-10 submission
deadline
and, in any event, the deadline should not be enforced
inflexibly. We
find no merit in DHR's arguments and uphold the Regional
Director's
determination. 2/
Background
1. Legal Framework
A state that chooses to participate in the programs under the
Social
Security Act, including Aid to Families with Dependent Children,
Foster
Care, and Medicaid, as well as other federal programs such as
Food
Stamps, may receive federal financial participation (FFP) in
costs
incurred by the state agency 3/ administering these programs.
When the
state agency incurs costs that benefit more than one program, the
joint
costs are eligible for FFP only if they are allocated in accord with
a
plan approved by DCA. 45 C.F.R. Part 95, Subpart E; 45 C.F.R.
95.507(a)
and 95.517(a); see also 45 C.F.R. 205.150 and 42 C.F.R. 433.34.
In addition to costs incurred by the state agency itself, the
state
agency's public assistance program CAP may distribute to the
federal
programs costs originating in other components of the state
government
but benefitting those programs. For example, in implementing
federal
programs, the state agency may use administrative, personnel, or
legal
services provided by other state agencies. The regulations
specify
that, in order to be included in the state agency's CAP, such
costs
either must be "supported by a written agreement" containing details
of
how the services will be billed to the state agency or must
be
"specifically addressed in a State-wide cost allocation plan . . . or
an
umbrella/department cost allocation plan." 45 C.F.R.
95.507(b)(6).
The requirements for preparing state-wide and umbrella department
(or
department-wide) CAPs are set forth in Office of Management and
Budget
Circular No. A-87 (OMB A-87), made applicable to state
government
activities by 45 C.F.R. 74.171. OMB A-87, Attachment (Att.)
A., Para.
J.3 makes HHS responsible for "developing and issuing the
instructions
for use" in preparing these CAPs.
These instructions are embodied in OASC-10, which requires that
"a
government agency that wishes to charge support service costs to
Federal
grants and contracts must first prepare a central service
cost
allocation plan to allocate the central service costs to
those
departments or units which they benefit." Id. at 6. These
CAPs,
allocating central service costs from the state or umbrella
department
to benefitting agencies, "must be prepared annually and . . .
submitted
to the cognizant Federal agency for approval . . ." Id. at
3.
Submission is required "within six months after the last day of
the
State's fiscal year." Id. at 7. 4/
A state-wide or department-wide CAP must (1) identify the
services
provided and their costs, (2) determine a method to distribute them
to
user departments or units, and (3) allocate them mathematically. Id.
at
6. State governments and agencies are not required to prepare
central
service CAPs, if they do not choose to. Id. at 20.
However, no FFP is
available for state-wide or department-wide central costs
which are not
supported by an approved CAP explaining their
distribution. Id. at 22.
2. Factual Background
The State agency charged with administering public assistance
programs
under the Act in Nevada is the Welfare Division. The Welfare
Division
is one of several component units of DHR; DHR is thus an
umbrella
department. The Welfare Division has had an approved public
assistance
program CAP (Nevada Welfare CAP) since at least 1981, in order
to
distribute its costs among the various federal programs that
it
operates. 5/ The Nevada Welfare CAP allocated "[a]ll
expenditures
charged to the Welfare Administration account . . . ." DHR
Ex. 2 at 1.
Nevada also had an approved CAP for FYs 1986 and 1987 for
state-wide
costs (Nevada State-wide CAP). DHR Ex. 5, Appendix B.
The Nevada
State-wide CAP covers both allocated costs (including categories
such as
controller and budget division) and billed costs (including,
for
example, printing, motor pool, and purchasing). Id. The
allocated
costs are assigned to "State/local departments and agencies for
further
allocation to Federal grants" performed by those departments.
Id.
Among the departments to which a share of the state-wide costs
is
allocated is DHR. Id. None of the component divisions of DHR
is listed
in the Nevada State-wide CAP.
Until 1988 the Welfare Division made no claim for FFP for costs
incurred
at the DHR departmental level or for state-wide services that
were
allocated to DHR in the Nevada State-wide CAP. In June 1988, DHR
first
distributed these costs among its operating components by
issuing
assessments for FYs 1986 and 1987. Based on these assessments,
the
Welfare Division then included claims for FFP in these expenditures
on
its quarterly expenditure reports for the quarter ending June 30,
1988.
However, these claims were deferred because no CAP at the
umbrella
department level supported the share allocated to the Welfare
Division.
Consequently, DHR submitted CAPs (DHR-CAP) to DCA on September 30,
1988
to cover State FYs 1986 through 1989. DCA approved the CAPs for
FYs
1988 and 1989, but rejected those for FYs 1986 and 1987 as untimely.
Issues
The appeal before us presents two issues:
(1) Was a CAP required at the DHR level in order for
the
Welfare Division to claim FFP for its share of state-wide
costs
allocated to DHR and of DHR level administrative costs?
(2) If a DHR-CAP was required, was DCA justified in
rejecting
the CAPs submitted on September 30, 1988 as untimely for
FYs
1986 and 1987?
Analysis
1. DHR was required to have an approved department-wide CAP before
the
Welfare Division could claim costs passed down from the DHR level.
Recovery of state-wide and department-wide central services costs must
be
based on a CAP prepared and approved in accordance with the
requirements of
OMB A-87. The regulation at 45 C.F.R. 95.507(b)(6),
quoted above,
clearly requires that an umbrella department's costs be
addressed in a
department-wide CAP in order to be passed down to a
component agency, absent
a specific billing agreement (which DHR never
claimed to have). 6/ No
other reading of this regulation is reasonable,
in light of the whole purpose
of the cost allocation process, which is
to ensure that federal programs pay
for costs only "to the extent of
benefits received." OMB A-87, Att. A,
Para. C.2.a. DCA approved the
allocation of a share of state-wide costs
to DHR itself, but, without a
department-wide CAP, DCA had no way to
ascertain what portion of those
state-wide costs benefitted Welfare Division
programs, as opposed to
other DHR components. This problem is even more
apparent in the area of
DHR administrative costs which were not included in
any CAP, since DCA
would have had no information about the nature of these
costs and the
extent to which they provided benefits to the Welfare
Division.
Contrary to DHR's impression, CAPs are not "only a formality, to make
DHHS
operating divisions more comfortable," but rather constitute an
important
mechanism for ensuring that federal funds are expended only in
accord with
the purposes for which they are appropriated. DHR Br. at 2.
Without a
department-wide CAP, DCA could not review the basis for funds
claimed by the
Welfare Division for state-wide and department-wide
costs.
DHR acknowledged that it had never submitted a department-wide CAP
and
that the Nevada Welfare CAP only included division-level
administrative
costs, but argued that DHR was unaware that development of
a
department-wide CAP was required for recovery of additional costs.
DHR
Br. at 1. As evidence, DHR insisted that "common sense" dictated
that
DHR officials would have claimed FFP in these costs if they had
known
how. DHR Reply Br. at 1. We have found that the regulations
establish
that costs can only be passed down from the departmental level
to
component agencies when DCA has approved a method of identifying
the
benefitting agencies and fairly distributing the costs through a
CAP.
States are not obliged to include these costs in their claims for
FFP
and may well conclude that the value of additional FFP recovery is
not
worth the trouble or cost of preparing a CAP. DCA is not required
to
second-guess the decisions of state officials and is entitled to
assume
that such decisions are made with knowledge of applicable
regulations.
Therefore, DHR's contention that it is implausible that DHR
officials
were aware that these costs were claimable but chose to forego
claiming
them is neither relevant nor necessarily accurate. 7/
DHR also argued that, since central service CAPS may be prepared at
any
level of state government, the CAP prepared by the Nevada
Welfare
Division should be read broadly enough to include state-wide
and
department-wide costs. DHR Br. at 2; OASC-10 at 20. 8/
However, this
dispute is not about whether the Welfare Division could have
been given
responsibility for preparing the state-wide or department-wide
CAPs.
The crucial point is that no level of Nevada government prepared a
CAP
describing how DHR would distribute its costs (including those
assigned
to it from the state-wide CAP) among its component divisions until
the
DHR-CAP involved here. 9/
2. The six-month submission deadline was applied properly to
the
DHR-CAP.
OASC-10 requires that state CAPs "be submitted to the cognizant
Federal
agency [here DCA] within six months after the last day of the
State's
fiscal year." OASC-10 at 7. DHR complained about the
enforcement of
this provision on the grounds that these guidelines were not
published
as regulations and that DHR lacked actual notice of them.
The submission deadline is in the nature of a procedural rule, exempt
from
the notice and comment rulemaking requirements of the
Administrative
Procedure Act under 5 U.S.C. 553(b). Since notice and
comment
rulemaking was not required, the agency's guidelines are binding
on the
states, if they are not unreasonable and actual notice has been
given.
See, e.g., Pennsylvania Dept. of Public Welfare, DAB No. 293 at
4
(1982)(Pennsylvania).
OMB A-87 notifies the states that HHS "will be responsible for
developing
and issuing the instructions" on preparing CAPs. At the very
least,
then, DHR should have known where to obtain these instructions.
Moreover, we
have held that "the States have been on notice of, and
bound by, federal CAP
requirements since July 1, 1969." Pennsylvania at
3. 10/ DCA
officials stated without contradiction during the
teleconference that copies
of OASC-10 were sent to all states upon
issuance. DCA submitted
transmittal letters from 1977 forwarding
OASC-10 to Nevada's Director of
Administration and to two divisions
within DHR. HHS Br., Ex. C.
DHR complained that these letters do not show receipt by the
Director's
Office at DHR and that, in any case, much turnover has occurred
since
1977, so that current officials at DHR might not be aware of
OASC-10's
requirements. DHR Reply Br. at 2. We see no basis for
exempting DHR
from compliance because of staff turnover, since the State is
certainly
responsible for training any new staff in proper compliance with
federal
rules. We hold that, in light of the notice in OMB A-87
that
instructions were to be issued by HHS, the provision of the
instructions
to the State, and the failure of DHR to contact HHS to seek
guidance,
DHR had adequate notice of OASC-10 and was bound by its
provisions.
DHR did not argue that the deadline was unreasonable. 11/ States
are
allowed to prepare an allocation method after the end of the
fiscal
year, so long as they submit it within six months. OASC-10
states that
it "is essential that plans be submitted in a timely
fashion." OASC-10
at 7. Orderly administration requires that CAP
proposals be processed
promptly and in sequential order. The federal
government is certainly
entitled to set some time frame, in order to
reasonably plan for its
liabilities, prevent open-ended exposure to future
claims, and to close
out its grants and contracts within a reasonable period
of time. HHS
Br. at 2. DHR made no showing that the time frame
selected was
unreasonable. Moreover, state-wide and
department-wide CAPs are due on
a annual basis because they identify not only
the allocation
methodology, but also, the actual costs to be allocated.
Verification
of actual costs, and of the appropriateness of an allocation
methodology
for a particular time period, becomes more difficult with the
passage of
time. Therefore, we find that the deadline was reasonable
and
enforceable.
DHR also argued that the six-month deadline should not be rigidly
enforced
here. 12/ While OASC-10 does provide for an extension of time
"upon
specific request," there is no basis here to find that any
extension was
warranted. 13/2 The Regional Director's determination
letter stated
that DHR never claimed before DCA that it was unaware of
the submission
deadline and that DHR's divisions have regularly complied
over the years with
the same six-month deadline for indirect cost rate
proposals. OASC-10
at 10; HHS Ex. D. The Regional Director's
determination then concluded
that "DHR presented no extenuating
circumstances which would justify
reversing" the DCA disapproval.
Despite invitations to do so during the
teleconference, DHR never
offered any circumstances justifying the late CAP
submission, other than
the fact that DHR had not previously chosen to
allocate these costs.
Thus, the difficulty is not that DCA has enforced the
applicable
deadline too rigidly, but rather that DHR has failed to
demonstrate any
basis for extending the normal deadline.
Conclusion
For the reasons explained above, we uphold the disapproval of the
CAPs
submitted by DHR for FYs 1986 and 1987.
Judith A. Ballard
Donald F. Garrett
Cecilia Sparks Ford Presiding Board Member
1. These guidelines were issued originally in
December 1976 by the
predecessor of HHS under the title "Cost Principles and
Procedures for
Establishing Cost Allocation Plans and Indirect Cost Rates for
Grants
and Contracts with the Federal Government," and they have remained
in
effect throughout the relevant period.
2. The record in this case includes the parties'
appeal files and
briefs, a recording of a telephone conference held on
February 7, 1991
(teleconference), and post-teleconference submissions from
both parties.
3. "'State agency' refers to the specific component .
. . within the
State department that is directly responsible for the
administration" of
the federal programs. 45 C.F.R. 95.505.
4. The system for central service CAPs is thus quite
different from
that for state agency public assistance program CAPs, which
establish
allocation methodologies which remain in effect after initial
CAP
approval unless amended. 45 C.F.R. 95.511(b).
5. A portion of the Nevada Welfare CAP was included
in the record as
DHR Exhibit (Ex.) 2. During the teleconference, both
parties were asked
whether any other section of the CAP was relevant and
neither provided
any additional parts. We will therefore assume that no
other provision
elsewhere in the CAP would affect this dispute.
6. DHR did argue alternatively that the assessments
were direct
charges, but never suggested that any written agreements existed
to
support a direct billing method for these costs under 45
C.F.R.
95.507(b)(6).
7. In fact, some evidence indicated that DCA
employees had at one
time specifically suggested a department-wide CAP, but
DHR officials
elected not to develop one. Teleconference; Affidavit of
Wallace Chun,
February 12, 1991; Affidavit of Richard W. Onstad, February 12,
1991.
Although these discussions did occur some years ago, DHR offered
nothing
to contradict the inference that DHR officials knowingly chose not
to
develop a department-wide CAP. DHR cannot now avoid the CAP
requirement
simply because later officials have reassessed the value of
preparing a
department-wide CAP.
8. DHR relied on references in the Nevada Welfare CAP
to "state" or
"central office" administrative costs. It is clear,
however, that in
context these references are to the Welfare Division's own
headquarters.
Teleconference. DHR also pointed out that the Nevada
Welfare CAP
mentions State Attorney General and personnel assessments.
However, DCA
responded in the teleconference that these services were covered
by
Section 2 of the Nevada State-wide CAP, which allowed for direct
billing
of certain types of services to agencies by usage. These
categories of
services were not related to the costs allocated to DHR and
required to
be covered in a DHR-CAP. Teleconference; DHR Exs. 2 and
5. It is
undisputed that the Nevada Welfare CAP was broad enough to
allocate
among the federal programs any costs properly borne by the
Welfare
Division. However, none of the language cited by DHR permits
the Nevada
Welfare CAP to be used to justify allocation of costs incurred
elsewhere
in the State government to the Welfare Division. Thus, the
Nevada
Welfare CAP only divides costs among the various federal programs
that
the Welfare Division administers; nowhere does it purport to explain
how
DHR-level costs (including DHR's share of state-wide costs)
are
allocated among the Welfare and other divisions.
9. DHR also suggested that costs included in the
state-wide CAP
should be allowed as prior period adjustments of Welfare
Division claims
under 45 C.F.R. 95.19. That regulation permits filing a
claim after the
usual deadline of two years after the quarter in which the
expenditures
were incurred if the claim is "an adjustment to prior year
costs," which
is defined as "an adjustment in the amount of a particular cost
item
that was previously claimed under an interim rate concept and for
which
it is later determined that the cost is greater or less than
that
originally claimed." 45 C.F.R. 95.4. This regulation is
inapposite
because (1) the CAPs themselves, not particular claims under them,
are
late, and (2) no item involved here was previously claimed under
an
interim rate concept.
10. An earlier version of OASC-10, entitled "A Guide
for State
Government Agencies," OASC-6, was published in 1969 and was sent
to
state administrators. Pennsylvania at 4. OASC-6 contained the
same
six-month submission deadline.
11. It would be particularly difficult to imagine how
DHR could have
argued that the CAP for FY 1986 was timely under any
reasonable
deadline, since it appears that even the two-year time frame
established
by section 1132 of the Social Security Act in which to submit
claims for
those programs expired before the retroactive claims were
submitted in
June 1988. See 45 C.F.R. 95.7 (Claims for FFP for state
agency
expenditures will be paid only if the state files them "within 2
years
after the calendar quarter in which the state agency made
the
expenditure.").
12. DHR also pointed to a situation in Oregon which
it claimed was
similar, but treated more leniently by DCA. DHR stated
that Oregon's
umbrella department allocated its administrative costs among
its
divisions without a CAP. DHR Reply Br. at 2. DCA later
required a CAP
but previous years' claims were not disallowed, according to
DHR.
During the teleconference, it emerged that Oregon did have
a
department-wide CAP, but it was submitted in 1977 and approved on
an
ongoing basis unless amended. DCA later required Oregon to change
to
annual approvals but did not disallow prior claims because an
approved
CAP was in effect. Teleconference; HHS's
Post-Teleconference
Submission. Nothing in DCA's treatment of Oregon is
inconsistent with
its treatment of DHR here.
13. OASC-10 also provides that a state is delinquent
and may not
recover central service costs if it fails to submit a timely
plan, as
required by DCA. OASC-10 at